ORDER
M.A. Bakshi, Vice President
1. to 6. [ These paras are not reproduce here as they involve minor issues].
7. The second ground of appeal is relating to the addition of Rs. 36,200 on account of valuation of stock of shares. The assessee in the past had carried on business of trading in shares. Certain shares were held as stock-in-trade and assessee was following the method of cost or market price whichever is lower for valuation of closing stock. In the year under appeal, it is not disputed that, no trading activity was carried on by the assessee in respect of the shares and, accordingly, there has neither been purchases nor sales in shares in the year under appeal. The assessee is also holding some shares as investments from which dividend has been received. Since there was no trading in shares, no trading account was drawn in respect of such activity. The assessee, however, revalued the stock of shares on the basis of cost or market price whichever was lower and claimed the loss on account of fall in the value of shares. The Assessing Officer disallowed the loss on the ground that there was no occasion for valuation of the stock in view of no activity in the ‘trading of shares’ in the year under appeal. The CIT(A) has allowed the loss on the ground that the assessee had consistently followed the method of valuation of stock “at cost or market price whichever was lower” and, therefore, was entitled to claim the loss on account of market fluctuation.
8. On hearing the parties and perusal of records, I am of the view that method of valuation of closing stock comes into operation only when a trading account is to be drawn on the basis of the trading activities. In the year under appeal, it is claimed that there was a temporary lull in business. This claim of the assessee is not acceptable. In fact, there has been a temporary suspension of business and not merely lull in business. The dictionary meaning of ‘lull’ according to ‘The Shorter Oxford English Dictionary’ is “To become gradually diminished in force or power”. Therefore, the word ‘lull’ does not stand for conscious suspension of business. Lull stands for gradual demolition of any force or activity, whereas suspension in itself an act of temporary closure with possibility of revival. The reason for not trading in shares by the assessee is that the market conditions did not favour such activities. One can appreciate that a businessman may not be prepared to sell the stock of shares on the expectation that the market value of the shares might go up in future. But it is difficult to appreciate as to why buying and selling of shares would be stopped by a trader merely because there is fluctuation in price of shares. When there are favourable conditions in the market for at least purchase of the shares and any businessman consciously does not purchase or sell shares, there has got to be presumption of suspension of business rather than a temporary lull in business. Price fluctuation of shares is inherent in trading of shares. Goldsmiths do not stop business of selling merely because the price of gold fluctuates. Foreign Exchange Traders do not stop buying and selling of Foreign Exchange by reason of price fluctuations. Price fluctuation is manifested in the nature of business. Therefore, the claim of the assessee that there was temporary lull in business of trading of shares is not acceptable. Considering the facts and circumstances of this case in the light of the material on record, I am of the considered view that the assessee had suspended the business for whatever reasons. So the question in hand has got to be considered in the light of suspension of business by the assessee of share trading. The decisions in respect of temporary lull in business, in my view, will be of no assistance in determining the issue in hand as there is a distinction between a temporary lull in business and a conscious suspension of business for unknown reasons. When the business has been suspended and there are no trading activities carried on by the assessee, a pertinent question that arises for consideration is as to whether there is any scope of drawing a trading account. The question of valuation of closing stock will arise if the assessee has to determine the profits in respect of the trading transactions. When no trading transaction is carried on by the assessee, in my view, there is no occasion for determination of profits in that activity. It has also to be borne in mind that the method of valuation of stock at cost or market price has been considered to be acceptable method of valuation of closing stock as per the system of accounting on the basis that in determining the profits in the trading activities, the effect of such activities on the closing stock has got to be taken into account in working the true profits of the trading activities. For example, if the assessee has stock of Rs. 10 lakhs in the preceding year and has purchased stock worth Rs. 2 lakhs and sold stock worth Rs. 3 lakhs, the profit on the activities of purchase and sale have got to be determined. In determining the profits from the trading activities, it is accepted principle that the value of the stock has got to be taken into account. For valuation of closing stock, different methods are recognized and one of the recognized methods is the cost or market price whichever is lower. There is no dispute on that. However, one has to consider as to whether there is any occasion for determination of profits in respect of no activities carried on by the assessee. It is well known that in drawing balance sheet at the close of the year, the closing stock is transferred to the balance sheet as ‘current asset’. When there are trading activities in the following year, such current asset is transferred back to the trading account for purposes of determination of profits. When there are no trading activities, there is no occasion for drawing a trading account, the stock appearing in the balance sheet as item of current assets is not to be transferred to the trading account. When closing stock is not to be transferred, it is not to be revalued. It may be pertinent to mention that the assessee does not adjust his profits merely on the basis of market fluctuation. Suppose, the market value of the shares goes up as on the close of the previous year, the assessee will not show the excess value as his profit and rightly so as such adjustment merely on the basis of market fluctuations would be presumptions. It is only for purposes of determination of the profits from the trading activities that the fall in the price of closing stock is taken into account to determine the true profits of trading activities and not the loss suffered on account of fall in the market price of goods/shares. If such adjustment is allowed then there would be no justification for not taking into account the rise in the market price of the closing stock. But it is not the intention to tax the increase or adjust decrease in the value of stock in isolation. If the claim of the assessee is allowed, it will open a Pandora Box for tax evasion. As is well-settled, a person may hold stocks partly in investments and partly as closing stock and person is free to transfer the stocks at any time from stocks held as investments to stock-in-trade. In order to get benefit of market fall in prices, assessee would find it convenient and beneficial to transfer stocks from investments into stock-in-trade and claim the difference as loss notwithstanding the fact that no transaction takes place in trading activity. As pointed out earlier the valuation of closing stock on the basis of cost or market price is acceptable not merely because of market fluctuation but because of event of purchase and/or sale of shares and to work out its impact on the closing stock. In the absence of any activity in trading in respect of a suspended business, the stock is not to be revalued and the loss cannot be claimed on the basis of fall in prices. The loss claimed by the assessee is a notional loss without there being any transaction. As already stated, if the notional loss is to be allowed, then notional profit would also be assessable. However that is not so the profit and loss is not assessed merely on the basis of price fluctuation of the closing stock. It would also be pertinent to mention that section 145 of the Income-tax Act, 1961 provides that the profits and gains of business shall be computed in accordance with the method of accounting regularly employed by the assessee. So the application of the method of accounting of which the method of valuation of the closing stock is also included comes into operation only when profits and gains of a particular business are to be computed. When there is no activity in trading of shares, Section 145 is inapplicable. It may also be pertinent to mention that in the case of suspension of manufacturing activities, the assessee may incur certain fixed expenses, such as, electricity expenses, rent of factory, etc. Those expenses in the case of lull in business would be allowable as expenses laid out for purposes of business, but such expenses will not go to add to the cost of existing manufactured goods. If there are no manufacturing activities, there can be no cost of manufacture. Similarly, in the trading activity when there is no transaction, any fixed expenses, such as administrative expenses, rent, etc. would be allowable as a deduction only as expenses laid out for purposes of keeping the business alive. Therefore, in my view, in the absence of any trading activity in shares, opening stock of the year will be the closing stock of the year without any adjustment an account of market fluctuation. The CIT(A) was, therefore, not justified in deleting the addition of Rs. 36,200. The addition of Rs. 36,200 is, accordingly, restored. The assessee shall, however, get the benefit of the enhanced value in the opening stock of the subsequent year. This addition is, accordingly, restored with the condition that necessary adjustment is made by the Assessing Officer in the subsequent year on the basis of the addition sustained in the year under appeal.
9 and 10. [These paras are not reproduced here as they involve minor issues.]
