Delhi High Court
H.B. Financial Consultants (P) Ltd. vs Joint Cit on 21 May, 2002
Equivalent citations: (2004)89TTJ(DEL)1042
ORDER
Keshaw Prasad, A.M. The appeal has been directed by the assessed against the order of the Commissioner (Appeals) dated 4-2-2000 pertaining to assessment year 1996-97.
2. Ground of appeal Nos. 1, 2, 3, 5 and 9 are general in nature and do not need any adjudication. As these grounds of appeal have not been pressed during the course of hearing, all these grounds of appeal are dismissed.
3. Ground No. 4 raised by the assessed relates to the disallowance of capital loss of Rs. 71,03,862 on the sale of investment.
4. Briefly, the facts of the case are that the assessed is a non-banking financial company. It was registered with the RBI. Up to the last year, the assessed was only making investments in the purchase of shares, securities and debentures. It was holding certain investments in the shape of shares, debentures. As on 1-4-1996, it had the investment amounting to Rs. 24 crores. It also made purchases of investment amounting to Rs. 36.67 lacs. It sold a part of investment at Rs. 5,06,02,468 on which the loss of Rs. 71,03,861 was claimed in the shape of capital loss. As the assessed did not have any income, such loss was requested to be carried forward.
5. At the time of assessment, the assessing officer examined the claim of loss. He observed that the assessed has claimed such loss as revenue loss. He also observed that the assessed cannot claim the loss on account of valuation of investment as the same was a balance sheet item. He also observed that if the value of assets held by the assessed depreciates in any year, the assessed cannot claim the loss due to fall in the price of such assets. He, therefore, disallowed the claim of loss.
6. On appeal, the Commissioner (Appeals) confirmed the same against which the assessed is in appeal before us.
7. It is argued by the learned counsel that the lower authorities have erroneously felt that the loss of Rs. 71,03,861 claimed by the assessed was on account of depreciation in the value of investment. The fact was that such loss was suffered by the assessed on account of actual sale of the investment and not on account of depreciation in the value of the investment. It was stated that the assessed had sold 6,90,000 shares of HB Portfolio Leasing Ltd. at a consideration of Rs. 4,38,15,000 whereas the cost of investment in the shares was Rs. 5,60,98,713. Thus, the assessed suffered a loss of Rs. 1,22,83,713 on such transaction. Another loss of Rs. 284 was also suffered by the assessed on the sale of shares of another company. The assessed-company also sold 15,575 shares of Mohindra & Mohindra on which profit of Rs. 51,80,136 was earned. After adjusting the loss on the sale of investment against the profit on the sale of investment, the net loss of Rs. 71,03,861 was shown in the P&L a/c. It was argued that as per Sch. VI Part-II Item 3(XII) of the Companies Act, the loss of investment has to be shown in the P&L a/c itself. It was under these circumstances that the loss on the sale of the investment was debited to the P&L a/c along with the loss suffered by the assessed on the valuation of closing stock (stock-in-trade).
8. It was further stated by the learned counsel that there was nothing wrong in debiting the loss on the sale of the investment in the P&L a/c. The assessing officer has to pass the order in accordance with the provisions of Income Tax Act. What he should have done was to treat the loss on sale of investment as capital loss and then should have allowed it to be carried forward as there was no other income which could be adjusted against such loss. Learned counsel stated that it was undisputed fact that up to the last assessment year the assessed was only engaged in making investment in the purchase of shares, securities and debentures. On 7-4-1995, the Board of Directors passed a resolution by which the assessed- company decided to trade in shares, securities and debentures also. Learned counsel further clarified that no shares, debentures or securities held as investment were converted into stock-in-trade. For carrying on the business of shares, the assessed-company made huge purchases. But as during the year, no sales were made, the business profit was not declared. Hence, the question of adjusting the loss against the income did not arise. The learned counsel, therefore, argued that the loss on the sale of the investment should be allowed to be carried forward to the subsequent years.
9. On the other head, learned Departmental Representative stated that section 73(1) of the Act has prohibited the adjustment of any income against the capital loss. Hence, the question of adjusting the income, if any, against the capital loss did not arise. The learned counsel stated that the assessed itself has debited the loss in the P&L a/c. It proves that the assessed has claimed it as a revenue loss. As is evident from the fact that the shares were held by the assessed as an investment and, therefore, any loss suffered on such shares cannot be allowed as revenue loss.
10. Regarding loss suffered on the sale of investment as claimed by the assessed, the learned Departmental Representative stated that merely treating it a sale in the books of account was not enough to hold that the loss was suffered on the sale of investment. As per the provisions of the Income Tax Act, if there was any depreciation in the value of the assets, the same cannot be adjusted in the closing stock. The assessing officer/Commissioner (Appeals) have, therefore, rightly disallowed the claim of the assessed.
11. We have considered the rival submissions. We have perused the order of the assessing officer as well as Commissioner (Appeals) and their reasoning for disallowing the loss claimed by the assessed. The first reasoning given by the lower authorities was on account of claiming the loss of investment as business loss because the same was debited to the P&L a/c. The second reasoning given by the lower authorities was that the loss suffered by the assessed was on account of depreciation in the value of the investment and not on account of their sales. We find that both the reasons given by the lower authorities were based on misconceived notions. If something was a capital loss and not a revenue loss, the revenue authorities could utmost deny the loss as revenue loss. In such a situation, the loss has to be treated as a capital loss. As per provisions of section 73(1) of he Act, the capital loss cannot be adjusted against income under any other head. In such situation, the assessing officer should have allowed such loss to be carried forward.
12. The details of investment, the sale of the investment and the cost of investment etc. have been placed on the record of the assessing officer. He has verified these documents. But he completely overlooked these documents and held that the loss on investment has been claimed due to depreciation in the value of investment. The fact is that the loss of Rs. 71,03,861 was suffered by the assessed on the sale of its investment. These details are already available with the assessing officer and a copy of the same has been placed in the paper book filed by the assessed. Under these circumstances, we have no hesitation in holding that the findings given by the lower authorities was not based on facts. We, therefore, hold that the loss of Rs. 71,03,861 was a capital loss suffered by the assessed on the sale of its investment. As per provisions of section 73(1) of the Act, such loss could not be adjusted against income under any other head. We, therefore, direct the assessing officer to allow such loss to be carried forward to the subsequent years to be set off against income as permitted under the law. This ground of appeal is allowed with above directions.
13. Ground Nos. 5 to 7 relate to the disallowance of loss on account of valuation of closing stock.
14. Briefly, the facts of the case are that the assessed had made certain purchases on investment account. These were brought forward from earlier years. On 7-4-1995, the Board of Directors of the assessed-company passed a resolution to the effect that the approval of Board of Directors be/and was hereby accorded to deal in stock-in-trade of shares, securities and debentures etc. as provided in the memorandum of association of the assessed-company. A public limited company, namely, H.B. Portfolio Leasing Ltd. came out with a public issue of convertible debentures in November, 1994. assessed applied for 6,38,562 debentures on cum-interest basis of Rs. 48 per debenture. The total purchase consideration amounted to Rs. 29.37 crores. The allotment of debentures came in February, 1995 and the purchases were made in July, 1995. As the debentures were convertible in nature,-these were converted into shares in Nov., 1995. These debentures were shown by the assessed as its stock-in-trade. As the convertible debentures purchased by the assessed were on cum-interest basis, the interest income of more than Rs. 3.75 crores was offered for taxation as business income and that has also been taxed so. At the end of the year, the assessed valued its stock-in-trade at cost or at market rate whichever was lower. As the market value of the shares held as stock-in-trade had gone down much below the purchase price, the assessed claimed the same as revenue loss. However, the assessing officer held that the shares purchased by the assessed were on account of investment and the treatment of the same as stock-in-trade was only to claim the business loss. The assessing officer further observed that in the earlier year, the assessed was valuing its investment at cost. In this year, as the assessed has valued its investment at cost or at market price, whichever was lower, such change in the method of valuation was done unilaterally which was not permissible. It was stated that by change the method of valuation of investment, the assessed has adopted a colourable device to evade the tax. By adopting the change of valuation of investment, the assessed has tried to create huge losses which cannot be permitted. He, therefore, disallowed the loss claimed by the assessed.
15. On appeal, the Commissioner (Appeals) confirmed the same against which the assessed is in appeal before us.
16. It is argued by the learned counsel that the Commissioner (Appeals) has made certain observations in her order which go to support the claim of the assessed. It is only in the concluding part that the Commissioner (Appeals)'s findings were incorrect and that too on the basis of certain different reasoning which was not taken by the assessing officer. The learned counsel stated that the Commissioner (Appeals) in principle has accepted the following facts as true and legally tenable :
(i) The assessed can keep some shares as investment and some shares as stock-in-trade. Only the intention at the time of purchasing the shares has to be seen.
(ii) Till last year the entire shares, securities etc. were held as investment. But in the year, the assessed-company decided to trade in shares, securities, debentures also. There cannot be any objection to such treatment.
(iii) The valuation of investment at cost and the valuation of stock-in-trade at cost or market price, whichever was lower was justified. Thus, there is no change in method of valuing the stock-in-trade. The claim of the assessed was, therefore, correct on this account.
17. But after agreeing to above legal position, the Commissioner (Appeals) went on to make further observations which are summarised as under :
(i) The Commissioner (Appeals) has observed that Mr. H.C. Bhasin was a director in HB Portfolio Leasing Co. Ltd. He is also a director in the assessed-company. Thus, there is common management. The assessed had admitted so vide its letter dated 21-10-1999, before the Commissioner (Appeals). This shows that both the companies are connected companies and the assessed-company along with some other concerns wanted to have major control in H.B. Portfolio Leasing Co. Ltd. by investing in the debentures which was to be ultimately converted into shares. As the debentures were purchased with an intention to have control over H.B. Portfolio Leasing Ltd. the debentures purchased could not be treated as stock-in-trade. So the debentures/shares received on conversion were investment and not stock-in-trade.
(ii) The TDS Certificate regarding interest received on these debentures clearly show that the interest was received by Sh. H.C. Bhasin, Miraculous Investment Co. Ltd., Cornflowers Investment Ltd., Glorious Leasing (P) Ltd. and Yellow Saphires Investment Ltd.
(iv) The learned Commissioner (Appeals) has also observed that these companies have transferred the interest in the company's account.
18. The Commissioner (Appeals) has observed that H.B. Portfolio Leasing Ltd. and the assessed-company, both were controlled by Shri H.C. Bhasin. By making purchases of debentures of H.B. Portfolio Leasing Ltd. the assessed-company has acquired the controlling shares of other company.
19. Learned counsel argued that only one director, namely, Sh. H.C. Bhasin was common. Shri Lalit Bhasin S/o Shri H.C. Bhasin is director in H.B. Portfolio Leasing Ltd. Thus, it cannot be said that both the companies were under same management. It was stated that the observations made by the Commissioner (Appeals) were not based on facts. It was stated that there was no dispute that till last year, the entire shareholdings of the assessed was kept as investment. It was during the year under consideration that the assessed sold 6,90,000 shares of H.B. Portfolio Leasing Ltd. which were kept as investment. If the intention of the assessed-company in subscribing to the debentures issued by H.B. Portfolio Leasing Ltd. was to have control over that company, the assessed- company would not have sold its shareholding of that company as it could have prejudiced its rights of having control over that company. The selling of the shares of that company and then again acquiring the shares of the same company by way of debentures with an intention to have control over that company does not stand to logic. Learned counsel further argued that the shares which the company got on conversion of debentures were sold by it in the year 1999-2000. The assessed had suffered loss on sale of such shares which was claimed as business loss. Even the assessing officer was pleased to allow the loss as business loss. The learned counsel filed the copy of the assessment order to support his claim. It was also stated that in its balance sheet as on 31-3-1996 (Sch. F), the assessed- company has given the details of its stock-in-trade. It was stated that even after considering the shares acquired by the assessed on the conversion of the debentures, the assessed-company shareholding in H.B. Portfolio Leasing Ltd. was less than 12 per cent. These figures clearly indicate that there was never an intention of acquiring the controlling share of H.B. Portfolio Leasing Ltd. in subscribing the debentures of that company.
20. Regarding the investment made by Shri H.C. Bhasin in purchase of debefitures of H.H. Portfolio Leasing Ltd., the learned counsel argued that when Shri H.C. Bhasin had given funds to the assessed-company, the company was engaged in purchasing investments only. It was not engaged in trading of shares. As on 1-4-1995, the assessed-company had enough surplus funds which could be utilised for purchase of stock-in-trade. The investment in the stock-in-trade during, the year was about Rs. 17 crores whereas the loan from H.C. Bhasin was substantially much less.
21. Learned counsel also stated that the ratio laid down by Honble Supreme Court in the case of McDowells Ltd. were not applicable in the instant case. It was a transaction at arms length. While relying on the decisions in Banyan & Berry v. CIT (1996) 222 ITR 831 (Guj) at 846 to 850 and CIT v. H. Holck Larsen (1986) 160 ITR 67 (SC), the learned counsel argued that the Commissioner (Appeals) was not justified in disallowing the loss claimed by the assessed.
22. On the other hand, learned Departmental Representative stated that the investment in debentures was made to have control over the management of H.B. Portfolio Leasing Ltd. Thus, the purchase made by the assessed were in the nature of purchases of investment and not the purchases of stock-in-trade. Regarding entries in the books of account as stock-in-trade, the learned Departmental Representative while relying on the decisions in Fort Properties (P) Ltd. v. CIT (1994) 208 ITR 232 (Bom) stated that the entries in the books of account were not determinative of the nature of the transaction. While relying on the decision in G. Venkataswami Naidu & Co. v. CIT (1959) 35 ITR 594 (SC) at 597, the learned Departmental Representative stated that the Hon'ble Supreme Court has laid down the parameteres of the income which was taxable under the head 'business income'. As those conditions were not satisfied in this case, the purchases could not be considered to be purchases of stock-in-trade. While relying on the decision in Khan Bahadur Ahmed Alladin & Sons v. CIT (1968) 68 ITR 573 (SC), learned Departmental Representative stated that total circumstances have to be considered to decide the nature of transaction. It is a case where the corporate veil has to be lifted to find out the true nature of transaction. The transaction noted by the assessed-company as stock-in-trade was a colourable device to evade tax which was not permissible under the law. The reliance was placed on the decision's reported in McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC), Workmen, Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. (1986) 157 ITR 77 (SC) and Union of India & Ors. v. Playworld Electronics (P) Ltd. (1990) 184 ITR 308 (SC).
23. We have considered the rival submissions. The Commissioner (Appeals) in principle has accepted that the company would be justified in valuing the investment at cost and the stock-in-trade at cost or market value whichever was lower. The assessed claimed that it made investment in the purchase of debentures which were converted into shares. Such shares were stock-in-trade and as the value of such shares had gone down, the market value was taken in the closing stock. But while denying the claim of loss, the Commissioner (Appeals) has held that shares on the valuation of which the loss has been claimed was on account of investment and not on account of stock-in-trade. Thus, the assessed-company's intention behind purchasing the debentures (which was to be converted into shares) was to have control over the company who issued the debentures/shares. We find that on the first day of the accounting year, the assessed held substantial shares of H.B. Portfolio Leasing Ltd. These shares were held as investment. During the accounting year, the assessed-company passed a resolution to the effect that henceforth it will be also engaged in the trading of shares/securities and debentures. To meet this purpose, even the share-capital of the company was increased. The assessed-company also made substantial purchases of shares/debentures as stock-in-trade. As mentioned earlier, the assessed-company was having substantial shares of H.B. Portfolio Leasing Ltd. as investment. It sold 6,90,000 shares of that company thus by reducing its investment to that extent. If the intention of the assessed-company behind purchasing the debentures/shares was to have control over that company, the assessed-company would not have sold such huge number of shares of that company which was kept as investment. We find that even after considering the shares acquired by the assessed-company on conversion of debentures, its shareholdings in that company was about 12 per cent only and no person by holding 12 per cent shares of a company can claim to have control over the management of that company.
24. We also find that when these debentures were purchased by the assessed-company on cum-interest basis, the interest of about Rs. 3.75 crores was earned. The same was offered for taxation as business income which has also been taxed so by the assessing officer. Thus, the assessing officer cannot blow hot and blow cold at the same time.
25. There is another important factor in this case. The assessing officer/Commissioner (Appeals) have held that treating the investment as stock-in-trade, thus claiming loss due to depreciation in the value of stock-in-trade was a colourable device. Such device is adopted with the sole purpose of evading tax. If we see the computation of income in the assessment order, the assessing officer had started with the figures of loss of Rs. 10.56 crores mentioned in the P&L a/c. He has made the disallowances of Rs. 14.3 crores (loss on account of investment, sale of investment and loss on account of stock-in-trade) and thus assessing the income at Rs. 3,75,41,021. This figure includes the figures of interest on debentures at Rs. 3,45,61,824 loss on sale of investment Rs. 71,03,862 and other losses (not relatable to convertible debentures) at Rs. 49 lacs. If these figures included in the P&L a/c are taken out, there will be loss of about Rs. 90 lacs. As there is no question of evading tax, due to such transaction, the assessing officer/Commissioner (Appeals)'s observations to the effect that this was a colourable device adopted by the assessed to evade the tax was far from truth.
26. We also find that the shares received by the assessed-company on conversion have been sold on which the loss was suffered. The revenue has accepted such loss as business losses. Thus, the revenue cannot say that the debentures/shares when acquired were capital assets and when sold these were stock-in-trade. Keeping in view these facts, we hold that the shares of H.H. Portfolio Leasing Ltd. acquired by the assessed-company on conversion of its debentures into shares was stock-in-trade and the assessed was at liberty to value the same at cost price or market price whichever was lower. By adopting the market price which was lower than the cost price, the assessed-company has acted perfectly in accordance with law and the principle of accountancy.
27. The Commissioner (Appeals) has made other observations about the sources of funds and the common management. Though for the purposes of coming to the conclusion whether the purchases of debentures/shares of H.B. Portfolio Leasing Ltd. was on account of investment or on account of stock-in-trade, the observations made by the Commissioner (Appeals) were irrelevant, but even assuming that the observations made by the lower authorities were relevant, we find that section 370(1B) of the Companies Act has prescribed the situation when the two companies could be said to be sister- concerns. On perusal of the provisions and applying the same with the assessed-company, we find that the assessed-company does not come into even one of parameteres prescribed by section 370(1B) of the Company Act. Moreover, H.B. Portfolio Leasing Ltd. has 7 directors whereas the assessed-company has only 3 directors. Only one director Shri H.C. Bhasin was common. Though the son of Shri Bhasin is also director in H.B. Portfolio Leasing Ltd., he has nothing to do with the assessed-company. Thus, it is not a case of common control or a common management. Similar is the case with the sources of purchase consideration met by Sh. H.C. Bhasin. When Shri Bhasin had advanced the funds to the assessed-company, the assessed-company was merely an investor. Subsequently, the Board of Directors decided to trade in shares. The share capital of the company also increased by about Rs. 10 crores. But all these factors are irrelevant for coming to the conclusion whether the purchases made by the assessed were in the nature of investment or in the nature of stock-in-trade. From the facts, it is clear that the assessed had purchased the debentures/shares as stock-in-trade and the assessing officer is directed to accept the claim of the assessed regarding loss due to depreciation in the value of stock-in-trade. The addition sustained by the Commissioner (Appeals) is, therefore, deleted and the ground of appeal raised by the assessed is allowed.
28. Ground No. 10 relates to the interest under section 234B. As this ground of appeal is consequential in nature, we relates to the interest under section 234B. As this ground of appeal is consequential in nature, we direct the assessing officer calculate the interest if any on the basis of income determined as per our order. While doing so, the assessing officer, will also consider the withdrawal of interest under section 244A of the Act.
29. In the result, the appeal filed by the assessed is partly allowed.