Income Tax Appellate Tribunal - Kolkata
Trade Apartments Ltd., Kolkata vs Department Of Income Tax on 11 June, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH: KOLKATA
[Before Shri N.S.Saini, A.M. & Shri Mahavir Singh, J.M.]
I.T.A. No.1632/Kol/2008 : Assessment Year : 2004-05
ACIT, Circle-4, Kolkata -Vs- M/s. Trade Apartments Ltd.,Kolkata
PAN : AABCT 2117P
(Appellant) (Respondent)
Date of concluding the hearing : 11.06.2013
Date of pronouncing the Order : 21.06.2013
Appearances : For the Appellant : Shri L.K.S. Dahiya, Sr.DR
: For the Respondent : Shri D.S. Damle, FCA
ORDER
Per Shri N.S.Saini, A.M. :
This is an appeal filed by the Revenue against the order of the CIT(A)-IV, Kolkata dated the 2nd June, 2008 for the assessment year 2004-05.
2. In the Revenue's appeal, the following ground has been taken:-
"1. That the Ld. CIT(A) has erred in deleting the addition on valuation of converted share of Off-shore India Ltd. to the tune of Rs.2,47,05,000/-, while the assessee has taken two contradictory methods for valuation of the same share for the same assessment year."
3. From the order of the AO, we note that the assessee was holding shares of other body corporate both by way of long-term investments and stock in trade. As on 31.03.2003, the assessee held shares in other bodies corporate having varying costs of Rs.4,00,97,271/-. The investment in shares, inter alia, included 28,43,800 shares of Yield Investments ltd. and 45,00,000 shares of Off-Shore India Ltd., whose carrying cost as on 31.03.2003 was Rs.1,53,56,520/- and Rs.2,47,05,000/- respectively. During the previous year, relevant to assessment year 2004-05, the assessee company resolved to convert equity shares held in these two companies 2 I.T.A. No.1632/Kol/2008 M/s. Trade Apartments Ltd. A.Y.2004-05 from investment to stock-in-trade in its books of accounts for the year ended 31.03.2004. The assessee passed accounting entries transferring the carrying cost of these two shares from investment to trading account. Accordingly, in its Profit & Loss a/c. for the year ended 31.03.2004, the assessee debited sum of Rs.4,00,61,520/- on account of transfer of investments to stock in trade. In respect of shares held on trading account, the assessee regularly followed principle of the lower of the cost or the market value in valuation of inventory whereas investments were valued at cost. For the purpose of arriving at the value of the inventory, the assessee followed Accounting Standard-13 as also RBI's Prudential guidelines, according to which shares of unlisted companies were valued either at cost or break-up value whichever is lower. In the course of assessment, the assessee had furnished details of break-up value of equity shares of Off-Shore India Ltd. as certified by M/s. Bose and Chakraborty, Chartered Accountant, in which the break-up value of the said shares was certified at (-) 1.89 per share. The said break-up value was certified by the Chartered Accountant, based on the figures reflected in the audited accounts of M/s. Off-Shore India Ltd. for the year ended 31.03.2003. The AO, therefore, held that when on 01.04.2003, the assessee converted shares of Off-Shore India Ltd. from investments to stock-in-trade, the market value or break-up value of these shares had already become negative and the same was valued by the assessee on 31.03.2004 at Re.1/-. Going by the same yardstick, the assessee should have accounted the conversion of investment to stock-in-trade on the same market value i.e. Re.1/- for the entire stock holding of Off-Shore India Ltd. and therefore, the assessee was not correct in transferring the investment to stock-in-trade at the carrying value of Rs.2,47,05,000/-. The AO, therefore, held that when the market value or break-up value of the shares of Off- Shore India Ltd. as on 01.04.2003 was Re.1/-; the assessee was entitled to claim the cost of such stock-in-trade at Re.1/- and not Rs.2,47,05,000/- as claimed and therefore in arriving at the total income, the AO disallowed the said cost of Rs.2,47,05,000/-.
3 I.T.A. No.1632/Kol/2008M/s. Trade Apartments Ltd. A.Y.2004-05
4. On appeal, the ld. CIT(A), for the reasons elaborately set out in para 4 of his order, deleted the said disallowance. Against the deletion of the said addition, the Revenue is in appeal before us.
5. Before us, the ld. CIT,DR submitted that the ld. CIT(A) allowed the relief to the assessee without properly appreciating the facts of the assessee's case. Accordingly, the ld. DR submitted that in granting relief to the assessee, the CIT(A) blindly accepted the assessee's explanation regarding entries passed in the books in conformity with the accounting standards issued by the Institute of Chartered Accounts of India. He stated that in the balance-sheet for the year ended on 31.03.2003, shares of Off-Shore India Ltd. were disclosed at carrying cost of Rs.2,47,05,000/- but as per the balance-sheet of the said investee company, it was very much apparent that its market value was nil because break-up value per share as certified by the CIT(A) was (-) Rs.1.89 per share. According to CIT(DR), the documents, which the assessee placed before the AO, clearly established that the shares were transferred from investments to stock-in-trade did not have any intrinsic value or market value and therefore in its books of accounts, such transfer had to be recorded with reference to the intrinsic value of the shares, which could at best be taken at Re.1/-. By adopting the carrying cost as the basis for passing of the accounting entries. The assessee had taken undue benefit of such carrying cost which was not permissible as per the legal provisions, though such accounting methods have been made in conformity with the accounting standards. The ld. CIT,DR further argued that provisions of section 45(2) of the Income-tax Act, 1961 specifically deals with the situation concerning of conversion of investments into stock-in-trade and it requires that in such a case, the income has to be computed with reference to fair market value as the capital asset on the date of conversion. Such provisions of section 45(2) were specifically incorporated in the Statute and which were contrary to the Accounting Standard-13 of the ICAI, the income had to be computed with reference to provisions of section 45(2) and not 4 I.T.A. No.1632/Kol/2008 M/s. Trade Apartments Ltd. A.Y.2004-05 in conformity with the accounting entries passed in accordance with accounting standard prescribed by the ICAI. He submitted that it is a settled legal proposition that the accounting standards prescribed by the ICAI could not override the statutory provisions of the income-Tax Act, 1961 and since in the present case, the section 45(2) contains specific provision, this had to be taken into account in computing the income. If such provision was applied, then on the date of conversion, market value was nil and therefore, the assessee could not adopt any artificial higher carrying cost as the cost of acquiring of trading stock. He, therefore urged for reversal of the CIT(A)'s order and restoration of the order of the AO.
6. The ld. A.R. of the assessee, on the other hand, fully supported the order of the ld. CIT(A). He submitted that assessee's accounts were maintained in conformity with the accounting standard issued by the ICAI as also on the basis of NBFC's Prudential Norms (Reserve Bank) Directions, 1998. Referring to para 23 of AS-13, the ld. A.R. pointed out that where long term investments are reclassified as current investments then the transfer should be made at the lower of cost or carrying amount on the date of transfer. The ld. A.R. submitted that assessee's balance-sheet as on 31st March, 2003 was accepted by the department in its assessment for the earlier year. Accordingly, the carrying cost of shares of Off- Shore India Ltd. and Yield Investments Ltd. were approved and the same were not disturbed. The carrying cost of investments as on 31.03.2003 automatically became the carrying cost as on 01.04.2003, which was the first day of the previous year for the assessment year 2004-05. On 01.04.2003, the assessee transferred equity shares of Yield Investments Ltd. and Off-Shore India Ltd. from investments to trading account. The accounting effect for such transfer was required to be given in the accounts and the same would only be done in conformity with the accounting standards which were mandatory for the assessee to follow. The ld. A.R. submitted that the carrying cost for each share of Yield Investments Ltd. was 5 I.T.A. No.1632/Kol/2008 M/s. Trade Apartments Ltd. A.Y.2004-05 Rs.5.40 per share and that of Off-Shore India Ltd. was Rs.5.49 per share. Based on such carrying cost, the assessee's balance-sheet as on 31.03.2003 was drawn up and the same was accepted by the Revenue in the assessment for the assessment year 2003-04. As per AS-13, the transfer of long term investment to current investment as on 01.04.2003 had to be necessarily done at such carrying cost and not with reference to the market value or break-up value of shares. The ld. A.R. submitted that it has been held by the Hon'ble Supreme Court in the case of CIT- vs- U.P. State Industrial Development Corporation reported in 225 ITR 703 (SC) that where the statutory provisions are not in conflict with the accounting standards or accepted commercial principles of accounting, then in such case, the income has to be computed on the basis of accounting standards or accepted commercial principles of accounting. The ld. A.R. argued in the present case that section 45(2) of the Act was not applicable because the shares of Off-Shore India Ltd. were not transferred or sold during the year. He submitted that section 45(2) of the I.T. Act, 1961 comes into force not in the year in which conversion takes place but it comes into play in the year in which the converted capital asset is actually sold or transferred. The ld. A.R. further submitted that in the assessee's case, entire shareholding of Off-Shore India Ltd. remained with the assessee till 31.03.2004 and therefore there did not occur any occasion to invoke section 45(2) of the Act. The ld. A.R. further submitted that provision of section 45(2) dealt with computation of income to be made under the head "Capital Gains" whereas in the present case, the issue concerned with the computation of income under the head "Profit and gains of the business" and in the context of which the question of determination of cost of trading cost was not dealt with by any specific provision of the Income Tax Act, 1961. The ld. A.R., therefore submitted that there was no statutory provision under Chapter IVD dealing with computation of business income which was contrary to AS-13 and in absence of any contrary provision, the accounting as done by the assessee in conformity with AS-13 had to be accepted for the purpose of assessee's income under the head "Profit & Gains from 6 I.T.A. No.1632/Kol/2008 M/s. Trade Apartments Ltd. A.Y.2004-05 business". The ld. A.R. further pointed out that in the relevant year, the assessee had transferred shares of Yield Investments Ltd. and Off-Shore India Ltd. from the investments to stock-in-trade. Carrying cost of these shares was Rs.5.40 per share and Rs.5.49 per share. In the case of Yield Investments Ltd., the number of shares was 28,43,800 and the carrying cost was Rs.1,53,56,250/-. In the case of Off- Shore India Ltd., the total number of shares were 45,00,000 and carrying cost was Rs.2,47,05,000/-. In both the cases, the conversion from investments to stock-in- trade was carried out at the aforesaid carrying cost and in the assessment, the AO did not dispute the basis adopted by the assessee in relation to Yield Investments Ltd. The AO, however, disputed the method of accounting only in relation to conversion in respect of Off-Shore India Ltd. The ld. A.R. further submitted that in respect of all unquoted shares, the assessee followed the principle of lower of the cost or break-up value method. For the purpose of determining the break-up of unquoted shares, the audited balance-sheet of the investee company as on 31.03.2003 were taken into account by following the same method. The break-up value of the quoted shares of Yield Investments Pvt. Ltd. was determined at Rs.4.94 per share. This break-up value was arrived at with reference to balance- sheet of Yield Investments Pvt. Ltd. as on 31.03.2003. As on 31.03.2004, the assessee continued to hold 3,43,800 shares of Yield Investments Pvt. Ltd. out of 28,43,800 shares transferred out of investments. As against the carrying cost of Rs.5.40 per share as on 01.04.2003, the remaining 3,43,800 shares were valued at break-up value method as on 31.03.2004 at the rate of Rs.4.94 per share. As a result, the valuation loss of Rs.1,58,148/- in respect of stock in trade of Yield Investments Pvt. Ltd. was allowed by the AO. The ld. A.R. further submitted that the assessee followed the same method of valuation of stock in the case of Off- Shore India Ltd. also. However, since in the latter case, the break-up value of each share was (-) Rs.1.89; for identification purposes, the value of stock in trade of shares of Off-Shore India Ltd. was taken at Re.1/-. It was further submitted that in the case of shares of both the companies, the assessee had followed the identical 7 I.T.A. No.1632/Kol/2008 M/s. Trade Apartments Ltd. A.Y.2004-05 basis of accounting for recording transfer from investment to stock in trade and also the basis of adopting for valuation in both the cases was identical. In the case of Yield Investments Pvt. Ltd., the AO did not find any infirmity in the accounting methods adopted by the assessee but the same method of accounting followed in relation to shares of Off-Shore India Ltd. was outrightly rejected. The ld. A.R. further submitted that the AO could not selectively approve the same method of accounting and method of valuation for one share and reject the same in relation to another. The ld. A.R. therefore, pleaded for upholding the order of the ld. CIT(A).
7. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. We find that in para 4 of the CIT(A)'s order, he has elaborately set out the factual aspect concerning the dispute involved in the present appeal and for the sake of clarity, we deem it fit to reproduce the findings of the ld. CIT(A) as under:
"4. I have considered the submissions of the A/R and perused the impugned order. The primary question in the present appeal is whether the A.O. was justified in substituting the value of shares of M/s.Off-Shore India Ltd. at the time of its transfer from "Investments" to "Stock in trade" as on 1.4.2003. From the facts on record I find that till 31st March 2003 the shares of Off- Shore India Ltd. & Yield Investment (P) Ltd. were held by the appellants as its "Investment (long term)". Pursuant to the accounting method consistently followed, the investments were carried in the Balance Sheet in the manner prescribed by Accounting Standard-13 (AS-13) read with Prudential Guidelines of Reserve Bank of India applicable to NBFCs. As on 31st March 2003, 45,00,000 shares of Off-Shore India Ltd. were carried in the Balance Sheet @ Rs.5.49 per share aggregating to Rs.2,47,05,000. 28,43,800 shares of Yield Investment (P) Ltd. were carried @ Rs.5.40 per share aggregating to Rs.1,53,56,250/-. In the assessment order for A.Y. 2003-04 carrying cost of these two investments was accepted by the A.O. and the carrying cost was not disturbed. Effective 1st April 2003 the Board of Directors of the appellant resolved to transfer shares of the said 2 companies (which were both unquoted), from "Investments" to "stock in 8 I.T.A. No.1632/Kol/2008 M/s. Trade Apartments Ltd. A.Y.2004-05 trade". The transfer of these 2 shares from "Investments" to "stock in trade" was recorded in the appellant's books in conformity with the Accounting Standard-13 & accordingly the transfer were accounted at carrying cost of these shares. Accordingly, shares of Off-Shore India Ltd. were transferred from Investment to stock in trade @ Rs.5.49 per share and shares of yield Investment (P) Ltd. were transferred @Rs.5.40 per share. From the impugned order it appeared that the transfer of shares of Yield Investment Pvt. Ltd. from "Investment" to "Stock in trade", carried out at the carrying cost was accepted by the A.O. This fact indicates that the method of accounting followed by the appellant in relation to the said transfer of shares was accepted by the A.O. The appellant followed the same accounting method and principles in relation to transfer of shares of Off- Shore India Ltd. which only was disputed by the A.O. in the impugned order. It is also found from the impugned order that part of the shares of Yield Investment Pvt. Ltd. transferred to stock in trade on 1.4.2003 were sold during the year and the loss arising there from was assessed partly under the head "capital gains" as required u/s 45(2) and partly as "business loss". The remaining shares of Yield Investment P. Ltd. remained in stock as on 31.3.2004. As at the end of the financial year 2003-04, all the shares of Off-Shore India Ltd., which were transferred to stock in trade, remained in stock. Since both the investee companies were closely held and their shares were not quoted on any recognized Stock Exchanges, valuation of both the shares was carried out by following the principle of "at cost or break-up value, whichever is lower" basis as required by Accounting Standard-13 & Prudential Guidelines of RBI. From the details furnished before me, I find that for the purpose of valuation of "stock in trade" on the above basis the appellant computed the "break-up value" of shares with reference to the last available Balance Sheet of the Investee companies, i.e. for the year ended 31st March 2003. As per the Balance Sheet as of 31st March 2003, the break-up value of shares of Yield Investment (P) Ltd. was Rs.4.94 per share, giving aggregate value of Rs.16,98,372/- for 3,43,800 shares, as against the carrying cost of Rs.5.40 per share at which these shares converted from Investment to stock in trade as on 1.4.2003. As a result of this method of inventory valuation the appellant recognized loss of Rs.1,58,148/- in respect of inventory of shares of Yield Investment P. Ltd. in its accounts and the same was also allowed by the A.O. in the impugned assessment. Based on the same principles the break up value of Off-Shore India Ltd. was determined by M/s. Bose & Chakraborty, chartered Accountants, at (-ve) Rs.1.89 per share. Since inventory can not be valued in negative terms, the shares of Off-Shore India Ltd. were valued at token amount of Re.1/-. From perusal of the Schedule of Investment and Stock in trade annexed to the Audited Balance Sheet as at 31.3.2004, I find that by following the same method of valuation the shares of M/s. Organised 9 I.T.A. No.1632/Kol/2008 M/s. Trade Apartments Ltd. A.Y.2004-05 Investments Ltd. Consolidated Industrial Fund Ltd. Canal Investments & Industries Ltd & Figro Chem P Ltd were also similarly valued at Re.1/-. In the impugned order the valuation of shares of these companies at token value of Re.1/- was accepted by the A.O. In the above factual background, I find that the appellant followed same accounting methods and principles for accounting the transfer of shares of 2 companies from "Investments" to "Stock in trade". The appellant followed same method of inventory valuation for valuing inventory of unsold shares of the said two companies as on 31st March 2004. The A.O. accepted the appellant's method of accounting and method of inventory valuation in relation to shares of Yield Investment (P) Ltd. but disputed the very same accounting and inventory valuation method in relation to shares of Off-Shore India Ltd. I further find that appellant's method of inventory valuation was same in respect of all shares of unlisted/unquoted companies & the shares of unquoted companies were always valued on the principle of "lower of the cost or break up value". For this purpose break up value was calculated on the basis of Balance Sheet of the investee companies for the preceding year. Wherever the break up value of the unquoted shares was negative, the appellant valued shares of such companies at token amount of Re.1/-. These accounting methods and principle of inventory valuation was uniformly followed and barring shares of Off-Shore India Ltd. the A.O. did not dispute or disbelieve the said method of accounting or method of valuation in any other case & rather he accepted appellant's all other transactions. The A.O. has justified the disallowance on the ground that the appellant followed different basis and method for accounting for recording transfer of shares from "investment" to "stock" and valuation of shares of Yield Investments (P) Ltd and Off-Shore India Ltd. I however, find that in both the cases the appellant have followed identical method of accounting and valuation. The A.O. was not justified in accepting the accounting and valuation in the case of Yield Investments (P) Ltd and in not accepting the same accounting and valuation methodology in the case of Off-Shore India Ltd. In the factual background therefore, I have no hesitation in holding that the A.O. disputed the assessee's method of accounting for recording transfer of shares of Off-
Shore India ltd. merely because it resulted in substantial reduction of income. The appellant followed identical accounting method and principles for recording transfer of shares of Yield Investment P Ltd & Off-Shore India Ltd, from "Investments" to "stock in trade" and the appellant followed same principles of Inventory valuation for valuing shares of both the companies as on 31st March 2004. In the circumstances, when the A,O. accepted the said method of accounting, accounting principles and basis of inventory valuation in relation to shares of Yield 'Investment Pvt. Ltd. there appears no legal justification for the A.O. to dispute and reject the same accounting method and principles only in relation to shares of Off-Shore 10 I.T.A. No.1632/Kol/2008 M/s. Trade Apartments Ltd. A.Y.2004-05 India Ltd. The A.O. could not adopt diametrically opposite standards in relation to identical transactions which were carried out simultaneously and all essential attributes of both the transactions were same and identical. The A.O. was not justified in accepting tax effect involving transfer of shares of Yield Investment (P) Ltd. from "Investments" to "stock in trade" and out- rightly reject the taxation effect of transfer of shares in the case of Off-Shore India Ltd."
7.1 Before us, the ld. CIT(DR) has urged to support the order of the AO by placing strong reliance on the provisions of section 45(2) of the Income Tax Act, 1961.
7.2 On the other hand, the ld. A.R. submitted that there is no dispute about the applicability of the provisions of section 45(2) of the Act. The fair market value of the shares on the date of the conversion was taken as per the regularly followed system of accounting and as no specific error in the order of the ld. CIT(A) could be pointed out by the Revenue, he fully supported the order of the ld. CIT(A).
7.3 We find that in the instant case, the case of the assessee is that it values unquoted shares on the basis of fair market value, which is in case of unquoted shares determined on the basis of break-up value of the last available balance- sheet. In the instant case, shares of two companies were converted as on 01.04.2003 from investment to stock in trade. Both these shares were valued at fair market value being less than cost as on 31.03.2003 and the same was duly accepted by the department. On the very same value, the said shares were converted into stock in trade on the immediately next date i.e. 01.04.2003. Thus, the shares were converted into stock in trade on the fair market value as on the date of conversion. Out of the shares of two companies which were converted on the same system, the department has accepted the system as correct in the case of Yield Investments Pvt. Ltd. and has disputed only in the case of Off-Shore India Ltd. As on 01.04.2003, the fair market value of Off-Shore India Ltd. was determined on the basis of break-up value of last available balance-sheet as on that 11 I.T.A. No.1632/Kol/2008 M/s. Trade Apartments Ltd. A.Y.2004-05 date, which was also accepted by the Revenue as the market value as on 31.03.2003, there was no reason to dispute that the same was not the market value as on 01.04.2003 on the basis of data available on that date. Thus, we find that no specific error in the order of the ld. CIT(A) could be pointed out by the Revenue by bringing any relevant material on record. We, therefore, do not find any good reason to interfere with the order of the CIT(A), which is confirmed and the ground of Revenue is dismissed.
8. In the result, the appeal filed by the Revenue is dismissed.
This Order is pronounced in the Court on 21st June, 2013.
Sd/- Sd/-
(Mahavir Singh) (N. S. Saini)
Judicial Member Accountant Member
Dated : 21st June, 2013
Copy of the order forwarded to:
1. M/s. Trade Apartments Ltd., 31, N.S.Road, Kolkata-700 001
2. ACIT, Circle-4, Kolkata
3. The CIT(A), Kolkata
4. CIT, Kolkata
5. DR, Kolkata Benches, Kolkata True Copy, By order, Asstt. Registrar, ITAT, Kolkata Talukdar(Sr.P.S.) 12 I.T.A. No.1632/Kol/2008 M/s. Trade Apartments Ltd. A.Y.2004-05