Gujarat High Court
Commissioner Of Income Tax-I vs Dishman Pharmaceuticals Ltd - ... on 30 March, 2010
TAXAP/446/2009 1/13 ORDER
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL No. 446 of 2009
=========================================
COMMISSIONER OF INCOME TAX-I - Appellant(s)
Versus
DISHMAN PHARMACEUTICALS LTD - Opponent(s)
=========================================
Appearance :
MR MANISH R BHATT, SR. ADVOCATE with MRS MAUNA M BHATT for Appellant(s) :
1,
None for Opponent(s) : 1,
=========================================
CORAM : HONOURABLE MR. JUSTICE D.A.MEHTA
and
HONOURABLE MS. JUSTICE H.N.DEVANI
Date : 30/03/2010
ORAL ORDER
(Per : HONOURABLE MS. JUSTICE H.N.DEVANI)
1. In this appeal under section 260A of the Income Tax Act, 1961 (the Act), appellant - Revenue has proposed the following five questions stated to be substantial questions of law arising out of order dated 30.04.2008 made by the Income- tax Appellate Tribunal (hereinafter referred to as the Tribunal) :-
(1) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) in directing to treat Rs.33,20,000/- as long term capital gain against short term capital gain held by the Assessing Officer?
TAXAP/446/2009 2/13 ORDER
(2) Whether the Appellate Tribunal is right in law
and on facts in confirming the order passed by the CIT(A) in deleting the interest disallowance of Rs.8,19,000/- on account of interest bearing funds diverted to associate companies?
(3) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) in deleting the disallowance of Rs.2,93,439/- made on account of unexplained expenditure?
(4) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) in deleting the addition of Rs.6,02,31,163/- made on account of difference between stock as per the books of account and stock as per stock statements submitted to the banks?
(5) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) in directing to exclude the sales tax and excise duty and the interest receipts from the total turnover while computing deduction u/s. 80HHC of the Act?
2. The respondent company is a manufacturer of bulk drugs and fine chemicals. Apart form this business, the TAXAP/446/2009 3/13 ORDER company also owns travelling business under the name of Adiman Travels and business centre under the name of Dishman Business Centre. The assessment year is 2000-2001. The respondent-assessee filed return of income on 30.11.2000 declaring total income of Rs.69,55,240/- which came to be processed under section 143(1) of the Act. Subsequently, the return was selected for scrutiny and accordingly notice was issued under section 142(2). The Assessing Officer framed assessment under section 143(3) of the Act whereby various additions were made, against which the assessee went in appeal before Commissioner (Appeals). Vide order dated 24.07.2003, Commissioner (Appeals) granted relief, against which the revenue carried the matter in appeal.
3. The first proposed question arises from findings recorded by the Tribunal, confirming the findings of Commissioner (Appeals) in relation to treating income of Rs.33,20,000/- derived from the sale of 415000 shares of SDBPL as long term capital gain as claimed by the assessee instead of short term capital gain. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has shown gain on sale of shares of Schutz Dishman Biotech Private Ltd. as 'Long-term Capital Gain' on the ground that shares so sold had been held by the assessee for a period of more than 12 months but less than 36 months. The Assessing Officer interpreted the proviso to section 2(42A) of the Act to mean that gain on sale of shares which are held for more than 12 months, would be 'Long-term Capital Gain' only if the shares are listed in a recognised stock exchange, otherwise the gain would be 'Short-term Capital Gain'.
TAXAP/446/2009 4/13 ORDER According to the Assessing Officer, the income in relation to sale of shares not listed in a recognised stock exchange would be a 'Long-term Capital Gain' only if the same are held for more than 36 months. He, accordingly, assessed the total gain on the sale of 4,15,000 shares of Schutz Dishman Biotech Private Limited amounting to Rs.33,20,000/- as 'Short-term Capital Gain".
3.1 The Commissioner (Appeals) placing reliance on CBDT Circular dated 10th June, 1994 bearing No.684 as well as on the proviso to section 2 (42A) of the Act, came to the conclusion that 'other securities' having been included in the proviso to section 2(42A) of the Act by a specific amendment, the condition by which listing of 'such securities' on a recognised stock exchange has been made compulsory cannot be read to mean that this condition has been made applicable to shares also, specially when prior to insertion of 'other securities' in the proviso, there was no such condition with respect to holding of shares and allowed the ground by holding that the capital gain was a 'Long-term Capital Gain' and directed the Assessing Officer accordingly.
3.2 The Tribunal agreed with the reasoning adopted by Commissioner (Appeals) and held that the condition relating to listing 'any other security' in a recognised stock exchange was not applicable to shares, and that gain on sale of shares, after holding the same for 12 or more months was 'Long-term Capital Gain' and accordingly, rejected the ground.
3.3 Section 2(42) of the Act which defines 'short term capital asset', insofar as the same is relevant for the purpose of TAXAP/446/2009 5/13 ORDER present appeal reads as under:-
"(42A) "Short term capital asset" means a capital asset held by an assessee for not more than thirty six months immediately preceding the date of its transfer:
Provided that in the case of a share held in a company or any other security listed in a recognised stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963) or a unit of a Mutual Fund specified under clause (23D) of section 10 or a zero coupon bond, the provisions of this clause shall have effect as if for the words "thirty-six months", the words "twelve months" had been substituted."
On a plain reading of the proviso to section 2(42A), it is apparent that the words 'recognised stock exchange' are used in relation to "any other security". Insofar as shares are concerned, the said proviso does not lay down any condition that the same have to be listed in a recognised stock exchange in India. In the circumstances, in respect of any shares held in a company, irrespective of as to whether the same are listed in a recognised stock exchange in India or not, the same would be TAXAP/446/2009 6/13 ORDER long-term capital assets if they have been held for more than 12 months.
3.4 This view also finds support in the CBDT Circular No.684 dated 10th June, 1994 wherein it has been explained that Finance Act, 1987 through an amendment to the provisions of section 2(42A) reduced the maximum period of holding in respect of company shares from 36 months to 12 months for being treated as short-term capital assets. The said Circular also provides that in order to provide units of the Unit Trust of India and Mutual Funds, specified under section 10(23D) of the Act, which are the instruments through which small term investors are increasingly getting the benefit of investment in the capital market, and all securities traded in the recognised stock exchanges, a level playing field. with company shares, the Finance Act has amended the provisions of section 2(42A) so that the maximum holding period for which such instruments are to be considered as short-term will be 12 months in place of 36 months. Thus, the CBDT Circular makes it amply clear that the provisions of section 2(42A) have been amended by the Finance Act with a view to bring securities traded in the recognised stock exchanges at par with company shares. In the circumstances, it is apparent that the intention of the Legislature was to permit company shares held for 12 months to be treated as short-term capital assets. In the circumstances, no infirmity can be found in the order of the Tribunal in holding that gain on sale of shares after holding the same for 12 or more months is a long-term capital gain.
4. Similarly in relation to proposed question No.(2), the Tribunal has again confirmed the finding of Commissioner TAXAP/446/2009 7/13 ORDER (Appeals) that the assessee company was having more than Rs.27.33 crores in the form of share capital and reserves and surplus which were totally interest free. That even if it is assumed that the assessee had diverted the said Rs.4.5 crores to the group concerns as and by way of share application money, the assessee was having sufficient non-interest bearing funds to give by way of advance for making investment without charging any interest. Therefore, there was no question of disallowing proportionate interest. On facts also, both the authorities have concurrently found after appreciating the evidence on record that the assessee had interest free funds in excess of the investments in question.
5. In relation to question no.(3), the Commissioner (Appeals) has recorded the following findings of fact:-
"9.2 I have, perused the certificate issued by the tax auditors within it was clarified and explained as to way the difference arose in the first place! It was clarified by the auditors that for the purpose of tax audit report he has considered the net balance after netting of respective debits and credits where as the ledger account obviously shows the gross balance. If this netting off is taken out, there is no difference between the said two figures. I, therefore hold that there is no difference between the books of accounts and the tax audit report and therefore the addition Rs.2,94,439/- is deleted. This ground of appeal is allowed."
Before the Tribunal, it was contended that the Commissioner TAXAP/446/2009 8/13 ORDER (Appeals) had entertained fresh evidence in violation of the provisions of Rule 46A of the Income Tax Rules. The Tribunal has recorded that there was no reference to any fresh evidence having been filed or considered by Commissioner (Appeals) with respect to addition of Rs.2.94.439/-. The Tribunal was of the opinion that Commissioner (Appeals) had deleted the addition on the appreciation of factual position, which had not been refuted by the Revenue and accordingly did not find any violation of Rule 46A of the Rules and upheld the order of the Commissioner on that ground.
5.1 From the facts emerging on record, it is apparent that the only ground raised before the Tribunal in relation to the said question was that Commissioner (Appeals) had entertained fresh evidence in violation of the provisions of Rule 46A. However, the Tribunal has upon appreciation of the evidence on record, on facts, found that no fresh evidence had been filed before or considered by Commissioner (Appeals) in respect to the said addition.
5.2 In absence of any evidence to dislodge the aforesaid findings of fact recorded by Commissioner (Appeals) and the Tribunal after appreciating the evidence on record, it is not possible to find any infirmity in the impugned order of the Tribunal.
6. In relation to the fourth question, the record reveals that the return of income declaring an income of Rs.69,55,240/- was accompanied by the audited Trading Account, Profit and Loss Account and Balance-Sheet as well as Audit Report. During the course of assessment proceedings, the Assessing Officer TAXAP/446/2009 9/13 ORDER asked the assessee to submit details of closing stock in terms of quality as well as in terms of value as per its books of account which, according to the Assessing Officer, were not furnished. The assessee, however, submitted a copy of statements of stock (quantity-wise as well as value-wise) submitted to the Bank from April, 1999 to February, 2000 as well as on 31st March, 2000. The Assessing Officer called for a copy of the stock statement furnished by the assessee to the Corporation Bank and State Bank of India for the period as on 31st March, 2000. From the statement so furnished to the Banks by the assessee, the Assessing Officer noticed that the closing stock shown in the Bank statement as on 31 st March, 2000 was to the tune of Rs.24,45,46,482.91 weighing 1188.49 metric tonnes. The Assessing Officer compared the quantity of stock shown in the statement submitted to the Bank and computed the difference in quantity of stock shown to the Bank and the stock as per books and found that there was an excess quantity in the stock statement offered as security for availing loan facility. He accordingly quantified the value of excess stock of raw materials and finished goods as shown to the Bank at Rs.6,02,31,163/- and made an addition accordingly.
6.1 Learned Senior Advocate for the appellant submitted that the facts mentioned in paragraphs 34 and 35 of the Tribunal's order, are incorrect. That closing stock as on 31 st March, 2000 as per Schedule-G to the audited balance-sheet was Rs.24,03,38,865/- which consisted of finished goods, work- in-progress and raw material. The figure taken by the Assessing Officer as per Annexure-20 to the audit report consisted of only raw material and finished goods but not the work-in-progress. However, the Assessing Officer in the assessment order had TAXAP/446/2009 10/13 ORDER given a categorical finding that there was a quantitative difference between figures of raw materials and finished goods as per books of account and statement given by the Bank. That the claim of the assessee that in the stock statement given to the Bank, work-in-progress had been classified as raw material or finished goods, was not substantiated by the assessee with any documentary evidence or day-to-day stock register.
6.2 As can be seen from the record, the assessee's case before Commissioner (Appeals) was that there was no discrepancy between the quantity of stock shown to the Bank and the books of account. Commissioner (Appeals) during the course of the appellate proceedings, called for the stock register maintained by the assessee and after verifying the said register, observed that the respondent had maintained the inventories in each individual different category with respective columns for opening stock, purchase, consumption, closing stock. The said register was maintained properly and clearly showed the movement of stock on daily basis. Commissioner (Appeals) found that insofar as the difference in value was concerned, upon comparison of the stock statement in its entirety, the real difference was only of Rs.42,07,626.88 ps. which was on account of the different methods of valuation adopted for valuing the same. Commissioner (Appeals) observed that it was well-settled that in case of a difference between the stock as disclosed in the books and stock as submitted to the Bank, if the difference is on account of quantity, the same is required to be added whereas if the difference is on account of valuation, the same cannot be added. In the present case, the difference being that of valuation, Commissioner (Appeals) deleted the addition of TAXAP/446/2009 11/13 ORDER Rs.6,02,31,163/- and allowed the ground. The Tribunal, upon appreciation of the evidence on record, was of the opinion that so far as the difference in stock (quantity-wise) shown to the Bank and as per books of accounts is concerned, the same does not survive because the Assessing Officer failed to take note of closing stock of work-in-progress which was duly recorded in the books of account and appeared in the balance- sheet and Schedule-G to the balance sheet. The Tribunal also noted that the departmental representative was not in a position to point out any infirmity in the findings recorded by the Commissioner (Appeals) which was as a result of appreciation of factual position available in the assessee's books of account which were duly produced before the Assessing Officer also. The Tribunal further noted that it was abundantly clear from the assessment that the Assessing Officer had duly noted the availability of work-in-progress to the tune of Rs.12,01,48,923/- as per Schedule-G of the balance-sheet whereas he has failed to consider the same while comparing the quantity-wise stock as per books with the quantity-wise stock as per statement furnished to the Bank. That having noticed the details of closing stock as per Annexure-20 to the Tax Audit Report, it was obligatory for the Assessing Officer, to get the position clarified from the assessee and to provide the assessee an opportunity to explain as to why the work-in-progress has not been shown in Annexure-20 to the audited balance-sheet. The Tribunal accordingly rejected the ground of Revenue and confirmed the order of the Commissioner (Appeals).
6.3 Thus, both the Tribunal as well as Commissioner (Appeals) have, upon appreciation of the evidence on record, TAXAP/446/2009 12/13 ORDER concurrently found that there was no difference in the stock quantity-wise as shown to the Bank and as per the books of account of the assessee; that the Assessing Officer had failed to take note of closing stock of work-in-progress which was duly recorded in the books of account and in Schedule-G to the balance-sheet. We have also gone through the paper book produced by the learned counsel for the appellant which was forming part of the record before the Tribunal. The learned counsel for the appellant is not in a position to point out anything contrary from the record so as to persuade us to take a different view. .
7. In relation to proposed question No.(5), the learned counsel for appellant-revenue has submitted that on an identical issue, this Court has admitted a Tax Appeal being Tax Appeal No.318 of 2008. In the circumstances, this appeal is required to be admitted in relation to the said question.
8. Thus, in relation to each of the first four proposed questions, there is nothing available on record to dislodge the concurrent findings of fact recorded both by Commissioner (Appeals) and the Tribunal after appreciating the evidence on record. Accordingly, none of the said proposed questions, or any other question, can be stated to arise out of the impugned order of the Tribunal insofar as the said issues are concerned. In absence of any substantial question of law, the appeal is dismissed qua proposed questions No.1 to 4.
9. In relation to proposed question No.5, the tax appeal is admitted on the following substantial question of law:-
TAXAP/446/2009 13/13 ORDER "Whether the Appellate Tribunal was justified in law and on facts in confirming the order passed by Commissioner (Appeals) directing to exclude Sales Tax and Excise duty from the total turnover for computing deduction under section 80HHC even after insertion of section 145A of the Act."
( D.A. Mehta, J. ) ( Harsha Devani, J. ) hki