Calcutta High Court
Commissioner Of Income Tax vs M/S Trade Apartments Ltd on 10 March, 2014
Author: Girish Chandra Gupta
Bench: Girish Chandra Gupta
ORDER SHEET
IN THE HIGH COURT AT CALCUTTA
Special Jurisdiction
[Income Tax]
ORIGINAL SIDE
ITAT No. 206 of 2013
GA No. 3750 of 2013
COMMISSIONER OF INCOME TAX, KOL-II
Versus
M/S TRADE APARTMENTS LTD
BEFORE:
The Hon'ble JUSTICE GIRISH CHANDRA GUPTA
The Hon'ble JUSTICE SUDIP AHLUWALIA
Date : 10th March, 2014.
For Appellanet : Ms. A. Ghutghutia, Advocate
For Respondent : Mr. J.P. Khaitan, Senior Advocate with
Ms. A. Banerjee and Mr. A. K. Dey, Advocates The Court : The subject matter of challenge in this appeal is a judgment and order dated 21st June, 2013 passed by the learned Income Tax Appellate Tribunal dismissing the appeal preferred by the revenue. The revenue has come up in appeal before this Court. The facts and circumstances of the case would appear from the assessment order dated 24th November, 2006, which are as follows:
" The valuation report of Bose & Chakraborty, Chartered Accountants dated 29.3.2004 for valuation of shares of Offshore India Ltd. following the audited Annual Accounts for the year ended 31st March, 2003 (copy enclosed), gives the break-up values of each of shares of Offshore India Ltd. at (-) Rs.1.89. 2
45,00,000 shares of Offshore India Ltd. were converted to stock as on 1.4.03 and included in the debit side of P & L A/c. at Rs.2,47,05,000/- which was taken to be the value of such shares since 31.3.2002, though valuation Report of the Auditor values the shares at (-) Rs.1.89 per share. These shares were not sold during the period 1.4.03 to 31.3.04. On 31.3.2004 it was shown as stock of 45,00,000 shares valued at Re.1.
Assessee has relied on the valuation report of the Chartered Accountant as per accounts as at 31.3.03 for valuing the closing stock of 31.3.04 at Re.1 but the same amount of shares has been converted on 1.4.03 at Rs.2,47,05,000/-. Within the same financial year two different valuation has been adopted by the assessee for the same stock of shares which is not permissible.
Without prejudice to the above discussion it is also noted that shares of another company namely, Yield Investment (P) Ltd. were also transferred from investment to stock along with shares of Offshore India Ltd. Part of the stock converted in Yield Investment (P) Ltd., were sold by the assessee during the year itself and the balance appears in the list of stock as held by the assessee as on 31/3/04. The method of the valuation of the shares of Yield Investment (P) Ltd. that has remained unsold on the last date of the previous year ie 31.3.04 is made on the same basis as per calculation of shares held as investment as on 31/3/03. This is direct contradiction to the method of valuation of shares held as investment and held as stock in trade in the case of shares of Offshore India Ltd. the reasons for which cannot be explained by the A/R."
The assessing officer, in the circumstances, reduced the value of transfer from investment to stock-in-trade by a sum of Rs.2,47,05,000/-. 3
Aggrieved by the order of the assessing officer, an appeal was preferred by the assessee before the CIT(A) who by his judgment and order dated 2nd June, 2008, allowed the appeal for the following reasons:
"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 methods 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 assessess'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 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 4 transfer of shares in the case of Off-Shore India Ltd. I therefore, direct the A.O. to delete the addition of Rs.2,47,05,000/-. Ground No.1 is therefore allowed."
The revenue unsuccessfully challenged the order dated 2nd June, 2008 before the learned Tribunal which was dismissed by the judgment and order dated 21st June, 2013. The learned Tribunal, agreeing with the views of the CIT(A), dismissed the appeal and in doing so, held as follows:
"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 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."
The revenue has come up in appeal before this Court. The substantial question of law which arises in this appeal is, "Whether the valuation of the shares of Off-Shore India Limited made on 1st April, 2003 when the block was transferred from investment to stock-in-trade was justified in law ?"
Mr. Khaitan, learned Senior Advocate appearing on behalf of the assessee, submitted that the valuation of the aforesaid shares of Off-Shore India Limited was made by the auditor on 29th March, 2004 at a minus sum of Rs.1.89 per share. Since the inventory could not be valued at a negative price, the entire block of shares of 5 Off-Shore India Limited was valued at Re.1/-. He submitted that in doing so, the assessee followed the guidelines issued by the Reserve Bank of India. He drew our attention to paragraph 6(3) of the Non Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 dated 31.1.1998, which is as follows :
"(3) Unquoted equity shares in the nature of current investments shall be valued at cost or break-up value, whichever is lower. However, NBFCs may substitute fair value for the break-up value of the shares, if considered necessary. Where the balance sheet of the investee company is not available for two years, such shares shall be valued at one rupee only."
He submitted that the following the aforesaid guidelines, the assessee was required to value the shares offered at the break up value or at cost whichever is lower. Since the break up value was a minus figure, the entire block at the end of the financial year was valued at Re.1/-.
He also drew our attention to the Notification Nos.154 to 156 dated 01.01.2002 by which the Non-Banking Financial Companies Regulations were amended. He relied in particular upon sub-clause iv of clause 8 which reads as follows :
"(iv) the inter-class transfer can take place only at the beginning of each year/half year as on April 1 or October 1 with the approval of the Board"
He submitted that according to the aforesaid guidelines of the Reserve Bank of India the transfer from investment to stock in trade could have been made only on lst April or on the lst October. In this case the assessee made the transfer on lst April, 2003.
He also drew our attention to Accounting Standards 13. He relied upon paragraph 32 thereof which reads as follows :
6
"32. Investments classified as long-term investments should be carried in the financial statements at cost. However, provision for diminution shall be made to recognise a decline, other than temporary, in the value of the investments, such reduction being determined and made for each investment individually."
He submitted that the assessee had followed the aforesaid paragraph in valuing the investment in respect of the shares of Off Shore India Limited.
The last submission of Mr. Khaitan has been disputed by Mrs. Ghutghutia, learned Advocate appearing for the revenue. She submitted that the assessee was obliged, according to paragraph 32 of the Accounting Standards 13 relied upon by him, to make provision for the diminution of the value of the shares held by way of investment. According to Mr. Khaitan such diminution was made during the financial year 2001-02. The assessee continued to hold the shares of Off Shore India Limited for the Financial Year 2002-03. The shares of Off Shore India Limited held by the assessee by way of investment were not traded during the financial year 2002-03. There is nothing to show that the value of these shares reached the minus figure of Re.1.89 per share on 29th March, 2004 over night. The fact on the contrary is that the aforesaid valuation was made by the auditor on the basis of the balance sheet for the financial year 2002-03. The fact that no provision for diminution of value of these shares during the financial year 2002-03 was made is a pointer, according to her, to show that the assessee consciously did not do so and sought to pass on the burdenupon the Revenue by the purported transfer from investment to stock in trade. So that the business profit could be set off against the aforesaid losses in investment suffered by the assessee.. She submitted that the ingenuity on the part of the assessee resorted to in order to avoid to pay tax for the profits earned from the business is apparent from the face of the record. Relying on a judgment of the Madras High Court in the case of R. Krishnaswamy Vs. Commissioner of Income 7 Tax reported in 261 ITR 253, she submitted that the conversion into stock in trade was not a normal necessary step. It was on the contrary an artificial step introduced solely for the purpose of evading the liability to pay tax and for no other purpose. Their Lordships of the Madras High Court in the aforesaid judgment held as follows :
"While the assessees no doubt had the freedom of managing their affairs in a manner which would minimise their liability for tax, that does not obligate the Revenue to refrain from examining the true character of the transactions and ignoring wholly artificial steps which are introduced solely with a view to evade tax and for no other purpose".
She submitted that upon an examination of the true character of the transaction it would appear that the shares of Off Shore India Limited were of no value whatsoeveron the day of conversion into stock-in-trade. At the time of such conversion on lst April, 2003 the rate was shown at more than Rs. 5/- per share whereas the entire block of shares on 31st March, 2004 was valued at Re.1/-.
We have considered the rival submissions advanced by the learned Advocates appearing for the parties. Sub-paragraph 3 of paragraph 6 of the Non- Banking Financial Companies Prudential Norms relied upon by Mr. Khaitan cast an obligation upon the assessee to value its current investment at cost or break up value whichever is lower. The assessee did not value the shares of Off Shore India Limited on lst April, 2003 as per the mandate appearing from the aforesaid guidelines. The assessee on the contrary valued the shares at more than Rs. 5/- per share whereas the shares on the date of conversion had a negative value of Rs. 1.89 paisa each on the basis of the balance sheet as on 31.03.03.
Mr. Khaitan submitted that on 31st March, 2003 or lst April, 2003 the balance sheet as at 31st March, 2003 of the Company Off Shore India Ltd. was not available. He in this regard, drew our attention to the Valuation Rules of the Wealth 8 Tax Act, 1957. He relied upon Explanation to Rule 11 of the 3rd Schedule to the Wealth Tax Act, 1957. He, in particular drew our attention to paragraph 3 thereof which reads as follows :
"The Board have decided that where the balance-sheet of a company drawn up as on the relevant valuation date is not published before the due date of filing wealth-tax return by the shareholders and hence not available to them on the said date, they may work out the value of unquoted equity shares under aforesaid rules 11 and 12 on the basis of the balance-sheet drawn up as on a date immediately preceding the relevant valuation date."
He submitted that this Explanation was issued by the CBDT. Needless to mention that the assessee did not even follow the aforesaid Explanation in valuing the shares on lst April, 2003.
The order passed by the Assessing Officer was set aside by the CIT (Appeals) principally on the ground that different standards were applied by the Assessing Officer in accepting the valuation of the shares converted into stock in trade. It is a fact that the assessee had converted shares of Off Shore India Limited and Yield Investment (P) Ltd. The CIT (Appeals) held that -
"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 Shares India Ltd. I, therefore, direct the A.O. to delete the addition of Rs. 2,47,05,000/. Ground No.1 is therefore allowed".
The learned Tribunal has accepted the aforesaid finding of the CIT (Appeals). We are sorry to say that both the CIT (Appeals) and the learned Tribunal 9 failed to notice the fact that a similar treatment can be made where investment was in shares of a similar nature. There is no rule or principle which enjoins similar treatment between the two dissimilar objects. The shares of Off Shore India Limited were valued at a negative price on 29th April, 2004 by the Auditor of the assessee on the basis of the balance sheet as at 31.3.2003 whereas the shares of Yield Investment Private Limited were treated by the assessee during the Financial Year 2003-04. The shares of Yield Investment Pvt. Ltd. were tradable shares whereas the shares of Off Shore India Limited were junk shares. The Assessing Officer did not in fact apply discriminatory standard. He on the contrary has demonstrated that the assessee valued the closing stock with respect to the shares of Yield Investment (P).Ltd. at the same rate at which they were valued at the beginning of the year whereas the block of 45,00,000 shares of Off Shore India Limited valued by the assessee on lst April, 2003 at more than Rs. 5/- per share was valued on 31.3.2004 at Re.1/- only. It is, therefore, not a fact that the assessee had given the same treatment to the shares of Off Shore India Limited and Yield Investment (P) Ltd. as opined by both the CIT (Appeals) and the learned Tribunal.
For the aforesaid reasons the order passed by the learned Tribunal and the CIT (Appeals) are both set aside.
The question formulated above is answered in the negative and in favour of the Revenue. The Valuation of these shares of Off Shore India Ltd. would be made in accordance with law and in doing so the Explanation to Rule 11 of 3rd Schedule to the Wealth Tax Act, 1957 may be taken into consideration by the Assessing Officer.
(GIRISH CHANDRA GUPTA, J.) (SUDIP AHLUWALIA, J.) sm/ANC