ACIT, CHENNAI V. M/s. Integrated Enterprises Ltd., CHENNAI

ITA 1837/CHNY/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96588 (ITAT-CHENNAI)
• Duration Of Justice: 4 year(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-12-2015
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 17-11-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 14-11-2011
• Court: TRIBUNAL
• Department Lawyers: DR U ANJANEYALU
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Cost of acquisition
• Section: 115JB; 37

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : CHENNAI . . . , . ! , ' # $ [ BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ] ./ I.T.A.NOS.1837 & 1841/MDS/2011 / ASSESSMENT YEARS : 2002-03 AND2007-08 THE ASSTT. COMMISSIONER OF INCOME-TAX COMPANY CIRCLE II(3) CHENNAI VS. M/S INTEGRATED ENTERPRISES LTD NO.5-A KENCES TOWERS NO.1 RAMAKRISHNA STREET, T. NAGAR CHENNAI 600 017 [PAN AAACI 1509 F ] ( %& / APPELLANT) ( '(%& /RESPONDENT) / APPELLANT BY : DR. U. ANJANEYALU, CIT /RESPONDENT BY : SHRI S. SRIDHAR, ADVOCATE / DATE OF HEARING : 17 - 1 1 - 2015 ! / DATE OF PRONOUNCEMENT : 09 - 12 - 2015 / O R D E R PER N.R.S.GANESAN, JUDICIAL MEMBER BOTH THE APPEALS OF THE REVENUE ARE DIRECTED AGAI NST SEPARATE ORDERS OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-III, CHENNAI, DATED 26.8.2011 FOR ASSESSMENT YEARS 2002- 03 AND 2007-08. I.T.A.NO.1837/MDS/2011 A.Y 2002-03 2. DR.U. ANJANEYALU, LD. DEPARTMENTAL REPRESENTATIVE S UBMITTED THAT THE FIRST ISSUE ARISES FOR CONSIDERATION IS VA LUATION OF THE STOCK. ITA NO.1837 & 1841/11 :- 2 -: 3. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HA S DEVIATED THE METHOD OF VALUATION OF THE CLOSING STOCK AND PR OVIDED ` 75.90 LAKHS TOWARDS DIMINUTION IN VALUE OF THE CLOSING ST OCK. THE ASSESSEE EXPLAINED BEFORE THE ASSESSING OFFICER THAT THE CLO SING STOCK HAS TO BE VALUED AT THE COST OR MARKET PRICE WHICHEVER IS LES S. DURING THE YEAR UNDER CONSIDERATION THERE WAS CONSIDERABLE DEPRECIA TION ON THE MARKET VALUE OF MANY SHARES DUE TO SCAM IN THE MARKET. TH E ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS VALUED THE SHA RES AT COST PRICE IN THE EARLIER ASSESSMENT YEARS. HOWEVER, FOR THE YEA R UNDER CONSIDERATION, THE ASSESSEE HAS VALUED THE CLOSING STOCK AT COST OR MARKET PRICE WHICHEVER IS LOWER. SINCE THE ASSESS EE CHANGED THE METHOD OF VALUING THE CLOSING STOCK, THE DIMINUTION IN THE VALUE OF ` 75.90 LAKHS HAS TO BE ADDED TO THE BOOK PROFIT U/S 115JB OF THE ACT. 4. ON THE CONTRARY, SHRI S. SRIDHAR, LD. COUNSEL FOR T HE ASSESSEE SUBMITTED THAT DUE TO SCAM IN THE MARKET, THE VALUE OF THE SHARES WAS CONSIDERABLY DEPRECIATED, THEREFORE, THE ASSESSEE THOUGHT IT FIT TO VALUE THE CLOSING STOCK AT MARKET PRICE THAN THE CO ST PRICE. SINCE THERE WAS NO TRADING ACCOUNT, THE DIMINUTION IN VALUE WAS PROVIDED IN THE PROFIT & LOSS ACCOUNT. ACCORDING TO THE LD. COUNSE L, THE ASSESSEE HAS THE OPTION TO VALUE THE CLOSING STOCK EITHER AT MAR KET PRICE OR AT THE COST PRICE WHICHEVER IS LOWER. THEREFORE, MERELY B ECAUSE THE ASSESSEE HAS VALUED THE SHARES AT MARKET PRICE THAT CANNOT BE A ITA NO.1837 & 1841/11 :- 3 -: REASON TO REJECT THE CLAIM OF THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. ACCORDING TO THE LD. COUNSEL, IN TH E EARLIER ASSESSMENT YEARS, THE ASSESSEE OPTED THE METHOD OF VALUATION WHICH SUITS ITS CONVENIENCE, THEREFORE, THE CIT(A) HAS RIGHTLY ALLO WED THE CLAIM OF THE ASSESSEE. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. ADMI TTEDLY, THE ASSESSEE VALUED THE CLOSING STOCK IN THE EARLIER A SSESSMENT YEARS AT THE COST PRICE. DURING THE YEAR UNDER CONSIDERATIO N THE ASSESSEE VALUED THE SAME AT MARKET PRICE. DUE TO CHANGE OF THE METHOD, THE ASSESSING OFFICER DISALLOWED THE DIMINUTION IN THE VALUE OF SHARES TO THE EXTENT OF ` 75.90 LAKHS. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT AS RIGHTLY SUBMITTED BY THE LD. COUNSEL FOR TH E ASSESSEE, THE ASSESSEE HAS OPTION TO VALUE THE SHARES EITHER AT C OST PRICE OR AT MARKET PRICE, THEREFORE, THE ASSESSEE OPTED TO VAL UE THE SHARES AT MARKET PRICE. SINCE THE MARKET PRICE IS LESS THAN THE COST PRICE, THE ASSESSEE CANNOT BE FAULTED WITH AND THE CIT(A) HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE. THIS TRIBUNAL DO NOT F IND ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A) AND ACCORDI NGLY THE SAME IS CONFIRMED. 6. THE NEXT ISSUE ARISES FOR CONSIDERATION IS COMPUTAT ION OF INDEXED COST FOR CAPITAL GAIN. ITA NO.1837 & 1841/11 :- 4 -: 7. DR. U. ANJANEYALU, LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE PURCHASED SHARES OF CI TY UNION BANK AND HELD THE SAME AS STOCK-IN-TRADE UPTO 31.3.1999. SU BSEQUENTLY, IT WAS CONVERTED INTO INVESTMENT TO THE EXTENT OF 20 LAKH S SHARES IN THE YEAR ENDED 31.3.2000. THE ASSESSEE HAS OFFERED THE PRO FIT ON CONVERSION TO THE EXTENT OF ` 9,82,499/- AS INCOME FOR THE ASSESSMENT YEAR 2000- 01. SUBSEQUENTLY, THE ASSESSEE HAS SOLD 3,00,000 SHARES OF CITY UNION BANK DURING THE YEAR UNDER CONSIDERATION. TH E ASSESSEE COMPUTED THE COST INFLATION INDEX BY TAKING THE ASS ESSMENT YEAR 1998- 99. HOWEVER, THE ASSESSING OFFICER ADOPTED THE COS T INFLATION INDEX OF THE YEAR 1999-2000. REFERRING TO THE DECISION OF T HE PUNE BENCH OF THIS TRIBUNAL IN KALYANI EXPORTS & INVESTMENTS (P) LTD VS DCIT, 78 ITD 95, THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE. REFERRING TO SEC. 55 OF THE ACT, MORE PARTICULARLY SUB CLAUSE (2), THE LD. DR SUBMITTED THAT WHEN THE ASSESSEE CONVERTED STOCK-IN-TRADE INTO IN VESTMENT, THE COST OF ACQUISITION SHALL BE FROM WHICH IT WAS DERIVED HAS TO BE TAKEN INTO ACCOUNT. THEREFORE, WHEN THE ASSESSEE CONVERTED T HE SHARES FROM STOCK-IN-TRADE TO INVESTMENT, ACCORDING TO THE LD. DR, THE PRICE IN THE YEAR IN WHICH THE CONVERSION WAS MADE HAS TO BE TAK EN INTO CONSIDERATION AND NOT THE INITIAL YEAR OF PURCHASE. 8. ON THE CONTRARY, SHRI S. SRIDHAR, LD. COUNSEL FOR T HE ASSESSEE SUBMITTED THAT THE DISPUTE BEFORE THIS TRIBUNAL IS NOT THE COST OF ITA NO.1837 & 1841/11 :- 5 -: ACQUISITION OF THE SHARES. THE DISPUTE IS WITH REG ARD TO COST OF INFLATION INDEX. THEREFORE, THE COST OF INFLATION INDEX OF T HE YEAR IN WHICH THE ASSESSEE INITIALLY ACQUIRED THE SHARES HAS TO BE TA KEN INTO CONSIDERATION. REFERRING TO EXPLANATION TO SEC. 48 , THE LD. COUNSEL SUBMITTED THAT THE INFLATION INDEX SHALL BE THE YEA R WHEN THE ASSESSEE INITIALLY ACQUIRED THE SHARES AND NOT SUBSEQUENT CO NVERSION. REFERRING TO THE DECISION OF THE PUNE BENCH OF THIS TRIBUNAL IN THE CASE OF KALYANI EXPORTS & INVESTMENT (P) LTD (SUPRA), THE L D. COUNSEL POINTED OUT THAT AN ASSET CANNOT BE ACQUIRED FIRST AS A NON -CAPITAL ASSET AT ONE POINT OF TIME AND AGAIN AS A CAPITAL ASSET AT A DIF FERENT POINT OF TIME. ACCORDING TO THE LD. COUNSEL, THERE WILL BE ONE ACQ UISITION OF THE ASSET WHEN THE ASSESSEE INITIALLY ACQUIRES IT IRRESPECTI VE OF ITS CHARACTER AT THE POINT OF TIME. THEREFORE, MERELY BECAUSE THE ASSESSEE CHANGED THE CHARACTER OF THE ASSET FROM STOCK-IN-TRADE TO I NVESTMENT, IT DOES NOT MATTER WHEN IT COMES TO COST OF INFLATION INDEX . THEREFORE, THE CIT(A), BY FOLLOWING THE DECISION OF THE PUNE BENCH OF THIS TRIBUNAL HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. AS RIGHTLY SUBMITTED BY THE LD. COUNSEL FOR THE ASSESSEE, THE ISSUE ARISES FOR CONSIDERATION IS COST OF INDEXATION OF THE ASSET IT WAS CONVERTED IN TO INVESTMENT-IN- TRADE. THE PUNE BENCH OF THIS TRIBUNAL IN THE CASE OF KALYANI EXPORTS ITA NO.1837 & 1841/11 :- 6 -: & INVESTMENTS (P) LTD. (SUPRA) BY MAJORITY VIEW FOU ND THAT AN ASSET CANNOT BE ACQUIRED FIRST AS NON-CAPITAL ASSET AT ON E POINT OF TIME AND AGAIN AS A CAPITAL ASSET AT A DIFFERENT POINT OF TI ME. THE TRIBUNAL FOUND THAT THERE CAN BE ONE ACQUISITION OF ASSET FO R THE FIRST TIME IRRESPECTIVE OF THE CHARACTER AT THAT POINT OF TIME . THEREFORE, BY MAJORITY OPINION IT WAS FOUND THAT WHAT IS RELEVANT FOR THE PURPOSE OF CAPITAL IS THE COST OF ACQUISITION AND NOT THE DATE AT WHICH IT BECAME THE CAPITAL ASSET. THE TRIBUNAL HAS CONSIDERED THE PROVISIONS OF SEC. 55 OF THE ACT AND ALSO THE JUDGMENT OF THE APEX COU RT IN CIT VS BAI SHRINBAI K KOOKA, 46 ITR 86. SINCE BY MAJORITY OPI NION, THE PUNE BENCH OF THIS TRIBUNAL FOUND THAT THE COST OF ORIGI NAL ACQUISITION HAS TO BE TAKEN INTO CONSIDERATION FOR CALCULATING THE COS T INFLATION INDEX AND THE CIT(A) HAS APPARENTLY FOLLOWED THE ABOVE ORDER, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A ). ACCORDINGLY, THE SAME IS CONFIRMED. 10. IN THE RESULT, THE APPEAL OF THE REVENUE FOR ASSES SMENT YEAR 2002-03 IS DISMISSED. I.T.A.NO. 1841/MDS/2011 A.Y 2007-08 11. DR.U. ANJANEYALU, LD. DR SUBMITTED THAT THE FIRST ISSUE ARISES FOR CONSIDERATION IS DISALLOWANCE OF 2% OF THE DIVI DEND INCOME EARNED BY THE ASSESSEE. ITA NO.1837 & 1841/11 :- 7 -: 12. THE LD. DR SUBMITTED THAT THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2007-08, THEREFORE, RULE 8D IS NOT APPLICABLE. HOWEVER, A REASONABLE ESTIMATE HAS TO BE MADE SINCE THE ASSESSEE HAS INCURRED EXPENDITURE FOR EARNING THE INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME. 13. WE HEARD SHRI S SRIDHAR, LD. COUNSEL FOR THE ASSESS EE ALSO. ACCORDING TO THE LD. COUNSEL, ADMITTEDLY RULE 8D IS NOT APPLICABLE DURING THE YEAR UNDER CONSIDERATION, THEREFORE, THE CIT(A) HAS ESTIMATED THE EXPENDITURE AT 2%. IN SEVERAL CASES, ACCORDING TO THE LD. COUNSEL, THIS TRIBUNAL CONFIRMED THE ESTIMATION OF EXPENDITURE AT 2% OF THE DIVIDEND INCOME EARNED BY THE ASSESSEE. THEREFORE, NO INTERFERENCE IN THE ORDER OF THE CIT(A) IS CALLED F OR. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. AD MITTEDLY, RULE 8D OF THE INCOME-TAX RULES IS NOT APPLICABLE FOR THE ASSE SSMENT YEAR UNDER CONSIDERATION. THEREFORE, THE EXPENDITURE FOR EARN ING THE EXEMPTED INCOME HAS TO BE ESTIMATED ON A REASONABLE BASIS. THE CIT(A), AFTER TAKING INTO CONSIDERATION ALL THE CIRCUMSTANCES AND FACTS AVAILABLE ON RECORD, ESTIMATED THE EXPENDITURE AT 2% OF THE DIVI DEND INCOME. IN THOSE CIRCUMSTANCES, THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE CIT(A). ACCORDINGLY THE SAME IS CONFIRMED. ITA NO.1837 & 1841/11 :- 8 -: 15. THE NEXT ISSUE ARISES FOR CONSIDERATION IS ADVERTIS EMENT EXPENSES PAID TO M/S ALPHA SYSTEMS LTD. 16. DR.U. ANJANEYALU, LD. DR SUBMITTED THAT THE ASSESS EE CLAIMED BEFORE THE ASSESSING OFFICER THAT A SUM OF ` 60 LAKHS WAS PAID TO M/S ALPHA SYSTEMS LTD TOWARDS ADVERTISEMENT EXPE NSES. ON VERIFICATION OF THE ACCOUNTS, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE, IN FACT, CLAIMED ` 72,30,000/- UNDER THE HEAD ADVERTISEMENT. IN THE EARLIER ASSESSMENT YEAR, THE ASSESSEE HAS C LAIMED ONLY ` 11,19,000/-. WHEN THE ASSESSING OFFICER CALLED FOR EXPLANATION FOR MARKED INCREASE IN THE EXPENSES, THE ASSESSEE COUL D NOT EXPLAIN PROPERLY. HOWEVER, THE ASSESSING OFFICER FOUND THA T M/S ALPHA SYSTEMS LTD. IS A GROUP CONCERN OF THE ASSESSEE. THE MAGAZINE SAID TO BE PUBLISHED BY M/S ALPHA SYSTEMS LTD WAS TO BE EXCLUSIVELY FOR THE USE OF THE ASSESSEE, THEREFORE, THERE IS NO QUESTI ON OF ANY PAYMENT FOR PUBLICITY OF THE MAGAZINE. ACCORDING TO THE LD . DR, THE ASSESSEE IS ENGAGED IN FACILITATING TAX INDEX NUMBER(TIN) WHICH DOES NOT REQUIRE ANY PUBLICITY AT ALL. IN THE ABSENCE OF ANY AGREEM ENT FOR PAYMENT OF ` 60 LAKHS TO M/S ALPHA SYSTEMS LTD, THE ASSESSING OF FICER FOUND THAT IT WAS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PUR POSE OF BUSINESS. 17. ON THE CONTRARY, THE LD. COUNSEL SUBMITTED THAT THE ASSESSEE IS ENGAGED IN GENERATING TAX IDENTITY NUMBER(TIN) F OR THE INCOME-TAX DEPARTMENT. THE ASSESSEE GAVE WIDE PUBLICITY IN T HE MAGAZINE ITA NO.1837 & 1841/11 :- 9 -: KNOWN AS THE INTEGRATED SHARE NEWS BY USING ADDI TIONAL PAGES. FOR MAKING THE ADVERTISEMENT, THE ASSESSEE HAS TO NECE SSARILY PAY TO M/S ALPHA SYSTEMS LTD. AFTER THE PUBLICATION, THE INCO ME OF THE ASSESSEE WAS INCREASED TO ` 12,18,65,000/-. IN EARLIER ASSESSMENT YEAR THE INCOME WAS AT ` 5,52,66,000/-. THEREFORE, ACCORDING TO THE LD. COUNSEL, THERE WAS AN IMMEDIATE NEXUS BETWEEN THE P AYMENT OF ADVERTISEMENT EXPENSES TO M/S ALPHA SYSTEMS LTD AND THE BUSINESS OF THE ASSESSEE. ACCORDING TO THE LD. COUNSEL, THE C IT(A) HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE U/S 37 OF THE A CT. 18. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. ADM ITTEDLY, THE ASSESSEE CLAIMED A SUM OF ` 72,30,000/- UNDER THE HEAD ADVERTISEMENT. THE PAYMENT WAS MADE TO M/S ALPHA SYSTEMS LTD WHICH IS PUBLISHING A MAGAZINE IN THE NAME OF THE INTEGRATED SHARE NEWS. THE CONTENTION OF THE ASSESSING OFFICER IS THAT THE MAGAZINE PUBLISHED BY M/S ALPHA SYSTEMS LTD. IS FOR EXCLUSIV E USE OF THE ASSESSEE AND THE ASSESSEE PAYS ` 2/- PER MAGAZINE TOWARDS THE COST. THE ENTIRE COST OF PUBLICATION IS BORNE BY THE ASS ESSEES CLIENT, THEREFORE, THE ASSESSING OFFICER FOUND THAT THERE I S NO QUESTION OF MAKING ANY FURTHER PAYMENT TOWARDS PUBLICITY. THE FACT REMAINS THAT THE ASSESSEE MADE WIDE PUBLICITY BY USING ADDITION AL PAGES IN THE MAGAZINE THE INTEGRATED SHARE NEWS WHICH WOULD HA VE BEEN ITA NO.1837 & 1841/11 :- 10 -: OTHERWISE USED BY M/S ALPHA SYSTEMS LTD FOR EARNING REVENUE. SINCE THE ASSESSEE MADE USE OF THE ADDITIONAL PAGES, IT HAS TO NECESSARILY COMPENSATE M/S ALPHA SYSTEMS LTD. AFTER WIDE PUBLI CATION, THERE WAS HIKE IN THE INCOME OF THE ASSESSEE FROM ` 5,52,66,000/- TO ` 12,18,65,000/- DURING THE YEAR UNDER CONSIDERATION. THEREFORE, AS RIGHTLY FOUND BY THE CIT(A), THERE WAS A NEXUS BETW EEN THE PAYMENT OF ADVERTISEMENT CHARGES AND THE BUSINESS OF THE A SSESSEE. HENCE, THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE W ITH THE ORDER OF THE CIT(A). ACCORDINGLY, THE SAME IS CONFIRMED. 19. IN THE RESULT, THE APPEAL OF THE REVENUE FOR ASSESS MENT YEAR 2007-08 STANDS DISMISSED. 20. TO SUMMARIZE THE RESULT, BOTH THE APPEALS OF THE RE VENUE STAND DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH DECEMBER, 2015, AT CHENNAI. SD/- SD/- ( . ! ) (A. MOHAN ALANKAMONY) ' / ACCOUNTANT MEMBER ( . . . ' ) (N.R.S. GANESAN) / JUDICIAL MEMBER #$ / CHENNAI %& / DATED: 9 TH DECEMBER, 2015 RD &' ()*) / COPY TO: 1 . / APPELLANT 4. + / CIT 2. / RESPONDENT 5. ),- . / DR 3. +/' / CIT(A) 6. -01 / GF