ACIT, CHENNAI V. M/s. Subuthi Finance Ltd., CHENNAI

ITA 2003/CHNY/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5187 (ITAT-CHENNAI)
• Duration Of Justice: 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 21-04-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 24-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: TAPAS KUMAR DUTTA
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Business income; Depreciation; Cost of acquisition; Fair market value; Revised return
• Section: 45(2); 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHENNAI BENCH C : CHENNAI [BEFORE DR. O.K. NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER] I.T.A NOS. 2002 & 2003/MDS/2010 ASSESSMENT YEARS : 2002-03 &2004-05 THE ACIT COMPANY CIRCLE VI(4) CHENNAI VS M/S SUBUTHI FINANCE LTD NO.114, IVTH FLOOR KOTHARI BUILDING M.G ROAD, CHENNAI 600034 [PAN AAFCS4074A ] (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI TAPAS KUMAR DUTTA RESPONDENT BY : SHRI S.SRIDHAR O R D E R PER HARI OM MARATHA, JUDICIAL MEMBER: THESE ARE TWO APPEALS OF THE REVENUE, FOR ASSE SSMENT YEARS 2002-03 AND 2004-05, FILED AGAINST THE SAME ASSESSE E, WHICH CAN BE DISPOSED OF BY A COMMON ORDER FOR THE SAKE OF CONVE NIENCE AND BREVITY. I.T.A.NO. 2002/MDS/2010 A.Y 2002-03 2. THIS APPEAL IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DATED 6.9.2010. ITA 2002&2003/10 :- 2 -: 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE- COMPANY IS ENGAGED IN THE BUSINESS OF FINANCE AND I N THE RETURN OF INCOME FILED ON 31.10.2002 FOR ASSESSMENT YEAR 2002 -03, IT DECLARED A LOSS OF ` 3,12,63,298/-. SUBSEQUENTLY, REGULAR ASSESSMENT WAS MADE U/S 143(3) ON 29.3.2005 BY MAKING THREE MAIN ADDITI ONS WHICH ARE AS UNDER: (I) DEPRECIATION ON WINDMILLS ` 1,80,00,000 (II) WEBSITE MAINTENANCE ` 15,00,000 (III) NEW PROJECT EXPENSES ` 7,80,000 4. THIS RESULTED INTO REWORKING OF THE RETURNED LOSS A T ` 1,09,83,928/-. IN FIRST APPEAL, THE ASSESSEE CHALL ENGED THE ABOVE ADDITIONS MADE ON ACCOUNT OF DISALLOWANCES AND IT W AS PRAYED THAT INCOME TO THE EXTENT OF ` 62,92,125/- BEING ON ACCOUNT OF TWO INSTALMENTS OF REBATE GRANTED BY THE ERSTWHILE BANK NAMELY, BANK OF MADURA LTD CONSEQUEST TO THE ONE TIME SETTLEMENT, B E DELETED. THIS AMOUNT WAS OFFERED FOR TAXATION WITHIN THE SCOPE OF SECTION 41(1) OF THE ACT. IN ASSESSMENT YEAR 1999-2000, THERE WAS A DISALLOWANCE OF ` 1,25,84,250/- INCLUDING THE DISPUTED COMPONENT OF ` 62,92,125/- AND THEREFORE, THE FIRST APPELLATE AUTHORITY GRANTED A RELIEF FOR DOUBLE TAXATION. THE SAID ORDER WAS SUBJECTED TO SECOND A PPEAL ON THE TECHNICAL GROUND THAT RULE 46A WAS VIOLATED WHILE D ELETING THE ADDITION OF ` 62,92,125/-. ON THIS ROUND, THE TRIBUNAL REMANDED THIS ISSUE BACK TO THE ASSESSING OFFICER FOR VERIFICATION OF F ACTS. ITA 2002&2003/10 :- 3 -: 5. THE ASSESSEE-COMPANY HAD ACTUALLY MADE A CLAIM OF T AKING LEASE OF FIVE FURNACES FROM THE ERSTWHILE BANK OF M ADURA LTD ON 26.5.1994 AND IN TURN SUB-LEASED THE SAID FURNACES TO M/S GUJARAT RODRELL ENGINEERING LTD. FOR THIS LEASE TRANSACTIO N, THE LEASE RENTAL WAS ` 1,24,84,250/-, TO BE PAID IN FOUR INSTALLMENTS. HOWEVER, THE LEASE AND SUB-LEASE TRANSACTIONS WERE HELD AS BOGUS IN EARLIER ASSESSMENT YEARS AND CONSEQUENTLY, THE DISALLOWANCE , OF BOTH CAPITAL AND INTEREST PORTIONS AFTER SETTING OFF OF THE SAID LEASE RENTALS RECEIVED, WAS MADE. THIS DECISION WAS TAKEN IN ASSESSMENT YE ARS 1996-97 TO 1998-99; AND FOR ASSESSMENT YEAR 1999-2000 RE-ASSES SMENT WAS MADE AND THE AMOUNT OF ` 1,25,84,250/- WAS DISALLOWED. IN THE SECOND ROUND, THE ASSESSING OFFICER HAS HELD THAT T HE CORRECT REMEDY WOULD BE TO DELETE THIS AMOUNT OF ` 62,92,125/- IN THE ASSESSMENT ORDER RELATING TO THE ASSESSMENT YEAR 1999-2000 INS TEAD OF IN THE ASSESSMENT YEAR 20002-03 BECAUSE THE ONE TIME SETTL EMENT WAS REACHED WITH THE BANK DURING THAT PERIOD. IT WAS A LSO ARGUED THAT THE LEASE RENTAL PAYABLE ON THE GROUND OF CESSATION OF LIABILITY WAS NOT JUSTIFIABLE AND TENABLE IN LAW. IN THE SECOND ROUN D, BEFORE THE LD. CIT(A), IT TOOK THE PLEA, INTER ALIA THAT THE TRIB UNAL ORDER WAS NOT ACTED UPON IN ITS LETTERS AND SPIRIT AND THAT UNDER THE ACT, NO DOUBLE TAXATION OF THE SAME AMOUNT IS PERMISSIBLE. THE LD . CIT(A) AGREED WITH THE LD.AR OF THE ASSESSEE AND HE, AFTER VERIFY ING THE ASSESSMENT ITA 2002&2003/10 :- 4 -: ORDER FOR ASSESSMENT YEAR 1999-2000 PASSED ON 29.11 .2006 U/S 143(3) R.W.S 147, OBSERVED THAT IT IS CORRECT ON T HE PART OF THE ASSESSEE TO CANVAS FOR DELETION OF THIS AMOUNT IN ASSESSMENT YEAR 2002-03 TO AVOID DOUBLE TAXATION AND NOT TO CONSIDE R THE SAME IN ASSESSMENT YEAR 1999-2000. AS A RESULT, HE DELETED THIS AMOUNT FROM THE COMPUTATION OF TAXABLE TOTAL INCOME AND DIRECTE D THE ASSESSING OFFICER TO DELETE THIS AMOUNT IN THE COMPUTATION OF TAXABLE TOTAL INCOME OF THE ASSESSMENT YEAR UNDER CONSIDERATION. 6. THE REVENUE HAS CHALLENGED THIS ACTION OF THE LD. C IT(A) BEFORE US. THE MAIN PLEA OF LD.DR IS THAT EACH ASSESSMENT YEAR BEING SEPARATE AND INDEPENDENT SO, ANY DISALLOWANCE MADE IN ONE ASSESSMENT YEAR CANNOT BE CREDITED IN LATER ASSESSM ENT YEAR. MOREOVER, WHEN THE ASSESSEE HAS NOT MADE SUCH A CL AIM EITHER IN ITS RETURN OF INCOME OR IN THE REVISED RETURN, IN THE L IGHT OF THE DECISION OF HON'BLE SUPREME COURT RENDERED IN THE CASE OF GOETZ E(INDIA) LTD, VS CIT (284 ITR 323), THIS DELETION IS NOT PROPER. O N THE OTHER HAND, THE LD.AR HAS REPEATED THE SAME REASONS WHICH WERE TAKE N BEFORE THE AUTHORITIES BELOW. RELIANCE WAS ALSO PLACED ON THE GENERAL AND NATURAL PRINCIPLES OF LAW UNDER WHICH SAME AMOUNT CANNOT BE TAXED TWICE. 7. AFTER HEARING BOTH SIDES, WE FIND THAT THE ORDER FO R ASSESSMENT YEAR 1999-2000 WAS REOPENED AND RE-ASSESSMENT WAS F RAMED ON 29.11.2006 WHICH DATE IS SUBSEQUENT TO THE FRAMING OF THE ASSESSMENT ITA 2002&2003/10 :- 5 -: FOR ASSESSMENT YEAR 2002-03 WHICH WAS MADE ON 29.3. 2005. OBVIOUSLY, THE ASSESSEE GOT FIRST OPPORTUNITY TO TA KE THIS PLEA ONLY BEFORE THE FIRST APPELLATE AUTHORITY BECAUSE THIS I NCIDENCE OCCURRED AFTER FRAMING OF THE RE-ASSESSMENT FOR ASSESSMENT Y EAR 1999-2000. THE OFFER OF ` 62,92,125/- REPRESENTING TWO INSTALLMENTS OF LEASE RENTALS WAS CONSEQUENT UPON THE WAIVER OF THE SAME BY THE BANK AND ADMITTEDLY, THERE WAS ONE TIME SETTLEMENT REACHED B ETWEEN THE BANK OF MADURA AND THE ASSESSEE. THESE DOCUMENTS WERE A VAILABLE BEFORE THE ASSESSING OFFICER. THE DUTY OF THE ASSESSING O FFICER IS NOT ONLY TO BRING THE INCOME UNDER TAX PROVISIONS BUT ALSO TO A VOID DOUBLE TAXATION AND TO GIVE ELIGIBLE RELIEF TO THE ASSESSEE EVEN IF IT IS NOT CLAIMED. THE DECISION IN THE CASE OF GOETZE(INDIA) LTD (SUPRA) DOES NOT PREVENT THE TRIBUNAL TO UNDO THE INJUSTICE CAUSED TO THE CO NCERNED ASSESSEE. SINCE THE AMOUNT OF ` 1,25,84,850/- WAS CLAIMED AS EXPENDITURE TOWARDS LEASE RENTAL IN THE COMPUTATION OF TAXABLE INCOME, THIS DISALLOWANCE HAS RESULTED INTO ENHANCEMENT OF TAXAB LE TOTAL INCOME. SINCE THE ASSESSEE HAS OFFERED ` 62,92,125/- FOR TAXATION ORIGINALLY PRIOR TO THE SUBSEQUENT DEVELOPMENTS, HENCE, IT IS NOT JUSTIFIED TO MAKE THE ADDITION OF THE VERY SAME AMOUNT AGAIN. I N THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE CONSID ERED OPINION THAT THE FINDINGS OF THE LD. CIT(A) IN THIS REGARD ARE I N ORDER BUT WE WOULD LIKE TO OBSERVE THAT THE ASSESSEE CANNOT AGAIN SEEK THE SAME RELIEF IN ITA 2002&2003/10 :- 6 -: ASSESSMENT YEAR OTHER THAN THE ASSESSMENT YEAR UNDE R CONSIDERATION OF THE SAME AMOUNT. WE CONFIRM THE IMPUGNED FINDIN G AND DISMISS THE APPEAL OF THE REVENUE. 8. IN THE RESULT, THE APPEAL OF THE REVENUE FOR ASSESS MENT YEAR 2002-03 IS DISMISSED. I.T.A.NO. 2003/MDS/2010 A.Y 2004-05 9. THIS APPEAL OF THE REVENUE, FOR ASSESSMENT YEAR 200 4-05, IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A) DATED 7.9.2010. 10. THE ASSESSEE-COMPANY, AS STATED ABOVE, IS ENGAGED I N THE BUSINESS OF LEASING AND HIRE PURCHASE AND IS ALSO E NGAGED IN THE BUSINESS OF POWER GENERATION FROM WINDMILLS. IT HA S BEEN FILING THE RETURN OF INCOME WITH COMPANY CIRCLE VI(4) AND IN T HE RETURN FOR ASSESSMENT YEAR 2004-05, THE COMPANY HAS CLAIMED A LOSS OF ` 1,09,12,562/-. DURING THE COURSE OF ASSESSMENT PRO CEEDINGS, THE ASSESSEE REVISED ITS TAX COMPUTATION BY COMPUTING C APITAL GAINS AT ` 38,18,814/- AND BUSINESS LOSS AT ` 7,04,690/-. THE BUSINESS LOSS HAS BEEN ADJUSTED AGAINST ITS CAPITAL GAINS RESULTING I NTO A NET CAPITAL GAIN OF ` 31,14,124/-. AS PER THE REVISED TAX CALCULATION O F THE ASSESSEE, THE FOLLOWING ADJUSTMENTS WERE MADE: (I) DEPRECIATION UNDER COMPANIES ACT ` 36,64,384 (II) DEPRECIATION UNDER INCOME-TAX ACT, ` 4,46,096 (III) LOSS ON SALE OF MACHINERY ` 2,32,42,105 (IV) LONG TERM CAPITAL GAIN ` 2,01,45,800 (V) SHORT TERM CAPITAL LOSS ` 80,00,000 ITA 2002&2003/10 :- 7 -: AFTER ADJUSTING THE ABOVE, THE ASSESSEE ARRIVED AT THE BUSINESS LOSS OF ` 7,04,690/-. 11. DURING THE YEAR, THE COMPANY HAD CONVERTED INVESTME NTS INTO STOCK-IN-TRADE AND ADOPTED INDEXATION COST AS PER S ECTION 48 OF THE ACT FOR THE PURPOSE OF PAYMENT OF CAPITAL GAINS ON CONV ERSION. ACCORDINGLY, COST OF ACQUISITION HAS BEEN ARRIVED A T ` 5,53,08,086 AND VALUE OF CONVERSION INCLUDING SALE HAS BEEN WORKED OUT AT ` 5,91,26,900/-, RESULTING INTO NET CAPITAL GAINS OF ` 38,18,840/-. THE CASE OF THE ASSESSEE IS THAT WHILE MAKING DISALLOWA NCE OF ` 1,80,00,000/-, THE ASSESSING OFFICER HAS OMITTED WD V OF ` 1,80,00,000 WHICH WAS AVAILABLE IN THE RECORDS OF THE DEPARTMEN T AS DISALLOWANCE OF DEPRECIATION IN THE ASSESSMENT YEAR 2002-03 WAS MADE ALTHOUGH CLAIMED BY THE ASSESSEE. AS PER THE ASSESSEE, THE ASSESSING OFFICER HAS INADVERTENTLY MENTIONED FINANCIAL YEAR 2003-04 ISNTEAD OF ASSESSMENT YEAR 2002-03. ACCORDING TO THE ASSESSEE , THE FINDING OF THE ASSESSING OFFICER THAT ASSESSEE HAS CLAIMED 100 % DEPRECIATION ON THE ASSETS SOLD IS BASED ON ASSUMPTIONS AND IS CONT RARY TO FACTS AVAILABLE WITH THE INCOME-TAX DEPARTMENT AS THE SAI D CLAIM HAD ALREADY BEEN DISALLOWED. 12. WITH REGARD TO THE SALE OF BONUS SHARES OF ` 2,00,00,000/-, THE CASE OF THE ASSESSEE IS THAT THE ASSESSING OFFICER HAS WRONGLY UNDERSTOOD THE PROVISIONS OF SECTION 55(2)(IIIA) OF THE ACT REGARDING ITA 2002&2003/10 :- 8 -: COMPUTATION OF CAPITAL GAINS WITH RESPECT TO BONUS SHARES AND ALSO THE CONCEPT OF CAPITAL GAINS AND CONCEPT OF BUSINESS IN COME ON THE CONVERSION OF INVESTMENT INTO STOCK-IN-TRADE AND BU SINESS PROFIT. ACCORDING TO THE ASSESSEE, OPENING STOCK OF STOCK-I N-TRADE AND VALUE OF CLOSING STOCK AT THE END OF THE YEAR HAS BEEN WR ONGLY COMPUTED. ACCORDING TO THE ASSESSEE, THE ASSESSING OFFICERS STATEMENT THAT THE ASSESSEES WORKING RESULTED IN CONSIDERABLE LOSS IN THE COMPUTATION OF CAPITAL GAINS WITHOUT SPECIFICALLY PINPOINTING THE PROVISIONS OF ACT CANNOT BE SUSTAINED. THE VEHEMENT SUBMISSIONS OF T HE ASSESSEE IS THAT THE ASSESSING OFFICER HAS WRONGLY BROUGHT TO T AX THE SALE OF BONUS SHARES WHICH IS SHORT TERM CAPITAL GAIN, WITHOUT AP PLYING THE PROVISIONS OF SECTION 55(2)(IIIA) OF THE ACT. 13. ON THE ISSUE OF SALE OF BONUS SHARES, THE FACTS WHI CH WE HAVE CULLED OUT ARE THAT IN THE FIRST ROUND, THE TRIBUNA L HAD DIRECTED THE LD. CIT(A) TO REEXAMINE THE ISSUE OF COMPUTATION OF PR OFITS FROM THE SALE OF BONUS SHARES AS PER LAW. THE CASE OF THE REVENU E IS THAT BONUS SHARES WERE NOT CONVERTED INTO STOCK-IN-TRADE BY TH E ASSESSEE. THE ISSUE REGARDING SALE OF BONUS SHARES HINGES AROUND THE FACT THAT THE COMPUTATION OF CAPITAL GAINS/PROFITS AND GAINS ESPE CIALLY, THE DETERMINATION OF HE COST OF ACQUISITION OF THE BONU S SHARES IN THE COMPUTATION. THE CASE OF THE ASSESSEE IS THAT THE SCOPE OF THE PROCEEDINGS ON THIS ISSUE IS VERY LIMITED INASMUCH AS THE COMPUTATION ITA 2002&2003/10 :- 9 -: OF CAPITAL GAINS/PROFITS AND GAINS ARISING OR ACCRU ING AS A RESULT OF SALE OF BONUS SHARES TO ICICI LTD FOR ` 2 CRORES [20,00,000 X ` 10/-] SHOULD BE IN ACCORDANCE WITH THE TWO DECISIONS OF THE HON' BLE SUPREME COURT WHICH ARE DISCUSSED IN THE COMMON ORDER OF THE TRIB UNAL. FURTHER CASE OF THE ASSESSEE IS THAT IN VIEW OF THE DECISIO N OF THE APEX COURT, WHICH HAS LAID DOWN THE PRINCIPLE REGARDING THE DET ERMINATION OF COST OF ACQUISITION OF BONUS SHARES WHEN THESE ARE ISSUE D BY A COMPANY, THAT IT HAS AN IMPACT ON THE ORIGINAL SHARES AND TH E VALUE OF THE ORIGINAL SHARES GETS AUTOMATICALLY REDUCED NOTWITHS TANDING THE FACT THAT THE TOTAL HOLDING OF THE SHAREHOLDER MAY BE LA RGER. ACCORDING TO THE ASSESSEE, THE HON'BLE SUPREME COURT HAS LAID E MPHASIS ON AVERAGE COST METHOD FOR ASCERTAINMENT OF THE COST IRRESPECTIVE OF THE FACT WHETHER THE SHARES ARE HELD BY THE INVESTOR OR DEALER. ON THE CONTRARY, THE CASE OF THE REVENUE IS THAT THE DIRE CTION OF THE LD. CIT(A) TO WORK OUT THE COST OF 2 LAKHS BONUS SHARES AT ` 1 CRORE AND ASSESSED AS SURPLUS AS BUSINESS INCOME IS NOT CORR ECT BECAUSE THE TRIBUNAL HAS DIRECTED THE LD. CIT(A) TO EXAMINE THE ISSUE OF COMPUTATION OF PROFIT FROM THE SALE OF BONUS SHARES AS PER LAW. ACCORDING TO THE REVENUE, THESE BONUS SHARES WERE N EVER CONVERTED INTO STOCK-IN-TRADE BY THE ASSESSEE. 14. AFTER HEARING BOTH SIDES IN THE LIGHT OF THE OBTAIN ING FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT WITH REGARD TO THE SALE ITA 2002&2003/10 :- 10 - : PROCEEDS, BEING ` 2 CRORES, THERE IS NO DISPUTE BETWEEN THE PARTIES. IN SO FAR AS THE COST OF ACQUISITION IS CONCERNED, THE CASE OF THE ASSESSEE IS THAT AVERAGE COST METHOD HAS BEEN APPROVED BY TH E APEX COURT IN ITS DECISION RENDERED IN THE CASE OF ESCORTS FARMS( RAMGARH) LTD VS CIT, 222 ITR 509, AND THE TRIBUNAL ORDER DATED 24.7 .2009 IS IN LINE WITH THE ABOVE DECISION. THE QUESTION BEFORE US IS AS TO WHAT IS THE TAXABLE INCOME ON THE SALE OF 20 LAKHS SHARES HELD BY THE ASSESSEE IN M/S INDO WIND ENERGY LTD, IN THE LIGHT OF THE TRIBU NAL ORDER WHICH WAS RENDERED IN LINE WITH THE DECISION OF HON'BLE SUPRE ME COURT RENDERED IN THE CASE OF ESCORTS FARMS(RAMGARH) LTD VS CIT(SU PRA). AFTER GOING THROUGH THE FIRST ORDER OF THE ASSESSING OFFICER, T HE ORDER OF THE LD. CIT(A) DATED 3.4.2008 AND THE DECISION OF THE TRIBU NAL DATED 24.7.2009, IT BECOMES CLEAR THAT WHAT WE HAVE TO DE CIDE NOW IS ONLY THE COMPUTATION OF ASSESSABLE PROFIT AS WELL THE AV ERAGE COST OF ACQUISITION OF BONUS SHARES WITH REFERENCE TO THE L AW DECLARED BY THE APEX COURT CITED IN THE ORDER OF THE TRIBUNAL. THE ISSUE BEFORE US BEING LIMITED, WE HAVE LIMITED SCOPE AS WHAT HAS B EEN DENIED BY THE BENCH IN THE FIRST ROUND AFTER FOLLOWING THE DECISI ON OF HON'BLE SUPREME COURT, THE AVERAGE COST OF ACQUISITION OF B ONUS SHARES HAS TO BE TAKEN INTO CONSIDERATION TO ARRIVE AT THE ASSESS ABLE INCOME RELATING TO THE TRANSACTION IN QUESTION. THE ASSESSEE-COMPA NY HAD GIVEN THE FOLLOWING WORKING BEFORE THE ASSESSING OFFICER F OR THE DETERMINATION ITA 2002&2003/10 :- 11 - : OF THE ASSESSABLE PROFIT RELATING TO THE TRANSACTIO N OF SALE OF BONUS SHARES UNDER CONSIDERATION: VALUE OF OPENING STOCK(24,20,000 SHARES) ` 2,42,00,000 NO. OF BONUS SHARES RECEIVED DURING THE YEAR ` 24,20,000 NO. OF SHARES HELD INCLUDING BONUS SHARES ` 48,40,000 AVERAGE COST OF SHARES ` 2,42,000/48,40,000 ` 5 SALE VALUE OF 20,00,000 SHARES SOLD ` 2,00,00,000 LESS: VALUE ARRIVED AT AS ABOVE ( ` 5 X20,00,000) ` 1 ,00,00,000 BUSINESS PROFIT ` 1,00,00,000 15. THE HON'BLE SUPREME COURT HAS HELD THAT THE SALE OF BONUS SHARES OF A COMPANY IMPACTS ORIGINAL SHARES AND TH AT THE BONUS SHARES HAVE TO BE VALUED BY SPREADING THE COST OF T HE OLD SHARES AND THE NEW ISSUE, VIZ., BONUS SHARES TAKEN TOGETHER IF THEY RANK PARI PASSU. THE BONUS SHARES IN QUESTION DEFINITELY RA NK PARI PASSU WITH THE ORIGINAL SHARES HENCE, IN VIEW OF THE DECISION OF THE APEX COURT (SUPRA) THE ACTION OF THE ASSESSING OFFICER IN ADOP TING THE COST OF ACQUISITION AT NIL WHILE COMPUTING THE ASSESSABLE SURPLUS FOR TAXATION IN HIS ORDER DATED 18.12.2006, IS ERRONEOUS AND THE LD. CIT(A) HAS CORRECTLY REVERSED THE SAME. THE ASSESSING OFFICER S ACTION NO LONGER SURVIVES IN VIEW OF THE TRIBUNAL ORDER. THE WORKIN G GIVEN BY THE ASSESSEE AND EXTRACTED HEREIN ABOVE TAKING THE AVER AGE COST OF SHARES AT ` 5/- IS CORRECT, IN OUR OPINION, AND IS IN LINE WIT H THE RATIO DECIDENDI OF THE DECISIONS OF THE HON'BLE SUPREME COURT. TH EREFORE, IN OUR ITA 2002&2003/10 :- 12 - : CONSIDERED OPINION, THE DIRECTION OF THE LD. CIT(A) GIVEN TO THE ASSESSING OFFICER TO ADOPT THE COST OF 20 LAKHS BON US SHARES AT ` 1 CRORE IS CORRECT. 16. THE SECOND ISSUE OF THIS APPEAL IS RELATING TO DELE TION OF ADDITION OF ` 1,45,900/- BEING LONG TERM CAPITAL GAINS ON CONVERS ION OF INVESTMENT INTO STOCK-IN-TRADE AND ` 42 LAKHS BEING PROFIT ON REVALUATION OF CLOSING STOCK OF SHARES. 17. ACCORDING TO THE LD.DR, THE ASSESSEE HAS NOT MADE S UCH A CLAIM EITHER IN ITS RETURN OF INCOME OR IN THE REVISED RE TURN AND HENCE, THE SAME IS TO BE DECIDED IN VIEW OF THE DECISION IN TH E CASE OF GOETZE(INDIA) LTD VS CIT (284 ITR 323) (SUPRA). IT SEEMS THAT THE LD.DR HAS NOT DISPUTED THE MERIT OF THE CLAIM BECAU SE IT WAS NOT SO CLAIMED BY THE ASSESSEE EITHER ORIGINALLY OR VIDE R EVISED RETURN. THE PROVISIONS OF SECTION 45(2) OF THE ACT HAVE TO BE C ONSIDERED AND INTERPRETED IN THE MANNER EXPLAINED BY THE CBDT IN CIRCULAR NO.397 DATED 16.10.1984, WHICH SAYS AS UNDER: ' U N D E R THE EXISTING PROVISIONS , PRO F ITS OR GAINS A R ISING FROM THE TR A NS F ER OF A CAPITAL A S SET EFFECTED IN T H E PREVIOUS YEAR ARE TAKEN TO BE T HE I NCOME OF THE PREVIOUS YEAR IN WH I CH THE TRANSFER TOOK PLACE AND A R E C HA RGEABLE TO INCOME TAX UNDER THE HEAD ' CAPITAL GAINS'. TH E AMENDING AC T HAS INSERTED A NEW SUB-SECTION (2) IN SECT I ON 45 O F T HE INCOME TAX ACT TO PROVIDE T HAT T HE PROFIT AND GAINS ARISING FR OM T H E TRANSFER BY WAY OF CONVERSIO N BY THE OWNER OF A CAPITAL ASSET IN T O, O R ITS TREATMENT BY HIM AS, STOCK I N TRADE, OF A BUSINESS CARRIED ON BY HI M , SHALL BE CHARGEABLE TO TAX UNDER THE HEAD 'CAPITAL GAINS' IN THE Y EAR IN WHICH SUCH STOCK IN TRADE IS ITA 2002&2003/10 :- 13 - : S OLD OR OTHERWISE TRANSFERRED BY H I M . THE NEW SUB SECTION FU R THER P R OVIDES THAT, FO R THE PURPOSE OF CO MPUTING THE CAPITAL GAINS IN SUCH CASES, THE FAIR MARKET VALUE OF THE CAP I T AL ASSET ON THE DATE ON WHICH IT WAS CONVERTED OR TREATED AS STOCK I N T R A D E SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION R EC E I VED OR ACCRUING AS A RESULT OF THE T RANSFER OF THE CAPITAL ASSET. T O IL L U STRATE: SUPPOSE THE COST OF THE ASSET IS ` 20,000/-. THE ASSET I S CO N V E RTED BY THE OWNER AS STOCK I N TRA D E ON 1 ST JUNE 1984 AND TAKEN TO H I S S T O CK AT THE MARKET VALUE OF ` 70,000/ - . THE ASSET IS SOLD ON 1 ST AU G U S T 1985 FOR ` 80,000/-. CAPITAL GA I N OF ` 50,000/- (S U BJE C T TO ADMISSIBLE DEDUC T IONS) WI L L B E L IABLE TO TAX IN THE ASSESSMENT YEAR 1986-87 . THE BUSINESS P RO F IT OF ` 10,000/- AR I SING ON T HE SAL E OF T HE ASSETS WILL BE L IABLE T O TAX A S P ART OF THE BUSINESS INCOME FOR TILE ASSESSMENT YEAR 1986 - 87 (THE A CC O UNTING YEAR OF THE ASSESSEE HAS B EEN T AK EN TO THE FINANCIAL YE AR) . THE AMENDMENT TAKES EFFECT FROM 1 ST APRIL 1985, AND WILL, ACCORDINGLY, APPLY IN RELATION TO THE ASS ESSMENT YEAR 1985-86 AND SUBSEQUENT YEARS. 18. FROM THE ABOVE, IT BECOMES CLEAR THAT THE INCIDENCE OF TAX WOULD OCCUR AT THE POINT OF SALE OF SUCH CONVERTED SHARES . TO UNDERSTAND THE ISSUE CLEARLY, IN OUR CONSIDERED OPINION, THE EXERT S FROM THE LD. CIT(A)S ORDER DATED 3.4.2008 GIVEN IN PARAGRAPHS 7 & 8 ARE RELEVANT: 'THE RELEVANT FACTS HAVE BEEN VERIFIED. IT IS SEE N THAT BOTH LONG TERM CAPITAL GAINS ON CONVERSION OF INVESTMENT INTO STOCK-IN-TRADE OF ` 1,45,900/- AND PROFIT ON REVALUATION OF CLOSING STOCK OF SHARES OF ` 42 LAKHS FROM A PART OF THE OTHER INCOME IN SCHEDULE 2 ANNEX ED TO THE PROFIT & LOSS ACCOUNT. AS HAS BEEN CORRECTLY NO TED BY THE ASSESSING OFFICER, IN TERMS OF SECTION 45(2) OF THE ACT, THE CAPITAL GAIN ON CONVERSION OF INVESTMENT INTO STOCK-IN-TRADE IS TO BE TAXED ONLY IN THE YEAR IN WHICH THE ITA 2002&2003/10 :- 14 - : SALE OF THE CONCERNED ASSETS TAKE PLACE. IT IS A FA CT THAT SALE OF THESE ASSETS HAS NOT TAKEN PLACE DURING THE PERIOD UNDER CONSIDERATION. THEREFORE, THE INCOME OF ` 1,45,900/- SHOWN IN THE BOOKS OF ACCOUNT AS GAIN ON CONVERSION WOULD NEED TO BE DEDUCTED FROM THE NET P ROFIT AS PER THE PROFIT AND LOSS ACCOUNT TO ARRIVE AT THE TAXABLE INCOME. THE ASSESSING OFFICER HAS NOT MADE ANY SUCH MODIFICATION WHILE COMPUTING THE INCOME CHARGEABLE TO TAX. HE IS HEREBY DIRECTED TO GIVE RELIEF OF ` 1,45,900/- FROM THE NET PROFIT AS PER THE PROFIT & LOSS ACCOUN T WHILE COMPUTING THE INCOME CHARGEABLE TO TAX AS PER THE PROVISIONS OF THE INCOME TAX ACT. APPEAL FILED BY T HE ASSESSEE ON THIS GROUND MAY BE TREATED AS ALLOWED. SIMILARLY, THE SUM OF ` 42,00,000/- REPRESENTS PROFIT ON VALUATION OF CLOSING STOCK OF SHARES. THE ASSESS EE COMPANY IN TERMS OF THE ESTABLISHED ACCOUNTING NORM S, IS ENTITLED TO VALUE ITS CLOSING STOCK AT MARKET VALUE OR COST WHICHEVER IS LESSER. ACCOUNTING ENTRIES DO NOT CREA TE TAXABLE INCOME WHEN THEY ARE NOT IN CONFORMITY WITH THE PROVISIONS OF THE INCOME TAX ACT. EVEN THOUGH PROFI T ON VALUE OF CLOSING STOCK OF SHARES IS SHOWN IN THE PR OFIT AND LOSS ACCOUNT UNDER THE HEAD 'OTHER INCOME' , NO SUC H PROFIT COULD BE SAID TO HAVE ACCRUED TO THE ASSESSEE FOR T HE PERIOD UNDER CONSIDERATION IN TERMS OF THE PROVISIO NS OF THE ACT. THIS SUM OF ` 42,00,000/- WOULD ALSO NEED TO BE DEDUCTED FROM THE NET PROFIT AS PER THE PROFIT AND LOSS ACCOUNT TO ARRIVE AT THE CORRECT TAXABLE INCOME ON THE FACTS OF THE ASSESSEE'S CASE. THE ASSESSING OFFICER IS HEREBY DIRECTED TO GIVE SUCH RELIEF. APPEAL FILED ON THIS GROUND MAY ALSO BE TREATED AS ALLOWED'. 19. IN VIEW OF OUR FOREGOING DECISION, ADDITIONS TO THE EXTENT OF ` 1,45,900/- AND ` 42,00,000/- REPRESENTING THE PROFIT ON VALUATION O F OPENING AND CLOSING STOCK OF INVESTMENT CONVERTED I N TO STOCK-IN-TRADE FOR ASSESSMENT YEAR 2004-05 HAVE BEEN CORRECTLY DEL ETED. WE DO NOT FIND ANY INFIRMITY IN THE FINDING OF THE LD. CIT(A) HENCE, WE DISMISS THE GROUNDS RAISED BY THE REVENUE IN THIS RESPECT. ITA 2002&2003/10 :- 15 - : 20. IN THE RESULT, THE APPEAL OF THE REVENUE FOR AS SESSMENT YEAR 2004-05 IS DISMISSED. 21. TO SUMMARIZE THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 .4.2011 SD/- SD/- (DR. O.K. NARAYANAN) VICE-PRESIDENT (HARI OM MARATHA) JUDICIAL MEMBER DATED: 29 TH APRIL, 2011 RD COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR