Soham Distributors (P) Ltd., , Kolkata V. ITO, Ward - 10(1), Kolkata

ITA 2531/KOL/2018

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 7112 (ITAT-KOLKATA)
• Duration Of Justice: 7 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 18-07-2019
• Assessment Year: 2013-2014
• Appeal Filed On: 06-12-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NICHOLAS MURMU CIT SR DR RE
• Keywords: Capital asset converted into stock in trade; Capital asset; Additional evidence
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA SMC BENCH, KOLKATA (BEFORESHRI S.S. GODARA, HONBLE JUDICIAL MEMBER) I.T.A NO. 2531/KOL/2018 ASSESSMENT YEAR: 2013-14 SOHAM DISTRIBUTORS (P) LTD.....................................................APPELLANT C/O SUBASH AGARWAL & ASSOCIATES, ADVOCATES SIDDHA GIBSON 1, GIBSON LANE SUITE 213 2 ND FLOOR KOLKATA 700 069 [PAN : AAQCS 3689 C] VS. INCOME TAX OFFICER, WARD-10(1), KOLKATA...............................RESPONDENT APPEARANCES BY: SHRI SUBASH AGARWAL, ADVOCATE, APPEARED ON BEHALF OF THE ASSESSEE . SHRI NICHOLAS MURMU, ADDL.CIT, SR. D/R, APPEARING ON BEHALF OF THE REVENUE. DATE OF CONCLUDING THE HEARING : JULY 18 TH , 2019 DATE OF PRONOUNCING THE ORDER : JULY , 2019 ORDER PER S.S. GODARA, JM :- THIS ASSESSEES APPEAL FOR ASSESSMENT YEAR 2013-14 ARISES AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL) 4, KOLKATA, PASSED IN APPEAL NO. 423/CIT(A)-4/WD.10(1)/KOL/2016-17, INVOLVING PROCEEDINGS U/S 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). 2. AT THE OUTSET I FIND THAT THERE IS A DELAY OF 180 DAYS IN FILING OF THIS APPEAL. AFTER PERUSING THE PETITION FOR CONDONATION, I AM CONVINCED THAT THE ASSESSEE WAS PREVENTED BY SUFFICIENT CAUSE FROM FILING THE APPEAL ON TIME. HENCE THE DELAY IS CONDONED AND THE APPEAL IS ADMITTED. 3. HEARD BOTH THE PARTIES. CASE FILE PERUSED. 4. THE SOLE SUBSTANTIVE GRIEVANCE CANVASSED IN THE INSTANT APPEAL SEEKS TO REVERSE BOTH THE LOWER AUTHORITIES ACTION ADDING THE ALLEGED UNDISCLOSED INCOME OF RS.33,16,703/- IN CASE OF M/S. ELDER PHARMACEUTICALS LTD. FOR THE REASON THAT IT FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING. THE CIT(A)S DETAILED DISCUSSION TO THIS EFFECT READS AS UNDER:- 2 I.T.A NO. 2531/KOL/2018 ASSESSMENT YEAR: 2013-14 SOHAM DISTRIBUTORS (P) LTD 3 I.T.A NO. 2531/KOL/2018 ASSESSMENT YEAR: 2013-14 SOHAM DISTRIBUTORS (P) LTD *************************************************** 5. THE LD. COUNSEL SUBMITS DURING THE COURSE OF HEARING THAT THE ASSESSEE COULD NOT HAVE RECOGNIZED THE IMPUGNED ACCRUED RECEIPT HAS INCOME OF THE RELEVANT ASSESSMENT YEAR SINCE M/S. ELDER PHARMACEUTICALS HAD BEEN SUBJECTED TO APPOINTMENT OF OFFICIAL LIQUIDATOR BY THE HONBLE BOMBAY HIGH COURT. HE REFERS TO THE ASSESSEES DETAILED ADDITIONAL EVIDENCE RUNNING INTO 24 PAGES INVOLVING THE SAID ENTITYS ANNUAL REPORT, VARIOUS PRESS REPORTS AS WELL AS SEBI ORDER DT. 20 & 27/12/2017. THE REVENUES CASE ON THE OTHER HAND IS THAT THE ASSESSEE OUGHT TO HAVE FILED ALL THESE DETAILS PARTICULARLY THE ANNUAL REPORT IN THE LOWER PROCEEDINGS BEFORE THE ASSESSING OFFICER OR THE CIT(A). AND THAT IT SHOULD HAVE RECOGNIZED THE IMPUGNED SUM OF INCOME RECEIVABLE FROM M/S ELDER PHARMACEUTICALS AS INCOME SINCE IT FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING. THE ABOVE ADDITIONAL EVIDENCE; ALTHOUGH YET TO BE SUBJECTED TO FACTUAL VERIFICATION SUGGESTS THAT M/S. ELDER PHARMACEUTICALS HAD BEEN UNDERGOING TURBULENT PHASE IN THE IMPUGNED ASSESSMENT YEAR ONWARDS. I NOTICE IN THIS BACKDROP THAT THE TRIBUNALS CO-ORDINATE BENCHS DECISION IN THE CASE OF DHEERAJ AMIN VS. ACIT IN ITA NO. 1709/BANG/2013 DT. 30/06/2014 , FOLLOWED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CHAINRUP SAMPATRAM VS CIT (1953) 24 ITR 481 (SC) AND HELD THAT ALTHOUGH UNDISPUTED LOSS CAN BE ALLOWED TO BE DEDUCTED FROM COMMERCIAL PROCEEDS AT THE FIRST SIGN OF ITS REASONABLE POSSIBILITY THE CONVERSE IS NOT TRUE REGARDING ANTICIPATED PROFITS TO BE TREATED AS INCOME UNLESS THE SAME ARE REALIZED GOING BY THE PRINCIPLES OF CONSERVATISM AND COMMERCIAL PRUDENCE. DETAILED DISCUSSION TO THIS EFFECT IN THE SAID TRIBUNALS ORDER READS AS UNDER:- 14. THE BUSINESS TRANSACTION ENTERED INTO ASSESSEE, IN OUR HUMBLE UNDERSTANDING, IS THIS. THE ASSESSEE HAS CONTRIBUTED A TRADE ASSET CONSISTING OF A PIECE OF LAND, ADMEASURING 1 ACRE AND 96.22 CENTS, ON WHICH A GROUP HOUSING PROJECT BY THE NAME OF ALEXANDRIA WAS TO BE CONSTRUCTED, AND WHAT HE GOT IN CONSIDERATION OF THIS TRANSFER IS THE RIGHT TO SELL 1,28,940.26 SQ. FT. 4 I.T.A NO. 2531/KOL/2018 ASSESSMENT YEAR: 2013-14 SOHAM DISTRIBUTORS (P) LTD CONSTRUCTED AREA IN THIS PROJECT. IN HIS CLOSING STOCK, EVEN IF HE IS TO SUBSTITUTE THE PART OWNERSHIP OF THE LAND TRANSFERRED WITH THE VALUE OF THIS RIGHT TO SELL 1,28,940.26 SQUARE FEET CONSTRUCTED AREA, IT WOULD NOT MAKE ANY DIFFERENCE TO THE PROFIT FIGURES BECAUSE, AS FAR AS THIS ASSESSEE, IS CONCERNED THE COST OF ACQUIRING THIS RIGHT IS THE SAME AS THE COST OF GIVING UP THE RIGHT IN THE HAND, AND, AS IS THE SETTLED LEGAL POSITION, THE CLOSING STOCK CAN ONLY BE VALUED AT COST PRICE OR MARKET PRICE-WHICHEVER IS LESS. OBVIOUSLY, THE COST PRICE OF THIS RIGHT TO SELL 1,28,940.26 SQ FT, WHICH HAS BEEN TREATED AS A TRADING ASSET, IS LESS THAN THE MARKET PRICE OF THESE RIGHTS, AND, THEREFORE, THESE RIGHTS CAN ONLY BE VALUED AT COST IN THE ACCOUNTS. 15.LET US TAKE A PAUSE HERE AND RECALL THE CONCEPTUAL REASONS FOR VALUING THE CLOSING STOCK AT COST PRICE OR MARKET PRICE WHICHEVER IS LESS. 16.IN THE LANDMARK JUDGMENT OF CHAINRUP SAMPATRAM VS CIT [(1953) 24 ITR 481 (SC)] , HONBLE SUPREME COURT HAS OBSERVED AS FOLLOWS: ........THE TRUE PURPOSE OF CREDITING THE VALUE OF UNSOLD STOCK IS TO BALANCE THE COST OF THOSE GOODS ENTERED ON THE OTHER SIDE OF THE ACCOUNT AT THE TIME OF THEIR PURCHASE, SO THAT THE CANCELLING OUT OF THE ENTRIES RELATING TO THE SAME STOCK FROM BOTH SIDES OF THE ACCOUNT WOULD LEAVE ONLY THE TRANSACTIONS ON WHICH THERE HAVE BEEN ACTUAL SALES IN THE COURSE OF THE YEAR SHOWING THE PROFIT OR LOSS ACTUALLY REALISED ON THE YEAR'S TRADING. AS POINTED OUT IN PARAGRAPH 8 OF THE REPORT OF THE COMMITTEE ON FINANCIAL RISKS ATTACHING TO THE HOLDING OF TRADING STOCKS, 1919, 'AS THE ENTRY FOR STOCK WHICH APPEARS IN A TRADING ACCOUNT IS MERELY INTENDED TO CANCEL THE CHARGE FOR THE GOODS PURCHASED WHICH HAVE NOT BEEN SOLD, IT SHOULD NECESSARILY REPRESENT THE COST OF THE GOODS. IF IT IS MORE OR LESS THAN THE COST, THEN THE EFFECT IS TO STATE THE PROFIT ON THE GOODS WHICH ACTUALLY HAVE BEEN SOLD AT THE INCORRECT FIGURE...... FROM THIS RIGID DOCTRINE ONE EXCEPTION IS VERY GENERALLY RECOGNISED ON PRUDENTIAL GROUNDS AND IS NOW FULLY SANCTIONED BY CUSTOM, VIZ., THE ADOPTION OF MARKET VALUE AT THE DATE OF MAKING UP ACCOUNTS, IF THAT VALUE IS LESS, THAN COST . IT IS OF COURSE AN ANTICIPATION OF THE LOSS THAT MAY BE MADE ON THOSE GOODS IN THE FOLLOWING YEAR, AND MAY EVEN HAVE THE EFFECT, IF PRICES RISE AGAIN, OF ATTRIBUTING TO THE FOLLOWING YEAR'S RESULTS A GREATER AMOUNT OF PROFIT THAN THE DIFFERENCE BETWEEN THE ACTUAL SALE PRICE AND THE ACTUAL COST PRICE OF THE GOODS IN QUESTION.' (EXTRACTED IN PARAGRAPH 281 OF THE REPORT OF THE COMMITTEE ON THE TAXATION OF TRADING PROFITS PRESENTED TO BRITISH PARLIAMENT IN APRIL, 1951). WHILE ANTICIPATED LOSS IS THUS TAKEN INTO ACCOUNT, ANTICIPATED PROFIT IN THE SHAPE OF APPRECIATED VALUE OF THE CLOSING STOCK IS NOT BROUGHT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOULD CARE TO SHOW INCREASED PROFIT BEFORE ITS ACTUAL REALISATION. THIS IS THE THEORY UNDERLYING THE RULE THAT THE CLOSING STOCK IS TO BE VALUED AT COST OR MARKET PRICE WHICHEVER IS THE LOWER, AND IT IS NOW GENERALLY ACCEPTED AS AN ESTABLISHED RULE OF COMMERCIAL PRACTICE AND ACCOUNTANCY. AS PROFITS FOR INCOME-TAX PURPOSES ARE TO BE COMPUTED IN CONFORMITY WITH THE ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING, UNLESS OF COURSE, SUCH PRINCIPLES HAVE BEEN SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENTS, UNREALISED PROFITS I N THE SHAPE OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF AN ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEAR'S ACCOUNT IN A BUSINESS THAT IS CONTINUING ARE NOT BROUGHT INTO THE CHARGE AS A 5 I.T.A NO. 2531/KOL/2018 ASSESSMENT YEAR: 2013-14 SOHAM DISTRIBUTORS (P) LTD MATTER OF PRACTICE, THOUGH, AS ALREADY STATED, LOSS DUE TO A FALL IN PRICE BELOW COST IS ALLOWED EVEN IF SUCH LOSS HAS NOT BEEN ACTUALLY REALISED. (EMPHASIS, BY UNDERLINING, SUPPLIED BY US) 17. THE PRINCIPLE IS THUS UNAMBIGUOUS. THE PRINCIPLES OF CONSERVATISM, AND CONSIDERATIONS OF PRUDENCE, IN THE ACCOUNTING TREATMENT REQUIRE THAT NO ANTICIPATED PROFITS BE TREATED AS INCOME UNTIL THE PROFITS ARE REALIZED, AND, AT THE SAME TIME, AN ANTICIPATED LOSS TO BE DEDUCTED FROM COMMERCIAL PROFITS, AT THE FIRST SIGN OF ITS REASONABLE POSSIBILITY. ACCOUNTING STANDARD 2, WHICH IS A MANDATORY ACCOUNTING STANDARD UNDER SECTION 145(2), ALSO STATES THAT INVENTORIES SHALL BE VALUED AT COST, OR NET REALISABLE VALUE, WHICHEVER IS LOWER. THERE MAY SEEM TO BE, AT FIRST SIGHT, AN ELEMENT OF DICHOTOMY IN THIS APPROACH INASMUCH AS ANTICIPATED LOSSES ARE TAKEN INTO ACCOUNT AND ANTICIPATORY PROFITS ARE IGNORED, BUT THAT IS THE IMPACT OF ACCOUNTING PRINCIPLES SANCTIONED BY THE STATUTE AND THE LAW LAID DOWN BY HONBLE SUPREME COURT. 18.IN VIEW OF THESE DISCUSSIONS, THE CONCEPTUAL FOUNDATION FOR THIS STOCK VALUATION PRINCIPLE ARE ACCOUNTING PRINCIPLE OF CONSERVATISM AND BUSINESS CONSIDERATIONS OF PRUDENCE, WHICH HAVE BEEN NOTICED AND APPROVED BY HONBLE COURTS ABOVE. IT IS FOR THESE REASON THAT WHEN MARKET PRICE OF AN ITEM IN THE CLOSING STOCK IS LESS THAN ITS COST PRICE TO THE BUSINESS, THE NOTIONAL LOSS IS ALLOWED AS A DEDUCTION BUT WHEN MARKET PRICE OF AN ITEM IN THE CLOSING STOCK IS MORE THAN ITS COST PRICE TO THE BUSINESS, THE NOTIONAL PROFIT IS NOT BROUGHT TO TAX. HOWEVER, BY GIVING THE IMPUGNED DIRECTIONS, LEARNED CIT(A) HAS ENDED UP BRINGING THAT ANTICIPATED PROFIT TO TAX. 19.WHAT THE ASSESSEE HAS GOT TODAY IS ONLY A RIGHT TO SELL THE 1,28,940.26 FTS OF CONSTRUCTED AREA IN THE ALEXANDRIA PROJECT AND THE PROFITS, HOWSOEVER CERTAIN THEY MAY APPEAR TO BE, WILL ONLY FRUCTIFY AND BE REALIZED, AND CAN EVEN BE QUANTIFIED, ONLY WHEN THIS RIGHT IS EXERCISED-IN PART OR IN FULL. THAT STAGE HAS NOT YET COME, AND UNTIL THAT STAGE COMES, IN OUR CONSIDERED VIEW, SUCH PROFIT CANNOT BE TAXED. UNLIKE IN A CASE OF A CAPITAL GAIN WHICH ARISES ON PARTING THE CAPITAL ASSET AT THE FIRST STAGE ITSELF, IT IS A CASE OF BUSINESS TRANSACTION WHICH IS COMPLETED WHEN THE RIGHTS SO ACQUIRED BY THE ASSESSEE ARE EXERCISED; NONE CAN MAKE PROFITS BY DEALING WITH HIMSELF, AS IS THE SETTLED LEGAL POSITION IN THE LIGHT OF THE SETTLED LEGAL POSITION IN THE CASE OF SIR KIKABHAI PREMCHAND VS CIT [(1953) 24 ITR 506 (SC)].IT IS FOR THIS REASON THAT WE ARE UNABLE TO UPHOLD THE ACTION OF THE AUTHORITIES BELOW ON THE FACTS OF THIS CASE. NO MATTER HOW REASONABLE IS IT TO ASSUME THAT THE ASSESSEE WILL MAKE THESE PROFITS, THESE PROFITS CANNOT BE BROUGHT TO TAX AT THIS STAGE. THAT IS WHAT THE LEGAL POSITION, FOR THE DETAILED REASONS SET OUT ABOVE, IS. 20.IN OUR CONSIDERED VIEW, THEREFORE, THE AUTHORITIES BELOW INDEED ERRED IN BRINGING TO TAX THE ANTICIPATED BUSINESS PROFITS ON ASSESSEES ENTERING INTO A DEVELOPMENT AGREEMENT WITH MENORAH REALTIES PVT LTD IN RESPECT OF THE LAND HELD BY THE ASSESSEE AS STOCK IN TRADE. THE IMPUGNED ADDITION OF RS RS.17,28,81,276 IS THUS DELETED. 6. I ADOPT THE ABOVE DETAILED REASONS MUTATIS MUTANDIS TO ACCEPT THE ASSESSEES ARGUMENTS CHALLENGING UNDISCLOSED INCOME ADDITION OF RS.33,16,703/- IN PRINCIPLE AND 6 I.T.A NO. 2531/KOL/2018 ASSESSMENT YEAR: 2013-14 SOHAM DISTRIBUTORS (P) LTD LEAVE THE ISSUE OPEN TO THE ASSESSING OFFICER FOR NECESSARY VERIFICATION OF THE ASSESSEES ADDITIONAL EVIDENCE (SUPRA). 7. THIS ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES IN ABOVE TERMS. KOLKATA, THE 24 TH DAY OF JULY, 2019. SD/- [S.S. GODARA] JUDICIAL MEMBER DATED : 24.07.2019 {SC SPS} COPY OF THE ORDER FORWARDED TO: 1. SOHAM DISTRIBUTORS (P) LTD C/O SUBASH AGARWAL & ASSOCIATES, ADVOCATES SIDDHA GIBSON 1, GIBSON LANE SUITE 213 2 ND FLOOR KOLKATA 700 069 2. INCOME TAX OFFICER, WARD-10(1), KOLKATA 3. CIT(A)- 4. CIT- , 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT, KOLKATA BENCHES