ITO, Ward-6(1), Kolkata, Kolkata V. M/s. Chattarpati Investments Ltd., Kolkata

ITA 269/KOL/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 2532 (ITAT-KOLKATA)
• Duration Of Justice: 4 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2010
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 03-05-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 09-02-2010
• Court: TRIBUNAL
• Department Lawyers: JYOTI KUMARI
• Assessee Lawyers: D S DAMLE
• Keywords: Capital asset; Business income; Business expenditure; Speculation loss; Capital expenditure; Set aside; Capital Gains
• Section: 43D; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : KOLKATA [BEFORE HONBLE SRI D. K. TYAGI, JM & HONBLE SRI B. C. MEENA, AM] I.T.A. NO.269/KOL/2010 ASSESSMENT YEAR: 2006-07 INCOME-TAX OFFICER, WD-6(1), KOLKATA -VS- M/S. CH ATTARPATI INVESTMENTS LTD. (PA NO. AABCC 0700 B) (APPELLANT) (RESPONDENT) C.O. NO. 22/KOL/2010 IN I.T.A. NO.269/KOL/2010 ASSESSMENT YEAR: 2006-07 CHATTARPATI INVESTMENT LTD. -VS- INCOME-TAX OFFI CER, WD-6(1), KOLKATA. (CROSS OBJECTOR) (RESPONDENT) DEPARTMENT BY : SMT. JYOTI KUMARI ASSESSEE BY : SRI D. S. DAMLE O R D E R PER D. K. TYAGI, JM: THE APPEAL PREFERRED BY THE REVENUE AND THE CROSS O BJECTION PREFERRED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE LD. CIT(A), KOLKATA DATED 11.11.2009 FOR ASSESSMENT YEAR 2006-07. SINCE THE APPEAL AND THE CROSS OBJECTION HAVE ARISEN OUT OF THE SAME ORDER AND THE SAME HAVE BEEN HEARD TOGETHE R, FOR THE SAKE OF CONVENIENCE, WE DISPOSE OF BOTH THE APPEAL AND THE CROSS OBJECTION BY THIS CONSOLIDATED ORDER. 2. THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS : 1. THAT, ON THE FACTS AND CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) HAS ERRED IN LAW IN ALLOWING THE DEDUCTION OF RS.12,83,543/- CLAIMED AS WRITING OFF OF THE PROVISION FOR NPA WITHOUT CONSIDERING THE FACT THAT THE ASSESEE IS NO T A BANKING COMPANY. 2. THAT, ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) HAS ERRED IN LAW IN ALLOWING THE DEDUCTION OF RS.12,83,543/- CLAIMED AS WRITING OFF OF THE PROVISION FOR NPA WITHOUT CONSIDERING THE DECISION OF THE ITAT, DELHI SPECIAL BENCH, GIVEN IN THE CASE OF NEW INDIA INDUSTRIES LTD. (ITA NO. 3958/DEL/2003), WHERE IT IS HELD THAT IN CASE OF CONFLICT BETWEEN I. T. ACT AND RBI ACT, THE PROVISI ONS OF I. T. ACT SHOULD PRECAIL. 3. THAT, ON THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) HAS ERRED IN LAW IN ALLOWING THE DEDUCTION OF RS.13,97,900/- CLAIMED AS INTEREST WITHOUT CONSIDERING THAT SUCH CLAIM IS PERTAINING TO A PRIOR PERIOD AND IS I NADMISSIBLE S PER THE PROVISIONS OF SEC. 4 READ WITH SEC. 145. 3. IN THE CROSS OBJECTION, THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS : 1. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN NOT ACCEPTING THE CONVERSION OF TRADING STOCK INTO INVESTMENTS ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE. 2 2. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN CONSIDERING THE LOSS ON SALE OF INVESTMENTS AS LOSS IN THE BUSINESS OF PURCHASE AND SALE OF SHARES AND NOT AS SHORT TERM CAPITAL LOSS AS CLAIMED ON THE FA CTS AND IN THE CIRCUMSTANCES OF THE CASE. 3. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN TREATING THE LOSS ON SALE OF SHARES AS DEEMED SPECULATION LOSS BY INV OKING THE PROVISIONS OF EXPLANATION TO SECTION 73 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE. 4. FIRST WE TAKE UP THE REVENUES APPEAL. IN RESPE CT OF GROUND NOS. 1 AND 2 OF THE REVENUE, BRIEF FACTS OF THE CASE AS OBSERVED BY THE AO ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEALING IN INVESTMENTS, FINANCE AND TRADING IN SHARES AND SECURITIES. IN COURSE OF EXAMINATION OF ACCOUNTS, FILED ALONG WITH THE RETURN, THE AO OBSERVED THAT DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEE DEBI TED A SUM OF RS.12,83,543/- TOWARDS PROVISION FOR NON-PERFORMING ASSETS. IN COURSE OF COMPLETION OF ASSESSMENT THE ASSESSEE WAS ASKED TO EXPLAIN WHY SUCH PROVISION SH OULD BE ALLOWED. IN REPLY, THE ASSESSEE FILED A WRITTEN SUBMISSION, WHICH WAS REPR ODUCED BY THE AO IN PAGE 2 OF THE ASSESSMENT ORDER. AFTER CONSIDERING THE REPLY OF T HE ASSESSEE, THE AO OBSERVED THAT ACCORDING TO PROVISION OF SEC. 36(1)(VIIA) SUCH PR OVISION CAN BE MADE BY A SCHEDULED BANK. ACCORDING TO PROVISION OF SEC. 36(1)(VIIA) SU CH PROVISION CAN BE MADE BY A SCHEDULED BANK, NON-SCHEDULED BANK (AS DEFINED IN C LAUSE (C) OF SEC.5 OF THE BANKING REGULATION ACT, 1949), PUBLIC FINANCIAL INSTITUTION , STATE FINANCIAL CORPORATION AND STATE INDUSTRIAL INVESTMENT CORPORATION. ACCORDING TO THE PROVISION OF SEC. 36(1)(VIII) SOME ASSESSEES CAN DEBIT A CERTAIN PERCENTAGE OF PR OFIT FOR CREATING A SPECIAL RESERVE FUND. THESE ARE FINANCIAL CORPORATION (INCLUDING PU BLIC COMPANY) WHICH IS ENGAGED IN BUSINESS OF PROVIDING LONG TERM FINANCE FOR INDUSTR IAL OR AGRICULTURAL DEVELOPMENT OR DEVELOPMENT OF INFRASTRUCTURE FACILITY IN INDIA OR PROVIDING LONG TERM FINANCE FOR CONSTRUCTION OR PURCHASE OF HOUSE IN INDIA FOR RESI DENTIAL PURPOSE. ACCORDING TO PROVISIONS OF SEC.43D, SOME SPECIFIC FINANCIAL INST ITUTION CAN MADE PROVISION AS PER GUIDELINES OF RBI AND PUBLIC COMPANIES WHOSE MAIN O BJECT IS CARRYING ON THE BUSINESS OF PROVIDING LONG TERM FINANCE FOR CONSTRUCTION OR PURPOSE OF HOUSES IN INDIA FOR RESIDENTIAL PURPOSE AND WHERE THE COMPANY IS REGIST ERED U/S.30 & 31 OF NATIONAL HOUSING BANK AT 1987. THESE COMPANIES CAN MAKE PROV ISION AND OFFER IT FOR TAXATION IN THE YEAR OF RECEIPT. HE ALSO OBSERVED THAT THE ACT IVITIES OF THE ASSESSEE ARE NOT COVERED BY ANY OF SUCH PROVISIONS. HENCE, NONE OF THE SECT ION IS APPLICABLE TO ASSESSEE. ACCORDINGLY, THE CLAIM OF ASSESSEES CONTENTION IS NOT COVERED BY ANY SPECIFIC PROVISIONS OF THE ACT TO ALLOW SUCH PROVISION FOR N PA. ON APPEAL, THE LD. CIT(A) HELD THE FOLLOWING : 3 I HAVE GONE THROUGH THE SUBMISSIONS OF THE APPELLA NT AND THE ASSESSMENT ORDER OF THE AO. THE JURISDICTIONAL INCOME TAX APPELLATE TRIBUN AL, KOLKATA HAS ALL THROUGH TAKEN A CONSISTENT VIEW THAT NPA DEBITED TO PROFIT & LOSS A CCOUNT PURSUANT TO RBI GUIDELINE IS AN ALLOWABLE DEDUCTION. IN THE PRESENT DECISION D T. 29.05.2009 THE ITAT A BENCH IN ITA NO. 2516/KOL/2007 UPHELD THE ACTION OF THE CIT (APPEALS) DIRECTING THE AO TO ALLOW THE CLAIM OF PROVISION FOR NPA OF RS.28,78,00 0/- DEBITED TO THE PROFIT & LOSS ACCOUNT AS AN ADMISSIBLE DEDUCTION FOR COMPUTING TH E TOTAL INCOME OF THE ASSESSEE. THIS DECISION IS THE CASE OF M/S. CHATTRAPATI INVES TMENTS LTD., A SISTER CONCERN OF THE APPELLANT. SIMILARLY THE HONBLE ITAT IN ITA NO. 4 4/KOL/2008 (DATED 11.4.2008) HELD THAT PROVISION FOR NPA DEBITED TO PROFIT & LOSS ACC OUNT PURSUANT TO RBI GUIDELINE IS AN ALLOWABLE DEDUCTION. HENCE, RESPECTFULLY, FOLLOWIN G THE DECISION OF THE JURISDICTIONAL ITAT, THE DISALLOWANCE OF RS.12,83,543/- AS PROVISI ONS FOR NPA IS DELETED. THIS GROUND OF APPEAL IS ALLOWED. AGGRIEVED BY THE SAID ORDER, NOW THE REVENUE IS IN APPEAL BEFORE US. 5. AT THE TIME OF HEARING BEFORE US BOTH THE PARTIE S AGREED THAT THE ISSUE IS NOW COVERED BY THE ORDER OF THE HONBLE APEX COURT IN T HE CASE OF SOUTHERN TECHNOLOGIES LTD. VS. JOINT CIT (2010) 320 ITR 577 (SC) IN FAVOU R OF THE REVENUE AND AGAINST THE ASSESSEE WHEREIN FOLLOWING WAS HELD : INCOME NON-BANKING FINANCIAL COMPANY PROVISION FOR NON-PERFORMING ASSETS AND DEBITED TO PROFIT AND LOS S ACCOUNTMADE UNDER RESERVE BANK PRUDENTIAL NORMSCA N BE TREATED AS INCOMENOT EXPENSE DEDUCTIBLE UNDER SE CTION 36(1)(VII) OR (VIIA) RESERVE BANK DISCLOSURE NORM S HAVE NOTHING TO DO WITH COMPUTATION OF TAXABLE INCOME UNDER INCO ME-TAX ACTINCOME- TAX ACT, 1961, SS. 2(24), 36(1)(VII), E XPLN;, (VIIA), 43D RESERVE BANK OF INDIA ACT, 1934, SS. 45-1, 45-1A, 4 5-1C, 45-JA, 45K 45Q NON-BANKING FINANCIAL COMPANIES PRUDENTIAL NORMS (R ESERVE BANK) DIRECTIONS, 1999 BUSINESS PROFITS COMPUTATION WHAT IS NOT DEDUCT IBLE UNDER SPECIFIC PROVISION NOT DEDUCTIBLE AS GENERAL BUSINESS EXPENDITURE INCOME-TAX ACT, 1961, SS. 36(1)(VII), (VIIA), 37. IN VIEW OF THIS, THE ORDER PASSED BY THE LD. CIT(A) IS SET ASIDE AND THAT OF AO IS RESTORED. THE GROUNDS OF APPEAL OF THE REVENUE ARE, THEREFORE, ALLOWED. 6. IN RESPECT OF GROUND NO. 3, THE FACTS AS OBSERVE D BY THE AO ARE THAT THE ASSESSEE IN ITS P&L ACCOUNT DEBITED A SUM OF RS.18,32,535/- IN PLACE OF RS.1,42,223/- CLAIMED IN THE IMMEDIATE PRECEDING YEAR. THE LOAN STRUCTURE O F BALANCE SHEET SHOW THAT THE LIABILITY HAVE BEEN REDUCED FROM RS.14.11 CR. TO RS .12.80 CR. IN THE COMPUTATION OF TOTAL INCOME AT NOTE NO. 2 IT HAS BEEN MENTIONED THAT IN TEREST (DR.) RELATING TO EARLIER YEAR AMOUNTING TO RS.13,97,900/- HAVE BEEN TAKEN INTO AC COUNT THIS YEAR AND CLAIMED AS IT IS NO LONGER WITHIN THE PURVIEW OF NEGOTIATIONS UNDERT AKEN BY THE COMPANY WITH ITS LOAN CREDITORS FOR WAIVER OR ACCRUED INTEREST. IT CLEARL Y INDICATES THAT IN THE CURRENT YEARS P & L ACCOUNT THE ASSESSEE CLAIMED EARLIER YEARS LIAB ILITY OF RS.13,97,900/-. DURING THE 4 ASSESSMENT PROCEEDINGS, THE AO ASKED THE ASSESEE TO EXPLAIN WHY SUCH EARLIER YEARS LIABILITY SHOULD BE ALLOWED. THE ASSESSEE VIDE IT S WRITTEN SUBMISSION SUBMITTED AS UNDER : IN THIS CONNECTION WE WOULD STATE THAT INTEREST AM OUNTING TO RS.13,97,900/. HAS BEEN CLAIMED AS AN ADMISSIBLE DEDUCTION IN THE.. COMPUTA TION OF TOTAL INCOME FOR THE CAPTIONED ASSESSMENT YEAR AS THE FINALITY IN THE MA TTER OF QUANTIFICATION AND PAYMENT OF INTEREST RELATING TO EARLIER YEAR IN REGARD TO SOME PARTIES WAS ARRIVED AT DURING THIS YEAR AND AS SUCH THE LIABILITY PROVIDED IN THIS ACC OUNT IS CONSIDERED THIS YEAR ONLY. THE NEGOTIATIONS FOR WAIVER OF INTEREST WERE UNDERWAY A ND THE COMPANY WAS HOPEFUL THAT THE ACCRUED INTEREST WOULD BE WAIVED BY THE LENDERS . HOWEVER, THE NEGOTIATIONS WITH THE LENDERS DID NOT SUCCEED AND ACCORDINGLY THE INTERES T LIABILITY WAS ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS DURING THE PREVIOUS YEAR AND HAS BEEN CLAIMED AS ADMISSIBLE DEDUCTION AS STATED NOTE 2 IN THE COMPUTATION OF TO TAL INCOME. THE ASSESSEE COMPANY DID NOT CLAIM DEDUCTION FOR INTEREST IN EARLIER YEA R AS THE COMPANY DID NOT WISH TO CLAIM INTEREST MERELY ON ACCRUAL BASIS PARTICULARLY WHEN THE COMPANY WAS NEGOTIATING WITH THESE LOAN CREDITORS FOR EFFECTING WAIVER OF INTERE ST OR SIGNIFICANT REDUCTION IN THE RATE OF INTEREST. IT IS MATTER OF RECORD THAT THE ASSESSEE IN FACT DID NOT CLAIM AS SUCH ANY DEDUCTION FOR INTEREST PAYABLE TO THESE PARTIES IN THE EARLIER ASSESSMENT YEAR I E. AY.2004-05 AND HENCE.NO DEDUCTION WAS ALLOWED TO TH E ASSESSEE COMPANY. UNDER THE MERCANTILE SYSTEM OF ACCOUNTING THE DEDUCTION WAS A VAILABLE ONLY IN RESPECT OF LIABILITIES AND EXPENDITURE FOR WHICH THE AMOUNT HA D FINALLY CRYSTALLIZED. UNDER THE MERCANTILE SYSTEM OF ACCOUNTING ALSO THE ASSESSEE. COMPANY COULD NOT HAVE ACCOUNTED FOR AND CLAIMED THE DEDUCTION FOR INTEREST CALCULAT ED ON THE BASIS OF ORIGINAL RATE OF INTEREST AS THE RATE OF INTEREST AS SUCH WAS ITSELF THE SUBJECT MATTER OF NEGOTIATION. IT WAS ONLY IN THESE CIRCUMSTANCE THE ASSESSEE CLAIMED DED UCTION OF RS. 1,39.79,000/- WHICH FACT WAS ALSO MENTIONED BY WAY OF A NOTE APPENDED T O THE COMPUTATION OF TOTAL INCOME. FROM THE ABOVE SUBMISSIONS, THE AO FOUND THAT THE L IABILITY WAS RELATED TOAY 2004-05. SEC. 145 CLEARLY STATES THAT ONE SHOULD FOLLOW EITH ER CASH OR MERCANTILE SYSTEM OF ACCOUNTING THEREFORE, SINCE THE ASSESEE FOLLOWS ME RCANTILE SYSTEM OF ACCOUNTING, THE ASSESSEE SHOULD HAVE CLAIMED THIS EXPENDITURE IN IT S P & L A/C. ON ACCRUAL BASIS. THE ANALYSIS OF ASSESSEES P&L A/C. CLEARLY SHOWS THAT IN THE EARLIER YEARS THE SSESSE DEBITED SOME EXPENDITURES ON ACCRUAL BASIS AND SINCE THE SA ME LIABILITY SEIZED, THE ASSESSEE WRITTEN BACK THE LIABILITY AND OFFERED FOR TAXATION U/S.41(L) OF I.T. ACT, 1961. IN THE INSTANT CASE THE ARGUMENT OF ASSESSEE ABOUT DEBITIN G OF INTEREST ON CRYSTALLIZATION BASIS CANNOT BE ACCEPTED. IT CLEARLY PROVES THAT ASSESSE ES DOUBLE STANDARD IN MAINTAINING OF A/CS. ACCORDINGLY, THE EARLIER YEARS LIABILITY OF RS.13,97,900/- WAS NOT ALLOWED. ON APPEAL, THE LD. CIT(A) HAS HELD AS UNDER : THE APPELLANT SUBMITTED THAT INTEREST WAS PROVIDED ON THE LOANS TAKEN FROM M/S. CEAT HOLDINGS LTD. AND B&K CAPITAL MARKETS UPTO 31.03.20 03. SUBSEQUENTLY, THE APPELLANT DID NOT CLAIM DEDUCTION FOR ANY INTEREST IN EARLIER YEARS ON THESE LOANS SINCE THE APPELLANT WAS NEGOTIATING WITH THE LOAN CREDITORS F OR AFFECTING DEDUCTION IN THE RATE OF INTEREST. DURING THE RELEVANT YEAR, THE LOAN CREDIT OR ACCEPTED THE APPELLANTS REQUEST FOR REDUCING THE INTEREST RATE. THE APPELLANT ACCOUNTED FOR THE INTEREST ACCRUED, WHICH WAS FINALIZED DURING THE PREVIOUS YEAR AND WAS CLAIMED AS SUCH DURING THE PREVIOUS YEAR 5 RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. IN TH E ACCOUNTS FOR THE YEAR ENDED 31.03.2005, DISCLOSURE WITH REGARD TO INTEREST OF R S.13,97,900/- RELATING TO EARLIER YEAR DEBITED TO THE PROFIT & LOSS ACCOUNT WAS ALSO MADE. WHEN THE NEGOTIATIONS REGARDING THE RATE OF INTEREST WERE ON, THE APPELLANT COULD N OT HAVE ACCOUNTED FOR THE INTEREST IN ASSESSMENT YEAR 2004-05. UNDER MERCANTILE SYSTEM OF ACCOUNTING, THE DEDUCTION WAS AVAILABLE ONLY IN RESPECT OF THE LIABILITIES WHICH HAVE FINALLY CRYSTALIZED. SINCE THE RATE OF INTEREST WAS IN NEGOTIATION THE APPELLANT SUBMIT TED THAT INTEREST COULD NOT BE CALCULATED AT ORIGINAL RATE AND CHARGED TO THE P&L ACCOUNT. THE REDUCED RATE OF INTEREST WAS CHARGED TO THE P&L ACCOUNT AFTER FINAL IZATION. THE ASSESSING OFFICER HAS NOT DISPUTED THE QUANTUM OF EXPENSES INCURRED BY TH E ASSESSEE. DURING THE EARLIER YEAR, THE APPELLANT NEITHER PROVIDED NOR CLAIMED THESE EX PENSES AS IT WAS NEGOTIATING WITH THE LOAN CREDITORS TO REDUCE THE INTEREST LIABILITY. TH IS FACT IS ALSO BORNE OUT FROM THE RECORDS LIKE AUDIT REPORT AND P&L ACCOUNT. THE HON BLE ITAT . B BENCH IN ITS ORDER DATED 20.12.2007 IN ITA NO. 2165/KOL/2007 IN THE CA SE OF OFF SHORE INDIA LIMITED (SISTER CONCERN OF THE APPELLANT GROUP) HAS ALLOWED THE DEDUCTION FOR INTEREST RELATED TO EARLIER YEAR. BASING ON THE ABOUT DISCUSSION THE AS SESSING OFFICER IS DIRECTED TO ALLOW THE AMOUNT OF 13,97,900/- AS DEDUCTION. THIS GROUND OF APPEAL IS ALLOWED. AGGRIEVED BY THE SAID ORDER, NOW THE REVENUE IS IN APPEAL BEFORE US. 7. AT THE TIME OF HEARING BEFORE US, THE LD. DR REL IED ON THE ORDER OF THE AO AND SUBMITTED THAT THE LIABILITY WAS RELATED TO EARLIER YEARS. SECTION 145 CLEARLY STATES THAT ONE SHOULD FOLLOW EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING. SINCE THE ASSESEE FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING, THE ASSESS EE SHOULD HAVE CLAIMED THIS EXPENDITURE IN ITS P&L ACCOUNT ON ACCRUAL BASIS. I N THE INSTANT CASE THE ASSESSEE MAINTAINING DOUBLE STANDARD OF ACCOUNTING. ACCORDI NGLY, THE AO HAS RIGHTLY DISALLOWED THE EARLIER YEARS LIABILITY OF RS.13,97,900/-. HE CONCLUDED HIS ARGUMENT BY PRAYING THAT THE ORDER OF THE AO MAY BE RESTORED. 8. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSES SEE RELIED ON THE ORDER OF THE LD. CIT(A) AND PRAYED BEFORE THE BENCH TO CONFIRM THE S AME. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE LD. CIT(A) BY FOLLOWING T HE ORDER OF THE ITAT B BENCH IN THE CASE OF ITA NO. 2165/K/2007 OFF SHORE INDIA LT D. VS. ACIT DATED 20.12.2007 HAS GIVEN RELIEF TO THE ASSESSEE. FOR THE SAKE OF BREV ITY, WE REPRODUCE THE RELEVANT PORTION OF HIS ORDER AS UNDER : 9. THE APPELLANT SUBMITTED THAT INTEREST WAS PROV IDED ON THE LOANS TAKEN FROM M/S. CEAT HOLDINGS LTD. AND B&K CAPITAL MARKETS UPTO 31. 03.2003. SUBSEQUENTLY, THE APPELLANT DID NOT CLAIM DEDUCTION FOR ANY INTEREST IN EARLIER YEARS ON THESE LOANS SINCE THE APPELLANT WAS NEGOTIATING WITH THE LOAN CREDITO RS FOR AFFECTING DEDUCTION IN THE RATE OF INTEREST. DURING THE RELEVANT YEAR, THE LOAN CRE DITOR ACCEPTED THE APPELLANTS REQUEST FOR REDUCING THE INTEREST RATE. THE APPELLANT ACCOU NTED FOR THE INTEREST ACCRUED, WHICH WAS FINALIZED DURING THE PREVIOUS YEAR AND WAS CLAI MED AS SUCH DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. IN THE ACCOUNTS FOR THE YEAR ENDED 31.03.2005, DISCLOSURE WITH REGARD TO INTEREST OF R S.13,97,900/- RELATING TO EARLIER YEAR 6 DEBITED TO THE PROFIT & LOSS ACCOUNT WAS ALSO MADE. WHEN THE NEGOTIATIONS REGARDING THE RATE OF INTEREST WERE ON, THE APPELLANT COULD N O HAVE ACCOUNTED FOR THE INTEREST IN ASSESSMENT YEAR 2004-05. UNDER MERCANTILE SYSTEM OF ACCOUNTING, THE DEDUCTION WAS AVAILABLE ONLY IN RESPECT OF THE LIABILITIES WHICH HAVE FINALLY CRYSTALLIZED. SINCE THE RATE OF INTEREST WAS IN NEGOTIATION THE APPELLANT SUBMIT TED THAT INTEREST COULD NOT BE CALCULATED AT ORIGINAL RATE AND CHARGED TO THE P&L ACCOUNT. THE REDUCED RATE OF INTEREST WAS CHARGED TO THE P&L ACCOUNT AFTER FINAL IZATION. THE ASSESSING OFFICER HAS NOT DISPUTED THE QUANTUM OF EXPENSES INCURRED BY TH E ASSESSEE. DURING THE EARLIER YEAR, THE APPELLANT NEITHER PROVIDED NOR CLAIMED THESE EX PENSES AS IT WAS NEGOTIATING WITH THE LOAN CREDITORS TO REDUCE THE INTEREST LIABILITY. TH IS FACT IS ALSO BORNE OUT FROM THE RECORDS LIKE AUDIT REPORT AND P&L ACCOUNT . THE HON BLE ITAT . B BENCH IN ITS ORDER DATED 20.12.2007 IN ITA NO. 2165/KOL/2007 IN THE CA SE OF OFF SHORE INDIA LIMITED (SISTER CONCERN OF THE APPELLANT GROUP) HAS ALLOWED THE DEDUCTION FOR INTEREST RELATED TO EARLIER YEAR. BASING ON THE ABOUT DISCUSSION THE AS SESSING OFFICER IS DIRECTED TO ALLOW THE AMOUNT OF RS.13,97,900/- AS DEDUCTION. THIS GRO UND OF APPEAL IS ALLOWED. SINCE THE LD. CIT(A) HAS DELETED THE ADDITION BY FO LLOWING THE DECISION OF THE TRIBUNAL CITED, SUPRA, WE DO NOT FIND ANY INFIRMITY IN HIS O RDER AND THE SAME IS HEREBY UPHELD. THEREFORE, THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 10. NOW, WE ARE COMING TO THE ASSESSEES CROSS OBJE CTION. IN GROUND NOS. 1 AND 2 OF THE CROSS OBJECTION THE ASSESSEE AGITATED AGAINST T HE ACTION OF THE LD. CIT(A) IN UPHOLDING THE ACTION OF THE AO IN NOT ACCEPTING THE CONVERSION OF TRADING STOCK IN TO INVESTMENTS. FACTS OF THE CASE AS SUMMARIZED BY THE AO ARE AS UNDER : 1. DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEE CONVERTED/TRANSFERRED OPENING STOCK OF RS.22,12,14,617/- TO INVESTMENT STOCK. FOR SUC H CONVERSION OF BUSINESS/TRADING STOCK INTO INVESTMENT STOCK, THE PLEAS OF THE ASSES SEE ARE THAT A) THE ASSESEE IS A NBFC CARRIES ON BUSINESS OF INVEST MENTS AND TRADING ON SHARES AND SECURITIES. B) BEING A NBFC, THE ASSESSEE FROM TIME TO TIME REVIEW S THE STOCK POSITION AND CHANGES THE CHARACTER OF STOCKS WITH THE APPROVAL O F THE BOARD. C) THE CONVERSION OF STOCK DO NOT VIOLATE PROVISIONS O F I. T. ACT. AGAINST THE CONTENTION OF THE ASSESSEE THE AO CONTE NTION ARE THAT A) IF THE ASSESSEE CARRIED ON SUCH CONVERSION ON TH E BASIS OF RBI GUIDELINES, THE AO ONLY CONSIDERS THE ISSUE ON THE BASIS OF I.T. ACT, RULES, CIRCULARS AND INSTRUCTIONS. B) BY SUCH CONVERSION OF STATUS OF STOCKS THE ASSE SSEE VIOLATED THE ACCOUNTING STANDARD I & II NOTIFIED BY CENTRAL GOVT. IN CONNEC TION WITH SEC. 145 OF I.T. ACT THROUGH NOTIFICATION NO.9949 DT. 25.1.96. FURTHER, ACCORDIN G TO PRONOUNCEMENT OF SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS & F ERTILIZERS LTD. VS CIT (227 ITR 172), ACCOUNTING PRACTICE FOLLOWED BY ASSESSEE CANN OT OVERRIDE THE I.T. ACT & RULES. C) AFTER INVOCATION OF SEC.111A & 10(38) BY FINANCE ACT (NO.2), 2004 SUCH CONVERTED ASSETS ENJOY ENORMOUS BENEFITS OF LOWER TAX OR NIL TAX. D). SUCH CONVERSION HAS BEEN MADE THROUGH A SIMPLE JOURNAL ENTRY AS BECAUSE ONE CANNOT TRADE WITH SELF. E) AFTER CONVERTING THE ASSETS THE ASSESSEE SOLD PA RT OF THAT ASSETS AND CLAIMED SHORT TERM CAPITAL LOSS. IF SUCH JOURNAL ENTRY WAS NOT MA DE, THE SAME SHOULD HAVE BEEN TREATED AS SPECULATION LOSS ACCORDING TO EXPLANATIO N BELOW SEC.73 OF THE ACT. 7 F) FOR SUCH CONVERSION TRADING ASSETS HAVE BEEN RED UCED WITHOUT SHOWING ANY CORRESPONDING INCOME AND CAPITAL ASSETS HAVE BEEN I NCREASED WITHOUT ANY CORRESPONDING CAPITAL EXPENDITURE. G) SUCH JOURNAL ENTRY IS NOTHING BUT A COLOURABLE D EVICE FOR TAX PLANNING WHICH IS FORBIDDEN BY THE APEX COURT IN MC.DOWELL & CO. LTD . VS. CIT (154 1TR 148).. H) IN THE IMMEDIATE PRECEDING YEAR THERE WAS NO INV ESTMENT STOCK. ACCORDING TO AOS CALCULATION THE ASSESSEE SUFFERED LOSS OF RS.23,66,874/- WHICH WAS TREATED BY HIM AS SPECULATION LOSS TO BE SET OFF AG AINST THE FUTURE SPECULATION PROFIT. IN APPEAL, THE LD. CIT(A) HAS HELD AS UNDER : 7. ON GOING THROUGH THE SUBMISSIONS OF THE APPELLA NT IT IS CLEAR THAT THE APPELLANT CONVERTED SHARES FROM ITS STOCK IN TRADE TO INVESTM ENTS ON 01.04.2004 AS PER THE DECISION OF THE BOARD OF DIRECTORS. OUT OF THE SHAR ES CONVERTED INTO INVESTMENTS, CERTAIN SHARES WERE SOLD DURING THE PREVIOUS YEAR AND THE R ESULTANT INCOME WAS OFFERED FOR TAXATION UNDER THE HEAD CAPITAL GAINS. THE A.O. H AS TREATED THE RESULTANT LOSS, ON SALE OF INVESTMENTS AS BUSINESS LOSS INSTEAD OF SHO RT TERM CAPITAL LOSS AS CLAIMED IN THE RETURN. THE APPELLANT SUBMITTED AS PER RBI GUIDELIN E THERE SHALL BE NO ENTIRE - CLASS TRANSFER ON ADHOC BASIS AND IF THE SAME IS DONE IT SHALL BE AFFECTED ONLY AT THE BEGINNING OF EACH YEAR I.E. ON 1ST APRIL OR 1ST OCTOBER WITH THE APPROVAL OF THE BOARD. THE SAID CLAUSE ALSO PROVIDES THAT THE INVESTMENTS SHALL BE TRANSFERRED SCRIP-WISE, FROM CURRENT TO LONG-TERM OR VISE-VERSA. THE APPELLANT AFFECTED THE TRANSFER ON 1ST APRIL, 2004 SCRIPT- WISE. AS SUBMITTED BY THE APPELLANT THERE IS NO BAR IN THE I.T ACT TO [PREVENT THE CONVERSION OF STOCK IN TRADE TO INVESTMENTS. THE IS SUE IS ONLY WHETHER SALE PROCEEDS OF SUCH CONVERTED INVESTMENT SHARES ARE TO BE TREATED AS BUSINESS INCOME OR INCOME FROM CAPITAL GAINS. VARIOUS JUDICIAL DECISIONS HAVE LAID DOWN PRINCIPLE S ON THE ISSUE. AS SEEN FROM THE DETAILS FILED BY THE APPELLANT THE STOCK IN TRADE A S ON 1/04/2004 WAS CONVERTED INTO INVESTMENTS. THE APPELLANT COMPANY WAS NOT HAVING A NY OPENING BALANCE IN THE INVESTMENT ACCOUNT. THE APPELLANT COMPANY WAS A NBF C COMPANY AND IS NOT REGISTERED WITH RBI. AS EVIDENT FROM THE DETAILS FILED, THE AP PELLANT COMPANY PURCHASED ALL THESE SHARES WITH BORROWED FUNDS. IN THE EARLIER ASSESSME NT YEARS THE APPELLANT COMPANY WAS ALSO CLAIMING THE APPELLANT HAS DEBITED THE PROFIT AND LOSS ACCOUNT WITH THE VALUATION LOSS AS IN EARLIER YEARS. THE APPELLANT MAIN BUSINE SS AS SEEN FROM RECORD IS ONLY TRADING IN SHARES. EVEN AT THE END OF THE YEAR THERE ARE NO SHARES IN THE INVESTMENT ACCOUNT AS SEEN FROM THE BALANCE SHEET. THE OBJECTIVE OF THE A PPELLANT SEEMS TO BE TO CONVERT THE SHARES ON THE FIRST DAY OF THE FINANCIAL YEAR AND T O CLAIM THE RESULTANT SALE PROCEEDS UNDER CAPITAL GAINS TO AVAIL THE BENEFIT U/S.111A A ND 10(38) OF THE ACT. TAKING INTO CONSIDERATION THE LOSS ON VALUATION CLAIMED BY THE APPELLANT AT TIME OF CONVERSION, THESE SHARES ARE TO BE TREATED AS STOCK IN TRADE ONLY. TH E BOARD RESOLUTION CONVERTING THESE STOCKS DOES NOT GIVE ANY LEGAL SANCTION TO TREAT SU CH SHARES AS INVESTMENTS. TAKING ALL THE FACTORS INTO CONSIDERATION THE A.O DETAILDLY DI SCUSSED THE ISSUE IN THE ASSESSMENT ORDER AND TREATED THE ALLEGED LOSS IN SALE OF INVES TMENTS AS SPECULATION LOSS. THE ORDER OF THE A.O IS UPHELD ON THIS ISSUE. THE GROUNDS OF APPEAL ARE DISMISSED. AGGRIEVED BY THE SAID ORDER, NOW THE ASSESSEE HAS F ILED THIS CROSS OBJECTION BEFORE US. 11. AT THE TIME OF HEARING BEFORE US, THE LD. COUN SEL FOR THE ASSESSEE WHILE REITERATING HIS SAME SUBMISSIONS AS SUBMITTED BEFOR E THE LOWER AUTHORITIES FURTHER SUBMITTED THAT THERE IS NO DISPUTE TO A.OS PROPOSI TION THAT IN MATTER OF ASSESSMENT, 8 PROVISIONS OF THE ACT & RULES WILL HAVE PRIMACY. HO WEVER, AO HAS NOT SPELT OUT ANY SPECIFIC PROVISION OF THE I T ACT OR RULES WHICH PR OHIBITS SUCH CONVERSION OR CONTAINING RULES REGARDING METHOD TO BE FOLLOWED FOR ACCOUNTIN G OF SUCH CONVERSIONS. RBI GUIDELINES ARE ISSUED IN TERMS OF SECTION 45 OF THE RBI ACT, 1934 WHICH IS STATUTORILY BINDING AND WHICH REQUIRES SUCH CONVERSION AT CARRY ING COST AND THEREFORE NO PROFIT OR LOSS CAN BE ACCOUNTED ON SUCH CONVERSION. THE SAID ACCOUNTING METHOD IS ALSO IN CONFORMITY WITH THE DECISION IN THE CASE OF CIT VS. DHANUKA & SONS [124 ITR 24 (CAL)]. IN RESPECT OF THE CONTENTION OF THE AO THA T BY CONVERSION OF STOCK INTO INVESTMENTS, ASSESSEE VIOLATED ACCOUNTING STANDARD 1 AND 2 NOTIFIED U/S. 145 OF THE ACT. ACCORDING TO SUPREME COURT DECISION IN CASE OF TUTI CORIN ALKALI 227 ITR 172 ACCOUNTING PRACTICE FOLLOWED CANNOT OVERRIDE I. T. ACT AND RULES IN RESPECT OF THIS CONTENTION, HE SUBMITTED THAT THIS IS BASELESS AND UNSUBSTANTIATED FINDING. FROM ACCOUNTING STANDARD NOTIFIED U/S 145 IT IS EVIDENT THAT IT DOES NOT PROHIBIT SUCH CONVERSION. SUPREME COURTS DECISION IN 227 ITR 172 IS NOT APPLICABLE BECAUSE I T ACT NOR RULES PROHIBIT CONVERSION OF STOCK IN TRADE INT O INVESTMENTS OR VICE VERSA. IN FACT JUDICIAL DECISION IN THE CASES OF CIT VS. DHANUKA & SONS (124 ITR 24], ACIT VS. BRIGHT STAR INVESTMENT PVT LTD [ITA 6374/MUM/2004], CIT VS . JANHAVI INVESTMENTS (P) LTD [304 ITR 276), KALYANI EXPORTS & INVESTMENTS (P) LT D & OTHERS VS. DCIT [78 ITD 95 (TM)) DEAL WITH CASES INVOLVING CONVERSION OF STOCK IN TRADE INTO INVESTMENTS. IN THESE DECISIONS JUDICIAL AUTHORITIES HAVE ACCEPTED THAT S UCH CONVERSION IS LEGALLY PERMISSIBLE AND HAVE LAID DOWN PARAMETERS AND PRINCIPLES TO BE ADOPTED FOR ASCERTAINING IMPACT OF SUCH CONVERSION WHILE ASSESSING TOTAL INCOME. IN RE SPECT OF THE AOS CONTENTION THAT AFTER INTRODUCTION OF SECTIONS 111A AND 10(38) IN 2 004, CONVERTED ASSETS ENJOY ENORMOUS BENEFITS, HE SUBMITTED THAT THIS CANNOT BE THE REASON FOR REJECTING CONVERSION. BASED ON APPREHENSION OF FUTURE REVENUE LOSS AO COU LD NOT REJECT THE CONVERSION. THE ASSESSEE INCURRED LOSS ON SALE OF SHARES AND CLAIME D FOR CARRY FORWARD OF THE SAME AND WAS NOT SET-OFF WITH INCOME. IN RESPECT OF THE CONT ENTION OF THE AO THAT AFTER CONVERSION, PART OF THE INVESTMENT WAS SOLD, RESULT ING IN SHORT TERM CAPITAL LOSS. IF IT WAS ASSESSED AS BUSINESS INCOME IT COULD BE HIT BY EXPL ANATION TO SECTION 73, HE SUBMITTED THAT IT IS TRUE THAT ON SALE OF SHARES OF TWO COMPA NIES ASSESSEE INCURRED SHORT TERM CAPITAL LOSS OF RS.27,86,496/- WHICH WAS NOT CLAIMED FOR SE T-OFF AGAINST CURRENT YEARS INCOME BUT CLAIMED TO BE CARRIED FORWARD U/S 74. EVEN IF I T WAS TREATED AS SPECULATION LOSS IT WOULD BE CARRIED FORWARD U/S 73. AS SUCH THE SAME D ID NOT HAVE ANY IMPACT ON CURRENT YEARS TOTAL INCOME AS LOSS WAS TO BE CARRIED FORWA RD AND NOT SET-OFF IN CURRENT YEAR. IN 9 RESPECT OF THE CONTENTION OF THE AO CONVERSION WAS CARRIED OUT WITHOUT CORRESPONDING INCOME AND CAPITAL ASSET INCREASED WITHOUT SHOWING CAPITAL EXPENDITURE, HE STATED THAT AS PER THE DECISION OF THE CALCUTTA HIGH COURT IN T HE CASE OF CIT VS. DHANUKA & SONS (124 ITR 24) ON CONVERSION NO INCOME/LOSS CAN BE RE COGNIZED . AS PER THE SAID DECISION AN ASSESSEE CANNOT MAKE PROFIT OR LOSS IN TRANSACTI ONS WITH ITSELF. SAME PRINCIPLE IS RECOGNIZED IN PRUDENTIAL GUIDELINES OF RBI. AGAINS T THE CONTENTION OF THE AO THAT CONVERSION WAS A COLOURABLE DEVICE FOR TAX PLANNING WHICH IS FORBIDDEN AS PER SUPREME COURT DECISION IN CASE OF MC.DOWELL & CO. (154 ITR 148), HE SUBMITTED THAT AS STATED ABOVE SUCH CONVERSION WAS CARRIED OUT AT CARRYING C OST AND DID NOT RESULT IN INCOME OR LOSS. ON SALE OF SHARES DURING THE YEAR THERE WAS L OSS WHICH WAS CLAIMED FOR CARRY FORWARD AND NOT SET-OFF WITH INCOME OF THE CURRENT YEAR. EVEN IF CONVERSION IS IGNORED THE LOSS ASSESSED COULD BE CARRIED FORWARD EITHER U /S 72 OR 73 AND AS SUCH LOSS WAS ENTITLED TO BE CARRIED FORWARD IN ANY CASE. IN THE DECISIONS REPORTED IN CIT VS. DHANUKA & SONS [124 ITR 24], ACIT VS. BRIGHT STAR INVESTMEN T PVT LTD [ITA 63741MUM/2004], CIT VS. JANHAVI INVESTMENTS (P) LTD [304 ITR 276], KALYANI EXPORTS & INVESTMENTS (P) LTD & OTHERS VS. DCIT [78 ITD 95 (TM)] CONVERSION O F STOCK IN TRADE INTO INVESTMENT IS JUDICIALLY UPHELD. THE DECISION OF SUPREME COURT IN 154 ITR 148 RECONSIDERED BY SUPREME COURT IN 263 ITR 706. HE ALSO CONTENDED THA T THE REASON I..E. IMMEDIATELY PRECEDING YEAR THERE WAS NO INVESTMENT FOR WHICH TH E AO REJECTED THE CONVERSION OF STOCK INTO INVESTMENTS IS NOT A VALID GROUND ITSELF . HE ALSO CONTENDED THAT THE REJECTION OF THE ASSESSEES CLAIM BY THE LD.CIT(A) ON ACCOUNT OF STOCK IN TRADE WAS CONVERTED INTO INVESTMENTS ON 1.4.2004, THE ASSESSEE WAS NOT HAVING ANY OPENING BALANCE OF INVESTMENTS. IN THIS REGARD, THE LD. COUNSEL FOR T HE ASSESSEE SUBMITTED THAT THE SHARES CONVERTED FROM STOCK INTO INVESTMENTS WERE HELD FOR A LONG TIME FOR OVER 5-6 YEARS AND THERE WAS NO TRADING ACTIVITY IN THESE SHARES. THE FACT THAT THERE WAS NO OPENING BALANCE OF INVESTMENT COULD NOT BE THE BASIS OF REJECTION O F THE CONVERSION OF STOCK INTO INVESTMENTS. HE ALSO CONTENDED THAT AS REGARDS THE CONTENTION OF THE LD. CIT(A) THAT THE ASSESSEE WAS AN NBFC AND IS NOT REGISTERED WITH RBI , THE COUNSEL SUBMITTED THAT AS REQUIRED BY THE RBI ACT, 1934 THE ASSESSEE HAD MADE AN APPLICATION FOR REGISTRATION WITH RBI. HOWEVER THE SAME WAS REJECTED BY THE RBI FOR WANT OF MINIMUM NET OWNED FUNDS CRITERIA. DESPITE THE APPLICATION FOR REGISTR ATION HAVING BEEN CANCELLED, RBI STILL STIPULATED THAT THE COMPANY WOULD BE CONTINUED TO B E GOVERNED BY RBI AND THE VARIOUS CIRCULARS, INSTRUCTIONS AND DIRECTIONS ISSUED FROM TIME TO TIME SHALL HAVE TO BE FOLLOWED. THE ASSESSEE BEING A NBFC HAD TO FOLLOW THE DIRECTI ONS ISSUED BY RBI AND IT FOLLOWED 10 THEM. IN RESPECT OF THE CONTENTION OF THE LD. CIT( A) THAT THE ASSESSEE PURCHASED ALL THESE SHARES WITH BORROWED FUNDS, THE COUNSEL IN TH IS RESPECT SUBMITTED THAT THIS OBSERVATION OF THE LD. CIT(A) IS BASED ON NO MATERI AL. NEITHER IN THE ASSESSMENT OF THE CURRENT YEAR OR IN THE EARLIER YEARS, THIS FINDING WAS EVER RECORDED BY THE A.O. IN RESPECT OF THE CONTENTION OF THE LD. CIT(A) THAT IN THE EARLIER ASSESSMENT YEARS AND IN THE CURRENT ASSESSMENT YEAR LOSS ON ACCOUNT OF VALU ATION WAS CLAIMED, HE SUBMITTED THAT THE SHARES WERE CONVERTED FROM STOCK TO INVESTMENTS AT THE CARRYING COST AND THUS NO PROFIT OR LOSS RESULTED. AS PER THE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. DHANUKA & SONS [124 ITR 24] ON CONVERSION NO IN COME/LOSS CAN BE RECOGNIZED .AS PER THE SAID DECISION AN ASSESSEE CANNOT MAKE PROFI T OR LOSS IN TRANSACTIONS WITH ITSELF. SAME PRINCIPLE IS RECOGNIZED IN PRUDENTIAL GUIDELIN ES OF RBI. FURTHER AS PER THE GENERALLY ACCEPTED ACCOUNTING METHODOLOGY CONSISTEN TLY FOLLOWED THE STOCK OF SHARES WERE VALUED AT LOWER OF COST OR MARKET VALUE. THE S HARES CONVERTED INTO INVESTMENTS WERE VALUED AT COST AT WHICH THESE SHARES WERE CONV ERTED. AGAINST THE CONTENTION OF THE LD. CIT(A) THAT MAIN BUSINESS OF THE ASSESSEE AS SE EN FROM RECORD IS ONLY TRADING IN SHARES, THE COUNSEL SUBMITTED THAT IN THE ASSESSMEN T ORDER, THE AO HAS HIMSELF MENTIONED THE NATURE OF BUSINESS TO BE INVESTMENT, FINANCE, TRADING IN SHARES AND SECURITIES. THEREFORE, THE LD. CIT(A)S FINDING IS THUS FACTUALLY INCORRECT. HE ALSO CONTENDED THAT AS ON 31.3.2005, THE INVESTMENTS HEL D WERE TO BE THE TUNE OF RS.19,44,64,094/- AS PER THE BALANCE SHEET. THE LD. CIT(A)S FINDING IN THIS RESPECT THAT THERE WERE NO SHARE IN INVESTMENT ACCOUNT AT THE EN D OF THE YEAR AS SEEN FROM THE BALANCE SHEET WAS FACTUALLY WRONG. IN RESPECT OF TH E CONTENTION OF THE LD. CIT(A) THAT THE OBJECTIVE FOR CONVERTING THE SHARES ON THE FIRS T DAY OF THE FINANCIAL YEAR IS TO CLAIM THE RESULTANT SALE PROCEEDS UNDER CAPITAL GAINS TO AVAIL BENEFIT U/S. 111A AND 10(38) OF THE ACT, THE LD. COUNSEL SUBMITTED THAT THIS FINDIN G OF THE LD. CIT(A) IS FACTUALLY INCORRECT. THE ASSESSEE SUFFERED LOSS OF RS.27,86, 496/- UPON SALE OF A PART OF THE CONVERTED SHARES AND CLAIMED THE SAME FOR CARRY FOR WARD U/S. 74 AND THE LOSS WAS NOT SET OFF WITH CURRENT YEARS INCOME. HE ALSO CONTENDED I N RESPECT OF THE CONTENTION OF LD. CIT(A) THE BOARD RESOLUTION CONVERTING STOCK INTO I NVESTMENTS DOES NOT GIVE ANY LEGAL SANCTION TO TREAT SUCH SHARES AS INVESTMENTS THAT I N FACT NO SANCTION IS REQUIRED FOR CONVERSION OF STOCK INTO INVESTMENTS. HE ALSO CONTE NDED THAT THERE ARE DECISIONS WHICH JUDICIALLY APPROVE THE CONVERSION OF STOCK INTO INV ESTMENTS AND THERE IS NO BAR ON SUCH CONVERSION. HE LASTLY PRAYED TO ALLOW THE CLAIM OF THE ASSESSEE. 11 12. ON THE OTHER HAND, THE LD. DR HEAVILY RELIED ON THE ORDERS OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE CASE LAWS RELIED ON BY THE ASSESSEES COUNSEL ARE PRIOR TO AMENDMENT IN THE ACT AND HENCE, ARE NOT APPLICAB LE TO THE FACTS OF THIS CASE. HOWEVER, SHE DID NOT DISPUTE THE FACT THAT AT THE E ND OF THE YEAR THERE WAS NO SHARES IN INVESTMENT ACCOUNT AND THAT THE LOSS SUFFERED OF RS .27,86,496/- UPON THE SALE OF A PART OF THE CONVERTED SHARES WAS CLAIMED AND CARRIED FORWAR D U/S. 74 OF THE ACT AND THE SAME WAS NOT SET OFF WITH CURRENT YEARS INCOME. SHE, H OWEVER, URGED BEFORE THE BENCH TO CONFIRM THE ACTIONS OF THE LOWER AUTHORITIES. 13. AFTER HEARING THE RIVAL SUBMISSIONS, PERUSING T HE MATERIAL AVAILABLE ON RECORD AND THE CASE LAWS CITED BY BOTH THE PARTIES, WE FIND TH AT THE ASSESSEE IS A NON-BANKING FINANCIAL COMPANY AND AMONGST OTHER THINGS CARRIES ON THE BUSINESS OF INVESTMENT IN SHARES AND SECURITIES. THE ASSESSEE COMPANY HELD SHARES AS ITS STOCK IN TRADE AS ON 31 ST MARCH, 2004. OUT OF THESE SHARES, THE ASSESSEE COM PANY MADE CONVERSION OF THE SHARES OF THE COMPANIES NAMELY, CESC LTD., CFL CAPITAL FIN ANCIAL SERVICES LTD., EVEREADY INDUSTRIES LTD., HILTOP HOLDINGS INDIA LTD., JUBILE E INVESTMENTS & INDS LTD. , KEC INTERNATIONAL LTD., RPG CABLES LTD. AND RPG HOME FI NANCE LTD. FROM ITS STOCK IN TRADE TO INVESTMENT ON 1.4.2004 I.E. THE FIRST DAY OF THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR UNDER APPEAL. THIS DECISION OF THE ASSESSEE C OMPANY HAD APPROVAL OF THE BOARD OF DIRECTORS. OUT OF THESE CONVERTED SHARES, THE SHAR ES OF CESC LTD. AND KEC INTERNATIONAL LTD. WERE SOLD BY THE ASSESSEE COMPAN Y AND SUFFERED LOSS OF RS.27,86,496/- WHICH WAS SHOWN BY IT UNDER THE HEAD CAPITAL GAIN/LOSS THIS LOSS WAS NOT SET OFF AGAINST THE CURRENT YEARS INCOME AND W AS CARRIED FORWARD TO NEXT YEAR. DURING THE ASSESSMENT PROCEEDINGS THE AO IGNORED TH IS CONVERSION OF STOCK OF SHARES TO INVESTMENTS AND RECALCULATED THE LOSS OF RS.23,66,8 74/- AND TREATED THE SAME AS SPECULATION LOSS INSTEAD OF SHORT TERM CAPITAL LOSS AS CLAIMED BY THE ASSESSEE. THE AO HAS, INTER ALIA, OBSERVED THAT BY CONVERTING SHARES FROM STOCK IN TRADE TO INVESTMENT THE ASSESSEE HAD VIOLATED THE PROVISIONS OF SECTION 145 AND ALSO THAT THE INCOME TAX ACT DOES NOT PROVIDE FOR SUCH CONVERSION. THE AO HAS A LSO OBSERVED THAT BY DOING SUCH CONVERSION THE ASSESSEE COMPANY WOULD ENJOY ENORMOU S BENEFITS U/S. 111A AND SECTION 10(38) OF THE ACT BY LOWERING ITS TAX LIABILITY OR INCURRING NIL TAX LIABILITY AND THIS ACTION OF THE ASSESEE IS NOTHING BUT A COLOURABLE D EVICE FOR TAX PLANNING WHICH IS FORBIDDEN BY THE APEX COURT IN MC.DOWELL & CO. LTD. VS. CIT (SUPRA). THE LD. CIT(A) HAS ALSO AGREED WITH THE AO INTER ALIA ON TH E GROUND THAT THERE WAS NO SHARES IN 12 INVESTMENT ACCOUNT AT THE END OF THE YEAR. NOW THE ISSUE BEFORE US IS WHETHER THE ACTION OF THE ASSESSEE COMPANY IN CONVERTING THE SHARES HE LD AS STOCK IN TRADE TO INVESTMENTS IS BONA FIDE ONE OR HAS BEEN DONE BY IT TO REDUCE ITS TAX LIABILITY. WE FIND THAT THE ASSESSEE COMPANY BY CONVERTING ITS SHARES OF STOCK IN TRADE TO INVESTMENT ACCOUNT AND SUBSEQUENTLY SELLING SOME OF THEM DURING THE YEAR H AS SUFFERED LOSS WHICH HAS NOT BEEN SET OFF AGAINST THE CURRENT YEARS INCOME OF THE AS SESEE COMPANY AND THE SAME HAS BEEN CARRIED FORWARD. THUS, THE ASSESSEE COMPANY DID N OT TAKE ANY ADVANTAGE OF SECTION 111A AND 10(38) INSERTED BY FINANCE ACT NO. 2 OF 20 04 AS ALLEGED BY THE AO. THE FACT THAT THE AO HAS HIMSELF BY IGNORING THIS CONVERSIO N OF SHARES CALCULATED THE LOSS SUFFERED BY THE ASSESEE AND TREATED THE SAME TO BE SPECULATION LOSS TO BE SET OFF AGAINST THE FUTURE SPECULATION PROFIT HAS NOT BEEN ABLE TO INCREASE THE TAX LIABILITY OF THE ASSESSEE, IS NOT IN DISPUTE. THEREFORE, THE OBSERVA TION OF THE AO THAT THE ASSESSEE HAS INDULGED IN A COLOURABLE DEVICE OF TAX PLANNING TO REDUCE ITS TAX LIABILITY HAS NO LEGS TO STAND. DURING THE COURSE OF HEARING ALSO THE REVEN UE HAS FAILED TO MAKE OUT A CASE THAT IN SUBSEQUENT YEARS ALSO ASSESSEE HAS GOT ANY BENE FIT BY CONVERTING THESE SHARES FROM STOCK IN TRADE TO INVESTMENT ACCOUNT. ON THE OTHER HAND, AT PAGE 48 OF THE PAPER BOOK, THE ASSESSEE HAS FILED THE FOLLOWING CHART, WHICH MAKES IT CLEAR THAT OUT OF THE SHARES CONVERTED FROM STOCK IN TRADE TO INVESTMENT ACCOUN T MOST OF THE SHARES HAVE BEEN KEPT BY THE ASSESSEE AS CLOSING STOCK OF INVESTMENT TILL 31 ST MARCH, 2009, WHICH PROVES THE BONA FIDES OF THE ASSESSEE COMPANY : STATEMENT OF TRANSFER OF SHARES FROM STOCK TO INVES TMENT ON 01.04.2004 AND SUBSEQUENT SALE AND CLOSING STOCK NAME OF SCRIP TFR FROM STOCK TO INV AS ON 1.4.04 SALES IN FY 04- 05 CLOSING INVESTMENT AS ON 31.3.05 CLOSING INVESTMENT AS ON 31.3.09 QTY VALUE QTY SALE VALUE QTY VALUE QTY. VALUE CESC LTD. 851210 19550765 63918 6781700 787292 18082569 819292 18411091 CFL CAPITAL FINANCIAL SERVICES LTD. 64100 96150 0 0 64100 96150 64100 96150 EVEREADY INDUSTRIES LTD. 81466 1942964 0 0 81466 1942964 0 0 HILTOP HOLDINGS INDIA LTD. 2779654 75897028 0 0 2779654 75897028 2779654 75897028 JUBILEE INVESTMENTS 537427 103186080 50000 1500000 487427 93586080 0 0 13 & INDS. LTD. KEC INTERNATIONAL LTD. 94425 3678565 0 0 94425 3678565 94647 11674 RPG CABLES LTD. 17633 180738 0 0 17633 180738 17633 180738 RPG HOME FINANCE LTD. 100000 1000000 0 0 100000 1000000 100000 1000000 TOTAL 205532290 8281700 194464094 95596681 FROM THE ABOVE CHART IT IS CLEAR THAT THE LD. CIT(A ) WAS FACTUALLY WRONG IN CONFIRMING THE ACTION OF THE AO ON THE GROUND THAT THERE WAS N O SHARES IN INVESTMENT ACCOUNT AT THE END OF THE YEAR. WE FURTHER FIND THAT THE REVENUE DID NOT POINT OUT ANY PROVISION OF THE I. T. ACT OR OF THE INCOME-TAX RULES WHICH PROHIBITS CONVERSI ON OF SHARES FROM STOCK IN TRADE TO INVESTMENT ACCOUNT. WHILE THE CASE LAWS RELIED ON BY THE ASSESSEE INCLUDING THE JURISDICTIONAL HIGH COURTS DECISION IN THE CASE OF CIT VS. DHANUKA & SONS (124 ITR 24) HAVE HELD SUCH CONVERSION AS LEGALLY PERMISSIBL E. THEREFORE, THE ORDERS PASSED BY THE LOWER AUTHORITIES ON THIS ISSUE ARE SET ASIDE A ND THE GROUNDS OF CROSS OBJECTION OF THE ASSESSEE ARE ALLOWED. 14. GROUND NO. 3 IS CONSEQUENTIAL TO OUR ABOVE FIND ING GIVEN IN PARA 13 AND DOES NOT REQUIRE ANY ADJUDICATION. 15. IN THE RESULT, THE APPEAL OF THE REVENUE IS PA RTLY ALLOWED AND THE CROSS OBJECTION OF THE ASSESSEE IS ALLOWED. 16. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 30 .6.2010 SD/- SD/- (B. C. MEENA ) (D. K. TYAGI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED :30TH JUNE , 2010 PRONOUNCED BY SD/- (CDR) SD/- (DKT) AM JM COPY TO : 1. ITO, WARD-6(1), KOLKATA. 2. M/S. CHATTARPATI INVESTMENTS LTD., DUNCAN HOUSE, 31 , N. S. ROAD, KOLKATA-700 001. 3. CIT(A), KOLKATA. 4. CIT, KOLKATA. 5. D.R., ITAT, KOLKATA. TRUE COPY BY ORDER DEPUTY REGISTRAR JD.(SR.P.S.) I.T.AT., KOLKATA