KHIRA MEHTA SHAH & ASSOCITES, MUMBAI V. ITO 19(2)(3), MUMBAI

ITA 478/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84082 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 12-08-2014
• Assessment Year: 1984-1985
• Appeal Filed On: 23-01-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: PITAMBAR DAS
• Section: 143(3)

Judgement Text

A IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI BEFORE SHRI B R BASKARAN, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. : 478/MUM/2012 (ASSESSMENT YEAR: 1984-85) M/S KHIRA MEHTA SHAH & ASSOCIATES, C/O WANKHEDE STADIUM, D-BLOCK, D ROAD, CHURCHGATE, MUMBAI -400 020 .: PAN: AACPM 8392 D VS ITO 19(2)-3, ROOM NO. 311, PIRAMAL CHAMBERS, LALBAUG, MUMBAI -400 012 (APPELLANT-CROSS OBJECTOR) (RESPONDENT) APPELLANT BY : NONE RESPONDENT BY : SHRI PITAMBAR DAS !'#$% /DATE OF HEARING : 12-08-2014 &'( #$%/ DATE OF PRONOUNCEMENT : 07-11-2014 * + * + * + * + O R D E R , , , , -'' -'' -'' -'' '. '. '. '. , . . . . . .. . PER VIVEK VARMA, J.M. : INSTANT APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) 35, MUMBAI, DATED 30.11.2011, WHEREIN THE FOLLOWING GROUNDS HAVE BEEN TAKEN: 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) ERRED IN NOT DELETING THE ADDITION OF RS. 3,01,60,223/- TO THE APPELLANT S INCOME BEING DIFFERENCE BETWEEN MARKET VALUE AND THE BOOK VALUE OF THE STOCK IN TRADE OF THE APPELLANT FIRM ON THE ALLEGED DISSOLUT ION OF THE APPELLANT FIRM. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) FURTHER ERRED IN CONFIRMING THE FINDING OF THE ASSESSING OFFICER THA T STOCK IN TRADE WAS DISTRIBUTED AMONGST THE PARTNERS ON DISSOLUTION OF THE APPELLANT FIRM AND NOT WITHDRAWN BY THE PARTNERS DURING THE COURSE OF THE RUNNING BUSINESS OF THE APPELLANT FIRM. 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) FURTHER ERRED IN REJECTING THE LEGAL POSITION THAT THE AMENDED PROVI SION OF SECTION 45(4) IS APPLICABLE WITH EFFECT FROM 01.04.1988 WHILE THE APPELLANT FIRM WAS DISSOLVED ON 31.12.1981 BY HOLDING THAT THE SAME IS IRRELEVANT. 4. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FURTHER ERRED IN NOT CONSIDERING AND GIVING A FINDING THAT ALL THE PARTN ERS HAVE PAID THEIR TAXES WHEN THEY RECEIVED THE REVALUED PRICE FROM TH E 5 FIRMS ON RETIREMENT FROM THESE FIRMS, AS IT IS ONE OF THE GR IEVANCES OF THE DEPARTMENT THAT THESE PARTNERS HAVE GOT REVALUED PR ICE FROM VIRAL M/S KHIRA MEHTA SHAH & ASSOCIATES ITA 478/MUM/2012 2 HOTELS & THEATERS PVT LTD ON RETIREMENT FROM THESE 5 FIRMS AND NOT PAID ANY TAX ON THE AMOUNT OF RS. 3 CRORES RECEIVED BY A LL THE PARTNERS. 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FURTHER ERRED IN RELYING ON THE FINDING GIVEN BY THE HON. MADRAS HIG H COURT IN THE CASE OF G R RAMACHARI & CO. 41 ITR 142 WHILE NOT GIVIN G ANY FINDING ON THE SUBMISSIONS OF THE APPELLANT THAT THE FINDINGS OF THIS CASE ARE NOT APPLICABLE ON THE FACTS OF THE APPELLANTS CASE. 6. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FURTHER ERRED IN RELYING ON THE DECISION OF THE HON. SUPREME COURT I N THE CASE OF MCDOWELL AND CO. LTD. V COMMERCIAL TAX OFFICER -154 ITR 148 (SC) AND HOLDING THAT COLOURING OF THE TRANSACTION IS NOT AC CEPTABLE AND IGNORING THE LATEST JUDGMENT OF THE HON. SUPREME COURT IN TH E CASE OF UNION OF INDIA V AZADI BACHAO ANDOLAN & ANR. 263 ITR 706 ( SC). 7. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) FURTHER ERRED IN NOT CONSIDERING THE VARIOUS JUDGMENTS RELIED UPON BY TH E APPELLANT FIRM AND MERELY HOLDING THAT THE RATIO OF THE JUDGMENTS CITED BY THE APPELLANT ARE DISTINGUISHABLE FROM THE FACTS OF THE APPELLANTS CASE. 8. THE APPELLANT FIRM CRAVES TO ADD TO, ALTER OR AM END THE FOREGOING GROUNDS, WHICH ARE WITHOUT PREJUDICE TO ONE ANOTHER , AT THE TIME OF HEARING. 2. THIS IS THE SECOND ROUND OF APPEAL, WHEREIN, IN THE FIRST ROUND, THE COORDINATE BENCH OF THE ITAT HAD RESTORED THE M ATTER TO THE FILE OF THE CIT(A) ON TECHNICAL GROUND. 3. THE FACTS ARE THAT THE ASSESSEE IS A FIRM WITH 1 6 PARTNERS, BELONGING TO 5 GROUPS, WHO USED TO UNDERTAKE DEVELO PMENT PROJECTS. SOMETIMES IN 1982, DISPUTES AROSE BETWEEN THE PARTN ERS AND THE ONGOING PROJECTS CAME TO HALT ON 17.11.1982. THE UN SOLD STOCK OF FLATS AND LAND WERE DISTRIBUTED ON 31.12.1982. THE UNSOLD STOCK OF FLATS AND LAND WERE TAKEN OVER BY A CONSORTIUM OF FIVE NE W FIRMS. THE OUTGOING PARTNERS RECEIVED MONETARY CONSIDERATION A T THE REVALUED PRICE, WHICH CAME TO RS. 3,01,60,223/-, BEING DIFF ERENCE OF REVALUED PRICE AT RS. 3,57,00,000/- AND ORIGINAL COST AT RS. 55,39,777/-. THIS RECEIPT OF RS. 3,01,60,223/- WAS CONSIDERED BY THE ASSESSEE AS NON- TAXABLE, BUT THE AO HELD THAT UNSOLD STOCK OF FLATS AND LAND SHALL BE TAKEN AS SIT ON THE DATE OF DISSOLUTION OF THE FIRM . 4. THIS IS THE POINT WHICH IS IMPUGNED BEFORE US. M/S KHIRA MEHTA SHAH & ASSOCIATES ITA 478/MUM/2012 3 5. BEFORE US, THE DR RELIED ON THE ORDERS OF THE RE VENUE AUTHORITIES BUT THERE WAS NO ATTENDANCE ON BEHALF OF THE ASSESS EE. 6. WE HAVE HEARD THE ARGUMENTS OF THE DR AND HAVE P URSUED THE ISSUE IN DETAILS FROM THE ORDERS OF THE AO AND THE CIT(A). THE CIT(A) HAS OBSERVED, I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE ASSESSEE/APPELLANT AND IN MY OPINION THEY CANNOT BE ACCEPTED. NO SERIO US EXCEPTION CAN BE TAKEN TO THE SUBMISSION OF THE ASSESSEE/APPELLANT T HAT WHEN STOCKS ARE WITHDRAWN FROM A RUNNING BUSINESS NO PROFIT MIG HT ARISE. THE FACTS OF THE CASE AS DISCUSSED ABOVE GIVE A LIE TO THIS C ONTENTION OF THE ASSESSEE. THE MADRAS HIGH COURT IN THE CASE OF ALA FIRM VS COMMISSIONER OF INCOME-TAX (102 ITR 622) HAS HELD T HAT STOCK IN TRADE OF A FIRM DOES NOT CEASE TO BE STOCK IN TRADE ON TH E DISSOLUTION OF THE FIRM THOUGH THE ASSESSEE/ APPELLANT HAS THE OPTION TO VALUE THE STOCK IN TRADE EITHER AT MARKET RATE OR AT COST WHICHEVE4R I S LOWER, DURING THE SUBSISTENCE OF THE BUSINESS. THAT OPTION IS NOT AVA ILABLE TO IT AT THE POINT OF TERMINATION OF BUSINESS WHEN THE STOCK IN TRADE IS TO BE VALUED AT MARKET VALUE. MADRAS HIGH COURT IN THE EARLIER C ASE OF G R RAMACHARI & CO. VS COMMISSIONER OF INCOME-TAX (41 I TR 142) HAS EXPLAINED THE LEGAL PROVISIONS REGARDING THE VALUAT ION OF STOCK IN TRADE ON CESSATION OF BUSINESS. THE PRIVILEGE OF VALUING THE OPENING AND CLOSING S TOCKS IN A CONSISTENT MANNER IS AVAILABLE ONLY TO CONTINUING BUSINESSES A ND IT CANNOT BE ADOPTED WHERE THE BUSINESS COMES TO AN END AND THE STOCK-IN-TRADE HAS TO BE DISPOSED OF IN ORDER TO DETERMINE THE EXA CT POSITION OF THE BUSINESS ON THE DATE OF CLOSURE. THE CASE OF A FIRM WHICH GOES INTO LIQUIDATION FORM S A CLOSE PARALLEL TO THE INSTANT CASE. IN SUCH A CASE ALL THE STOCK-IN-T RADE AND OTHER ASSETS OF THE BUSINESS WILL HAVE TO BE SOLD AND THEIR VALU E REALIZED. IT CANNOT BE CONTROVERTED THAT IT IS ONLY BY DOING SO THAT TH E TRUE STATE OF THE PROFITS OR LOSSES OF THE BUSINESS CAN BE ARRIVED AT . THE POSITION IS NOT VERY DIFFERENT WHEN THE PARTNERSHIPS CEASES TO EXIS T IN THE COURSE OF THE ACCOUNTING YEAR. THE FACT THAT R ONE OF THE EX-PA RTNERS, TOOK OVER THE ENTIRE STOCK AND CONTINUED TO RUN THE BUSINESS ON H IS OWN, WAS NOT RELEVANT AT ALL, WHEN THE PROFITS OR LOSSES OF THE PARTNERSHIP WAS CONSIDERED WHICH HAD COME TO AN END. IT SHOULD, THE REFORE, FOLLOW THAT IN ORDER TO ARRIVE AT THE CORRECT PICTURE OF THE TR ADING RESULTS OF THE PARTNERSHIP ON THE DATE WHEN IT CEASES TO FUNCTION, THE VALUATION OF THE STOCK IN HAND SHOULD BE MADE ON THE BASIS OF PREVAI LING MARKET PRICE. IN A CASE OF THIS KIND THE MARKET PRICE ALONE SHOUL D BE TAKEN IN ORDER TO ARRIVE AT THE TRADING RESULTS OF THE BUSINESS. THE JUDGMENT OF THE HIGH COURT AND THE REPORT OF THE COMMISSIONER IN CONNECT ION WITH THE VALUATION OF THE STOCK WOULD ONLY SERVE AS EVIDENCE OF THE MARKET VALUE OF THE GOODS ON THE DATE IN QUESTION. IT WAS TRUE THAT BECAUSE R AS AN INDIVIDUAL CARRY ING ON THE BUSINESS HAD TAKEN OVER THE GOODS OF THE PARTNERSHIP AND HAD VALUED THEM AT COST PRICE, THERE WOULD BE GREATER MARGIN. BETWEEN THAT PRICE AND THE EVENTUAL SALE PRICE LEADING TO A LARGER PROFITS IN THIS HANDS BEING BROUGHT TO TAX. IT WAS NO DOUBT OPEN TO HIM TO HAVE VALUED THE GOODS AT THE MARKET PRICE BECAUSE ON THE DISSOLUTION OF THE PARTNERSHIP WAS BIT A FACTOR THAT COULD AFFECT THE CONCLUSION AS TO THE PRINCIPLE ON WHICH THE CLOSING STOCK HAD TO BE VALUED IN THE CASE OF DISSO LVED PARTNERSHIP IN ORDER TO ARRIVE AT THE TRUE POSITION OF THE PROFITS OF THE PARTNERSHIP. M/S KHIRA MEHTA SHAH & ASSOCIATES ITA 478/MUM/2012 4 THEREFORE, THE VALUATION OF THE CLOSING STOCK AS AD OPTED BY THE TRIBUNAL WAS CORRECT. NOTE: THE CASE WAS DECIDED IN FAVOUR OF THE REVENUE . [CASES REFERRED TO CHAINRP SAMPATRAM V CIT [1953] 24 ITR 481 (SC), CHOUTHMAL GOLAPCHAND, IN RE AIR 1939 CAL. 559, CIT V AHMEDABAD NEW COTTON MILLLS CO. LTD. ILR 54 BOM. 213 AND SIR KIKABHAI PREMCHAND VS CIT (1953) 24 ITR 506 (SC). THE RELEVANT OBSERVATION IS AT PAGE 146 AND IS REPR ODUCED AS UNDER: IT IS OBVIOUS THAT WHEN A BUSINESS CEASES, ALL ITS STOCK-IN-TRADE HAS TO BE DISPOSED OF AND BROUGHT TO ACCOUNT IN ORDER TO B ALANCE THE BOOKS. THE GOODS ON HAND DO NOT LOSE THE CHARACTER OF STOC K-IN-TRADE, AND THIS PROPOSITION PUT FORWARD BY THE ASSESSEE HAS NO AUTH ORITY TO SUSTAIN IT. 25.7. THUS, IT WOULD APPEAR THAT, ONCE THE DISSOLUT ION TAKES PLACE, DISTRIBUTION OF STOCK IN TRADE BEFORE THE ACTUAL DI SSOLUTION DEED WAS DRAFTED AND SIGNED WILL HAVE TO BE VALUED AT MARKET PRICE WITH A VIEW TO BALANCING THE ACCOUNTS. IN THIS CASE, THE STOCK IN TRADE WAS ACTUALLY WITHDRAWN IN THE LATTER HALF OF NOVEMBER, 1982 WHEN THE ACTUAL DISSOLUTION DEED WAS EFFECTED SOON THEREAFTER 31.12 .1982. THEREFORE, THIS WOULD NOT GO TO DETRACT THE MERITS OF THE DEPA RTMENTS CASE. THE BUSINESS STATED TO BE HAD COME TO A STANDSTILL AS T HERE WAS A DISPUTE AMONG THE PARTNERS. WITHDRAWAL OF THE STOCK IN TRAD E OR DISTRIBUTION OF THE SAME IN THE PROFIT SHARE RATIO CAN ONLY BE CONS IDERED AS A NECESSARY OR CONCOMITANT FORMALITY FOR DISSOLUTION OR, IN OTHER WORDS, THIS DISTRIBUTION OF STOCK, IN TRADE HAS BEEN DONE IN THE COURSE OF DISSOLUTION AND, THEREFORE, IT IS IMPERATIVE THAT V ALUATION OF SUCH STOCK IN TRADE HAS TO BE AT THE MARKET PRICE. THE ARGUMEN T OF THE ASSESSEE THAT THE AMENDMENT BOUGHT ABOUT BY THE FINANCE ACT, 1987 IN THI9S REGARD WOULD GO TO SHOW THAT THE LAW HAS BEEN CHANG ED WITH EFFECT FROM 1.4.1988 HAS TO BE REJECTED AS IRRELEVANT. THE DECISION REFERRED TO ABOVE CLEARLY GO TO SHOW THAT WHEN STOCK IN TRADE I S DISTRIBUTED OR WITHDRAWN AT THE TERMINATION OF WHEN STOCK IN TRADE IS DISTRIBUTED OR WITHDRAWN AT THE TERMINATION OF BUSINESS, THEY HAVE TO BE VALUE AT THE MARKET PRICE. AS REGARDS THE SUBMISSION OF LD AR AND HIS RELIANCE ON VARIOUS CASE LAWS, THE RATIO OF JUDGMENTS ARE NOT APPLICABLE TO THE PRESENT FACTS IF TGE APPELLANT, THEREFORE, WITH DUE REGARDS TO ALL THE J UDICIAL PRONOUNCEMENTS RELIED UPON BY THE LD. AR, ARE FOUND TO BE DISTINGUISHABLE ON FACTS. KEEPING IN VIEW OF THE FACTUAL POSITION AS WELL AS THE LEGAL PROCUREMENTS MADE BY THE HONBLE COURT, I AS UNABLE TO ACCEPT THE PLEA OF THE APPELLANT AGAINST THE ASSESSING ORDER PASSED U/S 143(3) R.W.. 263 OF THE I.T. ACT, 1961. 7. FROM THE FACTS AVAILABLE, WE ARE OF THE OPINION THAT THE ORDER OF CIT(A) DOES NOT SUFFER FROM ANY INFIRMITY. WE ALSO FIND THAT THE CASE OF ALA FIRM AS DECIDED BY THE HONBLE MADRAS HIGH COUR T GOT ITS APPROVAL FROM THE HONBLE SUPREME COURT, AS REPORTED IN 189 ITR 285. WE, THEREFORE, SUSTAIN THE ORDER OF THE CIT(A), CONSEQU ENTIALLY, REJECT THE APPEAL AS FILED BY THE ASSESSEE. 8. SINCE ALL THE GROUNDS TAKEN IN GOA ARE ON THE SA ME ISSUE, ALL THE GROUNDS ARE REJECTED. M/S KHIRA MEHTA SHAH & ASSOCIATES ITA 478/MUM/2012 5 9. IN THE RESULT, THE APPEAL, AS FILED BY THE ASSES SEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH NOVEMBER, 2014. SD/- SD/- (B R BASKARAN) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 7 TH NOVEMBER, 2014 $/ COPY TO:- 1) / THE APPLICANT. 2) / THE RESPONDENT. 3) THE CIT (A)-35, MUMBAI. 4) / 19 , MUMBAI / THE CIT-19, MUMBAI. 5) -'01$! A , THE D.R. A BENCH, MUMBAI. 6) 12.3 COPY TO GUARD FILE. *+! / BY ORDER / / TRUE COPY / / [ 4/56 , DY. / ASSTT. REGISTRAR I.T.A.T., MUMBAI *895! '.!. * CHAVAN, SR. PS