RATAN PLASTIC INDUSTRIES, MUMBAI V. ACIT 20(2), MUMBAI

ITA 4971/MUM/2008

• Counselvise Citation: 497119914 RSA 2008
• Duration Of Justice: 5 year(s) 2 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-10-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 14-10-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 06-08-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SANJEEV JAIN
• Assessee Lawyers: PRAMOD KUMAR PARIDA; SANJUKTA CHOWDHARY
• Keywords: Capital asset; Business income; Depreciation; Deemed to accrue or arise in india; Fair market value
• Section: 45(2); 80HHC; 80IB

Judgement Text

, INCOME TAX APPELLATE TRIBUNAL,MUMBAI - D BENCH. . . .. . . .. . !' !' !' !' , ! ! ! ! BEFORE S/SH.I.P.BANSAL, JUDICIAL MEMBE R & RAJENDRA,ACCOUNTANT MEMBER /. /./. /. ITA NO.4971/MUM/2008, $ % $ % $ % $ %/ // / ASSESSMENT YEAR-2003-04 M/S RATAN PLASTIC INDUSTRIES MATHURIA APARTMENTS, 49-50, SIR M.V.ROAD, 1 ST FLOOR, ANDHERI (E) MUMBAI- 400069 VS. ACIT 20(2) MUMBAI. PAN: AAAFR3886K ( &' / // / APPELLANT ) ( ()&' / RESPONDENT ) $ *+ , ! $ *+ , ! $ *+ , ! $ *+ , ! / // / ASSESSEE BY : SHRI PRAMOD KUMAR PARIDA & MS. SANJUKTA CHOWDHARY - , ! / REVENUE BY : SHRI SANJEEV JAIN $ - $ - $ - $ - + + + + / // / DATE OF HEARING : 14-10-2013 ./% - + / DATE OF PRONOUNCEMENT : 23-10-2013 $ $ $ $ , 1961 - - - - 254 ( (( ( 1 ) )) )! +2+ !3 ! +2+ !3 ! +2+ !3 ! +2+ !3 ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM: CHALLENGING THE ORDER DATED 20.05.2008 OF THE CIT(A )-XX,MUMBAI,ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1.BUSINESS INCOME VS. CAPITAL GAINS AND DISALLOWANC E OF SEC.80 HHC-CLAIM RS.12,81,329 : A)THE LD. CIT(A) ERRED IN CONFIRMING THE BUSINESS I NCOME AS CAPITAL GAINS BY INVOKING THE PROVISION OF SEC.50(1) AND THEREBY DISREGARDING THE EXPORT SALE TO DENY THE BENEFIT OF SEC.80HHC WITHOUT APPRECIATI NG TO THE FACT THAT IT IS THE STOCK-IN-TRADE OF MOULDS WHICH HAD BEEN DISPOSED OFF BY WAY OF EXPORT SALES IN THE RELEVANT YEAR. B)THE LD. CIT (A) FAILED TO APPRECIATE THAT THE PRO VISION OF SEC. 45(2) R.W.S. 50 IS APPLICABLE TO THE FACTS OF THE APPELLANT. C)THE LD. CIT (A) ERRED IN NOT GRANTING 80HHC BENEF IT ON THE EXPORT OF OTHER MANUFACTURED ITEMS VALUIN G RS. 21,74,125/-. 2.WITHOUT PREJUDICE TO MERITS THE LD. CIT (A) ERRED IN CONFIRMING THE ESTIMATION AND DETERMINATION THE FAIR MARKET VALUE OF THE STOC K-IN- TRADE AT RS.71,11,978/-BEING THE DEEMED VALUE OF MO ULDS FOR CAPITAL GAINS TAX PURPOSES. 3.DISALLOWANCE OF CLAIM U/S 80IB-RS.9,74,1421 - THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE WITHOUT APPRECIATING TO THE FACT THAT PROFIT ON SA LE OF BUSINESS ASSETS HAD A DIRECT NEXUS TO THE MANUFACTU RING ACTIVITY CARRIED ON. THEREFORE, THE CLAIM U/S 80IB OUGHT TO HAVE BEEN ALLOWED. 4.THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLOWAN CE OF CLAIM OF DEPRECIATION WITHOUT APPRECIATING TO THE FACT THAT THE FRESH PURCHASE OF MOULDS AND ITS BEING READY FOR USE WERE NEVER IN DOUBT. THE DISALLOWANCE IS UNCALLED FOR AND THE SAME MAY BE AL LOWED. 5.CHARGING OF INTEREST U/S.234B THE APPELLANT ON MERITS DENIES ITS LIABILITY TO PEN AL INTEREST 6.THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR ALTER ALL OR ANY OF THE ABOVE GROUNDS OF APPEAL. 2 ITA NO. 4971/MUM/2008 M/S RATAN PLASTIC INDUSTRIES ASSESSEE-FIRM,ENGAGED IN THE BUSINESS OF MANUFACTUR ING OF MOULDED PLASTIC ARTICLES,FILED ITS RETURN OF INCOME ON 27.11.2003 DECLARING TOTAL INCOME OF R S. 13.85 LACS.ASSESSMENT WAS FINALISED BY THE ASSESSING OFFICER(AO)ON 23.03.2006DETERMINING THE T OTAL INCOME OF THE ASSESSEE AT RS.29. 98 LACS. 2. FIRST GROUND OF APPEAL IS ABOUT HEAD OF INCOME UNDE R WHICH INCOME HAS TO ASSESSED AND DENIAL OF DEDUCTION CLAIMED U/S.80HHC OF THE ACT.DURING TH E ASSESSMENT PROCEEDINGS, AO FOUND THAT ASSESSEE HAD CLAIMED DEDUCTION OF RS. 14.56 LACS U/ S. 80HHC, THAT IT HAD MADE THE EXPORT OF RS. 93.12 LACS,THAT THE SAME INCLUDED EXPORT PROCEEDS O F SALE OF MOULDS.HE ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE PROFIT ON SALE OF MOULDS SHOU LD NOT BE TAXED UNDER THE HEAD CAPITAL GAIN IN TERMS OF PROVISIONS OF SECTION 50 OF THE ACT AND TH E CLAIM MADE BY IT U/S. 80HHC SHOULD NOT BE DISALLOWED.AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE,AO HELD THAT ASSESSEE WAS NOT ENGAGED IN THE BUSINESS OF SALE OF MOULDS THAT THE MOULDS HAD BEEN PREVIOUSLY HELD AS FIXED ASSETS, THAT THE MOULDS HAD BEEN USED IN THE BUSINE SS, THAT ASSESSEE WAS CLAIMING DEPRECIATION ON THEM,THAT FORM NO. 3CD MENTIONED THE BUSINESS OF TH E ASSESSEE AS MANUFACTURING OF MOULDED ARTICLES AND NOT MOULDS, THAT ASSESSEE HAD SOLD FIX ED ASSETS ONLY, THAT THE MOULDS WERE PART OF BLOCK OF ASSETS,THAT THE CONSIDERATION RECEIVED ON TRANSFER/SALE OF MOULDS WAS TO BE TAXED UNDER THE HEAD CAPITAL GAIN IN VIEW OF PROVISIONS OF SECT ION 45(2) R.W.S 50 OF THE ACT. ACCORDINGLY, AO COMPUTED THE SHORT TERM CAPITAL GAINS (STCG) AT RS. 19.30 LACS. 2.1 .ASSESSEE PREFERRED AN APPEAL BEFORE THE FIRST APPE LLATE AUTHORITY (FAA).AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND THE ASSESSMENT ORDE R, HE HELD THAT PROVISIONS OF THE SEC.45(2) R.W. S.50(1) OF THE ACT WERE ATTRACTED IN THE CASE UNDER CONSIDERATION,THAT THE ASSESSEE HAD TRANSFERRED THOSE ASSETS ON WHICH DEPRECIATION HAD BEEN CLAIMED ,THAT IF TOTALITY OF THE FACTS AND CIRCUMSTANCES WERE CONSIDERED THE CONVERSION OF CAPITAL ASSET INT O STOCK-IN-TRADE WAS OF SUSPICIOUS NATURE, THAT CONVERSION WAS RESTORED FOR PURPOSE OF TAX BENEFITS ,THAT ASSESSEE HAD BEEN ALL ALONG USING THE MOULDS AS FIXED ASSETS,THAT THE ASSETS WERE SO TREA TED IN SOME CASES FROM AS FAR AS BACK JANUARY 1995,THAT SUDDEN CONVERSION OF THE ASSETS INTO STOC K-IN-TRADE DEFIED PRUDENT AND ESTABLISHED BUSINESS PRACTICE,THAT ASSESSEE HAD NOT ESTABLISHED THE NEED FOR SUDDENLY CONVERSING THE ASSETS INTO STOCK-IN-TRADE,THAT THE CONVERSION WAS NOTHING BUT A VEHICLE CLAIMED DEDUCTION U/S. 80HHC OF THE ACT THE TRANSACTION IN QUESTION WAS NOT REAL, T HAT A PURELY SUPERIMPOSED AND ARTIFICIAL PROCESS OF CONVERSION HAD BEEN BROUGHT INTO PLAY TO CLAIM D EDUCTION U/S. 80HHC,THAT THERE WAS NO COMMERCIAL COMPULSION OR EXPEDIENCY IN THE CONVERSI ON,THAT THE ACT OF CONVERSION WAS DESIGNED TO CREATE A WINDOW WHICH MADE IT POSSIBLE FOR THE A SSESSEE TO BYPASS THE PROVISIONS OF SECTION 50, THAT THE CONVERSION WAS A DEVICE TO AVOID TAX.REFER RING TO THE CASE OF MCDOWELL & CO.LTD.(154 ITR 148),FAA HELD THAT CONVERSION WAS A COLOURABLE DEVICE. HE FURTHER RELIED UPON THE CASES OF DURGAPRASAD MORE (82 ITR 540) AND SUMATI DAYAL (214 ITR 801)AND HELD THAT CASE OF THE ASSESSEE WAS COVERED BY THE PROVISIONS OF SECTION 5 0(1) OF THE ACT,THAT SECTION 50(2) DID NOT COME INTO PLAY IN THE CASE UNDER CONSIDERATION,THAT ASSE TS WHICH HAD BEEN ADDED WERE ALSO SOLD DURING THE YEAR ITSELF, THAT THE ASSETS WERE PURCHASED ONL Y TO CIRCUMVENT THE PROVISIONS OF SECTION 50(2) OF THE ACT.FINALLY, HE HELD THAT SALE OF THE MOULD HAD BEEN RIGHTLY TAKEN AT RS.71.11 LACS BY THE AO. 2.2. BEFORE US,AUTHORISED REPRESENTATIVE(AR)SUBMITTED TH AT THE ASSESSEE-FIRM HAD CONVERTED THE FIXED ASSETS INTO STOCK-IN-TRADE DURING THE YEAR UN DER CONSIDERATION,THAT THE CONVERSION INTO STOCK- IN-TRADE WAS AS PER THE PROVISIONS OF THE ACT, THAT NEW MOULDS WERE PURCHASED DURING THE YEAR UNDER CONSIDERATION,THAT ASSESSEE HAD SOLD THE MOUL DS OUTSIDE INDIA,THAT IT HAD EARNED FOREIGN EXCHANGE,THAT IT WAS ENTITLED TO DEDUCTION U/S.80HH C OF THE ACT,THAT DEPRECIATION ON THE NEW ASSETS WERE ALLOWABLE AS PER THE PROVISIONS OF THE ACT, THAT ASSESSEE HAD NOT VIOLATED ANY LAW, THAT BLOCK OF THE ASSETS HAD NOT SEIZED TO EXIST.HE REFE RRED TO PAGE NO.11,33-36,51-53 OF THE PAPER BOOK(PB). DEPARTMENTAL REPRESENTATIVE (DR) SUBMITTE D THAT PROVISIONS OF SECTION 45(2) R.W.S. 50 WERE APPLICABLE IN THE CASE UNDER CONSIDERATION,THA T THE BLOCK OF ASSETS HAD SEIZED TO EXIST,THAT 3 ITA NO. 4971/MUM/2008 M/S RATAN PLASTIC INDUSTRIES INCOME WAS RIGHTLY ASSESSED BY THE AO UNDER THE HEA D CAPITAL GAINS, THAT THE ASSESSEE WAS NOT ENTITLED TO CLAIM DEDUCTION U/S. 80HHC OF THE ACT. 2.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN OUR OPINION UNDISPUTED FACT OF THE CASE UNDER CONSIDERATION CAN BE SUMMARISED AS UNDER: I. ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURIN G OF MOULDED PLASTIC THINGS. II. IT WAS SHOWING MOULDS AS FIXED ASSETS TILL LAST ASS ESSMENT YEAR.(AS PER PG.11 OF THE PAPER BOOK COST OF THE MOULDS AS ON 01.04.2002 WAS 89.72 LACS.) III. DURING THE YEAR UNDER CONSIDERATION ASSESSEE CONVER TED THE FIXED ASSETS I.E.MOULDS INTO STOCK-IN-TRADE AT RS.34.58 LACS, IV. SALE PROCEEDS WERE RECEIVED IN FOREIGN EXCHANGE AS THE MOULDS WERE EXPORTED OUT OF INDIA, V. ASSESSEE HAD ALSO PURCHASED NEW MOULDS,AMOUNTING TO RS.29.64 LACS,DURING THE YEAR UNDER CONSIDERATION, VI. IT HAD CLAIMED DEDUCTION U/S.80HHC,AMOUNTING TO RS. 12.81 LACS OF THE ACT AND SAME WAS DISALLOWED BY THE AO/FAA. BEFORE PROCEEDING FURTHER,WE WILL LIKE TO DISCUSS T HE PROVISIONS OF SECTIONS 45 OF THE ACT THAT DEALS WITH CAPITAL GAINS.SUB-SECTION (1) OF THE SEC TION PROVIDES FOR THE CHARGING TO TAX THE CAPITAL GAINS.ACCORDING TO THIS SUB-SECTION,ANY PROFITS/GAI NS ARISING FROM TRANSFER OF CAPITAL ASSET EFFECTED IN THE PREVIOUS YEAR SHALL BE CHARGEABLE TO INCOME- TAX UNDER THE HEAD, CAPITAL GAINS AND SHALL BE DEEMED TO BE THE INCOME OF THE PREVIOUS YEAR IN WHI CH THE TRANSFER TAKES PLACE.IN OTHER WORDS BY VIRTUE OF THIS PROVISION,CAPITAL GAIN IS TREATED AS DEEMED INCOME OF THE PREVIOUS YEAR IN WHICH THE TRANSFER TAKES PLACE.SEC.45(2) READS AS UNDER : NOTWITHSTANDING ANYTHING CONTAINED IN SUB-S. (1), THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY WAY OF CONVERSION BY THE OWNER OF A CAPITAL ASSET INTO, OR ITS TREAT MENT BY HIM AS STOCK-IN-TRADE OF A BUSINESS CARRIED ON BY HIM SHALL BE CHARGEABLE TO INCOME-TAX AS HIS I NCOME OF THE PREVIOUS YEAR IN WHICH SUCH STOCK- IN-TRADE IS SOLD OR OTHERWISE TRANSFERRED BY HIM AND, FOR THE PURPOSES OF S. 48, THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVERSION OR TREATMENT SHALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPI TAL ASSET.' ON A PLAIN READING OF THE AFORESAID SECTION,IT IS C LEAR THAT THIS PROVISION WAS ENACTED FOR COMPUTING CAPITAL GAINS IN RESPECT OF TRANSFER OF CONVERTED A SSET INTO STOCK-IN-TRADE OF A BUSINESS.IT HAS BEEN PROVIDED THEREIN THAT SUCH PROFIT ARISING FROM THE TRANSFER BY WAY OF CONVERSION AS STOCK-IN-TRADE SHALL BE CHARGEABLE TO INCOME-TAX AS HIS INCOME OF THE PREVIOUS YEAR IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE TRANSFERRED BY AN ASSESSEE. CONSIDERING THE SCHEME OF ACT, IN CASE OF CONVERSIO N OF INVESTMENT INTO STOCK-IN-TRADE, THERE MAY BE THREE SEPARATE YEARS INVOLVED-THE FIRST ONE IS T HE YEAR WHEN THE ASSETS IS PURCHASED, SECOND ONE IS THE YEAR IN WHICH THE INVESTMENT IS CONVERTED IN TO STOCK-IN-TRADE AND THIRD ONE IS WHEN STOCK-IN- TRADE IS SOLD.IT IS POSSIBLE THAT ALL YEARS ARE MAY BE SEPARATE ASSESSMENT YEARS.AS A RESULT CAPITAL GAINS RELATED TRANSACTION MAY BE EXAMINED IN ONE OR MORE YEARS FOR DIFFERENT PURPOSES.WHEREAS GENUINENESS OF THE TRANSACTION CAN BE EXAMINED ONLY IN THE YEAR OF THE PURCHASE OF ASSETS, GENUINENESS OF CONVERSION OF ASSETS FROM INVESTMENT INTO STOCK-IN-TRADE AND CALCULATION OF CAPITAL GAIN BY TAKING THE FAIR MARKET VALUE OF THE CAPITAL ASSETS ON THE DATE ON WHICH IT WAS CONVERTED OR TREATED AS STOCK-IN-TRADE AS THE SAME IS TO BE DEEM ED AS FULL VALUE OF THE CONSIDERATION RECEIVED AS A RESULT OF THE TRANSFER OF CAPITAL ASSETS, CAN BE EXAMINED ONLY IN THE YEAR OF CONVERSION.IN OTHER WORDS,AS PER THE PROVISIONS OF SECTION 45(2) OF THE ACT,TRANSFER OR CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE WILL ATTRACT TAX UNDER CAPITAL GAINS AND LIABILITY ARISES IN THE YEAR IN WHICH THE STOC K- IN-TRADE,AFTER CONVERSION,IS SOLD. 4 ITA NO. 4971/MUM/2008 M/S RATAN PLASTIC INDUSTRIES WE FIND THAT THE ASSESSEE HAD NOT OFFERED THE INCOM E,ON SALE OF CONVERSION OF ASSETS IN TO STOCK-IN- TRADE,AS PER THE PROVISIONS OF SECTION 45(2) OF THE ACT.AO ALSO DID NOT CONSIDER THE SAID PROVISIONS WHILE FINALISING THE ASSESSMENT.THEREFORE,WE ARE OF THE OPINION,THAT IN THE INTEREST OF JUSTICE MATTER SHOULD BE RESTORED BACK TO THE FILE OF THE A O FOR DECIDING THE ISSUE OF TAXING THE INCOME - ON CONVERSION OF FIXED ASSETS IN TO STOCK IN TRADE- AS PER THE PROVISIONS OF SECTION 45(2) OF THE ACT. HE SHOULD AFFORD A REASONABLE OPPORTUNITY OF HEARIN G TO THE ASSESSEE. WE FIND THAT AO HAS NOT DOUBTED THE EXPORT OF MOULD S.IN THESE CIRCUMSTANCES,ASSESSEE CANNOT BE DENIED THE BENEFIT OF SECTION 80HHC OF THE ACT ON E XPORT PROCEEDS OF MOULDS.SIMILARY,IF ASSESEE HAS FULFILLED ALL THE CONDITIONS STIPULATED AS PER THE PROVISIONS OF SECTION 80HHC FOR THE OTHER EXPORTS,IT SHOULD BE ALLOWED DEDUCTIONS AS PER RULE S.MATTER IS RESTORED BACK TO THE FILE OF THE AO TO DETERMINE THE QUANTUM OF DEDUCTION WITH REGARD T O EXPORTS OTHER THAN MOULDS. GROUND NO.1 IS PAR TLY ALLOWED IN FAVOUR OF THE ASSESSEE. 3. GROUND NO.2 HAS BECOME ACADEMIC IN NATURE,AFTER OUR DECISION TO REMIT BACK THE MATTER TO THE FILE OF THE ASSESSEE.AO IS SUPPOSED TO DETERMINE TH E FAIR MARKET VALUE OF THE ASSETS AS PER THE PROVISIONS OF THE ACT.THEREFORE,GOA 2 IS ALLOWED FO R STATISTICAL PURPOSES. 4. NEXT EFFECTIVE GROUND IS ABOUT DISALLOWANCE OF DEPR ECIATION ON MOULD PURCHASED DURING THE YEAR. BEFORE US, AR SUBMITTED THAT MOULDS WERE READ Y FOR USE AND DEPRECIATION IS ALLOWABLE EVEN IF ASSETS WERE NOT USING DURING THE YEAR UNDER CONS IDERATION,WE FIND THAT THIS ASPECT HAS NOT BEEN LOOKED INTO BY THE AO/FAA.THEREFORE, MATTER IS REST ORED BACK TO THE FILE OF THE AO TO DECIDE THE ISSUE AFRESH.ASSESSEE IS DIRECTED TO PRODUCE THE EV IDENCE OF READINESS OF THE ASSETS DURING THE YEAR UNDER CONSIDERATION.IF MOULDS WERE AVAILABLE TO BE USED,AO SHOULD ALLOW THE DEPRECIATION AS PER THE PROVISIONS OF THE ACT. REST OF THE GROUNDS,BEING ACADEMIC OR CONSEQUENTIAL NATURE,ARE ALLOWED FOR STATISTICAL PURPOSES. AS A RESULT,APPEAL FILED BY THE ASSESSEE STANDS PARTLY ALLOWED. * 4 $ *+ - 3 4 ! 5 - + 67. ORDER PRONOUNCED IN TH E OPEN COURT ON 23 RD OCTOBER,2013 . !3 - ./% ! 8 9$ 23 :; 5 , 2013 / - 2 < SD/- SD/- ( . .. . . / I.P.BANSAL ) ( !' !' !' !' / RAJENDRA) / JUDICIAL MEMBER ! ! ! ! /ACCOUNTANT MEMBER / MUMBAI, 9$ /DATE: 23 .10. 2013 SK !3 - (+= >!=%+ !3 - (+= >!=%+ !3 - (+= >!=%+ !3 - (+= >!=%+/ COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / &' 2. RESPONDENT / ()&' 3. THE CONCERNED CIT(A)/ ? @ , 4. THE CONCERNED CIT/ ? @ 5. DR D BENCH, ITAT, MUMBAI / =A2 (+$ , . . . 6. GUARD FILE/ 2 B 5 ITA NO. 4971/MUM/2008 M/S RATAN PLASTIC INDUSTRIES )=+ (+ )=+ (+ )=+ (+ )=+ (+ //TRUE COPY// !3$ / BY ORDER, C / 6 DY./ASST. REGISTRAR , /ITAT, MUMBAI