The DCIT, Circle-5, Ahmedabad V. Nirma Industries Ltd., Ahmedabad

ITA 54/AHD/2009

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 9720 (ITAT-AHMEDABAD)
• Duration Of Justice: 7 year(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-02-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 10-12-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 05-01-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Earning of tax free income; Date of conversion; Fair market value; Avoidance of tax
• Section: 45(2); 143(3); 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, AHMEDABAD BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ./ ITA NOS. 54 & 55/AHD/2009 / ASSESSMENT YEAR: 2004-05 & 2005-06 DY. CIT, CIRCLE-5, AHMEDABAD .. APPELLANT VS M/S. NIRMA INDUSTRIES LTD., 2 ND FLOOR, C.U. SHAH CHAMBERS, ASHRAM ROAD, AHMEDABAD .. RESPONDENT PAN : AAACN 5352 M REVENUE BY : SHRI R.I. PATE L, CIT - DR SHRI A.K. PANDAY, SR-DR ASSESSEE(S) BY : SHRI S.N. SOPARKAR , AR / DATE OF HEARING 10/12/2015 /DATE OF PRONOUNCEMENT 01/02/2016 / O R D E R PER SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER: THESE TWO APPEALS HAVE BEEN FILED BY THE ASSESSEE AGAINST THE SEPARATE ORDER OF THE COMMISSIONER OF INCOME-TA X (APPEALS)-II, AHMEDABAD DATED 16.10.2008 AND 17.10. 2008 FOR ASSESSMENT YEARS 2004-05 AND 2005-06 RESPECTIVELY. SINCE BOTH THESE APPEALS BY THE REVENUE PERTAIN TO SAME A SSESSEE ON SIMILAR ISSUE; SO THESE ARE BEING DISPOSED OF BY THIS COMMON ORDER FOR SAKE OF CONVENIENCE. ITA NOS. 54 & 55/AHD/2009 DCIT VS. M/S. NIRMA INDUSTRIES LTD AY 2004-05& 2005-06 - 2 - ITA NO. 54/AHD/2009 : AY 2004-05 IN THIS APPEAL, THE REVENUE HAS TAKEN FOLLOWING GRO UNDS:- 1. THE LD. COMMISSIONER OF INCOME-TAX (A)-XI, AHMEDABA D HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDIT ION MADE ON ACCOUNT OF ACCRUED INTEREST ON OFCPS/DDBS O F RS.6,98,276/- 2. THE LD. COMMISSIONER OF INCOME-TAX (A)-XI, AHMEDABA D HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDIT ION MADE ON ACCOUNT OF DISALLOWANCE OF LOSS ON SALE OF OFCPNS OF IDEAL PETRO PRODUCTS AND SHREE RAMA POLYSYNTH PVT LTD OF RS.13,05,16,000/- 3. THE LD. COMMISSIONER OF INCOME-TAX (A)-XI, AHMEDABA D HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDIT ION MADE ON ACCOUNT OF DISALLOWANCE OF INTEREST EXPENDI TURE U/S 14A OF THE ACT OF RS.3,64,050/-. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. COMMISSIONER OF INCOME-TAX (A)-XI, AHMEDABAD OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. 5. IT IS THEREFORE PRAYED THAT THE ORDER OF THE LD. COMMISSIONER OF INCOME-TAX (A)-XI, AHMEDABAD MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE REST ORED. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING OF SOAP, STONE POWDER, AGRICULTURAL PRODUCE AND TRADING IN C ONSUMER GOODS. ITA NOS. 54 & 55/AHD/2009 DCIT VS. M/S. NIRMA INDUSTRIES LTD AY 2004-05& 2005-06 - 3 - 3. FIRST ISSUE IS WITH REGARD TO THE DELETION OF AD DITION MADE ON ACCOUNT OF ACCRUED INTEREST ON OFCPNS/DDBS OF RS.6,98,276/-. THE ASSESSING OFFICER MADE THE AD DITIONS OF RS.3,49,138/- EACH ON THE INVESTMENT OF OFCPNS OF A DESH FINSTOCK PVT LTD & AKSHAT FINSTOCK PVT LTD AS ACCRU ED INTEREST. THE CIT(A) IN HIS ORDER OBSERVED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF KISAN DISCRET IONARY FAMILY TRUST IN APPEAL NO.1850/AHD/2007 FOR AY 2003 -04. AGREEING TO THE CONTENTION OF AUTHORIZED REPRESENTA TIVE, WE FIND THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE AFORESAID DECISION OF ITAT IN THE C ASE OF KISAN DISCRETIONARY FAMILY TRUST (SUPRA). THEREFORE, THE ORDER OF THE CIT(A) IN THIS REGARD NEEDS NO INTERFERENCE FROM OU R SIDE; WE CONFIRM THE SAME. 4. THE NEXT ISSUE IS WITH REGARD TO THE DISALLOWAN CE OF LOSS ON SALE OF OPTIONALLY FULLY CONVERTIBLE PROMISSORY NOTES (HEREINAFTER CALLED OFCPNS) OF IDEAL PETRO PRODUC TS AND SHREE RAMA POLYSYNTH PVT. LTD. OF RS.13,05,16,000/-. T HE ASSESSEE MADE INVESTMENTS IN OFCPNS OF FOLLOWING THREE COMPA NIES:- I) IDEAL PETROPRODUCTS PVT LTD II) EAST WEST POLYART PVT LTD III) SHREE RAMA POLYSYNTH PVT LTD ITA NOS. 54 & 55/AHD/2009 DCIT VS. M/S. NIRMA INDUSTRIES LTD AY 2004-05& 2005-06 - 4 - THE INVESTMENTS WERE TREATED AS STOCK IN TRADE AS O N 01.04.2003. THE CONVERSION WAS MADE AGGREGATING TO RS.47,88,26,000/- AS PER THE FOLLOWING DETAILS:- SR. NO. NAME OF SECURITY CONVERSION COST DATE QUANTITY RATE TOTAL VALUE (RS.) 1 OFCPN OF IDEAL PETRO PRODUCTS 01.04.2003 1730 82,000 14,18,60,000 2 OFCPN OF EAST WEST POLYART 01.04.2003 1500 1,06,500 15,97,50,000 3 OFCPNS OF SHREE RAMA POLYSYNTH 01.04.2003 1664 1,06,500 17,72,16,000 T OTAL 47,88,26,000 4.1 THE ASSESSEE-COMPANY SOLD PART OF THESE ASSETS ON 24.03.2004 AND THE DETAILS OF SALES AND CLOSING STO CK OF THESE ASSETS ARE AS UNDER:- SR. NO. NAME OF SCRIPS CONVERSION COST CLOSING STOCK (RS.) DATE QTY RATE VALUE QTY RATE VALUE 1 OFCPN OF IDEAL PETRO PRODUCTS 25.03.04 1730 8000 13840000 - - - 2 OFCPN OF EAST WEST POLYART 25.03.04 200 106500 21300000 1300 106500 138450000 3 OFCPNS OF SHREE RAMA POLYSYNTH 25.03.04 300 105000 31500000 1364 105000 143220000 TOTAL 66640000 281670000 THE ASSESSEE TREATED INVESTMENTS IN THESE COMPANIE S AS STOCK IN TRADE AS ON 01.04.2003. THE SAME WAS BASE D ON THE CERTIFICATE OF CHARTERED ACCOUNTANT AND A COPY OF T HE SAID CERTIFICATE WAS PLACED BEFORE THE LOWER AUTHORITIES . 4.2 SECTION 45(2) DEALS WITH THE SITUATION OF CONVE RSION OF INVESTMENT INTO STOCK IN TRADE. SECTION 45(2) READ S AS UNDER:- ITA NOS. 54 & 55/AHD/2009 DCIT VS. M/S. NIRMA INDUSTRIES LTD AY 2004-05& 2005-06 - 5 - 'NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECTION (1), THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY W AY OF CONVERSION BY THE OWNER OF A CAPITAL ASSET INTO, OR ITS TREATMENT BY HIM AS STOCK-IN-TRADE OF A BUSINESS CA RRIED ON BY HIM 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 HIM AND, FOR TH E PURPOSES OF SECTION 48, THE FAIR MARKET VALUE OF TH E ASSET ON THE DATE OF SUCH CONVERSION OR TREATMENT SHALL B E DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RE CEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPI TAL ASSET.' 4.3 THE ASSESSEE CLAIMED LOSS ARISING FROM THE DATE OF INVESTMENT TILL CONVERSION INTO STOCK IN TRADE AS O N 01.04.03 AS CAPITAL LOSS FOR RS.2,78,90,000/-. THE DIFFERENCE B ETWEEN SALES VALUE, CLOSING STOCK AND CONVERSION WAS CLAIMED AS BUSINESS LOSS. THE ASSESSING OFFICER TREATED THE SAID LOSS A S SHAM TRANSACTION AND DUBIOUS METHOD FOR AVOIDANCE OF TAX AND HENCE HE HELD THAT THE SAME WAS ARTIFICIAL BUSINESS LOSS ACCRUED TO THE ASSESSEE AT RS.13,05,16,000/- AND DI SALLOWED THE SAME. 4.4 MATTER WAS CARRIED BEFORE THE FIRST APPELLATE A UTHORITY, WHEREIN VARIOUS CONTENTIONS WERE RAISED ON BEHALF O F THE ASSESSEE AND HAVING CONSIDERED THE SAME, CIT(A) ALL OWED THE CLAIM OF THE ASSESSEE, WHICH HAS BEEN OPPOSED ON BE HALF OF THE REVENUE, INTER ALIA, SUBMITTING THAT THE CIT(A) ERR ED IN LAW AND ON FACTS IN DELETING THE ADDITION MADE ON ACCOUNT O F DISALLOWANCE OF LOSS ON SALE OF OFCPNS OF IDEAL PET RO PRODUCTS ITA NOS. 54 & 55/AHD/2009 DCIT VS. M/S. NIRMA INDUSTRIES LTD AY 2004-05& 2005-06 - 6 - AND SHREE RAMA POLYSYNTH PVT LTD OF RS.13,05,16,000 /-. ON THE OTHER HAND, LD. AUTHORIZED REPRESENTATIVE SUPPO RTED THE ORDER OF THE CIT(A) AND RAISED VARIOUS FACTUAL AND LEGAL ARGUMENTS FOR THE SAME. 4.5 AFTER GOING THROUGH THE RIVAL CONTENTIONS AND M ATERIAL ON RECORD, WE FIND THAT OPTIONALLY FULLY CONVERTIBLE P ROMISSORY NOTES (IN SHORT OFCPNS) WERE PURCHASED ON 25.03.2 002 ON THE PRICE SHOWN IN BOOKS AND PAYMENTS WERE MADE. IT WAS TREATED AS INVESTMENT MADE AND PURCHASES WERE MADE FROM INDEPENDENT CONCERNS NOT RELATED TO THE ASSESSEE. THE OFCPNS WERE SOLD ON PRICE INDICATED BY THE ASSESSEE AND THE SALE CLAIMED TO BE GENUINE. THE SALE WAS MADE TO I NDEPENDENT PARTIES AND THERE IS NOTHING ON RECORD TO SUGGEST T HAT THEY WERE RELATED TO THE ASSESSEE AS PRESCRIBED U/S 40A(2)(B) OF THE ACT. ON THESE PURCHASES AND SALE, THE ASSESSEE SUFFERED LOSS AS INDICATED ABOVE. THERE WAS NO EVIDENCE ON RECORD TO SUGGEST THAT THE SALE WAS MADE AT LOWER PRICE THAN THE MARK ET RATE AND THE BALANCE AMOUNT WAS RECEIVED BACK BY THE ASSESSE E. THE ASSESSEE CONVERTED THE INVESTMENT INTO STOCK IN TRA DE AND CONVERSION WAS ALLOWED UNDER INCOME-TAX ACT. THERE IS NO LEGAL BAR FOR SUCH CONVERSION. IF THE ASSESSEE HAD NOT CO NVERTED THE INVESTMENT INTO STOCK IN TRADE, THE TOTAL LOSS SUFF ERED WOULD ITA NOS. 54 & 55/AHD/2009 DCIT VS. M/S. NIRMA INDUSTRIES LTD AY 2004-05& 2005-06 - 7 - HAVE BEEN CLAIMED AS LOSS UNDER SHORT TERM/LONG TER M CAPITAL GAIN AS THE CASE MAY BE. HOWEVER, WHEN THE ASSESSE E CONVERTED IT INTO STOCK IN TRADE, THE LOSS SUFFERED BETWEEN THE DATE OF INVESTMENT TO THE DATE OF CONVERSION WAS TR EATED AS LOSS UNDER CAPITAL GAIN ASSESSABLE IN THE YEAR WHEN SALE WAS MADE AND LOSS FROM THE DATE OF CONVERSION TO THE DATE OF SALE WAS TO BE TREATED AS BUSINESS LOSS, WHICH ASSESSEE CLAIMED . THE VALUATION ON DATE OF CONVERSION INTO STOCK IN TRADE WAS TAKEN ON THE BASIS OF REPORT OF CHARTERED ACCOUNTANT. THE RE WAS NO CONTRARY SALE PRICE AVAILABLE ON THE DATE OF CONVER SION. WHEN THE PURCHASE & SALES ARE GENUINE AND PURCHASES & SA LE PRICES ARE ACCEPTED, THE PARTIES ARE INDEPENDENT AND NOT R ELATED TO THE ASSESSEE U/S.40A(2)(B) OF THE ACT AND THERE WAS NO EVIDENCE THAT SUPPRESSED SALE PRICE DIFFERENCE CAME BACK TO THE ASSESSEE, THE LOSS ON SALE COULD NOT BE DISALLOWED AS LOSS ARISING FROM SHAM TRANSACTION OR AS BOGUS LOSS. HEN CE, THE ADDITION MADE BY THE ASSESSING OFFICER WAS RIGHTLY DELETED BY THE CIT(A). ACCORDINGLY, WE UPHOLD THE ORDER OF TH E CIT(A) IN THIS ISSUE. 5. NEXT ISSUE IS WITH REGARD TO THE DISALLOWANCE OU T OF ADMINISTRATIVE AND OTHER EXPENSES AND PAYMENT TO AN D PROVISION FOR EMPLOYEES FOR RS. 3,64,050/- U/S 14A OF THE ITA NOS. 54 & 55/AHD/2009 DCIT VS. M/S. NIRMA INDUSTRIES LTD AY 2004-05& 2005-06 - 8 - INCOME-TAX ACT. THE ASSESSING OFFICER VIDE DISCUSS ION AT PARAGRAPH 7 AND 7.1 OF THE ASSESSMENT ORDER DISALLO WED RS.3,64,050/- U/S.14A OF INCOME-TAX ACT. THE ASSES SING OFFICER CONSIDERED THAT THE FOLLOWING ARE THE EXPEN SES WHICH ARE INCURRED FOR EARNING ALL TYPES OF INCOME, WHETH ER TAXABLE OR EXEMPT:- ACCOUNTING CHARGES RS.16,00,000 RATES & TAXES RS. 4,068 PAYMENT TO AUDITORS RS. 2,68,000 CONSULTATION EXPENSES RS. 4,320 OTHER EXPENSES RS. 80,398 ARRANGEMENT FEES RS. 1,38,400 OTHER EXPENSES RS. 1,80,279 PAYMENT TO & PROVISION RS. 7,50,296 FOR EMPLOYEES ---------------- RS.29,45,363 =========== 5.1 THE ASSESSING OFFICER HAS CONSIDERED THAT ASSES SEE COMPANY EARNED FOLLOWING INCOMES WHICH WERE EXEMPT INCOME OR GIVEN DIFFERENT TREATMENT FOR TAXATION:- DIVIDEND INCOME RS. 10,30,730 AGRICULTURE INCOME RS. 8,72,075 SHARE OF PROFIT FROM AOP RS. 9,60,061 PROFIT ON SALE OF SECURITIES RS.3,03,31,069 ------------------ RS.3,31,93,935 ============= THEREFORE, THE ASSESSING OFFICER ALLOWED RS.3,64,05 0/- AS EXPENSES INCURRED FOR EARNING EXEMPT INCOME ON THE BASIS OF FOLLOWING FORMULA: RS.3,31,93,935/26,85,56,550 X 2945363 = RS.3,64,050 ; AND DISALLOWED RS.3,64,050/- U/S. 14A OF THE INCOME -TAX ACT. ITA NOS. 54 & 55/AHD/2009 DCIT VS. M/S. NIRMA INDUSTRIES LTD AY 2004-05& 2005-06 - 9 - 5.2 MATTER WAS CARRIED BEFORE THE FIRST APPELLATE A UTHORITY, WHEREIN VARIOUS CONTENTIONS WERE RAISED ON BEHALF O F THE ASSESSEE AND HAVING CONSIDERED THE SAME, THE CIT(A) OBSERVED THAT THERE WAS NO DIRECT EXPENSES RELATABLE TO EARN ING OF DIVIDEND INCOME, AGRICULTURAL INCOME AND OTHER INCO MES AND THEREFORE, THE DISALLOWANCE U/S 14A WAS NOT JUSTIFI ED AND ACCORDINGLY THE ADDITION WAS DELETED. TAKING ALL T HE FACTS AND CIRCUMSTANCES INTO CONSIDERATION, WE ARE INCLINED T O CONCUR WITH THE FINDINGS OF THE CIT(A) WHO HAS RIGHTLY DEL ETED THE DISALLOWANCE IN QUESTION, BECAUSE THE DIVIDEND INCO ME, AGRICULTURAL INCOME AND OTHER INCOMES OF THE ASSESS EE HAVING FOUND NO NEXUS WITH THE EXPENSES INCURRED BY THE AS SESSEE- COMPANY. THE ASSESSEE-COMPANY IS A MEMBER OF ASSOCI ATION OF PERSONS (AOP) AND AOP IS A SEPARATE LEGAL ENTITY. T HE ASSESSEE- COMPANY RECEIVED SHARE OF PROFIT FROM AOP. THE EXP ENSES INCURRED BY THE ASSESSEE-COMPANY HAVE NO DIRECT OR INDIRECT NEXUS FOR RECEIPT OF SHARE OF PROFIT FROM AOP AND T HE PROFIT ON SALE OF SECURITY IS THE INCOME ASSESSABLE TO TAX UN DER THE HEAD CAPITAL GAIN. THE ASSESSEE-COMPANY HAD OFFERED SHO RT TERM CAPITAL GAIN OF RS.2,79,33,377/- AND LONG TERM CAPI TAL GAIN OF RS.88,68,072/- WHICH WAS CONSIDERED FOR TAXATION IN THE RETURN OF INCOME AND THE SAME WAS ALSO ASSESSED IN THE ASS ESSMENT ITA NOS. 54 & 55/AHD/2009 DCIT VS. M/S. NIRMA INDUSTRIES LTD AY 2004-05& 2005-06 - 10 - ORDER PASSED U/S 143(3) OF THE ACT. IN VIEW OF THE ABOVE, THE CIT(A) WAS RIGHTLY DELETED THE ADDITION IN QUESTION I.E. RS.3,64,050/- MADE U/S 14A OF THE ACT. THEREFORE, T HE ORDER OF THE CIT(A) ON THIS ISSUE DOES NOT REQUIRE ANY INTER FERENCE FROM OUR SIDE. WE UPHOLD THE SAME. 5.3. IN THE RESULT, THIS APPEAL FILED BY THE REVENU E IS DISMISSED. ITA NO. 55/AHD/2009 : AY 2005-06 6. THE ONLY EFFECTIVE GROUND RAISED BY THE REVENUE IN THIS APPEAL IS WITH REGARD TO THE DISALLOWANCE U/S 14A O F THE ACT WHICH IS IDENTICAL TO THE ISSUE IN REVENUES APPEAL VIDE ITA NO.54/AHD/2009 FOR ASSESSMENT YEAR 2004-05 (SUPRA). THEREFORE, FOR THE DETAILED DISCUSSION IN ITA NO.54 /AHD/2009 FOR AY 2004-05 IN PARAGRAPH 5 TO 5.2 (SUPRA), WE D O NOT FIND ANY MERIT IN THIS GROUND; AND ACCORDINGLY, THE SAME IS REJECTED. IN THE RESULT, THIS APPEAL FILED BY THE REVENUE IS ALSO DISMISSED. 7. AS A RESULT, BOTH APPEALS FILED BY THE REVENUE A RE DISMISSED. ORDER PRONOUNCED IN THE COURT ON 1 ST OF FEBRUARY, 2016 AT AHMEDABAD. SD/- SD/- ( RAJESH KUMAR ) ACCOUNTANT MEMBER ( SHAILENDRA KUMAR YADAV ) JUDICIAL MEMBER AHMEDABAD; DATED 01/02/2016 *BT ITA NOS. 54 & 55/AHD/2009 DCIT VS. M/S. NIRMA INDUSTRIES LTD AY 2004-05& 2005-06 - 11 - !'# $#! / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A), 5. !'# $$ , , / DR, ITAT, AHMEDABAD 6. #() / GUARD FILE. / BY ORDER, //TRUE COPY// / (DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD