DCIT CEN CIR I, MUMBAI V. BINANI METALS LTD, MUMBAI

ITA 6231/MUM/2009

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3898 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 5 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-05-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 28-04-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 02-12-2009
• Court: TRIBUNAL
• Department Lawyers: PRAKASH L PATHADE
• Keywords: Sale consideration of property below Jantri Value; Capital asset; Depreciation; Principle of natural justice; Fair market value; Bad and doubtful debts
• Section: 50C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE S/SHRI B.R. BASKARAN (AM) & PAWAN SINGH (JM) I.T.A. NO. 6231 /MUM/ 2009 (ASSESSMENT YEAR 2004 - 05 ) ACIT (OSD) - 2(1) AAYAKAR BHAVAN M.K. ROAD NEW MARINE LINES MUMBAI - 400 020. VS. M/S. BINANI M ETALS LTD. MERCANTILE CHAMBERS 2 ND FLOOR, 12, JN HEREDIA MARG BALLARD ESTATE MUMBAI - 400 001. ( APPELLANT ) ( RESPONDENT ) C.O. NO. 66/MUM/2011 (ASSESSMENT YEAR 2004 - 05) M/S. BINANI METALS LTD. MERCANTILE CHAMBERS 2 ND FLOOR, 12, JN HEREDIA MARG BALLARD ESTATE MUMBAI - 400 001. VS. ACIT - 2(1) AAYAKAR BHAVAN 5 TH FLOOR M.K. ROAD MUMBAI - 400 020. ( APPELLANT ) ( RESPONDENT ) PAN NO. AAACB2901J ASSESSEE BY SHRI VIJAY MEHTA DEPARTMENT BY SHRI PRAKASH L. PATHADE DATE OF HEARING 9 .2 . 201 6 DATE OF PRON OUNCEMENT 9 . 5 . 201 6 O R D E R PER B.R. BASKARAN, A M : - THE APPEAL FILED BY THE REVENUE AND THE CROSS OBJECTION FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 15 - 09 - 2009 PASSED BY LD CIT(A) - 4, MUMBAI AND THEY RELATE TO THE ASSESSMENT YE AR 2004 - 05. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEALING IN NON - FERROUS METALS, TRADING IN SHARES/STOCKS, CONSUMER PRODUCTS AND ALSO ENGAGED IN FINANCING BUSINESS. BINANI METALS LTD. 2 3. THE FIRST ISSUE CONTESTED BY THE REVENUE RELATES TO THE DISALLOWANC E OF CLAIM OF BAD DEBTS OF RS.15.00 LAKHS, WHICH HAS SINCE BEEN DELETED BY LD CIT(A). THE BAD DEBTS WRITTEN OFF BY THE ASSESSEE WAS DISALLOWED BY THE AO WITH THE OBSERVATION THAT THE ASSESSEE HAS NOT OFFERED THE SAME AS INCOME IN ANY OF THE YEARS AS REQUI RED U/S 36(2)(I) OF THE ACT. THE LD CIT(A) ALLOWED THE CLAIM BY HOLDING THAT THE ASSESSEE IS ALSO CARRYING ON MONEY LENDING BUSINESS AND HENCE THE REQUIREMENT OF OFFERING THE AMOUNT WRITTEN OFF AS INCOME IN ANY OF THE YEARS DOES NOT APPLY TO THE MONEY LEN T IN THE ORDINARY COURSE OF THE BUSINESS OF BANKING OR MONEY LENDING CARRIED ON BY THE ASSESSEE. 4. WE HEARD THE PARTIES ON THIS ISSUE. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSEE, INTER ALIA, IS ALSO ENGAGED IN FINANCING BUSINESS. IN CASE OF AMOUNT WRITTEN OFF AS BAD DEBT, THE REQUIREMENT OF OFFERING THE SAME AS INCOME IN ANY OF THE YEARS SHALL NOT APPLY IF THE SAME REPRESENTS MONEY LENT IN THE ORDINARY COURSE OF BUSINESS OF BANKING OR MONEY LENDING CARRIED ON BY THE ASSESSEE. THE PROVISIONS OF SEC. 36(2)(I) IS VERY CLEAR ON THIS SUBJECT. HENCE, IF THE AMOUNT OF RS.15.00 LAKHS WRITTEN OFF BY THE ASSESSEE REPRESENTS THE MONEY LENT IN THE ORDINARY COURSE OF BUSINESS, THEN THE SAME IS ALLOWABLE AS DEDUCTION U/S 36(1)(VII) OF THE ACT. HOWEVER A PERUSAL OF SCHEDULE L GIVEN IN THE ANNUAL REPORT, WE NOTICE THAT THE AMOUNT OF RS.15.00 LAKHS IS MENTIONED AS ADVANCES WRITTEN OFF. WE ALSO FIND THAT THE ASSESSEE HAS WRITTEN OFF RS.10,000/ - AS BAD DEBTS WRITTEN OFF. FROM THE EXPLANATIONS FURNISHED BEFORE THE AO, WE FIND THAT THE ASSESSEE HAD GIVEN THE ABOVE AMOUNT OF RS.15.00 LAKHS AS ADVANCE TO M/S GALLANT HOLDINGS LTD. IT IS NOT STATED THAT THE SAME REPRESENTS MONEY LENT IN THE ORDINARY COURSE OF BUSINESS OF MONEY LENDING. WE NOTICE T HAT THE LD CIT(A) HAS ALSO NOT GIVEN ANY SPECIFIC FINDING AND HE HAS GRANTED RELIEF ON THE REASONING THE ASSESSEE IS CARRYING ON MONEY LENDING BUSINESS. HOWEVER WHAT IS REQUIRED TO BE SHOWN IS THAT WHETHER THE IMPUGNED AMOUNT OF RS.15.00 LAKHS REPRESENTS MONEY LENT IN THE ORDINARY COURSE OF BUSINESS OF MONEY LENDING OR NOT. THIS FACTUAL ASPECT HAS NOT BEEN EXAMINED BY LD CIT(A). ACCORDINGLY, WE ARE OF THE VIEW THAT THIS FACT REQUIRES VERIFICATION AT THE END OF THE AO. ACCORDINGLY, WE SET ASIDE THE ORDE R PASSED BY LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO BINANI METALS LTD. 3 WITH THE DIRECTION TO EXAMINE AS TO WHETHER OR NOT THE ABOVE SAID AMOUNT OF RS.15.00 LAKHS GIVEN TO M/S GALLANT HOLDINGS LTD REPRESENTS MONEY LENT IN THE ORDINARY COURSE OF BUS INESS OF MONEY LENDING. IF IT IS FOUND TO BE SO, THE AO SHOULD ALLOW THE DEDUCTION U/S 36(1)(VII) OF THE ACT. OTHERWISE THE AO MAY TAKE APPROPRIATE DECISION IN ACCORDANCE WITH THE LAW. 5. THE NEXT ISSUE RELATES TO THE DISALLOWANCE OF CLAIM OF LOSS A RISING ON WRITING OFF OF STOCK AMOUNTING TO RS.53,61,000/ - , WHICH HAS SINCE BEEN DELETED BY LD CIT(A). THE ASSESSEE HAD IMPORTED CERTAIN GOODS FROM CHINA IN THE IMMEDIATELY PRECEDING YEAR. SINCE THEY DID NOT FARE WELL IN THE MARKET AND SOME OF THE ITEMS LIKE FINGER LOCKS DID NOT SUIT INDIAN CLIMATIC CONDITIONS, THE ASSESSEE CHOSE TO WRITE OFF A PORTION OF AVAILABLE STOCK. THE ASSESSEE DID NOT ASSIGN ANY SALVAGE VALUE TO IT. THE AO NOTICED THAT THE ASSESSEE HAS IMPORTED DIFFERENT ITEMS AND IT HAS ALSO SO LD SOME OF THE ITEMS IN THE MARKET, THE AO ALSO OPINED THAT THE ASSESSEE COULD HAVE REALISED SIZEABLE AMOUNT, IF IT HAD SOLD THE GOODS AT HALF OF ITS COST. ACCORDINGLY HE TOOK THE VIEW THAT THE ASSESSEES ACTION OF WRITING OFF OF THE CLOSING STOCK WAS N OT JUSTIFIED AND ACCORDINGLY DISALLOWED THE CLAIM. THE LD CIT(A) TOOK THE VIEW THAT THE CLAIM OF WRITING OFF OF OBSOLETE STOCK IS AS PER THE PRUDENT ACCOUNTING POLICY. HE PLACED RELIANCE ON THE DECISION RENDERED BY HONBLE APEX COURT IN THE CASE OF CHAIN RUP SAMPAT RAM VS. CIT (1953)(25 ITR 481) AND HELD THAT THE ACCOUNTING POLICY ADOPTED BY THE ASSESSEE IS REQUIRED TO BE ACCEPTED. ACCORDINGLY HE DELETED THE DISALLOWANCE MADE BY THE AO. 6. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. W E NOTICE THAT THE LD CIT(A) HAS GONE BY THE ACCOUNTING PRINCIPLES AND ACCORDINGLY DELETED THE IMPUGNED DISALLOWANCE. WE NOTICE THAT THE CASE OF THE AO IS THAT THERE WAS NO PROPER JUSTIFICATION FOR WRITING OFF OF THE STOCKS IN THIS YEAR, AS THEY HAVE BEEN IMPORTED ONLY IN THE FAG END OF THE IMMEDIATELY PRECEDING YEAR. FURTHER, THE ASSESSEE HAS IMPORTED DIFFERENT ITEMS AND IT HAS ALSO SOLD SOME OF THE ITEMS LIKE ARTIFICIAL PLANTS AND FLOWERS, BATH ITEMS, HEAVY PRODUCTS, DRIED FLOWERS ETC., DURING THE YEAR U NDER CONSIDERATION. HENCE THE AO TOOK THE VIEW THE SAME CAN BE SOLD IN THE SUBSEQUENT PERIOD ALSO AND HENCE THERE IS NO LOGIC TO WRITE OFF ONE PORTION OF THE SAME DURING THE YEAR UNDER BINANI METALS LTD. 4 CONSIDERATION. SIMILARLY IN RESPECT OF STATIONERY ITEMS IMPORTED BY T HE ASSESSEE, A PART WAS SOLD DURING THE YEAR AND SOME OTHER PART WAS SHOWN AS CLOSING STOCK. HENCE THERE WAS NO PROPER REASON TO WRITE OFF ONE PORTION OF THE STATIONERY ITEMS IMPORTED. SIMILARLY, THE ASSESSEE HAS SHOWN SOME PORTION OF SOME OTHER ITEM IN CLOSING STOCK AND WRITTEN OFF SOME PORTION OF THE VERY SAME ITEM. ONLY IN RESPECT OF FINGER LOCK, IT WAS SUBMITTED THAT THEY DID NOT FARE WELL IN THE MARKET, SINCE IT DID NOT SUIT INDIAN CLIMATIC CONDITIONS. 7. HENCE, THE CASE OF THE AO WAS THAT THE ASSESSEE HAS NOT GIVEN PROPER REASONS FOR WRITING OFF OF A PORTION OF THE CLOSING STOCK AND FURTHER THE TIME WAS NOT RIPE FOR WRITING OFF. IN THE OPINION OF THE AO, THE ASSESSEE HAS NOT FOLLOWED COMMON BUSINESS PRUDENCE OF TAKING STEPS TO SELL THE PRODUCT S AT THE POSSIBLE PRICES. WHEREAS THE LD CIT(A) HAS DECIDED THE ISSUE ON THE PRINCIPLES OF ACCOUNTING POLICY FOLLOWED BY THE ASSESSEE, WHICH IS NOT THE CASE OF THE AO AT ALL. 8. AT THE TIME OF HEARING, THE ASSESSEE WAS ASKED TO FURNISH THE DETAILS OF SALES TAX ASSESSMENT, I.E., WHETHER THE SALES TAX AUTHORITIES HAVE ACCEPTED THE CLAIM OF WRITE OFF. THE ASSESSEE HAS FURNISHED THE COPY OF ORDERS AND A PERUSAL OF THE SAME SHOWS THAT THE SALES TAX AUTHORITIES HAVE DISCUSSED ABOUT THE SALES ONLY AND THE RE WAS NO OCCASION FOR THEM TO DISCUSS ABOUT THE STOCK WRITTEN OFF. IT IS ALSO NOT KNOWN AS TO WHETHER THIS ISSUE WAS CONSIDERED BY SALES TAX AUTHORITIES IN THE SUCCEEDING YEAR. 9. BE THAT AS IT MAY, THE CLAIM OF WRITE OFF OF OBSOLETE ITEMS ARE ALL OWED IN THE NORMAL CIRCUMSTANCES, PROVIDED IT IS SHOWN THAT THE STOCK HAS BECOME OBSOLETE AND THERE IS NO SCOPE EITHER TO CONSUME OR TO SELL IN THE OPEN MARKET. IN THE INSTANT CASE, THE DISCUSSIONS MADE BY THE AO SHOWS THAT THE ASSESSEE HAS NOT OFFERED PR OPER EXPLANATIONS WITH REGARD TO WRITING OFF OF ITEMS, OTHER THAN FINGER LOCKS. WITH REGARD TO THE FINGER LOCKS ALSO, THE ASSESSEE HAS NOT SUBSTANTIATED ITS CLAIM BY FURNISHING THE DOCUMENTS RELATING TO COMPLAINTS RECEIVED TOWARDS NON - FUNCTIONING OF ITEMS , ACTION TAKEN THEREON AND ANY OTHER MATERIAL TO SUBSTANTIATE ITS CLAIM THAT IT DID NOT SUIT INDIAN CLIMATIC CONDITIONS. THUS, WE ARE OF THE VIEW THAT THE ASSESSEE HAS NOT PROPERLY BINANI METALS LTD. 5 SUBSTANTIATED THE CLAIM OF WRITE OFF BEFORE THE AO. HOWEVER, IN THE INTER EST OF NATURAL JUSTICE, WE ARE OF THE VIEW THAT THE ASSESSEE SHOULD BE PROVIDED WITH AN OPPORTUNITY TO SUBSTANTIATE ITS CLAIM. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND RESTORE THE SAME TO THE FILE OF THE AO WITH THE DIRECT ION TO EXAMINE THIS ISSUE AFRESH. THE ASSESSEE IS ALSO DIRECTED TO FURNISH PROPER EXPLANATIONS ALONG WITH EVIDENCES TO SUBSTANTIATE ITS CLAIM AND ALSO FURNISH THE DETAILS AS TO HOW THE SAID STOCK WAS DISPOSED OF FINALLY. AFTER HEARING THE ASSESSEE, THE A O MAY TAKE APPROPRIATE DECISION IN ACCORDANCE WITH THE LAW. 10. THE NEXT ISSUE URGED BY THE REVENUE RELATES TO THE DIRECTION OF THE LD CIT(A) TO ADOPT THE SALE CONSIDERATION OF PREFERENCE SHARES AS RS.2.50 LAKHS AS AGAINST RS.92.50 LAKHS ADOPTED BY TH E AO. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE SOLD BUSINESS ASSETS CONSISTING OF A FLAT, MACHINERY AND MOTOR CAR. THE ASSESSEE HAD CLAIMED DEPRECIATION THEREON. THE SURPLUS OF RS.95.81 LAKHS REALISED ON THE SALE WAS OFFERED AS SHORT TERM CAPIT AL GAIN AS PER THE PROVISIONS OF SEC. 50 OF THE ACT. 11. THE AO ALSO NOTICED THAT THE ASSESSEE HAS SOLD 6110 EQUITY SHARES HELD IN M/S DECON MERCANTILE PRIVATE LIMITED FOR A CONSIDERATION OF RS.10/ - PER SHARE AND ALSO 9,25,000/ - PREFERENCE SHARES O F THE SAME COMPANY HAVING A FACE VALUE OF RS.10/ - AT A PRICE OF RE.0.27 PER SHARE (27 PAISE). THE ASSESSEE DECLARED SHORT TERM CAPITAL LOSS FROM THE ABOVE SAID TRANSACTIONS AND CLAIMED SET OFF OF THE SAME AGAINST THE SHORT TERM CAPITAL GAIN REALISED ON SA LE OF BUSINESS ASSETS REFERRED TO IN THE PRECEDING PARAGRAPH. 12. THE AO NOTICED THAT THE ASSESSEE HAS SOLD THE SHARES TO OTHER FAMILY CONCERN AND ALSO TO THE SPOUSE OF A DIRECTOR. FURTHER THE AO ALSO OBSERVED THAT THE PREFERENCE SHARES LEGALLY CARRY PREFERENCE OVER THE EQUITY SHARES AND WHEN THE ASSESSEE COULD REALISE FACE VALUE ON SALE OF EQUITY SHARES, HOW COULD IT SELL THE PREFERENCE SHARES AT A PALTRY FIGURE OF TWENTY SEVEN PAISE PER SHARE. THE AO ALSO ANALYSED THE BALANCE SHEET OF M/S DECON MER CANTILE PRIVATE LIMITED AND NOTICED THAT IT IS HAVING NET WORTH OF RS.1.08 CRORES AND IT HAS MADE LIQUID INVESTMENTS ALSO. THE NET WORTH OF SHARES STOOD BINANI METALS LTD. 6 AT RS.10.974 PER SHARE. IT WAS CONTENDED THAT THE PROPERTIES HELD BY IT HAS BEEN ENCUMBERED WITH TENA NTS AND HENCE THEY COMMAND NO VALUE. HOWEVER, THE SAID CLAIM WAS REJECTED BY THE AO ON THE REASONING THAT THE ASSESSEE HAS NOT APPLIED THE ABOVE SAID LOGIC WHILE FIXING THE PRICE OF EQUITY SHARES, SINCE THE EQUITY SHARES HAVE BEEN SOLD AT PAR VALUE OF RS. 10/ - PER SHARE. THE AO ALSO NOTICED THAT THE ASSESSEE HAS GIVEN LOAN TO M/S DECON MERCANTILE PRIVATE LIMITED AND THERE WAS AN OUTSTANDING BALANCE OF RS.1,63,106/ - AS ON 31.3.2004. BASED ON THIS INFORMATION, THE AO DREW INFERENCE THAT THE ASSESSEE WOULD NO T HAVE GIVEN LOAN TO THE ABOVE SAID COMPANY, IF IT IS IN DOLDRUMS OR FACING FINANCIAL PROBLEMS. FURTHER, WHEN THE ASSESSEE IS REALISING A PRICE OF RS.10/ - PER EQUITY SHARE, THERE IS NO REASON TO ACCEPT A PRICE OF TWENTY SEVEN PAISE FOR PREFERENCE SHARES, WHICH COMMAND PREFERENCE OVER THE EQUITY SHARES. 13. ACCORDINGLY, THE AO TOOK THE VIEW THAT THE ASSESSEE HAS ADOPTED TAX AVOIDANCE TACTICS TO GENERATE SHORT TERM CAPITAL LOSS IN ORDER TO SET OFF THE SAME AGAINST THE SHORT TERM CAPITAL GAIN REALISED ON SALE OF BUSINESS ASSETS. THE AO FURTHER NOTICED THAT THE PREFERENCE SHARES WERE PURCHASED IN MARCH, 2002 AND SOLD IN JANUARY, 2004. HENCE THE ASSET SHOULD HAVE BEEN TREATED AS LONG TERM CAPITAL ASSET AS PER SEC. 2(42A) OF THE ACT, AS THE SHARES HAVE B EEN HELD FOR MORE THAN 12 MONTHS. 14. ACCORDINGLY, THE AO TOOK THE VIEW THAT THE ASSESSEE HAS SOLD THE PREFERENCE SHARES IN ORDER TO CREATE ARTIFICIAL LOSS WITH THE INTENTION TO AVOID TAX. HE DREW SUPPORT FOR THIS VIEW FROM THE DETAILS OF SALE OF BUS INESS ASSETS, I.E., THE FLAT WAS SOLD ON 31.12.2003 AND THE PREFERENCE SHARES HAVE BEEN SOLD ON 27.1.2004. THE AO, BY PLACING RELIANCE ON THE DECISION OF HONBLE SUPREME COURT RENDERED IN THE CASE OF MCDOWELL AND CO. LTD VS. CIT (154 ITR 148) HELD THAT TH E ASSESSEE HAS ADOPTED TAX AVOIDANCE TACTICS. ACCORDINGLY HE HELD THAT THE SELLING PRICE OF PREFERENCE SHARES SHOULD BE ADOPTED AT RS.10/ - PER SHARE. ACCORDINGLY HE ADOPTED THE SALE CONSIDERATION AT RS.92.50 LAKHS (RS.10/ - PER PREFERENCE SHARE) AS AGAINS T RS.2.50 LAKHS (RS.0.27 PER SHARE) DECLARED BY THE ASSESSEE. SINCE BOTH THE EQUITY SHARES AND PREFERENCE SHARES HAVE BEEN HELD FOR MORE THAN 12 MONTHS, THE AO COMPUTED LONG TERM CAPITAL GAIN. BINANI METALS LTD. 7 15. IN THE APPELLATE PROCEEDINGS, THE LD CIT(A) UPHELD THE VIEW OF THE AO THAT THE GAINS ARISING ON SALE OF BOTH EQUITY AND PREFERENCE SHARES SHOULD BE ASSESSED AS LONG TERM CAPITAL GAIN, IN VIEW OF THE SPECIFIC PROVISIONS OF SEC. 2(42A) OF THE ACT. HOWEVER, HE AGREED WITH THE CONTENTION OF THE ASSESSEE THAT THE SALE VALUE OF PREFERENCE SHARES DECLARED BY THE ASSESSEE AT TWENTY SEVEN PAISE PER SHARE COULD NOT BE DISTURBED BY THE AO. ACCORDINGLY HE DIRECTED THE AO TO ADOPT THE SALE CONSIDERATION OF PREFERENCE SHARES AT TWENTY SEVEN PAISE AND ACCORDINGLY COMPUT E LONG TERM CAPITAL GAIN/LOSS. THE REVENUE IS AGGRIEVED BY THIS DECISION OF LD CIT(A). 16. THE LD. D.R SUBMITTED THAT THE ASSESSEE HAS SOLD THE PREFERENCE SHARES AT UNBELIEVABLY LOW RATE, ONLY WITH THE INTENTION TO CLAIM SET OFF OF THE LOSS ARISING T HERE FROM AGAINST THE SHORT TERM CAPITAL GAIN ARISING ON SALE OF BUSINESS ASSETS. HE SUBMITTED THAT THE ASSESSEE HAS SOLD THE EQUITY SHARES AT RS.10/ - PER SHARE. SINCE THE PREFERENCE SHARES HAVE TO BE SETTLED IN PREFERENCE TO EQUITY SHARES AS PER THE PRO VISIONS OF COMPANIES ACT, THE SELLING RATE OF TWENTY SEVEN PAISE PER SHARE AGAINST THE PAR VALUE OF RS.10/ - PER SHARE WAS NOT BELIEVABLE. FURTHER THE SHARES HAVE BEEN SOLD TO CLOSELY RELATED PERSONS. HE SUBMITTED THAT THE PROVISIONS OF SEC. 50D HAVE BEEN INSERTED INTO THE ACT AND THE SAME PROVIDES FOR ADOPTION OF FAIR MARKET VALUE AS FULL VALUE OF CONSIDERATION. ACCORDINGLY HE SUBMITTED THAT THE LD CIT(A) WAS NOT JUSTIFIED IN DIRECTING THE AO TO ADOPT THE SALE VALUE OF TWENTY SEVEN PAISE PER SHARE. 17 . ON THE CONTRARY, THE LD A.R SUBMITTED THAT THE PROVISONS OF SEC. 50D HAS BEEN INSERTED WITH EFFECT FROM 1.4.2013 AND HENCE THE SAME WILL NOT APPLY TO THE YEAR UNDER CONSIDERATION. HE FURTHER SUBMITTED THAT THE CAPITAL GAINS IS COMPUTED U/S 48 OF THE ACT BY TAKING INTO ACCOUNT THE FULL VALUE OF CONSIDERATION AND NOT FAIR MARKET VALUE. HE SUBMITTED SHOULD NOT DISTURB THE FULL VALUE OF CONSIDERATION DECLARED BY THE ASSESSEE WITHOUT BRINGING ANY MATERIAL ON RECORD TO SHOW THAT THE ASSESSEE HAD ACTUAL LY RECEIVED ANY MONEY OVER AND ABOVE THE DECLARED CONSIDERATION. HE PLACED RELIANCE ON A NUMBER OF CASE LAWS, SOME OF WHICH ARE QUOTED BELOW: - (A) NARIMAN POINT BUILDING SERVICES & TRADING (26 TAXMANN.COM 16) (B) RUPEE FINANCE (P) LTD VS. ACIT (120 ITD 539)(MUM) BINANI METALS LTD. 8 (C) CIT VS. NILOFER I SINGH (2009)(309 ITR 233)(DELHI) (D) CIT VS. SHIVAKAMI CO. P LTD (159 ITR 71)(SC) (E) DCIT VS. M/S RAMA CAPITAL AND FISCAL SERVICES (ITA NO.205/M/13 DATED 30.10.2015). THE LD A.R SUBMITTED THAT THE TRIBUNAL HAS CONSISTE NTLY HELD THE SALE CONSIDERATION CANNOT BE SUBSTITUTED BY FAIR MARKET VALUE, EVEN IF THE SALE HAS TAKEN PLACE BETWEEN RELATED PARTIES. 18. WE HEARD THE PARTIES ON THIS ISSUE. WE NOTICE THAT THE ALLEGATION OF THE ASSESSING OFFICER IS THAT THE ASSESSE E HAS ADOPTED TAX AVOIDANCE TRICK BY SELLING PREFERENCE SHARES AT A PALTRY SUM OF TWENTY SEVEN PAISE PER SHARE AS AGAINST THE PAR VALUE OF RS.10/ - PER SHARE. THE ASSESSING OFFICER HAS SUPPORTED HIS VIEW WITH THE FOLLOWING POINTS: - (A) THE PREFERENCE SHAR ES COMMAND PREFERENCE OVER THE EQUITY SHARES. HOWEVER, THE EQUITY SHARES HAVE BEEN SOLD AT PAR VALUE OF RS.10/ - . WHEN THE EQUITY SHARES ARE SOLD AT THAT PRICE, THEN THE PREFERENCE SHARES COULD NOT HAVE BEEN LESS THAN RS.10/ - . THE PREFERENCE SHARES ARE I N THE NATURE OF REDEEMABLE PREFERENCE SHARES CARRYING A RETURN OF 6%. (B) THE SHARES HAVE BEEN SOLD TO CLOSE RELATED PERSONS ONLY. (C) M/S DECON MERCANTILE PRIVATE LIMITED, WHOSE SHARES HAVE BEEN SOLD BY THE ASSESSEE, WAS ALSO A SUBSIDIARY OR GROUP COMPANY OF THE ASSESSEE. (D) EVEN IF THE ARGUMENTS THAT ALL THE ASSETS OF M/S DECON MERCANTILE ARE ENCUMBERED WITH TENANTS AND HENCE THERE IS NO MARKET VALUE IS ACCEPTED, THEN THE ASSESSEE COULD NOT HAVE REALISED THE PRICE OF RS.10/ - FOR EQUITY SHARES. (E) M/S DECON MERCANTILE IS DECLARING PROFIT EVERY YEAR AND THE NET WORTH VALUE OF SHARES STAND AT RS.10.974 PER SHARE. (F) M/S DECON MERCANTILE HAS FIXED ASSETS AS WELL AS CURRENT ASSETS. THE MARKET VALUE OF FIXED ASSETS SHALL BE MUCH MORE THAN THE IR BOOK VALUE. (G) THE ASSESSEE ITSELF HAS GIVEN LOAN TO M/S DECON MERCANTILE AND A BALANCE OF RS.1,63,106/ - IS OUTSTANDING AS ON 31.3.2004. IF M/S DECON MERCANTILE BINANI METALS LTD. 9 WAS FACING FINANCIAL PROBLEMS, THE ASSESSEE WOULD NOT HAVE GIVEN LOAN TO IT. (H) THE SHARES HAVE BEEN SOLD ON 27.1.2004, WHERE AS THE ASSESSEE HAS REALISED CAPITAL GAINS ON SALE OF BUSINESS ASSETS ON 31.12.2003. ACCORDINGLY, THE AO HAS TAKEN THE VIEW THAT THE ASSESSEE HAS ADOPTED COLOURABLE DEVICE TO AVOID TAX. ACCORDINGLY, THE AO REJECT ED THE SALE VALUE DECLARED BY THE ASSESSEE AND ADOPTED THE PAR VALUE OF RS.10/ - PER SHARE FOR PREFERENCE SHARES ALSO. 19. BEFORE THE LD CIT(A), THE ASSESSEE HAS ARGUED THAT THE ENTIRE INCOME GENERATED BY M/S DECON MERCANTILE FROM THE PROPERTY IS BEING SPENT ON THEIR MAINTENANCE AND HENCE THERE WAS NO SCOPE FOR APPRECIATION IN THE VALUE OF SHARES OF M/S DECON MERCANTILE. THE LD CIT(A) DID NOT AGREE WITH THE VIEW OF THE AO THAT THE ASSESSEE HAS ADOPTED TAX AVOIDANCE TACTICS ON THE REASONING THAT, ONCE T HE CAPITAL GAIN ARISING ON TRANSFER OF PREFERENCE SHARES IS TREATED AS LONG TERM, THE ASSESSEE DOES NOT GET ANY BENEFIT, SINCE LONG TERM CAPITAL LOSS CANNOT BE SET OFF AGAINST THE SHORT TERM CAPITAL GAIN. FURTHER THE LD CIT(A) HAS ACCEPTED THE CONTENTIONS OF THE ASSESSEE THAT THE AO HAS NOT SHOWN THAT THE ASSESSEE HAS RECEIVED ANYTHING MORE THAN THE DECLARED VALUE. ACCORDINGLY, BY PLACING RELIANCE ON THE DECISION OF HONBLE SUPREME COURT RENDERED IN THE CASE OF K.P.VERGHESE VS. ITO, THE LD CIT(A) HELD THA T THE SALE CONSIDERATION OF PREFERENCE SHARES SHOULD BE ACCEPTED AS TWENTY SEVEN PAISE PER SHARE AND DIRECTED THE AO TO ADOPT THE SAME. 20. WE NOTICE THAT THERE IS FALLACY IN THE ARGUMENT PUT FORTH BY THE ASSESSEE BEFORE LD CIT(A) THAT THERE IS NO S COPE OF APPRECIATION OF SHARE VALUE. THE IMPUGNED ISSUE RELATES TO THE PREFERENCE SHARES, WHERE IN THE INVESTOR COULD GET ONLY THE PAR VALUE OF SHARES AND THE PREFERENCE SHARE HOLDERS CANNOT PARTICIPATE OR TAKE THE BENEFIT OF APPRECIATION IN THE NET WORT H OF THE COMPANY. THE ABOVE SAID ARGUMENT SHALL BE APPLICABLE ONLY TO THE EQUITY SHARE HOLDERS, SINCE THEY ARE ENTITLED TO PARTICIPATE IN THE NET WORTH OF A COMPANY. IT IS PERTINENT TO NOTE THAT THE EQUITY SHARES HAVE BEEN SOLD AT PAR VALUE OF RS.10/ - PE R SHARE, WHERE AS THE REDEEMABLE PREFERENCE SHARES HAVE BEEN SOLD AT TWENTY SEVEN PAISE PER SHARE. THERE IS MERIT IN THE ARGUMENT OF THE AO BINANI METALS LTD. 10 THAT THE PREFERENCE SHARES COMMAND PREFERENCE OVER THE EQUITY SHARES AND HENCE IN THE EVENT OF LIQUIDATION OF THE COMPANY, THE PREFERENCE SHARES SHALL GET ITS DUES FIRST. ACCORDINGLY, WE ARE OF THE VIEW THAT THERE IS MERIT IN THE CONTENTIONS OF THE AO THAT A PRUDENT PERSON WOULD NOT HAVE SOLD THE PREFERENCE SHARES AT TWENTY SEVEN PAISE PER SHARE AND THE EQUITY SHARES AT RS.10/ - PER SHARE. THUS, WHEN THE EQUITY SHARES COULD BE SOLD AT ITS PAR VALUE, THEN THERE IS MERIT IN THE VIEW OF THE AO THAT THE PREFERENCE SHARES WOULD NOT BE SOLD AT A LOWER RATE. WE NOTICE THAT THE AO HAS ALSO ANALYSED THE BALANCE SHEET POSITIO N OF M/S DECON MERCANTILE AND HAS GIVEN A FINDING THAT THE NET WORTH OF THE EQUITY SHARES WAS MORE THAN RS.10/ - PER SHARE. THE ABOVE SAID VALUE WAS ARRIVED AT BY TAKING THE VALUE OF FIXED ASSETS AT THEIR BOOK VALUE AND IF MARKET VALUE OF THE FIXED ASSETS IS CONSIDERED, THEN THE NET WORTH WOULD BE MORE. 21. THE LD A.R HAS PLACED RELIANCE ON HOST OF CASE LAW TO CONTEND THAT THE PROVISIONS OF SEC. 48 PROVIDES FOR COMPUTATION OF CAPITAL GAINS BY TAKING FULL VALUE OF CONSIDERATION ONLY AND NOT THE FAIR MARKET VALUE. IT WAS ALSO CONTENDED THAT THE FULL VALUE OF CONSIDERATION SHALL BE THE DECLARED VALUE OF SALES, UNLESS IT IS SHOWN THAT SOMETHING EXTRA HAS BEEN RECEIVED. IN OUR VIEW, THE ABOVE SAID RATIO SHALL APPLY ONLY IN RESPECT OF BONAFIDE TRANSACTI ONS. FOLLOWING OBSERVATIONS MADE BY THE CO - ORDINATE BENCH IN THE CASE OF NARIMAN POINT BUILDING SERVICES & TRADING (P) LTD (SUPRA) CLARIFY THIS LEGAL POSITION: - 5.2.THERE IS NO DOUBT THAT THE ASSESSING OFFICER HAS POWERS AND JURISDICTION TO EXAMINE AND VERIFY THE FACT, IF THE ASSESSING OFFICER HAS DOUBTED THAT THE ASSESSEE HAS UNDERSTATED THE SALE CONSIDERATION. BUT WHEN THE BONAFIDE OF THE TRANSACTION AND THE ACTUAL SALE CONSIDERATION RECEIVED BY THE ASSESSEE HAS NOT BEEN SUSPECTED, THEN FOR THE PURPO SE OF COMPUTATION OF CAPITAL GAINS, THE FULL VALUE OF CONSIDERATION CANNOT BE SUBSTITUTED BY MARKET PRICE OR VALUE OF CAPITAL ASSETS AS ON THE DATE OF TRANSFER. IF THE TRANSACTION OF SALE OF SHARES IS BONAFIDE ONE BETWEEN A WILLING PURCHASER AND WILLI NG SELLER AND IF THE SAME IS NOT CARRIED OUT WITH THE INTENTION OF EVADING TAX, THEN THERE IS NO NECESSITY TO SUBSTITUTE THE DECLARED SALES VALUE WITH ANY OTHER AMOUNT. HOWEVER, IF THE TRANSACTION HAS TAKEN PLACE WITH THE OBJECTIVE OF EVADING THE TAX AND IF IT IS NOT SHOWN THAT THE AGREED SALES CONSIDERATION WAS JUSTIFIABLE, THEN WE ARE OF THE BINANI METALS LTD. 11 VIEW THAT THE AO WAS JUSTIFIED IN NOT PLACING RELIANCE ON THE TRANSACTION AS DECLARED BY THE ASSESSEE. IT IS A WELL SETTLED PROPOSITION THAT THE INTENTION BEHIND AN Y TRANSACTIONS COULD BE EXAMINED FROM THE ANGLE OF HUMAN PROBABILITIES AND HUMAN CONDUCT. THIS IS SO HELD BY HONBLE SUPREME COURT IN THE CASE OF DURGA PRASAD MORE (82 ITR 540) AND SUMATI DAYAL (214 ITR 801). FURTHER IT IS ALSO WELL SETTLED THAT SUBSTANC E SHALL PREVAIL OVER THE FORM. 22. IN THE INSTANT CASE, THE UNDISPUTED FACTS REMAIN THAT THE ASSESSEE HAS SOLD BOTH EQUITY SHARES AND PREFERENCE SHARES. IT IS ALSO AN UNDISPUTED FACT THAT THE PREFERENCE SHARES SHALL COMMAND PREFERENCE OVER THE EQUITY SHARES IN THE CASE OF DIVIDEND AS WELL AS LIQUIDATION OF THE COMPANY. THE ASSESSEE HAS SOLD THE EQUITY SHARES AT PAR VALUE, BUT THE PREFERENCE SHARES HAVE BEEN SOLD AT A PALTRY FIGURE OF TWENTY SEVEN PAISE. THE AO HAS ESTABLISHED THAT THE COMPANY, M/S DE CON MERCANTILE IS HAVING ASSETS AND THE NET WORTH WAS ABOVE RS.10/ - PER SHARE, EVEN IF THE VALUE OF FIXED ASSETS IS CONSIDERED AT BOOK VALUE. THE APPRECIATION OR DEPRECIATION IN THE NET WORTH SHALL AFFECT ONLY THE EQUITY SHARES AND NOT THE PREFERENCE SHAR ES IN THE CASE OF A RUNNING COMPANY. THOUGH THE ASSESSEE HAS CLAIMED THAT THE PROPERTIES OWNED BY M/S DECON MERCANTILE ARE ENCUMBERED BY THE TENANTS AND HENCE MARKET VALUE OF THE SAME IS NIL, YET NO SUPPORTING MATERIAL WAS PLACED TO SHOW THAT M/S DECON ME RCANTILE WOULD NOT GET ANY MONEY, IN THE EVENT OF ITS SALE. ON THE CONTRARY, IT IS SEEN THAT M/S DECON MERCANTILE HAS BEEN RECEIVING RENTAL INCOME FROM THOSE PROPERTIES AND HAS BEEN INCURRING EXPENSES TOWARDS MAINTENANCE. HENCE THE SAID CONTENTION ALSO C ONTRADICTS WITH THE FACTS AVAILABLE ON RECORD. 23. WE HAVE SEEN THAT BOTH THE PREFERENCE AND EQUITY SHARES HAVE BEEN SOLD TO CLOSELY RELATED PERSONS. WE HAVE FURTHER SEEN THAT THE SALE HAS TAKEN PLACE IMMEDIATELY AFTER REALIZING CAPITAL GAINS ON SALE OF BUSINESS ASSETS. THE ANALYSIS MADE BY THE AO WOULD SHOW THAT A PRUDENT MAN WOULD NOT HAVE SOLD THE PREFERENCE SHARES HAVING A PAR VALUE OF RS.10/ - PER SHARE AT TWENTY SEVEN PAIS PER SHARE, WHILE HE WAS ABLE TO SELL THE EQUITY SHARES AT PAR VALUE OF RS. 10/ - PER SHARE. THE EXPLANATION GIVEN FOR SELLING PREFERENCE SHARES AT A LOWER RATE ALSO PROVED TO BE WRONG BY THE AO BY BINANI METALS LTD. 12 DISCUSSING ABOUT THE FINANCIAL POSITION OF THAT COMPANY. ACCORDINGLY, WE ARE OF THE VIEW THAT THE SELLING RATE SHOWN FOR PREFERENCE S HARES DEFIES HUMAN CONDUCT AND PROBABILITIES. ALL THESE FACTORS SUPPORT THE CASE OF THE AO THAT THE SALE OF PREFERENCE SHARES AT A VERY LOW RATE WAS WITH THE INTENTION TO AVOID TAX. ACCORDINGLY, WE ARE OF THE VIEW THAT THE AO WAS JUSTIFIED IN NOT ACCEPTIN G THE SELLING RATE OF PREFERENCE SHARES AT TWENTY SEVEN PAISE PER SHARE. THE LD CIT(A) HAS TRIED TO JUSTIFY THE POSITION BY STATING THAT THE ASSESSEE DID NOT GET ANY BENEFIT, SINCE THE LONG TERM CAPITAL LOSS CANNOT BE SET OFF AGAINST SHORT TERM CAPITAL GA IN. HOWEVER, AT THE TIME OF ENTERING INTO THE IMPUGNED TRANSACTIONS AND ALSO AT THE TIME OF FILING RETURN OF INCOME, THE ASSESSEE WAS UNDER THE IMPRESSION THAT THE SALE OF PREFERENCE SHARES WOULD RESULT IN SHORT TERM CAPITAL LOSS ONLY. HENCE THE INTENTIO N OF THE ASSESSEE AT THE TIME OF ENTERING INTO THE TRANSACTIONS HAVE TO BE SEEN AND NOT THEREAFTER. ACCORDINGLY WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE. 24. HOWEVER, WE NOTICE THAT THE AO HAS SUBSTITUTED THE SELLING RATE BY RS.10/ - PER SHA RE. SINCE THE SELLING RATE OF PREFERENCE SHARES WAS FIXED AT TWENTY SEVEN PAISE PER SHARE IN ORDER TO GENERATE LOSS, IN OUR VIEW, THE SAME SHOULD BE CONSIDERED AS SHAM TRANSACTION. IN THAT CASE, IN OUR VIEW, IT MAY NOT BE CORRECT TO SUBSTITUTE THE SELLIN G RATE BY RS.10/ - SHARE. SINCE THE TRANSACTION HAS TAKEN PLACE BETWEEN THE CLOSELY RELATED PERSONS AND SINCE IT IS HELD THAT IT WAS A SHAM TRANSACTION ENTERED WITH THE INTENTION OF GENERATING LOSS, THERE IS REMOTE POSSIBILITY THAT THE PARTIES HAD AGREED TO THE SELLING RATE OF RS.10/ - PER SHARE. HENCE, UNDER THESE SET OF FACTS, WE ARE OF THE VIEW THAT THE LOSS GENERATED ON SALE OF PREFERENCE SHARES HAS TO BE IGNORED, SINCE IT WAS NOT A GENUINE LOSS, BUT A MANAGED LOSS WITH A DESIGN. ACCORDINGLY WE DIRECT THE AO TO IGNORE THE LOSS ARISING ON SALE OF PREFERENCE SHARES. 25. NOW WE SHALL TAKE UP THE CROSS OBJECTION FILED BY THE ASSESSEE. THE CROSS OBJECTION IS DELAYED BY 299 DAYS. THE ASSESSEE HAS MOVED PETITION REQUESTING THE BENCH TO CONDONE THE DELAY . WE HAVE HEARD THE PARTIES ON THIS PRELIMINARY ISSUE. HAVING REGARD TO THE RIVAL SUBMISSIONS, WE CONDONE THE DELAY AND ADMIT THE C.O. BINANI METALS LTD. 13 26. IN THE C.O., THE ASSESSEE HAS SOUGHT SET OFF OF LONG TERM CAPITAL LOSS ARISING ON SALE OF SHARES AGAINST THE CA PITAL GAINS WORKED OUT U/S 50 OF THE ACT. IN THE EARLIER PARAGRAPHS, WE HAVE HELD THAT THE LOSS ARISING ON SALE OF PREFERENCE SHARES SHOULD BE IGNORED. ACCORDINGLY, THE GROUND RAISED BY THE ASSESSEE, IN SO FAR AS IT RELATES TO THE PREFERENCE SHARES, DOES NOT REQUIRE ADJUDICATION. HENCE THIS GROUND SHALL SURVIVE ONLY IN RESPECT OF LOSS ARISING ON SALE OF EQUITY SHARES. WE NOTICE THAT THE ASSESSEE HAS PLACED RELIANCE ON THE DECISION RENDERED BY THE CO - ORDINATE BENCH IN THE CASE OF MANALI INVESTMENTS VS. A CIT (ITA NO.6646/MUM/2008 DATED 13.4.2011) AND ALSO IN OTHER CASES. SINCE THIS CLAIM IS BEING MADE FOR THE FIRST TIME BEFORE US, WE RESTORE THIS ISSUE TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THE CLAIM OF THE ASSESSEE IN THE LIGHT OF DECISIONS AVAILABLE ON THIS MATTER. 27. THE ASSESSEE HAS ALSO RAISED A GROUND THAT THE INCOME TAX ON THE CAPITAL GAIN ARISING ON SALE OF DEPRECIABLE ASSETS SHOULD BE COMPUTED AT 20%, EVEN THOUGH THE SAME IS TAXED AS SHORT TERM CAPITAL GAIN DUE TO LEGAL FICTION PR OVIDED IN SEC. 50C OF THE ACT. IN THIS REGARD, THE ASSESSEE PLACED RELIANCE ON THE DECISION RENDERED BY THE CO - ORDINATE BENCH IN THE CASE OF M/S PODDAR BROTHERS INVESTMENT P LTD VS. DCIT (ITA NO.1114/MUM/2013 DATED 25.3.2015), WHICH IN TURN PLACED RELIANC E ON THE DECISION OF THE TRIBUNAL RENDERED IN THE CASE OF SMITA CONDUCTORS (ITA/4004/MUM/2011). THE LD D.R DID NOT PLACE BEFORE US ANY OTHER DECISION CONTRADICTING THIS VIEW. SINCE THIS CLAIM IS MADE FOR THE FIRST TIME, WE RESTORE THIS ISSUE TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THE CLAIM OF THE ASSESSEE IN THE LIGHT OF DECISIONS REFERRED ABOVE. 28. IN THE RESULT, THE APPEAL FILED BY THE REVENUE AS WELL AS THE CROSS OBJECTION OF THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSE S. ORDER HAS BEEN PRONOU NCED IN THE OPEN COURT ON 9 .5 .2016 . SD/ - SD/ - (PAWAN SINGH ) (B.R.BASKARAN ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 9 / 5 /20 1 6 COPY OF THE ORDER FORWARDED TO : BINANI METALS LTD. 14 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// ( DY./ASSTT. REGISTRAR) ITAT, MUMBAI PS