CLARIDGES INVESTMENTS AND FINANCE P.LTD, MUMBAI V. ITO 4(1)(1), MUMBAI

ITA 7365/MUM/2013

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3339 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 18-02-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 13-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Earning of tax free income; Additional evidence; Date of conversion; Speculation loss; Bad and doubtful debts
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C , MUMBAI BEFORE SHRI AMIT SHUKLA , JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO. 7365/MUM/2013 : (ASSESSMENT YEAR : 2007 - 08) M/S. CLARIDGES INVESTMENTS AND FINANCE PVT. LTD., 106 FREE PRESS HOUSE, 10 TH FLOOR,NARIMAN POINT, MUMBAI 400 021. (APPELLANT) PAN : AAACC1607N VS ITO - 4(1)(1), MUMBAI (RESPONDENT) APPELLANT BY : SHRI J.P. BAIRAGRA RESPONDENT BY : SHRI RAJESH OJHA (DR) DATE OF HEARING : 13/01/2016 DATE OF PRONOUNCEMENT : 20 /01/2016 O R D E R PER AMIT SHUKLA, JM : THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST IMPUGNED ORDER DT. 2.9.2013 , PASSED BY THE CIT(A) - 8, MUMBAI IN RELATION TO THE PENALTY PROCEEDINGS U/S 271(1)(C) FOR THE A.Y 2007 - 08. IN VARIOUS GROUNDS OF APPEAL THE ASSESSEE HAS MAINLY CHALLENGED THE LEVY OF PENALTY U/S 271(1)(C) OF RS. 95 ,00,000/ - WHICH IS 173% OF THE TAX SOUGHT TO BE EVADED, THAT IS, OF RS.55,12,625/ - . THE PENALTY HAS BEEN MAINLY LEVIED ON THE DISALLOWANCE OF RS. 1,83,75,418/ - ON ACCOUNT OF VALUATION LOSS OF CONVERTED STOCK OF SHARES FROM INVESTMENT TO STOCK - IN - TRADE . 2. THE BRIEF FACTS OF THE CASE AS EXPLAINED BY LD. COUNSEL AND AS CULLED OUT FROM THE ASSESSMENT ORDER PASSED U/S 143(3) ARE THAT , THE ASSESSEE IS A 2 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 MEMBER OF THE BOMBAY STOCK EXCHANGE AND IS ENGAGED IN THE BUSINESS OF SHARE BROKING, TRADING AND DEALING IN SHARES AND SECURITIES. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE AO NOTED THAT THE ASSESSEE HAS CREDITED INCOME FROM OPERATIONS OF RS.5,06,87,371/ - TO THE PROFIT AND LOSS ACCOUNT AGAINST WHICH TOTAL EXPENDITURE DEBITED WAS RS. 5,63,87,889/ - THEREBY ARRIVING AT A LOSS OF RS. 57,00,518/ - . THE MAJOR INCOME FORMING PART OF INCOME FROM OPERATIONS WAS RS. 5 CRORES , WHICH REPRESENTED BAD DEBTS RECOVERED DURING THE YEAR AND THE OTHER REMAINING PART WAS MAINLY ON ACCOUNT OF INTEREST INCOME AND DIVIDEND INCOME. THE MAJOR EXPENDITURE DEBITED T O THE PROFIT AND LOSS ACCOUNT INCLUDED AN AMOUNT OF RS.52,60,830/ - ON ACCOUNT OF LOSS ON CONVERSION OF INVESTMENTS INTO STOCK - IN - TRADE WHICH ASSESSEE HAS ADDED BACK TO THE INCOME IN THE COMPUTATION OF INCOME , TO BE CLAIMED IN THE YEAR IN WHICH THE CONVERTE D STOCK IS SOLD. THE LOSS QUANTIFIED AT RS. 1,83,75,418/ - WAS ON ACCOUNT OF VALUATION OF STOCK - IN - TRADE AT COST OR MARKET PRICE, WHICHEVER IS LOWER AS ON 31.3.2007. THE BACKGROUND OF THE CONVERSION OF SHARES IS THAT, T HE ASSESSEE HAD PURCHASED SHARES OF M/S. SAKUMA EXPORTS LTD. ON 20 TH MARCH AND 21 ST MARCH, 2006 WHICH WAS SHOWN UNDER THE HEAD INVESTMENTS. ON 3 RD APRIL, 2006, THE ASSESSEE CONVERTED 1,00,000 SHARES OF RS. 10/ - EACH OF M/S. SAKUMA EXPORTS LTD. AND 9,01,725 NOS. OF 5% PREFERENCE SHARES OF RS. 100/ - EACH INTO STOCK - IN - TRADE AT THE CURRENT MARKET RATE. SUCH A CONVERSION INTO STOCK - IN - TRADE WAS MADE THROUGH BOARD RESOLUTION DT. 3.4.2006, COPY OF WHICH IS APPEARING IN THE PAPER - BOOK AT PG. 21. THE DETAILS OF THE SHARES CONVERTED FROM INVESTME NTS INTO STOCK - IN - TRADE WAS AS UNDER : AMOUNT AT AMOUNT OF DATE OF COST OF DATE OF WHICH LOSS ON PARTICULARS QTY ACQUISITION ACQUISITION CONVERSION CONVERTED CONVERSION EQUITY SHARES OF SAKUMA EXPORTS 6,00,000 20/03/2006 2,52,33,427 03/04/2006 2,16,00,000 36,33,427 EQUITY SHARES OF SAKUMA EXPORTS 3,01,725 21/03/2006 1,24,89,503 03/04/2006 1,08,62,100 16,27,403 PREF. SHARES OF SAKUMA EXPORTS LTD. 1,00,000 20/03/2006 64,88,592 03/04/2006 64,88,592 - TOTAL 4,42,11,522 3,89,50,692 52,60,830 3 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 ON THE LAST DATE OF THE BALANCE - SHEET, THAT IS , AS ON 31.3.2007, THE SHARES WERE VALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER AS PER THE REGULAR METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE WHICH WAS ALSO PROVIDED IN THE NOTE S TO THE B ALANCE - S HEET. ON VALUATION , THE ASSESSEE INCURRED LOSS ON CLOSING STOCK OF RS.1,83,75,418/ - , T HE WORKING OF THE LOSS WAS AS UNDER : QUANTITY RATE AMOUNT MARKET AMOUNT VALUATION OF LOSS ON LOSS (COST) (COST) RATE AS (MARKET CLOSING STOCK AT VALUATION SHARE SR. SCRIPT 31.03.07 VALUE) COST OR MARKET NO. RATE WHICHEVER IS LESS 1 ADANI PORT LTD. 5,000 50,000 10.00 50,000 50,000 - - 2 SAKUMA EXPORT LTD. 9,01,725 36.00 3,24,62,100 17.55 1,58,25,274 1,58,25,274 1,66,36,826 18.45 3 SAKUMA EXPORT LTD. 5% PREF SHARES 1,00,000 64.89 64,88,592 47.50 47,50,000 47,50,000 17,38,592 17.35 TOTAL 3,90,00,692 2,06,25,274 2,06,25,274 1,83,75,418 3. THE AO , HOWEVER, DISALLOWED THE LOSS MAINLY ON TWO GROUNDS , VIZ : - I) FIRSTLY, T HE ASSESSEE COMPANY HAS ADOPTED THE DEVICE OF RESOLUTION FOR CONVERSION OF INVESTMENT INTO STOCK - IN - TRADE AND THEN VALUE D THE STOCK - IN - TRADE AT THE COST OR MARKET WHICHEVER IS LOWER WITH THE INT ENTION TO SET - OFF THE LOSS ON CONVERSION AGAINST RECOVERY OF BAD DEBTS OF RS.5,00,00,000/ - DURING THE YEAR HENCE IT IS A COLOURABLE DEVICE ; AND II) SECONDLY, T HE AO IN THE ALTERNATIVE HELD THAT, THE RESULTANT LOSS ON ACCOUNT OF VALUATION OF THE STOCK - IN - TRADE IS COVERED BY THE E XPLANATION TO SECTION 73 AND THEREBY IT IS A SPECULATION LOSS WHICH CANNOT BE SET - OFF AGAINST BUSINESS INCOME ON THE BASIS OF THE JUDGEMENT OF HONBLE BOMBAY HIGH COU RT IN THE CASE OF PRASAD AGENTS (PVT.) LTD., 180 TAXMANN 178. 4 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 4. BEFORE THE LD. CIT(A), THE MAIN CONTENTION OF THE ASSESSEE WAS THAT THE ASSESSEE HAD CONVERTED THE SHARES INTO STOCK - IN - TRADE AS EARLY AS ON 3.4.2006 AND ON THAT DATE IT WAS IMPOSSIBLE TO VI SUALIZE THAT THE SHARE HAVING MARKET PRICE AT RS. 65/ - AND RS. 36/ - ON 3.4.2006 WILL BE PRICED AT RS. 47.50/ - AND RS. 17.55/ - ON 31.3.2007. THUS, THERE WAS NO INTENTION AT THE TIME OF CONVERSION TO SET OFF THE LOSS AGAINST THE RECOVERY OF BAD DEBTS OF RS. 5 CRORES. HOWEVER, THE LD. CIT(A) CONFIRMED THE ACTION OF THE AO. ON THE ALTERNATE GROUND OF INVOKING THE PROVISIONS OF EXPLANATION TO SEC. 73, HE HELD THAT THE SAME HAS BECOME INFRUCTUOUS IN VIEW OF THE FACT THAT HE HAS ALREADY CONFIRMED THE DISALLOWAN CE. 5. IN THE SECOND APPEAL ALSO, THE TRIBUNAL HAS CONFIRMED THE ORDER OF THE LD. CIT(A) AFTER OBSERVING AND HOLDING AS UNDER : 12. IN THE FY 2005 - 06, APART FROM THE RECOVERY OF BAD DEBTS AMOUNTING TO RS. 8 CRORES, THE ONLY OTHER INCOME SHOWN BY THE A SSESSEE IS INCOME FROM INTEREST AT RS. 1,27,870/ - , MISCELLANEOUS INCOME AT RS. 1,655/ - , DIVIDEND RS.9,282/ - . THERE WAS NO BUSINESS OPERATION SHOWN IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. DURING THE YEAR UNDER CONSIDERATION, AS PER BOARDS RESOLUTIO N DT. 3.4.2006 I.E. 14 DAYS AFTER THE DATE OF PURCHASE OF SHARES, THE BOARD RESOLVED THAT LONG TERM INVESTMENTS IN THE SHARES OF M/S. SAKUMA EXPORT BE AND HEREBY CONVERTED INTO STOCK - IN - TRADE AT CURRENT MARKET RATE. HOWEVER, NO REASON HAS BEEN GIVEN BY TH E BOARD WHY WITHIN 14 DAYS OF PURCHASE OF LONG TERM INVESTMENT HAS BEEN DECIDED TO BE CONVERTED INTO STOCK - IN - TRADE. THIS MAY GO AGAINST THE COMMERCIAL PRUDENCE. FURTHER BUSINESS OPERATIONS FOR THE YEAR UNDER CONSIDERATION SHOW THAT OTHER THAN THE RECOVE RY OF BAD DEBT TO THE TUNE OF RS. 5 CRORES, THE ONLY OTHER INCOME SHOWN BY THE ASSESSEE IS INCOME FROM INTEREST AT RS. 1,71,770/ - , MISCELLANEOUS INCOME RS. 2,733/ - AND DIVIDEND RS. 5,12,868/ - WHICH MEANS THAT THE MAJOR COMPONENT OF THE INCOME IS THAT OF DI VIDEND. WE FAILED TO UNDERSTAND EVEN AFTER CONVERTING THE INVESTMENT INTO STOCK IN TRADE, THE ASSESSEE HAS NOT DONE ANY BUSINESS IN THE SHARES SO CONVERTED. THE ASSESSEE HAS NOT DONE ANY TRADING IN THE IMMEDIATE PAST ASSESSMENT 5 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 YEAR NOR DURING THE YEAR U NDER CONSIDERATION. THIS CONDUCT OF THE ASSESSEE OF CONVERTING LONG TERM INVESTMENT INTO STOCK IN TRADE IS NOT BACKED BY ANY COMMERCIAL PRUDENCE OR JUSTIFIABLE CAUSE. THE ASSESSEE HAS NOT BROUGHT ANY COGENT MATERIAL EVIDENCE ON RECORD EVEN SUBSEQUENT TO T HE YEAR UNDER CONSIDERATION TO SHOW THAT IT HAS DONE SOME TRADING OR BUSINESS IN SHARES. 13. NO DOUBT LEGITIMATE TAX PLANNING IS NOT BARRED BY ANY PROVISION OF THE LAW IN THE LIGHT OF THE DECISION OF THE SUPREME COURT (SUPRA). HOWEVER, EACH CASE HAS TO BE CONSIDERED ON THE CONDUCT OF THE ASSESSEE AND IN THE INSTANT CASE, THE CONDUCT OF THE ASSESSEE CLEARLY SUGGEST THAT HIS ONLY INTENTION WAS TO CREATE ARTIFICIAL LOSS BY CONVERTING INVESTMENT IN STOCK IN TRADE AND SETTING IT OFF AGAINST THE BAD DEBTS REC OVERED. THE SAY OF THE COUNSEL THAT THE ASSESSEE COULD HAVE DONE THIS IN THE EARLIER YEAR ITSELF WHEN THE RECOVERY WAS 8 CRORES DOES NOT SUPPORT THE CONDUCT OF THE ASSESSEE BECAUSE THE SHARES WERE PURCHASED AT THE FAG END OF THE ACCOUNTING YEAR I.E. ON 20/ 21/3/2006. THE ASSESSEE COULD NOT HAVE DONE THIS EXERCISE BECAUSE IT NEEDED A BOARD RESOLUTION WHICH HAS TO BE FILED WITH THE ROC. NOW, ON SUCH A DISALLOWANCE ON ACCOUNT OF VALUATION LOSS ON CONVERTED STOCK OF SHARES OF RS. 1,83,75,418/ - , PENALTY U/S 271(1)(C) HAS BEEN LEVIED BY THE ASSESSING OFFICER ON CONCEALMENT OF INCOME WHICH HAS BEEN COMPUTED AT RS. 95 LACS WHICH IS MORE THAN 173% OF THE TAX SOUGHT TO BE EVADED. 6 . THE LD. CIT(A) AFTER DISCUSSING THE VARIOUS CASE LAWS AND THE PHILOSOPHY BEHI ND LEVY OF PENALTY U/S 271(1)(C) HAS CONFIRMED THE PENALTY ON THE GROUND THAT THE ASSESSEE HAS DELIBERATELY CONCEALED ITS PARTICULARS OF INCOME AND THE LOSS CLAIMED ON VALUATION OF STOCK AS ON 31.3.2007 IS NOTHING BUT ARTIFICIAL LOSS TO REDUCE THE TAX LIAB ILITY. 7 . BEFORE US, THE LD. COUNSEL, SHRI J.P. BAIRAGRA AFTER EXPLAINING THE ENTIRE FACTS OF THE CASE, AS NOTED ABOVE, SUBMITTED THAT THE SHARES PURCHASED 6 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 ON 20 TH AND 21 ST MARCH, 2006 WAS CONVERTED INTO STOCK - IN - TRADE WITHIN 14 DAYS AFTER BEING APPROVED BY THE BOARD OF DIRECTORS IN THE RESOLUTION PASSED ON 3.4.2006. ON THE DATE OF CONVERSION , THE LOSS OF RS. 52,60,830/ - WAS NOTED IN THE BOOKS OF ACCOUNTS. UP TILL 3.4.2006 THERE WAS NO RECOVERY OF ANY BAD DEBT , AS ALL THE RECOVERY OF BAD DEBTS WAS POST THIS DATE , HENCE IT CANNOT BE INFERRED THAT THE ASSESSEE AT THAT TIME HAD DELIBERATELY VALUED THE STOCK AT LOSS SO AS TO SET OFF AGAINST THE FUTURE INCOME FROM RECOVERY OF BA D DEBTS. THE VALUATION LOSS WAS ONLY DETERMINED AS ON 31.3.2007 AND ASSESSEE COULD NOT HAVE ANTICIPATED THAT THE SHARE VALUE AT THE MARKET PRICE WILL BE REDUCED AFTER A PERIOD OF MORE THAN 11 MONTHS. THUS, RIGHT FROM THE STAGE OF CONVERSION OF THE SHARES INTO STOCK - IN - TRADE TILL THE VALUATION DATE OF THE STOCK AT THE END OF THE YEAR , THERE WAS NO INTENTION OF THE ASSESSEE TO SET OFF THE INCOME RECEIVED BY WAY OF RECOVERY OF BAD DEBTS BY THE ASSESSEE. THE AO HIMSELF HAS NOTED THAT THE ASSESSEE IS A MEMBER OF THE BOMBAY STOCK EXCHANGE , ENGAGED IN THE BUSINESS OF TRADING OF SHARES AND SUCH A CONVERSION OF SHARES INTO STOCK - IN - TRADE WA S PART AND PARCEL OF THE ASSESSEES NATURE OF BUSINESS, THEREFORE, IT CANNOT BE HELD THAT THERE WAS SOME COLOURABLE DEVICE FOR CONVERTING THE SHARES INTO STOCK - IN - TRADE AND NOT ONLY THAT, TO ANTICIPATE THAT THERE WOULD BE REDUCTION IN THE VALUE OF THE SHARES AFTER ONE YEAR. THUS, THE WHOLE PREMISE ON WHICH THE DISALLOWANCE HAS BEEN MADE CANNOT BE SUSTAINED, ATLEAST NO PENALTY CA N BE LEVIED EITHER FOR CONCEALMENT OF INCOME OR FOR FURNISHING OF INACCURATE PARTICULARS. HE ALSO POINTED OUT BEFORE US THAT AS ON TODAY, SHARES ARE STILL LYING WITH THE ASSESSEE AND NOW THE PRICE OF SHARES HAVE SHOT UP MANIFOLD AND IF THESE SHARES ARE TO BE SOLD, THEN, THERE WOULD BE A TAXABLE INCOME AND IF SUCH SHARES WERE TO BE HELD AS INVESTMENT, THEN, THERE WOULD BE HUGE EXEMPT INCOME. THIS SHOWS THAT ASSESSEE ACTED PURELY BONAFIDELY . 7 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 8. HIS SECOND LIMB OF ARGUMENT WAS THAT THE AO IN THE COURSE OF A SSESSMENT ORDER HAD INITIATED THE PENALTY PROCEEDINGS ON THE GROUND OF FURNISHING OF INACCURATE PARTICULARS OF INCOME . THUS, SATISFACTION OF THE AO AT THE TIME OF PASSING OF THE ASSESSMENT ORDER WAS FOR FURNISHING OF INACCURATE PARTICULARS , HOWEVER, W HILE ISSUING THE NOTICE U/S 274 R.W.S 271 THE AO HAS NOT MADE IT CLEAR UNDER WHICH GROUND THE PENALTY PROCEEDINGS HAVE BEEN INITIATED. LATER ON, IN THE PENALTY ORDER THE AO HAS LEVIED PENALTY ON CONCEALMENT OF INCOME , THAT IS, ON TOTALLY DIFFERENT GROUND . EVEN THE LD. CIT(A) TOO HAS CONFIRMED THE PENALTY ON THE GROUND OF CONCEALMENT OF PARTICULARS OF INCOME. THUS, THE PENALTY WAS INITIATED ON A DIFFERENT GROUND AND IT HAS BEEN LEVIED ON AN ENTIRELY DIFFERENT GROUND, THEREFORE, SUCH PENALTY ORDER CANNOT BE SUSTAINED. THIS FACT HAS ALSO BEEN NOTED BY THE LD. CIT(A) IN PARA 2.3.2 AND 2.3.3 AND DESPITE NOTING THIS DIFFERENCE IN THE LEGAL POSITION, THE LD. CIT(A) HAS CONFIRMED THE PENALTY. HE SUBMITTED THAT NOW THERE IS A CATENA OF DECISIONS OF VARIOUS HON BLE HIGH COURTS STATING THAT THE AO IS UNDER OBLIGATION TO SPECIFY THE GROUND ON WHICH THE PENALTY IS BEING INITIATED AND FAILURE TO DO SO WILL VITIATE THE WHOLE PENALTY PROCEEDINGS. THIS PROPOSITION , HE SUBMITTED IS SUPPORTED BY THE DECISION OF THE HONB LE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. MANJUNATHA COTTON & GINNING FACTORY REPORTED IN 359 ITR 565 AND THE HONBLE GUJARAT HIGH COURT IN THE CASE OF MANU ENGINEERING REPORTED IN 122 ITR 306 AND HONBLE DELHI HIGH COURT IN THE CASE OF VIRGO MARKETIN G REPORTED IN 171 TAXMAN 156 . THUS, HE SUBMITTED THAT ON THIS GROUND ALSO THE PENALTY CANNOT BE LEVIED. 9 . ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON THE ORDER OF THE LD. CIT(A) AND SUBMITTED THAT , HERE IN THIS CASE, THE ASSESSEE HAS TRIED TO SET OFF A HUGE INCOME ON ACCOUNT OF RECOVERY OF BAD DEBT S BY PASSING A BOOK 8 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 ENTRY AND VALUING THE STOCK AT LOSS. THIS WAS DONE WHEN THE ASSESSEE REALIZED THAT THE MARKET VALUE OF THE SHARES HAD FALLEN DOWN AND SUCH A LOSS CAN EASILY BE USED FOR SETTING OFF THE IN COME AND THEREBY REDUCING THE TAX LIABILITY. THIS PRECISELY HAS BEEN HELD BY THE TRIBUNAL IN PARA 12 & 13 OF ITS ORDER. SUCH A FINDING OF FACT BY THE TRIBUNAL IS FINAL AND, T HEREFORE, PENALTY ON THESE FACTS HAS RIGHTLY BEEN LEVIED AND CONFIRMED. 10 . WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDER AS WELL AS THE MATERIALS PLACED ON RECORD. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE IS A MEMBER OF THE BSE AND IS ENGAGED IN THE BUSINESS OF TRADING AND DEALING I N SHARES AND SECURITIES. THE ASSESSEE HAD PURCHASED SHARES ON 20 TH & 21 ST MARCH, 2006 AND WITHIN 14 DAYS THE SAID SHARES, WHICH WERE BOUGHT AS AN INVESTMENT, WAS CONVERTED INTO STOCK - IN - TRADE. SUCH A CONVERSION WAS AUTHORIZED BY THE BOARD OF DIRECTORS VI DE BOARD RESOLUTION DT. 3.4.2006, THE RELEVANT EXTRACT OF WHICH READS AS UNDER : BOARD RESOLUTION EXTRACT OF MINUTES OF THE MEETING OFTHE BOARD OF DIRECTORS OF CLARIDGES INVESTMENT AND FINANCE PRIVATE LIMITED HELD ON, 3 RD APRIL, 2006 AT 11.00 A.M. AT THE REGISTERED OFFICE OF THE COMPANY. RESOLVED THAT LONG TERM INVESTMENT IN THE FULLY PAID UP 1,00,000 EQUITY SHARES OF RS. 10 EACH AND 901,725. 5% PREFERENCE SHARES OF RS.100 EACH OF SAKUMA EXPORTS LTD. BE AND HEREBY CONVE RTED INTO STOCK IN TRADE AT CURRENT MARKET RATE. FURTHER RESOLVED THAT DIRECTORS OF THE COMPANY BE AND HEREBY AUTHORIZED TO SIGN ALL THE PAPERS AND DOCUMENTS WHICH MAY BE NECESSARY FOR THE CONVERTING THIS INVESTMENT INTO STOCK IN TRADE AND OTHER REQUIREM ENTS ON BEHALF OF THE COMPANY. 9 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 AFTER THE CONVERSION, THE STOCK OF SHARES WAS VALUED AT LOSS OF RS.52,60,830/ - IN THE BOOKS OF ACCOUNTS , DETAILS OF WHICH HAS ALREADY BEEN INCORPORATED IN THE FOREGOING PARAGRAPHS. THE MAIN REASON FOR DISALLOWANCE BY THE A O WAS THAT THE ASSESSEE - COMPANY HAS ADOPTED A DEVICE OF BOARD R ESOLUTION FOR CONVERSION OF INVESTMENT INTO STOCK - IN - TRADE AND THEN VALUED THE STOCK - IN - TRADE AT COST OR MARKET PRICE WHICHEVER IS LOWER WITH THE INTENTION TO SET OFF THE LOSS AGAINST INCOME FROM RECOVERY OF BAD DEBTS AND SUCH AN ACTION WAS CLEARLY A COLOURABLE DEVICE. THE TRIBUNAL TOO HAS CONFIRMED THE SAID DISALLOWANCE AND UPHELD THE ACTION OF THE AUTHORITIES BELOW , MAINLY ON FOLLOWING GROUNDS : I) FIRSTLY, T HERE WAS NO BUSINESS OPERATION OF SHARES IN THE IMMEDIATELY PRECEDING YEAR AND NO REASON HAS BEEN GIVEN BY THE BOARD OF DIRECTORS AS TO WHY WITHIN 14 DAYS OF THE PURCHASE OF SHARES AS LONG TERM INVESTMENT HAS BEEN CONVERTED INTO STOCK - IN - TRADE; II) SECONDLY, A FTER CONVERSION, THE ASSESSEE HAS NOT DONE ANY BUSINESS OF CONVERTED SHARES AND THIS CONDUCT OF THE ASSESSEE OF CONVERTING INVESTMENTS INTO STOCK - IN - TRADE IS NOT BACKED BY ANY COMMERCIAL PRUDENCE; AND III) LASTLY, T HE ASSESSEE HAS NOT SHOWN WHETHER THE BOARD RESOLUTION WAS FILED WITH THE ROC. THUS, ON THESE GROUNDS THE DISALLOWANCE OF RS. 1,83,75,418/ - HAS BEEN CONFIRMED ON WHICH NOW HUGE PENALTY HAS BEEN LEVIED. 11 . IT IS TRITE LAW THAT THE QUANTUM AND PENALTY PROCEEDINGS ARE SEPARATE AND DISTINCT PROCEEDINGS AND FINDING GIVEN IN THE QUANTUM PROCEEDINGS MAY HAVE SOME PROBATIVE VALUE BUT SUCH FINDING AND MATERIAL ALONE MAY 10 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 NOT JUSTIFY THE IMPOSITION OF PENALTY IN A GIVEN CASE. THE CONSIDERATI ONS WHICH ARISE IN THE PENALTY PROCEEDINGS ARE SEPARATE AND DIFFERENT FROM THE ASSESSMENT PROCEEDINGS BECAUSE, A T THE TIME OF LEVY OF PENALTY THE MATTER HAS TO BE EXAMINED AFRESH WHETHER ASSESSEE IS GUILTY OF FURNISHING INACCURATE PARTICULARS OF INCOME OR CONCEALMENT OF INCOME AND CANNOT BE SOLELY GUIDED BY THE FINDINGS GIVEN IN THE QUANTUM SIDE. THE ASSESSEE IN THE COURSE OF THE ASSESSMENT PROCEEDINGS MAY ADDUCE SOME ADDITIONAL EVIDENCE OR RELY ON S A ME MATERIAL TO ESTABLISH THAT IT IS NOT GUILTY FOR LEVY OF PENALTY AND THE CLAIM WAS MADE ON A BONA FIDE BELIEF AND REASONABLE GROUND AT THE TIME OF FILING OF THE RETURN OF INCOME. IN THE PENALTY PROCEEDINGS THE SAME MATERIAL HAS TO BE REAPPRAISED FROM THE ANGLE WHETHER ASSESSEE HAS ACTUALLY FURNISHED INACCURA TE PARTICULARS OR HAS CONCEALED PARTICULARS OF INCOME OR NOT. FIRST OF ALL, THE ENTIRE OBSERVATIONS OF THE TRIBUNAL ARE BASED ON THE PREMISE AND HYPOTHESIS THAT THE ASSESSEE HAS NOT DONE ANY BUSINESS IN SHARES WHICH WAS CONVERTED INTO STOCK - IN - TRADE. SUC H A PREMISE AND OBSERVATION MAY BE THE GROUND TO DRAW ADVERSE INFERENCE BECAUSE THE ASSESSEE MAY NOT SELL THE STOCK IN THIS YEAR AND MAY DO SO IN THE SUBSEQUENT YEARS. THEREFORE, THIS CANNOT BE THE GROUND FOR DIS - BELIEVING THE CONVERSION OF INVESTMENT INT O STOCK - IN - TRADE. OTHERWISE ALSO , COMMERCIAL PRUDENCE HAS TO BE SEEN FROM THE ASSESSEE S POINT OF VIEW , WHETHER IT WANTS TO SELL ITS STOCK - IN - TRADE THIS YEAR OR IN THE SUBSEQUENT YEAR. THE THIRD MAIN GROUND TAKEN BY THE TRIBUNAL THAT THE BOARD RESOLUTION HAS NOT BEEN FILED WITH THE ROC , AGAIN CANNOT BE THE CRITERIA FOR DOUBTING THE GENUINENESS OF THE BOARD RESOLUTION BECAUSE APPARENTLY THERE IS NO LAW UNDER THE COMPANIES ACT OR ATLEAST NOTHING HAS BEEN BROUGHT BEFORE US THAT THE BOARD RESOLUTION HAS TO BE FILED BEFORE THE ROC. SUCH PREMISE OF THE TRIBUNAL CANNOT BE THE GUIDING FACTOR OR FAIT ACCOMPLI IN THE PENALTY PROCEEDINGS. THE AO HAS INVOKED E XPLANATION TO SEC. 271(1)(C). 11 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 EXPLANATION 1 TO SEC. 271(1)(C) RAISES A REBUTTABLE PRESUMPTION WHICH CAN BE REBUTTED BY THE ASSESSEE BY POINTING OUT TO THE FACTORS AND MATERIAL ON RECORD THAT THE CLAIM MADE IN THE RETURN OF INCOME WAS NOT ONLY BONA FIDE , BUT WAS ALSO SUBSTANTIATED BY EVIDENCE AND MAT ERIAL ON RECORD AT THAT TIME . THE ONUS CAST UPON UNDER E XPLANATION IS LIKE A CIVIL SUIT, THAT IS, PREPONDERANCE OF PROBABILITIES. IF THE PROBABLE FACTORS SUPPORT THE CLAIM OF THE ASSESSEE, THEN, WITHOUT THEIR BEING REBUTT AL OR ADVERSE MATERIAL TO DOUBT S UCH A PROBABILITY , THEN THE PRESUMPTION HAS TO BE DRAWN IN FAVOUR OF THE ASSESSEE AND THE ONUS , THEN SHIFTS HEAVILY UPON THE REVENUE TO PROVE THAT THE ASSESSEES EXPLANATION ON BONA FIDE BELIEF IS FALSE. HERE, IN THIS CASE, ALL THE PROBABLE FACTORS WERE I N FAVOUR OF THE ASSESSEE WHICH CAN BE GAUGED BY THE FACT THAT THE CONVERSION OF SHARES FROM INVESTMENT TO STOCK - IN - TRADE WAS FULLY SUPPORTED BY BOARD R ESOLUTION AND ENTRIES IN THE BOOKS OF ACCOUNTS. THERE IS NO OTHER MECHANISM TO SHOW THE CONVERSION FROM INVESTMENT TO STOCK - IN - TRADE. THE LOSS ON THE DATE OF CONVERSION IS SUPPORTED BY THE MARKET DATA AVAILABLE IN THE PUBLIC DOMAIN, THAT IS, AS LISTED IN THE STOCK EXCHANGE. AT THE TIME OF CONVERSION OF STOCK - IN - TRADE , THERE WAS NO RECOVERY OF BAD DEBTS UP TILL 3.4.2006 (I.E. ON THE DATE OF CONVERSION), HENCE IT CANNOT BE INFERRED THAT THE ASSESSEE HAD INTENDED TO SET OFF THE FUTURE BAD DEBTS RECOVERY FROM THE LOSS ON CONVERSION AND LATER ON VALUATION OF THE STOCK AT THE YEAR END . ANOTHER IMPORTANT FACTOR W HICH HAS BEEN POINTED OUT BY THE LD. COUNSEL AT THE TIME OF THE HEARING IS THAT , NOW IN A.Y 2015 - 16 THE VALUE OF THE SHARES HAS SHOT UP MANIFOLD AND IF THE ASSESSEE HAS TO PAY TAX NOW ON SUCH SHARES ( WHICH IS STILL BEING HELD BY THE ASSESSEE ), THEN THE ASS ESSEE WILL HAVE HUGE INCOME TAX LIABILITY OF MORE THAN RS. 22.72 LACS W HEREAS, H AD IT BEEN HELD AS INVESTMENT, THEN, THE ENTIRE INCOME WOULD HAVE BEEN EXEMPT U/S 10(38) . IF WE TAKE INTO ACCOUNT THE FUTURE EVENT OF A.Y 2015 - 16 , WHEN THE VALUE OF THE SHARES HAVE 12 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 SHOT UP, THEN, IT CANNOT BE HELD THAT THE ASSESSEE HAS PLANNED ANY COLOURABLE DEVICE DELIBERATELY ONLY TO SET OFF THE RECOVERY OF BAD DEBTS. THE LOSS ON ACCOUNT OF VALUATION OF STOCK AS ON 31.3.2007 IS ACTUALLY A BOOK LOSS AS PER THE MARKET R ATE. UNDER THESE FACTS AND SURROUNDING CIRCUMSTANCES THE LOSS ON CONVERSION CANNOT BE DOUBTED AS ALL THESE FACTORS STRONGLY POINT OUT THAT THE LOSS OF RS.1,83,75,418/ - IS GENUINE LOSS AND NO PENALTY CAN BE LEVIED ON DISALLOWANCE OF SUCH A LOSS. THE ASSESS EES EXPLANATION AND THE CLAIM HAS NOT BEEN REBUTTED BY BRINGING ANY MATERIAL ON RECORD EXCEPT FOR REJECTING THE SAME ON THE BASIS OF PRESUMPTION AND SURMISE THAT THE LOSS HAS BEEN SHOWN PURELY TO SET OFF THE RECOVERY OF BAD DEBTS. THUS, THE PENALTY LEVIE D ON SUCH A DISALLOWANCE CANNOT BE UPHELD AND SAME IS DIRECTED TO BE DELETED ON MERITS . 12 . ANOTHER IMPORTANT THING WHICH IS TO BE NOTED HERE IS THAT, IN THE QUANTUM PROCEEDINGS THE AO HAS DISALLOWED THE LOSS ON ALTERNATE GROUND ALSO BY INVOKING E XPLANATI ON TO SEC. 73 , HOLDING THAT IT IS A SPECULATION LOSS. HOWEVER, NEITHER IN THE PENALTY ORDER NOR IN THE SUBSEQUENT QUANTUM ORDER THIS ISSUE HAS BEEN DECIDED. THEREFORE, THE SAME CANNOT BE HELD TO BE A GROUND FOR LEVY OF PENALTY. MOREOVER, BEFORE US THE L D. COUNSEL HAD POINTED OUT THAT IN A.Y 2008 - 09 THE AO HAD DISALLOWED A SIMILAR LOSS AS SPECULATIVE LOSS BY INVOKING EXPLANATION TO SEC. 73, HOWEVER, NO PENALTY PROCEEDINGS HAVE BEEN INITIATED. THEREFORE, ON THESE FACTS IT CANNOT BE HELD THAT PENALTY CAN BE CONFIRMED ON THIS ALTERNATE GROUND TAKEN BY THE AO. 1 3 . COMING TO THE LAST LIMB OF THE ARGUMENT OF THE LD. COUNSEL THAT PENALTY HAS BEEN INITIATED ON THE GROUND OF FURNISHING OF INACCURATE PARTICULARS AND LATER ON HAS BEEN LEVIED ON ACCOUNT OF CONCEA LMENT OF INCOME, THEREFORE, SUCH A PENALTY C ANNOT BE SUSTAINED . W E AGREE WITH SUCH A CONTENTION OF THE LD. COUNSEL THAT THE TWO CHARGES FOR INITIATING THE 13 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 PENALTY , THAT IS, CONCEALMENT OF PARTICULARS OF INCOME AND FURNISHING OF INACCURATE PARTICULARS OF I NCOME OPERATE ON TWO DIFFERENT FOOTING AND IF PROCEEDINGS HAVE BEEN INITIATED ON THE CHARGE OF FURNISHING OF INACCURATE PARTICULARS, SAME CANNOT BE LEVIED ON CHARGE OF CONCEALMENT OF INCOME. THERE HAS TO BE A CLEAR - CUT FINDING ABOUT THE CHARGE OF PENALTY RIGHT FROM THE INITIATION STAGE TO SHOW CAUSE NOTICE STAGE AND FINALLY AT THE STAGE OF LEVY OF PENALTY. THERE CANNOT BE ANY INCONGRUITY IN THE INITIATION AND LEVY OTHERWISE THE WHOLE CHARGE FRAMED BY THE AO GETS VITIATED. SUCH A CONTENTION IS NOW DULY FINDS SUPPORT BY THE HONBLE HIGH COURT AS HAS BEEN REFERRED AND RELIED UPON BY THE LD. COUNSEL. T HE HONBLE HIGH COURTS HAVE BEEN CONSISTENT IN HOLDING THAT THE AO HAS TO INVOKE SPECIFIC CHARGE FOR INITIATING THE PENALTY AND THE SAME HAS TO BE SPECIFICAL LY MENTIONED IN THE SHOW CAUSE NOTICE ITSELF OTHERWISE IT IS FATAL ON LEVY OF PENALTY ITSELF . THIS VIEW HAS BEEN CATEGORICALLY UPHELD BY THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF MANJUNATHA COTTON & GINNING FACTORY ( SUPRA ). THUS, ON THIS COUNT ALSO, THE PENALTY LEVIED BY THE AO IS LIABLE TO BE QUASHED. ACCORDINGLY, IN VIEW OF THE FINDING GIVEN ABOVE THE PENALTY OF RS.95 ,00,000/ - , AS CONFIRMED BY THE LD. CIT(A), STANDS DELETED AND CONSEQUENTLY, THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. 1 4 . IN TH E RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH JANUARY, 2016. SD/ - SD/ - ( RAJESH KUMAR ) ACCOUNTANT MEMBER (AMIT SHUKLA) JUDICIAL MEMBER MUMBAI, DATE : 20 TH JANUARY, 2016 14 M/S.CLARIDGES INVESTMENTS & FINANCE P.LTD ITA NO.7365/MUM/2013 COPY TO : 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT(A) - 8 , MUMBAI 4) THE ITO - 4(1)(1) , MUMBAI 5) THE D.R, C BENCH, MUMBAI 6) GUARD FILE BY ORDER DY./ASSTT. REGISTRAR I.T.A.T, MUMBAI *SSL*