THE ITO 9(1)-3, MUMBAI v. M/S. EQUATOR HOLDING PVT. LTD, MUMBAI

ITA 6297/MUM/2007 | 2003-2004
Pronouncement Date: 07-05-2010 | Result: Dismissed

Appeal Details

RSA Number 629719914 RSA 2007
Assessee PAN OFMAY2010C
Bench Mumbai
Appeal Number ITA 6297/MUM/2007
Duration Of Justice 2 year(s) 6 month(s) 27 day(s)
Appellant THE ITO 9(1)-3, MUMBAI
Respondent M/S. EQUATOR HOLDING PVT. LTD, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 07-05-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted J
Tribunal Order Date 07-05-2010
Date Of Final Hearing 28-04-2010
Next Hearing Date 28-04-2010
Assessment Year 2003-2004
Appeal Filed On 11-10-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI J BENCH MUMBAI BEFORE SHRI N.V. VASUDEVAN (JUDICIAL MEMBER) AND SHRI PRAMOD KUMAR (ACCOUNTANT MEMBER) ITA NO.6297/MUM./2007 ASSESSMENT YEAR : 2003-04 DATE OF HEARING 28.4.2010 INCOME TAX OFFICER 9(1) 3 R.NO.224 AAYAKAR BHAVAN M.K. ROAD MUMBAI 400 020 .. APPELLANT VS M/S. EQUATOR HOLDINGS P. LTD. MUKTANGAN 10 TH FLOOR SAROJINI ROAD SANTACRUZ (WEST) MUMBAI 400 054 RESPONDENT APPELLANT BY : SHRI PRABHAT JHA RESPONDENT BY : SHRI KIRIT R. KAMDAR O R D E R PER PRAMOD KUMAR A.M. 1. BY WAY OF THIS APPEAL THE ASSESSING OFFICER HAS CHALLENGED CORRECTNESS OF COMMISSIONER (APPEAL)S ORDER DATED 18 TH JULY 2007 FOR THE ASSESSMENT YEAR 2003- 04. ITA NO.6297/MUM./2007 EQUATOR HOLDINGS P. LTD. [2] 2. IN THE FIRST GROUND OF APPEAL THE ASSESSING OFFICE R HAS RAISED THE FOLLOWING GRIEVANCE:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) ERRED IN DELETING THE ASSESSING OFFI CERS ADDITION OF RS.4 19 805/- MADE ON ACCOUNT OF CHANGE IN METHOD O F VALUATION OF CLOSING STOCK WITHOUT APPRECIATING THE FACT THAT SE CTION 144(A) READ WITH SECTION 145(3) DOES NOT PERMIT SUDDEN CHANGE I N VALUATION AND THE PROFITS ARE REQUIRED TO BE OFFERED DURING THE TRANS ITIONAL PERIOD. 3. THE RELEVANT MATERIAL FACTS ARE AS FOLLOWS. THE ASS ESSEE IS ENGAGED IN THE BUSINESS OF DEALING IN SHARES. DURING THE SCRUTINY PROCEEDINGS THE ASSESSING OFFICER NOTICED THAT THERE IS A CHANGE IN THE METHO D OF ACCOUNTING FOLLOWING THIS YEAR. IT WAS NOTED AS AGAINST VALUATION OF CLOSING STOCK AT MARKET VALUE ALL ALONG THE ASSESSEE HAS NOW SWITCHED TO COST PRICE OR MARKET PRICE WHICHEVER IS LOWER . THE ASSESSING OFFICER FURTHER NOTED THAT AS A RESULT OF THIS CHANGE THE PROFIT FOR THE YEAR HAS BEEN REDUCED BY RS.4 19 805/- . THE ASSESSING OFFICER REJECTED THE CHANGE ON THE GROUND THAT EVEN THOUGH IT IS BONAFIDE THE ASSESSEE IS REQUIRED TO OFFER PROFITS TO TAX DURING TRANSITIONAL PERIOD SO AS TO REGULARIZE THE SAID CHANGE WHICH AS THE ASSESSING OFFICER NOTED HAS RESULTED IN SUPPRESSION OF INCOME CHARGEABLE TO TAX AN ADDITION OF RS.4 19 805/- WAS ACCORDINGLY MADE TO THE RETURNED INCOME. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEA L BEFORE THE LEARNED CIT(A) WHO REVERSED THE ACTION OF THE ASSESSING OFFICER BY OBS ERVING AS FOLLOWS:- 2.3 I HAVE CONSIDERED THE A.OS AS WELL AS THE APP ELLANTS CONTENTION. THERE IS FORCE IN THE APPELLANTS CONTENTION THAT I F THE CHANGE IS BONAFIDE AND THE ASSESSEE HAS ADOPTED ESTABLISHED A ND SETTLED PRACTICE EVEN IF THE TAXABLE INCOME IS REDUCED ON ACCOUNT OF THE CHANGED METHOD OF STOCK VALUATION IT IS NOT OPEN TO THE REVENUE T O ADD ANY AMOUNT IN THE TAXABLE INCOME OF THE ASSESSEE WHICH IS RESULTI NG EFFECT OF CHANGED METHOD OF VALUATION. IN THE APPELLANTS CASE THE P ROFIT RESULTING ON ACCOUNT OF DIFFERENCE IN VALUATION OF CLOSING STOCK IS NOTIONAL IN NATURE AND THERE IS NO TRANSFER OF STOCK. IT IS ALSO FOUND THAT THE CHANGED METHOD HAS BEEN CONSISTENTLY FOLLOWED IN THE SUBSEQ UENT YEARS ALSO. ITA NO.6297/MUM./2007 EQUATOR HOLDINGS P. LTD. [3] CONSIDERING THE APPELLANTS CONTENTION AND RESPECTF ULLY FOLLOWING THE JUDGMENT CITED ABOVE I AM OF THE VIEW THAT THE APP ELLANT HAS FOLLOWED RECOGNIZED AND SETTLED ACCOUNTING PRACTICE OF ACCOU NTING. THEREFORE THE CHANGE IS BONAFIDE. THE ADDITION MADE BY THE A.O. I S THEREFORE DELETED. 4. AGGRIEVED OF THE RELIEF SO GIVEN BY THE LEARNED CIT (A) THE ASSESSING OFFICER IS IN APPEAL BEFORE US. 5. HAVING HEARD THE RIVAL CONTENTION AND HAVING PERUSE D THE MATERIAL ON RECORD WE ARE NOT INCLINED TO DISTURB THE CONCLUSION ARRIV ED AT BY THE LEARNED CIT(A). IT IS PLAIN ON PRINCIPLE THAT WHEN MARKET VALUE OF STOCK IS TAKEN INTO ACCOUNT FOR COMPUTATION OF BUSINESS PROFITS AND WHEN SUCH MARKE T VALUE IS HIGHER THAN COST AS IS THE POSITION ON THE FACTS OF THE CASE BEFORE US IT RESULTS IN BRINGING TO CHARGE APPRECIATION IN VALUE OF UNSOLD STOCK SOMETHING W HICH IS CLEARLY IMPERMISSIBLE IN VIEW OF FIRST PRINCIPLES OF STOCK VALUATION AS SUCC INCTLY SET OUT IN THE LANDMARK JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF CH AINRUP SAMPATRAM VS CIT 24 ITR 481. THE IMPUGNED ADJUSTMENT MADE BY THE ASSESS ING OFFICER IS UNSUSTAINABLE IN LAW FOR THIS FUNDAMENTAL REASON ITSELF. THAT APA RT THERE IS NO DISPUTE THAT THE CHANGE IN VALUATION METHOD IS BONAFIDE AND HAS BEEN CONSISTENTLY FOLLOWED IN ALL SUBSEQUENT YEARS. IN VIEW OF THESE DISCUSSIONS AND BEARING IN MIND ENTIRETY OF THE CASE WE APPROVE THE CONCLUSION ARRIVED AT BY THE L EARNED CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 6. GROUND NO.1 IS THUS DISMISSED. 7. IN GROUND NO.2 THE ASSESSEE HAS RAISED THE FOLLOWI NG GRIEVANCE:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) ERRED IN ADMITTING THE EVIDENCE FILE D BY VIRTUE OF RULE 46(A)(1) OF THE I.T. RULES WITHOUT APPRECIATING THE FACT THAT THE ITA NO.6297/MUM./2007 EQUATOR HOLDINGS P. LTD. [4] EVIDENCES IN RESPECT OF ALLOWABILITY OF BAD DEBTS W ERE NOT FILED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 8. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THE ISSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY HON'BLE SUPREME COURTS DECISIO N IN THE CASE OF TRF LTD. VS CIT 2010TIOL15SCIT) BECAUSE IN ANY EVENT THE AMOU NT WAS DULY WRITTEN OFF IN THE BOOKS OF ACCOUNT AND ASSESSEE WAS NOT REALLY RE QUIRED TO ESTABLISH THAT THE AMOUNT HAS BECOME UNRECOVERABLE. NO INTERFERE IS TH US CALLED FOR IN THE DECISION OF THE LEARNED CIT(A). WE APPROVE THE SAME. 9. GROUND NO.2 IS ALSO DISMISSED. 10. IN GROUND NO.3 THE ASSESSEE HAS RAISED THE FOLLOWI NG GRIEVANCE:- 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED CIT(A) ERRED IN DELETING THE ASSESSING OFFI CERS ADDITION OF RS.19 32 557/- U/S 41(1) WITHOUT APPRECIATING THE F ACT THAT THE SUM OF RS.18 00 000/- WAS NOT PAYABLE BY THE ASSESSEE TO M /S. FAIR GROWTH FINANCIAL SERVICES AS THE SPECIAL COURT AT MUMBAI H AD ALREADY CONSIDERED THAT THE ASSESSEE HAS PAID THE AMOUNTS B Y TRANSFERRING SHARES IN EXCESS OF ITS DUES TO M/S. FAIR GROWTH FI NANCIAL SERVICES. 11. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AS SESSING OFFICER INTER- ALIA NOTED THAT THE ASSESSEE HAD TO PAY AN AMOUNT OF RS.18 00 000/- TO FAIR GROWTH FINANCIAL SERVICES LTD. WHICH WAS SECURED BY THIRD PARTY PLEDGE OF SHARES BUT THE SAME IS NO LONGER PAYABLE UNDER THE SETTLEMENT. THE ASSESSING OFFICER THUS TREATED THE SAID AMOUNT ALONG WITH RS.1 32 559/- AS INTERES T CREDITED THEREON AS INCOME OF THE ASSESSEE U/S 41(1) OF THE ACT. WITHOUT PREJUDI CE TO THIS GROUND THE ASSESSING OFFICER ALSO TREATED THIS AMOUNT AS UNEXPLAINED CRE DITS IN BOOKS OF ACCOUNT. AGGRIEVED ASSESSEE CARRIED THE MATTER IN APPEAL BE FORE THE LEARNED CIT(A) WHO REVERSED THE ACTION OF THE ASSESSING OFFICER AND OB SERVED AS FOLLOWS:- ITA NO.6297/MUM./2007 EQUATOR HOLDINGS P. LTD. [5] 4.2 THERE IS FORCE IN THE APPELLANTS SUBMISSION T HAT NO ADDITION CAN BE MADE U/S 41(1) OR U/S 68 OF THE I.T. ACT SINCE THE APPELLANT HAD NOT CLAIMED ANY DEDUCTION OF LOAN AMOUNTING TO RS.18 LA CS IN ANY EARLIER A.YS. SUB-SECTION I OF SECTION 41 PROVIDES THAT WHE RE AN ALLOWANCE OR DEDUCTION HAS BEEN MADE IN THE ASSESSMENT FOR ANY Y EAR IN RESPECT OF ANY LOSS EXPENDITURE OR TRADING LIABILITY AND SUBS EQUENTLY DURING ANY PREVIOUS YEAR THE ASSESSEE HAS RECEIVED WHETHER IN CASH OR IN ANY OTHER MANNER WHATSOEVER OR THE ASSESSEE IS BENEFITED BY THE REMISSION OF CESSATION THEREOF THE AMOUNT THUS OBTAINED BY HIM SHALL BE DEEMED TO BE PROFITS AND GAINS OF BUSINESS AND ACCORDINGLY CH ARGEABLE TO INCOME TAX AS THE INCOME OF THAT PREVIOUS YEAR. IN THE APP ELLANTS CASE NO SUCH EVIDENCE HAS BEEN BROUGHT ON RECORD HENCE I AM IN CLINED TO AGREE WITH THE APPELLANT THAT NO ADDITION CAN BE MADE U/S 41(1 ) OF THE I.T. ACT. BESIDES THIS IT IS ALSO OBSERVED THAT THE INTEREST AMOUNTING TO RS.1 32 559/- HAS ALSO BEEN CLAIMED IN PURSUANT TO COURTS ORDER WHERE THE HONBLE COURT HAS HELD INTEREST WAS DUE AND PAY ABLE BY THE PETITIONERS (APPELLANT IS ALSO ONE OF THE PETITIONE R) TO THE RESPONDENT I.E. FAIR GROWTH FINANCIAL SER VICES AND THEREFORE IT IS AN ALLOWABLE DEDUCTION. FURTHER THE A.OS ACTION IN INVOKING TH E PROVISIONS OF SECTION 68 IS ALSO NOT CORRECT SINCE THE TRANSACTION WAS T AKEN PLACE IN ASSESSMENT YEAR. 1993-94 AND IF ANY ACTION IS TO BE TAKEN IT SHOULD HAVE BEEN TAKEN IN THE YEAR WHEN THE LOAN WAS TAKEN. UND ER THE CIRCUMSTANCES AND FACTS OF THE CASE THE ADDITION I S HEREBY DELETED. 12. AGGRIEVED BY THE RELIEF SO GIVEN BY THE LEARNED CIT (A) THE ASSESSING OFFICER IS IN APPEAL BEFORE US. 13. WE HAVE HEARD THE RIVAL CONTENTIONS PERUSED THE MA TERIAL ON RECORD AND DULY CONSIDERED THE APPLICABLE LEGAL POSITION AS ALSO TH E FACTUAL MATRIX OF THE CASE. AS THE LEARNED CIT(A) RIGHTLY OBSERVES THE QUESTION OF ADDITION U /S 41(1) ARISES ONLY WHEN AMOUNT WRITTEN BACK IS CLAIMED AS DEDUCTION IN EARLIER YEA RS. THE PROVISIONS OF SECTION 68 CAN ALSO NOT BE APPLIED ON THE FACTS OF THE PRESENT CASE AS CREDIT IS DULY EXPLAINED AND INTEREST CREDIT IS ALSO IN ACCORDANCE WITH THE DIRECTIONS OF HONBL E SPECIAL COURT. WHATEVER AMOUNT HAS BEEN DEDUCTED IN COMPUTATION OF BUSINESS PROFITS IN EARLIER YEARS IN RESPECT OF THIS TRANSACTION I.E. INTEREST OF RS.37 80 000/- AND WHICH IS NO LONGER PAYABLE HAS ANYWAY BEEN OFFERED AS INCOME U/S 41(1) BY THE ASSESSEE. THAT A PART THE AMOUNT SHOWN AS PAYABLE TO FAIR GROWTH IS TO BE SETTLED ON SALE OF SHARES. NON E OF THESE FACTS HAVE BEEN CONTROVERTED BY THE LEARNED DEPARTMENTAL REPRESENTATIVE. IN VIEW OF THESE FACTS AS ALSO BEARING IN MIND THE ITA NO.6297/MUM./2007 EQUATOR HOLDINGS P. LTD. [6] ENTIRETY OF THE CASE WE APPROVE THE CONCLUSION ARR IVED AT BY THE LEARNED CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 14. GROUND NO.3 IS ALSO THUS DISMISSED. 15. IN THE RESULT APPEAL IS DISMISSED. PRONOUNCED IN T HE OPEN COURT TODAY ON 7 TH DAY OF MAY 2010. SD/- (N.V. VASUDEVAN) JUDICIAL MEMBER SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER MUMBAI; 7 TH DAY OF MAY 2010 COPIES OF THE ORDER FORWARDED TO : (1) THE APPELLANT (2) THE RESPONDENT (3) CIT MUMBAI (4) CIT(A) MUMBAI (5) DR J BENCH (6) GUARD FILE TRUE COPY BY ORDER ETC. ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL PRADEEP J. CHOWDHURY MUMBAI BENCHES SR. PRIVATE SECRETARY ITA NO.6297/MUM./2007 EQUATOR HOLDINGS P. LTD. [7] DATE INITIAL 1. DRAFT DICTATED ON 3.5.2010 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 4.5.2010 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4.5.2010 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 4.5.2010 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 4.5.2010 SR.PS/PS 6. DATE OF PRONOUNCEMENT 7.5.2010 SR.PS 7. FILE SENT TO THE BENCH CLERK SR.PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER