ACIT 7(3), v. M/s Tata Housing Development Co. Ltd,

ITA 6739/MUM/2003 | misc
Pronouncement Date: 05-04-2010 | Result: Allowed

Appeal Details

RSA Number 673919914 RSA 2003
Assessee PAN NJUNE1996W
Bench Mumbai
Appeal Number ITA 6739/MUM/2003
Duration Of Justice 6 year(s) 5 month(s) 20 day(s)
Appellant ACIT 7(3),
Respondent M/s Tata Housing Development Co. Ltd,
Appeal Type Income Tax Appeal
Pronouncement Date 05-04-2010
Appeal Filed By Department
Order Result Allowed
Bench Allotted H
Tribunal Order Date 05-04-2010
Date Of Final Hearing 12-03-2010
Next Hearing Date 12-03-2010
Assessment Year misc
Appeal Filed On 15-10-2003
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H MUMBAI BEFORE SHRI D.K. AGARWAL J.M. AND SHRI A.L. GEHLOT A.M. SL.NO. ITA NO. AY APPELLANT RESPONDENT 1 6739/M/03 1997-98 ASSTT. COMMISSIONER OF INCOME-TAX 7(3) ROOM NO. 654 6 TH FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI 400 020 M/S TATA HOUSING DEVELOPMENT CO. LTD. BOMBAY HOUSE 24 HOMI MODY STREET FORT MUMBAI 400 001 2 6326/M/03 1997-98 M/S TATA HOUSING DEVELOPMENT CO. LTD. BOMBAY HOUSE 24 HOMI MODY STREET FORT MUMBAI 400 001 JT. COMMISSIONER OF INCOME- TAX SP RANGE -1 AAYAKAR BHAVAN MUMBAI. 3 2665/M/04 1998-99 ASSTT. COMMISSIONER OF INCOME-TAX 7(3) ROOM NO. 654 6 TH FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI 400 020 M/S TATA HOUSING DEVELOPMENT CO. LTD. BOMBAY HOUSE 24 HOMI MODY STREET FORT MUMBAI 400 001 4 2666/M/04 1999-00 -DO- -DO- ASSESSEE BY : MR. DINESH VYAS MR. I. ANAND REVENUE BY : MR. S.K. PAHWA ORDER PER A.L. GEHLOT A.M.: THESE FOUR APPEALS PERTAIN TO ONE ASSESSEE OUT OF WHICH THREE APPEALS BEING 6739/M/03 AND 6326/M/03 ARE CROSS-APP EALS FOR AY 1997-98 AND THE APPEALS BEING 2665 & 2666/M/03 ARE FILED BY REVENUE FOR AY 1998-99 AND 1999-00. SINCE COMMON IS SUES ARE ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 2 INVOLVED IN THESE APPEALS THEY WERE HEARD TOGETHER AND THEREFORE FOR THE SAKE OF CONVENIENCE A COMMON ORDER IS PASSED. ITA NO. 6739/M/03 APPEAL BY THE REVENUE FOR AY 19 97-98 2. THIS APPEAL IS DIRECTED AGAINST THE ORDER OF CIT (A)-VII MUMBAI VIDE ORDER DATED 31.07.2003. 3. GROUND NO. 1 IS AGAINST THE ACTION OF THE CIT(A) IN DELETING THE DISALLOWANCE OF RS. 9 LACS ON ACCOUNT OF PAYMENT MA DE TO M/S CONCEPT MARKETING AND ADVERTISING LTD. 4. THE ASSESSEE COMPANY IS THE OWNER OF A BUILDING KNOWN AS NARANG HOUSE WHICH IS RENTED OUT TO THE SUBSIDIARY COMPANY FOR A RENT OF RS. 57.6 LACS. THE SUBSIDIARY COMPANY RUNS FROM NARANG HOUSE A BUSINESS CENTER ALSO BEING USED BY THE ASSE SSEE AND THE ASSESSEE COMPANY PAYS A RENT OF RS. 12.0 LACS TO TH E SUBSIDIARY COMPANY. THE ASSESSEE USED TO MAKE CERTAIN OTHER PA YMENTS FOR TELEPHONE PRINTING AND STATIONERY ETC. THE AO OBSER VED THAT SINCE THE WHOLE BUILDING WAS OWNED BY THE ASSESSEE COMPANY IT THERE WAS VERY LITTLE LOGIC IN THE ARRANGEMENT OF FIRST RECEIVING RENT OF RS. 57.0 LACS AND THEN PAYING BACK A RENT OF RS. 12.0 LACS IN ADD ITION TO OTHER PAYMENTS LIKE TELEPHONE PRINTING ETC. THE AO HAD H ELD THAT THE PAYMENT OF RS. 12.0 LAC WAS EXCESSIVE COMPARED TO A NY BENEFIT DERIVED FROM THE SERVICE. HE FURTHER HELD THAT THE AMOUNT O F ONLY RS. 3 LAC PER ANNUM TO BE REASONABLE AMOUNT FOR THE SERVICE DONE/ RENDERED BY THE SUBSIDIARY COMPANY AND HAD DISALLOWED THE BALANCE A MOUNT OF RS. 9.0 LACS BY APPLYING THE PROVISIONS OF SECTION 40A(2) O F THE ACT. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE CI T(A) DELETED THE DISALLOWANCE MADE BY THE AO BY OBSERVING AS UNDER:- I HAVE CONSIDERED THE AOS REASONING AND THE LEARNE D COUNSELS ARGUMENT IN THIS REGARD. IT IS SEEN THAT THE AO HAD NOT GIVEN ANY REASONS AS TO WHY THE RENT OF RS. 12.0 LACS PAID BY THE ASSESSEE TO THE SUBSIDIARY COMPANY WAS REGARDED AS EXCESSIVE . HE HAS MERELY OBSERVED THAT SINCE THE WHOLE BUILDING IS OW NED BY THE ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 3 ASSESSEE COMPANY ITSELF THERE IS VERY LITTLE LOGIC IN THE ARRANGEMENT OF FIRST RECEIVING RENT OF RS. 57 LACS AND THEN PAYING BACK A RENT OF RS. 12.0 LACS. THE AO HAD NOT SAID ANYTHING ELSE AS TO WHY THERE IS NO LOGIC IN THE AR RANGEMENT OF ASSESSEE RENTING OUT THE BUILDING TO THE SUBSIDIARY WHO IS RUNNING IT AS A BUSINESS CENTER AND THEN PAYING THE RENT TO THE SUBSIDIARY FOR USE OF THE BUSINESS CENTER. IN THE A BSENCE OF ANY REASONS GIVEN BY THE ASSESSEE AS DISCUSSED ABOVE T HE DISALLOWANCE OF RS. 9.0 LACS MADE BY HIM CANNOT BE SUSTAINED ACCORDINGLY THE ADDITION OF RS. 9.0 LACS MADE BY TH E AO IS HEREBY DELETED. 5. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE RECORD. THE CATEGORICAL FINDING OF THE CIT(A) BEFORE DELETING THE DISALLOWANCE IS THAT THE AO HAS NOT GI VEN ANY REASONS AS TO WHY THE RENT OF RS. 12.0 LACS PAID BY THE ASSESS EE TO THE SUBSIDIARY COMPANY WAS REGARDED AS EXCESSIVE. THE AO WAS OF TH E VIEW THAT THE WHOLE BUILDING IS OWNED BY THE ASSESSEE COMPANY ITS ELF THERE IS VERY LITTLE LOGIC IN THE ARRANGEMENT OF FIRST RECEIVING RENT OF RS. 57 LACS AND THEN PAYING BACK A RENT OF RS. 12.0 LACS AGAINST W HICH THE CIT(A) HELD THAT THE AO HAS NOT SAID ANYTHING ELSE AS TO W HY THERE IS NO LOGIC IN THE ARRANGEMENT OF ASSESSEE RENTING OUT THE BUIL DING TO THE SUBSIDIARY WHO IS RUNNING IT AS A BUSINESS CENTRE A ND THEN PAYING THE RENT TO THE SUBSIDIARY FOR USE OF THE BUSINESS CENT RE. IT IS CONTENDED THAT SIMILAR PAYMENTS WERE CLAMED IN EARLIER YEAR B UT NO DISALLOWANCE WERE MADE. CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE WE ARE OF THE VIEW THAT THE REASONS SHOWN BY THE AO FOR MAKIN G DISALLOWANCE WERE WITHOUT ANY BASIS. THAT TO MAINTAIN CONSISTENC Y THE AO HIMSELF SHOULD HAD ALLOWED THE CLAIM OF THE ASSESSEE. WE TH EREFORE FIND THAT THE CIT (A) HAS RIGHTLY DELETED THE DISALLOWANCE MA DE BY THE AO. THE ORDER OF CIT(A) ON THIS ISSUE IS CONFIRMED. 6. GROUND NO. 2 IS AGAINST THE ACTION OF CIT(A) IN ALLOWING DEDUCTION OF RS. 9 88 03 025/- FOR INTEREST U/S 36( 1)(III) OF THE ACT. 7. THE AO NOTICED THAT THE ASSESSEE COMPANY CHANGED ITS METHOD OF RECOGNIZING PROFITS FROM THE COMPLETED CONTRACT METHOD TO THE ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 4 PERCENTAGE OF COMPLETION OF METHOD. CONSEQUENTLY T HE ASSESSEES RECOGNITION OF PROFITS HAS CHANGED. THE AO WAS OF T HE VIEW THAT THE ASSESSEES METHOD OF FOLLOWING THE COMPLETED CONTRA CT METHOD WAS NOT ACCEPTABLE. HENCE THE ASSESSEES CLAIM OF INTEREST EXPENDITURE OF RS. 9 88 03 025/- U/S36(1)(III) WHICH WAS MADE ON THE BASIS OF ACCOUNTING STANDARD VII OF ICAI WAS REJECTED BY TH E AO BY FOLLOWING THE JUDGMENT OF ITAT IN THE CASE OF JCT LTD. 65 IT D 169(CAL.). BEFORE THE CIT(A) THE ASSESSEE FOLLOWED THE JUDGMENT OF B OMBAY HIGH COURT IN THE CASE OF CIT VS. LOKHANDWALA CONSTRUCTION IND USTRIES LTD. VIDE INCOME TAX APPEAL NO. 101 OF 2001 DATED 15.1.2003 WHEREIN THE HONBLE BOMBAY HIGH COURT UPHELD THE STAND OF THE A SSESSEE THAT INTEREST ON BORROWINGS FOR THE PURPOSE OF THE BUSIN ESS IS ALLOWABLE U/S 36(1)(III) AND IT WILL NOT GO TO THE WORK-IN-PR OGRESS. THE CIT(A) FOLLOWED THE SAID JUDGMENT AND DIRECTED THE AO TO D ELETE THE DISALLOWANCE OF RS. 9 88 03 025/-. 8. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE RECORD. SINCE THE CIT(A) FOLLOWED THE J UDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF LOKHANDWAL A CONSTRUCTION INDUSTRIES LTD. AND DIRECTED THE AO TO DELETE THE D ISALLOWANCE WE DO NOT FIND ANY INFIRMITY IN THE ACTION OF THE CIT(A) AND HENCE WE UPHOLD THE ORDER OF CIT(A) ON THIS COUNT. 9. GROUND NO. 3 IS AGAINST THE ACTION OF CIT(A) IN DELETING THE ADDITION OF RS. 2 14 166/- ON ACCOUNT OF PAYMENT TO WARDS SUPERANNUATION FUND. 10. THE AO HAS DISALLOWED AN AMOUNT OF RS. 2 14 166 /- PAID AS CONTRIBUTION TOWARDS SUPER ANNUATION FUND BY APPLYI NG THE PROVISIONS OF SECTION 43B OF THE INCOME TAX ACT. THE EXPLANATI ON OF THE ASSESSEE WAS THAT THE ASSESSEE HAS REVISED THE SALARY OF ITS EMPLOYEES IN JUNE 1996 WITH EFFECT FROM APRIL 1996 DUE TO WHICH AD DITIONAL AMOUNT OF SUPER ANNUATION CONTRIBUTION BECAME PAYABLE ON SUCH ADDITIONAL ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 5 CONTRIBUTION ON SALARY ARREARS WAS DUE FOR PAYMENT IN THE MONTH OF MAY 1997 AND THE SAME WAS PAID WITHIN THE DUE DATE AND AS SUCH NO DISALLOWANCE IS CALLED FOR IN THIS RESPECT. THE CIT (A) AFTER CONSIDERING THE ASSESSEES SUBMISSIONS DELETED THE SAID DISALL OWANCE BY OBSERVING AS UNDER:- I HAVE CONSIDERED THE ARGUMENT OF THE LEARNED COUNS EL AND THE REASONING OF THE AO FOR MAKING THE DISALLOWANCE. TH E AO HAS HELD THAT THERE IS NO DUE DATE FOR PAYMENT OF CONTR IBUTION OF SUPER ANNUATION FUND AND AS SUCH THE FIRST PROVISO TO SECTION 43B WILL NOT APPLY IN ASSESSEES CASE. IT IS SEEN THAT THE ITEM SUPER ANNUATION FUND IS COVERED BY CLAUSE (B) OF SECTION 43B OF THE INCOME TAX ACT. THE FIRST PROVISO TO SECTION 43B IS APPLICABLE TO CLAUSE (B). THIS PROVISO PUTS A RESTRICTION IN ALLO WING THE DEDUCTION ON ACCOUNT OF SUPER ANNUATION FUND THAT T HE DEDUCTION WAS NOT TO BE ALLOWED UNLESS SUCH SUM HAS ACTUALLY BEEN PAID ON OR BEFORE THE DUE DATE AS DEFINED IN THE EXPLANATIO N BELOW CLAUSE 5(A) AND SUB-SECTION (1) OF SECTION 36 OF THE INCOM E TAX ACT. AS PER CLAUSE 5A OF THE EXPLANATION TO SECTION 36(1) T HE DUE DATE MEANS THE DATE BY WHICH THE ASSESSEE IS REQUIRED AS AN EMPLOYEE TO CREDIT THE EMPLOYEES CONTRIBUTION TO TH E EMPLOYEES ACCOUNT IN THE RELEVANT FUND UNDER ANY ACT RULE O RDER OR NOTIFICATION ISSUED THERE UNDER ETC. THE DUE DATE F OR PAYMENT OF CONTRIBUTION TO THE PROVIDENT FUND BEING 31.5.1997 THE PAYMENT IS FOUND TO BE MADE IN TIME. ACCORDINGLY THE DISALLOW ANCE MADE BY THE AO BY APPLYING THE PROVISIONS OF SECTION 43B OF THE INCOME TAX ACT CANNOT BE SUSTAINED. THE ADDITION OF RS. 2 14 166/- ON THIS ACCOUNT IS ACCORDINGLY DELETED. 11. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. WE FIND THAT THE ITEM OF SUPER ANNUATION FUND IS COVERED BY CLAUSE (B) OF SECTION 43B OF THE ACT. TH E FIRST PROVISO TO SECTION 43 B IS APPLICABLE TO CLAUSE (B) WHICH PUT S RESTRICTION IN ALLOWING THE DEDUCTION ON ACCOUNT OF SUPER ANNUATIO N FUND THAT THE DEDUCTION WAS NOT TO BE ALLOWED UNLESS SUCH SUM HAS ACTUALLY BEEN PAID ON OR BEFORE THE DUE DATE AS DEFINED IN THE EX PLANATION BELOW CLAUSE 5(A) AND SUB-SECTION (1) OF SECTION 36 OF TH E ACT. SINCE THE DUE DATE FOR PAYMENT OF CONTRIBUTION TO PROVIDENT FUND BEING 31.05.1997 THE PAYMENT IS FOUND TO BE MADE IN TIME AND THEREF ORE THE CIT(A) DELETION THE DISALLOWANCE MADE BY THE AO. WE FIND N O INFIRMITY IN THE ORDER OF CIT(A) AND THE SAME IS HEREBY UPHELD. ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 6 ITA NOS. 2665/M/04 & 2666/M/04 FOR AY 1998-99 & 199 9-00 APPEALS BY REVENUE 12. GROUND NO. 1 IS THAT THE CIT (A) ERRED IN DIREC TING THE AO TO ASSESS THE INCOME FROM COMPLETION METHOD OF ACCOUN TING AND NOT ON PERCENTAGE METHOD OF ACCOUNTING. 13. BRIEFLY THE FACTS OF THIS GROUND ARE THAT THE A O NOTED THAT THE ASSESSEE TILL AY 1996-97 FOLLOWED COMPLETION METHO D OF ACCOUNTING. THE AO WAS OF THE VIEW THAT PERCENTAGE METHOD OF A CCOUNTING IS PROPER METHOD. TO MAINTAIN CONSISTENCY THE AO MADE ASSESSMENT FOLLOWING PERCENTAGE METHOD OF ACCOUNTING FOR THE YEAR UNDER CONSIDERATION. IT WAS SUBMITTED BY THE ASSESSEE THA T THE ASSESSEE HAD CONSISTENTLY FOLLOWED COMPLETION METHOD OF ACCOUNT ING AND SAID METHOD HAS BEEN ALLOWED IN ASSESSEES OWN CASE BY I TAT IN THE EARLIER YEARS. THE CIT (A) HELD THAT THE ISSUE HAS BEEN SET TLED BY THE ITAT IN EARLIER YEARS THAT COMPLETION METHOD OF ACCOUNTING IS TO FOLLOW. THE CIT(A) HAS FOLLOWED HIS PREDECESSORS ORDER FOR AY 1996-97 AND AGREED WITH THE ASSESSEES METHOD OF ACCOUNTING AND DIRECT ED THE AO TO ASSESSEE THE INCOME ARISING OUT OF CONSTRUCTION OF HOUSING ON COMPLETION METHOD OF ACCOUNTING. 14. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. WE FIND THAT ISSUE IS COVERED I N FAVOUR OF THE ASSESSEE TO FOLLOW THE COMPLETION METHOD OF ACCOU NTING BY THE EARLIER ORDERS OF THE ITAT FOR AY 83-84/87-88 WHICH HAVE BEEN CONFIRM THE HONBLE JURISDICTION HIGH COURT VIDE JU DGMENT DATED 31.7.2006. THE CIT(A) HAS FOLLOWED EARLIER YEARS O RDER OF ITAT AND THE VIEW TAKEN BY THE ITAT HAS BEEN CONFIRMED BY T HE HONBLE JURISDICTION HIGH COURT THEREFORE IN THE LIGHT OF THAT WE DO NOT FIND ANY ERROR IN THE ORDER OF THE CIT (A). THE ORDER OF THE CIT(A) ON THE ISSUE IS CONFIRMED. ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 7 15. GROUND NO. 2 IS THAT THE CIT(A) ERRED IN ALLOWI NG THE CLAIM OF RS. 11 49 22 689/- BY WAY OF INTEREST U/S 36(1)(III ) WHICH HAD BEEN CAPITALIZED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT AS WORK IN PROGRESS BUT WAS CLAIMED AS ALLOWABLE EXPENDITURE FOR COMPUT ATION OF INCOME. THIS ISSUE IS IDENTICAL TO THE GROUND NO. 2 IN REVE NUES APPEAL FOR AY 1997-98 WHICH HAS BEEN DECIDED IN PARA NOS. 6 TO 8 OF THIS ORDER. THEREFORE FOLLOWING THE CONCLUSIONS DRAWN THEREIN WE UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE. 16. GROUND NO. 3 IS THAT THE CIT(A) ERRED IN DELETI NG THE DISALLOWANCE OF RS. 3.25 LACKS MADE BY THE AO U/S 40A(2)(B) OF THE ACT. 17. THIS GROUND IS ALSO SIMILAR TO THE GROUND NO. 1 OF REVENUES APPEAL FOR AY 1997-98 WHICH HAS BEEN DECIDED IN PA RAS 3 TO 5 OF THIS ORDER. IN THE LIGHT OF THE DISCUSSION IN THAT YEAR WE CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE ALSO. ITA NO. 2666/M/04 APPEAL BY REVENUE 18. GROUND NO. 1 IS THAT THE CIT(A) ERRED IN DIRECT ING THE AO TO ASSESS INCOME FROM COMPLETION METHOD OF ACCOUNTING AND NOT ON PERCENTAGE METHOD OF ACCOUNTING. 19. THIS GROUND IS IDENTICAL TO THE GROUND NO. 1 FO R AY 1998-99. FOLLOWING THE CONCLUSIONS DRAWN IN THAT GROUND IN P ARA NO14 WE CONFIRM THE ORDER OF THE CIT (A) ON THE ISSUE FOR T HIS YEAR ALSO. 20. GROUND NO. 2 IS THAT THE CIT(A) ERRED IN ALLOWI NG THE CLAIM OF RS. 12 65 21 744/- BY WAY OF INTEREST U/S 36(1)(III ) OF THE ACT. ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 8 21. THIS GROUND IS IDENTICAL TO THE GROUND NO. 2 FO R AY 1998-99 THEREFORE FOLLOWING THE CONCLUSIONS DRAWN THEREIN WE UPHOLD THE ORDER OF CIT(A) ON THIS ISSUE. ITA NO. 6326/M/03 APPEAL BY THE ASSESSEE FOR AY 1 997-98 22. GROUND NO. 1 READS AS UNDER:- I) THE CIT(A) GROSSLY ERRED IN UPHOLDING THE AOS O RDER AND THEREBY REJECTING THE REVISED RETURN FILED BY THE A PPELLANT. II) THE CIT(A) GROSSLY ERRED IN CONFIRMING THE AOS ORDER AND NOT ACCEPTING THE COMPUTATION OF INCOME U/S 115JA OF TH E ACT AT RS. 5.07 CRORES WHEN THE ACTUAL INCOME AS PER COMP LETION CONTRACT METHOD WAS ONLY RS. 4.81 CRORES. 23. THE ASSESSEE IS A PUBLIC LIMITED COMPANY CARRYI NG ON THE BUSINESS OF DEVELOPING RESIDENTIAL AND COMMERCIAL A REAS. THE ASSESSEE HAS BEEN FOLLOWING HITHERTO COMPLETION METHOD OF A CCOUNTING. DURING THE YEAR THE ASSESSEE CHANGED ITS METHOD OF ACCOUNT ING FROM COMPLETION METHOD OF ACCOUNTING TO PERCENTAGE M ETHOD OF ACCOUNTING AND ACCORDINGLY ORIGINAL RETURN OF INCO ME WAS FILED. (ON THE BASIS OF PERCENTAGE METHOD OF ACCOUNTING) A R EVISED RETURN OF INCOME WAS FILED FOLLOWING COMPLETION METHOD OF AC COUNTING. THE AO DID NOT ACCEPT ASSESSEES REVISED RETURN OBSERVING THAT ASSESSEE IS BOUND TO FILE RETURN OF INCOME ON THE SAME METHOD F OLLOWED IN ITS BOOKS OF ACCOUNT AND THAT PROFITS AND GAINS OF BUSI NESS IS TO BE COMPUTED IN ACCORDANCE WITH THE METHOD OF ACCOUNTIN G REGULARLY EMPLOYED BY THE ASSESSEE. THE AO REFERRED SECTION 1 39(5) OF THE ACT AND OBSERVED THAT A REVISED RETURN IS TO BE USED TO CORRECT OBVIOUS OMISSION AND MISTAKE IN THE ORIGINAL RETURN AND THE REVISED RETURN CANNOT BE USED TO MAKE FOR ENTIRELY NEW CLAIM. THE AO ACCORDINGLY REJECTED THE REVISED RETURN AND PROCEEDED TO MAKE A SSESSMENT ON THE BASIS OF ORIGINAL RETURN. THE CIT (A) HELD AS UNDER :- I HAVE CAREFULLY CONSIDERED THE FACTS OF THE ISSUE AND THE LEARNED COUNSELS ARGUMENTS IN THIS BEHALF AND THE L EGAL POSITION ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 9 ON THE ISSUE. IN THIS REGARD A REFERENCE IS REQUIR ED TO BE MADE TO SUB-SECTION (5) OF SECTION 139 OF THE INCOME TAX AC T. IF ANY PERSON HAVING FURNISHED A RETURN UNDER SUB -SECTION (1) OR IN PURSUANCE OF A NOTICE ISSUED UNDER SUB-SE CTION (1) OF SECTION 142 DISCOVERS ANY OMISSION OR ANY WRONG STATEMENT THEREIN HE MAY FURNISH A REVISED RETURN AT ANY TIME BEFORE THE EXPIRY OF ONE YEAR FROM THE END OF THE RELEVANT ASSESSMENT YEAR OR BEFORE THE COMPLETION O F THE ASSESSMENT WHICHEVER IS EARLIER. A READING OF THIS SECTION SHOWS THAT IF ANY PERSON HAVING FURNISHED A RETURN DISCOVERS ANY OMISSION OR ANY WR ONG STATEMENT THEREIN HE MAY FURNISH A REVISED RETURN. THUS THE REVISED RETURN CAN BE FILED ONLY IF ANY OMISSION OR ANY WRONG STATEMENT IS DISCOVERED IN THE ORIGINAL RETURN. A R EVISED RETURN IS USED TO CORRECT ANY OMISSION OR ANY WRONG STATEMENT DISCOVERED IN THE ORIGINAL RETURN AND IT CANNOT BE FILED FOR A NY OTHER PURPOSE. IT CANNOT BE SAID THAT WHILE ISSUING THE INT IMATION THE AO HAS ACCEPTED THE REVISED RETURN FILED BY THE ASSESSEE. ACCORDINGLY IT IS HELD THAT THE AO WAS JUSTIFIED I N REJECTING THE REVISED RETURN FILED BY THE ASSESSEE AND WAS ALSO J USTIFIED TO PROCEED TO MAKE ASSESSMENT ON THE BASIS OF THE ORIG INAL RETURN OF INCOME. THE ACTION OF THE AO IN MAKING THE ASSESSME NT ON THE BASIS OF THE PERCENTAGE OF COMPLETION METHOD IS ALS O JUSTIFIED BECAUSE THE ASSESSEE ITSELF HAS MAINTAINED ITS ACCO UNTS FOR THE ASSESSMENT YEAR UNDER CONSIDERATION ON THE BASIS OF THAT METHOD. THE FACT THAT THE ASSESSEE HAS BEEN FOLLOWI NG SOME OTHER METHOD IN THE EARLIER YEARS OR IN THE LATER ASSESSM ENT YEARS IS NOT RELEVANT FOR DECIDING THE ISSUE IN ASSESSMENT Y EAR UNDER CONSIDERATION. ACCORDINGLY THIS GROUND OF APPEAL O F THE ASSESSEE IS DISMISSED. 24. THE LEARNED AR SUBMITTED THAT IN EARLIER YEARS FOR AY 1983-84 TO 1987-88 THE ASSESSEE HAS FILED RETURN OF INCOME ON THE BASIS OF COMPLETION METHOD OF ACCOUNTING. SAID COMPLETION METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE HAS BEEN ACCEP TED BY THE ITAT BY REJECTING REFERENCE FILED BY THE DEPARTMENT. THE LE ARNED AR FURTHER SUBMITTED THAT IN AY 1989-90 THE ASSESSEE SUCCEEDE D BEFORE THE ITAT ON THE ISSUE OF METHOD OF ACCOUNTING. THE LEARNED A R FURTHER SUBMITTED THAT THE ORDERS OF ITAT FOR AY 83-84/87-8 8 HAS BEEN CONFIRMED BY THE HONBLE JURISDICTIONAL HIGH COURT VIDE INCOME TAX APPLICATION NO. 215 216 217 AND 218 OF 2000 VIDE JUDGMENT DATED 31 ST JULY 2000. IT WAS HELD BY THE HONBLE JURISDICT IONAL HIGH COURT ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 10 THAT PROJECT COMPLETION METHOD FOLLOWED BY THE ASSE SSEE IS PROPER AND THERE IS NO ERROR IN FOLLOWING THE SAME WHICH IS BE ING FOLLOWED CONSISTENTLY. THE LEARNED AR SUBMITTED THAT ON THE BASIS OF FINAL OUTCOME OF THE CONTROVERSY THE ASSESSEE FILED REVI SED RETURN FOLLOWING THE COMPLETED CONTRACT METHOD. THE LEARNED AR FURTH ER SUBMITTED THAT THE AO HIMSELF HAS ACTED UPON THE REVISED RETU RN FILED BY THE ASSESSEE BY ISSUING INTIMATION DATED 9 TH OCTOBER99 ACCEPTING THE REVISED RETURN. IT WAS SUBMITTED THAT INTIMATION WA S ISSUED U/S 143(1)(A) OF THE ACT ON 9 TH OCTOBER98 ON THE BASIS OF ORIGINAL RETURN FILED ON 28.11.97 AND WHEN THE REVISED RETURN WAS F ILED ON 27.11.98. THE AO ISSUED ANOTHER INTIMATION U/S 143(1)(A) ON 9 TH OCTOBER99 ACCEPTING THE RETURN OF INCOME. THE LEARNED AR SUBM ITTED THAT THE AO ACCEPTED THE REVISED RETURN WHILE ACCEPTING THE INT IMATION U/S 143(1)(A) THEREFORE THE SAME RETURN CANNOT BE IGN ORED BY ISSUING INTIMATION U/S 143(3) OF THE ACT. 25. THE LEARNED DR ON THE OTHER HAND RELIED UPON THE ORDER OF CIT (A) AND SUBMITTED THAT THE REVISED RETURN FILED BY THE ASSESSEE IS NOT IN ACCORDANCE WITH SECTION 139(5) OF THE ACT. 26. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. THE ADMITTED FACTS OF THE CASE ARE THAT THE ASSESSEE FOLLOWED CONSISTENTLY COMPLETION METHOD O F ACCOUNTING. FIRST TIME IN AY 1983-84 THE AO REJECTED THIS METH OD COMPLETION METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE AND COMPLETED THE ASSESSMENT WORKING OUT THE ON INCOME YEAR TO YEAR B ASIS FOLLOWING PERCENTAGE METHOD OF ACCOUNTING. IN OTHER WORDS THE REVENUE HAS TAKEN A CONTINUOUS STAND IN SUBSEQUENT YEARS TO FOL LOW PERCENTAGE METHOD OF ACCOUNTING. DURING THE YEAR UNDER CONSID ERATION TO MATCH WITH THE AOS FINDING IN AY 1983-84 ONWARDS THE AS SESSEE CHANGED ITS METHOD OF ACCOUNTING FROM COMPLETION METHOD OF ACCOUNTING TO PERCENTAGE METHOD OF ACCOUNTING AND FILED ORIGINA L RETURN. HOWEVER ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 11 THE ASSESSEE FILED REVISED RETURN ON THE BASIS OF COMPLETION METHOD OF ACCOUNTING. 26.1 LET US SEE WHAT IS THE RELEVANT PROVISION SECTION 139 IS (5). THE SAID SECTION READS AS UNDER:- IF ANY PERSON HAVING FURNISHED A RETURN UNDER SU B-SECTION (1) OR IN PURSUANCE OF A NOTICE ISSUED UNDER SUB-SECTIO N (1) OF SECTION 142 DISCOVERS ANY OMISSION OR ANY WRONG STATEMENT THEREIN HE MAY FURNISH A REVISED RETURN AT ANY TIME BEFORE THE EXPIRY OF ONE YEAR FROM THE END OF THE RELEVANT ASSESSMENT YEAR O R BEFORE THE COMPLETION OF THE ASSESSMENT WHICHEVER IS EARLIER. 26.2 WHAT WAS CONTEMPLATED BY SECTION 139(5) WAS FILING OF REVISED RETURNS WHEN THE ASSESSEE 'DISCOVERED' ANY 'OMISSION' OR ANY 'WRONG STATEMENT'. THE WORD 'OMISSION' WOULD CONNOT E 'AN UNINTENTIONAL ACT OR NEGLECT TO PERFORM WHAT THE LA W REQUIRED'; THE WORDS 'WRONG STATEMENT' WOULD INCLUDE IN ITS SCOPE 'A STATEMENT WHICH WAS NOT FALSE TO THE KNOWLEDGE OF THE PERSON MAKING IT'; AND THE WORD 'DISCOVER' WOULD TAKE IN ITS AMBIT 'THAT W HICH WAS HIDDEN CONCEALED OR UNKNOWN'. THE WORD DISCOVERS CONNOTES DISCOVERY OF SOME OMISSION OR WRONG STATEMENT IN THE RETURN OF WHICH THE ASSESSEE WAS NOT AWARE AT THE TIME OF FILING OF THE ORIGINAL RETURN. IF THE ASSESSEE DELIBERATELY OMITTED PARTICULARS OF IN COME AND MADE WRONG STATEMENTS IN THE ORIGINAL RETURN THE REVISE D RETURN WOULD NOT BRING THE CASE WITHIN THE SCOPE OF SECTION 139(5). THE DISCOVERY OF THE OMISSION OR WRONG STATEMENT MADE BY THE ASSESSEE T HAT ITSELF IS NOT SUFFICIENT TO BRING THE REVISED RETURN WITHIN THE A MBIT AND SCOPE OF SUB-SECTION (5) OF SECTION 139. THE FURTHER REQUIRE MENT IS THAT THIS OMISSION OR WRONG STATEMENT IN THE ORIGINAL RETURN MUST BE DUE TO BONA FIDE INADVERTENCE OR MISTAKE ON THE PART OF TH E ASSESSEE. THE OMISSION OR WRONG STATEMENT IN THE ORIGINAL RETURN CAN BE SAID TO BE DUE TO BONA FIDE INADVERTENCE OR BONA FIDE MISTAKE ON THE PART OF THE ASSESSEE ONLY ON THE BASIS OF EVALUATION OF THE EVI DENCE OR MATERIAL ON RECORD. ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 12 26.3 IN THE INSTANT CASE LET US SEE WHE THER THE REVISED RETURNS FILED BY THE ASSESSEE CAN BE SAID TO BE WITHIN THE CORRECT A MBIT AND SCOPE OF SUB- SECTION (5) OF SECTION 139. FOR THIS PURPOSE ONE HA S TO SEE THAT WHETHER THE DISCOVERY OF THE OMISSION OR WRONG STATEMENT WAS MA DE BY THE ASSESSEE. THAT OMISSION OR WRONG STATEMENT IN THE ORIGINAL RETURN WAS DUE TO BONA FIDE INADVERTENCE OR MISTAKE ON THE PART OF THE ASSESSEE . IN THE CASE UNDER CONSIDERATION MAIN REASONS FOR FILING THE REVISED R ETURN OF INCOME BY THE ASSESSEE WAS THAT WHICH METHOD OF ACCOUNTING WHETH ER COMPLETION METHOD OF ACCOUNTING OR PERCENTAGE METHOD OF ACCOUNTING WAS TO BE FOLLOWED BY THE ASSESSEE. THE ASSESSEE FOLLOWED CONSISTENTLY C OMPLETION METHOD OF ACCOUNTING. FIRST TIME IN AY 1983-84 THE AO REJEC TED THIS METHOD COMPLETION METHOD OF ACCOUNTING FOLLOWED BY THE A SSESSEE AND COMPLETED THE ASSESSMENT WORKING OUT THE INCOME ON YEAR TO YE AR BASIS FOLLOWING PERCENTAGE METHOD OF ACCOUNTING. DURING THE YEAR UNDER CONSIDERATION TO MATCH WITH THE AOS FINDING IN AY 1983-84 ONWARDS THE ASSESSEE CHANGED ITS METHOD OF ACCOUNTING FROM COMPLETION METHOD OF ACCOUNTING TO PERCENTAGE METHOD OF ACCOUNTING AND FILED ORIGINA L RETURN. HOWEVER THE ASSESSEE FILED REVISED RETURN ON THE BASIS OF COMP LETION METHOD OF ACCOUNTING TO MAINTAIN ITS CONSISTENCY AND IN ACCO RDANCE WITH ISSUE SETTLED BY THE ITAT. FROM THE FACTS AND CIRCUMSTANCES OF TH E CASE WE NOTICED THAT THE ASSESSEE UNABLE TO TAKE ONE STAND WHETHER HE SH OULD STICK TO THEIR OWN STAND TO FOLLOW COMPLETION METHOD OF ACCOUNTING O R TO FOLLOW THE AO BY FOLLOWING PERCENTAGE METHOD OF ACCOUNTING THAT S ITUATION ITSELF IS SUFFICIENT TO PROVE THE BONAFIDE OF THE ASSESSEE. THE SECOND R EASON FOR FILING REVISED RETURN OF INCOME WAS THAT THE ASSESSEE WRONGLY CALC ULATED CAPITAL GAIN ON 1810 SHARES OF PPTL WHEREAS IN FACT 1792 SHARES WER E SOLD. THE AO FOUND THAT SELLING OF 1792 SHARES WAS THE CORRECT FACT. T HE AO HIMSELF HAS UTILIZED CERTAIN FACTS OF THE REVISED RETURN WHILE MAKING AS SESSMENT. THERE WERE BONAFIDE OMISSION AND WRONG STATEMENT IN ORIGINAL RETURN OF INCOME WHICH WAS DISCOVERED BY THE ASSESSEE T HEREFORE THE REVISED RETURN OF INCOME FILED BY THE ASSESSEE IS IN ACCORDANCE WITH SUB-SECTION (5) OF SECTION ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 13 139 OF THE ACT. HERE WE WOULD ALSO LIKE TO REFER O NE JUDGMENT OF THE APEX COURT IN THE CASE OF GOETZE (INDIA) LTD.V. COMMISSI ONER OF INCOME-TAX 284 ITR 323 (SC) WHERE IN THE ISSUE BEFORE THE COURT WA S WHETHER THE APPELLANT- ASSESSEE COULD MAKE A CLAIM FOR DEDUCTION OTHER THA N BY FILING A REVISED RETURN BEFORE AO. THE DEDUCTION WAS DISALLOWED BY T HE ASSESSING OFFICER ON THE GROUND THAT THERE WAS NO PROVISION UNDER THE IN COME-TAX ACT TO MAKE AMENDMENT IN THE RETURN OF INCOME BY MODIFYING AN A PPLICATION AT THE ASSESSMENT STAGE WITHOUT REVISING THE RETURN. THE C OURT HELD THE ASSESSING OFFICER CANNOT ENTERTAIN A CLAIM FOR DEDUCTION OTHE RWISE THAN BY FILING A REVISED RETURN. IN THE CASE UNDER CONSIDERATION THE ASSESSEE FILED THE REVISED RETURN OF INCOME TO MAINTAIN ITS CONSISTENCY. THE ASSESSEE CAN CLAIM ITS CLAIM ONLY BY FILING A REVISED RETURN BEFORE THE AO THUS THE ACTION OF THE ASSESSEE IN FILING REVISED RETURN IS IN ACCORDANCE WITH THE JUDGMENT OF THE APEX COURT CITED SUPRA. THE DECISIONS ON WHICH THE CIT (A) RELIED UPON IN HIS ORDER ARE DISTINGUISHABLE ON FACTS AS IN THOSE CASES THE ASSESSEE HAD NEITHER OMITTED TO MENTION SOMETHING NOR MADE ANY W RONG STATEMENT. THEREFORE IN THOSE CASES THE RETURN FILED UNDER SE CTION 139(5) WERE NOT A VALID RETURNS. 26.4 IN THE LIGHT OF ABOVE DISCUSSIONS WE SET A SIDE THE ORDERS OF REVENUE AUTHORITIES AND ALLOW THE GROUND OF THE APP EAL OF THE ASSESSEE. SINCE MAIN GROUND HAS BEEN DECIDED IN FAV OUR OF THE ASSESSEE THE SECOND PART OF THE GROUND IS CONSEQUE NTIAL GROUND TO THE MAIN GROUND THEREFORE THE SAME IS NOT REQUIRE D TO BE ADJUDICATED BY US. 27. GROUND NO. 2 IS IN RESPECT OF DISALLOWANCE OF R S. 2 23 68 234/- ON ACCOUNT OF ADMINISTRATIVE CHARGES PAID TO HDFC A S A REVENUE EXPENDITURE AND TREATING THE SAME AS DEFERRED REVEN UE EXPENDITURE AND ADDED BACK TO THE ENTIRE AMOUNT OF RS. 2 23 68 234/-. 28. THE ASSESSEE HAD PAID A SUM OF RS. 2.23 CRORES TO HDFC AS ADMINISTRATIVE CHARGES BEING 1% ON THE LOAN OBTAINE D FROM IT DURING THE YEAR. THE AO DISALLOWED THE SAID AMOUNT ON THE BASIS OF GENERAL OBSERVATION THAT THE BEFIT OF LOAN IS FOR OVER THE PERIOD. ANOTHER ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 14 REASON GIVEN BY THE AO WAS THAT IN BOOKS OF ACCOUNT THE ASSESSEE TREATED THIS EXPENDITURE AS DEFERRED EXPENDITURE. T HE AO RELIED UPON VARIOUS DECISIONS INCLUDING A JUDGMENT OF APEX COUR T IN THE CASE MADRAS INDUSTRIAL INVESTMENT CORP. LTD V. COMMISSIO NER OF INCOME- TAX 225 ITR 802(SC). THE CIT (A) THOUGH CONFIRMED T HE DISALLOWANCE BUT SIMULTANEOUSLY OBSERVED THAT AN IDENTICAL ISSU E CAME UP BEFORE HIM IN AY 1996-97 WHEREIN HE HAS ALLOWED ASSESSEE S GROUND VIDE ORDER DATED 14 TH MARCH 2003 IN APPEAL FOR AY 1996-97. HOWEVER THEREAFTER THE DECISION OF KOLKATTA ITAT IN THE CAS E OF SHAW WALLACE & CO. LTD. 86 ITD 315 (KOL) WHICH DIRECTLY DEALS WI TH THE ISSUE. THE CIT(A) NOTED THAT THE ITAT HAS HELD THAT THE EXPE NDITURE HAS THE EFFECT FOR THE PERIOD OF LOAN. FOLLOWING THE SAID D ECISION OF ITAT THE CIT(A) UPHELD THE ORDER OF AO. 29. THE LEARNED AR SUBMITTED THAT ON IDENTICAL SET OF FACTS THE CIT(A) IN ASSESSEES OWN CASE FOR AY 1996-97 HAS DE CIDED THE ISSUE AFTER A DETAILED DISCUSSION IN FAVOUR OF THE ASSESS EE. THE LEARNED AR FURTHER SUBMITTED THAT THE CIT(A) HAS DISTINGUISHED THE JUDGMENT OF THE APEX COURT IN THE CASE OF MADRAS INDUSTRIAL INV ESTMENT CORPORATION LTD. 225 ITR 802 WHEREIN THE ISSUE OF DEBENTURE ON DISCOUNT WHICH WAS REDEEMABLE AFTER A PERIOD OF 10 YEARS. THE LEARNED AR FURTHER SUBMITTED THAT THE CIT(A) IN AY 1996-97 HAS RIGHTLY HELD THAT THE CLAIM OF THE ASSESSEE IS A RE VENUE EXPENSES AND THE SAME IS ALLOWABLE IN VIEW OF THE JUDGMENT OF TH E JURISDICTIONAL HIGH COURT IN THE CASE OF ASSOCIATED CEMENT COMPANI ES 249 ITR 3 WHEREIN IT HAS BEEN HELD THAT COMMITMENT CHARGES PA ID TO A FINANCIAL INSTITUTION IS TO BE HELD AS REVENUE EXPENDITURE. IN CASE OF INDIA CEMENT LTD. 60 ITR 52 THE APEX COURT HELD THAT LO AN OBTAINED IS NOT AN ASSET OR ADVANTAGE OF AN ENDURING NATURE AND TH EREFORE THE EXPENDITURE MADE FOR SECURING THE USE OF MONEY FOR CERTAIN PERIOD WAS OF A REVENUE EXPENDITURE. THE LEARNED DR SUBMITTED THAT THE ISSUE IS COVERED BY THE JUDGMENT OF THE APEX COURT IN THE CA SE OF MADRAS INDUSTRIAL INVESTMENT CO. (SUPRA). ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 15 30. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. THE ADMITTED FACTS OF THE CASE ARE THAT THE ASSESSEE CLAIMED ADMINISTRATIVE CHARGES OF THE LOAN OBTAINED IN AY 96-97. THE CIT (A) ALLOWED THE CLAIM OF THE ASSESSE E IN THE YEAR UNDER CONSIDERATION THE CIT(A) FOLLOWED A DECISION OF ITA T KOLKATTA BENCH IN THE CASE OF SHAW WALLACE & CO. LTD. 86 ITD 315 (K OL). IT WAS A CASE OF RECEIVING LESSER AMOUNT FOR LIABILITY AND TO PAY HIGHER AMOUNT OVER A PERIOD OF 6 YEARS. UNDER THAT CIRCUMSTANCE THE IT AT HELD THAT ONLY 1/7 OF EXPENDITURE IS ALLOWABLE. IN MADRAS INDUSTRI AL INVESTMENT CORP. LTD V COMMISSIONER OF INCOME-TAX 225 ITR 802( SC) THE ASSESSEE-COMPANY ON 10-12-1966 ISSUED DEBENTURES OF TOTAL VALUE OF RS. 1.5 CRORES AT A DISCOUNT OF 2 PER CENT REDEEMAB LE WITH INTEREST AFTER 12 YEARS. THE ISSUE PRICE OF A DEBENTURE OF R S. 100 WAS RS. 98. THE TOTAL DISCOUNT ON THE ISSUE OF RS. 1.5 CRORES A MOUNTED TO RS. 3 LAKHS. FOR THE ASSESSMENT YEAR 1968-69 THE ASSESSE E WROTE OFF RS. 12 500 OUT OF TOTAL DISCOUNT OF RS. 3 LAKHS BEING T HE PROPORTIONATE AMOUNT OF DISCOUNT FOR THE PERIOD OF SIX MONTHS END ING WITH 30-6- 1967 TAKING INTO ACCOUNT THE PERIOD OF 12 YEARS WH ICH WAS THE PERIOD OF REDEMPTION AND DIVIDING THE DISCOUNT OF RS. 3 LA KHS OVER THE PERIOD OF 12 YEARS. THE ASSESSING OFFICER DISALLOWED ITS C LAIM FOR DEDUCTION OF RS. 12 500 AND ALSO DISALLOWED DISCOUNT AMOUNT OF R S. 10 000 PERTAINING TO ISSUE OF DEBENTURE IN AN EARLIER YEAR ON THE GROUND THAT DISCOUNT ON BONDS AND DEBENTURES WAS NOT ALLOWABLE AS EXPENDITURE . THE APEX COURT HELD THAT EXPENDITURE IS NOT NECES SARILY CONFINED TO THE MONEY WHICH HAS BEEN ACTUALLY PAID OUT. IT COVE RS A LIABILITY WHICH HAS ACCRUED OR WHICH HAS BEEN INCURRED ALTHO UGH IT MAY HAVE TO BE DISCHARGED AT A FUTURE DATE. HOWEVER A CONTI NGENT LIABILITY WHICH MAY HAVE TO BE DISCHARGED IN FUTURE CANNOT BE CONSIDERED AS EXPENDITURE. ALTHOUGH EXPENDITURE PRIMARILY DENOTES THE IDEA OF SPENDING OR PAYING OUT IT MAY IN GIVEN CIRCUMSTAN CES ALSO COVER AN AMOUNT OF LOSS WHICH HAS NOT GONE OUT OF THE ASSESS EE'S POCKET BUT WHICH IS ALL THE SAME AN AMOUNT WHICH THE ASSESSEE HAS HAD TO GIVE UP. IT ALSO COVERS A LIABILITY WHICH THE ASSESSEE H AS INCURRED IN ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 16 PRAESENTI ALTHOUGH IT IS PAYABLE IN FUTURO. A CONTI NGENT LIABILITY THAT MAY ARISE IN FUTURE IS HOWEVER NOT 'EXPENDITURE'. IT WOULD ALSO COVER NOT JUST A ONE-TIME PAYMENT BUT A LIABILITY SPREAD OUT OVER A NUMBER OF YEARS. THE COURT FURTHER HELD THAT WHEN A COMPANY ISSUES DEBENTURES AT A DISCOUNT IT INCURS A LIABILITY TO PAY A LARGER AMOUNT THAN WHAT IT HAS BORROWED AT A FUTURE DATE. IT IS NOT NECESSARY TO GO INTO THE QUESTION WHETHER THIS ADDI TIONAL LIABILITY EQUIVALENT TO THE DISCOUNT WHICH IS INCURRED IN PR AESENTI BUT IS PAYABLE IN FUTURE REPRESENTS DEFERRED INTEREST OR NOT. THAT MAY DEPEND UPON THE TOTALITY OF CIRCUMSTANCES RELATING TO THE ISSUE OF DEBENTURES INCLUDING ITS TERMS. THE LIABILITY TO PAY THE DISCOUNTED AMOUNT OVER AND ABOVE THE AMOUNT RECEIVED FOR THE D EBENTURES IS A LIABILITY WHICH HAS BEEN INCURRED BY THE COMPANY FO R THE PURPOSES OF ITS BUSINESS IN ORDER TO GENERATE FUNDS FOR ITS BUS INESS ACTIVITIES. THE AMOUNTS SO OBTAINED BY ISSUE OF DEBENTURES ARE USED BY THE COMPANY FOR THE PURPOSES OF ITS BUSINESS BUT THE LIABILITY WAS A CONTINUING LIABILITY WHICH STRETCHED OVER A PERIOD OF 12 YEARS . IT WAS THEREFORE A LIABILITY SPREAD OVER A PERIOD OF 12 YEARS. 30.1 FROM ABOVE JUDGMENT OF THE APEX COURT WE NO TICED THAT WHETHER EXPENDITURE IS DEFERRED EXPENDITURE TO BE C LAIMED IN NUMBER OF THE YEARS OR IN THE YEAR WHEN IT WAS ACCRUED DEP ENDS UPON THE FACTS OF THE EACH CASE. ACCORDING TO SECTION 37 (1) OF THE ACT THE REVENUE EXPENDITURE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS MUST BE ALLOWED IN ITS ENTIRETY IN THE YEAR IN WHICH IT IS INCURRED. IT CANNOT BE SPREAD OVER A NUMBER OF YEAR S EVEN IF THE ASSESSEE HAS WRITTEN IT OFF IN HIS BOOKS OVER A PER IOD OF YEARS. HOWEVER THE FACTS MAY JUSTIFY AN ASSESSEE WHO HAS INCURRED EXPENDITURE IN A PARTICULAR YEAR TO SPREAD AND CLAI M IT OVER A PERIOD OF ENSUING YEARS. IN FACT ALLOWING THE ENTIRE EXPE NDITURE IN ONE YEAR MIGHT GIVE A DISTORTED PICTURE OF THE PROFITS OF A PARTICULAR YEAR. ISSUING DEBENTURES AT A DISCOUNT IS SUCH INSTANCE W HERE ALTHOUGH THE ASSESSEE HAS INCURRED THE LIABILITY TO PAY THE DISC OUNT IN THE YEAR OF ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 17 ISSUE OF DEBENTURES THE PAYMENT IS TO SECURE A BEN EFIT OVER A NUMBER OF YEARS. THERE IS A CONTINUING BENEFIT TO THE BUSI NESS OF THE COMPANY OVER THE ENTIRE PERIOD. THE LIABILITY SHOULD THERE FORE BE SPREAD OVER THE PERIOD OF THE DEBENTURES AS IN SUCH CASES THERE IS INBUILT CONDITION REGARDING OF LIABILITIES WHICH PERTAIN TO NUMBER OF YEARS. THE APEX COURT IN THE CASE OF CASE OF INDIA CEMENTS LTD. V. CIT [1966] 60 ITR 52 (SC) LAY DOWN THE LAW THAT LIABILITY INC URRED FOR THE PURPOSE OF OBTAINING THE LOAN WOULD BE REVENUE EXPE NDITURE. THE DECISION OF ITAT KOLKATTA BENCH IN THE CASE OF SHAW WALLACE & CO. LTD. 86 ITD 315 (KOL) ON WHICH THE CIT (A) RELIED UPON IS DISTINGUISHABLE ON FACTS AS IN THAT CASE THE ASSESS EE INCURS A LIABILITY TO PAY A LARGER AMOUNT THAN WHAT IT HAS BORROWED A T A FUTURE DATE. THE FACTS OF THAT CASE ARE SIMILAR TO THE FACTS OF MADRAS INDUSTRIAL INVESTMENT CORP. LTD V COMMISSIONER OF INCOME-TAX 2 25 ITR 802(SC). 30.2 IN THE LIGHT OF ABOVE DISCUSSIONS IF WE CONSIDERED THE FACTS OF THE CASE UNDER CONSIDERATION WE FIND THERE ARE NO M ATERIAL ON RECORD BASIS ON WHICH IT CAN BE SAID THE THERE IS INBUILT CONDITION OF THE LIABILITY FOR A NUMBER OF YEARS. IT IS ALSO NOT THE CASE OF REVENUE THAT THE ASSESSEE INCURRED A LIABILITY TO PAY A LARGER A MOUNT THAN WHAT IT HAS BORROWED AT A FUTURE DATE. FROM THE FACTS OF T HE CASE WE NOTICED THAT THE CASE UNDER CONSIDERED IS COVERED BY THE JU DGMENT OF THE APEX COURT IN THE CASE OF INDIA CEMENTS LTD. V. CIT [196 6] 60 ITR 52 (SC) WHERE IN IT WAS HELD THAT A LOAN OBTAINED CANNOT BE TREATED AS AN ASSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS OF THE ASSESSEE. A LOAN IS A LIABILITY AND HAS TO BE REPAI D AND IT IS ERRONEOUS TO CONSIDER A LIABILITY AS AN ASSET OR AN ADVANTAGE . THE NATURE OF THE EXPENDITURE INCURRED IN RAISING A LOAN WOULD NOT DE PEND UPON THE NATURE OF PURPOSE OF THE LOAN. A LOAN MAY BE INTEND ED TO BE USED FOR THE PURCHASE OF RAW MATERIAL WHEN IT IS NEGOTIATED BUT THE COMPANY MAY AFTER RAISING THE LOAN CHANGE ITS MIND AND SP END IT ON SECURING CAPITAL ASSETS. THEREFORE THE PURPOSE FOR WHICH TH E NEW LOAN WAS REQUIRED WAS IRRELEVANT TO THE CONSIDERATION OF THE QUESTION WHETHER ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 18 THE EXPENDITURE FOR OBTAINING THE LOAN WAS THE REVE NUE EXPENDITURE OR CAPITAL EXPENDITURE THAT (A) THE LOAN OBTAINED WAS NOT AN ASSET OR ADVANTAG E OF AN ENDURING NATURE; (B) THE EXPENDITURE WAS MADE FOR SECURING THE USE O F MONEY FOR A CERTAIN PERIOD AND (C) IT WAS IRRELEVANT TO CONSIDER THE OBJECT WITH W HICH THE LOAN WAS OBTAINED. CONSEQUENTLY IN THE CIRCUMSTANCES OF THE CASE THE EXPENDITURE WAS REVENUE EXPENDITURE. THE COURT HELD THAT THE EXPENDITURE IN QUESTION WAS NOT IN THE NATURE OF CAPITAL EXPENDITURE AND WAS LAID OUT OR EXPENDED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF THE ASSESSEE'S BUSIN ESS WHICH IS ALLOWABLE EXPENSES. 30.3 FOLLOWING THE ABOVE RULING OF THE APEX CO URT WE ALLOW THE CLAIM OF THE ASSESSEE. 31. GROUND NO. 3 IS IN RESPECT OF TAXING A S UM OF RS. 6 19 02 450/- AS BUSINESS INCOME INSTEAD OF CAPITAL GAIN. 32. BRIEFLY THE FACTS RELATING TO RAISE THIS GROUND ARE THAT THE ASSESSEE HAS CLAIMED THAT AS IT HAD TAKEN OVER THE COMPANY M/S PRABHADEVI PROPERTIES AND TRADING CO. LTD. ( IN SHO RT AS PPT) AND THE SHARES IN THE SAID COMPANY ACQUIRED BY THE ASSESSEE WAS HELD AS INVESTMENT. TWO SHARES OF PPT WERE ACQUIRING DURING THE PREVIOUS YEAR 1989-90 RELEVANT TO AY 1990-91. FURTHER THE AS SESSEE WAS OFFERED THE RIGHT SHARES OF THE SAID COMPANY DURING THE RELEVANT PERIOD OF AY 1990-91 IN ACCORDANCE WITH THE PROVISI ONS OF SECTION 372 OF THE COMPANIES ACT. DURING THE PREVIOUS YEAR REL EVANT TO AY 1993- 94 AS PER ASSESSEES CLAIM THE INVESTMENT INTO THE SHARES OF PPT AT COST OF RS. 157.46 LACS WERE CONVERTED INTO STOCK-I N-TRADE AT THE FAIR MARKET VALUE OF RS. 776.49 LACS AND THE DIFFERENCE BETWEEN THE FAIR MARKET VALUE OF AND THE COST AMOUNTING TO RS. 6 19 02 450/- WAS ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 19 RECORDED IN THE BOOKS OF ACCOUNTS DURING THE PREVIO US YEAR RELEVANT AY 1993-94 AS GAIN ARISING FROM SUCH TRANSFER. DURI NG THE YEAR UNDER CONSIDERATION AY 97-98 THE AO NOTED THAT SINCE THE ASSESSEES ENTIRE BUSINESS CONSISTS ONLY OF CONSTRUCTION AND SALE OF RESIDENTIAL AND OFFICE BUILDINGS THE TRANSACTIONS OF ALLEGED PURCH ASES OF SHARES OF PPT CONVERTING THE SAME INTO STOCK-IN-TRADE AND SA LE OF THE SAME TO THE PROSPECTIVE PURCHASERS OF THE FLATS IN THE BUIL DING CONSTRUCTION ON THE LAND OF PPT CANNOT BE REGARDED AS SALE OF INVES TMENT. THE AO WAS OF THE VIEW THAT SUCH SALE OF SHARES IS ONLY AN OUT ER SHELL AND THE REALITY OF THE TRANSACTION IS CONSTRUCTION AND SALE OF BUILDING. THE AO HELD THAT BY LOOKING AT THE ACTUAL NATURE OF TRANSA CTION THE INCOME OF RS. 6 19 02 450/- IS TAXABLE AS PART OF THE BUSINES S INCOME ARISING ON SALE OF THE FLATS IN THE PREVIOUS YEAR UNDER CONSID ERATION. THE AO HAS ACCORDINGLY TAXED THE AMOUNT OF RS. 6 19 02 450/- A S BUSINESS INCOME FOR AY 1997-98. THE CIT(A) DISCUSSED THIS IS SUE AT PAGES 12 TO 17 OF HIS ORDER AND HELD THAT THE ENTIRE INCOME IS TAXABLE AS BUSINESS INCOME AND THE AOS ACTION IN TAXING THE B USINESS INCOME AT RS. 6 19 02 450/- AS AGAINST ASSESSEES CLAIM OF CA PITAL GAINS OF RS. 5 75 33 970/- IN RESPECT OF THE ALLEGED CONVERSION OF CAPITAL ASSET INTO STOCK-IN-TRADE IS UPHELD. 33. THE LEARNED AR SUBMITTED THAT IN AY 1993-94 THE ASS ESSEE CONVERTED SHARES OF SUBSIDIARY COMPANY FROM INVESTM ENT TO STOCK-IN- TRADE. THE CONVERSION DONE AT FAIR MARKET VALUE AND ACCORDINGLY CAPITAL GAINS OF RS. 6 19 02 450/- WAS CALCULATED A ND SHOWN IN COMPUTATION OF TOTAL INCOME FOR AY 1993-94 AND PUT A NOTE ON THE SAID COMPUTATION READS AS UNDER:- IN VIEW OF THE PROVISIONS OF SECTION 45(2) OF THE I NCOME TAX ACT 1961 PROFIT ON CONVERSION O INVESTMENTS OF SHARES HELD IN A SUBSIDIARY COMPANY PRABHADEVI PROPERTIES & TRADING CO. LTD. INTO STOCK-IN-TRADE WOULD BE CHARGEABLE TO TAX AS T HE INCOME OF THE PREVIOUS YEAR IN WHICH SUCH STOCK IN TRADE IS S OLD OR OTHERWISE TRANSFERRED BY THE COMPANY AND HENCE IT I S EXCLUDED FROM THE TOTAL INCOME OF THE YEAR. ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 20 33.1 THE LEARNED AR FURTHER SUBMITTED THAT THE A SSESSEE FILED APPEAL AGAINST THE ORDER OF AO FOR AY 1993-94 ON SO ME OTHER ISSUES. THE AO WHILE GIVING EFFECT ORDER OF CIT(A() WRONGLY ADDED RS. 6 19 02 450/- AS CAPITAL GAIN IN TOTAL INCOME. THE ASSESSEE FILED A RECTIFICATION APPLICATION U/S 154 DATED 02/07/97. T HE AO ACCEPTED ASSESSEES APPLICATION AND RECTIFIED THE MISTAKES V IDE ORDER DATED 21/07/97 AS UNDER:- 3. TOTAL INCOME IS NREVISED AS UNDER:- TOTAL INCOME AS PER ORDER U/S 250 DATED 23.5.97 RS. 5 78 60 821 LESS: I) PROFIT ON CONVERSION OF INVESTMENT INTO STOCK IN TRADE AS DISCUSSED ABOVE RS6190 2450 II) OTHER INCOME INCLUDED IN NET PROFIT AS DISCUSSED ABOVE 3410486 6 53 12 936 REVISED TOTAL LOSS 74 5 2 115 ========== 33.2 THE LEARNED AR SUBMITTED THAT THE ASSESSEE HAS MADE FULL DISCLOSURE OF THE FACTS. HE SUBMITTED THAT IN CASE OF CONVERSION OF INVESTMENT INTO STOCK-IN-TRADE THE TAX SHALL BE CH ARGED UNDER THE HEAD CAPITAL GAIN IN THE YEAR IN WHICH SUCH STOCK-I N-TRADE IS SOLD OR OTHERWISE TRANSFER. HE FURTHER SUBMITTED THAT FOR T HE PURPOSE OF COMPUTING THE CAPITAL GAIN THE FAIR MARKET VALUE OF THE CAPITAL ASSET ON THE DATE ON WHICH IT WAS CONVERTED OR TREATED AS STOCK-IN-TRADE SHALL BE DEEMED TO BE THE VALUE OF THE CONSIDERATIO N. THE LEARNED AR SUBMITTED THAT IN CASE UNDER CONSIDERATION THE ASSE SSEE HAS CALCULATED SUCH CAPITAL GAIN OF RS. 6 19 02 450/-IN AY 1993-94 AND THE SAME HAS BEEN ACCEPTED BY THE DEPARTMENT. THE L EARNED AR SUBMITTED THAT IN VIEW OF THE SECTION 45(2) THE RE VENUE AUTHORITIES ARE NOT CORRECT IN ASSESSING THE SAID INCOME AS INC OME FROM BUSINESS. 33.3 THE LEARNED DR ON THE OTHER HAND RELIED UPON THE ORDER OF THE REVENUE AUTHORITIES AND SUBMITTED THAT THE CORR ECT NATURE OF TRANSACTION UNDER CONSIDERATION IS BUSINESS TRANSAC TION; THEREFORE THE PROFIT FROM SUCH BUSINESS TRANSACTION IS ASSESS ABLE UNDER THE HEAD INCOME FROM BUSINESSES. THE LEARNED DR SUBMIT TED THAT THE AO ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 21 AND CIT(A) HAVE DISCUSSED THE MATTER IN DETAIL IN T HEIR ORDERS THAT THE REAL NATURE OF THE TRANSACTION IS A BUSINESS TRANSA CTION AND NOT CONVERSION OF INVESTMENT INTO STOCK-IN-TRADE OR OTH ERWISE. 34. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE RECORD. THE ADMITTED FACTS OF THE CASE UNDER CONSIDERATION ARE THAT THE ASSESSEE HAS CONVERTED S HARES OF SUBSIDIARY COMPANIES FROM INVESTMENT TO STOCK-IN-TR ADE IN FY RELEVANT TO AY 1993-94. IN AY 1993-94 THIS CONVERSION HAS B EEN ACCEPTED BY THE REVENUE WHICH IS EVIDENT FROM THE MATERIAL ON RECORD RELEVANT ASSESSMENT ORDER AND ORDER PASSED BY THE AO U/S 154 OF THE ACT. IN THE YEAR UNDER CONSIDERATION I.E. AY 1997-98 THE A SSESSEE HAS SOLD THE SAID SHARES WHICH WERE CONVERTED FROM INVESTME NT INTO STOCK-IN- TRADE IN AY 1993-94. ON THE BASIS OF ADMITTED FACTS THE QUESTION TO BE EXAMINED IN AY 1997-98 IS WHETHER THE AO CAN EXA MINE THE NATURE OF TRANSACTION IN THE YEAR OF SALE I.E. AY 1997-98 WHICH HAS ALREADY BEEN CONVERTED FROM INVESTMENT TO STOCK-IN-TRADE IN EARLIER YEAR AY 1993-94. IN THIS CONNECTION WE WOULD LIKE TO REFER THE RELEVANT SECTION WHICH IS SECTION 45(2) OF THE ACT READS A S UNDER:- 45(2): NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SE CTION (1) THE PROFITS OR GAINS ARISING FROM THE TRANSFER BY WAY O F CONVERSION BY THE OWNER OF A CAPITAL ASSET INTO OR ITS TREATMENT BY HIM AS STOCK-IN-TRADE OF A BUSINESS CARRIED ON BY HIM SHAL L BE CHARGEABLE TO INCOME-TAX AS HIS INCOME OF THE PREVI OUS YEAR IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE TRAN SFERRED BY HIM AND FOR THE PURPOSE OF SECTION 48 THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH CONVERSION OR TREATMENT S HALL BE DEEMED TO BE THE FULL VALUE OF THE CONSIDERATION RE CEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. 34.1 CAPITAL GAIN PROVISIONS ARE PROVIDED IN CH APTER IV-E OF THE ACT. SECTION 45(1) LAY DOWN THAT PROFIT AND GAINS A RISING FROM THE TRANSFER OF CAPITAL ASSETS EFFECTED IN A PREVIOUS Y EAR SHALL BE DEEMED TO BE THE INCOME OF THE PREVIOUS YEAR IN WHICH TRAN SFER TOOK PLACE. SUB-SECTION (2) AS IT EXISTS AT PRESENT WAS INSERTE D W.E.F. ASST. YR. 1985-86 UP TO ASST. YR. 1984-85 THE LEGAL POSITIO N AS EMERGED FROM ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 22 REPORTED DECISIONS WAS THAT WHEN A PERSON HOLDING A CAPITAL ASSET CONVERTED INTO STOCK IN TRADE OF HIS BUSINESS AND T HEN SOLD IT IN THE COURSE OF SUCH BUSINESS DIFFERENCE BETWEEN SALE PR ICE AND FAIR MARKET VALUE OF THE ASSET ON THE DATE OF CONVERSION WAS AS SESSABLE AS BUSINESS PROFITS OF THE YEAR IN WHICH THE SALE TOOK PLACE. HOWEVER IN SUCH A CASE THE DIFFERENCE BETWEEN FAIR MARKET VAL UE OF THE ASSET ON THE DATE OF CONVERSION AND ORIGINAL COST OF ACQUISI TION COULD NOT BE SUBJECTED TO TAX EITHER AS BUSINESS PROFITS OR CAPI TAL GAINS. THE SAID DIFFERENCE COULD NOT BE BUSINESS PROFITS BECAUSE FO R DETERMINING BUSINESS PROFITS WHAT IS TO BE DEDUCTED FROM SALE P RICE IS THE COST OF THE ASSET TO THE BUSINESS AND COST OF THE ASSET TO THE BUSINESS IS THE FAIR MARKET VALUE ON THE DATE ON WHICH THE ASSET BE CAME PART OF STOCK-IN-TRADE I.E. ON THE DATE OF CONVERSION AND NOT THE ORIGINAL COST OF ACQUISITION WHICH REPRESENTED COST OF THE CAPITA L ASSET AND NOT STOCK-IN-TRADE. THE SAID DIFFERENCE BETWEEN FAIR MA RKET VALUE ON THE DATE OF CONVERSION AND ORIGINAL COST OF ACQUISITION COULD NOT BE CAPITAL GAINS BECAUSE IN ORDER TO BE ASSESSABLE CAPITAL GAI NS THE AMOUNT IN QUESTION SHOULD REPRESENT GAINS AND SUCH GAINS SHOULD HAVE ARISEN AS A RESULT OF TRANSFER BOTH OF WHICH ENVISAGE EX ISTENCE OF TWO DIFFERENT PERSONS TRANSFEROR AND TRANSFEREE WHILE IN THE ACT OF CONVERSION THERE ARE NOT TWO PERSONS AND NON GAINS ARISE ON THE PERSON MAKING THE CONVERSION. THUS SAID DIFFERENCE ESCAPED ASSESSMENT ALTOGETHER. AS THERE WAS LACUNA IN THE S TATUTORY PROVISIONS WHERE THE CONVERSION OF INVESTMENT INTO STOCK-IN-TRADE WAS NOT TRANSFERRED AND THEREFORE WAS NOT SUBJECT TO CAPITAL GAIN. THIS LACUNA HAS BEEN PLUGGED BY INSERTION OF SUB-CLAUSE (IV) IN SECTION 2(47) DEFINING TRANSFER AND SUBSECTION (2) IN SEC TION 45 PROVIDING FOR CHARGING OF CAPITAL GAINS. SUB-CLAUSE (IV) OF SECTI ON 2(47) ENLARGED THE DEFINITION OF TRANSFER SO AS TO INCLUDE SUCH CONV ERSION AND SUB- SECTION (2) OF SECTION 45 BROUGHT THE SAID DIFFEREN CE TO CHARGE AS CAPITAL GAINS. IT IS PROVIDED IN SUB-SECTION (2) TH AT WHEN SUCH CONVERSION TAKES PLACE AND SUBSEQUENTLY WHEN SAID A SSET IS SOLD AS STOCK-IN-TRADE THE DIFFERENCE IN QUESTION WOULD BE CHARGEABLE TO TAX ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 23 AS THE INCOME OF THE PREVIOUS YEAR IN WHICH ULTIMAT E SALE TOOK PLACE. A CIRCULAR NO. 397 DATED 16.10.1984 [1985] 152 IT R (ST) 29 EXPLANATORY NOTES ON THE PROVISIONS OF THE TAXATION (AMENDMENT) ACT 1984 EXPLAINED THE AMENDED PROVISIONS AS UNDER:- 9.2 THE AMENDING ACT HAS INSERTED A NEW SUB-SECTION (2) IN SECTION 45 OF THE ACT TO PROVIDE THAT THE PROFITS A ND GAINS ARISING FROM THE TRANSFER BY WAY OF CONVERSION BY THE OWNER OF A CAPITAL ASSET INTO OR ITS TREATMENT BY HIM AS STOCK-IN-TRADE OF A BUS INESS CARRIED ON BY HIM SHALL BE CHARGED TO TAX UNDER THE HEAD CAPITA L GAINS IN THE YEAR IN WHICH SUCH STOCK-IN-TRADE IS SOLD OR OTHERWISE T RANSFERRED BY HIM. THE NEW SUB-SECTION FURTHER PROVIDES THAT FOR THE P URPOSES OF COMPUTING THE CAPITAL GAIN IN SUCH CASES THE FAIR MARKET VALUE OF THE CAPITAL ASSET ON THE DATE ON WHICH IT WAS CONVERTED OR TREATED AS STOCK- IN-TRADE SHALL BE DEEMED TO BE THE FULL VALUE OF TH E CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. TO ILLUSTRATE : SUPPOSE THE COST OF THE ASSET IS RS. 20 000. THE ASSET IS CONVERTED BY THE OWNER AS STOCK-IN-TRADE ON 1-6-1984 AND TAKE N TO HIS STOCK AT THE MARKET VALUE OF RS. 70 000. THE ASSET IS SOLD O N 1-8-1985 FOR RS. 80 000. CAPITAL GAIN OF RS. 50 000 (SUBJECT TO ADMISS IBLE DEDUCTIONS) WILL BE LIABLE TO TAX IN THE ASSESSMENT YEAR 1986-87. TH E BUSINESS PROFIT OF RS. 10 000 ARISING ON THE SALE OF THE ASSET WILL BE LIABLE TO TAX AS PART OF THE BUSINESS INCOME FOR THE ASSESSMENT YEAR 1986 -87. (THE ACCOUNTING YEAR OF THE ASSESSEE HAS BEEN TAKEN TO B E THE FINANCIAL YEAR). 34.2 IN THE ABOVE CIRCULAR THE CALCULATION OF C APITAL GAIN AND BUSINESS PROFIT HAS BEEN EXPLAINED BY GIVING ILLUST RATION. CONSIDERING THE SCHEME OF ACT WE FIND THAT IN CASE OF CONVERSI ON OF INVESTMENT INTO STOCK-IN-TRADE THERE MAY THREE SEPARATE YEAR S INVOLVED AS IN THE CASE UNDER CONSIDERATION; THE FIRST ONE IS THE YEAR WHEN THE ASSETS WERE PURCHASED SECOND ONE IS THE YEAR IN WHICH T HE INVESTMENT WAS CONVERTED INTO STOCK-IN-TRADE AND THIRD ONE IS WHEN STOCK-IN-TRADE WAS SOLD. SINCE ALL YEARS ARE SEPARATE YEARS AND RELATED ASSESSMENT ARE ALSO SEPARATE ASSESSMENT YEARS. THE EXAMINATION OF THE TRANSACTION IS ALSO SUBJECT TO THREE ASSESSMENT YEA RS BUT FOR DIFFERENT PURPOSES. THE GENUINENESS OF THE TRANSACTION CAN BE EXAMINED ONLY IN THE YEAR OF THE PURCHASE OF ASSETS WHICH IN THIS C ASE IS FY ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 24 31.03.1991 31.03.1992 OR SAY BEFORE THE FY RELEVAN T TO AY 1993-94. THE GENUINENESS OF CONVERSION OF ASSETS FROM INVEST MENT INTO STOCK- IN-TRADE AND CALCULATION OF CAPITAL GAIN BY TAKIN G 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 TRANS FER OF CAPITAL ASSETS CAN BE EXAMINE ONLY IN THE YEAR OF CONVERSION I.E. AY 93-94. NOW WHAT IS TO SEE IN THE YEAR OF SALE AY 97-98 IS ONLY CHA RGEABILITY OF CAPITAL GAIN AND BUSINESS INCOME. THE AO DID NOT DISPUTE AB OUT THE CALCULATION OF RS. 6 19 02 450/-. HE DISPUTED ONLY THAT RS. 6 19 02 450/- SHOWN BY THE ASSESSEE AS THE CAPITAL GAIN IS A BUSINESS PROFIT AS HE WAS OF THE VIEW THAT CONVERSI ON WAS NON GENUINE. THE AO HAS TRIED TO EXAMINE THE GENUINENES S OF TRANSACTION AND ITS CONVERSION FROM INVESTMENT TO STOCK IN TRAD E IN THE YEAR WHEN THE ASSET WAS SOLD AS STOCK-IN-TRADE. IN VIEW OF TH E ABOVE DISCUSSION WE ARE OF THE VIEW THAT THE GENUINENESS OF THE TRAN SACTION OR GENUINENESS OF CONVERSION OF ASSTS FROM INVESTMENT TO STOCK IN TRADE WHICH HAS ALREADY CONVERTED IN EARLIER YEAR AND NOT DURING THE YEAR CANNOT BE EXAMINED IN THE YEAR OF THE SALE OF STOCK -IN-TRADE. IT CAN BE EXAMINED ONLY IN THE YEAR WHEN THE ASSET WAS ACQUIR ED OR CONVERTED FROM INVESTMENT INTO STOCK-IN-TRADE. AS MENTIONED A BOVE THE AO DID NOT DISPUTE ABOUT THE GENUINENESS OF THE TRANSACTIO N IN THE YEAR OF PURCHASE AND IN THE YEAR OF CONVERSION FROM INVESTM ENT INTO STOCK-IN- TRADE. IN VIEW OF THE CLEAR PROVISIONS OF SECTION 4 5(2) WE ARE OF THE CONSIDERED VIEW THAT THE REVENUE IS NOT CORRECT IN EXAMINING THE GENUINENESS OF THE TRANSACTION IN THE YEAR UNDER CO NSIDERATION WHERE ASSET WAS SOLD WHICH HAS BEEN CONVERTED FROM INVES TMENT INTO STOCK- IN-TRADE IN EARLIER YEAR. WE ACCORDINGLY ALLOW TH E CLAIM OF THE ASSESSEE. WE THEREFORE SET ASIDE THE ORDERS OF TH E REVENUE AUTHORITIES AND DIRECT THE AO TO ASSESS RS. 6 19 02 450/- AS CAPITAL GAIN INSTEAD OF BUSINESS INCOME. ITA NOS. 6739 & 6326/M/03 & 2665 & 2666/M/04 M/S TATAL HOUSING DEVELOPMENT CO. LTD. 25 35. IN THE RESULT THE ASSESSEES APPEAL NO. 6326 /M/02 IS ALLOWED AND THE REVENUE APPEALS NO. 6739/M/03 AND 2665 & 26 66/M/03 ARE DISMISSED. PRONOUNCED ON THIS 5 TH DAY OF APRIL 2010. SD/- SD/- (D.K. AGARWAL) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTANT M EMBER DATED: 5 TH APRIL 2010 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE H BENCH I.T .A.T. MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR I.T.A.T. MUMBAI. KV S.NO. DESCRIPTION DATE INITLS 1. DRAFT DICTATED ON SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER