2011 (1) TMI 941 - AT - Income Tax

Estimating the suppressed trading profit - Stock transfer - CIT(A) has, with reference to the assessee s accounts, found the same to be duly accounted for in its books - Held that - Non-reflection of the same in the P&L account would not imply it being unaccounted, as the said account is essentially to be debited only for the cost of the goods sold, so that the stock not forming part of the said cost could be directly taken to the Balance-Sheet, as has been the case. In fact, had it been not so, and the stock actually unaccounted, the transfer at a higher value would lead to a surplus (credit) of Rs. 21.48 lakhs in the assessee s accounts, which is not the case - The charge of tax can only be on the real, and not notional, income, i.e., what it might or ought to have been. The law in the matter, i.e., of only the real income/actual income being liable to tax, is well settled. The actual accruing/earning of income being a matter of fact, which would include inferential findings based on the surrounding facts and circumstances as well, it is the genuineness of the stock transfer which is being essentially questioned by the Revenue. However, it disputes the business decision of re-organization of the operations within the group companies, of which the stock transfer is an integral part, on the basis of peculiar, undisputed circumstances, without any valid/cogent basis - The finding of suppression of income can only be validated on the basis of strong circumstantial evidence/s. There is no case of any tax avoidance, as (say) on account of differential rate of tax or there being losses in one firm which could be adjusted through the transfer of profits, or the transferee concern being exigible to a lower rate of tax, etc. In fact, there is no charge of tax avoidance in any manner. There is no basis to support a finding of accrual/earning of profit and, consequently, no case for suppression of income obtains so that we have no hesitation in reversing the findings of the ld. CIT(A) in the matter. In favour of assessee.

Summary

Issues:
Cross-appeals by assessee and revenue arising from Commissioner of Income-tax (Appeals)-IV, Kochi's order for assessment year 2003-04.

Analysis:
The case involves the transfer of stock by an assessee-company to its holding company at book value, leading to a dispute regarding the treatment of the stock transfer in the assessment. The Assessing Officer reopened the assessment due to discrepancies in the stock valuation, alleging suppression of income. The revenue estimated a suppressed trading profit and assessed the income accordingly.

The assessee explained the stock transfer as a result of discontinuing operations and leasing out plant and machinery to the holding company. The assessee argued commercial expediency for transferring stock at cost to the sister concern. The revenue contended that market rates should have been applied, estimating profits based on arm's length value. Both parties appealed against the partial allowance of the first appeal.

During the proceedings, the assessee's counsel presented valid business reasons for discontinuing operations and transferring stock. The holding company had transferred the stock at market value and was taxed accordingly. The revenue's objection was primarily related to the location of production facilities, not the trading activity. The Tribunal examined the case on its merits.

The Tribunal observed that the stock transfer was duly recorded in the books of the transferee company. The revenue's addition for the alleged unaccounted stock was found to be without merit. The revenue's inference of trading profit on the stock transfer was challenged, emphasizing the genuine reasons for discontinuing operations and the commercial decisions taken by the assessee.

The Tribunal concluded that there was no basis for inferring profit or income suppression. The reorganization of business by the assessee was deemed to be on commercial lines, with no evidence of tax avoidance. The Tribunal reversed the findings of the Commissioner of Income-tax (Appeals) and allowed the assessee's appeal while dismissing the revenue's appeal.

In summary, the Tribunal ruled in favor of the assessee, highlighting the genuine commercial decisions taken and rejecting the revenue's claims of income suppression. The case underscores the importance of considering business realities and commercial expediency in assessing tax liabilities.