TMI Blog2016 (2) TMI 825X X X X Extracts X X X X X X X X Extracts X X X X ..... alue of the shares have 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 rate. Under these facts and surrounding circumstances the loss on conversion cannot be doubted as all these factors strongly point out that the loss of ₹ 1,83,75,418/- is genuine loss and no penalty can be levied on disallowance of such a loss. The Assessee’s 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 levied on such a disallowance cannot be upheld and same is directed to be deleted on merits. 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 Explanation 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. Therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18/- 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, the Assessee had purchased shares of M/s. Sakuma Exports Ltd. on 20th March and 21st March, 2006 which was shown under the head Investments . On 3rd April, 2006, the Assessee converted 1,00,000 shares of ₹ 10/- each of M/s. Sakuma Exports Ltd. and 9,01,725 nos. of 5% preference shares of ₹ 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 investments into stock-in-trade was as under : Particulars Qty Date of Acquisition Cost of Acquisition Date of conversion Amount at which Converted Amount of Loss on conversion Equity Shares of Sakuma Exports 6,00,000 20/03/2006 2,52,33,427 03/04/2006 2,16,00,000 36, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, disallowed the loss mainly on two grounds, viz :- i) Firstly, the Assessee company has adopted the device of resolution for conversion of investment into stock-in-trade and then valued the stock-in-trade at the cost or market whichever is lower with the intention to set-off the loss on conversion against recovery of bad debts of ₹ 5,00,00,000/- during the year hence it is a colourable device; and ii) Secondly, the AO in the alternative held that, the resultant loss on account of valuation of the stock-in-trade is covered by the Explanation 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 Hon ble Bombay High Court in the case of Prasad Agents (Pvt.) Ltd., 180 Taxmann 178. 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 visualize that the share having market price at ₹ 65/- and ₹ 36/- on 3.4.2006 will be priced at ₹ 47.50/- and ₹ 17.55/- on 31.3.2007. Thus, there was no intention at the time of conversion to set o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 recovered. 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 ₹ 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 ₹ 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 behind 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars of income . Thus, satisfaction of the AO at the time of passing of the assessment order was for furnishing of inaccurate particulars , however, while 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 Hon ble Karnataka High Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of accounts, details of which has already been incorporated in the foregoing paragraphs. The main reason for disallowance by the AO was that the Assessee-company has adopted a device of Board Resolution for conversion of investment into stock-intrade 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, there 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-intrade; ii) secondly, after 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, the Assessee has not shown whether the Board resolution was filed with the ROC. Thus, on these grounds th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 material on record at that time. The onus cast upon under explanation is like a civil suit, that is, preponderance of probabilities. If the probable factors support the claim of the Assessee, then, without their being rebuttal or adverse material to doubt such 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 Assessee s explanation on bona fide belief is false. Here, in this case, all the probable factors were in favour of the Assessee which can be gauged by the fact that the conversion of shares from investment to stockin- trade was fully supported by Board Resolution 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, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 concealment of income, therefore, such a penalty cannot be sustained. We agree with such a contention of the ld. Counsel that the two charges for initiating the penalty, that is, concealment of particulars of income and furnishing of inaccurate particulars of income 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 Hon ble High Court as has been referred and relied upon by the ld. Counsel. The Hon ble 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 spe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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