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2016 (2) TMI 825 - ITAT MUMBAI

2016 (2) TMI 825 - ITAT MUMBAI - TMI - Penalty u/s 271(1)(c) - disallowance of loss on the date of conversion of stock-in-trade - Held that:- 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 d .....

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e 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 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 s .....

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other 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. Therefore, the same cannot be held to be a ground for levy of penalty. Moreover, before us the ld. Counsel had pointed out that in A.Y 2008-09 the AO had disallowed a similar loss as .....

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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 ₹ 95,00,000/- which is 173% of the tax sought to be evaded, that is, of ₹ 55,12,625/-. The penalty has been mainly levied on the disallowance of ₹ 1,83,75,418/- on account of valuation loss of converted stoc .....

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gainst which total expenditure debited was ₹ 5,63,87,889/- thereby arriving at a loss of ₹ 57,00,518/-. The major income forming part of income from operations was ₹ 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 to the profit and loss account included an amount of ₹ 52,60,830/- on account of loss on conversion of investments into stock .....

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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 .....

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et price whichever is lower as per the regular method of accounting followed by the Assessee which was also provided in the notes to the Balance-Sheet. On valuation, the Assessee incurred loss on closing stock of ₹ 1,83,75,418/-, the working of the loss was as under : Sr. No. Script Quantity Rate (Cost) Amount (Cost) Market Rate as 31.03.07 Amount (Market Value) Valuation of Closing Stock at Cost or Market Rate whichever is less Loss on valuation Loss share 1 Adani Port Ltd. 5,000 50,000 1 .....

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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 Co .....

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ecovery of bad debts of ₹ 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 disallowance. 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 ₹ 8 cror .....

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t current market rate. However, no reason has been given by the Board why within 14 days of purchase of Long Term investment has been decided to be converted into stock-intrade. This may go against the commercial prudence. Further business operations for the year under consideration show that other than the recovery of bad debt to the tune of ₹ 5 crores, the only other income shown by the assessee is income from interest at ₹ 1,71,770/-, miscellaneous income ₹ 2,733/- and divid .....

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cause. The assessee has not brought any cogent material evidence on record even subsequent to the 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 .....

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uch 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 particul .....

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0/- 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 bad 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 .....

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iness, 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 can 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 th .....

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e 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 differen .....

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vitiate the whole penalty proceedings. This proposition, he submitted is supported by the decision of the Hon ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory reported in 359 ITR 565 and the Hon ble Gujarat High Court in the case of Manu Engineering reported in 122 ITR 306 and Hon ble Delhi High Court in the case of Virgo Marketing reported in 171 Taxman 156. Thus, he submitted that on this ground also the penalty cannot be levied. 9. On the other hand, ld. .....

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der. Such a finding of fact by the Tribunal is final and, therefore, 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 in shares and securities. The Assessee had purchased shares on 20th & 21st March, 2006 and within 14 day .....

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,000 equity shares of ₹ 10 each and 901,725. 5% preference shares of ₹ 100 each of Sakuma Exports Ltd. be and hereby converted 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 requirements on behalf of the company. After the conversion, the stock of shares was valued at loss of ₹ 52,60,830 .....

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onfirmed 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 convert .....

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erial alone may not justify the imposition of penalty in a given case. The considerations which arise in the penalty proceedings are separate and different from the assessment proceedings because, at 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 addu .....

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othesis that the Assessee has not done any business in shares which was converted into stock-intrade. Such 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 disbelieving the conversion of investment into 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 .....

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O has invoked Explanation to Sec. 271(1)(c). 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 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 Assess .....

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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 co .....

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xempt u/s 10(38). If we take into account the future event of A.Y 2015-16, when the value 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 o .....

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ed 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. Therefore, the same cannot be held to be a ground for levy of penalty. Moreover, before us the ld. Counsel had pointed out that in A.Y 2008-09 the AO had disallowed a similar loss as speculative loss by invoking explanatio .....

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