TMI Blog2016 (8) TMI 565X X X X Extracts X X X X X X X X Extracts X X X X ..... market value on the date of transfer. This figure of income escaping assessment does not in any manner refer to the interest expenditure. In other words, a brief reference to the assessee claiming interest expenditure for the assessment year 2005-2006 was confined only to suggest that the same was done to avoid detection during the scrutiny assessment and the Assessing Officer did not built his case any further in the context of income chargeable to tax having escaped the assessment. - Decided in favour of assessee. - SPECIAL CIVIL APPLICATION NO. 10217 of 2011 - - - Dated:- 10-8-2016 - MR. AKIL KURESHI AND MR. A.J. SHASTRI, JJ. FOR THE PETITIONER : MR SAURABH N SOPARKAR SENIOR ADVOCATE WITH MR MONAAL J DAVAWALA AND MRS SWATI SOPARKAR, ADVOCATE FOR THE RESPONDENT : MR KM PARIKH, ADVOCATE ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The petitioner has challenged a notice dated 11.1.2011 (wrongly typed as 11.1.2010) for reopening the petitioner's assessment for the assessment year 2005-2006. 2. Brief facts are as under. The petitioner is a limited company registered under the Companies Act. For the assessment year 2005-2006, the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the date of purchase of such shares. These shares in question, purchased by the assessee as stockintrade continued to be held as stockintrade till 31.03.2004. Meanwhile, a new Amendment was made in the Income Tax Act. Through this amendment, sale of shares held as investment through recognized StockExchanges became free from incidence of tax u/s.10(38) with effect from A.Y.2005-06. The assessee showed the above referred shares as transferred from stockintrade to investment at the same old historical purchase cost as cost of purchase on 1.4.2004 relevant to A.Y. 2005-06. The Tax Auditor, Shri Hiten C. Timbadia, did not mention a word about this change, affecting taxable income of the assessee in the Tax Audit Report, inspite of the specific requirement of the Tax Audit u/s.44AB of the I T Act, 1961. Statement of Shri Hiten Timbadia, Tax Auditor was recorded on oath and he expressed regrets for this willful omission on his part. Since there is differential tax treatment between stockintrade and investment under the Income Tax Act, any change or transfer can be done at market price and not at cost price. Any change in the value of stockintrade would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s under: Market price of shares as on l.4.2004 for the quoted Shares 1. Shares of Sun Pharma Ind. Ltd., 2010198 equity shares + 4020396 bonus shares = 6030594 shares value of share of company as on 1.4.2004 (Average Price) Rs.659.4l/- Market price of shares of Sun Pharma lnd. Ltd. Rs.397,66,33,989/- The cost of acquisition Rs.9,l6,98,559/- Profit Rs.388,49,35.430/- 2. Shares of Equity of Zigma Software Ltd. 490629 equity shares Value of share of Zigma Software Ltd. as on 1.4.2004 average price ₹ 19.91 Market price of share of Zigma Software Ltd. Rs.97,68,423/- Cost of acquisition Rs.43,20,000/- Profit Rs.54,48,423/- Income escaping for the year which remained to be taxed is ₹ 389,03,83,853/- . In this case, the assessment was finalised u/s.143(3) of the IT Act. Howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances can it be stated that income chargeable to tax had escaped assessment. We have therefore, focused only on this aspect of the matter. 8. In this background, if we analyse the reasons recorded by the Assessing Officer, in such reasons, he had stated that the assessee was engaged in the business of trading in shares and securities apart from having other business activities. The company had purchased shares with borrowed funds and held them as stockintrade. The company would claim interest expenditure on the borrowed funds. This pattern continued till 31.3.2004. In the meanwhile, amendment was made in the Income Tax Act through which the sale of shares held as investment through recognized stock exchange would be free from tax with effect from assessment year 2005-2006. The assessee thereupon transferred the shares from stockintrade to investment which was done on 1.4.2004 as per old historical purchase cost. According to the Assessing Officer, any such change or transfer of shares had to be done on market price and not at cost price, since valuation of transferred stockintrade would have direct effect on the taxable income under the Income Tax Act. The profit arising o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the close of the year on any stock which was not disposed of during the year. During the course of the year under consideration, the assessee withdrew some silver bars and shares from the business and settled them on three trusts, in all of which the assessee himself was one of the beneficiaries. He had retained to himself the revisionary life interest after the death of his wife who was given the first life interest. He himself was the managing trustee in two of the trusts and virtually in the third. In the books, the assessee credited the business with cost price of bars and shares so withdrawn. This became the bone of contention before the Supreme Court. The assessee contended that the act of withdrawal of such shares and bars resulted in neither income nor profit or gain to himself or to his business, nor was it a business transaction and accordingly not taxable. The Revenue however, argued that the bars and the shares were brought into business and any withdrawal therefrom must be dealt with along ordinary and wellknown business lines, namely, that if a person withdraws an asset from a business, he must account for it to the business at market rate prevailing at the date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cancelling out of the unsold stock from bothsides of the accounts leaves only the transactions on which there have been actual sales and gives the 225 true and actual profit or loss on his year's dealings. In the same way, the appellant has reflected the true state of his finances and given a truthful picture of the profit and loss in his business by entering the bullion and silver at cost when he withdrew them for a purely nonbusiness purpose and utilised them in a transaction which brought him neither income nor profit nor gain. 1. Decision in case of Kikabhai Premchand (supra), came up for consideration before a larger Bench of nine judges in case of Commissioner of Income-tax v. Bal Shirinbhai K. Kooka reported in (1962) 46 ITR 86(SC). It was a converse situation where the assessee lady held by way of investment large number of shares of different companies which were purchased before 19391940 at a cost which was much less than the market value prevailing on 1945. For the assessment year, 19461947, the Income Tax Officer found that the assessee had converted her shares into stockintrade and was trading in shares. Her income for the assessment year 19461947 was there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax v. Dhanuka sons reported in 124 ITR 24, observed that when there was a withdrawal of part of stockintrade from the assessee's business and when withdrawal was not in the course of business transaction with third party, there was no transaction at all because a person could not be said to have a transaction with one's own self. There could therefore, not be any actual profit or loss in such transfer. It was observed as under : On a careful consideration of the respective submissions of the parties and the decisions cited before us, it appears that the facts in the present case are more in conformity with the facts in Sir Kikabhai Premchand than with the facts in Bai Shirinbai K. Kooka . In the instant case, there has been withdrawal of a part of the stockintrade from the assessee's business. This withdrawal was not in the course of a business transaction with a third party. In fact, strictly speaking, there has been no transaction at all because a person cannot be said to have a transaction with one's own self. We do not agree with the contention of Mr. Sen that such a transfer should be reflected in the books at nil value. In our opinion, the transact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ost price and not market price and second, he refers to profit to the business which would be the difference between the cost of acquisition of the shares and their market value on the date of transfer which should be taxed. In view of the judgement in case of Kikabhai Premchand (supra), mere transfer of shares by the company from its stockintrade to investment account would result in no profit or gain to the business. The question of correct valuation at which the same should have been transferred therefore, pales into insignificance when we are concerned with a single question namely, whether on the premise suggested by the Assessing Officer it can be stated that the income of the petitioner chargeable to tax had escaped assessment. 2. A close scrutiny of the reasons recorded would find a mention of the act of assessee not disallowing the interest component on such shares for the assessment year 2005-2006 which according to the Assessing Officer was done to avoid detection. If case of the Assessing Officer was that interest on borrowed funds would be a legitimate deduction, as long as the shares were held as stock, but upon the shares being converted into investment, such in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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