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2016 (8) TMI 565 - GUJARAT HIGH COURT

2016 (8) TMI 565 - GUJARAT HIGH COURT - TMI - Reopening of assessment - disallowing the interest component - Held that:- 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 .....

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ransfer of shares of Zigma Software Ltd. This computation of the profit was based on the original cost of acquisition in the 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 Off .....

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hallenged 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 petitioner filed the return of income on 31.10.2005 declaring income of ₹ 57.73 lacs (rounded off). This return was taken in scrutiny by the Assessing Officer. The Assessing Officer framed assessment on 27.12. .....

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nd Shri Hiten. C. Timbadia, FCA, Tax Auditor (u/s.44AB of the IT Act, 1961) of the assessee company were recorded. On the basis of the documents found during the course of survey, statements of above mentioned persons and the return of income filed by the assessee company, the following discrepancies emerged: The assessee was engaged in the business of trading in shares and securities, apart from other business activities. During Financial Years 1995-96, 1996-97 and 1997-98, the assessee purchas .....

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mainly held for the purpose of earning profits on sales of shares and dividend income is merely incidental to the holding of stockintrade. b. 1.3 The CIT(A) ought to have considered that the entire borrowings made by the appellant was for the purpose of business which includes the investment made in stockintrade and accordingly the interest on borrowing would be deductible expenditure u/s.36(1)(iii). From the above quoted. grounds of appeal filed by the assessee, it becomes absolutely clear that .....

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ncidence 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 .....

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l rate whereas profit earned on sale of shares held as investment is free from incident of tax u/s.10(38) w. e f. A.Y. 2005-06. In view of the above mentioned facts, I have reason to believe that the income chargeable to tax has escaped assessment because of collusion between the Assessee and the Tax Auditor, wherein the Auditor did not mention the fact of a transfer of shares held as stock in trade to "investment , at cost price in its Tax Audit report. This willful omission on part of the .....

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d by the assessee. When the statement of Shri Girish Desai, whole time Director of the company was recorded during the course of survey, he admitted that he was aware of the consequences and he was also aware that by naming stockintrade as investment they can escape taxability. During earlier years, when disallowance was made under section 14A, the assessee kept insisting that the shares in question have been purchased from interest bearing borrowed funds and the interest on them allowable busin .....

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m interest free funds, which is contrary to the stand taken by them, as mentioned earlier, in the case of same shares during earlier assessment years. The quantum of income escaping assessment is worked out as 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, .....

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since the Tax Auditor did not disclose full and complete facts relating to this transfer in his Audit Report, and the issue escaped AO s attention. The case needs to be reopened u/s.147 of the Income-tax Act, 1961. 3. The petitioner raised detailed objections under communication dated 26.5.2011. Such objections were however, rejected by the Assessing Officer by an order dated 8.7.2011. 4. From the materials on record, it can be seen that the assessment which was framed after scrutiny is sought .....

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by the Assessing Officer during the scrutiny assessment. 3) In any case, there was no taxing event by mere conversion of such shares. This being the sole ground on which the Assessing Officer seeks to reopen the assessment, the same must fail. In this context, counsel relied on several decisions, to which we would refer to at a later stage. 6. On the other hand, learned counsel Shri K.M. Parikh for the department opposed the petition contending that the conversion of shares from stockintrade to .....

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for the petitioner, as noted above, had raised three separate contentions, he focused solely on the last of these contentions while elaborating such contentions. In other words, his main and in fact, the sole contention was that in the process of converting the shares from stock to investment, the petitioner was not liable to pay any tax and that therefore, under no circumstances can it be stated that income chargeable to tax had escaped assessment. We have therefore, focused only on this aspec .....

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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 .....

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crores (rounded off). It was further alleged that for the assessment year 2005-2006, the assessee purposedly did not disallow interest component on such shares, since any such disallowance would have attracted the attention of the Assessing Officer during scrutiny assessment. He therefore, formed a belief that difference between cost of acquisition of shares of M/s Sun Pharmaceuticals Industries Ltd. and market price which was ₹ 9.16 crores and ₹ 397.66 crores respectively would be .....

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tion of shares at its market value on the date of transfer? In the context, the question would also be, would it make any difference whether for its accounting purpose the assessee transferred such stocks at cost instead of prevailing market value? The question in other words would be by mere transfer of shares from stockintrade to investment, did any taxing event arise so as to make the petitioner liable to pay the tax on any income? 9. Very similar issue arose before the Constitution Bench of .....

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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 .....

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lknown 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 the withdrawal. The second contention of the Revenue was that if the act of withdrawal is at a time when the market price is higher than the cost price, then the State would be deprived of a potential profit. If the market rate was lower, the assessee would be entitled to claim such loss. In this context, the majority opinion was that .....

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them, for under the Income-tax Act the State has no power to tax a potential future advantage. All it can tax is income, profits and gains made in the relevant accounting year. xxx In such circumstances we are of opinion that it is wholy unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is nonexistent. Cut away the fict .....

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der that he may be compelled to pay to Government a tax which is anything but fictional. xxx The appellant's method of bookkeeping reflects the true position. As he makes his purchases he enters his stock at the cost price on one side of the accounts. At the close of the year he enters the value of any unsold stock at cost on the other side of the accounts thus cancelling out the entries relating to the same unsold stock earlier in the accounts; and then that is carried forward as the openin .....

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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 th .....

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that the ratio in case of Kikabhai Premchand (supra) would not govern the case on hand and, therefore, did not require reconsideration in the said case. On the main issue on hand, the Supreme Court held and observed as under : In an earlier part of this judgment we have taken pains to point out the distinction between Kikabhai's case (2) and the case under our consideration. In view of that distinction, we do not think that it is really necessary in the present case to reexamine the ratio of .....

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ess or trading activity was concerned, the market value of the shares as on April 1, 1945, was what it costs the business. We do not think that there is any question of a notional sale here. The High Court did not create any legal fiction of a sale when it took the market value as on April 1, 1945 as the proper figure for determining the actual profits made by the assessee. That the assessee later sold the shares in pursuance of a trading activity was not in dispute; that sale was an actual sale .....

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ing the judgement in case of Kikabhai Premchand (supra), a Division Bench of Calcutta High Court in case of Commissioner of Income-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, .....

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siness 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 transaction will have to be entered in the account at the value in which the item was being carried, that is, at the market value of the opening stock. Had it been a case of a sale o .....

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by the value at which such stock was being carried. Further, in our view, there cannot be any actual profit or loss in such transfers where no third party is involved and the items are kept in a different account of the assessce himself. The question of gain or loss would arise in the facts of the instant case only in future when the stocks transferred to the investment account might be dealt with by the assessee. If such shares be disposed of at a value other than the value at which it was tra .....

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ade no profit or gain nor did it sustain a loss. The appellant did not derive any income. He may have stored up a future advantage for himself but since transactions did not derive an immediate pecuniary gain, the State cannot tax it since under the Income Tax Act, the State had no power to tax a potential future advantage. Facts of the present case are quite similar. The Assessing Officer had referred to in detail the reasons recorded as a sequence of events under which the assessee converted i .....

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pra), 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 rec .....

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