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The D.C.I.T, Circle 2, Ghaziabad Versus M/s Supreme Ceramics Ltd. And Vice-Versa

2017 (12) TMI 357 - ITAT DELHI

Short term capital gain on sale of shares - non materialization of transaction - hypothetical income - Held that:- The facts as emerged before us are that the proposed transaction of sale of shares did not materialize at all. No agreement or MOU or any sale bill etc. with respect to sale of these shares has been brought on record. It is contended that no such document was entered into and therefore there was no question of bringing on record any such document. Further, even sale consideration of .....

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ot materialize. Under these circumstances, it cannot be held at all that any capital gain was earned by the assessee on sale of impugned shares. Thus, addition made by the AO is illegal and factually incorrect and the same is here by directed to be deleted. - Addition for deviation u/s 145A - assessee did not include amount of Excise duty and VAT while making valuation of the closing stock - Held that:- Hon’ble Delhi High Court in case of CIT vs. Mahavir Aluminium Ltd.,[2007 (11) TMI 41 - HI .....

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ing adjustment will be required to be made in all relevant heads of Income and Expenditure including the opening stock. - The adjustment on account of Payment of Excise duty and VAT out of Cash/Bank but not debited in P & L Account would also be required to be given. It is noted that assessee has submitted detailed submissions and evidences to demonstrate the fact of payment of Excise duty as well as amount of Excise duty and VAT embedded in the value of opening stock. No dispute on facts ha .....

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16 And ITA No. 414/DEL/2016 - Dated:- 21-11-2017 - SHRI B.P. JAIN, ACCOUNTANT MEMBER AND SHRI SUDHANSHU SRIVASTAVA, JUDICIAL MEMBER For The Assessee : Shri Ashwani Tanena, Adv Shri Acrhit Rehan, Adv For The Revenue : Shri S.K. Jain, Sr. DR ORDER PER B.P. JAIN, ACCOUNTANT MEMBER, The above two cross appeals have been filed by the Revenue and assessee respectively against the order dated 20.11.2015 for AY 2011-12. 2. First, we shall take up the appeal filed by the assessee in ITA No. 414/ DEL/ 201 .....

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nt of sale of shares is bad in law and against the facts and circumstances of the case and without following the principles of natural justice. 3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the action of Ld. AO in not allowing the benefit of carry forward of losses of ₹ 1,63,84,566/- while passing the impugned assessment order. 4. That the appellant craves the leave to add, modify, amend or delete any of the grounds .....

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of ₹ 2.60 Crores as short term capital gain on sale of shares of M/s Dudheshwar Steel and Alloys Ltd. The brief background of the impugned addition is that during the course of assessment proceedings, it was noted by the Assessing Officer (in short referred to as AO ) that assessee has received advance of ₹ 25 Lakhs against the sale of shares of aforesaid company, however no capital gain has been shown in the income tax return on sale of these shares. Therefore, the AO computed the v .....

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he notice dated 10/02/2014, the assessee was required to furnish computation of capital gains on sale of these shares. The assessee has furnished reply to this query vide point No. 3 & 4 of reply dated 21/02/2014 explaining that the assessee held shares worth ₹ 2, 50, 00,000/- of Dudheshwar Steel & Alloys Ltd... The said company was in the process of sale but, after the settlement of the terms and conditions for sale and also after giving possession of the entire business of the sa .....

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ory was delivered to the purchasers. The sale consideration of ₹ 30 Crores was settled- for entire assets and liabilities of the company. The assessee company held 17% shareholding in that company. Therefore, the assessee company was entitled for the amount of sale consideration to the extent of 17% of the sale consideration negotiated between the parties. The claim of the assessee that the sale has not been effected due to dispute and also due to the fact that full value of consideration .....

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ee despite specific query to furnish computation of capital gains, the shares will be treated as short term capital asset and capital gain will be computed accordingly. Action u/s 271(1) (c) is being taken . 5. Thereafter, the AO computed the taxable amount of capital gain in the assessment order as under:- INCOME FROM CAPITAL GAINS: Short term capital gains: Deemed sale consideration being 17% of ₹ 30 Crores 5,10,00,000 Less: Cost of acquisition as per books 2,50,00,000 2,60,00,000 6. Bei .....

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of advance was received in contemplation of sale, but the transaction did not materialize and even sale consideration was not fixed. The AO did not completely go through the Point No.8 of Notes to Accounts and jumped to the wrong conclusion that sale has taken place that too without any evidence in this regard in the possession of AO. Further, AO has wrongly invoked the provisions of Section 2(47) of the Income tax Act, 1961 r.w.s. 53A of Transfer of Property Act which is applicable in the case .....

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in it has been held by Hon ble Supreme Court that there should be de-facto transfer for attracting provisions of Section 2(47)(vi). It was also held in there that no tax can be collected from the assessee on a hypothetical income. Thus, addition made by the AO is purely notional and wrongly confirmed by the CIT (A) and therefore it should be deleted. 8. Per contra, Ld. Senior DR strongly argued the case on behalf of the revenue. He relied upon the order of AO. It was submitted by him that the bu .....

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any material whatsoever on record. It is further noted that the AO made half reading of the Note No.8 of Notes to Account appended to the Balance Sheet of the assessee. The said Note No.8 has been provided at the page no.11 of the Paper Book which reads as under: The company has made investment of ₹ 2,50,00,000/- in earlier years in Shares of M/s Dudheshwar Steels & Alloys Private Limited. Net Assets Value of these shares as on 31.03.2010 (as per audited Balance Sheet of M/s Dudheshwar .....

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he profit/ (loss) of the company has neither been ascertained nor disclosed in the financial statement of the company . 8. The perusal of the above shows that the assessee had received as advance a sum of ₹ 25 Lakhs. However disputes took place and transaction of sale did not take place. Under these circumstances, there was no basis at all to draw inference from this note that the impugned transaction of sale has been completed by the assessee. In addition to the above, our attention was d .....

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ged in the FIR that these persons fraudently and forcibly took over possession of factory and stock of goods lying therein as well as share certificates and share transfer deeds. 10. Thus, the facts as emerged before us are that the proposed transaction of sale of shares did not materialize at all. No agreement or MOU or any sale bill etc. with respect to sale of these shares has been brought on record. It is contended that no such document was entered into and therefore there was no question of .....

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Hon ble Supreme Court in the case of CIT vs. Balbir Singh Maini, supra. Para 22 of this Judgment reads as under: The object of Section 2(47) (vi) appears to be to bring within the tax net a de facto transfer of any immovable property. The expression enabling the enjoyment of takes color from the earlier expression transferring , so that it is clear that any transaction which enables the enjoyment of immovable property must be enjoyment as a purported owner thereof. The idea is to bring within t .....

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s now well settled that income tax cannot be levied on hypothetical income . In CIT v. Shoorji Vallabhdas and Co. [CIT v. Shoorji Vallabhdas and Co., (1962) 46 ITR 144 (SC)] it was held as follows: (ITR p. 148) ... Income tax is a levy on income. No doubt, the Income Tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot .....

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have been made in the books of account. 12. The above passage was cited with approval in Morvi Industries Ltd. v. CIT [Morvi Industries Ltd. v. CIT, (1972) 4 SCC 451 : 1974 SCC (Tax) 140 : (1971) 82 ITR 835] in which this Court also considered the dictionary meaning of the word accrue and held that income can be said to accrue when it becomes due. It was then observed that: (SCC p. 454. Para 11) 11. ... The date of payment ….. does not affect the accrual of income. The moment the income a .....

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it be said that for the purposes of taxability that the income is not hypothetical and it has really accrued to the assessee. Insofar as the present case is concerned, even if it is assumed that the assessee was entitled to the benefits under the advance licenses as well as under the duty entitlement passbook, there was no corresponding liability on the Customs Authorities to pass on the benefit of duty-free imports to the assessee until the goods are actually imported and made available for cle .....

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foresaid reason. This being the case, it is clear that there is no profit or gain which arises from the transfer of a capital asset, which could be brought to tax under Section 45 read with Section 48 of the Income Tax Act. 16. In the present case, the assessee did not acquire any right to receive income, in as much as such alleged right was dependent upon the necessary permissions being obtained. This being the case, in the circumstances, there was no debt owed to the assessee by the developers .....

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. Apparently, the proposed transaction of sale fell through and did not materialize. Under these circumstances, it cannot be held at all that any capital gain was earned by the assessee on sale of impugned shares. Thus, addition made by the AO is illegal and factually incorrect and the same is here by directed to be deleted. As a result, Ground No. 1 & 2 are allowed. Ground No. 3 18. In this ground, the assessee is aggrieved with the action of lower authorities in not allowing benefit of car .....

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why the benefit of carry forward of losses and depreciation has not been granted. There appears to be omission on the part of AO in this regard. Therefore, in the interest of justice and fair play we remit the issue back to the file of AO to consider the claim of the assessee in proper manner and pass a speaking order on allow ability or otherwise of this claim. Undoubtedly, the AO shall give adequate opportunity of hearing to the assessee before passing a fresh order on this issue. As a result, .....

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mber, 2012 in ITA No.2871 /Mum/2007. Therefore, the order of the Ld.CIT (A) may be set-a-side and that of the AO be restored. 20. The grounds raised by the revenue involved a common issue with respect to addition for deviation u/s 145A amounting to ₹ 1, 29, 39,052/-. 21. The brief background of the addition is that it was noted by the AO in the Tax Audit report that assessee did not include amount of Excise duty and VAT while making valuation of the closing stock. Accordingly, he gave a sh .....

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r, no amount of Excise duty is pending to be paid, therefore, no further adjustment at all would be needed. Detailed working was submitted to the AO showing the effect of adjustment at NIL amount. However, AO was not satisfied and therefore he made the addition. 22. Being aggrieved, assessee carried the matter before CIT (A) and submitted detailed working that NIL adjustment is required to be made. The CIT (A) was satisfied with the submissions of the assessee and therefore, he deleted the addit .....

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enial to the fact that provisions of Section 145A are mandatory. However, the fact is that assessee has demonstrated before both the lower authorities that no adjustment would be needed even if the accounts are converted into inclusive method. Thus, compliance of Section 145A has been in effect made by the assessee. Our attention was also drawn on the guidance note of ICAI explaining provisions of Section 145A wherein it was clarified that whenever adjustment is made in valuation of inventories, .....

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CIT(A) showing that no further adjustment would be needed u/s 145A even if accounts are prepared on Inclusive basis. We find it convenient and useful to reproduce the relevant part of the submissions made by the assessee before the CIT (A): The first ground of appeal pertains to addition of ₹ 12939052/- to the income of the assessee by observing that due to deviation from the provisions of section 145A, the profit of the assessee company has been short computed by ₹ 12939052/-. The L .....

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tached. Ld. AO further submitted that as per the calculation made by the assessee, there is no effect in the profit due to deviation from the provisions of section 145A. Thereafter, Ld. AO while referring to the provisions of section 145A & stating that the same is mandatory observed that while giving effect to the provisions of section 145A, no effect is to be given on the opening stock and that the amount of excise duty paid out of cash/bank not debited to the P & L account has first t .....

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in present, assessee is a limited company. The financial statements are therefore required to be prepared as per provisions of Companies Act and accordingly valuation of inventories for Balance Sheet purposes are required to be made as per AS-2 (Accounting Standard-2) issued by the ICAI. Further, as per AS-2, the valuation of inventory should be made at lower of cost and net realizable value & the method of valuation should be consistently applied from year to year. Your goodself will appre .....

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AO during the course of assessment proceedings and your goodself will appreciate that the Ld. AO has not found any arithmetical mistake in the said working. He simply stated that benefit of excise & VAT in opening stock and that the excise duty & VAT paid out of cash/bank not debited in P & L account is not admissible. Your goodself will appreciate that the observation of the Ld. AO is not correct and in this regard please find enclosed herewith the entire working of the relevant cl .....

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that assessee is not refraining from the compliance of provisions of Section 145A. Rather the claim of the assessee is that provisions of Section 145A are duly complied with and no further adjustment is required to be made as has been wrongly made by the AO. Further, our attention is drawn on the working submitted by the assessee before the AO which shows that no adjustment will be required to be made in this case. The worksheet submitted by the assessee as is reproduced in the assessment order .....

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Total (B) 2,50.85.039 Increase/Decrease in profit (A-B) NIL Thus, according to the calculation made by the assessee, there is no effect in the profit due to deviation from the provisions of section 145A. 27. However, the AO disregarded the working and made the addition by giving his own working. It is noted by us that the difference in working of the assessee and working made by the AO is mainly due to the reason that AO has not given the benefit of corresponding adjustment in the value of open .....

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idance Note explaining the provisions of Section 145A. Further, on the basis of sense of justice and equity also same inference can be drawn that if Trading and P & L Account is to be converted from Exclusive method to Inclusive method, then corresponding adjustment will be required to be made in all relevant heads of Income and Expenditure including the opening stock. 28. Further, the adjustment on account of Payment of Excise duty and VAT out of Cash/Bank but not debited in P & L Accou .....

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