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2014 (5) TMI 705 - HC - Income TaxValuation of share - Block transferred from investment to stock in trade - Whether the valuation of the shares of Off-Shore India Limited made on 1st April, 2003 when the block was transferred from investment to stock-in-trade was justified in law Held that - The assessee did not value the shares of Off Shore India Limited on 1st April, 2003 as per the mandate appearing from the guidelines - The assessee valued the shares at more than Rs. 5 per share whereas the shares on the date of conversion had a negative value of Rs. 1.89 paisa each on the basis of the balance sheet as on 31.03.03 - both the CIT (A) and the Tribunal failed to notice the fact that a similar treatment can be made where investment was in shares of a similar nature - There is no rule or principle which enjoins similar treatment between the two dissimilar objects. The shares of Off Shore India Limited were valued at a negative price on 29th April, 2004 by the Auditor of the assessee on the basis of the balance sheet as at 31.3.2003 whereas the shares of Yield Investment Private Limited were treated by the assessee during the Financial Year 2003-04 - The shares of Yield Investment Pvt. Ltd. were tradable shares whereas the shares of Off Shore India Limited were junk shares - The AO did not in fact apply discriminatory standard - He has demonstrated that the assessee valued the closing stock with respect to the shares of Yield Investment (P).Ltd. at the same rate at which they were valued at the beginning of the year whereas the block of 45,00,000 shares of Off Shore India Limited valued by the assessee on 1st April, 2003 at more than Rs. 5/- per share was valued on 31.3.2004 at Re.1/- only - It is not a fact that the assessee had given the same treatment to the shares of Off Shore India Limited and Yield Investment (P) Ltd. thus, the order of the Tribunal is set aside - as opined by both the CIT (Appeals) and the learned Tribunal The Valuation of the shares of Off Shore India Ltd. would be made in accordance with law and in doing so the Explanation to Rule 11 of 3rd Schedule to the Wealth Tax Act, 1957 may be taken into consideration by the AO - Decided against Revenue.
Issues Involved:
1. Valuation of shares of Offshore India Ltd. 2. Conversion of shares from investment to stock-in-trade. 3. Consistency in valuation methods for different companies. 4. Compliance with Reserve Bank of India guidelines. 5. Application of Accounting Standards. 6. Allegations of tax evasion. Issue-Wise Detailed Analysis: 1. Valuation of Shares of Offshore India Ltd.: The primary issue was the valuation of shares of Offshore India Ltd. The valuation report by Bose & Chakraborty, Chartered Accountants, dated 29.3.2004, assessed the shares at (-) Rs.1.89 per share. However, the assessee converted 45,00,000 shares to stock on 1.4.03, valuing them at Rs.2,47,05,000/-, and later at Re.1/- on 31.3.2004. The assessing officer reduced the value by Rs.2,47,05,000/- due to inconsistent valuation within the same financial year. 2. Conversion of Shares from Investment to Stock-in-Trade: The assessee transferred shares from investment to stock-in-trade on 1st April 2003, valuing them at Rs.2,47,05,000/-. The CIT(A) found the method consistent with Yield Investment (P) Ltd., but the Tribunal noted that the shares were valued differently at the beginning and end of the year, suggesting inconsistency. 3. Consistency in Valuation Methods for Different Companies: The CIT(A) allowed the appeal, stating that the assessee followed identical methods for valuing shares of Offshore India Ltd. and Yield Investment (P) Ltd. The Tribunal upheld this, noting no specific error by the Revenue. However, the High Court found that the shares of Offshore India Ltd. were valued differently from Yield Investment (P) Ltd., indicating inconsistent treatment. 4. Compliance with Reserve Bank of India Guidelines: The assessee claimed compliance with RBI guidelines, valuing shares at cost or break-up value, whichever is lower. The shares were valued at Re.1/- due to a negative break-up value. The High Court noted that the assessee did not follow the guidelines on 1st April 2003, as the shares should have been valued at their negative break-up value. 5. Application of Accounting Standards: The assessee cited Accounting Standards 13, specifically paragraph 32, for valuing long-term investments at cost with provisions for diminution. The Revenue argued that the assessee did not make provisions for diminution during the financial year 2002-03, raising questions about the valuation method. 6. Allegations of Tax Evasion: The Revenue alleged that the conversion was an artificial step to avoid tax liabilities. The High Court referenced the Madras High Court judgment in R. Krishnaswamy Vs. Commissioner of Income Tax, emphasizing that artificial steps to evade tax should be scrutinized. The High Court found that the shares of Offshore India Ltd. were of no value at the time of conversion, supporting the Revenue's claim of tax evasion. Conclusion: The High Court set aside the orders of the CIT(A) and the Tribunal, finding that the assessee did not apply consistent valuation methods and failed to comply with RBI guidelines. The valuation of Offshore India Ltd. shares was not justified in law. The question was answered in favor of the Revenue, directing the valuation to be made in accordance with the law, considering the Explanation to Rule 11 of the 3rd Schedule to the Wealth Tax Act, 1957.
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