2010 (3) TMI 1284 - HC - Income Tax

Summary

Issues Involved:
1. Classification of Rs.33,20,000/- as long-term or short-term capital gain.
2. Deletion of interest disallowance of Rs.8,19,000/-.
3. Deletion of disallowance of Rs.2,93,439/- for unexplained expenditure.
4. Deletion of addition of Rs.6,02,31,163/- due to stock discrepancies.
5. Exclusion of sales tax and excise duty from total turnover for deduction u/s 80HHC.

Summary:

Issue 1: Classification of Rs.33,20,000/- as Long-term or Short-term Capital Gain
The Tribunal confirmed the CIT(A)'s decision to treat Rs.33,20,000/- as long-term capital gain. The Assessing Officer had classified it as short-term capital gain, interpreting the proviso to section 2(42A) of the Income Tax Act, 1961, to mean that shares must be listed on a recognized stock exchange to qualify as long-term capital assets if held for more than 12 months. The CIT(A) and Tribunal, relying on CBDT Circular No.684 and the proviso to section 2(42A), concluded that the listing condition applies only to "other securities" and not to shares. Thus, shares held for more than 12 months are long-term capital assets regardless of listing status.

Issue 2: Deletion of Interest Disallowance of Rs.8,19,000/-
The Tribunal upheld the CIT(A)'s finding that the assessee had sufficient interest-free funds (Rs.27.33 crores) to cover the Rs.4.5 crores advanced to group concerns. Therefore, there was no basis for disallowing proportionate interest on the grounds of diversion of interest-bearing funds.

Issue 3: Deletion of Disallowance of Rs.2,93,439/- for Unexplained Expenditure
The CIT(A) deleted the addition of Rs.2,93,439/- after finding no discrepancy between the books of accounts and the tax audit report, which was clarified by the tax auditors. The Tribunal found no violation of Rule 46A of the Income Tax Rules, as no fresh evidence was entertained by the CIT(A). The Tribunal upheld the CIT(A)'s decision based on the appreciation of the factual position.

Issue 4: Deletion of Addition of Rs.6,02,31,163/- Due to Stock Discrepancies
The Tribunal and CIT(A) found no quantitative discrepancy between the stock shown to the bank and the books of account. The Assessing Officer failed to consider the closing stock of work-in-progress, which was duly recorded in the books and balance sheet. The difference in stock value was attributed to different valuation methods, not quantity discrepancies. The Tribunal confirmed the CIT(A)'s deletion of the addition.

Issue 5: Exclusion of Sales Tax and Excise Duty from Total Turnover for Deduction u/s 80HHC
The Tribunal's decision to exclude sales tax and excise duty from the total turnover for computing deduction u/s 80HHC was admitted for further consideration. The substantial question of law admitted is: "Whether the Appellate Tribunal was justified in law and on facts in confirming the order passed by Commissioner (Appeals) directing to exclude Sales Tax and Excise duty from the total turnover for computing deduction under section 80HHC even after insertion of section 145A of the Act."

Conclusion:
The appeal is dismissed for issues 1 to 4 due to lack of substantial questions of law. The appeal is admitted for issue 5 regarding the exclusion of sales tax and excise duty from total turnover for deduction u/s 80HHC.