2007 (4) TMI 282 - AT - Income Tax

Issues Involved:
1. Nature of shares held by the assessee.
2. Reliance on return of income before search action.
3. Application of principles of res judicata.
4. Overriding effect of special procedure for search cases.
5. Consideration of seized material and documentary evidence.
6. Alleged fraudulent scheme of tax planning.
7. Avoidance of capital gains tax under section 46(2) and DTAA.
8. Consideration of quantum of facts and documentary evidence.
9. Logical conclusion of findings in appellate order.
10. Comprehensive consideration of facts and evidence.
11. Findings of fact and law in block assessment order.
12. Construction of remarks by the Bombay High Court.
13. Application of Supreme Court judgment in McDowell & Co. Ltd.
14. Prayer for setting aside CIT(A) order and restoring Assessing Officer's order.
15. Leave to amend or alter grounds of appeal.

Detailed Analysis:

1. Nature of Shares Held by the Assessee:
The primary contention was whether the shares of M/s. Sterlite Industries (India) Ltd. and M/s. Madras Aluminium Co. Ltd. held by the assessee were in the nature of stock-in-trade or investments. The CIT(A) concluded that the shares were held as investments for acquiring a controlling stake, not as stock-in-trade. This was based on the intention of the assessee and the conduct over the years, where the shares were acquired to maintain control over the companies.

2. Reliance on Return of Income Before Search Action:
The CIT(A) relied on the return of income filed by the assessee before the search action for the assessment year 1998-99, where the conversion of shares from stock-in-trade to investments was disclosed. The Assessing Officer had accepted this conversion in the regular assessment for the said assessment year.

3. Application of Principles of Res Judicata:
The CIT(A) noted that the findings of the regular assessment under section 143(3) for the assessment year 1998-99 should be relevant to the block assessment proceedings. The Assessing Officer in the block assessment did not provide reasons for deviating from the findings of the regular assessment.

4. Overriding Effect of Special Procedure for Search Cases:
The CIT(A) rejected the contention that the special procedure for assessment of search cases under Chapter XIV-B had an overriding effect over regular assessment. The CIT(A) emphasized that the facts and findings in the regular assessment were relevant and should not be ignored.

5. Consideration of Seized Material and Documentary Evidence:
The Assessing Officer relied on seized documents indicating a calculated plan to convert stock-in-trade into investments to avoid tax liability. However, the CIT(A) found that these documents did not conclusively prove that the shares were held as stock-in-trade.

6. Alleged Fraudulent Scheme of Tax Planning:
The Assessing Officer alleged that the assessee devised a fraudulent scheme to avoid tax, which was unearthed during the search. The CIT(A) acknowledged the presence of planning but concluded that the shares were inherently investments, not stock-in-trade.

7. Avoidance of Capital Gains Tax under Section 46(2) and DTAA:
The CIT(A) noted that the conversion of shares and subsequent liquidation did not result in tax liability under section 46(1) since the shares were held as investments. The Double Taxation Avoidance Agreement (DTAA) between India and Mauritius was also considered, which provided that no capital gains tax was leviable in Mauritius.

8. Consideration of Quantum of Facts and Documentary Evidence:
The CIT(A) found that the Assessing Officer did not adequately consider all facts, documentary evidence, and points of law. The CIT(A) emphasized the need for a holistic approach, considering the nature of the shares as investments.

9. Logical Conclusion of Findings in Appellate Order:
The CIT(A) observed that the Assessing Officer did not arrive at a logical conclusion based on the findings in the block assessment order. The CIT(A) concluded that the shares were investments, not stock-in-trade.

10. Comprehensive Consideration of Facts and Evidence:
The CIT(A) concluded that the treatment of shares as stock-in-trade was a misclassification. The shares were held as investments for acquiring a controlling stake, and the conversion on 31-3-1998 merely corrected the classification.

11. Findings of Fact and Law in Block Assessment Order:
The CIT(A) found that the block assessment order did not consider the findings of the regular assessment. The CIT(A) emphasized the need for consistency and relevance of findings in both assessments.

12. Construction of Remarks by the Bombay High Court:
The CIT(A) noted that the observations of the Bombay High Court in the case of Twinstar Holdings Ltd. v. Anand Kedia were confined to the applicability of section 281 and did not pre-judge the issues involved in the block assessment.

13. Application of Supreme Court Judgment in McDowell & Co. Ltd.:
The CIT(A) acknowledged the relevance of the Supreme Court judgment in McDowell & Co. Ltd. but concluded that the conversion of shares was not a colorable device but a reflection of their true nature as investments.

14. Prayer for Setting Aside CIT(A) Order and Restoring Assessing Officer's Order:
The CIT(A) upheld the assessee's contention that the shares were investments and deleted the addition made by the Assessing Officer.

15. Leave to Amend or Alter Grounds of Appeal:
The CIT(A) addressed all grounds raised by the revenue and concluded that the shares were investments, not stock-in-trade, and the addition made by the Assessing Officer was deleted.

Conclusion:
The CIT(A) concluded that the shares held by the assessee were investments for acquiring a controlling stake, not stock-in-trade. The conversion of shares on 31-3-1998 corrected the classification, and the block assessment order did not adequately consider the findings of the regular assessment. The appeal filed by the revenue was dismissed, and the order of the CIT(A) was upheld.

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