2003 (12) TMI 290 - AT - Income Tax

Summary

Issues Involved:
1. Treatment of long-term capital gain as taxable income.
2. Validity of the order passed by the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)].
3. Rejection of books of accounts under Section 145(2) of the Income Tax Act, 1961.
4. Exemption under Section 47(iv) of the Income Tax Act, 1961.

Detailed Analysis:

1. Treatment of Long-Term Capital Gain as Taxable Income:
The primary issue raised by the assessee was the AO's treatment of the long-term capital gain of Rs. 21,67,506 as taxable income. The AO observed that the assessee had made deductions from the gross income profit on the sale of investments without providing reasons. The assessee claimed that the shares were sold to a wholly owned subsidiary, S.W. Consultants (P) Ltd., and thus exempt under Section 47(iv) of the Income Tax Act, 1961. However, the AO found discrepancies in the dates of transactions and the actual ownership status of the subsidiary at the time of the transaction, leading to the conclusion that the exemption under Section 47(iv) was not applicable.

2. Validity of the Order Passed by AO and CIT(A):
The assessee contended that the orders by the AO and CIT(A) were "bad in law and void ab initio." The AO's decision was based on the observation that the assessee's books of accounts were not maintained regularly and contained numerous discrepancies, including overwriting and non-chronological entries. The CIT(A) upheld the AO's findings, noting that the books of accounts could not be relied upon due to various defects and discrepancies pointed out during the assessment.

3. Rejection of Books of Accounts Under Section 145(2):
The AO rejected the assessee's books of accounts under Section 145(2) of the Income Tax Act, citing that the accounts were not maintained regularly and contained numerous discrepancies. The AO's detailed examination revealed that the transactions were recorded in a non-chronological order, with overwriting and uninitialed corrections, casting doubt on the reliability of the accounts. The CIT(A) supported this view, emphasizing that the books could not justify the claim that S.W. Consultants (P) Ltd. was a wholly owned subsidiary at the time of the transaction.

4. Exemption Under Section 47(iv):
The core of the dispute was whether the assessee was entitled to exemption under Section 47(iv) for the sale of shares to S.W. Consultants (P) Ltd. The AO concluded that the assessee did not own 100% of the subsidiary's shares at the time of the transaction on 22nd March 1995. The AO cited the Supreme Court's decision in McDowell & Co. (P) Ltd. vs. CTO, emphasizing that tax planning must be within the law and that colorable devices to avoid tax are not permissible. The CIT(A) agreed, noting that the assessee failed to provide independent evidence to substantiate the claim of ownership on the transaction date, and the payment consideration was debited only on 31st March 1995.

Conclusion:
The Tribunal upheld the findings of the AO and CIT(A), dismissing the appeal filed by the assessee. The Tribunal found that the assessee's books of accounts were unreliable, and the claim for exemption under Section 47(iv) was not substantiated. The Tribunal emphasized that the transaction took place before the subsidiary became wholly owned, making the exemption inapplicable. The Tribunal also noted that the arguments and evidence presented by the assessee did not successfully rebut the detailed observations and conclusions of the tax authorities.