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TMI Blog2016 (8) TMI 565X X X X Extracts X X X X X X X X Extracts X X X X ..... g Officer had recorded the following reasons to issue such notice : "Facts : A survey u/s.133A of the Income-tax Act was carried out in the case of assessee company on 27th & 28th September 2010. During the course of survey and post survey investigations, statements of Shri Girish Desai, whole time director of the assessee company and Shri Hiten. C. Timbadia, FCA, Tax Auditor (u/s.44AB of the IT Act, 1961) of the assessee company were recorded. On the basis of the documents found during the course of survey, statements of above mentioned persons and the return of income filed by the assessee company, the following discrepancies emerged: The assessee was engaged in the business of trading in shares and securities, apart from other business activities. During Financial Years 1995-96, 1996-97 and 1997-98, the assessee purchased certain shares out of interest bearing borrowed funds and held it as "stockintrade". The assessee kept claiming interest on such borrowed funds as its expenses and kept reducing its taxable income. The A0 made disallowance u/s.14A. The assessee took the below mentioned grounds of appeal before the Honorable ITAT for earlier years completed assessments:- a. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escaped assessment because of collusion between the Assessee and the Tax Auditor, wherein the Auditor did not mention the fact of a transfer of shares held as 'stock in trade' to "investment', at cost price in its Tax Audit report. This willful omission on part of the Tax Auditor also tantamounts to professional misconduct as it defeats the very purpose and intention of the Tax Audit u/s.44AB of the Income Tax Act, 1961. The malafide of the assessee is also proved by the fact that the assessee showed a highly suppressed market value of the shares in question in its account statements. The market value of shares of M/s. Sun Pharmaceuticals Industries Ltd, held by the assessee as on 1.4.2004 was Rs. 397,66,33,989/- as compare to Rs.l57,0l,72,947/- reflected by the assessee. When the statement of Shri Girish Desai, whole time Director of the company was recorded during the course of survey, he admitted that he was aware of the consequences and he was also aware that by naming 'stockintrade' as 'investment' they can escape taxability. During earlier years, when disallowance was made under section 14A, the assessee kept insisting that the shares in question have been purchased from i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e truly and fully all material facts. Reopening of assessment beyond a period of four years was therefore, invalid. 2) The sole issue of the conversion of shares held by the company as stockintrade into investment was examined by the Assessing Officer during the scrutiny assessment. 3) In any case, there was no taxing event by mere conversion of such shares. This being the sole ground on which the Assessing Officer seeks to reopen the assessment, the same must fail. In this context, counsel relied on several decisions, to which we would refer to at a later stage. 6. On the other hand, learned counsel Shri K.M. Parikh for the department opposed the petition contending that the conversion of shares from stockintrade to investment was not disclosed in the returns filed or during the original assessment. Reopening beyond a period of four years was therefore permissible. The petitioner adopted the cost price for such conversion instead of the market value which would be the correct method. This would result into income chargeable to tax escaping assessment. This issue was never examined by the Assessing Officer during the original assessment. 7. Before proceeding further, we may rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmaceuticals Industries Ltd. and market price which was Rs. 9.16 crores and Rs. 397.66 crores respectively would be the profit to the company which escaped assessment. Likewise, he noted that the assessee had acquired equity shares of Zigma Software Ltd. at the cost of Rs. 43.20 lacs which had a market value of Rs. 97.68 lacs as on 1.4.2004 and the difference between the two i.e. Rs. 54.48 lacs was the profit escaping assessment. Fundamental question is in the process of converting the shares held by the company as stockintrade into investment, was the assessee liable to pay tax on cost of acquisition of shares at its market value on the date of transfer? In the context, the question would also be, would it make any difference whether for its accounting purpose the assessee transferred such stocks at cost instead of prevailing market value? The question in other words would be by mere transfer of shares from stockintrade to investment, did any taxing event arise so as to make the petitioner liable to pay the tax on any income? 9. Very similar issue arose before the Constitution Bench of Supreme Court in case of Sir Kikabhai Premchand v. Commissioner of Income-tax reported in (1953 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot tax them, for under the Income-tax Act the State has no power to tax a potential future advantage. All it can tax is income, profits and gains made in the relevant accounting year. xxx In such circumstances we are of opinion that it is wholy unreal and artificial to separate the business from its owner and treat them as if they were separate entities trading with each other and then by means of a fictional sale introduce a fictional profit which in truth and in fact is nonexistent. Cut away the fictions and you reach the position that the man is supposed to be selling to himself and thereby making a profit out of himself which on the face of it is not only absurd but against all canons of mercantile and income-tax law. And worse. He may keep it and not show a profit. He may sell it to another at a loss and cannot be taxed because he cannot be compelled to sell at a profit. But in this purely fictional sale to himself he is compelled to sell at a fictional profit when the market rises in order that he may be compelled to pay to Government a tax which is anything but fictional. xxx The appellant's method of bookkeeping reflects the true position. As he makes his purchases ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual profits in the present case ? We think that the basis must be, as the High Court has put it, the ordinary commercial principles on which actual profits are computed. We think that the approach of the High Court was correct and normally the commercial profits out of the transaction of sale of an article must be the difference between what the cost the business and what it fetched on sale. So far as the business or trading activity was concerned, the market value of the shares as on April 1, 1945, was what it costs the business. We do not think that there is any question of a notional sale here. The High Court did not create any legal fiction of a sale when it took the market value as on April 1, 1945 as the proper figure for determining the actual profits made by the assessee. That the assessee later sold the shares in pursuance of a trading activity was not in dispute; that sale was an actual sale and not a notional sale; that actual sale resulted in some profits. The problem is how should those profits be computed? To adopt the language of Lord Radcliffe, the only fair measure of assessing trading profits in such circumstances is to take the market value at one end and the ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e kept in a different account of the assessce himself. The question of gain or loss would arise in the facts of the instant case only in future when the stocks transferred to the investment account might be dealt with by the assessee. If such shares be disposed of at a value other than the value at which it was transferred from the business stock, the question of capital loss or capital gain would arise." 1. It can thus be seen that the situation in the present case finds a direct answer in the judgement of the Constitution Bench in case of Kikabhai Premchand (supra) in which, as noted, the assessee had settled a part of his shares and silver bars held as stock into a trust of which he was prime beneficiary and was also in control of the trust. It was held that in the process, the assessee's business made no profit or gain nor did it sustain a loss. The appellant did not derive any income. He may have stored up a future advantage for himself but since transactions did not derive an immediate pecuniary gain, the State cannot tax it since under the Income Tax Act, the State had no power to tax a potential future advantage. Facts of the present case are quite similar. The Assessi ..... 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