9911796707
TMI Blog1987 (8) TMI 124X X X X Extracts X X X X X X X X Extracts X X X X ..... 1976 No. Of Shares Purchase price Rate on 31-3-1976 Value on 31-3-1976 Value at cost or market price whichever lower A. Equity 900 Rs.99,000 nil nil nil B. Equity 500 Rs.50,000 nil nil nil 6 % Pref. 2250 Rs.225,000 Rs.75 each Rs.168,750 Rs.1,68,750 Rs.374,000 . Rs.168,750 Rs.1,68,750 As on 31-3-1977 . . . Value of opening stock Rate on 31-3-1977 Value on 31-3-1977 Value at cost or market price whichever lower 6 % Pref. 2250 Rs.1,68,750 nil nil nil 5. During the course of assessment proceedings under s. 143(3)/144B of the Act, the ITO enquired of the assessee as to how and why the closing stock of the shares in question was valued at Nil. He also enquired as to who took the decision to purchase the shares in question at part and what was the purpose behind it. In order to appreciate the rival contentions of the parties, it would be necessary to reproduce below the relevant portion of the draft assessment order framed by the ITO for the asst. y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tracted in view of the facts set out in the foregoing paragraphs. Thirdly, without prejudice to the foregoing, another aspect off the matter also requires consideration. In its letter dt. 10th March, 1978 referred to above, inter alia, the assessee firm had stated that the shares were purchased in good faith and "in anticipation that the Company might pay handsome dividends in the next few years to come". Apart from the fact whether a perusal of the balance sheet of the company warrants such optimism, this explanation of the assessee goes to show that these shares were purchased not as a dealer in shares but as an investor in shares resigned to a long gestation period for a return. When the assessee admits that these purchases were made with a view to earn an income by way of an investment, by no stretch of imagination can purchase of these shares be considered as a part of the stock-in-trade of the assessee. In this view of the matter these shares should not figure in the trading account of the assessee at all. These investments should have been shown separately in the balance sheet and should not have been mixed up with stock-in-trade. In that event diminution of closing stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vestment, we object to the same,as the same are purchased for dealing in shares, and as such the same have been included in the closing stock of the firm. As has been mentioned in your draft assessment order, the advice was taken from late Shriman J.M. Ghorpade in the sale and purchase of the shares and securities. There is nothing wrong in obtaining advice from an experienced person, who knew a lot about the prospects of companies. The ITO's view that the purchase of these shares were/was a collusionery transaction and is not a genuine one has no foundation at all as while making the investments one does expect a rise in future so that the advantage of price fluctuations can be exploited. This is what was precisely done. The expectation may fructify or may fail. There is nothing in law which prevents one to take decisions which ultimately prove imprudent. In the second para on page 4 of your draft assessment order you have stated that the difference between the two which comes to Rs. 2,05,250 is added back in this year as the same is considered as a fictitious loss, is objected to, as the same arising out of a genuine business transaction of the assessee firm, which is a profes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee firm were shareholders in M/s Gaekwad Investment Corporation Ltd. at the relevant time. He has further stated that the partners were directors of M/s Frozen foods Pvt. Ltd. and with the data available at his disposal he has tried to establish that the purchase of shares in Frozen Foods Pvt. Ltd. was a collusive transaction emanated from extra commercial consideration. He has further tried to analyse as to how the investment was not prudent in view of the accumulated losses compared to the capital base of that company. The learned ITO has repeatedly mentioned about the "Gaekwad Group" which is relevant to the context. He could have confined himself to the individual partners of the assessee firm and their association with Gaekwad Investment Corporation P. Ltd. from what is stated above, it is argued that the attempt of the ITO to establish collusion is a farfetched idea based on his imagination." 7. On 4th Sept., 1979, the assessee wrote the following letter to the IAC in respect of s. 144B proceedings for the asst. yr. 1976-77: "1. The value of the shares of Frozen Foods Private Limited has been taken at Mil because as per the value worked out on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the income returned and that assessed was mainly due to the addition of Rs. 1,68,750 in the aforesaid transaction. 10. Being aggrieved by the orders of the ITO, the assessee had preferred appeals before the Commissioner(A). Along with the grounds of appeal for the asst. yr. 1976-77, the assessee had filed statement of facts and the relevant portion thereof, reads as under: "5. As stated, the appellant was dealer in shares. In the previous year relevant, the firm purchased 1400 equity and 2250 6 per cent cumulative preference shares of Messrs Frozen foods Pvt. Ltd. from a company Messrs Gaekwad Investment Corporation P. Ltd. It is verified that the company took a decision to dispose of its entire holdings in Messrs Frozen Foods on 30th Jan.,1976 at any price but not being less than at part. Thus, the shares were available for purchase at face value only if they were to be purchased. 6. The partners of the firm having given knowledge of this, thought of purchasing these shares. Though the company had not yielded any dividends so far and though the break-up value of the shares were at "Zero" the partners who are concerned to take a decision, had all the hopes, having the kn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue" concept. The market value is determined mainly on "yield basis" or "on break up value basis". Both on these lines, the value of the shares under consideration were at "zero" and accordingly they have been valued on that concept as on 31st March, 1976, The result is obvious in the accounts. 11. The learned ITO after all the submissions has branded the transaction on primary suspicions as "not genuine" "extra commercial" transaction. He also holds that the purchase is on "capital Investment" account. The learned ITO/IAC have not proved the 'intent' to the logical ends but have based on their suspicions. He also states that the provisions of sec. 40A(2) are also attracted. The learned ITO has gone mainly on the provisions of s. 40A(2) of the Act," The assessee had also filed statement of facts along with memo of appeal for the asst. yr. 1977-78 on similar lines. 11. In his consolidated appellate order dt. 31st July,1982, the Commissioner (A) upheld the aforesaid additions, in the following manner: "(a) From the facts and figures given in partnership 5 of the assessment order for the asst. yr. 1976-77 dt. 6th Sept., 1979 it is obvious that the accumulated losses of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase price in the asst. yr. 1976-77 only, and it was hinted that by accepting the appellant's version of market value of preference share being Rs. 75 on 31st March,1976, the ITO had unwittingly indulged in inconsistency. The ITO present subsequently has very ably explained this position to me. For the sake of facility, we need restrict our attention to the transaction of preference shares only because this point is relevant to those shares only and not to the equity shares. Further again, for the sake of facility, let us consider the position of one preference share. Thus, one preference share is purchased by the appellant in January-February, 1976 for Rs. 100 and the market value of that share at the end of the relevant previous year i.e., 31st March, 1976 is taken at Rs. 75. Thus, in the asst. yr. 1976-77 relevant to the previous year ending 31st March, 1976, a loss of Rs. 25 is claimed. Further, the balance of Rs. 75 is claimed as loss in the asst. yr. 1977-78 because after showing the opening stock of that year as on 1st April, 1976 at the rate of Rs. 75 the appellant had shown it NIL in closing stock as on 31st March, 1977. Thus, through the purchase price of Rs. 100 is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares at Rs. NIL and that of preference shares at Rs. 75 as on 31st March, 1976 a copy of the valuation report by the M/s Sathe Vasht, Chartered Accountants (3rd Floor, 199, Churchgate Reclamation, J. Tata Rd., Bombay)dt. 3rd June,1976, is produced. A perusal of that report shows that the learned valuers have adopted the balance-sheet of that company viz. M/s Frozen Foods Pvt. Ltd. as on 31st Dec., 1974, and have arrived at some figure of deficiency viz. Rs. 9,91,225 as is discernible from the figures given in Para 5 of the assessment order. From this fact also, it is obvious that even an independent buyer would have looked at the balance sheet of that company as on 31st March, 1974 (ad indicated in sub-Para (a) above). It needs to be further observed that this balance sheet as on 31st Dec.,1974 would have constituted the basis even for estimating the worth of these shares at the time of alleged transaction of purchase in January-February,76. So as per this valuation report the value of equity shares was nil even at the time of alleged purchase in January-February, 76, and it is interesting to note that valuation report doe not indicate as to the date on which the respective valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all these reasons, additions made by the ITO in the asst. yrs. 1976-77 and 1977-78 on account of losses claimed on transactions of equity and preference shares of M/s Frozen Foods (P)Ltd. deserve to be upheld." 12. Simultaneously with the framing of the assessment the ITO had initiated the proceedings under s. 274/271(1)(c) of the Act, and called upon the assessee to show cause why penalty should not be imposed under s. 271(1)(c) of the Act, in respect of the aforesaid additions made in the assessment. The assessee has resisted the action of the ITO. The ITO however, imposed penalty under s. 271(1)(c) of the Act vide orders both dt. 26th Feb., 1983. The relevant portion of the order for the asst. yr. 1976-77, reads as under: "It is seen from the above reply that the assessee has offered no explanation for the claim of fictitious losses amounting to Rs. 2,05,250 during the year despite the fact that the assessment order specifically mentioned that the penalty proceedings under s. 271(1)(c) have been initiated in respect of such disallowance of loss. 5. Since the assessee was evading the issue another letter was sent by the undersigned requiring the assessee to offer its ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ircumstances, the proposed penalty u/s. 271(1)(c) is hereby approved". It may be mentioned that more or less on the aforesaid lines, the ITO imposed penalty for the asst. yr. 1977-78 also. 13. Being aggrieved by the orders of the ITO, the assessee preferred appeals before the Commissioner(A) and strongly urged that on the facts and circumstances obtaining in its case, no penalty could have been imposed under s. 271(1)(c) of the Act. In his consolidated order under appeal, the Commissioner(A) adverted to his consolidated order in the assessment proceedings and confirmed the action of the ITO in imposing penalty under s. 271(1)(c) of the Act, in the following manner: "3. In the course of hearing before me of the present appeals against penalty order, Shri D.M. Sant, C.A. and the learned counsel for the appellant, did not point out any factual inaccuracy either in the relevant assessment orders of the ITO or my appellate order referred to above or the penalty orders which are the subject-matter of these appeals. His short contention before me was that the appeals to the Tribunal have been filed even against my appellate order dt. 31st July, 1982 confirming the additions and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) under the well known principles of accountancy, the assessee is entitled to value the closing stock at cost or market price whichever is lower, (iv) the shares in question were purchased by the assessee in its normal course of business and till date, the assessee is holding the said shares in the hope that M/s Frozen Foods Private Ltd., would turn the corner and declare handsome dividends, (v) the assessee had not claimed the loss in respect of the shares in question but had valued the closing stock on the basis of the cost or market price whichever is lower, and (vi) no gift-tax proceeding were started by the Revenue with a view to treat the price paid for the shares in question as deemed gift under s. 4(1)(a) r/w s. 2(xxiv) of the GT Act, 1958. 15. Thereafter, he invited the attention of the Tribunal to the orders of the ITO framed under s. 143(3)/144B of the Act, and highlighted the fact that the ITO was not sure as to how the addition could be made, in the manner he did. Firstly, he stated (without any evidence) that this was a collusive transaction. Secondly, he was of the opinion that the provisions of s. 40A(2) of the Act, would be applicable even though no expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... known fact that M/s Frozen Foods Pvt. Ltd. had huge accumulated losses and that there was no indication of getting any dividends in the near future. He, further submitted that the fact that assessee was still holding the shares of M/s Frozen Foods Pvt. Ltd. with the hope to earn handsome dividends, would not in any way further its case. He also pointed out that the assessee has not brought any evidence on record to show that it had some internal information about the further of M/s Frozen Foods Pvt. Ltd. Finally, he submitted that it is not true that the findings in the assessment proceedings would not be relevant for considering the imposability of penalty under s. 271(1)(c) of the Act. In support of his submissions, he relied on the decisions in the cases of New Bijli Foundry vs. CIT (1981) 23 CTR (P H) 10: (1982) 135 ITR 593 (P H) and McDowell Co. vs. CTO (1985) 47 CTR (SC) 126: (1985) 154 ITR 148 (SC) as well as a case of Atul Kumar Deovrat Co. vs. CIT (1987) 60 CTR (Cal) 131: (1987) 31 Taxman 87 (Cal). He therefore, urged that we should uphold the order of the Commissioner (A). 19. We have carefully considered the rival submissions of the parties and the material to whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pronounced on 17th April,1985, the earlier decision in the case of CIT vs. A. Raman Co. (1968)67 ITR 11 (SC) held the field. Therefore no adverse inference and that too in the penalty proceedings, could be taken against the assessee as the decision in the case of McDowell Co. is "a new and radical approach adopted by the courts in India and abroad" in the tax matters, as observed by the Hon'ble Kerala High Court in the case of Neroth Oil Mills Co. Ltd. vs. CIT (1987) 62 CTR (Ker) 33: (1987) 166 ITR 418 (Ker). On the proper appreciation of the facts and circumstances obtaining in the instant case, we have no hesitation in holding that the assessee has not concealed its income or furnished inaccurate particulars thereof so as to bring its case within the mischief of s. 271(1)(c) of the Act. In this view of the matter, we have no hesitation in cancelling the penalty imposed under s. 271(1)(c) of the Act, for both the years under consideration. 20. In the result, both appeals are allowed. P.J. GORADIA, A.M. I have gone through the order passed by my ld. Brother and agree with the same. I would like to highlight certain factual aspects as under: 1.1. for deciding the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a clear inference that price paid for the purchase of the shares though for above the intrinsic value, was the price for gaining control in the management of the company. When such changeover is envisaged naturally various factors weigh in the minds of intending buyers viz. Market value of the fixed assets owned by the company though shown at book value in the books of account, confidence with regard to the future development of the company in future, etc. There is therefore, no reason to doubt the bona fides in purchasing the shares at a price given by the assessee company. 1.3. This would lead us to the second aspect of the controversy i.e. with regard to the valuation of these very shares at the close of the year. No doubt there could be two views on the aspect whether then in such circumstances these shares should not have been shown as investments in assessee's balance sheet. But this aspect has no effect on controversy on hand. Besides, the addition was already made in value of closing stock disregarding value shown by the assessee and therefore, ultimate effect gets adjusted by adopting the cost only for purpose of closing stock valuation and that is why probably the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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