Commissioner Of Income Tax Iii, Chennai v. M/S. Sriram Investments Ltd., Mookambika Complex, Iii Floor

IN THE HIGH COURT OF JUDICATURE AT MADRAS C O R A M THE HON'BLE MR. JUSTICE NOOTY.RAMAMOHANA RAOANDTHE HON'BLE Dr. JUSTICE ANITA SUMANTH Tax Case Appeal No.1421 of 2010 Commissioner of Income Tax III,Chennai... AppellantVsM/s. Sriram Investments Ltd.,Mookambika Complex,III Floor, No.4 Lady Desika Road,Mylapore, Chennai 600 004.. Respondent M/s. Sriram Investments Ltd.,Mookambika Complex,III Floor, No.4 Lady Desika Road,Mylapore, Chennai 600 004 Prayer:- Appeal filed under Section 260A of the Income Tax,1961, against the Order of the Income Tax Appellate Tribunal,Chennai C Bench, dated 26.03.2010, in I.T.A.No.1612/Mds/2009.Against order passed by the income Tax Appellate TribunalChennai, Bench C Chennai made in ITA.No.1612/mbs/2009 for theassessment year 2005-2006 which was preferred against the orderpassed by the commissioner Income Tax appeals V, 121 MahatmaGandhi Road, Chennai 600 034 made in ITA.No.332/2007-2008dt.24.12.2008. For Appellant : Mr. J.NarayanasamyFor Respondent : Mr. R.Sivaraman (Judgment of the Court was delivered by Anita Sumanth, J.,) The above Appeal is preferred by the Revenue underSection 260 A of the Income Tax Act, 1961, (in short, ‘the Act’)calling in question the correctness of order dated 26.03.2010,passed by the Income Tax Appellate Tribunal, Chennai. 2. The following five substantial questions of law relatingto the assessment year 2005-06 have been raised:1. Whether on the facts and in thecircumstances of the case, the Income Tax AppellateTribunal was right in holding that the assessee was https://hcservices.ecourts.gov.in/hcservices/ entitled to account for only the “additional financecharges” on a cash basis, while it was otherwisefollowing the mercantile the system of accounting andalso accounting for the very same transaction on amercantile basis under the Company Law? 2. Whether on the facts and in the circumstancesof the case, the Income Tax Appellate Tribunal wasright in holding that the assessee could be permittedto follow the mercantile system of accounting for thepurpose of Company Law and a Hybrid system for thepurposes of Income Tax? 3. Whether on the facts and in the circumstancesof the case, the Income Tax Appellate Tribunal wasright in holding that additional finance charges couldbe shown for Income Tax purposes on receipt basis,though the assessee has accounted for the same in theregular accounts on accrual basis and therefore werenot includible in the taxable business income, ignoringthe special provisions contained in Section 43 D of theIncome Tax Act and Rules made thereunder, specifyingthe classes of assessees and categories of bad anddoubtful debts in respect of which such exclusion couldbe made? 4. Whether on the fact and in the circumstances ofthe case, the Income Tax Appellate Tribunal was rightin deleting the dis-allowance of Long Term Capital Lossof Rs.3,98,07,218/- on account of sale of shares to asister concern without applying the ratio of theSupreme Court's decision in the case of Aishini LeastFinance P. Ltd., (309 I.T.R. 320)? 5. Whether on the facts and in the circumstancesof the case, the Income Tax Appellate Tribunal wasright in holding that the provision for the bad debtscould not be added back while computing the bookprofits u/s 115JB in view of the retrospectiveamendment made by the Finance (2) Act, 2009 by theinsertion of clause (l) in the explanation 1 to Section115 JB?" 3. Heard Mr.J.Narayasamy, learned senior standing counselappearing for the appellant and Mr.R.Sivaraman, learned counselappearing for the respondent/assessee. 4. Learned counsel appearing for both sides agree thatquestion Nos.1, 2 and 3 are covered by a decision of thisCourt, in T.C.A.No.1422 of 2010, of even date, in favour of theassessee and Question No.5, in favour of the Revenue andagainst the assessee. 3. Heard Mr.J.Narayasamy, learned senior standing counselappearing for the appellant and Mr.R.Sivaraman, learned counselappearing for the respondent/assessee. 4. Learned counsel appearing for both sides agree thatquestion Nos.1, 2 and 3 are covered by a decision of thisCourt, in T.C.A.No.1422 of 2010, of even date, in favour of theassessee and Question No.5, in favour of the Revenue andagainst the assessee. Adverting to question No.4, the brief facts are as follows:- The assessee / respondent is a Non Banking Financial Companyengaged in the business of hire purchase, financing, leasing andinvestments. By virtue of guidelines issued by the Reserve Bankof India, Non Banking Financial Companies (NBFC) were requiredto concentrate on core financing business and exit frommanufacturing and other activities. The assessee consequentlywished to divest its shareholding in Shriram Auto Components(Madras) Limited (name changed to Rambal Limited) and ShripetCybertech Systems Limited. The shareholding of the assessee inthe aforesaid two companies was valued at the figure of Rs.1/-per share and the sale resulted in a capital loss of an amountof Rs.3.98 crores (Rs.2.88 + 1.10 crores). 5. During the course of assessment, the Assessing Authorityraised a query on the allowance of capital loss on the sale ofshares, specifically on the valuation adopted. Thejustification provided by the assessee in respect thereofreads thus:- ‘The company is a manufacturer of Automobilecomponents. We had acquired 10 lakhs shares inthis company at a cost of Rs.100 lakhs in the yearended 30.03.99. The company had been incurringlosses every year and had not declared any dividendsince its inception in 1996. The accumulated debitbalance in Profit & Loss Account as on 31.03.04amounted to Rs.594 lakhs against the share capitalof Rs.1288 lakhs. There was no return for us fromthe investment in the company. Further, due to theguidelines of Reserve Bank of India, we a NonBanking Financial Company had to concentrate on ourcore financing business and had to exit frommanufacturing activities. There was no scope forthe sale of these shares in market. In thesecircumstances, we had to sell these shares @ Rs.1per share and exit from the company.Shripet Cybertech Systems Limited has beenmanufacturing pet bottles and had made veryinsignificant profits till 31.03.03 and had notdeclared any dividend since its inception. In theyear ended 31.03.04, it had incurred a huge loss ofRs.1,14,59,899/-. Due to loans, there has beenerosion in share capital. We had acquired 683600shares in this company for Rs.68,36,000/- duringthe year ended 30.06.96 and we had not receivedany return from this investment. Further due tothe guidelines of Reserve Bank of India, we, a NonBanking Financial Company had to concentrate on ourcore financing business and had to exit frommanufacturing activities. Though the equity sharesof the company have been listed in the Madras andAhmedabad Stock Exchanges, there were no transactions in the stock exchanges since April2002. Hence there was no market for the shares.In these circumstances, we had to sell the shares @ Re.1 per share and exit from that company. transactions in the stock exchanges since April2002. Hence there was no market for the shares.In these circumstances, we had to sell the shares @ Re.1 per share and exit from that company. 6. The assessee thus explained that the two companies wereeither incurring loss or making insignificant profits andneither had declared dividend since inception. Thus, though theequity shares of one of the companies were listed in the Madrasand Ahmedabad Stock Exchanges, there had been no transactions inthe said stock exchanges since April 2002 and hence there is nomarket for the shares. The shares were thus valued nominally fora price of Re.1/- per share. The Assessing Authority did notdispute the factum of sale. The only query raised at the stageof assessment was in regard to the value adopted, at a figure ofRe.1/-, as against the face value of Rs.10/- per share. He,thus, rejected the claim of long term capital loss, notpermitting the assessee to carry forward and set off the same infuture. 7.An appeal was filed before the Commissioner of IncomeTax (Appeals) (in short ‘the CIT (A)’) that was allowed by orderdated 24.12.2008, holding that the valuation adopted by theassessee appeared to be acceptable in the light of thejustification offered by the assessee and also specificallynoting that though the assessing officer rejected the valuationadopted by the assessee, he had not offered or arrived at anyother alternative. The order of the CIT (A) was assailed beforethe Income Tax Appellate Tribunal, (in short, ‘ITAT), which byorder dated 26.03.2010 confirmed the same, reiterating thefindings of the CIT (A) to the effect that the valuation was inorder. The Tribunal particularly notes that though a suspicionhad been raised by the Assessing Officer regarding the valuationof the shares, nothing was placed on record to substantiate suchsuspicion or provide a more acceptable alternative. It is, inthis background, that the Revenue is now before this Court. 8. We are of the view that the Assessee had provided anacceptable justification for both transactions of sale of sharesincluding the aspect of valuation of the shares. The AssessingAuthority, while accepting the genuineness of the transactions,merely raises a vague suspicion relating to the valuationadopted by the assessee. This, by itself, is insufficient toreject the claim of capital loss. While the Assessing Officeris certainly entitled to question the valuation, he ought tohave produced some materials to either disprove thejustification offered by the assessee or to substantiate hisdoubts. A mere suspicion, however strong it might appear, cannottake the form of a substantiated opinion sans supportingmaterials and hence it cannot form the basis for rejection ofthe claim. 9. The Standing Counsel appearing for the Department reliedupon a judgment of the Supreme Court, in Civil Appeal Nos.3343 and 3344 of 2008, dated 06.05.2008, in the case of Commissionerof Income Tax v. Ashini Lease Finance (P) Ltd., in support ofhis contention. On a perusal thereof, we find that the facts aredistinguishable from the facts of the present case. Theassessee, in that case, borrowed funds from its sister concerns,which were deployed towards purchase of equity shares in acompany called AEC Ltd. Deduction of interest paid to thesister concerns was claimed. Investigations carried out by theDepartment revealed that the entire exercise was only to enablethe take-over of AEC Ltd by the sister concerns and that thetransaction was a mere sham. The assessing officer had marshaledsufficient facts to indicate that the assessee in that case wasa mere conduit and recorded a finding to such an effect. It wasin the aforesaid circumstances that the Supreme Court concludedthat the transaction ‘would indicate circular trading enteredinto solely with the idea of evading tax’. Such a finding basedon factual records is conspicuous by its absence in the presentcase. 10. Further more, the question of valuation in itself, is apure question of fact particularly, when the same has beenconcurrently accepted by both the lower appellate authorities.No perversity has been either alleged or made out at any stagein appeal. We agree with the conclusions of the ITAT and are ofthe view that no substantial questions of law arise forconsideration. 11. In conclusion, substantial questions of law Nos.1 to 4stand answered in favour of the Assessee and against the Revenueand substantial question of law No.5 stands answered in favourof the Revenue and against the Assessee. No costs. To The Commissioner of Income Tax III, Chennai 2 The Income Tax Appellate Tribunal Appeal V 121, Mahatma Gandhi, Road, Chennai 3 The Income Tax Appellate Tribunal, Chennai BenchC Chennai ssk(CO)md(30/12/2016)