D.b. Income Tax Reference v. R.b. Kishorechand Maheshwari

D.B. Income Tax Reference No.11/2004 IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN ATJAIPUR BENCH, JAIPUR :ORDER: D.B. Income Tax Reference No.11/2004CIT Jaipur Vs. R.B. Kishorechand Maheshwari. Date of Order : 11[th] July 2013 HON'BLE MR. JUSTICE DINESH MAHESHWARI'HONBLE MR. JUSTICE NARENDRA KUMAR JAIN-II Mr. J.K. Singhi, Sr. Advocate with Mr. Anuroop Singhi, for theappellant. <><><> BY THE COURT:(Per Dinesh Maheshwari,J.) Though listed in default category for process fees and noticeshaving not been filed but then, for the matter having remainedpending since the year 2004, we have examined the merits to find asto whether this reference case is required to be proceeded further ornot. After having heard the learned counsel for the applicant-revenue and having perused the material placed on record, as alsothe order passed by this Court in D.B. Income Tax ReferenceApplication No.4/2005, we are satisfied that no purpose would beserved by keeping this reference case pending any further. In the statement of case, said to have been drawn inpursuance of the order passed by this Court on 16.02.2004, theIncome Tax Appellate Tribunal, Jaipur Bench, Jaipur (‘the ITAT’) hasreferred the following questions of law in this case:- D.B. Income Tax Reference No.11/2004 “1. Whether on the facts and in the circumstances ofthe case and in law, the Tribunal was justified in acceptingthe trading results of share account notwithstanding the factthat the assessee converted the shares of Private LimitedCompanies mostly controlled by family group of his own intostock-in-trade and these were not quoted on any stockexchange? 2. Whether on the facts and in the circumstances ofthe case and in law, the Tribunal was justified in holding thaton conversion of shares into stock-in-trade the value ofconverted stock as on the date of conversion should betaken at market value and not at cost? 3. Whether on the facts and in the circumstances ofthe case and in law, the Tribunal was justified in allowing theloss in shares business?” The brief, the relevant background aspects are that the assessee belongs to a family group that owns several firms andprivate limited companies engaged in steel business. Before01.04.1981, the assessee had acquired 1900 shares in one of theprivate limited companies of the family, namely, Pratap Steel RollingMills P. Ltd., Ballabhgarh, at a cost of Rs.4,75,000/-. In theassessment year 1982-83, the assessee declared that he would treatall the shares held by him including the shares of private limitedcompanies as his stock-in-trade; and proceeded to debit the above-mentioned shares to the trading account of shares as on 01.04.1981.While doing so, the assessee took the market value of the saidshares to be their cost to the business of shares; and determined themarket value of the said shares as on 01.04.1981 on yield basis atRs.21,44,150/- (Rs.112.85 per share). During the year, he acquired400 shares in another private limited company of the family, namely,R.B.Kishorechand & Sons (Properties) P. Ltd., at a cost ofRs.40,000/-. The assessee purchased some shares of public companies also and sold them during the year. The closing stock ofshares including the shares of private limited companies was valuedat the market value of shares as on 31.03.1982 or the costwhichever was the lower. Ultimately, the assessee claimed a loss ofRs.6,120/- in the trading account of shares in the assessment year1982-83. companies also and sold them during the year. The closing stock ofshares including the shares of private limited companies was valuedat the market value of shares as on 31.03.1982 or the costwhichever was the lower. Ultimately, the assessee claimed a loss ofRs.6,120/- in the trading account of shares in the assessment year1982-83. In the assessment year 1983-84, the assessee furtherpurchased some shares of public as well as private limitedcompanies. The shares of public companies were resold during thesame year. The closing stock as on 31.03.1983 was valued atmarket value of shares as on 31.03.1983 or cost whichever was thelower. The market value of shares held by the assessee in PratapSteel Rolling (P) Ltd., Ballabhgarh as on 31.03.1983 fell drasticallyafter they were converted during the year into preference shares.Thus, in the assessment year 1983-84, the assessee claimed a lossof more than Rs.9 lacs in respect of shares of private limitedcompanies because of fall in their market value. Though it appears that the Assessing Officer (‘the AO’) hadaccepted the conversion of the questioned shares into stock-in-tradein the preceding assessment years but did not agree in thisassessment year i.e., 1983-84. In the impugned assessment orderdated 27.03.1986, the AO referred to the assessment order made inrelation to another assessee of the same group and observed, interalia, as under:- “I have discussed these questions in detail in theassessment order passed by me in the case of Shri PrakashChand Maheshwari (Individual) for the assessment year1983-84. I have held therein that-(a) The assessee was not entitled to convert the shares of D.B. Income Tax Reference No.11/2004 private limited companies of the family group into stock intrade. These shares carried restriction on their transfer. Theywere not quoted on the Stock Exchange. All the shareholdersof these companies or a majority of them belonged to a familygroup. The assessee could have no genuine intention oftrading with his relations. (b)Without prejudice to the above finding, even if it isgranted for the sake of argument that the assessee couldconvert his shares of private limited companies into stock intrade he could not debit the trading account with the marketvalue of those shares as on the date of conversion. He coulddebit only the actual cost of the shares.” The AO, accordingly, proceeded to recast the trading accountof the share business of the assessee by excluding the transactionspertaining to the sale and purchase of shares of private limitedcompanies converted into stock-in-trade and consequently,disallowed the trading loss claimed by the assessee. The firstAppellate Authority in its order dated 31.10.1988 declined to interferein the assessment order so far the aforesaid issues were concerned,while following its earlier order dated 14.09.1988 concerning theother assessee Shri P.C.Maheshwari of the same group for theassessment year 1983-84. In further appeal, however, the ITAT disagreed with the ordersaforesaid and allowed the claim of the assessee with theobservations that the questioned shares were, in fact, converted intostock-in-trade by the assessee in the preceding assessment years;and during those years, the department had not taken any objectionthereto and hence, it was not justified for the department to takesuch plea in the assessment year 1983-84. In the impugned orderdated 24.06.1994, the ITAT referred to the orders passed by it in thecases pertaining to other assessees of the same group and, interalia, observed and held as under:- D.B. Income Tax Reference No.11/2004 In further appeal, however, the ITAT disagreed with the ordersaforesaid and allowed the claim of the assessee with theobservations that the questioned shares were, in fact, converted intostock-in-trade by the assessee in the preceding assessment years;and during those years, the department had not taken any objectionthereto and hence, it was not justified for the department to takesuch plea in the assessment year 1983-84. In the impugned orderdated 24.06.1994, the ITAT referred to the orders passed by it in thecases pertaining to other assessees of the same group and, interalia, observed and held as under:- D.B. Income Tax Reference No.11/2004 “3. Admittedly, the facts and circumstances of the assesseesbefore us are similar to the facts and circumstances of thecase of Shri Prakashchand Maheshwari and RajeevchandMaheshwari mentioned above. For reasons as discussed indetail in the case of the above-mentioned two assessees,namely, Shri Prakashchand Maheshwari (Indl) and ShriRajeevchand Maheshwari, we hold in the cases ofSmt.Pratibha Maheshwari and Shri R.B.KishorechandMaheshwari (HUF) for the assessment years 1983-84 thatthe ld. CIT(A) was not justified in law as well as on facts inholding that the shares held by the assessees in PrivateLimited Companies could not be converted into stock-in-trade when conversion of those shares into stock-in-tradestands accepted by the department during the precedingassessment years and the same basis has been followed bythese assessees in assessment year 1983-84. In this way,Ground No.1 in the cases of both the appellants is allowed. 4.Similarly for reasons discussed in the case ofPrakashchand Maheshwari and Shri RajeevchandMaheshwasri mentioned above, we hold that in the cases ofSmt.Pratibha Maheshwari and Shri R.B.KishorechandMaheshwari also the ld. CIT(A) erred in law as well as onfacts in holding that even on conversion of shares into stock-in-trade the value of converted stock as on the date ofconversion should be the cost price because as per thedecision of the Hon’ble Supreme Court in the case of BaiShirin Bai Kooka the value of the converted stock should bethe market value as on the date of conversion. Accordingly,Ground No.2 for assessment year 1983-84 in both thesecases is also allowed.” It is borne out from the record of Income Tax ReferenceApplication No.4/2005 decided on 12.10.2011 that in relation toassessment proceedings concerning another assessee Shri PraveenChand Maheshwari of the same group for the assesment year 1984-85, similar view was taken by the ITAT following its earlier decisions,including the order dated 16.12.1994 in ITA No.68/JP/89 pertainingto the said assessee for the assessment year 1983-84. InReference Application No.4/2005, while rejecting the contentions ofthe revenue and finding no referable question, a co-ordinate of thisCourt observed and held as under:- D.B. Income Tax Reference No.11/2004 “6.Indeed when we peruse the facts of this case whichwere subject matter of appeal decided by the Tribunal, it isnoticed that the direction were given by the Tribunal to allowthe loss to be carried forward to the next year. The Tribunalin the case of the assessee had made these observationsand hence they were consequential in nature as well. Evenother wise, such directions were in accord with the schemeof the Act so also recognised in accountancy standard. It isfor the reason that firstly a loss can always be carriedforward to the next year by the assessee and secondly, inthe facts of this case, it was all the more when it wasconsequential in nature and given pursuant to a direction bythe Tribunal in the case of the assessee. It is for these tworeasons; the Tribunal was of the view that such questionreally does not arise though proposed and hence declined torefer the same and in our opinion rightly. 7. It is a settled principle of law that in order to invoke thejurisdiction for referring the question to the High Court, it isnecessary for the Tribunal to see that firstly the questionproposed must arise out of the order of the Tribunalsecondly, it should be referable, thirdly, it must relate to lawand fourthly it should not involve any question of fact. It isonly when these factors are taken note of and finding isreturned, the question can be referred else not. In this caseall these factors were noticed and then it was found that nosuch referable question arises. 8. In the light of foregoing discussion, the application isfound to be devoid of any merit. It fails and is accordinglydismissed.” Having examined the matter in its totality, we are satisfied thatthe order passed by the ITAT on 24.06.1994 in relation to therespondent-assessee for the assessment year 1983-84 calls for nointerference and the referred questions deserve to be answeredagainst the revenue. The sum and substance of the matter remains that thequestion of conversion of shares in relation to the respondent-assessee did not arise in the assessment year 1983-84. The saidconversion, in fact, was carried out in the preceding assessmentyears and during those years, the department had not taken anyobjection thereto. The ITAT, thus, cannot be said to have erred in observing that when the conversion of those shares into stock-in-trade was accepted by the department during the preceding years,and the same had been followed by the assessee in the assessment year 1983-84, the claim of the assessee was unexceptionable. The same position has been applied in relation to the otherassessees of the same group even in the next assessment year1984-85 which has been approved by this Court in the above-referred order dated 12.10.2011. As regards the value of the converted stock too, the ITATcannot be said to have erred in observing that value of the convertedstock should be the market value as on the date of conversion. In the aforesaid view of the matter, question Nos.1 and 2above-referred are required to be, and are, answered against therevenue. The loss in share business being consequential to theprocess adopted by the assessee and approved by ITAT, questionNo.3 is also required to be, and is, answered against the revenue. This reference case stands disposed of accordingly. (NARENDRA KUMAR JAIN-II), J. (DINESH MAHESHWARI), J. cpgoyal/- CERTIFIED THAT ALL CORRECTIONS MADE IN THE JUDGMENT / ORDER HAVE BEEN INCORPORATED IN THE JUDGMENT / ORDER BEING EMAILEDORDER HAVE BEEN INCORPORATED IN THE JUDGMENT / ORDER BEING EMAILED C.P.Goyal PA D.B. Income Tax Reference No.11/2004