Itxa/807/2018 Of Pr. Commissioner Of Income Tax-10 v. Nilkanth Tech Park Pvt. Ltd

IN THE HIGH COURT OF JUDICATURE AT BOMBAYPURTIPRASADORDINARY ORIGINAL CIVIL JURISDICTIONPARAB Digitally signed byPURTI PRASADPARABDate: 2023.10.0718:03:00 +0530INCOME TAX APPEAL NO. 807 OF 2018 Pr. Commissioner of Income Tax – 10 V/s.Nilkanth Tech Park Pvt. Ltd. ….Appellant …Respondent ---- Mr. Akhileshwar Sharma for Appellant.Ms. Vasanti B. Patel for Respondent. ---- CORAM : K.R. SHRIRAM & NEELA GOKHALE, JJ. DATED : 4[th] OCTOBER 2023 P.C. : 1.The following substantial questions of law are proposed : QUESTION OF LAW 1.Whether on the facts and in the circumstances of the case and inLaw, the Hon’ble ITAT was justified in holding that the order passed byLd. CIT does not fulfill the twin conditions as contemplated u/s. 263 ofthe Income Tax Act, 1961, without appreciating that the allowability ofclaim of the assessee by the Assessing Officer was not in accordancewith law, which justifies to term the assessment order as erroneous andprejudicial to the interest of Revenue? 2.Whether on the facts and in the circumstances of the case and inLaw, where there was no discussion in the assessment order of theAssessing Officer about the dealing with Explanation to section 73 ofthe Income Tax, 1961, the Commissioner of Income Tax had rightlyinitiated proceedings u/s. 263 of the Income Tax Act, 1961 as theallowability of loss without applying Explanation to section 73 of theIncome Tax Act, 1961 and section 45(2) of the Income Tax Act, 1961was without application of mind by the Assessing Officer? 2.In the statement of facts in the appeal it is stated that respondent/assessee is engaged in the business of manufacturing of chemicals. Mr. Sharma stated that assessee is in real estate business. The assessee filed return of income for Assessment Year 2009-10 on 29[th]September 2009 declaring total income at loss of Rs.4,88,18,926/-. Theassessment was completed under Section 143(3) of the Income Tax Act,1961 (the Act) and an assessment order dated 17[th] November 2011 came tobe passed. 3.Thereafter, appellant issued a Show Cause Notice dated 4[th]March 2014 under Section 263 of the Act calling upon assessee to showcause as to why the assessment made by the Assessing Officer (A.O.) shouldnot be cancelled/set aside to the extent as mentioned in the notice.Paragraph No.2 of the notice reads as under : 2. On going through the details filed by the assessee companyduring the course of assessment proceedings, it was seen that theassessee company had converted its investment of 3,00,000 sharesof S.P.S. Limited amounting to Rs.5,75,70,135/- into stock-in-tradewhich were sold on 30.03.2009 for a consideration ofRs.96,55,125/-. The loss arising from this transaction was claimedby you as a loss under the head ‘business’. The assessing officerassessed the said loss at Rs.4,49,03,946/- and allowed it to becarried forward as development and there has been no change inits nature of business during the year, the provisions of theExplanation to section 73 of the Act are squarely applicable to theshare trading transactions carried out by the assessee during theyear under consideration. Since the Assessing Officer has treatedshare trading loss as business loss while completing the assessment,the order passed u/s. 143(3) on 17.11.2011 is erroneous andprejudicial to the interest of revenue. 4.Assessee replied to the Show Cause Notice and appellant rejected the submissions of assessee and concluded that the order passed by the A.O. was erroneous and prejudicial to the interest of assessee. Appellantset aside the assessment order and directed the A.O. to pass the assessment 4.Assessee replied to the Show Cause Notice and appellant rejected the submissions of assessee and concluded that the order passed by the A.O. was erroneous and prejudicial to the interest of assessee. Appellantset aside the assessment order and directed the A.O. to pass the assessment order afresh by applying the provisions of Section 45(2) of the Act to theconversion of share from investment or capital asset to stock-in-trade. Theloss was directed to be treated as a speculation loss. The order dated 24[th]March 2014 passed by appellant under Section 263 of the Act wasimpugned before the Income Tax Appellate Tribunal (ITAT). Variousgrounds were taken before the ITAT. Apart from the ground that CIT erredin applying provisions of explanation to Section 73 of the Act and therebytreating the loss as speculative, it was also urged that CIT erred in passingthe order under Section 263 of the Act on the issue of Section 45(2) of theAct and treating loss as capital loss without raising the issue in the ShowCause Notice. Assessee also urged that the order of CIT was merechange of opinion and hence erroneous. 5.The ITAT, after considering the submissions made by parties, byan order dated 19[th] May 2017 set aside the order of CIT for various reasonsbut one of the primary grounds for interfering was that the twin conditionsfor exercising jurisdiction under Section 263 of the Act, viz., order of theAssessing Officer (A.O.) being erroneous and that was prejudicial to theinterest of Revenue being conjunctive, have not been met. Further, in thenotice there was not even a reference to Section 45 (2) of the Act. In theorder passed by CIT, Paragraph Nos.5 (b), 7, 7.1 and 8 read as under : xxxxxxxxxx 5(b) The provisions of section 45(2) of the Act provide that if acapital asset is converted into stock-in-trade and stock-in-trade issold or otherwise transferred by the assessee, then for the purposecapital asset is converted into stock-in-trade and stock-in-trade issold or otherwise transferred by the assessee, then for the purpose of section 48, the fair market value of the asset on the date ofconversion shall be deemed to be the full value of the considerationreceived or accruing as a result of the transfer of the capital assets.Since the shares were held by the assessee as investment andconverted into stock-in-trade during the previous year relevant toA.Y. 2009-10, the difference between the fair market value on thedate of conversion and the cost/indexed cost of acquisition is liableto be treated as capital gains and the difference between the fairmarket value on the date of conversion and the actual saleconsideration would be business income/loss and in the event ofloss, the same would be liable to be treated as per the explanationto Section 73 of the Act. xxxxxxxxxx 7. The nature of assessee’s real estate business is such that therevenue receipts are not consistent bu received in large chunksnormally after a project is complete. If the assessee’s argument isaccepted, it will result in a ridiculous situation with the company’snature of business changing with each year. A major constructioncompany which had no projects complete during a year but earneddividends on fixed deposits would be considered as afinancial/investment company in that year. xxxxxxxxxx 7. The nature of assessee’s real estate business is such that therevenue receipts are not consistent bu received in large chunksnormally after a project is complete. If the assessee’s argument isaccepted, it will result in a ridiculous situation with the company’snature of business changing with each year. A major constructioncompany which had no projects complete during a year but earneddividends on fixed deposits would be considered as afinancial/investment company in that year. 7.1 In addition, it should be borne in mind that in A.Y. 2008-09,the immediately preceding A.Y., the assessee had accepted that lossin shares was speculation loss. It has also been noted that theprovisions of section 45(2) had not been followed. According tothe provisions of section 45(2) of the Act provide that if a capitalasset is converted into stock-in-trade and stock-in-trade is sold orotherwise transferred by the assessee, then for the purpose ofsection 48, the fair market value of the asset on the date ofconversion shall be deemed to be the full value of the considerationreceived or accruing as a result of the transfer of the capital assets.Since the shares were held by the assessee as investment andconverted into stock-in-trade during the previous year relevant toA.Y. 2009-10, the difference between the fair marker value on thedate of conversion and the cost/indexed cost of acquisition is liableto be treated as capital gains and the difference between the fairmarket value on the date of conversion and the actual saleconsideration would be business income/loss and in the event ofloss, the same would be liable to be treated as per the explanationto Section 73 of the Act. 8. In view of the above, the assessment made by the AssessingOfficer is set aside to be made afresh applying the provisions of sec.45(2) to the conversion of shares from the investment or capitalassets to stock-in-trade. The loss incurred in the conversion at fairmarket value viz-a-viz cost of acquisition will be treated as longterm capital loss, the loss incurred on the subsequent sale of theshares would be treated as speculation loss. 6. It is therefore, very clear that in the Show Cause Notice quoted earlier, there is no discussion or even reference to Section 45 (2) of the Actand assessee has not been given an opportunity to explain as to why theprovisions of Section 45(2) of the Act should not be applied to theconversion of shares from investment or capital asset to stock-in-trade. 7.Section 263(1) of the Act reads as under : Section 263(1) - The [Principal Chief Commissioner or ChiefCommissioner or Principal Commissioner] or] Commissioner maycall for and examine the record of any proceeding under this Act,and if he considers that any order passed therein by the [Assessing]Officer [or the Transfer Pricing Officer, as the case may be,] iserroneous in so far as it is prejudicial to the interests of the revenue,he may, after giving the assessee an opportunity of being heard andafter making or causing to be made such inquiry as he deemsnecessary, pass such order thereon as the circumstances of the casejustify, [including - (i) an order enhancing or modifying the assessment orcancelling the assessment and directing a freshassessment; orcancelling the assessment and directing a freshassessment; or (ii) an order modifying the order under section 92CA;oror (iii) an order cancelling the order under section 92CAand directing a fresh order under the said section].and directing a fresh order under the said section]. Therefore, the Commissioner may call for or examine the record of any proceeding if he considers that any order passed therein by the A.O.is erroneous in so far as it is prejudicial to the interests of the Revenue. (i) an order enhancing or modifying the assessment orcancelling the assessment and directing a freshassessment; orcancelling the assessment and directing a freshassessment; or (ii) an order modifying the order under section 92CA;oror (iii) an order cancelling the order under section 92CAand directing a fresh order under the said section].and directing a fresh order under the said section]. Therefore, the Commissioner may call for or examine the record of any proceeding if he considers that any order passed therein by the A.O.is erroneous in so far as it is prejudicial to the interests of the Revenue. Once he is satisfied that the order passed by the A.O. is erroneous and it isprejudicial to the interest of Revenue, before he passes any order as thecircumstances of the case may justify including an order enhancing ormodifying the assessment or cancelling the assessment and directing a freshassessment, an opportunity should be given to assessee of being heard. If there is no reference to provisions of Section 45(2) of the Act in the noticeissued under Section 263 of the Act, it is obvious that such an opportunity ofbeing heard has not been given to assessee. 8.In the circumstances, on this ground alone, the order passed bythe CIT should be quashed and set aside. 9.Moreover, the ITAT has proceeded to dispose the matter onmerits and come to the conclusion that the very same issue of converting thecapital asset into stock-in-trade was the subject of query raised during theassessment proceedings. The ITAT came to the conclusion that theassessment order has been passed by the A.O. by application of mind andafter considering the response of assessee. Revenue has not disputed thereplies that were placed by assessee before the A.O. 10.A point was raised by Mr. Sharma that there is no discussion onthis in the assessment order. It is settled law as held in the judgment of thiscourt in Aroni Commercials Ltd. vs. Deputy Commissioner of Income Tax -2(1)[1]that once a query is raised during the assessment proceedings and theassessee has replied to it, it follows that the query raised was a subject ofconsideration of the A.O. while completing the assessment and it is notnecessary that an assessment order should contain reference and/ordiscussion to disclose its satisfaction in respect of the query raised. 1 [2014] 44 taxmann.com 304 (Bombay) 11.It will also be apposite to reproduce Paragraph No. 8 of the judgment of this court in Commissioner of Income Tax vs. Fine Jewellery (India) Ltd.[2] and it reads as under : 8. We find that the impugned order of the Tribunal does recordthe fact that specific queries were made during the assessmentproceedings with regard to details of expenditure claimed underthe head “miscellaneous expenses” aggregating to Rs.2.94 crores.The respondent-assessee had responded to the same and onconsideration of response of the respondent-assessee, theAssessing Officer held that of an amount of Rs.17.98 lakhs incurredon account of repairs and maintenance out of Rs.2.94 crores iscapital expenditure. This itself would be indication of applicationof mind by the Assessing Officer while passing the impugned order.The fact that the assessment order itself does not contain anydiscussion with regard to the balance amount of expenditure ofRs.1.76 crores, i.e., Rs.2.94 crores less Rs.17.98 lakhs claimed asrevenue expenditure would not by itself indicate non-application ofmind to this issue by the Assessing Officer in view of specificqueries made during the assessment proceedings and therespondent-assessee's response to it. In fact this Court in the caseof “Idea Cellular Ltd. Vs. Deputy CIT [2008] 301 ITR 407 (Bom)has held that if a query is raised during the assessment proceedingsand responded to by the assessee, the mere fact that it is not dealtwith in the Assessment Order would not lead to a conclusion thatno mind had been applied to it. Moreover, from the nature of expenditure as explained by thepetitioner to the Assessing Officer during the assessmentproceedings itself indicates that the view that the same were in therealm of revenue expenditure, is a possible view. Therefore, wefind no fault in the impugned order having followed the bindingdecision of the Supreme Court in the case of Max India Ltd.(supra), while allowing the appeal before it. Accordingly, no substantial question of law arise forconsideration. Thus, appeal is dismissed. No order as to costs. 12.Accordingly, no substantial question of law arise for consideration. Thus, appeal dismissed. No order as to costs. (NEELA GOKHALE, J.) (K.R. SHRIRAM, J.) 2 [2015] 372 ITR 303 (Bom)