M/S Bhagyoday Investments Pvt. Ltd v. Commissioner Of Income Tax (Central), Ludhiana

[L.T-R. No.61 of 1997 IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH Income Tax Reference No.61 of 1997|Decided on:-February 21, 2014. M/s Bhagyoday Investments Pvt. Ltd. ........-Applicant, Versus Commissioner of Income Tax (Central), Ludhiana. woe RESpOondent, CORAM: Hon'ble Mr. Justice Rajive BhallaHon'ble Mr. Justice Dr. Bharat Bhushan Parsoon.Hon'ble Mr. Justice Dr. Bharat Bhushan Parsoon. 22222 Argued by:- Mr. Aalok Mittal, Advocate fo Mr. Akshay Bhan, Advocate for the applicant-assessee. Mr. Rajesh Katoch, Advocatefor the respondent-revenue. Dr. Bharat Bhushan Parsoon, J. In this reference, tollowing questions of law are required to be answered: (1)Whether on the facts and in the circumstances of thecase, the ITAT was right in upholding the addition ofRs.4,25,000/- on account of valuation of shares in theclosing stock on the basis of cost or market pricewhichever was lower?; and,case, the ITAT was right in upholding the addition ofRs.4,25,000/- on account of valuation of shares in theclosing stock on the basis of cost or market pricewhichever was lower?; and, (II)Whether, on the facts and in the circumstances of thecase, the ITAT was right in upholding the levy of interestunder Section 217(1A) of the Income Tax Act?case, the ITAT was right in upholding the levy of interestunder Section 217(1A) of the Income Tax Act? [L.T-R. No.61 of 1997 2 |The assessee company is a dealer in 'shares'. It was holding 4%non-cumulative preference shares as also equity shares of M/s RockmanCycle Industries Private Limited. The shares were held by it as itsstock-in-trade. The ‘opening stock’ of preference shares had been adopted onthe basis of ‘closing stock’ for the preceding year wherein the valuation hadbeen taken @ 10/- per share. Earlier, the shares were being valued at costprice but in the assessment under consideration, the assessee had valued theShares at market or cost price whichever was lower. Since the market valueof 4% non-cumulative preference shares was lower, the assessee had valuedthe same at Rs.4.25 lacs as against the value of Rs.8.5 lacs in the openingstock and thus had claimed a loss of Rs.4.25 lacs. 3 |Disagreeing with the assessee, the Assessing Officer(hereinafter called the AQ) had treated the loss of Rs.4.25 lacs as fictitiousand sequelly had made an addition of this amount in the total income of theassessee when the assessment was tramed by him on 13.2.1989 vide order(Annexure A). In the appeal preferred by the assessee, addition of Rs.4.25lacs in the income of the assessee was confirmed by the Commissioner ofIncome Tax (Appeals) (Central), Ludhiana [hereinafter called the CIT(A)]vide order (Annexure B) dated 21.11.1990. 4Feeling aggrieved, the assessee filed second appeal before theIncome Tax Appellate Tribunal, Chandigarh Bench (hereinafter called theTribunal) wherein also addition of Rs.4.25 lacs made by the AO andconfirmed by the CIT(A), was further confirmed. 5 |Another issue before the Tribunal was with respect to levy ofinterest under Section 217(1A) of the Act. Miscellaneous petition of theassessee was also rejected by the Tribunal vide order (Annexure D) dated6.11.1996 confirming its verdict (Annexure C) dated 26.6.1996. 6.|We have heard counsel for the parties while going through the [L.T-R. No.61 of 1997 paper book. 4Feeling aggrieved, the assessee filed second appeal before theIncome Tax Appellate Tribunal, Chandigarh Bench (hereinafter called theTribunal) wherein also addition of Rs.4.25 lacs made by the AO andconfirmed by the CIT(A), was further confirmed. 5 |Another issue before the Tribunal was with respect to levy ofinterest under Section 217(1A) of the Act. Miscellaneous petition of theassessee was also rejected by the Tribunal vide order (Annexure D) dated6.11.1996 confirming its verdict (Annexure C) dated 26.6.1996. 6.|We have heard counsel for the parties while going through the [L.T-R. No.61 of 1997 paper book. yd The assessee had taken up a plea that the addition made by theAO and sustained by the CIT(A), could not have been anticipated at the timeof filing of the estimate and as such, no interest was leviable under Section217(1A). It was claimed that it was bonafide estimate and was furnished inits right earnest. The Tribunal did not agree with this plea of the assessee andupheld the levy of interest as well. It was verdicted by the Tribunal that itwas for the assessee to show that at the point of time, when a revisedestimate of advance tax was filed, the assessee had correctly filed the sameand that too in a bonafide manner. The Tribunal had further held thatchargeability of interest under Section 217 (1A) was dependent upon thefacts of each case. Taking up facts and circumstances of the case, theTribunal had held that interest under Section 217 (1A) of the Act waschargeable and had upheld the finding of the AO sustained by the CIT(A). S|When we examine the entire spectrum of the dispute, ittranspires that no question of law much less substantial, arises foradjudication in this reference. Going deep on facts, the AO had noticedmalafide intention on the part of the assessee and has also found that deviceadopted by the assessee was dubious. For coming to this conclusion, the AOhad primarily relied upon some other factors which had been detailed in theorder (Annexure A), relevant portion whereof is as under: “The malafide intention on the part of the assessee andthe dubious/colourable nature of the device adopted by it iscrystal clear in view of the above discussion offacts which innut-shell are: 1)The assessee acquired preference shares of nominalvalue ofRs.10/- even when he fully know that the marketprice of such share was much below the nominal value,being 4% non-cumulative preference shares.value ofRs.10/- even when he fully know that the marketprice of such share was much below the nominal value,being 4% non-cumulative preference shares. 11)The assessee valued these preference shares at Rs.5/- pershare only during this year even when these sharesshare only during this year even when these shares existed in the Balance Sheet of earlier years and were allalong being valued at Rs.10/- per share. The choice oftime to reduce the value of shares was clearly malafide;and, 111)The assessee valued equity shares at cost and preferenceshares at reduced price even when both types of shareswere allotted simultaneously and the assessee admits thathe did not have the option to take equity shares andrefuse the preference shares.”shares at reduced price even when both types of shareswere allotted simultaneously and the assessee admits thathe did not have the option to take equity shares andrefuse the preference shares.” Q |Even when viewed from the legal pedestal, verdict in|McDowell & Company Limited Versus Commercial Tax Officer (1985) 154 ITR 148 (Supreme Court)militates against the device adopted by theassessee as a colourable venture of tax evasion. It 1s not a case of taxplanning at all. Relevant portion of this judgment is reproduced as below: “Tax planning may be legitimate provided it is within theframe work of the law. Colourable devices cannot be part oftaxplanning and it is wrong to encourage or entertain the beliefthat it is honourable to avoid the payment of tax by dubiousmethods. It is the obligation of every citizen to pay the taxeshonestly without restoring to subterfuges. Q |Even when viewed from the legal pedestal, verdict in|McDowell & Company Limited Versus Commercial Tax Officer (1985) 154 ITR 148 (Supreme Court)militates against the device adopted by theassessee as a colourable venture of tax evasion. It 1s not a case of taxplanning at all. Relevant portion of this judgment is reproduced as below: “Tax planning may be legitimate provided it is within theframe work of the law. Colourable devices cannot be part oftaxplanning and it is wrong to encourage or entertain the beliefthat it is honourable to avoid the payment of tax by dubiousmethods. It is the obligation of every citizen to pay the taxeshonestly without restoring to subterfuges. There is behind taxation laws as much moralsanction as 1s behind any other welfare legislation and it is apretence to say that avoidance of taxation is not unethical andthat it stands on less a moral plans than honest payment oftaxation. The proper way to construe a taxing statute, whileconsidering a device to avoid tax, is not to ask whether theprovisions Should be construed literally or liberally norwhether the transaction is not unreal and not prohibited by theStatute but whether the transaction is a device to avoid tax andwhether the transaction is such that the judicial process mayaccord its approval to it. It is neither fair nor desirable toexpect the Legislature to intervene and take care of everydevice and scheme to avoid taxation. It is upto the court to takestock to determine the nature ofthe new and sophisticated legaldevices to avoid tax and to expose the devices for what theyreally are and to refuse to givejudicial benediction. ~ 10.The AQO had also found it to be a case of concealment as also o [L.T-R. No.61 of 1997 furnishing of inaccurate particulars of income by adopting dubious methodand colourable device. Sequelly, notice for penalty under Section 271(1)(C©)as also under Section 273(2)(C) of the Act had been issued separately forchargeability of interest under Section 215/217(1A) of the Act vide order(Annexure A) dated 13.2.1989. ll.When the matter was taken up by the assessee before the firstappellate authority i.e. Appellant Assistant Commissioner of Income Tax(Appeals), pleas of the assessee could not cut any ice there and were rejectedon the following grounds. It was vide order (Annexure B) dated 21.11.1990: G1)Firstly, the preference shares are not quoted in themarket and reducing their value by 50% according to theWealth Tax Rules, is not the market price;market and reducing their value by 50% according to theWealth Tax Rules, is not the market price; 11)Secondly, these shares were redeemed within three yearsin January 1990 at Rs.10/-, therefore, reducing the valueby ad hoc manner is without anyjustification. It was alsopaying 4%fixed rate of interest. |in January 1990 at Rs.10/-, therefore, reducing the valueby ad hoc manner is without anyjustification. It was alsopaying 4%fixed rate of interest. | 111)Thirdly, it was admitted by the appellant that preferenceshares and equity shares of the same company wereissued in a definite ratio, therefore, if the value of one isreduced the value of other automatically increased. Thevalue of both the shares should be valued by the samemethod whether cost price or the market price; and,shares and equity shares of the same company wereissued in a definite ratio, therefore, if the value of one isreduced the value of other automatically increased. Thevalue of both the shares should be valued by the samemethod whether cost price or the market price; and, 111)Thirdly, it was admitted by the appellant that preferenceshares and equity shares of the same company wereissued in a definite ratio, therefore, if the value of one isreduced the value of other automatically increased. Thevalue of both the shares should be valued by the samemethod whether cost price or the market price; and,shares and equity shares of the same company wereissued in a definite ratio, therefore, if the value of one isreduced the value of other automatically increased. Thevalue of both the shares should be valued by the samemethod whether cost price or the market price; and, 1V) Fourthly, by changing the method of accounting forvaluing closing stock suddenly this year and varying Itfrom the earlier years without any reasoning except toreduce the valuation of one particular year which is noteven quoted in the market is without anyJustification andthe change of method 1s not justified and this ACITSorder 1s confirmed and the appeal on this ground 1sdismissedaanvaluing closing stock suddenly this year and varying Itfrom the earlier years without any reasoning except toreduce the valuation of one particular year which is noteven quoted in the market is without anyJustification andthe change of method 1s not justified and this ACITSorder 1s confirmed and the appeal on this ground 1sdismissedaan 12.Consequently, the appeal of the assessee was dismissed. 13.In further appeal filed by the assessee before the Tribunal, no [L.T-R. No.61 of 1997 relief became available to the assessee. Confirming addition of Rs.4.25 lacsto income of the assessee determined by the AO, following observationswere made in paras 8 to 10 in order (Annexure C) by the Tribunal: aoeWe have carefully considered the rival submissions asalso the facts on record. There is no denial to the fact that46000 equity shares and &5000 preference shares of the samecompany were purchased by the assessee as a compositetransaction. The value ofpreference shares @ Rs.10/- per sharewas quite high even at the time ofpurchase because the returnwas only 4%. The value of equity shares was, on the otherhand, much higher than theface value at Rs.10/- per share. Theassessee had to purchase both the shares together and couldnot choose to purchase one and reject the other. The transactionwas, therefore, a compose transaction and if any method had tobe applied or if any change of method had to be effected, thesame would be applicable to both types of shares, namely, theequity shares and the preference shares. In the present case, theassessee Chose to adopt a different method in respect ofpreference shares only which by the very nature of things wasnot permissible and would give a distorted picture. Nothing hadhappened in the year under consideration to warrant thechange from the value being taken at Rs.4,25,000/- in theclosing stock as against the value of Rs.&,50,000/- in theopening stock. Right from day one, the value of preferenceshares was Rs.8,50,000/- and no circumstances had supervenedto depress their value in the year under consideration. We,therefore, hold that the assessee was notjustified in segregatingthe shares and adopt a different method of valuation of closingstock in respect thereto. Such a change was neither bonafidenor proper. The entire case law relied upon by the learnedcounselfor the assessee would, therefore, be distinguishable onfacts. 9The matter can be examinedfrom yet another angle. It iscommon place to say that the profits of each year have to becomputed independently for that year. The Hon'ble SupremeCourt in the case of CIT v. British Pains India Ltd. (188 ITR 44)has observed that it is a_well-recognised principle ofcommercial accounting to enter in the profit and loss accountthe value of the stock-in-trade at the beginning and at the endof the accounting year at cost or market price, whichever islower. The Supreme Court has further observed that valuation 9The matter can be examinedfrom yet another angle. It iscommon place to say that the profits of each year have to becomputed independently for that year. The Hon'ble SupremeCourt in the case of CIT v. British Pains India Ltd. (188 ITR 44)has observed that it is a_well-recognised principle ofcommercial accounting to enter in the profit and loss accountthe value of the stock-in-trade at the beginning and at the endof the accounting year at cost or market price, whichever islower. The Supreme Court has further observed that valuation of the stock-in-trade at cost or market value, whichever islower, 1s a matter entirely within the discretion of the assessee.But whichever method he adopts, it should disclose a truepicture of his profits and gains. If, on the other hand, he adoptsa system which does not disclose the true state of affairsfor thedetermination of tax, even if it is ideally suited for otherpurposes of his business. It is the duty of the AO to adopt suchmethod of computation as he deems appropriate for properdetermination ofthe true income ofthe assessee. 10.Since there was no change regarding the valuation ofpreference shares in the year under consideration, it theassessee chose to value the closing stock ofpreference sharesdifferently, the Assessing Officer had to value the opening stockof such shares in such a manner that the correct profits couldbe worked out. It the assessee chose to value the closing stockofpreference shares at Rs.4,25,000/- against the purchase priceofRs.8,50,000/-, the opening stock had also to be valued on thesame basis at Rs.4,25,000/- as against the value ofRs.8,50,000/- adopted by the assessee in the present case. Thischange gives a distorted picture ofthe profits ofthe assesseeforthe year under consideration and would, therefore, lead tomisleading results. On that basis also, the switch over to amethod of valuing the preference shares was not bonafide orproper. We entirely agree with the reasoning of the Id. CIT(A)that on the peculiar facts and circumstances of this case, theaddition ofRs.4,25,000/- was calledfor. This ground, therefore,fails and is rejected.” 14.As has been mentioned above, the Tribunal also did not agreewith the version of the assessee that estimation of income made by it was abonafide exercise and as such, no interest could be levied under Section217(1A) of the Act. 15.In view of the above discussion, when the entire matter isevaluated on the canvass of facts and circumstances, no question of lawarises for adjudication. All these question of facts as also the matter indispute having already been evaluated and decided concurrently against theassessee, need not be answered any further. [L.T-R. No.61 of 1997 16.In the result, both the questions claiming to be of law, in fact,are based on facts and as such, these questions are not required to beanswered in this reference. Sequelly, the reference is adjudicated against theassessee and in favour of the revenue. (Dr. Bharat Bhushan Parsoon)Judge February 21, 2014‘Yag Dutt} (Rajive Bhalla)Judge 1.|Whether Reporters of local papers may be allowed to see the judgment? Yes | 2Whether to be referred to the Reporters or not? Yes cwWhether the judgment should be reported in the Digest? Yes