TaxTMI 
TaxTMI 
2016 (2) TMI 825
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.... engaged in the business of share broking, trading and dealing in shares and securities. During the course of the assessment proceedings, the AO noted that the Assessee has credited income from operations of Rs. 5,06,87,371/- to the profit and loss account against which total expenditure debited was Rs. 5,63,87,889/- thereby arriving at a loss of Rs. 57,00,518/-. The major income forming part of income from operations was Rs. 5 crores, which represented 'bad debts' recovered during the year and the other remaining part was mainly on account of interest income and dividend income. The major expenditure debited to the profit and loss account included an amount of Rs. 52,60,830/- on account of loss on conversion of investments into stockin- trade which Assessee has added back to the income in the computation of income, to be claimed in the year in which the converted stock is sold. The loss quantified at Rs. 1,83,75,418/- was on account of valuation of stock-in-trade at cost or market price, whichever is lower as on 31.3.2007. The background of the conversion of shares is that, the Assessee had purchased shares of M/s. Sakuma Exports Ltd. on 20th March and 21st March, 2006 which was s....
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....market whichever is lower with the intention to set-off the loss on conversion against recovery of bad debts of Rs. 5,00,00,000/- during the year hence it is a colourable device; and ii) Secondly, the AO in the alternative held that, the resultant loss on account of valuation of the stock-in-trade is covered by the Explanation to Section 73 and thereby it is a speculation loss which cannot be set-off against business income on the basis of the judgement of Hon'ble Bombay High Court in the case of Prasad Agents (Pvt.) Ltd., 180 Taxmann 178. 4. Before the ld. CIT(A), the main contention of the Assessee was that the Assessee had converted the shares into stock-in-trade as early as on 3.4.2006 and on that date it was impossible to visualize that the share having market price at Rs. 65/- and Rs. 36/- on 3.4.2006 will be priced at Rs. 47.50/- and Rs. 17.55/- on 31.3.2007. Thus, there was no intention at the time of conversion to set off the loss against the recovery of bad debts of Rs. 5 crores. However, the ld. CIT(A) confirmed the action of the AO. On the alternate ground of invoking the provisions of explanation to Sec. 73, he held that the same has become infructuous in v....
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....that the assessee could have done this in the earlier year itself when the recovery was 8 crores does not support the conduct of the assessee because the shares were purchased at the fag end of the accounting year i.e. on 20/21/3/2006. The assessee could not have done this exercise because it needed a Board Resolution which has to be filed with the ROC." Now, on such a disallowance on account of valuation loss on converted stock of shares of Rs. 1,83,75,418/-, penalty u/s 271(1)(c) has been levied by the Assessing Officer on concealment of income which has been computed at Rs. 95 lacs which is more than 173% of the tax sought to be evaded. 6. The ld. CIT(A) after discussing the various case laws and the philosophy behind levy of penalty u/s 271(1)(c) has confirmed the penalty on the ground that the Assessee has deliberately concealed its particulars of income and the loss claimed on valuation of stock as on 31.3.2007 is nothing but artificial loss to reduce the tax liability. 7. Before us, the ld. Counsel, Shri J.P. Bairagra after explaining the entire facts of the case, as noted above, submitted that the shares purchased on 20th and 21st March, 2006 was converted into sto....
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....er on, in the penalty order the AO has levied penalty on concealment of income, that is, on totally different ground. Even the ld. CIT(A) too has confirmed the penalty on the ground of concealment of particulars of income. Thus, the penalty was initiated on a different ground and it has been levied on an entirely different ground, therefore, such penalty order cannot be sustained. This fact has also been noted by the ld. CIT(A) in para 2.3.2 and 2.3.3 and despite noting this difference in the legal position, the ld. CIT(A) has confirmed the penalty. He submitted that now there is a catena of decisions of various Hon'ble High Courts stating that the AO is under obligation to specify the ground on which the penalty is being initiated and failure to do so will vitiate the whole penalty proceedings. This proposition, he submitted is supported by the decision of the Hon'ble Karnataka High Court in the case of CIT vs. Manjunatha Cotton & Ginning Factory reported in 359 ITR 565 and the Hon'ble Gujarat High Court in the case of Manu Engineering reported in 122 ITR 306 and Hon'ble Delhi High Court in the case of Virgo Marketing reported in 171 Taxman 156. Thus, he submitted that on this gro....
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....et price whichever is lower with the intention to set off the loss against income from recovery of bad debts and such an action was clearly a colourable device. The Tribunal too has confirmed the said disallowance and upheld the action of the authorities below, mainly on following grounds : i) firstly, there was no business operation of shares in the immediately preceding year and no reason has been given by the Board of Directors as to why within 14 days of the purchase of shares as long term investment has been converted into stock-intrade; ii) secondly, after conversion, the Assessee has not done any business of converted shares and this conduct of the Assessee of converting investments into stock-in-trade is not backed by any commercial prudence; and iii) lastly, the Assessee has not shown whether the Board resolution was filed with the ROC. Thus, on these grounds the disallowance of Rs. 1,83,75,418/- has been confirmed on which now huge penalty has been levied. 11. It is trite law that the quantum and penalty proceedings are separate and distinct proceedings and finding given in the quantum proceedings may have some probative value but su....
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....is like a civil suit, that is, preponderance of probabilities. If the probable factors support the claim of the Assessee, then, without their being rebuttal or adverse material to doubt such a probability, then the presumption has to be drawn in favour of the Assessee and the onus, then shifts heavily upon the Revenue to prove that the Assessee's explanation on bona fide belief is false. Here, in this case, all the probable factors were in favour of the Assessee which can be gauged by the fact that the conversion of shares from investment to stockin- trade was fully supported by Board Resolution and entries in the books of accounts. There is no other mechanism to show the conversion from investment to stock-in-trade. The loss on the date of conversion is supported by the market data available in the public domain, that is, as listed in the stock exchange. At the time of conversion of stock-in-trade, there was no recovery of bad debts up till 3.4.2006 (i.e. on the date of conversion), hence it cannot be inferred that the Assessee had intended to set off the future bad debts recovery from the loss on conversion and later on valuation of the stock at the year end. Another important fa....