1. This appeal of the Department is directed against order dt. 17th Feb., 1994 passed by CIT(A)-III, Lucknow, by which appeal of the assessee for asst. yr. 1991-92 was disposed of.
1(i) That the learned CIT(A) has erred in law and on the facts of the case in directing the AO to assess the capital gains on sale of shares to partners at Rs. 9,66,39,467 as against the capital gains of Rs. 12,60,04,004 which were computed correctly by the AO, in the circumstances of the case.
1(ii) That the learned CIT(A) has erred in law and on the facts of the case in directing the AO to allow business loss of Rs. 8,66,99,100 on sale of shares to partners, which was correctly disallowed by the AO, in the circumstances of the case.
1(iii) That the learned CIT(A) has erred in law and on the facts of the case in accepting the assessee's claim that the shares transferred to partners had been converted into stock-in-trade, when the alleged conversion was not followed by the requisite conduct expected of a dealer in shares.
1(iv) That the learned CIT(A) has erred in law and on the facts in accepting the assessee's plea that there was no distribution of shares within the meaning of Section 45(4) of the IT Act, 1961, without appreciating that the word 'distribution' is of a wide import and includes apportionment of shares among the partners by book entries as was done in the present case.
1(v) That the learned CIT(A) has erred in law and on the facts of the case in accepting the assessee's contention that for the purposes of working out the capital gains, the actual cost of the original shares was not affected by the subsequent acquisition of bonus shares, whereas the AO had correctly computed the cost of original shares by applying,the averaging out formula. Reliance is placed on CIT v. T.V.S. & Sons Ltd. (1983) 143 ITR 644 (Mad) and Escorts Farms (Ramgarh) Ltd. v. CIT .
1(vi) That the learned CIT(A) has erred in law and on the facts of the case in deleting the disallowance of interest of Rs. 61,38,630 which was correctly made by the AO on account of allowing substantial advances by way of debits or withdrawals by the partners and also making advances to sister-concerns at the rate of interest lesser than the rate at which interest was paid on borrowings.
1(vii) That the learned CIT(A) has erred in law and on the facts of the case in deleting the addition of Rs. 33,16,225 which was correctly made by the AO by estimating the hire charges receipts by invoking the provisions of Section 145(2) of the IT Act, 1961.
1(viii) That the learned GIT(A) has erred in law and on the facts of the case in directing the assessee. to allow full depreciation as claimed, without appreciating that the AO had already allowed the assessee's claim for depreciation in full.
1(ix) That the learned CIT(A) has erred in law and on the facts of the case in deleting the disallowance of Rs. 20,77,406 being machinery spares and repairs which was correctly made by the AO, in the circumstances of the case.Raj Kumar Singh & Co. v. Dy. CIT ITA No. 1288/AU/1993, which has been followed by the learned CIT(A) while allowing relief as mentioned in ground Nos. 1(vi), 1(vii) and 1(ix) above, has not been accepted by the Department and a reference application under Section 256(1) is pending with the Tribunal.
1(xi) That the learned CIT(A) has erred in law and on the facts of the case in deciding the issue of capital gains and conversion of shares into stock-in-trade by accepting the assessee's contention in to without giving his specific findings on the various aspects of the issue.
3. The issue involved in ground Nos. 1(i) to 1(v) relate to addition of capital gain on sale of share to partners which was shown at Rs. 9,66,39,467 by the assessee but was computed by the AO at Rs. 12,60,04,004. The other point involved in the same ground relates to business loss of Rs. 8,66,99,100 claimed by the assessee on sale to partners which was disallowed by the AO.4. The relevant facts giving rise to this appeal are that assessee is a firm and was in existence since 1985. As evident from the partnership deed dt. 30th July, 1988 appearing at pp. 124 to 127 of the paper book, the business of the assessee was as under : 3. The business of the partnership shall continue to be civil engineering construction and to execute the existing contracts in hand and/or take and execute any other contract or contracts and to invest in shares and securities, etc., and/or such other business as the partners may mutually decide from time-to-time.
5. This partnership deed was amended by executing a supplementary deed on 1st Jan., 1990, the copy of which is appearing at pp. 128 to 130 of the paper book, in which the Clause 3 was amended and the same reads as under : 1. That Clause 3 of the partnership deed dt. 30th July, 1988 shall stand substituted by the following clause : That the business of the partnership shall continue to be civil engineering construction and to execute the existing contracts in hand and/or take and execute any other contract or contracts and also to carry on the business of purchase and sale and to otherwise deal in stocks, shares, debentures and other securities and commercial paper and/or such other business as the partners may mutually decide from time-to-time.' That the following shares which are held as on date as 'investments' of this partnership are transferred by way of conversion from capital asset into 'stock-in-trade' of its business w.e.f. 1st day of January, 1990.
6. Another supplementary deed was executed on 1st Jan., 1990 and copy thereof is appearing at pp. 131 to 133 of the paper book by which Clause 4 was amended by adding the following clause : That w.e.f. 1st April, 1990, the opening balances lying on that date in the capital accounts of the partners shall be sub-divided into (1) fixed. capital account, (2) partners' current accounts. The fixed capital accounts shall be of the following amounts.
7. It has also come on record that assessee-firm was also a sub-contractor of M/s Jaiprakash Associates (P) Ltd., another firm of the same group and it was giving on hire its dumpers and tippers to the contractors on daily wages. The assessee-firm was having 91,970 shares of M/s Jaiprakash Associates (P) Ltd. each valuing Rs. 100 in asst. yr.
1986-87. On 31st Dec., 1985, M/s Jaiprakash Associates (P) Ltd. issued bonus shares @ 1:1 and thus total of the shares with the assessee-firm amounted to 1,83,940. It is also the case of the assessee and not disputed by the Department that M/s Jaiprakash Associates (P) Ltd. merged into M/s Jaypee Rewa Cement Ltd. by the order of the Hon'ble High Court on 30th July, 1986 in a company petition No. 7 of 1986 connected with the company application No. 2 of 1986, the copy of which has been filed by the learned counsel for the assessee. The scheme of amalgamation of M/s Jaiprakash Associates (P) Ltd. and M/s Jaypee Rewa Cement Ltd. is appearing as Sch. I to the order of the Hon'ble High Court and Clause 6(a)(i) provides that transferee company (M/s Jaypee Rewa Cement Ltd.) shall issue at par and allot to the transferor company [M/s Jaiprakash Associates (P) Ltd.] shareholders in proportion of 75 equity share of Rs. 10 per share in the transferee company credited as fully paid-up for every one fully paid-up equity share of Rs. 100 per share held in the transferor company on such date. Later on M/s Jaypee Rewa Cement Ltd. changed its name to M/s Jaiprakash Industries Ltd. (hereinafter referred to as JIL). As per this amalgamation scheme, the shareholding of the assessee-firm amounted to 1,37,95,500 and assessee, after amending Clause 3 of partnership deed vide supplementary deed dt. 1st Jan., 1990, converted its stock of shares of different companies being held as investment into stock-in-trade of the business w.e.f. 1st Jan., 1990 which resulted into surplus of Rs. 11,66,08,127 and this amount of surplus was credited to the account of partners in their profit-sharing ratio. The surplus arose on account of the fact that equity shares of M/s Jaiprakash Industries Ltd. was on the date of conversion quoted at Rs. 18.50 per share as against book value of Rs. 10 per share.
8. Before taking up the facts of relevant asst. yr. 1991-92, it will be in the fitness of things to take into consideration the factual position noted by the AO in respect of this conversion of stock of investment into stock-in-trade carried out during the previous year relevant to asst. yr. 1990-91. The AO noted that from scrutiny of details for the year as well as subsequent year, it was revealed that assessee-firm had sold a substantial number of shares to its partners and related persons on 17th April, 1990 and 18th April, 1990 @ Rs. 12.50 and Rs. 12 per share, respectively. He further noted that in a short span of 3-1/2 months from the date of conversion, a substantial number of shares were sold at a lower price. In view of the provisions of Section 45(2) of the IT Act, 1961 (hereinafter referred to as the Act), the assessee has offered capital gain on the difference between the value as on the date of conversion and the cost of price of shares and has claimed deduction under Section 48(2) of the Act thereon. The assessee has also claimed business loss on account of sale on reduced price of Rs. 12.50 and Rs. 12 per share as against converted cost of Rs. 18.50 per share. The AO was of the view that assessee had adopted a device simply to avoid lawful payment of tax. in the assessment order for asst. yr. 1990-91, the AO has noted that he called upon the assessee to explain why entry of conversion of shares in stock-in-trade be not treated as sham with the sole objective of tax evasion only. The AO has taken note of the reply dt. 14th Nov., 1992 in which the details were given as under: (a) For a very long-time the firm held following investments by way of shares of companies and bonds of public sector corporation : Book value(i) 56,400 equity shares of Jaypee Hotels Ltd., New Delhi, 5,56,050.00 of Rs. 10 each fully paid-up(ii) 7,43,150 equity shares of Jaiprakash Enterprises Ltd., 74,65,097.00 Lucknow, of Rs. 10 each fully paid-up(iii)1,37,95,900 equity shares of Jaiprakash Industries 13,79,55,000.00 Ltd.,Lucknow, of Rs. 10 each fully paid-up(iv) 2,500 equity shares of Jaiprakash Investments (P) Ltd., 25,000.00 Lucknow, of Rs. 10 each fully paid-up(v) 2,250 equity shares of Jaiprakash Associates non- 2,00,000.00 convertible bonds (A series) of Rs. 1,000 each of NHPC, New Delhi _______________ 14.62,03.147.00(b) On 1st Jan., 1990, it was decided by all the partners ofthe firm to carry on the business of purchase and sale and to otherwisedeal in stocks, shares, debentures and other securities andcommercial papers, etc. and for this purpose to convert, out ofthe above, the following shares and bonds which were quoted onstock exchanges, as stock-in-trade of its business w.e.f. 1st Jan., 1990.
No. of share and bonds(i) Equity shares of Rs. 10 each of Jaiprakash Industries Ltd. 1,37,95,500(ii) Equity shares of Rs. 10 each of Jaiprakash Enterprises Ltd. 7,43,150(iii)Equity shares of Rs. 10 each of Jaypee Hotels Ltd. 56,400(iv) 7 year 14% secured redeemable non-convertible bonds of 200 National Hydro Electric Power Corporation Ltd. of Rs. 1,000 each A supplementary deed dt. 1st Jan., 1990 was executed to this effect, a photostat copy of which is furnished herewith as per Annex. 1.
The aforesaid conversion of shares and bonds into stock-in-trade is also evidenced by entries in our books of account maintained in the regular course of business. Photostat copies of these entries are furnished herewith as per Annex. 2.
These shares and bonds were duly shown in the balance sheet as on 31st March, 1990 as stock-in-trade of business.
As per details furnished in para 5 of our letter dt. 15th June, 1992 (photostat copy enclosed for ready reference-Annex. 3) a surplus of Rs. 11,68,08,127.50 resulted from this conversion which had been credited to the accounts of the partners in their profit-sharing ratio. This surplus is chargeable to income-tax as capital gain in the year of actual sale/transfer as per the provisions of Section 45(2) of the Act.
On these facts, the conversion of the shares/bonds held on investment account into stock-in-trade of business is wholly genuine and in conformity with the agreement between the parties and as such there is no question of its being treated as sham or with any object of tax evasion whatsoever.
9. The AO proceeded to examine the supplementary deed executed on 1st Jan., 1990 and was of the view that main business of the assessee remained that of civil construction work and Clause 3 of the partnership deed was amended with motive to avoid payment of tax. The AO also examined the factual position and noted that in asst. yr.
1990-91, the assessee had effected purchases and sales of shares of Rs. 2,69,550 and Rs. 2,73,534 and even in asst. yr. 1991-92, the assessee has purchased shares worth Rs. 5,21,156 and sold shares worth Rs. 2,11,964. These figures go to show that assessee was not dealing in shares transactions but all this was done with ulterior motive of tax saving and the AO observed that assessee-firm cannot be allowed to take any benefit flowing out of such conversion insofar as tax implications are concerned. Accordingly, the entry of conversion was not treated by him as genuine book entry and the AO concluded that assessee would not be entitled to any tax benefit arising out of this entry. For this, the AO tried to get support from the ratio of the apex Court in the case of Mc Dowell & Co. Ltd. v. CTO .
10. The assessee has effected sales of 1,37,95,500 shares of M/s Jaiprakash Industries Ltd., 7,43,150 shares of M/s Jaiprakash Enterprises Ltd., and 56,400 shares of M/s Jaypee Hotels Ltd. out of shares which were converted into stock-in-trade. On 17th April, 1990, 56 lakhs shares were sold to M/s Siddharth Construction Co. (P) Ltd., a partner of assessee-firm @ Rs. 12.50 per share. On 18th April, 1990, 69 lakhs shares were sold to M/s Siddharth Construction Co. (P) Ltd. @ Rs. 12 per share. On that very date, a large number of shares were sold to remaining 16 partners of the assessee-firm @ Rs. 12 per share and details thereof are appearing at p. 3 of the assessment order. The AO while completing assessment for the year under consideration for computation of capital gains took help from the observations of the assessment order framed for asst. yr. 1990-91 in which it was held that conversion of investment into stock-in-trade was not a bona fide act but was made with the sole objective of tax avoidance. The AO further noted that assessee no doubt had purchased shares of different companies worth Rs. 5,21,156 on different dates and sold some shares also, but the manner and magnitude of purchases/sales. made by the assessee was not sufficient to term the assessee as dealer in share and securities. On the observation made in the assessment order for asst.
yr. 1990-91, the AO concluded that shares held by the assessee are to be treated as investment and not stock-in-trade.
11. The AO further proceeded to examine the details of shares sold and it was noted that more than 90 per cent shares have been transferred to M/s Siddharth Construction Co. (P) Ltd., a partner, and written agreement was executed in between assessee-firm and that partner, but so far as sale of shares to other remaining 16 partners were concerned, there was no written agreement. The other facts noted by the AO was that assessee-firm had not received sale consideration from any of the transferee partners but only book entries in the respective current accounts of the partners have been made on those dates by debiting the amount of sale consideration to their respective account. About the written agreement in between assessee-firm and M/s Siddharth Construction Co. (P) Ltd., it was noted by the AO that transferee partner was required to pay interest @ 15 per cent per annum to the assessee-firm on the amount of sale consideration of 56 lakhs shares till the date of its payment and even assessee has charged interest to the extent of Rs. 43,47,328 on that amount. So far as remaining partners are concerned, no interest has been charged by the assessee-firm and the AO has taken note of the fact that it was on the pretext that remaining partners were having sufficient opening credit balances in their accounts to absorb the debits on account of sale consideration of shares. The, AO did not find substance in this plea of the assessee on the pretext that while completing assessment of the assessee-firm for asst. yr. 1990-91, it has been held that in substance and reality the partners' accounts were not having any credits but substantial debits were there, in case the unrealised surplus on account of shares revaluation and conversion of investments into stock-in-trade were excluded therefrom.
12. Further, the AO noted that the abovereferred to shares worth 1,37,75,600 were transferred on different dates in the register of shareholding of the company as under:Date of transfer No. of shares To whom transferred19-5-1990 25,45,500 Siddharth Construction Co. (P) Ltd.31-8-1990 10,00,000 -do-22-11-1990 1,02,30,100 Remaining partners ___________ 13. One of the reasons for delay in transfer of 1,02,30,100 shares was the fact that aforesaid shares were under a non-disposable undertaking given by the firm to Industrial Finance Corporation of India (hereinafter referred to as IFCI) and the shares were released from this non-disposable undertaking as under :47,99,500 Released vide letter dt. 23-10-1990___________ 14. The AO, on the above facts, concluded that these shares were under non-disposable undertaking and the IFCI vacated the said undertaking on 24th Sept., 1990 and 23rd Oct., 1990, then it was not an expenditure by the assessee, as how this firm could have effected alleged sale of shares which remained under non-disposable undertaking of IFCI on the dates of sale.
15. The AO also noted that M/s Siddharth Construction Co. (P) Ltd., major transferee, has shown sale of 10,00,000 shares through share broker @ Rs. 34 on 6th Sept., 1991 and resultant short-term capital gain of Rs. 2,11,49,736 and substantial dividend income has. been adjusted against huge business loss by the transferee company. Not only M/s Siddharth Construction Co. (P) Ltd., but the AO has named D.G.Kadkade, Rajendra Singh, Ravi Prakash Singh and S.K. Jain who have also adopted similar types of conversion and all of them have indulged in tax avoidance by claiming business loss on the one hand and also claiming deduction under Section 48 of the Act on the other hand as done by the assessee.
16. The next point noted by the AO was that assessee has shown receipt of dividend of Rs. 51,25,000 on 17th Oct., 1990 in respect of 1,02,50,000 shares which were transferred on the register of company as on 22nd Nov., 1990. According to the AO, if the abovereferred to shares were sold by the assessee on 17th April, 1990 and on 18th April, 1990 as alleged, then there was no occasion for the assessee to receive dividend worth Rs. 51,25,000 on shares already sold by it and it again raises question mark as to the genuineness of the transactions of shares with reference to date. On this basis, the AO opined that agreement for sale shown on 17th April; 1990 and 18th April, 1990 was nothing but it was an afterthought manipulation made by the assessee for tax avoidance and share transfer deeds were collusive and non-reliable. It was also concluded by the AO that genuine date of transfer has been registered in the register of the company which was 19th May, 1990, 31st Aug., 1990 and 22nd Nov., 1990 as noted above. For this, the AO placed reliance on the decision in the case of CIT v.Bharat Nidhi Ltd. and the apex Court decision in the case of Alapati Venkataramiah v. CIT in which it was held that the date of accrual of capital gain is the date when transfer takes place and the entries in the account books are irrelevant for determining such date.
17. On the basis of entire circumstances narrated above, in which alleged sales have been effected, the AO opined that it is a case of distribution of assets by the assessee-firm and covered under Section 45(4) of the Act and relevant portion of the finding of the AO is as under: 5.4 If the entire circumstances in which the alleged sale has been effected are viewed in proper perspective and totality as well as the manner in which all shares have been transferred from the firm to the partners by debiting the respective accounts of the partners is kept in mind, the only inference which can be logically drawn is that it is an arrangement of distribution of assets of the firm to its partners which has been accorded the facade of a sale with the intention of tax avoidance. In legal parlance, the word 'distribution' is of widest import and the words 'apportionment, allotment, allocation, classification' clearly fall with the brad sweep of this word (State of Tamil Nadu v. L. Abu Kaver Bai , Madhu Sudan Singh v. Union of India the firm to the partners at a particular rate is nothing else but apportionment of shares among partners by book entries and is well covered within the legal import of the word 'distribution'.
Therefore, I hold that this is a case of transfer of assets by way of distribution of assets to the partners and the provisions of Section 45(4) of the IT Act are applicable. Sec. 45(4) lays down as under : The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other AOP or BOI (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of Section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of transfer.
On reading of above provisions, it is clear that these provisions are applicable to the transfer of assets not only on dissolution of the firm but otherwise also and, therefore, the present case clearly falls within the ambit of these provisions. Since the shares have been transferred on 19th May, 1990, 31st Aug., 1990 and 22nd Nov., 1990, respectively, as per details already indicated in para 5.3 the quoted rate of shares on those dates in Delhi Stock Exchange (DSE) (distribution has been made in Delhi) shall be deemed to be the full value of consideration received on accruing on account of transfer of these shares. On perusal of rates, it is seen that 19th May, 1990 being Saturday, rates were not quoted on that date and rates of nearest date, i.e., 18th May, 1990 @ Rs. 15.50 per share at DSE is being taken. Quoted rate of shares of DSE on 31st Aug., 1990, ranged between Rs. 32, Rs, 33, Rs. 33.50 and Rs. 34 per share and average rate of Rs. 33 per share would be taken. For 22nd Nov. 1990, the quoted rate of Rs. 24.50 per share at DSE is being taken for purposes of determining the full value of consideration. 2,43,150 shares of M/s Jaypee Enterprises Ltd. were transferred in company's register on 31st May, 1990 in favour of M/s Siddharth Construction Company. The quoted rate of these shares in DSE on 31st May, 1990 was Rs. 9.50 per share and the same is being taken for determining full value of consideration. Besides, 56,400 shares of M/s Jaypee Hotels Ltd. were also transferred in company's register on 10th Sept., 1990 in favour of M/s Siddharth Construction Company. Quoted rate of these shares as on 10th Sept., 1990 is not available and, therefore, the rate on 12th Sept., 1990 in DSE @ Rs. 17.50 per share is being taken for determining the full value of consideration.
18. Later on the AO proceeded to arrive at the cost of acquisition of shares. He noted that assessee has worked out the cost of acquisition on the basis of averaging the cost of original shares but he was of the view that such working will result into reduction of cost of acquisition of original shares because the value of original shares is proportionately diminished. For this proposition, the AO placed reliance on the decision of the Hon'ble Madras High Court in the case of CIT v. T.V.S. & Sons Ltd. (1983). 143 ITR 644 (Mad) and on the decision of the Hon'ble Delhi High Court in the case of Escorts Farms (Ramgarh) Ltd. v. CIT and applying the same analogy, the cost of acquisition of the shares was taken at Rs. 1,14,82,416 by the AO. Long-term capital gain was worked out at Rs. 12,60,04,004 which is in Annex. 'A' to the assessment order.
19. The assessee came in appeal and it was submitted that the AO was not justified to work out the capital gain of Rs. 12,60,04,004 as against capital gain of Rs. 9,66,39,467 and was also not justified in not allowing the business loss of Rs. 8,66,99,100 on sales of shares to partners. The learned counsel for the assessee challenged the very observation of the AO made in the assessment framed in asst. yr.
1990-91 and relied upon in the assessment of the assessment year under consideration in relation to the conversion to its stock investment into stock-in-trade on the ground that the same was not a genuine and bona fide one but was simply a device to avoid payment of due taxes.
The contention of the assessee was that the action of conversion of its shares into stock-in-trade was evidenced by the following facts : (a) The decision of the partners of the appellant-firm (was) to carry on the business of purchase and sale and to otherwise deal in stocks, shares, debentures and other securities. It was emphasised that the shares which were the subject of conversion were all quoted on different stock exchange.
(b) The fact of conversion was evidenced by a supplementary deed of partnership executed by the partners on 1st Jan., 1990, i.e., the date of the conversion itself. Clauses 1 and 2 of this deed clearly mention about the fact of conversion and give the particulars of shares and bonds which were the subject of conversion.
(c) The said conversion was duly recorded in the accounts and copies of entries made in the books of account have already been submitted to and seen by the AO. (d) The said shares were duly shown as stock-in-trade as part of current assets in the relevant balance sheets of the appellant-firm as on 31st March, 1990 and also 31st March, 1991.
(e) Apart from the said shares, the appellant-firm dealt in other stocks, shares and securities. In the asst. yr. 1990-91, such purchases and sales amounted to Rs. 2,69,615 and Rs. 2,73,534 respectively. During the asst. yr. 1991-92, they were of Rs. 5,21,156 and Rs. 2,11,964, respectively.
20. About the legal position, the learned counsel for the assessee placed reliance on the decision of the apex Court in the case of CTT v.Bai Shirinbai K. Kooka in which the right of conversion of once investment into stock-in-trade was judicially recognised and this decision was subsequently followed by the apex Court in the case of CIT v. Groz-Beckert Saboo Ltd .
The other contention in this respect was that the AO has no right to question the principle or action of the assessee to declare itself to be a dealer from a particular date in relation to any of its investment either in shares or other properties. The only course left open to the AO was to charge tax of capital gains, if any, on the actual sale in terms of Section 45(2) of the Act. For this preposition, reliance was placed on the decision of the Hon'ble Supreme Court of India in the case of Bengal & Assam Investors Ltd. v. CIT and the case of Raja Bahadur Kamakhya Narain Singh v. CIT .
The assessee's case was that it had converted its investment in shares into its stock-in-trade w.e.f. 1st Jan., 1990 and later on sale carried out by the assessee goes to prove that assessee was carrying on business in those shares. The learned counsel for the assessee also contended before the learned CIT(A) that even under the income-tax statutory recognition to conversion of capital assets into stock-in-trade had been made by adding sub-cl. (iv) to Section 2(47) of the Act which subsequently recognised conversion of share assets under stock-in-trade as transfer. Further, reference was made to Section 45(2) of the Act, which also recognised conversion of investment into stock-in-trade. In view of these statutory provisions, the learned counsel for the assessee argued before the learned CIT(A) that there was no warrant or scope for questioning or doubting the right or act of conversion nor it is a case for application of the ratio of the Hon'ble Supreme Court of India in the case of McDowell & Co. Ltd. v. CTO (supra).
21. The next argument of learned counsel for the assessee before the learned CIT(A) was that appellant through conversion of investment into stock-in-trade and subsequent sale of the shares as stock-in-trade has resulted into payment of higher rate of tax by the assessee as well as by its partners. The working of tax payable was given in the written submission submitted before the learned CIT(A) which revealed that if the said shares were retained by the assessee-firm without any conversion into stock-in-trade and sold to outsiders directly, the tax incidence would have come to 24 per cent to 25 per cent only while the tax incidence on conversion and subsequent sale of the shares by the partners to outsiders came to about 35 per cent. On this basis, the contention of the assessee was that Department has collected higher tax by the act of conversion by the assessee and the doubt raised by the AO that there was any device adopted by the assessee for tax avoidance was uncalled for and without any basis.
22. It was further contended that after assessee amended the relevant Clause 3 of partnership deed, assessee had carried out purchases and sales of number of shares of different companies and on different dates. Some of the shares of different companies remained as stock-in-trade by the end of two years which were duly reflected by the assessee in its books of account as stock-in-trade. The very purpose for referring such transaction was to prove that assessee was dealer in shares and not an investor as concluded by the AO.23. The learned counsel for the assessee also submitted that there was no legal bar on the sale of shares from the firm to its partners. For this proposition, the learned counsel for the assessee placed reliance on the decision of the Hon'ble Bombay High Court in the case of CIT v.Kaluram Puranmal in which it was held that there was no prohibition in law that firm cannot deal with its partners or vice versa in the normal course of business.
24. Next, it was contended that there was a written agreement between the assessee-firm and M/s Siddharth Construction Co. (P) Ltd. for sale of 56 lakhs shares and there was no sufficient balance in the account of this company which necessitated execution of written agreement and payment of interest @ 15 per cent on the outstanding amount of sale was charged. With regard to other transactions which was done with other partners, it was pointed out that there was sufficient balance in their account to adjust sale price of the shares. A reference to the order dt. 23rd Dec., 1993 passed by Tribunal, Allahabad Bench, in the case of the assessee for asst. yr. 1990-91 was also made in which it was concluded that credit for revaluation of shares in the accounts of the partners were genuine credits and representing real balance in their accounts. On the basis of these facts, it was contended that partners were having sufficient capacity to purchase shares because there were sufficient balances in their capital account.
25. Referring to the observation of the AO about non-disposal undertaking given by the assessee-firm to IFCI, the learned counsel for the assessee submitted that such undertaking was given to the financial institution as a normal practice to ensure that during the subsistence of loan, the management or the ownership of the company is not de-established. It was only to safeguard the interest of the lenders and it did not amount to prohibition upon the transfer of the shares.
Non-disposal undertaking only involved the obtaining of necessary permission from the financial institution by the company before a transfer or share was registered in the books of the company and did not prohibit the sale or the transfer of share which being a moveable property, could be carried out by mere delivery of the script along with a duly completed transfer deed. In the case of the assessee, the learned counsel for the assessee submitted before the learned CIT(A) that shares were transferred in the registers of the shareholders of the company only after the permission of the IFCI had been obtained and such permission in respect of transfer of 19,96,000 shares were accorded on 23rd Oct., 1990 and the same were actually registered in the company only on 22nd Nov., 1990.
26. The learned counsel for the assessee explained that no doubt purchasers of the shares who were partners of the assessee-firm has subsequently sold the shares at substantial profits but those partners were independent of the assessee-firm. How they dealt with their holdings after their purchase was not the concern of the assessee. It was also pointed out that sales were made on the latest prevailing rates of the stock exchange on the relevant dates. Nobody could have visualised the future trend of the price on the stock exchange.
27. About receipt of dividend by the assessee, it was clarified before the learned CIT(A) by the assessee that the sale of shares was ex-dividend and the dividend related to the period when the shares were owned and held by the assessee-firm i.e., year ending on 30th March, 1990.
28. About application of provisions of Section 45(4) of the Act by the AO to the above transaction of shares, the learned counsel for the assessee submitted that provisions of Section 45(4) of the Act will be applicable only in the case of "distribution" of the assets by the firm in the event of its "dissolution" or "otherwise". It was contended that expression "otherwise" must be construed ejusdem generis and that must derive its meaning and colour from the expression "dissolution". It was explained that it can cover the situation of similar nature as of dissolution and did not cover the case of a direct sale by the firm to its partners for consideration. For application of provisions of Section 45(4) of the Act, there must be "distribution" of the assets of the firm among its partners. Reference to the decision of Tribunal, Bombay Bench, in the case of Burlingtons' Exports v. Asstt. CIT (1993) 45 ITD 424 (Bom) was made, in which it was held that in order to attract application of Section 45(4) of the Act, there should be distribution of assets by the firm to the partner in both the situations namely-either under "dissolution" or "otherwise". It was also held in the said case by the Bombay Bench of Tribunal that where a property is transferred to a partner for consideration, it would be a case of sale by the firm to the partner and not a "distribution". It was further opined that in case of "distribution", no consideration is involved and the partners have to share withdrawal as per prescribed sharing ratio agreed to in the partnership deed. On the basis of that decision, it was contended by the learned counsel for the assessee before the learned CIT(A) that facts of the assessee's case are also pan materia and the decision of the Tribunal, Bombay Bench, is squarely applicable.
29. In the same context, it was further contended that it was an admitted fact that the shares were not sold or transferred to all the partners according to their profit-sharing ratio as given in the partnership deed. There were at least two partners to whom no shares were sold or transferred at all. It again ruled out question of any distribution of assets of the assessee-firm to its partners since distribution must necessarily include and cover all the partners unless otherwise specifically agreed. Further, it was pleaded that sale of shares to the respective partners was not in their profit-sharing ratio, as more than 90 per cent of the total shares were sold to one partner viz., M/s Siddharth Construction Co. (P) Ltd. while that concern was having 41.5 per cent sharing ratio in the profit and losses of the assessee-firm. Similarly, the ratio of the shares sold to other partners is different from their respective profit-sharing ratio in the firm. On all these, the learned counsel for the assessee argued that provisions of Section 45(4) of the Act were deeming and fictional provision must be construed strictly and unless and until all the ingredients of the section were satisfied, it should not be applied, particularly to the case of sale for consideration.
30. About the doubt raised by the AO in connection with date of registration of shares in the register of the shareholders of the company vis-a-vis date of transfer, it was contended by the learned counsel for the assessee that reference to the case law by the AO on the said point was clearly distinguishable as one of that cases related to transfer of immovable property while in the case in hand, transfer was in respect of shares, a movable property.
31. In respect of shares, it was the case of the assessee that it being movable property, could be sold/transferred by mere delivery of the shares certificate along with duly executed transfer deeds. The sale is to be taken as complete as soon as the transfer deed along with certificates were delivered. The registration of transfer in the share transfer register of the company concerned was not necessary for effecting either the sale or the transfer of the shares. For this preposition, the assessee placed reliance on the decision in the case of CWT v. Babulal Jatia (Decd.) (1981) 137 ITR 540 (Cal) and in the case of CIT v. M. Ramaswamy . In both these cases, it was held that upon the execution of the transfer deed and the physical handing over of the shares by the transferor to the transferee, the shares stand transferred even though transfer is not registered in the company's books. On the basis of the date of actual sale of shares to different partners, the assessee submitted that prpfit/loss of the above shares should be with reference to the sales on the above date and the rates as shown in the order of assessment.
32. Lastly, the contention of the assessee was in respect to the "cost" to be adopted for sold out shares, The assessee submitted that while computing the capital gains, the AO had applied averaging formula and thus reduced the cost of acquisition of the original shares from Rs. 1,32,02,878 to Rs. 86,27,836 resulting in the increase in the amount of capital gains by Rs. 45,75,042. On this, the plea of the learned counsel for the assessee was that there was no warrant or justification for reduction in the actual cost of the original shares or for the increase by Rs. 45,75,042 in the amount of capital gains. Reliance was placed on the decision of the apex Court in the case of Sekhawati General Traders Ltd. v. ITO and the decision of Hon'ble Calcutta High Court in the case of CIT v. Steel Group Ltd. in which it was held that mere fact of the issue of bonus shares could not result in the reduction in the cost of the original shares. The learned counsel for the assessee also pointed out that this issue was also considered by the Tribunal, Allahabad Bench, in the case of Smt. Rekha Dixit which was decided in favour of the assessee. The learned CIT(A) also noted that he has followed that decision in the case of Ram Adhar Singh in asst. yr. 1991-92 vide order dt. 30th Nov., 1993. Following all these, the learned CIT(A) was in agreement with the plea of the assessee and noted that original cost of acquisition in respect of shares sold out should be taken at Rs. 1,32,02,878 and capital gains have to be worked out on this basis.
33. All these facts and circumstances as well as case law submitted by the assessee were considered by the learned CIT(A) and he did find force in the same and granted relief to the assessee and the AO was directed to assess capital gain at Rs. 9,66,39,467 under Section 45(2) of the Act and also to allow deduction of Rs. 8,66,99,100 being loss suffered on the sale of shares. This view of the learned CIT(A) is subject-matter of ground Nos. 1(i) to 1(iv) raised by the Department.
34. Shri K.K. Pandey, CIT (Departmental Representative) has placed reliance on the order of the AO in the case of the assessee for asst.
yr. 1990-91 and even filed copy of the same. Placing reliance on the observations made therein, the learned CIT (Departmental Representative) submitted that judicial authority seized with the matter are supposed to see smoke screen and the same has to be dismantled or removed to find out the substance of the matter. He also pointed out that it is not relevant to see as to whether provisions of Section 45(2) of the Act or provisions of Section 45(4) of the Act are to be made applicable but the main issue is as to whether loss of Rs. 9,66,39,467 claimed by the assessee is genuine or not and for this he again took us to the observation of the AO in the assessment order for asst. yr. 1990-91 in which it was concluded by the AO that action of the assessee in conversion of shares held by the assessee into stock-in-trade was a sham transaction simply to avoid payment of due taxes. In this connection, the learned CIT (Departmental Representative) referred to para 8.3 of the said assessment order for asst, yr. 1990-91 in which the AO has specifically noted that volume of transaction of sale and purchase of shares in asst. yrs. 1990-91 and 1991-92 go to show that assessee has made purchases and sale of the shares worth Rs. 2,69,515 and Rs. 2,73,534, respectively, in asst. yr.
1990-91 and had shown purchase of shares worth Rs. 5,21,156 and sale of shares of Rs. 2,11,964 in asst. yr. 1991-92. These transactions were insignificant and it cannot be said that assessee was having any intention to deal in shares. The learned CIT (Departmental Representative) pointed out that in asst. yr. 1990-91, the year under consideration, the assessee has effected sales of more than 90 per cent shares held by it to its partners and that too within short span of time within which shares were converted from investment into stock-in-trade. The finding of the AO was that this exercise of conversion was motivated with objective of tax evasion. Ultimate finding was that entry of conversion of investment into stock-in-trade was a colourable device to avoid correct incidence of taxation and for that the AO was justified to take support from the famous decision of the Hon'ble Supreme Court of India in the case of Mc Dowell & Co. Ltd. v. CTO (supra).
35. The next argument of the learned CIT (Departmental Representative) was that the AO has rightly observed that by conversion of shares from investment to stock-in-trade, the assessee had shown increase in the value of the shares and the assessee-firm had credited the amount of such increase into respective capital account of the partners as per profit-sharing ratio. This was incorrect method adopted by the assessee. The learned CIT (Departmental Representative) contended that capital account of partners can be increased either by deposit made by the partners or by profit of the firm or the profit of that partner received as per his share from the profit of the firm. The same is the case in respect of loss, as the capital account of the partner can be reduced in case there is loss suffered by the firm and proportionate amount of loss is attributed to the partner or the capital account of the partner can be reduced in case partner has made any withdrawal out of its capital account. Except this method, there can be no method known to the principle of accountancy for increase or decrease in the capital account of the partner and in the case in hand, the assessee-firm has credited amount of appreciation of cost of shares in the capital account of the partner and the same is against the principle of accountancy. When the Bench enquired as to what should have been the mode to adjust the amount of appreciation in the case of share vis-a-vis firm or its partners, the learned CIT (Departmental Representative) pointed out that only mode available to the firm was that it should have credited a reserve, as in the case of company and that amount of appreciation in the cost of share resulted by conversion of investment into stock-in-trade, should have (been) credited in that reserve account and there would not be any other mode. As assessee had shown notional increase in the capital account of the partners out of appreciation cost of the shares, the mode adopted by the assessee is not recognised under any principle of accountancy and this again go to show that the assessee has adopted a colourable device simply to avoid incidence of lawful tax payment.
36. The learned CIT (Departmental Representative) also pointed out that provisions of Section 45(2) of the Act were not applicable because assessee should have given the amount of difference of conversion from investment into stock-in-trade to reserve account and thus accounts prepared by the assessee were not correct, as it has credited amount of such difference into partners' capital accounts.
37. The learned CIT (Departmental Representative), on the basis of the above, pointed out that the AO was justified to observe further that there was no conversion as per law. Once the conversion from investment into stock-in-trade is not legal, the assessee was not supposed to sell shares to its partners because there was no stock-in-trade and that amounted to distribution of capital assets and provisions of Section 45(2) are to be made applicable as done by the AO and the learned CIT(A) was not justified to reverse the order of the AO.38. As against it, Shri Kanchun Kaushal, learned counsel for the assessee, reiterated the same submissions as were raised before the learned CIT(A). In this connection, the learned counsel for the assessee has placed reliance on the copies of written submission submitted before the learned CIT(A) and the first written submission is appearing at pp. 1 to 5 of the paper book-I and the learned counsel for the assessee pointed out that the learned CIT(A) had made queries vide order dt. 13th May, 1993, the copy of which is appearing at p. 1 of the paper book-II, and assessee submitted detailed reply thereof in respect of conversion of capital assets into stock-in-trade and the same is appearing at pp. 2 to 5 of the paper book-II. The other reply of the assessee is appearing at pp. 2 to 29 of the paper book-II. The assessee further filed detailed reply dt. 21st June, 1993 and copies thereof are appearing at pp. 30 to 85 of the paper book and another written submission was filed on all these points and the same is appearing at pp. 86 to 114 of the paper book-II and again another written submission dt. 29th Jan., 1994 was filed and copy thereof are appearing at pp. 115 to 120 of the paper book-II. The position was specifically made clear to the learned GIT(A). The learned counsel for the assessee pointed out that the main business of the assessee-firm was contract business relating to construction work and in asst. yr. 1986-87, the gross receipts were about Rs. 1.63 crores and the same started reducing and in asst. yr. 1989-90, the total gross receipts were Rs. 9.52 lakhs only. As business of civil construction work was reduced to this extent, the partners of the assessee-firm decided to enter into business of purchase and sale of stocks, shares, debentures, etc. and executed a supplementary deed of partnership on 1st Jan., 1990 by which clause No. 3 of the partnership deed was changed to include in it the business of purchase and sale of shares otherwise to deal in stock, shares, debentures, etc. As assessee was having equity shares of Rs. 10 per share of JIL to the extent of 1,37,95,500, equity shares of Rs. 10 per share of M/s Jaiprakash Enterprises Ltd. to the extent of 7,43,150, equity shares of M/s Jaypee Hotels Ltd. to the extent of 56,400 and others and these were being held as investment from 1st Jan., 1990, the assessee converted these capital assets to stock-in-trade in pursuance to the said supplementary deed of partnership and the holding of the shares and bonds, etc. was treated as stock-in-trade. Necessary entries in the books of account were carried out and thus shareholding was shown as stock-in-trade in the balance sheet for the year ending 31st March, 1990. There were transactions of sale and purchase of other shares of different companies in asst. yrs. 1990-91 and 1991-92. The learned counsel for the assessee further pointed out that main item of share was of M/s Jaiprakash Industries Ltd. The original face value of each share was Rs. 10 per share, but on conversion, the value of each share was Rs. 18.50 per share as per stock exchange rate as on 1st Jan., 1990 and this has resulted into a surplus of Rs. 11,68,08,127 and this surplus was credited to the accounts of the partners in their profit ratio. The learned counsel for the assessee submitted that this action of the assesses is in conformity with the legal provisions, because conversion of capital assets into stock-in-trade is legally recognised one and for this reliance was placed on the decision of the Hon'ble Supreme Court of India in the cases of Bengal & Assam Investors Ltd. v. CIT (supra) and CIT v. Groz-Beckert Saboo Ltd. (supra). Not only this, the learned counsel for the assessee pointed out that the Hon'ble Madras High Court in the case of CIT v. .Ambadi Enterprises Ltd. had followed the ratio of the apex Court decision in the case of CIT v. Bai Shirinbai K. Kooka (supra) and the Hon'ble Gujarat High Court has followed the decision in the case of CIT v. Groz-Beckert Saboo Ltd. (supra) and in the case of CIT v. Kaira District Co-operative Milk Producers' Union Ltd. (2001) 247 ITR 314 (Guj) in which the right of conversion of capital assets into stock-in-trade by the assessee has been recognised. The learned counsel for the assessee submitted that in view of these facts, the Department cannot be allowed to question the right of the assessee to convert the holding of shares which was invested originally as investment into stock-in-trade and that too by amending the main clause of partnership deed and the same was given effect by necessary entries in the books of account as mentioned above.
39. Further, the learned counsel for the assessee pointed out that provisions of Section 45(2) of the Act also recognised such conversion of capital assets into stock-in-trade and further provisions of Section 2(47)(iv) of the Act also provide that conversion of capital assets into stock-in-trade will be included in the definition of word "transfer". The learned counsel for the assessee on the basis of above further submitted that even under the Act, the same has been duly recognised.
40. The next plea of the learned counsel for the assessee is that once there is statutory recognition to such conversion, then the AO has no authority to challenge such legal action of the assessee when the IT Act specifically permits the assessee to do so. The AO misdirected himself to place reliance on the ratio of the decision in the case of Mc Dowell & Co. Ltd. v. CTO (supra) because their Lordships in that case have also opined that lawful planning is permissible. In view of these, the assessee legally converted its capital assets viz., shareholding into stock-in-trade and that was as per law referred to above and question of adopting any colourable device by the assessee was not there and observations of the AO (were) not called for, as the same were against any basis.
41. The learned counsel for the assessee again challenged the very action of the AO where the AO had expressed his doubts on the action of the assessee-firm in selling the shares to its partners. The learned counsel for the assessee pointed out that in view of the decision of CIT v. Kaluram Puianmal (supra), the assessee-firm has all rights to transact sale and purchase business even (with) its partners and there is no provision in law to the fact that a firm cannot deal with its partners or vice versa in the normal course of business.
42. The learned counsel for the assessee submitted that there was written agreement about sale of shares in respect of M/s Siddharth Construction Co. (P) Ltd. to whom more than 90 per cent shareholding was sold. The learned counsel for the assessee submitted that explanation was given to the AO as well as to the learned CIT(A) that M/s Siddharth Construction Co. (P) Ltd. was not having sufficient credit balance in its capital account that is why written agreement was executed and interest @ 15 per cent was charged on the outstanding balances. The AO has taken note of the fact that assessee had shown receipt of Rs. 47 lakhs as interest charged by the assessee from this concern. There was no need for written agreement with other partners because they were having credit balances and the amount of sale consideration stand adjusted by the assessee-firm out of those outstanding balances.
43. Further, the AO failed to take note of the fact that shares were not transferred to all the partners nor in their profit-sharing ratio basis. Further, it is also submitted by the learned counsel for the assessee that the AO wrongly attached much significance to non-disposable undertaking given by the assessee to the IFCI. There was no prohibition to sell the shares, but the only thing required was to obtain permission from IFCI to whom non-disposable undertaking was given by the assessee-firm and it was a regular feature in such business transactions. The assessee obtained clearance from financial institution and the only lacuna was that names of the purchasers could have not entered in the register of the company unless and until such clearance from IFCI was not obtained by the assessee. Here, the purchasers have not asked for such clearance and the clearance was obtained and sale of shares was effected by actual delivery of the share scripts as well as by executing the transfer deed in respect of each of the purchases. Under these circumstances, the AO was not justified to call for any question, the transaction of sale of shares by the assessee-firm to its partners on the abovereferred to surmises and conjectures.
44. The main thrust of the AO in asst. yrs. 1990-91 and 1991-92 was that whole of the exercise done by the assessee was to avoid payment of due taxes. In this connection, the learned counsel for the assessee pointed out that a working was given before the learned CIT(A) and copy thereof is appearing at p. 164 of the paper book which shows that in case the said shares were retained by the assessee without any conversion into stock-in-trade and sold to outsider directly, the tax incidence would have come to 24 per cent to 25 per cent only. In alternative, the tax incidence on conversion and subsequent sale of the shares by the partners to outsiders came to about 35 per cent. In this way, the Department has collected higher tax by the act of conversion by the assessee. The learned counsel for the assessee submitted that this working of the assessee has not been questioned by the AO or by the learned CIT (Departmental Representative) and if it is taken as correct, then observations of the AO that assessee had adopted a colourable device to avoid payment of tax are no more alive, as assessee and its partners have already suffered higher amount of taxes and Department has not been deprived of any amount of lawful taxes.
45. It was also highlighted by the learned counsel for the assessee that partners who purchased shares were independent of the assessee-firm. How they have dealt with their holding after their purchase was not the concern of the assessee. It was also pointed out that sale of shares to different partners were made on the latest prevailing rate of stock exchange on the relevant dates. Nobody could have visualised the future trend of the prices on the stock exchange.
The assessee suffered losses as price of the share fell in the month of April when shares were transferred to partners but later on there was increase in the prices of the shares and each of the respective partners who purchased the shares, sold the shares at higher rates and have returned short-term capital gain of substantial amount and in this connection, the learned counsel for the assessee had given working of short-term capital gain returned by M/s Siddharth Construction Co. (P) Ltd. in asst. yr. 1991-92 to the extent of Rs. 2,11,59,436 and in asst.
yr. 1993-94 to the extent of Rs. 34,38,225 and again in the same year to the extent of Rs. 1,90,27,600. The share price could have fell down and in that case those partners could have also suffered losses but it is the trend of the market and thus observation of the AO questioning sale of shares to partners in any manner is not justifiable.
46. About application of provisions of Section 45(4) of the Act, the learned counsel for the assessee submitted that the same is not applicable at all because it is not the case of distribution of capital assets as is required under Section 45(4) of the Act, but it was a case of simple sale of capital assets by the assessee-firm to partners for consideration. The transaction of sale is not covered under provisions of Section 45(4) and for that reliance has been placed by the learned counsel for the assessee on the decision of the Hon'ble Bombay High Court in the case of Burlingtons' Exports v. Asstt. CIT (supra) in which the finding is in favour of the assessee.
47. The learned counsel for the assessee also questioned the action of the AO in taking the date of registration of shares in the register of the shareholders of the company as date of transfer. In this connection, our attention was drawn to the decision of Tribunal, Lucknow Bench, in the case of Rajendra Singh v. Asstt. CGT involved in GTA No. 6/A11/1995, decided on 24th April, 2003 [reported at (2003) 80 TTJ (Lucknow) 625-Ed.], copy of which has been filed and the same is appearing at pp. 166 to 186 of the paper book and the important issue in this case was as to whether the date of execution of sale deed or the date of transfer of share certificate or the date of actual delivery of shares are the relevant dates for deciding the date of transfer in case of sale of shares or its date of registration in the register of transferee-company which is to be taken as relevant date.
The Bench has considered all the facts and placing reliance on the decision of the apex Court in the case of Vasudeo Ramchandra Shelat v.P.J. Thakar (1995) 45 Comp Gas 43 (SC) which was also followed by the Hon'ble Calcutta High Court in the case of Sheila Devi Chamria v. Tara Chand Saraogi and Ors. and also after discussing the decision in the case of R. Subba Naidu v. CGT and others, it was concluded that date of registration of transfer in the register of company is not at all relevant for deciding the transaction of shares but it is the date of actual delivery of shares and the execution of the date of transfer which is relevant for taking date of transaction of the sale. The contention is that this view negates the very observation of the AO and he was not justified to take date of registration of shares in the register of the shareholders of the company as date of transfer. The assessee has also contended that the AO was not justified to reduce the actual cost of the original shares by Rs. 45,75,042 and for that reliance was placed on the decision of Sekhawati General Traders (supra) and CIT v. Steel Group Ltd. (supra) and contended that the learned CIT(A) was justified to decide this issue in favour of the assessee on the basis of the decision in the case of Smt. Rekha Dixit which he has followed in the case of Ram Adhar Singh in asst. yr. 1991-92. The contention is that the learned CIT(A) has rightly decided the issue in favour of the assessee and it does not require any interference.
48. We have considered the rival submissions and perused the record carefully. The facts which are not in dispute are that on 31st March, 1986 the assessee-firm was holding 1,83,940 shares of Rs. 100 per share of M/s Jaiprakash Associates (P) Ltd. M/s Jaiprakash Associates (P) Ltd. and M/s Jaypee Rewa Cement Ltd. moved a petition before the Hon'ble High Court of Allahabad for amalgamation and admittedly the Hon'ble High Court of Allahabad allowed such amalgamation vide order dt. 30th July, 1986, the copy of which has been filed before us and as mentioned above, the transferee-company viz., M/s Jaypee Rewa Cement Ltd. was to issue at par and allot to the transferor-company viz., M/s Jaiprakash Associates (P) Ltd. 75 equity shares of Rs. 10 per share for every one fully paid-up equity share of Rs. 100 per share held in the transferor-company. Accordingly, the assessee-company became entitled to 1,37,95,500 shares of JIL @ Rs. 10 per share. It is also on record that assessee was in the construction business but the said business was not yielding good results, as its gross receipts fell down from Rs. 1.63 crores in asst. yr. 1986-87 to Rs. 9.52 lakhs in asst. yr.
1989-90. It is also on record that partners of the assessee-firm decided to switch over and amended the main object clause of the partnership deed vide supplementary deed executed on 1st Jan., 1990 by which assessee-firm decided to carry on the business of shares and securities, etc. It was also decided by the partners that all the stock of shareholding as investment be converted into stock-in-trade as on 1st Jan., 1990. This main clause was implemented by the assessee by converting investment of shareholding into stock-in-trade and for that assessee had recorded relative entry of conversion in the books of account and copies of such entries as on 31st March, 1990 made in the books of account were duly submitted to the AO with the return for asst. yr. 1990-91. Further, shareholding as on 31st March, 1990 was shown as stock-in-trade in the relevant balance sheet of the assessee as on 31st March, 1990. Further, assessee had dealt in sale and purchase of shares in asst. yrs. 1990-91 and 1991-92 though the amount involved in the transactions of sales and purchases were quite small.
49. While completing assessment for asst. yr. 1990-91, the AO, as evident from pp. 31 to 34 of the assessment order dt. 30th Dec., 1992, copy of which has been filed by the assessee and the same is on record, concluded that action of the assessee to convert the shareholding which was shown as investment into stock-in-trade was a colourable device to avoid payment of lawful taxes. For this, he has taken into consideration that main investment of the assessee was in the shares of 1,37,95,500 of JIL of Rs. 10 per share which were converted @ Rs. 18.50 per share and from further scrutiny of the details of asst. yrs.
1990-91 and 1991-92, it transpired that assessee had sold more than 90 per cent shares on 17th April, 1990 and 18th April, 1990 @ Rs. 12.50 per share and Rs. 12 per share, respectively. He doubted the action of the assessee that within a span of 3-1/2 months from the date of conversion, assessee-firm sold substantial number of shares at a lower price. The assessee has offered capital gains as per provisions of Section .45(2) on the difference between value as on the date of conversion and cost price of shares and claimed deduction under Section 48(2) of the Act thereon and on the other hand, the assessee has claimed business loss on account of sale on the reduced price of Rs. 12 and Rs. 12.50 per share as against converted cost of Rs. 18.50 per share. In this way, the assessee has succeeded in tax evasion to a great extent. For this, the AO has taken help from the ratio of the apex Court in the case of Mc Dowell & Co. Ltd. v. CTO (supra) and his finding is that it was a colourable device adopted by the assessee to evade payment of lawful taxes.
50. In view of these facts, the first question arises as to whether the assessee was justified to convert the shareholding shown as investment into stock-in-trade In this connection, reliance has been placed by the learned counsel for the assessee on several decisions out of which two case laws had been referred to by the learned CIT(A) and that are CIT v. Bai Shirinbai K. Kooka (supra) and CIT v. Groz-Beckert Saboo Ltd. (supra). In both the cases, right of conversion of once investment into stock-in-trade had been judicially recognised. The other two cases had been referred (to) by the learned counsel for the assessee during the course of hearing before us and those are CIT v. Ambadi Enterprises Ltd. (supra) and that of CIT v. Kaira District Co-operative Milk Producers Union Ltd. (supra) in which both the High Courts have again recognised the right of the assessee to convert his investment into stock-in-trade. During the course of hearing also, the learned CIT (Departmental Representative) has virtually conceded to this legal preposition that every assessee has his right to convert his investment into stock-in-trade. Apart from it the assessee has also given out valid reason for doing so as apparent from the copy of written submission filed before the learned CIT(A) and a perusal thereof shall show that in asst. yr. 1986-87, the assessee was having gross receipts worth Rs. 1.63 crores and it reduced to Rs. 9.52 lakhs in asst. yr.
1989-90 and these facts forced the assessee to change the main object of the business and necessary amendment in the relevant clause of partnership deed was carried out by executing supplementary deed on 1st Jan., 1990 bringing the business of dealing in shares, securities, bonds, etc. as another business of the assessee to be carried out in future. Further, the assessee has given effect to this amendment of main clause of the partnership deed and the AO himself has admitted in the assessment order that for asst. yr. 1990-91 the assessee had converted the shares of JIL as stock-in-trade by making necessary entries in the relevant balance sheet and other books of account. So the factum of conversion from investment into stock-in-trade of shareholding is proved on record.
51. The next point relates to the amount of appreciation, which resulted from such conversion of shareholding because initially share of JIL were that of Rs. 10 per share and on the date of conversion, the amount of each share was Rs. 18.50. There was surplus of Rs. 11,66,08,127.50 and assessee had credited the said amount in the.
respective capital account of each partner as per their profit-sharing ratio. The learned CIT (Departmental Representative) had questioned this action of the assessee and contended that this was against the settled principle of accountancy as those amounts should have been credited to the reserve account to be created by the assessee and assessee-firm was not justified to give credit in the partners capital account as done. In this connection, it is pointed out that this issue was before the Tribunal, Allahabad Bench, in the case of the assessee for just preceding asst. yr. 1990-91 though in different context, as the issue in that year was as to whether each of the partner was having actual amount available to them for making withdrawal and interest on such withdrawal may be charged or not. The Tribunal has also considered the amount of appreciation (which) arose on account of conversion of shareholding from investment into stock-in-trade. The learned CIT (Departmental Representative) had raised point that alleged appreciation in the valuation of share was only notional and no cash flow was there on the basis of that .valuation and accordingly the partner should not have been allowed withdrawal. The learned CIT (Departmental Representative) had also stressed that if at all for the purpose of accountancy, the correct valuation of the share had to be reflected in the account, then the balance amount, i.e., "investment and the actual price" should have been shown as reserve and not credited to the accounts of the partners. This is the same argument as pleaded by the learned CIT (Departmental Representative) before us. The observations of the Tribunal on this point are relevant and we are reproducing the same as under: 18...In our opinion, that preposition does not appear to be correct.
When certain shares had been received in exchange of old shares after amalgamation of a company into another company and the shares received in exchange were far in excess of the original value of the shares, then the actual cost of the shares allotted in exchange have got to be reflected in the balance sheet for proper valuation of the assets and liabilities of the firm. As regards the contention of the reserve, it is generally one in the case of the companies where the said amount cannot be adjusted against the individual shareholders.
In the case of the firm, whether you put it as reserve or credits in the account of the partners it means the same as truth the reserve belong to none but the proprietors just as in their capital investment by them in the firm. A reference to that effect can be made to p. 246 of the book 'Advanced Accounts' by M.C. Shukla and T.S. Grewal, in which the nature of the reserve has been explained as under: Reserves are shown on the liability side of a balance sheet. It perplexes many a new student of accountancy. He argues that the business owes this sum to no one. Why should it be a liability and if a reserve is a liability, what is its use It should be an asset. The truth is that reserves belong to the proprietors just as capital does. This sum is owed by the business to the proprietors.
Hence, it is quite proper to show it as a 'liability'. Looked at in another way, reserves themselves are not assets. Reserves mean that a portion of assets, equalling reserves, is free to be utilised by the business as it likes and assets equalling reserves are not required to pay liabilities. Also, reserves indicate that, taking into account the capital brought in cash into the business by the proprietor and the sums owed to outsiders, there is surplus of assets. The surplus really is measured by the amount of the reserves.' From the above, it is clear that as to whether the alleged valuation is shown as reserve or credited to the accounts of the partners, it means the same as alleged amount belongs to the partners and can be utilised by them as and when they like. Hence, in this case, in our opinion, even crediting of the said amount to the accounts of the partners in proportion to their share was also justified on the basis of the principle of accountancy.
52. This observation of the Bench in the case of the assessee goes against the Department and submission of the learned CIT (Departmental Representative) to the effect that assessee instead of crediting capital account of partners should have created reserve, does not have any substance in it.
53. Apart from it, we may refer the decision of the apex Court in the case of CIT v. J.K. Hosiery Factory and relevant Similarly, reliance was placed on the observations of the Division Bench of the Allahabad High Court in K.T. Wire Products v. Union of India . It may be mentioned that there it was noted that under the general scheme of the IT Act, losses and profits under different heads had to be aggregated and the net income arrived at which was liable to tax. If the resultant figure was a loss, it was carried forward and set off against the business profits of the succeeding year. This is the position in the case of all assessees except registered firms. In the case of registered firms, the net loss including depreciation allowance, if any, is allocated to the partners, who alone were entitled to set off the loss allocated to them in their individual assessments and to carry forward any loss which remained unabsorbed, as provided in ss. 32(2) and 75(2) of the IT Act, 1961.
54. From the above, it is evident that the Hon'ble Supreme Court of India has quoted with approval the observation of the jurisdictional High Court in the case referred to above in which it was observed that in case of registered firm, the net loss including depreciation allowance, if any, is allocated to the partners, who alone were entitled to set off the loss allocated to them in their individual assessment. Once loss can be allocated to the partners, then conversion is also true and in case there is any profit of the registered firm, naturally it has to be allocated to the partners on the same ratio and thus, action of the assessee-firm by crediting the "amount of appreciation in the shareholding to respective capital accounts of the partners was justified one and thus the AO was not justified to take adverse view of the fact.
55. The next plea of the Department was that assessee has sold shares to partners and more than 90 per cent shares have been sold to M/s Siddharth Construction Co. (P) Ltd. and certain shares to the remaining 16 partners. The first plea is that there was written agreement between the assessee-firm and M/s Siddharth Construction Co. (P) Ltd. and that there was no such written agreement in respect of other partners. The explanation of the assessee was that other partners were having sufficient credit balance in their respective capital account while there was no sufficient amount available in the capital account of M/s Siddharth Construction Co. (P) Ltd. that is why assessee was constrained to get written agreement and even interest @ 15 per cent on the outstanding amount has been charged and the AO has taken note of this fact that assessee had returned Rs. 43,47,328 as interest from that concern. There is no abnormality in this view of the facts and thus the AO was not justified to raise doubts on such transactions.
56. The next point taken by the AO was that there was no actual credit balance appearing in the capital account of remaining partners. In this connection, the AO took help from the observation of asst. yr. 1990-91 in which it was observed that the amount of appreciation on account of conversion of shareholding investment into stock-in-trade was notional one and not to be taken into consideration. In this connection, again we may refer that Tribunal, Allahabad Bench, in the case of the assessee for asst. yr. 1990-91 has decided this issue vide order dt.
23rd Dec., 1993 referred to above and relevant findings are to the effect that the amount credited by the assessee-firm in respect of capital accounts of the partners out of appreciation in the shareholding on account of conversion was real one and not the notional one as observed by the AO.57. The AO first of all observed in the assessment order for asst. yr.
1990-91 and again in the assessment order for the year under consideration that assessee had sold most of the shares to its partners. In this connection, the AO was not justified to question the bona fides of the assessee in such transactions, because the assessee-firm is separate and independent identity for income-tax purposes and partners are separate from the assessee-firm for that very purpose. Further, assessee has rightly placed reliance on the decision of Hon'ble Bombay High Court in the case of CIT v. Kaluram Puranmal (supra) in which relevant observations which are in favour of the assessee are as under: It appears to us that it is not proper for us to go into the interesting question raised by Mr. Desai as they do not arise from the order of the Tribunal. It appears that both the AAC and the Tribunal on the facts and circumstances upheld the broad contention advanced on behalf of the assessee that since the firm was indistinguishable from the partners and, therefore, in law merely a compendious name for the totality of the partners, the ITO was in error in, proceeding on the footing that there was a transaction-a commercial transaction-of sale of shares between the firm and its seven partners. Before us counsel for the Revenue as well as for the assessee have adopted the same extreme positions but it is not possible to agree with either. In income-tax law a partnership firm is a distinct assessable legal entity. From this, it would not follow that all transactions between the firm and its partners, whatever be their nature, whatever be the reasons therefor, are to be regarded as equivalent of ordinary transactions between two separate legal entities. Similarly, from the fact that in general jurisprudence a firm is not invested with legal personality it would not follow that any transaction between the firm and its partners will be required to be considered as an internal partnership arrangement and cannot be regarded as giving rise to legal consequences similar to a transaction between two separate entities.
In the realities of commercial life one will find a firm borrowing from or lending to its partner, giving premises on lease to or taking premises on lease from its partner and similarly selling or purchasing goods and other assets to or from its partner or partners. Merely because a transaction is between a firm and its partner it will not result in the consequence or application of the principle that since the firm is not separate in law from its partners, there cannot be any trade or profit as between the two or flowing from the transaction between the two.
58. A perusal of the above shall show that there is no prohibition in law that a firm cannot transact with partners or vice versa in the normal course of business. The case of the assessee is fully governed by the said principle.
59. Apart from it, reasons why sale of shares was effected to the partners have also been explained by the assessee in the written submissions submitted on 20th May, 1993 before the learned CIT(A)-III and copy thereof is appearing at pp. 2 to 5 of the paper book in which it was submitted that assessee came to know that shareholding of the firm in respect of shares of JIL being held as stock-in-trade began to show a declining trend. Some suggestions were received that these may be sold in the open market even at the reduced rate prevailing on that time but partner did not find it feasible and beneficial to sell these shares in the open market, as the same act would have further reduced the prices of those shares substantially. Further, the very position of JIL and M/s Jaiprakash Enterprises Ltd. would have gone down in the share market and then it was decided that instead of selling shares in the open market, the partners will purchase the same. It is also relevant to point out that it is not the partners who have purchased the shares in their profit-sharing ratio. These two important aspects have to be kept in mind. .
60. The AO has also questioned that the assessee was not having any authority to dispose of shares, as there was a non-disposable undertaking submitted by the assessee to IFCI from whom assessee-firm has taken loan. This point has already been explained before the learned CIT(A) because it is normal practice being adopted by the financial institutions to obtain such undertaking to ensure that during the subsistence of the loan, the management or the ownership of the company is not de-established. It is only to safeguard the interest of the lenders and it did not amount to prohibition upon the transfer of the shares. The only thing required was to seek permission and that has been obtained. This issue was not of any significance.
61. The whole case of the assessee (sic-AO) was that by conversion of investment of shareholding into stock-in-trade and subsequent sale of the shares to some of the partners by the assessee was a device to avoid payment of due taxes and it should not be allowed. The explanation of the assessee was that by adopting this method, the assessee and its partners have paid more taxes, otherwise the assessee-firm, if allowed to retain the shares as investment and would have sold them as such, would have returned profit @ 24 to 25 per cent and in the first situation, the assessee and its partners have suffered taxes @ 35 per cent and above. The working of both the situation had been furnished and the same is appearing at pp. 164 and 165 of the paper book and the same is as under:No. of shares 1,37,75,600Cost of each share to R.K. Singh & Co.
0.63Sale price per share 34Tax in the hands of the firm and partnersSale consideration (1,37,75,600 x 34) 46,83,70,400Cost (1,37,75,600 x 0.63) 86,78,628 ____________Long-term capital gains 45,96,91,772Deduction under Section 48 @ 60% 27,58,15,063 ____________Taxable income 18,38,76,709Tax on the above@ 20.16% (A) 3,70,69,545 _____________Partner's share 14,68,07,164 ______________Tax on the above @ 51.75% (Siddharth) (B) 7,59,72,707 OrTax on the above @ 56% (individual) (C) 8,22,12,012 Effective RateTotal tax paid (A + B) = 24.14% 11,30,42,252 (A + C) = 25.47% 11,92,81,557In case shares were first converted into stocks in R.K. Singh & Co.,sold to Siddharth from there @ Rs. 12 and then sold in the market.AssumptionsNumber of shares 1,37,75,600Cost per share to R.K. Singh Co.
0.63Book value per share in R.K. Singh & Co.
10Converted into stock-in-trade at Rs. 18.50 per shareSold to Siddharth at Rs. 12.00 per share.(1,37,75,600 x 18.50) 25,48,48,600Less : Cost of share (1,37,75,600 x 0.63) 86,78,628 ______________Long-term capital gain 24,61,69,972Less: Deduction under Section 48 @ 60% 14,77,01,983 ______________Sale consideration (1,37,75,600 x 12) 16,53,07,200Less : Converted value (1,37,75,600 x 18.50) 25,48,48,600 _______________(3) Total income (A+B) 89,26,589Firm's tax on the above @ 20.16% (C) 17,99,600Partner's shares 71,26,989Taxability in the hands of the companySale consideration (1,37,75,600x34) , 46,83,70,400Less : Cost of purchase (1,37,75,600 x 12).
16,53,07,200 ________________Short-term capital gain (D) 30,30,63,200(2) Partner's share of R.K. Singh & Co. (LTCG) 71,26,989 _________Total income 31,01,90,189Tax on the above @ 51.75% 16,05,23,423Total tax paid .
16,23,23,023Effective rate 34.66% 62. This working given by the assessee has not been challenged by the Department nor the learned CIT (Departmental Representative) has pointed out any mistake in the said calculation. In the absence of any defect/calculation mistake by the Department in this working which was submitted before the learned CIT(A), the whole case of the Department goes away and thus the very basis of the AO that assessee adopted a colourable device to avoid payment of due taxes remains no more alive.
63. Another point raised by the AO was that after purchases made by the partners, shareholding was sold by the respective partners at higher prices and they have earned more profits. This plea is again without any substance. It is admitted fact that the assessee-firm has converted its investment into stock-in-trade on 1st Jan., 1990 and valued the share at the market value. The shares have been transferred on 17th April, 1990 and 18th April, 1990 to the partners and the amount of consideration charged from the partners was at the rate prevailing at the stock exchange. It was not expected from any assessee to think for future as to whether there will be decline in trend in the prices of a particular share or there may be increase in the said prices. No one can guess and if assessee sold the shares in the month of April, 1990, under the impression that there was a declining trend in the prices of shares of JPL and another concern, then it can be termed as a wise decision, as in case there would have been further decrease in the prices of the shares, assessee would have suffered more losses. What happened subsequently is not the concern of the assessee because it has already disposed of the shares. Further, assessee has filed chart showing disposal of shares of M/s Siddharth Construction Co. (P) Ltd. who was major purchaser of the shares. In asst. yr. 1991-92, the shares were sold by that firm @ Rs. 34 per share and returned short-term capital gain of Rs. 2,11,49,736. In assessment year, the share price rose to Rs. 130 per share and in asst. yr. 1994-95 it fell down to Rs. 62.65 per share and there was further decline in the rate of shares.
Under these circumstances, when nobody can guess the future trend of stock market, then in case assessee sold the shares at the rate prevailing at the stock exchange on a particular date, then its part of conduct comes to an end and what happened to the purchasers afterwards is not the concern of the assessee-firm. The Department has already taxed those partners on the amount of short-term capital gain earned by respective partners. However, the assessee cannot be treated to have manipulated the facts and adopted any device much less colourable in all these transactions because price of such share was quoted as per stock exchange and assessee cannot be expected to guess about future and this was also not available to the AO.64. The next plea of the AO was in respect of application of provisions of Section 45(4) of the Act. In this connection, assessee was justified to place reliance on the decision of Tribunal, Bombay Bench, in the case of Burlingtons' Exports v. Asstt. CIT (supra). The relevant portion thereof is in para 18 and the same is reproduced as under : 18. We, however, find force in the contention of the learned counsel for the assessee, Sri Dastur, that in that case also, there should be a distribution of assets by the firm to the partners so as to invoke the provisions of Section 45(4) of the Act. The words 'or otherwise' are used as an alternate to the words 'on dissolution' and, therefore, in both the situations, i.e., on dissolution or otherwise, the distribution of a capital asset is a must. What is distribution of capital asset is not defined in the Act. Generally, it is the allocation of the assets by the firm given to the partners or the legal heirs on dissolution, retirement, death or exclusion of one or more of the partners of the firm and in cases of mere change in the constitution of a firm. Any withdrawal of the capital asset by the partners of the firm from the firm to the exclusion of others might also be a distribution of capital assets. However, if such withdrawal is for consideration, it would be a case of sale by the firm to the partners and not distribution. In distribution, no consideration is involved and the partners have to share the withdrawal in their prescribed sharing ratio agreed to in the partnership deed. We agree with the learned counsel for the assessee that the withdrawal of these properties on 7th Oct., 1986 by the two occupant-partners was not a distribution of capital asset. It was not without any consideration. Partners accounts were debited by the respective consideration agreed, i.e., the written down value of the two properties. The profit-sharing ratio of Sri R.K.A. Kapur and Sri N.R. Kapur, as on the date of withdrawal, i.e., on 7th Oct., 1986, was 51 per cent and 49 per cent, respectively. The written down values of the properties taken out by them were Rs. 1,36,867 and Rs. 3,90,230 and the market values as stated by the AO Rs. 69,07,500 and Rs. 84,00,000, respectively. Neither of these two sets of figures of written down values or market values are in profit-sharing ratio. No evidence has been brought on record to suggest that the difference arising because of the withdrawal, otherwise than in profit-sharing ratio was settled by the two partners in any other way. The contention of the learned Departmental Representative, Sri Keshav Prasad, that the words 'or otherwise' is an alternate to or disjunctive of 'on dissolution' and, consequently, the transfer of capital assets otherwise than by way of distribution on dissolution can also be covered by Section 45(4) of the Act, in our opinion, cannot be accepted. If that were the case, all transactions, whether by or between the firm, AOP or BOI, would be covered by the provisions of Section 45(4) of the Act, including those which are normally entered between outsiders and covered by the other provisions of Section 45, such as sub-ss. (1), (2), (3) and (5). A situation would emerge out in that case that the two provisions would exist simultaneously at particular time, side by side. Such an interpretation giving rise to an overlapping of one provision over the other has to be avoided. Even if such an overlapping is permitted or possible, the law favourable to the assessee should prevail. In this case, as we have held, there was a transfer on 7th Oct., 1986 and, therefore, it would fall under Section 45(1) of the Act, which brings to tax only that capital gains which arises to the assessee on transfer. The written down value of the two properties was the consideration that has arisen to the assessee. Amount which is over and above the stated or agreed consideration cannot be brought to tax even though the market value of the two properties was much higher to the stated or agreed consideration. It is not the case of the learned Departmental Representative that the assessee had received the market value of these properties and therefore, as held by Their Lordships of the Supreme Court in the case of K.P. Varghese, nothing more than what has been agreed to and actually received or recorded, could be brought to tax as capital gains. The difference, if any, could at best be a deemed gift which is excluded from the ambit of capital gains tax by the provisions of Section 47(ii) of the Act. In our opinion, therefore, Section 45(4) of the Act has no application to the facts of the case before us.
65. If we apply the above ratio, then provisions of Section 45(4) of the Act cannot be pressed into service in the factual position of the case, because it is a case of outright sale of shareholding by the assessee-firm to its partners and that too for consideration and thus it cannot be a case of "distribution" by dissolution of the firm or even under the word "otherwise" because the case of sale is not covered under Section 45(4) of the Act. Further, as pointed out above, all the partners have not purchased shares, as only 16 partners have purchased out of 18 partners and that too not in their profit-sharing ratio as explained by the assessee and as evident, because more than 90 per cent shares have been purchased by M/s Siddharth Construction Co. (P) Ltd. while it is having share of 41 per cent in the assessee-firm. Under these circumstances, provisions of Section 45(4) of the Act were also not applicable.
66. The last point relates to the working of cost of the shares. The AO has applied averaging formula and reduced the cost of acquisition of the original shares from Rs. 1,32,02,878 to Rs. 86,27,836. There was no justification for reduction in the actual cost of the original shares.
The decision of the apex Court in the case of Sekhawati General Traders (supra) and the decision of the Hon'ble Calcutta High Court in the case of CIT v. Steel Group Ltd. (supra) are in favour of the assessee and rightly relied by the learned CIT(A) and the AO was not justified to work out the cost of acquisition of the original shares at Rs. 1,32,02,878 as against Rs. 86,27,836 and the view taken by the learned CIT(A) is justified one.
67. On the basis of the above discussion, the conclusion is that the learned CIT(A) has rightly relied upon the submission of the assessee on each and every point raised in the assessment order and the view taken by him was justified and the amount of capital gain on sale of shares to partners was Rs. 9,66,39,467 and the AO was rightly directed to allow loss of Rs. 8,66,99,100 for sale of shares to partners.
68. The grounds 1(i) to 1(v) are accordingly decided against the Department.
69. So far as remaining grounds are concerned, the learned counsel for the assessee has furnished a chart at p. 121 of the paper book and all the grounds are virtually covered.
70. Ground No. 1(vi) relates to deletion of interest amounting to Rs. 61,38,630 which was added by the AO and identical issue was before the Tribunal in the case of the assessee for asst. yr. 1990-91 and Tribunal vide its order dt. 23rd Dec., 1993 in Raj Kumar Singh & Co. v. Dy. CIT ITA No. 1288/All/1993 has already decided this issue in favour of the assessee and the learned CIT(A) has also taken note of this fact. As the learned CIT(A) has followed the order of the Tribunal, there is no infirmity in the order and we also confirm the view taken by the learned CIT(A) which is based on the decision of the Tribunal in the case of the assessee for just preceding year.
71. Ground No. 1(vii) relates to deletion of addition towards hire charges receipts which were increased by Rs. 33,16,225 and identical issue was before the Tribunal in the case of the assessee for asst. yr.
1990-91 and Tribunal vide its order dt. 23rd Dec., 1993 in ITA No.1288/All/1993 has already decided this issue in favour of the assessee and the learned CIT(A) has also taken note of the fact. As the learned CIT(A) has followed the order of the Tribunal, there is no infirmity in the order and we also confirm the view taken by the learned GIT(A) which is based on the decision of the Tribunal in the case of the assessee for just preceding year, That the learned CIT(A) has erred in law and on the facts of the case in directing the assessee to allow full depreciation as claimed, without appreciating that the AO had already allowed the assessee's claim for depreciation in full.
73. From the above, there is nothing in the ground, as factual position narrated in the ground is that the AO has already allowed claim for depreciation in full, then the direction given by the learned CIT(A) to the AO to allow full depreciation is not perverse or uncalled for.
Ground fails.
74. Ground No. 1(ix) relates to deletion of addition of Rs. 20,77,406 made by the AO towards machinery spares and repairs and identical issue was before the Tribunal in the case of the assessee for asst. yr.
1990-91 and Tribunal vide its order dt. 23rd Dec., 1993 in ITA No.1288/All/1993 has already decided this issue in favour of the assessee and the learned CIT(A) has also taken note of the fact. As the learned CIT(A) has followed the order of the Tribunal, there is no infirmity in the order and we also confirm the view taken by the learned CIT(A).
which is based on the decision of the Tribunal in the case of the assessee for just preceding year.
75. Ground Nos. 1(x) and (xi) are already discussed in ground Nos. 1 to 1(v) above.