High Court Of Delhi
CIT vs. Late Sohan Lal Through Legal Heirs
Sections 24(1)(iv), 28(i)
Asst. Year 1977-78
S.B. Sinha, C.J. & A.K. Sikri, J.
IT Ref. Nos. 35 of 1985 & 30 of 1986
28th May, 2002
Counsel Appeared
Sanjiv Khanna with R.D. Jolly & Ms. Rashmi Chopra, for the Petitioner : None, for the Respondents
JUDGMENT
S.B. SINHA, C.J. :
These references were made at the instance of the Revenue under s. 256(1) of the IT Act, 1961 (hereinafter referred to as ‘the Act’) by the Income-tax Appellate Tribunal, Delhi Bench ‘B’, New Delhi (hereinafter referred to as ‘the Tribunal’), for opinion of this Court on the following questions :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that for ascertaining the trading result on the sale of shares, the value of the opening stock would continue to be taken at cost as followed by the assessee from year to year ?”
“2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in allowing the amount of Rs. 3,000 as a charge on the income from property received by the assessee on partition and hence “deductible under s. 24(1)(iv) of the IT Act, 1961 ?”
The assessment year in question is 1977-78, the year ending being 31st Dec., 1976. The assessee was being assessed as an individual. He sold the following shares in the year in question : Rs.
(i) 28,641 ordinary shares of New Indian Industries Ltd. @ Rs. 3
(ii) 1,05,870 deferred shares of New 85,923
India Industries Ltd. 31,761Â @ Rs. 0.30
(iii) 120 shares of M. Gulab Singh &
Sons (P) Ltd. @ Rs. 35 4,200Â Â Â Â Â 1,21,884
The said share were being held as investment upto the asst. yr. 1963-64 and from the asst. yr. 1964-65, they were transferred from investment account to stock-in-trade account, whereafter the assessee has been dealing in shares and certain sales were made from time to time. Allegedly, the assessee had throughout been showing opening stock of shares at cost and the closing stock of shares also for a number of years. The trading result in terms of the aforementioned practice adopted by the assessee was :
Rs.
Opening stock of share 4,85,898.00
Sale 1,21,884.00
Closing stock 2,46,510.45
Loss 1,17,103.59
2. The contention of the assessee that the said amount be treated to be a loss was accepted by the AO inter alia on the ground that when the assessee transferred the shares from investment account to stock-in-trade account, such transfers would have been assessed at the market value on the date of transfer. The AO for coming to the said conclusion relied upon a decision of the apex Court in CIT vs. Bai Shirinbai K. Kooka (1962) 46 ITR 86 (SC) : TC 14R.129.
3. On the aforementioned ground, an addition of Rs. 2,37,787 was made. An appeal was taken thereagainst by the assessee wherein Commissioner of Income-tax (Appeals) [in short, ‘CIT(A)’] came to the conclusion that the shares of Munshi Gulab Singh & Sons (P) Ltd., which had been shown at Rs. 47.37 per share could be brought down to Rs. 35 in that year. CIT(A) upheld the order passed by the AO. The matter was taken to the Tribunal wherein the learned Tribunal having regard to the fact that the system of valuing the shares at cost had continued in the past held : “20. It may be mentioned that the value of the shares sold in this year has come in the assessee’s trading account from the earlier years and as the closing stock of the earlier year had been valued at cost, the same value has been adopted for the opening stock in this year……”
4. The Tribunal held that the principles laid down by the apex Court in Bai Shirinbai K. Kooka’s case (supra) would not apply as therein the shares had been valued from year to year for a long period on cost basis and the trading results had been worked out on that basis, which had been accepted. The Tribunal observed that from the point of view of accountancy where a consistent method is adopted and the valuation of stock is done in a regular manner, the variation adopted by the Income-tax Officer (in short, ‘ITO’) would not be justified. Referring to the decision of the apex Court in the case of Investments Ltd. vs. CIT (1970) 77 ITR 533 (SC) : TC 14R.373, the Tribunal observed that the income of the business be properly deduced from the manner in which the assessee was valuing his stocks from year to year and, therefore, no adjustment was required to be made to the trading results shown. It was further observed that it was competent to change the value of opening stock and the value of closing stock of the shares.
5. So far as the second question is concerned, the fact of the matter is as follows :
It is not in dispute that the assessee had received certain properties on partition in 1956 in terms of the deed of partition. A stipulation was made in the said deed to the effect that the assessee was to maintain his mother. He claimed Rs. 3,000 towards maintenance of his mother on the ground that the said sum should be allowed as a charge against the income from property.
CIT(A) held that the said charge had been created by the assessee voluntarily. The Tribunal, however, directed that the same should be allowed as a deduction and should not be considered to be a charge created by the assesseevoluntarily.
6. In the aforementioned situation, the questions, as set out above, were referred to for opinion of this Court.
7. Mr. Sanjiv Khanna, the learned counsel appearing on behalf of the Revenue, would submit that the assessee could not take benefit of its action of converting into investment shares into the trading shares in the year 1964 and, thus, while making assessment for the asst. yr. 1977-78, the AO had correctly valued the shares sold at the market price in 1964 and ascertained the property on such transaction. The learned counsel would contend that only because wrong method had been adopted for a long time by the assessee, the same would not confer any vested right in him. Such a mistake, contends the learned counsel, could be corrected particularly in view of the fact even the principles of res judicata cannot be said to have any application whatsoever in the proceedings under the IT Act.
The learned counsel would contend that the conversion of the opening stock and closing stock were wholly irrelevant for the purpose of making assessment in the earlier years and the only relevant year when the same could have been taken into consideration when the sale took place. Referring to the decision in CIT vs. Groz-Beckert Saboo Ltd. (1979) 8 CTR (SC) 155 : (1979) 116 ITR 125 (SC) : TC 17R.1229, the learned counsel would contend that the date of conversion is relevant. As regards his contention that a wrong method could not have been a ground for allowing the claim of the petitioner. Srtong reliance has also been placed by Mr. Khanna on CIT vs. British Paints India Ltd. (1991) 94 CTR (SC) 210 : (1991) 188 ITR 44 (SC) : TC 2R.113.
8. As regard the second question, the learned counsel would contend that the finding of the learned Tribunal to the effect that s. 24(1)(iv) of the Act would have no application in the instant case having regard to cl. 16 of the deed of partition is erroneous. Reliance in this connection has been placed on CIT vs. Central Bank Executor & Trustee Co. Ltd. (1993) 112 CTR (Bom) 289 : (1993) 203 ITR 666 (Bom) : TC 40R.622, CIT vs. Murlidhar Kanodia & Sons (HUF) (1993) 204 ITR 760 (All) : TC 40R.627 and CIT vs. Smt. Indramani Devi Singhania (1991) 99 CTR (All) 96 : (1991) 189 ITR 124 (All) : TC 40R.627. Re : Question No. 1 :
9. In Shirinbai K. Kooka’s case (supra), it has been held by the apex Court that the profit from the sale of shares will be assessable and such profit would be the difference between the sale price of the shares and the market price thereof prevailing on the date when such conversion took place and not the difference between the sale price and the price at which the shares were originally purchased by the assessee.
10. The said decision of the apex Court, in our considered opinion, could not have been distinguished by the learned Tribunal only on the ground that the assessee had been dealing with trading shares at cost for a period of about 13 years. It has clearly been held by the apex Court that when the assessee as a trader earned only profit, which was to be from the market value and not from the actual sale price, the same should be the criteria for making assessment.
11. The question as to whether the Department has at any point of time disturbed the trading result as shown by the assessee or could direct change in the base of conversion is not relevant. The question, which fell for consideration before the Tribunal, could have been determined only during the relevant assessment year and not prior thereto.
12. A wrong method of assessment carried out by the assessee per se cannot be a ground for non- levy of tax, if the same is otherwise leviable having regard to the decision of the apex Court. A wrong method of maintenance of account, in our opinion, can be corrected during the relevant year, particularly when the principles of res judicata have no application. Furthermore, it has rightly been submitted by Mr. Khanna that the conversion of opening stock and closing stock became relevant only when the sale took place.
13. In Groz-Beckert Saboo Ltd.’s case (supra) the law has been stated in the following terms : “……..It is now well settled by these decisions that where an assessee converts his capital assets into stock-in-trade and starts dealing in them, the taxable profit on the sale must be determined by deducting from the sale proceeds the market value at the date of their conversion into stock- intrade (since this would be the cost of the business) and not the original cost to the assessee……..
14. In British Paints India Ltd.’s case (supra) the apex Court held that a wrong method of accountancy cannot be a defence. As regards wrong practice, the apex Court stated the law thus : “The correct principle of accounting is to enter the stock in the books of account at cost unless the value is required to be reduced by reason of the fall in the market value of those goods below their original cost. Ordinarily, therefore, the goods should not be written down below the cost price except where there is an actual or anticipated loss. On the other hand, if the fall in the price is only such as it would reduce merely the prospective profit, there would be no justification to discard the initial valuation at costs…..”
15. There cannot be any doubt whatsoever that the conversion of opening stock and closing stock was relevant when the sale took place.
16. In Gangadhar Babu Lal vs. CIT (1966) 62 ITR 718 (All) : TC 14R.145, it is stated :
“Property which a coparcener receives on partition would be capital in his hands. It is open to the petitioner on receipt of a capital asset to retain it as such or to convert it into stock-in-trade and it will be a question of fact to be decided on the materials in each case as to whether the assessee had continued to treat the capital asset as an investment or had converted it into his stock-intrade. No general principle could be laid down which would be applicable to all cases and each case must be decided on its own circumstances according to commonsense principles.”
17. We, therefore, are of the opinion that the judgment of the learned Tribunal cannot be upheld.
18. The answer to the second question, which arises for consideration, would depend upon the nature of transaction, namely, whether the charge has been created voluntarily or involuntarily. A deed of partition is a matter of contract between the co-sharers. A person enters into a memorandum of agreement with his co-sharers voluntarily and for the said purpose, the parties to the said memorandum of agreement must be ad idem. It was open to the assessee to enter into or not to enter into the said memorandum of partition. No law imposes any obligation upon the assessee to enter into such memorandum of agreement of partition. Such charge, thus, not been created by operation of law, nor by reason thereof any devolution subject to charge has taken place.
19. In Central Bank Executor & Trustee Co. Ltd.’s case (supra) the Bombay High Court has stated the law in the following terms : “a charge which is (1) either not created by the assessee or (2) which is not created by the assessee voluntarily in the sense that it is created or thrust upon the assessee either by operation of law or by a decree of a Court or by the act of his predecessor in title or by reason of the property coming into his hands with an existing or overriding charge, will have to be treated as an involuntary charge for the purpose of s. 24(1)(iv) of the IT Act, 1961. The language of s. 24(1)(iv) incorporates the concept of a charge being voluntarily created by the assessee as against a charge which comes into being by operation of law or by virtue of an order of the Court or by the act of parties other than the assessee such as when the assessee gets a property already subject to a charge. Only those annual charges which are not created by the assessee voluntarily in this sense, are capable of being deducted from the income from house property.”
20. We may, however, notice that in Murlidhar Kanodia & Sons (HUF) (supra), a Bench of the Andhra Pradesh High Court held : “that the mortgage was a voluntary act of the assessee and, therefore, the charge in respect of the interest on the property cannot be said to be an involuntary annual charge within the meaning of s. 24(1)(iv) of the Act.”
21. In CIT vs. Rajah Dhanrajgiriji (1985) 45 CTR (AP) 53 : (1985) 154 ITR 719 (AP) : TC
40R.623, however, B.P. Jeevan Reddy, J. (as his Lordship then was), it was held : “The word “voluntarily” cannot be understood as signifying a meaning opposite to the words “by operation of law”. If that was the intention of Parliament, it would have used the words “by act of parties”, which is the expression generally understood as the opposite of the words “by operation of law”. In cl. (iv), the expression used is “voluntarily”, which must be understood as distinct from, and as opposed to, the expression “involuntarily”. The word “involuntarily” means, without there being any option, i.e., under an enforceable obligation. However, where a person creates an annual charge to meet an existing, genuine, legal or contractual obligation, it would not be a case of creating a charge voluntarily.” We, however, for the reasons stated hereinabove, cannot subscribe to the said view.
1. Even on a different occasion, the same learned Judge in Smt. Indramani Devi Singhania’s case (supra) has taken a different view.
2. In that view of the matter, we are of the opinion that the impugned judgment of the learned Tribunal cannot be upheld even on the second question.
3. For the reasons aforementioned, we answer the questions referred to for our opinion in the negative, i.e., in favour of the Revenue and against the assessee. This reference is accordingly disposed of. However, in the facts and circumstances of the case, there shall be no order as to costs.
[Citation : 257 ITR 242]
