DCIT 12(1)(1), MUMBAI vs. ASP INVESTMENT CONSULTANTS P.LTD, MUMBAI

On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that only after assessing officer made a particular inquiry about working of capital gains that assessee rectified the mistake and offered the income for tax and thus it cannot be said as a Suo Moto admission of income."

Briefly stated facts are that the AO during the course of assessment proceedings noticed from the tax audit report that the assessee has converted capital asset into stock-in-trade and this was not disclosed by the assessee in the return of income. The AO required the assessee to furnish working of capital gain in accordance with the provisions of section 45(2) of the Act and assessee stated that it has erroneously declared loss of ₹3,66,19,350/- in the return of income and accordingly, for the revised computation of income declaring total income at ₹30,16,391/-. The AO noted from the assessee’s revised computation and working of long term capital loss on sale of shares at ₹1,22,24,770/- and loss on conversion of investment into stock-in-trade of ₹2,74,03,924/-. The assessee stated that there has been inadvertent error in filing the return of income showing loss on sale of shares whereas correct working is business income of ₹30,16,391/-. The AO initiated the penalty proceedings in respect of loss claimed at ₹3,96,35,741/- stating that the assessee has furnished inaccurate particulars of income of this loss. The AO levied the penalty under section 271(1)(c) of the Act by stating in Para 5 as under: - “5. Considering the overall legislative and judicial intent in this regard it is held that the assessee has purposefully not offered clear picture arising on conversion of capital asset to stock-in-trade, and has claimed excessive business loss in the Return of income submitted while the 4 | P a g e ITA No.3734/Mum/2018 ASP Investment Consultants P. Ltd. same was specifically mentioned in the Tax Audit Report to by pass its tax liability and to wrongly carry forward the same as business loss to subsequent years and to set off with the business income of those years. Therefore, the assessee is held to be liable for penalty for furnishing of inaccurate particulars of income within the meaning of section 271(1)(c) of the Income Tax Act, 1961 for offering business income at a loss of ₹3,66,19,350/- instead of business profit of ₹30,16,391/-. Aggrieved assessee preferred the appeal before Commissioner of Income Tax (Appeals).

The CIT(A) deleted the penalty by recording the following findings: - “During the year, the Appellant Company converted it's capital assets into stock in trade at a loss of Rs. 2,74,03,924/-. This conversation has not been doubted. Subsequently, the shares were sold when the shares were sold on the open market via the stock exchange (STT Paid), there was a business loss. However, the Appellant's representative in the 5 | P a g e ASP Investment Consultants P. Ltd. assessment proceedings erroneously offered an addition to the business income of Rs. 30,16,391/-. Based solely on this submission, the business Income of the Appellant was determined at Rs. 30,16,319/- and satisfaction of 'furnishing of inaccurate particulars of Income' for the levy of penalty was recorded. There was no real basis for arrival at a Business Income of Ps. 30,16,319/- as the same was offered only as an addition and not the revised total Income and the Net effect thereof would go to reducing the loss incurred by the Appellant. The offering of Rs. 30,16,319/- as total income was an inadvertent mistake made on behalf of the CA and the result of a miscommunication. The income of Rs. 30,16,319/- was not offered in the return of Income nor is it reflected in the final accounts of the Appellant. A perusal of the Final Accounts dearly show that there is no revenue from operations during the financial year under consideration. There was merely a business loss on basis of sale of shares. All the said entries were properly recorded in the books of account and a return claiming loss u/s 143(1) was 6 | P a g e ITA No.3734/Mum/2018 ASP Investment Consultants P. Ltd. filed within the prescribed time. Hence, there was no furnishing of inaccurate particulars of Income and the penalty levied by AO may be deleted. It is noted that it is also not in dispute that the assessee has shown all the particulars of fixed asset converted into stock-in-trade in its financial statements, tax audit report and audit report of the company. The company converted it's capital assets into stock in trade at a loss of Rs. 2,74,03,924/-. This bonafide conversion by the assessee has not been found to be false or untrue by the Hon’ble Apex Court in CIT vs. Reliance Petroproducts Pvt. Ltd. (2010) 322 ITR 158 (SC) after considering various decisions including Dilip N. Shroff vs. JCIT(2007) 291 ITR 519(SC) and Union of India vs. Dharamendra Textile Processors (2008) 306 ITR 277 (SC) has observed and held (page 158 head notes as under:

We have heard rival contentions and gone through the facts and circumstances of the case. We noted from the facts of the case that the assessee has declared loss of ₹3,66,19,350/- in its return of income by disclosing in Tax audit report in From 3CD in column 12 that it had converted its investment into stock-in-trade. We noted that the loss as per annual accounts was determined as per the method of accounting regularly followed and as per accepted accounting practices and standards as per company law. But, while filing the return of income the chartered accountant of the assessee disclosed the said loss under the head business or profession and while doing so he inadvertently did not consider the implications of section 45(2) of the Act. During the course of assessment proceedings, the AO noticed that the income was not computed in accordance with the provisions of section 45(2) of the Act but the relevant detail was before the AO during the course of assessment proceedings in the audit report. The assessee immediately revised its working vide letter dated 09.02.2015, wherein the long term capital loss on sale of shares was determined at ₹1,22,24,770/- and loss on conversion of investment into stock-in-trade was determined at ₹2,74,03,924/- thereby, the assessee declared an amount of ₹30,16,391/- under the head income from business. We noted that the complete details/ particulars were available before the AO in regard to this transaction of sale of sales and conversion of its investment into stock-in-trade. In view of the explanation of the assessee that there has been an inadvertent mistake/ error in filing the return of income and that also occurred