AIT-2007-342-ITAT
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH ‘1’ MUMBAI
BEFORE S/SHRI G.E. VEERABHADRAPPA (VP) & SHAILENDRA KUMAR YADAV
ITA No. 3475/Mum/2006
(Assessment Year: 2001-02)
The Asst. CIT Range 4(1),
Mumbai
V.
(Appellant)
Claridges Investment & Finance P. Ltd.
107, Doctor Centre, 135, August kranti
Maidan, Kemps Corner, Mumbai-400 038
PAN: AAACC1607N
(Respondent)
For the assessee: Shri S.K. Tulsiyan
For the revenue: Shri N.N. Mishra-CIT (DR)
AIT Head Note: when there is conflict between the judgments of non-jurisdictional High
Courts, then the view favourable to the assessee should be adopted. (Para 4)
there is no case for making any disallowance on the interest paid on the monies
borrowed as the facts clearly reveal that the borrowed funds have been utilized of the
purpose of business. Merely because there was huge overdraft account it cannot be
held that such borrowed funds were utilized for non-business purpose.(Para 8)
Assessing Officer has not established any nexus between the borrowed funds and the
interest free advances given to Kumbh Trading Pvt. Ltd. Therefore, in that situation
the disallowance of any part of interest paid on monies borrowed does not arise.(Para 9)
When borrowed funds were utilized for day-to day running of the business, there could
not be any justification for disallowance of interest. Secondly, the Assessing Officer
as also the learned CIT(A) have simply assumed that all the shares had been purchased
out of borrowed funds. We do not accept that merely because the payments were
made from the overdraft account it entailed utilization of borrowed funds as
distinguished from the assessee’s own funds. There is direct authority of the judgment
of Hon’ble high court against such assumptions. The burden of proof as respects
utilization of borrowed funds, for the purposes of the provisions of section 14A, is on
revenue. (Para 20)
addition of Rs. 44,93,731 made by the Assessing Officer being the amounts of excess
brokerage debited to some clients- The addition made by the Assessing Officer is
based on suspicion, surmises and conjectures. There is no material in the possession of
the assessing officer that the reversed amounts were indeed collected from the
clients. The addition is, therefore, totally unjustified and contrary to the provisions of
the Act, and accordingly directed to be deleted.(Para 37)
addition of Rs. 41,33,919 made by the Assessing Officer by way of the assessment of
deemed interest on the funds allegedly diverted to M/s Ashok Mittal & Co.- It is
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essential to prove diversion of borrowed funds for non-business purpose before
disallowing interest paid on borrowed capital. The addition has been made purely
nationally by applying a rate of 17% on the outstanding amounts in the accounts of
AMC. No such interest has been charged by or accrued to the assessee. Income-tax
is a charge upon income earned and not the income that could have been earned. The
addition made is, therefore, liable to be deleted in this short ground alone.(Para 42)
the disallowance of expenses on purchase of software to the tune of Rs. 3,24,508.
The AO treated the expenditure as capital expenditure. The CIT(A) held that the kind
of software purchased by the assessee, being a systems software, should be treated
as capital expenditure- Having regarded to the scale of operations of the assessee
company the expenditure is too low to be regarded as resulting into any long term
benefit. It is not the case of the revenue that any part of this expenditure relates to
any software custom made/installed for the assessee on standalone basis. We
therefore direct deletion of the disallowance. (Para 48)
the assessee entered into various transactions in shares through three Kolkata-based
brokers. According to the AO those transactions were not genuine and he has
therefore made various disallowance/additions. The assessee has challenged the
disallowance of Rs. 7,20,93,640 made by the AO of the loss claimed in respect of
delivery-based transactions. The AO made the disallowance because the there Kolkata
brokers through whom the assessee had made the transactions did not report the
transactions to the Calcutta Stock Exchange.
the assessee’s transactions are supported by the movement of shares as reflected in
Demat account, movement of money as reflected in the bank account, entries in the
books of account of the assessee, prevalent market quotations of CSE, Contract Notes
and Delivery bills issues by Kolkata brokers and their statements in response to the
enquiries made by the Assessing officer. Last but not the least the assessee has
shown net profit of R. 16.18 Crores. the AO has acted upon grossly inadequate
material and his conclusions are in the realm of suspicion, conjecture and surmise.
Accordingly we direct that the profit/loss from the assessee’s transactions with the
three Kolkata brokers be assessed as shown in the books of account of the assessee.
As a corollary of the finding that the assessee’s transactions with the three Kolkata
brokers were paper transactions only and not genuine transactions the AO has
disallowed the business loss of Rs. 26.44 Crores, claimed as deduction by the
assessee, on the ground that the loss not actually incurred. It is pertinent to note
here that the loss is reflected in the books of account. Money for the transactions
have gone out from the bank accounts. Shares sold have gone out from the Demat
accounts of the assessee. There is nothing to indicate that any of those money and
shares returned to the assessee in some from or the other. It important to emphasize
here that the disallowance on the ground of infraction of law can be made only if
there is serious breach or defiance of law or contumacious conduct. The technical or
venial default would not justify the harsh action of disallowance of an expenditure
actually incurred. the denial of deduction of loss on the ground of non-genuineness or
loss is untenable. In the absence of any material to implicate the assessee in any
serious breach or contravention of law and in view of the fact that there is no
material to show that the pertinent authorities ever took exception to the assessee’s
role in the transactions in question we further hold that the disallowance of loss on the
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ground of infraction of law also is not tenable. In the absence of any adverse verdict
against the assessee from the relevant authorities we are no wind in the sail of the
revenue that the loss is not allowable on account of infraction of law.(Para 73)
the assessee’s claim of loss was premature. Because there was subsequently recovery
of approx Rs. 1 crore from Kolkata brokers the revenue contends that all hopes of
recovery were not loss and there was possibility of amount being recovered. The
learned counsel for the assessee submitted that after constant efforts only a sum of
Rs. 1 crore could be recovered over a period of three and half years. That showed
that there was slim chance of any further recovery. Hence the circumstance relied
upon by revenue should be held as establishing the assessee’s case. The learned counsel
emphatically submitted that the assessee doggedly pursued the issue of recovery and
left no stone unturned. A criminal complaint was filed. Police investigation was involved.
Cheques dishonored. A criminal suit was filed. All that is a matter of record. We see
considerable force in these contentions of the assessee. We therefore direct deduction
of the sum of Rs. 26.44 Crores as business loss incurred by the assessee during the
year.(Para 74)
an order initiating special audit u/s 142(2A) in the case of an assessee without allowing
that assessee an opportunity of being heard is vitiated in law. But in the case before
us the Assessing Officer has availed of extended time limit, even if as held by us he
did not avail of any extended jurisdiction. In our view the extended time limit as laid
down by Explanation 1(iii) is not available to him for want of a valid and proper
reference under section 142(2A).
the assessment order in the instant case is bad in law as having been made beyond
the statutory time limit to make the assessment. (Para 95)
Per G.E. Veerabhadrappa (Vice President):
1. This coarse appeals arise out of the order dated 31 St March 2006 of the CIT(A) for the
A.Y. 2001-02. We have heard these appeals together and dispose the same by this
consolidated order
2.
The first dispute in the revenue’s appeal is directed against the disallowance of loss
of Rs. 13,11,01,153 relating to purchase and sale of units of manual funds. The learned
CIT(DR) vehemently relied upon the discussions in the assessment order and the Punjab &
Haryana High Court in the case of Vaneet Jain V. CIT 205 CTR 92.
3.
The learned counsel for the assessee, on other hand, strongly argued that the
decision of the Special Bench of the Tribunal in the case of Wallfort Shres & Stock
Brokers Ltd. V. ITO, 96 ITD 1 completely covers the issue in favour of the assessee. He
also relied upon the decision of the Delhi High Court in he case of CIT V. Vikramaaditya
Associates (287 ITR 268).
4.
We have carefully considered the rival contention and have gone through the
record. In our view, the order of the CIT(A) does not require any interference. The Mumbai
Benches of the Tribunal after considering the decisions of the Delhi High Court and the
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Punjab & Haryana High Court accepted similar contention of the assessee in the following
cases:
(i)
(ii)
(iii)
Ashok Kumar Damani ‘A’ Bench (ITA No. 7004/M/2004)
Oxemberg Fashion Ltd. ‘E’ Bench (ITA No. 5617/M/2004}
Ronak Manaharlal Sheth ‘I’ Bench (ITA No. 2966/M/2004)
altogether contrary views are expressed by ‘E’ Bench in the case of Omprakash Agarwal
(ITA No. 7895/M2004). In the light of the principle laid down by the Hon’ble Supreme
Court in the case of Vegetable Products Ltd. (88 ITR 192) and also the decision of the
jurisdictional High Court in the case of Siemens Ltd. 143 ITR 120 (Bom) when there is
conflict between the judgments of non-jurisdictional High Courts, then the view favourable
to the assessee should be adopted. Respectfully following the Special Bench decision in the
case of Wallfort Shares & Stock brokers Ltd. (suprs), we conform the order of the CIT(A)
5.
The next ground in the revenue’s appeal relates to the disallowance of interest
amounting to Rs. 3,84,41,309. During the year in question the assessee company carried out
of transactions in BSE for a company named Classic Credit Ltd. (‘CCL’ in short). These
transactions included shares purchase for Rs. 14,24,98,050/- on December 20, 2002 and rs.
21,32,23,650/- on 17th February 2001. The Assessing Officer noted that the assessee had
given delivery of the shares thus purchase to Mr. Ashok Mittal who was one of the
Directors of the assessee company. On both the dates, the assessee had overdrawn
balances in the overdraft accounts and even after the credit balances in other bank
accounts the assessee had overdraft bank balance. As against the purchase above
mentioned the assessee received payments of Rs. 2,09,77,950/- on 23rd March 2001 and of
Rs. 13,54,58,250/- on March 24, 2001. The balance amount of Rs. 19,92,85,000/- was
received by the concluded that the first week of April 2001. On these facts the Assessing
Officer concluded that the assessee had borrowed funds for the purchase of shares. He
further concluded that the assessee diverted its borrowed funds for financing the
purchases made by CCL. He calculated interest attributable on the borrowed funds from
the date of settlement till the date of recovery at Rs. 3,84,41,309/- and made a
disallowance of that amount while computing the assessee’s income chargeable to tax.
6.
Before the CIT(A) it was contended that the transaction for CCL were done in its
ordinary course of business and the assessee charged brokerage on these transaction.
Moreover till such time the payments were received the assessee had sufficient interest
free advances from its group concerns like Regulus freight Forwarders Pvt. Ltd., indicating
thereby that there was no deployment of borrowed funds as pointed out by the Assessing
Officer. The learned CIT(A) was of the view that the Assessing Officer failed to establish
the nexus between the borrowed funds and the application of the funds and there was any
sort of collision between two parties to result in a reduction of its income by not accounting
notional income in the accounts.
7.
The learned Departmental Representative strongly supported the findings of the
Assessing Officer. He relied on the following decisions:
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CIT v. V.I. Baby & Co. 154 ITR 248 (Ker);
CIT v. United General Trust Ltd. 200 ITR 488 (SC);
Waterfall Estates Ltd. v. CIT 219 ITR 563;
Madhav Prasad Jatia v. CIT 118 ITR 200,211 (SC);
Shankar Theaters v. CIT 146 ITR 547 (Bom);
Phaltan Sugar Works Ltd. v. CIT 208 ITR 989 (Bom).
According to him the learned CIT(A) certain erred in deleting the aforesaid disallowances.
The learned counsel for the assessee drew our attention to the bare facts, which clearly
establishes that there was no necessary nexus between the borrowed funds and the
application of such borrowed monies. It is not even a special auditor appointed by the
department who had identified the borrowed funds allegedly utilized by the assessee
assessee in purchase of shares on behalf of CCL. The learned counsel for the assessee
strongly relied on the decision of the Hon’ble Calcutta High Court in the case of
Woolcombers of India Ltd. v. CIT 134 ITR 219 and the Hon’ble Bombay High Court decision
in the case of CIT v. Bombay Samachar Ltd. 74 ITR 723 as also principle laid down by the
Hon’ble Supreme Court in the case of Madhav Jatia (supra).
8.
We have carefully considered the submissions made by either sides and also gone
through the authorities relied upon by both the sides. In our view, the disallowance is not
properly made. The debt has been credited in the ordinary course of business of the
assessee. The amounts against CCL, arose not on account of any loan or advance given by the
assessee to that party but because the assessee had made purchases on behalf of the party
with a view to earn brokerage, which was a major business activity if the assessee. In our
view, there is no case for making any disallowance on the interest paid on the monies
borrowed as the facts clearly reveal that the borrowed funds have been utilized of the
purpose of business. Merely because there was huge overdraft account it cannot be held
that such borrowed funds were utilized for non-business purpose. The assessee had
sufficient interest free funds taken from its group concerns, which should have been
considered by the department before framing the disallowances. In any case, the learned
CIT(A) has gone through these factual aspects and has rightly deleted the disallowances. In
these facts and circumstances of the case, we see no reason to interfere with his order on
this issue.
9.
The third ground in the revenue’s appeal relates to disallowance of Rs. 9,47,559
notionally computed by the Assessing Officer in respect of the assessee’s interest free
advances to Kumbh Trading Pvt. Ltd. The arguments by both the sides on the issue are on
the same lines as advanced on the previous issue. We have gone through the assessment
order and find that the Assessing Officer has not established any nexus between the
borrowed funds and the interest free advances given to Kumbh Trading Pvt. Ltd. Therefore,
in that situation the disallowance of any part of interest paid on monies borrowed does not
arise. The Bombay High Court in the case of Bombay Samachar Ltd.
(supra), has held that if an assessee advances its own funds interest free and carries on the
business with the aid of borrowed funds there would be no disallowance if the borrowed
funds are not diverted to any non-business purpose. The order of the CIT(A), in our view,
does not call for any interference on the issue. It is accordingly upheld.
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10.
In the result, the appeal filed by the revenue is dismissed.
11.
Now we take up the assessee’s appeal. The first ground in the assessee’s appeal is
directed against the disallowance of an aggregate sum of Rs. 1,17,82,179 U/s 14A of the
Income-tax Act on account of deemed interest comprising of Rs. 17,98,947 attributable to
investment made in manual funds and Rs. 99,83,323 attributable to investment made in
shares. The assessee had invested Rs. 80,00,00,000 in 6 schemes of mutual funds and
received income from those schemes aggregating to Rs. 11,14,36,242 that were claimed
exempt from tax u/s 10(33) of the Act. The Assessing Officer noted that the entire
investment of Rs. 80 Crores had been drawn from the overdraft accounts with Bank of
Punjab. He worked out interest attributable at Rs. 17,98,947 on borrowed funds employed
to earn tax-free income from manual funds. Similarly, the assessee earned dividend income
on shares of Indian companies amounting to Rs. 50,12,257 that too was exempt u/s 10(33)
of the Act. The Assessing Officer computed interest paid attributable to the dividend
income at Rs. 99,83,232. He held that prior to exemption the dividend was chargeable to
tax under head “Income from other sources”, even if the dividend arose incidental to the
business carried out by the assessee and therefore the argument of the assessee that it
was not hos intention to earn dividend and the dividend was incidental to his business was
without merit. He disallowed both the amounts viz Rs. 17,98,947 and Rs. 99,83,232
purporting to apply the provisions of section 14A. The assessee’s appeal on this point not
being accepted the assessee has raised this issue in the second appeal before us.
12.
During the course of hearing us the learned counsel for the assessee pointed out
that while making the disallowance, the Assessing Officer did not take into consideration
the judgment of the Hon’ble Supreme Court in the case of Rajasthan State Warehouse
Corporation v. CIT (242 ITR 450) and also the judgment of the Hon’ble Bombay High Court
in the case of CIT V. Tata Chemicals Ltd. (256 ITR 395), which the assessee had relied on.
The Assessing Officer also brushed aside the assessee’s argument that it required
substantial funds to deal in securities in the Stock Exchange, which was met from the
borrowed funds in addition to own funds. During the year under consideration, the total
turnover of the company in shares was Rs. 9218 crores. According to the requirements of
the Stock Exchange, the company had to keep margin money of 20% if its turnover.
Therefore, the company had to utilize borrowed funds for utilized for day-to day running of
the business, there could not be any justification for disallowance of interest.
13.
Coming to the provisions of section 14A of the Act, the learned counsel submitted
that those provisions were applicable in respect of the expenditure incurred in relation to
the exempt income. As the assessee had received dividend income, expenditure incurred in
relation to that income only would be covered by the provisions of sec. 14A pf the Act. It
was submitted that the borrowed funds were utilized by the assessee for running of the
business and also for paying the merging money to the Stock Exchange, and not for earning
dividend. There was no direct nexus between the utilization of borrowed funds and earning
of dividends. On the other hand, the nexus was clearly between the borrowed funds and
running of the business as a trader in stock & shares.
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14.
The learned counsel pointed out that the assessee had invested Rs. 80 crores in
schemes of various manual funds from which the assessee earned income of Rs. 11,14,36,242
for which the Assessing Officer worked out interest attributable at Rs. 17,98,947. The
assessee had earned dividend income on shares of Indian companies amounting to Rs.
50,12,257 and on that amount the Assessing Officer worked out interest attributable at Rs.
99,83,232. The fallacy in the reasoning of the revenue was apparent in the fact that no
prudent businessman would spend interest on borrowed funds to the tune of Rs. 99,83,232
just to earn dividend income of Rs. 50,12,257. In addition, the Assessing Officer had
further disallowed the sums of Rs. 8,92,914 and Rs. 21,92,812 as demat charges and
administrative expenses attributable to dividend income from shares of Indian companies.
15.
The learned counsel referred to the landmark judgment on the question of
allowability of interest on borrowed capital in the case of CIT v. Malayalam Plantations Ltd.
(53 ITR 140, SC) wherein the Hon’ble Supreme Court observed that the expression ‘for the
purpose of the business’ is wider in acope than the expression ‘for the purpose of earning
profits’. The apex court has thus clearly held that if the payment of interest is for the
purpose of business, it has to be allowed. Similar views were expressed by the Hon’ble
Bombay High court in the case of CIT v. Shree Changdeo Sugar Mills Ltd. 143 ITR 469
(Bom) and CIT v. Belapur Co. Ltd. 161 ITR 516 (Bom). In the case of CIT v. Kanoria
Investments Pvt. Ltd. 232 ITR 007 (Cal) the Hon’ble Calcutta High Court held that once the
capital was borrowed for the business it was immaterial how the borrowed money was
applied. Even if the borrowed money is applied in making investment which yield dividend,
the entire interest paid on borrowing should be allowed as deduction for computing business
income and no part of interest should be apportioned and deducted from dividend. Thus,
this judgment of Hon’ble Calcutta High Court answered the stand taken by the Assessing
Officer based on the legal provisions of section 56(2)(i) making dividend compulsorily
chargeable to tax under the head “Income from other sources”.
16.
The learned counsel for the assessee strongly relies upon the Hon’ble jurisdictional
high court’s recent judgment in the case of CIT v. Emrald Co. Ltd. [2006] 284 ITR 586
(Bom). He pointed out the following observations of their lordships:“Therefore, in the case of a dealer in shares, as in the present case, the dividend
retains the character of business income though assessed under section 56. The
interest on the borrowings is paid for the purpose of business and therefore,
allowable under section 36(1)(iii). The interest paid is not expenditure laid out or
expended wholly or exclusively for the purpose of earning the dividend as
required under section 57(iii) and therefore, should not be reduced under section 57
from the dividend income.” (Emphasis supplied)
The learned counsel pointed out that in the case of Mafatlal Holdings Ltd. v. Addl. CIT 85
TTJ (Mumbai) 821 the Tribunal held that the expression “for the purpose of the business”
in s. 36(1)(iii) is wider in scope than “for the purpose of earning profits”. Fact that the
dividend income was exempt in the hands of the assessee was no ground to disallow the
interest.
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17.
The learned counsel submitted that the working of disallowance as made by the
Assessing Officer was based on adhok disallowances and not on actual facts. The Hon’ble
Bombai High Court in the case of CIT v. general Insurance Corporation of India Ltd. 254
ITR 203 (Bom) held that the expenditure that is not directly relatable to earning of
dividend income can not be deducted from deduction u/s 80M. Again in the case of CIT v.
Central Bank of India 264 ITR 522 (Bom) Hon’ble Bombay high Court held that only actual
expenditure incurred was deductible and estimated proportionate expenditure was not
deductible from goes dividend while working out deduction under section 80M. Reference
was invited to the decision of the Tribunal in the case of Shaw Walace & Co. Ltd. 80 ITD
156 (Cal) and of Madhya Pradesh Hogh Court in the case of State Bank of Indore v. CIT 275
ITR 23 (MP). In the instant case neither the assessing Officer not the CIT(A) had
established the direct nexus between the borrowed funds and the acquisition of mutual
funds units or shares of Indian companies on which income/dividend was received by the
assessee. A large amount of dividend was received by the assessee on shares purchased by
the clients whom delivery was made after the record date. Thus the estimate disallowance
as had been made was contrary to the judgments of jurisdictional high court in the case of
General Insurance Corporation and Central Bank of India (supra). The learned cousel
strongly placed reliance in this regard on the decision of Tribunal in the case of ACIT v.
Eicher Ltd. 101 TTJ 269 (Del.). It has been held in that case the expenditure which
Assessing Officer seeks to disallow under section 14A should be actually incurred and ‘so
incurred with a view to producing non-taxable income’. There being no material with the
Assessing Officer to show that any expenditure was actually incurred in earning dividend
income, the tribunal held that nothing could be disallowed under section 14A on estimate
basis. In the case of the assessee also no amount was borrowed for earning of dividend
income but for the purpose of dealing in shares and dividend had been received only
incidental to dealing in shares. Moreover, the Revenue had made the disallowance of
interest merely on estimate. Hence the decision of Tribunal in the case of Eicher Ltd.
(supra) was squarely applicable.
18.
The learned counsel then referred to the decision of Maruti Udyog Ltd. v. DCIT 92
ITD 119 (Del.) It was pointed out that in that case the Tribunal has held that the burden of
proof is on the person who alleges the existence of a fact and on that reasoning the burden
of proof that the borrowed funds related to acquisition of shares that yielded tax- free
income is on the Revenue under the provisions of section 14A. In that decision the Tribunal
has further held that the nexus between borrowed funds and investment can be said to be
established only where it is shown that interest free funds were not available with the
assessee. In the case of Maruti Udyog Ltd. that assessee was not a dealer in shares that
the present assessee is, still the Tribunal held that since interest free funds available
exceeded the funds invested in shares no disallowance under section 14A was called for.
Following that decision also the disallowance under section 14A was not sustainable.
19.
The learned Departmental representative strongly relied upon the order of the
Assessing Officer and the learned CIT(A). he emphasized that the provisions of section
14A are widely worded and therefore if there was any income that was exempted by any
provisions of the Act the expenditure relatable to such income had to be disallowed. It did
not matter that no expenditure was separately incurred for the purpose of earning such
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income. As long as there was exempt income and expenditure that could be related to that
exempt income the provisions of section 14A mandated disallowance of expenditure
relatable to exempt income. The judgment of Hon’ble Supreme Court was delivered prior to
the enactment of the provisions of section 14A and id not come in the way of the operation
of the provisions of section 14A. The learned departmental representative strongly relied
upon the decision of the Tribunal reported in 101 ITD 151 (Del.)
20.
We have carefully considered the rival submissions and are of the view that the
disallowance made by the Assessing Officer and upheld by the learned CIT(A) is assailable
on several counts. In the instant the authorities below have merely applied an adhoc formula
and made no attempt to make the disallowance on actual basis. This approach cannot be
permitted as held by the Hon’ble jurisdictional high court in the cases of General Insurance
Corporation of India ltd. (supra) and Central Bank of India Ltd. (supra). The hollowness of
the revenue’s approach is exposed from the fact that a disallowance of interest
attributable has been worked out at Rs. 99,83,232 just to earn dividend income of Rs.
50,12,257. We therefore see considerable justification in the contention of the assessee
that it required substantial funds to deal in securities in the Stock Exchange, which was
met from the borrowed funds in addition to own funds. During the year under consideration,
the total turnover of the company shares was Rs. 9218 crores. According to the
requirements of the Stock Exchange, the company had to keep merging money of 20% of its
turnover. Therefore, the company had to utilize borrowed funds for payment of this huge
margin to the Stock Exchange. When borrowed funds were utilized for day-to day running
of the business, there could not be any justification for disallowance of interest. Secondly,
the Assessing Officer as also the learned CIT(A) have simply assumed that all the shares
had been purchased out of borrowed funds. We do not accept that merely because the
payments were made from the overdraft account it entailed utilization of borrowed funds
as distinguished from the assessee’s own funds. There is direct authority of the judgment
of Hon’ble Calcutta high court in the case of Woolcombers of India (supra) against such
assumptions. As held by the Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd
(supra) the burden of proof as respects utilization of borrowed funds, for the purposes of
the provisions of section 14A, is on revenue.
21.
As a matter of legal proposition also it is not possible to accept that even in the
case of a dealer/broker in shares as distinguished from an investor in shares the borrowed
funds utilized for acquisition of shares should be related to earning of dividends. Where
the shareholding is on trading account or on behalf of a third party the interest
expenditure cannot be said to have been incurred for earning of dividend. There is force in
the contention that the dividend income in the case of present assessee has been to a large
extent merely incidental income for which no borrowing was made. The legal position in this
regard is not altered by the provisions of section 14A that apply only when there is
expenditure in relation to an exempt income. These provisions do not create any legal fiction
to deem any expenditure as expenditure incurred in relation to exempt income. This legal
view of the matter is well supported by the judgment of Hon’ble Calcutta High Court in the
case of CIT v. Kanoria Investments Pvt. Ltd. 232 ITR 007 (Cal) and the decisions of ITAT
in the cases of Mafatlal Holdings Ltd. V. Addl. CIT 85 TTJ (Mumbai) 821 as also ACIT V.
Eicher Ltd. 101 TTJ 369 (Del.) where the tribunal has held that the expenditure which A.O.
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seeks to disallow under section 14A should be actually incurred and ‘so incurred with a view
to producing non-taxable income’. As against these authorities the learned Departmental
representative has relied upon the decision of the Tribunal in the case of Everplus
Securities & finance Ltd. v. DCIT 101 ITD 151 (Del.). The facts of that case are altogether
distinct from the facts of the present case. M/s Everplus Securities & Finance Ltd made
investment out of borrowed funds in group companies. The Tribunal has repeatedly
enumerated in para 5.28 of that order that that assessee was not a trader in shares and
there was no trading activity. We see no assistance to the case of the revenue from that
decision. At any rate the legal position in this respect is put beyond debate as respects the
dividend earned on shares acquired for trading purposes by the judgment of Hon’ble
jurisdictional high court in the case of Commissioner of Income-tax v. Emrald Co. Ltd.
[2006] 284 ITR 586 (Bom). The following observations of the Hon’ble Court put the legal
position in this regard in no uncertain terms:“Therefore, in the case of a dealer in shares, as in the present case, the dividend
retains the character of business income though assessed under section 56. The
interest on the borrowing is paid for the purpose of business and therefore,
allowable under section 36(10(iii). The interest paid is not expenditure laid out or
expended wholly or exclusively for the purpose of earning the dividend as
required under section 57(iii) and therefore, should not be reduced under section 57
from the dividend income.” (Emphasis Supplied)
22.
In view of the discussion in the foregoing paragraphs we hold that the learned
CIT(A) erred in upholding the disallowance of Rs. 1,17,82,179 u/s 14A of the Income-tax
Act. We direct the assessing officer to delete this disallowance.
23.
The second ground of appeal is directed against the disallowance of Rs. 30,85,726
u/s 14A of the Act out of demat charges expenses and administrative expenses. According
to the Assessing Officer, a part of these expenses is attributable to investment made
towards equity shares and units of mutual funds. He therefore, made a proportionate
disallowance out of all the three heads of expenditure. The learned CIT(A), while
confirming the disallowance, has stated that ‘the methodology adopted by the Assessing
Officer for making the disallowance is both technically and commercially correct and
reasonable’.
24.
The learned counsel argued that no weightage was given to the assessee’s argument
that the demat cost was not a cost of purchase or sale but was only a transaction cost, and
that stock exchange expenses had no relation with the dividend income of the assessee and
were levied on the broker who dealt for his clients in the stock exchange.. The learned
counsel further submitted that various case law and arguments mentioned in the
submissions in regard to ground of appeal no. 1 in so far they apply to ground of Appeal No.2
also should be taken into consideration. He relied heavily upon the judgment of the apex
court in the case of Rajasthan State Warehousing Corporation 242 ITR 450. Further the
learned counsel argued that the assessee’s business was dealing in shares and securities,
which was indivisible. All the expenses were incurred in connection with the appellant’s
business and not in connection with earning of dividend. Not a single item of expenditure
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was directly attributable to earning of any exempt income. In the normal course, expenses
like demat charges, stock exchange or administrative expenses could not have been claimed
by the appellant as deduction against the income from dividend. Such expenses, therefore,
should not have been forcibly attributed to the dividend income and then disallowed by the
Assessing Officer. The learned Departmental Representative reiterated the same
arguments as in relation to ground of appeal no.1 above.
25.
On consideration of rival submissions we find that the same principles as in relation
to the first ground do apply to this ground as well. It is true that while the disallowance
disputed in ground of Appeal No. 1 relates to deductions claimed under section 36(1)(iii) the
disallowance in this ground of appeal is of deductions claimed under section 37(1) but the
fact remains that these expenses also can not be said to have been incurred in relation to
dividend income. The assessee purchase shares of Indian companies or units of mutual funds
for trading or on behalf of third party. None of the purchases have been shown on
investment account. Hence no expenditure can be directly related to dividend/income that
in the case of the instant assessee is only incidental to approach. Assumptions and working
made by the learned A.O. suffer from the same numerous flaws and deficiencies as
discussed at length in relation to ground of appeal no. 1 above. Following our reasoning as in
relation to ground of appeal No.1 we allow this ground of appeal also and direct the
Assessing Officer to delete the disallowance.
26.
The third ground of appeal relates to the disallowance of the loss amounting to Rs.
2,47,34,748 claimed on account of transactions with Century Consultants Ltd. The assessee
purchased shares of cyberspace Info Ltd. on behalf of Century Consultants Ltd. on
18.01.2001 and the total amount receivable on this account was Rs. 2,47,69,500,69 which
according to the bounced. The assessee, therefore, claimed that the sum of Rs. 2,47,69,500
be allowed as business loss/bad debt. The Assessing Officer held that since the assessee
had 640000 shares of Cyberspace worth Rs. 74,56,000 and also the margin money of Rs.
15,00,000, the loss of Rs. 2,47,69,500 could not have been claimed by the assessee. The
Assessing Officer held that the assessee’s claim for allowing this amount was not
acceptable as the amount had not been written off also in the books of accounts and the
requirements of the provisions of section 36(2) were not met. The learned CIT(A) agreed
with the Assessing Officer and held that the amount in question was allowable neither as
bad dent nor as business loss. He held also that the claim of loss was premature because the
assessee had not mad4e efforts of any sort to recover the debt and made claim of business
loss in undue haste.
27.
The learned counsel for the assessee informed us that copies of account of the
party for the transactions at BSE & NSE are given at pages 60 & 70 of the paper book
respectively. Copies of the two bounced cheques are given at pages 540 to 542 of the
paper-book. The legal principle in this respect was elucidated in the judgment of the Hon’ble
Supreme Court in the case of Badridas Daga v. CIT 34 ITR 10 and if the guiding principle as
laid down in that judgment, is applied to the assessee’s case there could not be any doubt
that the loss was incurred by the assessee in the course of carrying on of the business and
that the nature of sale proceeds realizable was on income account and therefore it resulted
in revenue loss. The learned counsel explained that as the cheques issues by Century
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Consultants Ltd. were not realized, the assessee tried its level best to sell the shares in the
open market. However, the shares could not be sold, as the market was falling and the
quantity being traded off in the Exchange was negligible. As the shares held by the
assessee did not have any significant value, the assessee treated the realizable value
thereof as nil. As regards the margin money of Rs. 1500000 remaining with the assesse, the
same was retained on account of Century Consultants to enable the company to defend
itself on account of various transactions executed for and on behalf of that company. Hence
while determining the loss arising on accost of transactions done in the shares of
Cyberspace Info Ltd. for and on behalf of Century Consultants, the extire amount which
had become irrecoverable was written off in the books of account and claimed as trading
loss. It was emphatically clarified that the observation of the Assessing Officer that the
amount was not written off by the assessee was not correct. The learned counsel reiterated
that the amount due from Century Consultants was written off in the books of account.
28.
The learned counsel argued that there was little merit in the objections of the
lower authorities. The main objection related to the assessee having in its possession as at
the end of F.Y. 2000-01 6,40,000 shares of Cyberspace Info Ltd. and relaying on the
alleged rate of Rs. 11.68 as at the end of the financial year the Assessing Officer held that
the assessee retained with himself the shares of the market value of Rs. 74,56,000/-.
Further the assessee had held the margin money of Rs. 15,00,000/-.At the outset, based on
this reasoning the authorities below should have restricted the disallowance to Rs.
89,56,000 whereas the disallowance had been made of the entire claim of Rs. 2,47,34,748.
More importantly, the Assessing Officer had completely misdirected himself while valuing
the shares at Rs. 74,56,000 @ Rs. 11.68. In that regard reference was invited to the
assessee’s submissions before the Special Auditor at pages 419-420 of the paper-book. The
post-dated cheques of Rs. 1,25,00,000 each wre deposited by the assessee on 18.03.2001.
The same were returned on bounced on 19.03.2001. Immediately, the assessee tried to sale
the shares but there were no takers. From 19 th to 22nd March on an average one trade took
place and during those four days the total volume of the shares transacted in the Exchange
was 19 shares only i.e. less than 5 shares per day. Thereafter the quoted price at BSE
plummeted to Rs. 2/- only and that too for minuscule quantity of shares. The assessee
simply could not have sold 6,44,000 shares in its possession for complete want of buyers.
Those shares were at that tome practically of no value at all. Secondly, the learned A.O.
objected to the claim of business loss on the ground that certain steps been taken by the
assessee. There again the Assessing Officer had completely misdirected himself and paid no
heed to fround realities. Mere filing the suit was not a prospect of actual recovery. That
was more question of the availability of the funds with the debtor. Further, it is common
knowledge that such types of litigation are long-drawn, protected and result into mounting
cost in terms of and money generally not commensurate with the final outcome. The learned
counsel relied upon the judgments in the cases of Jethabhai Hirji And Jethabhai Ramdas V.
CIT 120 ITR 792 (Bom) and A.W. Figgis & Co. Pvt. Ltd. V. CIT 264 ITR 63 (Cal) It was
submitted that the revenue authorities as also the special auditor appointed by them had
not take note of the letter and spirit of the Accounting Standard 4 requiring the note to be
taken of and the effect to be given to “contingencies and events occurring after the
balance sheet date” that are reasonably known as at the time of closure of accounts and the
actual date of signing of the balance sheet. Further the Courts have tome and again
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emphasized in a plethora of cases that I such matter the correct view can not be taken on
the basis of a dogmatic approach but on the basis of what a prudent man of commerce would
recognise to be the correct state of affairs. As to the Assessing Officer taken a severe
exception to the account of Century Consultants Ltd. not being squared up in the books of
the assessee, the learned counsel pointed out that assessee’s claim was that of business
loss and not of bad u/s 36(1)(vii) and therefore there was no pre-condition of write off.
Even as respects the bad debts also the condition laid down by the statute refers to writeoff in the books of account of the assessee and not necessarily in the personal ledger
account of the debtor. In the case of the present assessee the debt was written off in the
books of account even though the account of the party was not squared up.
29.
The learned Departmental representative strongly emphasized the contents of the
orders of the authorities below. He relied upon the following judgments:
1.
2.
3.
CIT v. Hotel Ambassador 253 ITR 430 (Kerala)
CIT v. micromax Systems Pvt. Ltd. 277 ITR 409 (Mad)
South India surgical Co. Ltd. v. ACIT 201 CTR (Mad) 289
30.
We have carefully considered the rival submissions. Basically, the reasons given for
the disallowance of the assessee’s claim of business loss are there-fold. First, in view of the
provisions of section 36(2) the assessee could not claim bad debt in relation to the amount
expended for purchase of shares on behalf of Century Consultants. The assessee could
claim bad debt in respect only of unrecovered brokerage. Secondly, according to the
Assessing Officer there is no business loss because the assessee had held valuable security
against the debt. We are in substantial agreement with the contention of the learned
counsel for the assessee that this argument holds good only to the extent of the value of
the security and no more. If the full value of the debt was not covered by the net value of
the security, the assessee was justified to claim the business loss to the extent of the
unsecured debt. Thirdly, the learned CIT(A) holds that the assessee’s claim of business loss
was premature.
31.
As to the first contention the Assessing Officer is correct that condition
precedent as enumerated in section 36(2) is not satisfied as respects the amount expended
for purchase of shares on behalf of Century Consultants. From that it does not follow that
the assessee could not at all claim deduction of money loss. From the facts on record it
cannot be disputed that the assessee had purchased the shares on behalf of CCL in the
ordinary course o its profit making activity. Any bona fide loss arising in the ordinary course
of carrying on of business which is of revenue nature is to be allowed as business loss even
if the provisions relating to deduction of bad debt do not apply. The leading case law on the
subject is the judgment of the apex court in the case of Badridas Daga v. CIT 34 ITR 10.
The Hon’ble Supreme Court has laid down the legal proposition in the following words:
“when a claim is made for a deduction for which there is no specific provision in
section 10(2) (of the old Act), whether it is admissible or not will depend on
whether, having regard to accepted commercial practice and trading principles, it
can be said to arise out of the carrying on of the business and to be incidental
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to it. If that is established, then the deduction must be allowed, provided of course
there is no prohibition against it, express or implied, in the Act,” (emphasis supplied)
The aforesaid principle has bee applied in suitable cases time and again without
qualification. We therefore do not find merit in the argument of the Assessing Officer that
the assessee’s claim of deduction should fail for want of satisfaction of section 36(2)
requirement.
32.
As to the contention of the learned CIT(A) that the loss was claimed in under haste
he ahs relied upon no material to arrive at this finding and therefore the same is not
warranted on the facts and in the circumstances of the case. The assessee gas
demonstrated that there was sharp erosion in the value of the shares of Cyberspace that
bad become due. The cheques issued by CCL bounced. It is understood as to how the CIT(A)
has termed it ‘undue haste’. If the events unfolded quickly that cannot be blamed upon the
assessee. There is no mandatory procedure that the assessee did not comply with. In the
case of Jethabhai Hirji And Jethabhai Ramdas v. CIT 120 ITR 792 (Bom) Hon’ble
jurisdictional high Court has held:
“It is now well settled that the fact that the assessee has not taken steps by way
of legal proceedings against the debtor would not automatically justify the finding
that he was not entitled to write off the amount as a bad debt. In our opinion, the
fact that an assessee, subsequent to the write off of the debt, continues with legal
proceedings against the debtor need not necessarily lead to the conclusion that the
write off was improper or lacked bona fides.”
Similarly, in the case of A.W. Figgis & Co. Pvt. Ltd. v. CIT 264 ITR 63 (Cal) Hon’ble Calcutta
high court has held as under:
“If the assessee knew it well that filing of the suit would not in any way help the
assessee but rather burden the assessee with additional financial expenses. If the
assessee feels that in spite of the suit, the loan will not be recovered, the filing of a
civil suit for recovery of debt is not necessary to claim the bad debt. Therefore, in
this case the amount should be allowed as bad debt.”
It is therefore see that there is hardly any force in the contention of the learned CIT(A)
as respects the efforts of recovery not made by the assessee. The assessee, on an honest
appraisal of ground realities came to an honest behalf that the amounts outstanding against
Century Consultants had resulted into a business loss. Hence the case of the appellant falls
within the parameters laid down by the hon’ble jurisdictional high Court in the case of
Jethabhai Hirji (supara). The case law relied upon in this behalf by the learned DR is off
the mark. In the case of CIT v. Hotel Ambassador 253 ITR 430 (Kerala) that assessee had
not charged bad debt written off to profit & loss account at all. It did not from part of
audited books of account. Moreover, the claim of bad debt was first made in reassessment
proceedings. Facts of that case are altogether different. In the case of CIT v. Micromax
Systems Pvt. Ltd. 277 ITR 409 (Mad) that assessee merely created “provision for bad
debt” and charged the provision to profit & loss account. Hon’ble high court held that bad
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debt was not written off in the books of account and the precondition laid down in the
provisions of section 36(1)(vii) as after amendment with effect from 1.4.1989 was not
satisfied. Facts of that case also are altogether different. In the case of South India
Surgical Co. Ltd. v. ACIT 271 CTR (Mad) 289 there were dues from government hospitals
and they had acknowledged the claim. Non payment was possibly from fund-flow problems.
In respect of other hospitals also that assessee did not produce any relevant material to
show that the debt had become bad. Thus facts of all the ther jusgments relied upon by the
learned CIT(DR) are altogether different and those judgments can not be applied on the
facts of the case before us.
33.
We are now left with the main objection of the Assessing Officer that there was
security of Rs. 15 lacs and the assessee had in this custody 6,40,000 shares of Cyberspace
purchased on behalf of CCL. We see force in the contention of the learned counsel for the
assessee that on this ground the Assessing Officer could not disallow the entire business
loss of Rs. 2,47,34,748 when as per the Assessing Officer himself Cyberspace shares were
worth Rs. 74,56,000 only. Even as regards that value alleged by the Assessing Officer the
learned counsel for the assesee has pointed out that the post-dated cheques of Rs.
1,25,00,000 each were deposited by the assessee on 18.03.2001. The same were returned as
bounced on 19.03.2001. Immediately, the assessee tried to sale shares but there were no
takers. From 19th to 22nd March on an average one trade took place and during those four
days the total volume of the shares transacted in the Exchange was 19 shares only i.e. less
than 5 shares per day. Thereafter the quoted price at BSE plummeted to Rs. 2/- only and
that too for auditor in the assessee’s letter as placed at pages 419-420 of the paper-book
have not been controverter by the Assessing Officer and the learned CIT(A) in any manner.
There is no material relied upon or any argument in the learned CIT(DR’s) submissions
either. We therefore hold that the value of those shares at the material time should be
taken approximately Rs. 2 only. However we cannot accept the entire amount being claimed
as business loss when the assessee had with him the security deposit of Rs. 15 lacs and in
his custody 6.40 lakh shares. We, therefore taking into consideration the security deposit
and the value of the shares in the custody, sustain the disallowance to the tune of Rs.
27,80,000. The Assessing Officer is directed to allow the balance amount of business loss
as claimed by the assessee.
34.
The fourth ground of appeal relates to the addition of Rs. 44,93,731 made by the
Assessing Officer being the amounts of excess brokerage debited to some clients. The
appellant subsequently reversed such excess brokerage income in respect of the following
parties:1.
2.
3.
4.
Classic Credit Ltd.
Fortune Investments
Ashok Mittal & Co.
Mr Shah
Rs. 6,70,904
Rs. 11,27,805
Rs. 25,58,584
Rs._1,36,438_
Rs. 44,93,931
While making the addition, the Assessing Officer has stated in his order that no valid and
justifiable reason for reversal of income was provided by the assessee, and that the major
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portion of such reversal is in favour of Ashok Mittal & Co. which is a proprietary concern of
Shri Ashok Mittal, a director of the assessee company. The learned CIT(A) more less more
or less repeated the arguments of the Assessing Officer while confirming the addition. The
assessee had explained before the Assessing Officer that there was no reversal of
brokerage income chargeable from the above clients. Brokerage was originally calculated at
a fixed percentage with the help of an accounting package, and later adjusted in some cases
according to the terms that had been agreed upon. Thus adjustment entries were passed in
order to give effect to the agreed rates. The contentions of the assessee have not been
accepted by the Assessing Officer and the learned CIT(A). They are of the view that the
agreed rates are unreliable and collusive.
35.
During the course of hearing before us the learned counsel for the assessee
submitted that both the Assessing Officer and the learned CIT(A) have not applied their
minds while deciding on the. Neither of them appreciated that brokerage was to be charged
in accordance with the terms and conditions agreed upon. If there was excess charging of
brokerage, the excess amount had to be reversed in the account of the affected client. All
the four parties had confirmed that they had received credits for excess brokerage
charged. The learned counsel pointed out that brokerage income on the trades executed by
the assessee on behalf of its constituents were fully and truly recorded in the accounts,
and that brokerage charge charged in excess of the agreed terms alone was reversed by
passing necessary accounting entries. In the case of Ashok Mittal & Co. the lower rate of
brokerage should be viewed in the light of the volume of trasactions entered into by that
client as also the shares lent by him to the assessee company for being offered as security
against the loans taken from banks. It was argued that as a prudent businessman the
assessee had agreed to charge brokerage at a particular rate out of commercial expediency.
In support of those contentions the learned counsel relied upon the judgments in the cases
of Travancore Titanium Products Ltd. v. CIT (60 ITR 277, SC); Shahzada Nand & Sons v.
Sons v. CIT 108 ITR 538 (SC); Sasoon J David & Co. Pvt. Ltd. v. CIT 118 ITR 261 (SC) and
S.A. builders Ltd. v. CIT (Appeals) 288 ITR 1 (SC).
36.
The learned CIT(DR) strongly relied upon the observations in the assessment order
and the order of the learned CIT(A). He supported the addition with the judgments in the
case of State Bank of Travancore v. CIT 158 ITR 102 (SC) and Western India Oil
Distributing Co. Ltd. v. CIT 206 ITR 359 (Bom).
37.
We have carefully considered the rival submissions. We find that the learned CIT
(DR) has erroneously relied upon the judgment of Hon’ble Supreme Court in the case of
State Bank of Travancore (supra). That judgment related to the case where the assessee
bank did not provide for the accrued interest on sticky loans on the ground that the loans
were sticky and there was dim prospect of actual recovery of interest. Hon’ble Supreme
Court held that so long as an assessee followed the mercantile system of accounting
interest income had to be recognized on accrual basis. The facts of the assessee before us
are vastly different. Here adjustment entry is explained not because of any doubt as
regards recovery but being rectification of mistake. The judgment in the case of State
Bank of Travancore (supra) does not prohibit rectification of mistake in the books of
account by reversal of an erroneous entry. For the same reason there is no assistance to
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the case of revenue from the judgment of Hon’ble jurisdictional high court in the case of
Western India Oil Co. (supra). As to the of the authorities below the Assessing Officer has
disallowed due expenditure given by the assessee on the ground that Shri Ashok Mittal, one
of the directors of the assessee company was the proprietor of Ashok Mittal & Co. That
fact does not necessarily make the transactions of the assessee with that concern collusive
transaction. There is no application of mind on the explanation of the assessee that the
volume of business with M/s Ashok Mittal & Co. and the shares pledged by them as security
for the assessee’s business justified the lower rate of brokerage. Further there is no basis
at all given as respect the other there parties. There is no material to suggest that the
assessee received any brokerage, in case or kind, outside the books of account. There is no
law making it obligatory upon an assessee ro maximize his profits. Income-tax is a charge
upon the income earned and not upon the income that could have been earned. In the recent
case of S.A. builders Ltd. v. CIT 288 ITR 1 (SC). The Hon’ble Supreme Court have
elucidated the meaning of the expression, “commercial expediency” and made the following
observations:“The expression “commercial expediency” is one of wide import and includes such
expenditure as a prudent businessman incurs for the purpose of business. The
expenditure may not have been business expenditure if it was incurred on
grounds of commercial expediency. Decisions relating to section 37 also the
expression used is “for the purpose of the business” “For purpose of business”
includes expenditure voluntarily incurred for commercial expediency, and it is
immaterial if a third party also benefits thereby… Once it is established that there
was nexus between the expenditure and purpose of the business (which need not
necessarily be the business of the assessee itself) the Revenue cannot justifiably
claim to put itself in the arm-chair of the businessman or in the position of the
board of directors and assume the role to decide how much is reasonable
expenditure having regard to the circumstances of the case. No businessman can
be compelled to maximize his profits.” (Head-note) (Emphasis Supplied)
Both the Assessing Officer at the learned CIT(A) should have considered the issue in the
light of the above judgments of the apex court. But that has been done. The addition made
by the Assessing Officer is based on suspicion, surmises and conjectures. There is no
material in the possession of the assessing officer that the reversed amounts were indeed
collected from the clients. The addition is, therefore, totally unjustified and contrary to
the provisions of the Act, and accordingly directed to be deleted.
38.
The fifth ground of appeal relates to the addition of Rs. 41,33,919 made by the
Assessing Officer by way of the assessment of deemed interest on the funds allegedly
diverted to M/s Ashok Mittal & Co. (AMC). The Assessing Officer, while admitting that
AMC was a client of the assessee company who regularly purchased and sold shares on
behalf of AMC, stated that over and above the relationship of a broker the assessee
company advanced funds from time to time to AMC and also received funds from AMC. It is
pointed out by the Assessing Officer that from 31.01.2001 to 31.03.2001 there was a
continuous debit balance in the account of AMC except on there days when the balance was
in credit. The Assessing Officer further observed that the debit balance was due to funds
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advanced by the assessee company to AMC and also due to debits on account of business
transactions. On these facts, the Assessing Officer disallowed the interest attributable to
the period between 31.01.2001 and 31.03.2001 amounting to Rs.41,33,919. The learned
CIT(A) agreed with the views of the Assessing Officer and observed that Sri Ashok Mittal
enjoyed substantial amount of interest-free funds for a considerable period of time.
39.
The learned counsel for the assessee strongly objected to the addition and stated
that the same was made by the Assessing Officer and confirmed by the ld. CIT(A) without
any valid reason. There was no justification for looking at the accounts of the last quarter
only and to ignore the earlier quarter and even earlier years. Secondly, the lower authorities
did not appreciate that there was a written understanding (Page 98 of the paper-book) with
AMC about transfer of funds from the assessee company to AMC and vice versa for
business purposes of each other and there was no transaction not guided by the commercial
expediency of the assessee’s own business. Thirdly, Shri Ashok Mittal had agreed to pledge
his own shares as security for the huge bank loans taken by the assessee Reference in this
regard was invited to pages 559 to 561 of the paper-book. The learned counsel argued that
the principle of commercial expediency as enunciated in the judgments of the Hon’ble
Supreme Court in the cases of CIT v. Walchend & Co. (P) Ltd. 65 ITR 381 (SC); Travancore
Titanium Products Ltd. v. CIT (60 ITR 277, SC); Shahzada Nand & Sons v. CIT 108 ITR 358
(SC); Sasoon J David & Co. Pvt. Ltd. v. CIT 118 ITR 261 (SC) and S.A. builders Ltd. v. CIT
(Appeals) 288 ITR 1 (SC) duly supported the transactions of the assessee company with
AMC.
40.
Lastly, the learned counsel submitted that neither the learned Special Auditor nor
the Assessing Officer had identified the borrowed funds allegedly utilized by the assessee
in making any uncalled for advance to AMC. In fact the working of disallowance had been
made purely notionally by applying a rate 17% on the outstanding amounts in the accounts of
AMC. Such course of action was contrary to the judgment of the jurisdictional high court in
the case of CIT v. Bombay Samachar Ltd. 74 ITR 723 (Bom). The debt in the account of
AMC was partly a consequence of the shares purchased by the assessee on their behalf and
that was the normal business of the assessee. It could not be said that the conditions laid
out in section 36(1)(iii) were not met. The learned counsel relied upon in this behalf on
Hon’ble apex court judgment in the case of Madhav Prasad Jatia V. CIT 118 ITR 200.
41.
The learned CIT(DR) relied upon the assessment order and the order of the learned
CIT(A). He sought to support their orders by placing reliance upon the judgments in the
cases of Phaltan Sugar Works Ltd. v. CIT 208 ITR 989 (Bom); Phaltan Sugar Works Ltd. v.
CIT 216 ITR 479 (Bom) and Madhav Prasad Jatia v. CIT 118 ITR 200, 211 (SC).
42.
We have carefully considered the rival submissions. In the case of Bombay
Samachar Ltd. (supra) the Hon’ble jurisdictional high Court has held that the view that an
assessee could have decreased the extent of his borrowing by collecting its outstanding and
therefore, would not be entitled to claim interest paid on borrowed capital is untenable. If
it is undisputed that no part of the borrowed capital was utilized for purpose other than
business purpose the entire interest paid on such borrowed capital would be an allowable
deduction under section 10 (2)(iii) of 1922 Act, now section 36(1)(iii) of 1961 Act. The
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judgments of the jurisdictional high court in the cases of Phaltan Sugar Works Ltd. (supra)
relied upon by the learned CIT (DR) relate to the diversion of interest bearing borrowed
capital for non business purposes and do not lay down that an assessee ought to charge
interest on all the loan and advances. The same is the position as regards certain
observations of the Apex Court in the case of Madhav Prasad Jatia (supra) relied upon by
the learned CIT(DR). It is therefore essential to prove diversion of borrowed funds for
non-business purpose before disallowing interest paid on borrowed capital. No such material
has been relied upon in the orders of the authorities below, nor has the learned CIT (DR)
brought any such material on record. The addition has been made purely nationally by
applying a rate of 17% on the outstanding amounts in the accounts of AMC. No such interest
has been charged by or accrued to the assessee. As pointed out earlier income-tax is a
charge upon income earned and not the income that could have been earned. The addition
made is, therefore, liable to be deleted in this short ground alone,. The learned counsel of
the assessee has, however, relied further upon principle of commercial expediency and the
fact that the Assessing Officer has taken into consideration only broken period of there
months and not viewed the transactions of the assessee with AMC as a whole. Taking into
account all these aspects we see no merit in this addition and direct deletion thereof.
43.
The Sixth ground of appeal is directed against the addition of Rs. 1,47,01,000
sustained by the learned CIT(A). The relevant facts in this regard are that during the
course of assessment proceedings the assessee stated that the dividend income credited in
the books of account of the assessee and offered for the assessment included the dividend
to the tune of Rs. 38,25,147 that had been received on shares bought for the clients nut
received by the assessee because the delivery of those shares was given after record date
for the receipt of dividend declared on those shares. In the assessment order the
Assessing Officer held that the assessee could not substantiate this explanation and he
made addition of Rs. 45,34,19,215 representing undisclosed investment in shares on which
the dividend had been disclosed in the books of account of the assessee. However, during
the course of the appeal before the learned CIT(A) the Assessing Officer submitted a
Remand Report. In that report the Assessing Officer, inter alia, accepted that the
assessee had by and large established the explanation given by relevant details and
documentary evidence but the assessee could not furnish documentary evidence as respects
the shares of the value of RS. 1,47,01,000. The learned CIT(A) therefore sustained the
addition as made by the Assessing Officer to that extent.
44.
During the course of hearing before us the learned counsel submitted that the
assessee had in the proceedings of special audit as well as assessment proceedings pointed
out that the receipt of dividend had been recorded in the books of account of the assessee
and therefore there could not be any unexplained investment outside the books of account.
The assessee had identified the shares on which dividend was received and pointed out that
he had kept separate accounts of the purchases on own account as well as on account of the
clients and all shares were paid for from the assessee’s bank accounts. The Assessing
Officer, however, insisted upon the full documents of each and every purchase and for want
of some supporting record, for which no proper or adequate opportunity was given to the
assessee, he made addition of Rs. 45,34,19,215. There was neither any application of mind
on the part of the Assessing Officer not any judicious approach by him as a quasi-judicial
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authority. The learned CIT(A) also failed to take a practical and rational view of the matter.
During the course of proceedings before the learned CIT(A) the Assessing Officer
furnished a remand report and recorded that barring two buyers of shares of the
aggregate consideration of Rs. 1,47,01,000, the assessee had furnished the relevant
documents to prove that those shares did not belong to him. The learned counsel strongly
objected to assessment of unexplained investments in relation to the transaction that were
admittedly recorded in the books of account. From the remand report of the Assessing
Officer, which had been made a part of the appellate order, it transpired that reasonable
opportunity was not given to the assessee for submission of documentary evidence when
summons issue to the clients came back unserved. The assessee was not confronted with the
findings of the Assessing Officer. Merely because dividend on the shares was received by
the assessee, it could not be hypothetically assumed that the investments in the shares
were made by the assessee and that those investments were unexplained-whereas the books
of account showed that soon afterwards those shares were delivered to the client and all
such client had been identified. Without prejudice, the learned counsel submitted that
documentary evidence was available in respect of the transactions amounting to Rs.
1,47,01,000 and the assessee had moved separately an applications under Rule 29 in this
behalf. It was pointed out also that the name of the client was Anant gupta and not Anand
Gupta ass stated by the Assessing Officer. Summons sent to Anand Gupta might have come
back unserved as the name was wrongly written.
45.
The learned CIT(DR) argued that the Assessing Officer had exami9ned the issue at
length. The assessee could not establish its explanation as regards shares purchased to the
extent of RS. 1,47,01,000, the addition was sustained by the learned CIT(A).
46.
We have carefully considered the rival submissions. In our view on the facts and in
the circumstances of the case and the manner in which this issue has been framed we
accept the additional evidences furnished in this regard. In the light of the same the
disputed issue stands restored to the Assessing Officer with a view and also in the light of
the evidences the assessee may produce in this behalf.
47.
The seventh ground of appeal relates to upholding of the disallowance of expenses
on purchase of software to the tune of Rs. 3,24,508. The Assessing Officer treated the
expenditure as capital expenditure. The learned CIT(A) has held that the kind of software
purchased by the assessee, being a systems software, should be treated as capital
expenditure. The learned counsel for the assessee strongly urged that in this fact-charging
technology era expenditure on purchase of computer software could not be said to have
resulted in any enduring benefit. He relied upon the tribunal decisions in the case of
Business Information Processing Services v. ACIT 73 ITD 304 (Jaipur) and Vinod kothari
Consultants Ltd. v. DCIT 91 ITD 153 (Kol.)(TM). The learned CIT (DR), on the contrary,
relied upon the decision of ITAT Mumbai H Bench in ITA No. 2323/Mum?2002 and of ITAT
Delhi in the case of Maruti Udyog Ltd. v. DCIT 92 ITD 119 (Del.).
48.
On consideration of the arguments on both sides hold that the assessee should
succeed on this point. The entire expenditure is of Rs. 3,24,508 only. The total turnover of
the company in shares during the year under consideration is RS. 9218 crores. Having
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regarded to the scale of operations of the assessee company the expenditure is too low to
be regarded as resulting into any long term benefit. It is not the case of the revenue that
any part of this expenditure relates to any software custom made/installed for the
assessee on standalone basis. We therefore direct deletion of the disallowance.
49.
The eighth ground of appeal relates to the disallowance of Rs. 7,92,192 sustained by
the learned CIT(A). The disallowance has been made by the Assessing Officer out of the
expenses incurred by the assessee towards promotion of business. Out of the total claim of
Rs. 9,39,150, expenses involving payments in foreign currency to the tune of Rs. 6,45,235,
have been fully disallowed by the Assessing Officer on the ground of absence of full details.
Out of the balance amount of RS. 2,93,915, a sum equal to Rs. 50%, i.e. Rs. 1,46,957 has
been disallowed on estimate as having been incurred for non-business purposes. The learned
CIT(A) has enumerated certain items of expenses and held that the Assessing Officer was
fully justified in making the disallowance.
50.
The learned counsel argued that the learned CIT(A) had only identified certain
items of expenditure incurred in hotel bill and departmental stares and stated that the
addition was justified. He submitted that the assessee had furnished reasonable amount of
details to the Special Auditor as also the assessing officer. Reference in this regard was
invited to pages 562 to 628 of the paper book. Th4e lower authorities did not go into the
details of expenses to find out as to whether the expenses were incurred for the purposes
of business. Foreign tours by the directors and their wives were not necessarily personal as
assumed by the Assessing Officer and the learned CIT(A). Unless the purpose of the tour
was looked at, one could court pronouncements in the cases of the case of CIT v. India
Products Ltd. 207 ITR 647 (Cal.); CIT v. Sundaram Clayton Ltd. 240 ITR 271 (Mad.) and CIT
v. Aspinwall & Co. Ltd. (235 ITR 106, Ker.). In the assessee’s case an objective analysis of
the purpose of foreign tours had not been done, which was evident from both the
assessment order and the appellate order. The disallowance had been made in an adhoc
manner without appreciating the facts of the case. Entire disallowance was therefore liable
to be deleted. The learned counsel emphasized further that the provision of section 37(2A)
had been omitted with effect from 1.4.1998.
51.
The learned CIT (DR) supported the orders of the authorities below and relied upon
the judgments in the cases of L.H. Sugar Factory & oil Mills (P) Ltd. v. CIT 125 ITR 293
(SC); CIT v. T.S. Hajee Moosa & Co. 153 ITR 422 (Mad) and D.B. Madan v. CIT 261 ITR 193
(Mad).
52.
We find that the Assessing Officer has disallowed the entire expenditure in foreign
currency for want of details. During the course of assessment proceedings the assessee
furnished only the credit card statement and stated that the payments had been made
through account payee cheques and the expenditure was recorded in the books of account.
We see justification in the stand taken by the revenue that unless the purpose of
expenditure was substantiated the expenditure did not qualify to be deducted under
section 37(1). The assessee has not furnished any evidence that the foreign tours by the
directors and their family member had been undertaking for the business purpose of the
assessee. The disallowance of foreign currency expenses is therefore confirmed. As to the
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domestic currency expenses it is seen that the expenditure is by way of hotel & restaurant
bills or by way of purchase of luxury goods. The authorities below have allowed 50% of the
expenditure as business expenditure. The disallowance has been made because here also the
objective of the expenditure is not substantiated with any further evidence or information.
On consideration we do not see any reasons to interfere in the order of the learned CIT(A)
in this behalf. Hence this ground of appeal is rejected.
53.
The ninth ground of appeal relates to the assessment of Rs. 2,67,73,684 made by
the Assessing Officer under the provisions of section 45(2). The assessee had disclosed
investments in equity shares at Rs. 1332.48 lakhs in the audited balance-sheet as on
31.03.2000. On 02.04.2000 these investments were converted into stock-in-trade by
passing a journal entry in the books of account. The market value of the shares on the date
of conversion was Rs. 1064.74 lakhs. The market value was based on the valuation as on
31.03.2000, as 01.04.2000 was Saturday and 02.04.2000 was Sunday. The Assessing
Officer treated the difference between the cost of investments (Rs. 1332.48 lakhs) and
the market value (Rs. 1064.74 lakhs) as capital loss as against the appellant’s claim as
business loss, and did not allow the benefit of set off of the loss against business income of
the appellant. The learned CIT (A) agreed with the Assessing Officer and upheld the
treatment given by the Assessing Officer.
54.
During the course of hearing before us the learned counsel referred to the
judgment of Hon’ble Supreme Court in the case of Investments Ltd. v. CIT 77 ITR 533 and
argued that on from conclusion could be drawn from the description in the balance-sheet as
investment or stock-in-trade. To the same effect was the judgment of Hon’ble Supreme
Court in the case of Dalhousie Investment trust Company v. CIT 68 ITR 486. How the
assessee dealt with the asset was material and now he described it in the books of account.
Based on this reasoning the learned counsel argued that investments appearing in the
balance-sheet were actually stock-in-trade. In order to rectify the apparent mistake of
showing the stock-in-trade as investments, the appellant converted these investments as
stock, and did trading on that converted stock. The loss arose as a sequel to the conversion.
There was no reason for showing this loss as capital loss, as sec. 45(2) did not permit this.
The section dealt with only ‘profits or gains arising from the transfer by way of conversion’
and not ‘losses’ arising from such transfer. The loss could, therefore, only be shown as
business loss.
55.
The learned CIT(DR) referred to the provisions of section 45(2) and argued that
the legal fiction created by those provisions had to be given effect to. He relied upon the
tribunal decision reported in 287 ITR (AT) 017 (Del).
56.
We have carefully considered the rival submissions. The treatment given by the
Assessing Officer is in accordance with the statutory provisions of section 45(2). We do
not see force in the argument that these provisions come into play only when there is profit
or gain and not when there is loss. For that matter even the provision of section 45(1) speak
of “profits or gains arising the transfer of a capital asset” only but in computation of income
chargeable to tax the capital loss also has to be given effect to. The expression “Profit” in
the sense includes negative profit. The stand taken by the revenue has its statutory
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foundation in the provisions of section 71(3) of the Act. As to the contention of the
assessee that there was merely a rectification of mistake no such case has been set up with
relevant evidence, Moreover, the provisions of section 45(2) do not draw any distinction
depending upon an assessee’s reasons for conversion of a capital asset into or treatment as
stock-in-trade. We hold that in the impugned order the learned CIT(A) has rightly upheld
the assessment order in this behalf. Accordingly we reject this ground of appeal.
57.
grounds of appeal No. 10, 11, 12 and 13 are directed against various
disallowance/addition made by the Assessing Officer in Para 9.12 from pages 39 to 56 of
the assessment order. These grounds of appeal are interrelated and have certain common
facts. These were argued together by the learned counsel for the assessee and the learned
CIT(DR).For convenience we are considering the same together. During the year under
consideration the assessee entered into various transactions in shares through three
Kolkata-based brokers, M/s Dinesh Kumar Singhania & Co., M/s Doe Jones Investments &
Consultants Pvt. Ltd., and M/s Arihant Exim Scrips Pvt. Ltd. According to the Assessing
Officer those transactions were not genuine and he has therefore made various
disallowance/additions. By ground no.10, the assessee has challenged the disallowance of
Rs. 7,20,93,640 made by the Assessing Officer of the loss claimed in respect of deliverybased transactions. The Assessing Officer made the disallowance because the there kolkata
brokers through whom the assessee had made the transactions did not report the
transactions to the Calcutta Stock Exchange.
Ground of Appeal No. 11 and 12 pertain to the assessee’s claim of deduction of
speculation loss of Rs. 15,67,29,843 and loss no non-delivery based transactions of Rs.
6,19,10,450 disallowed by the Assessing Officer on the similar basis. Furthermore, the
assessee had claimed business loss of RS. 26,44,07,332 on the ground that the there
Kolkata based brokers (supra) had defaulted in making payments, on account, to the
assessee to that extent. That claim too has been disallowed by the Assessing Officer on
similar reasoning and is disputed by the assessee by ground of appeal No. 13 For making
these disallowances the Assessing Officer has drawn from the report of the Special
Auditor made u/s 142(2A). In the audit report it was stated that the assessee company did
not produce any bills or contract notes from any of the there brokers in support of its claim
of purchase and sale of shares. Though, the assessee produced five documents in the from
of “Delivery Bill” Those documents had various lacunae like the serial no., trade no,. the time
of the execution of the transactions etc. was not mentioned. In the Additional Report made
subsequently
the
Special
Auditor
acknowledgment
that
11
memos
of
confirmations/contract-note issue by the there brokers in From B were furnished by the
assessee. The Audit report stated also delivered the shares. The Assessing Officer made
enquiries with Calcutta Stock Exchange to find out the status of the transactions- it only
stated that as no trade no. was furnished by the there brokers it was not possible to
conform whether the said trades were done through the trading system of the Exchange or
not. CSE, however, stated that it was necessary to furnish details of off market trades to
the Exchange, but the there brokers had not submitted details of any off market trades
made with the aseessee. CSE confirmed that it was mandatory from 30 th October 2000 to
put client code in the system at the time of placing orders but there was no record of nay
client code pertaining to the assessee in the Exchange The Exchange also reported that the
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there brokers were declared defaulters on 26.03.2001 and expelled from membership of
the Exchange with effect from 25.09.2001. The Assessing Officer confronted the assessee
with the results of the enquiry mad with Calcutta Stock Exchange. It was stated by the
assessee that the transactions were effected off market, and in view of contract notes in
From B prescribed by SEBI received from the brokers the assessee had considered the
traders as goods as on market trades. The assessee furnished the copies of contract notes
and demat-slips to the Assessing Officer. A certified true copy of the bank statement of
Dinesh Singhania & Co. Evidencing receipt of Rs. 20,03,68,022 was also produced. The
assessee pointed out to the Assessing Officer that due to a big declared defaulters for
non-payment of the commitments. Pursuant to the investigation, SEBI filed prosecuting
against the there broking firms. The said brokers of CSE were also debarred by SEBI from
associating with securities market activities and dealing with securities market till the
completion of investigation u/s 11 and 11B of SEBI Act. The assessee clarified that the loss
was incurred due to purchase and sale of securities in the normal course of the business,
and that all the transactions were recorded in its books of account. The assessee contended
that the shares were delivered to the constituents and payments were received expect
those outstanding as on 31.03. 2001 and argued that under such circumstances there could
not be any doubt the genuineness of the trades. The Assessing Officer found that from the
various transactions of the assessee with the there Kokata brokers the following position
emerged:
(i) Business loss of Rs. 6,54,75,600 on account of delivery based transactions
(ii) Speculation income of Rs. 36,71,67,890
(iii) Speculation income of Rs. 13,98,80,283
(iv) Business loss on account of non recovery of outstanding amount of Rs.
26,44,07,332 as respects the transactions (i) (ii) and (iii) above.
As respect the Delivery based transactions as at (i) above the Assessing Officer did not
accept the assessee’s clarifications and disallowed the loss of RS. 7,20,93,640 as not being
genuine. He, however, traded the profit of Rs. 66,18,640 arising out of transaction in shares
of Larsen & Tourbo Ltd. as income from other sources. As regards the transactions at (iii)
above the Assesssing Officer disallowed the loss of Rs. 15,67,29,843 but assessed the
profit of Rs. 1,68,49,560 as income from other sources. Further the Assessing Officer
assessed as income from other sources speculation profit of Rs. 42,90,78,343 as not
genuine/not prove. The Assessing Officer further held that the loss had not crystallized
during the relevant financial year. He pointed out that the appellant had received a sum of
Rs. 1 crore subsequently from the there brokers, which indicated that the business loss
claimed by the assessee was premature and not crystallized during the financial year 200001 as claimed by the Exchange it was established that the trades in question had not taken
place at the floor of the Exchange nor had the there brokers informed the details of any of
market trades made with the assessee. The there brokers, when examined, merely stated
that as per the usual practice the transactions with the assessee had to be reported to the
CSE but they were readily unable to furnish any documentary evidence in that contention.
The Assessing Officer held that whereas the assesee’s claim of loss could not be allowed,
profits from trades as shown by the assessee were assessable under the head “Income
from other sources” being unexplained credits.
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58. The learned CIT (A) held that the undisputed facts of the case were that the
transactions on which loss was claimed were never executed on the floor of exchange and
were thus against the rules and regulations framed by SEBI, a statutory regulatory body.
Under the circumstances there was no doubt that the transactions did not have any lawful
foundation nor carried out in normal business methodology. As to the loss of Rs.
26,44,07,332 claimed on account of non-recovery the learned CIT(A) held that the loss had
not actually crystallized as was evident from the fact that a sum of Rs. 1 crore had been
received by the assessee subsequently.
59. The learned counsel for the assessee contended that the orders of the authorities
below in this behalf are devoid of all merits. The Assessing Officer had acted on irrelevant
and non-existing material and had ignored obvious material since that went entirely in
favour of the assessee. He purported to act upon the report of the Special Auditor u/s
142(2A) and the information supplied by Calcutta Stock Exchange but he stated what they
did not state and did not state what obviously stated. Lakhani & Co., The special auditors
appointed under section 142(2A) made their report on 6 th August 2004 (pages 340 to 404
of the paper book). In Para 11 of Annexure-I of that report (pages 355-357 of the paper
book) the special auditor has discussed the assessee’s transaction with the three Kolkata
brokers. The special auditor says that the appellant did not produce any bills or contract
notes from the three brokers but produced five documents titled “Delivery Bill” that did
not contain serial number, the time (not date) of execution of the transactions, separate
brokerage amount, type of transaction (purchase or sale). At the same time the Report
acknowledgment that the complete break-up of the transactions as per books of account
had been given and most significantly, “The company has received in the demat account the
shares and also delivered the shares.” (Page 356 of the paper book) The special auditor
nowhere stated that the transactions are not genuine. In this report the market only two
kinds of observations viz. A) In the absence of bills or contract notes he is not in a position
to comment whether the transactions are in compliance of the provisions of the Securities
Contract (Regulation) Act, 1956 and B) In the absence of the supporting proof in the from
of contract notes, proof prevailing market price on the date transactions, time of execution
of the transactions, proof of having executed the transactions through the Stock Exchange
or proof of having executed the transactions off market he is not in a position to comment
about the genuineness of the speculation loss incurred. In other words, the special auditor
admitted that he found not an iota of material to suggest that the transactions were not
genuine. He only abstained from certifying the proof/loss as shown by the assessee as
genuine because the contract notes were not given. Lakhani & Co. the special auditor
supplemented their report dated 6th August 2004 by additional report dated 26 th August
2004 (page 329 of the paper book). In this report he acknowledged that the assessee
forwarded 11 contract notes in From B prescribed whenever there was a transaction
between two brokers’ constituents, in support of the transactions in question. He, however,
pointed out that there were columns for ‘Order No.’, Trade No.’ and ‘Trade Time’ but no
information as regards those items had been given. The additional report acknowledged that
the assessee had furnished Demat Slips, Demat statements and Clearing house statements
of the brokers. However, the Special auditor observed that those documents only
confirmed the delivery of the shares and to and from whose account it had been
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transferred but they did not conclusively prove that the transactions of sales were
effected on the floor of the exchange or were market trades. Significantly, the Special
Auditor certified after referring to the questions of The Calcutta stock Exchange
Association that the price at which the transactions of purchase and sales had been
disclosed were within the price hand of the market price of the respective days. (page 331
of the paper-book).
60.
The learned counsel for the assessee further pointed out that the Calcutta Stock
Exchange (CSE) in their letter dated September 22, 2004, reproduced in the assessment
order; did not a any place refute the correctness or genuineness of the transactions in
question. They only observed:
“It is not possible for the Exchange to confirm whether the trades done by the said
persons were through the trading system of the Exchange or not unless the trade
numbers are furnished in the contract notes.”
Calcutta Stock Exchange further clarified:
“It is not possible to state that the documents as submitted by our assessee are
genuine or not as these documents do not contain trade numbers. The assessee is
supposed to furnish Contract Note with trade no., trade time, delivery statement,
difference bills etc. We are enclosing herewith one specimen copy of Form B of
contract note for tour ready reference.”
Thus the learned counsel argued that there was no adverse finding in the letter of CSE. The
letter, of course pointed out certain deficiencies in the documents but CSE did not
pronounce the transaction to be not genuine or even illegal. On comparison of the Special
Audit Report and the response from Calcutta Stock Exchange with the findings of the
Assessing Officer it was apparent that the Assessing Officer had added his own
imagination when he stated that the CSE has confirmed that these transactions had not
taken place on the floor of the Exchange Furthermore, he allowed his flight of fancy to
overtake the contract of the aforesaid documents when he concluded:
“It therefore follows that these transactions are shown i[only in order to generate
loss or profit and are nit genuine shares transactions a since even the concerned
brokers in this regard have confirmed that these transactions should have reported
to the CSE but have indirectly admitted that the same have not been informed to
the CSE The relevant reply of the brokers is reproduced here:
….7, Sir, as usual practice the above transaction should be reported to the CSE.
However, readily we can not furnish any documentary evidence in this connection.”
The correct position in this respect was that CSE stated that it was not possible to confirm
that the trades were done through the trading system of the Exchange and the brokers
stated that they could not readily furnish the details. Rest was entirely the assessing
officer flight of fancy. The Assessing Officer had in his zeal to make funciful additions to
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the declared income not seen the material that was stating him in face. All the transactions
were duty recorded in the books of account (the special auditor had conformed that in his
original report). The appellant and received all the shares purchased in the Demat account
and likewise and delivered the shares sold from Demat account (the special auditor and
confirmed that too in his original report). The shares were purchased or sold at the
prevalent market price on the date of trade (the special auditor took pains to verify and he
accepted the price shown, in the Additional report). At the request of the Assessing
Officer CSE supplied the quotations of the material period to the Assessing Officer and he
had kept mum in regard thereof, obviously because he found the price shown by the
appellant supported by the furnished by CSE. All the payments received or made were
routed through the regular bank accounts of the assessee. The assessee furnished five
Delivery Bills and latter eleven contract Notes duly signed and confirmed by Kolkata
brokers. Last but not the least, none of the alleged irregularities could be attributed to the
assessee because if at all, the same were the obligation of the there brokers who were the
numbers of CSE and the assessee.
61. The learned counsel for the assessee argued that it was the time-honored precept of
Evidence that the apparent sate is true until contrary is prove and the burden to prove the
contrary rates upon one who asserts the contrary. In this context Rewatmull 87 ITR 249
(S.C.). In the present case the assessee had fully discharged the initial burden placed on hi
to furnish supporting evidence as respects the transactions claimed to have been carried
out by him. The assessee had furnished all the evidence reasonably expected to be in his
possession. As against the evidence placed by the assessee the Assessing Officer had
noting more than conjectures, surmises and suspicion. Disallowance had been made without
examining the evidence like, contract notes, payments made against purchase and received
against sale of shares delivery instructions, respective credit and debit in the demat
statements, relevant entries appearing in the bank statement of the assessee and in the
bank statement of kolkata brokers, which were all produce before the Assessing Officer. In
the assessment order and the appellant order no evidence or material against the assessee
had been relied upon. As already pointed out neither the special audit report nor CSE
communication recorded that the transactions of the assessee were not genuine. The only
circumstance relied upon by the revenue was that certain columns in the Contract Notes had
been left blank and that the there Kolkata brokers did not furnish Form B to CSE that they
were supposed to do. None of those irregularities were committed by the assessee. At the
assessment stage, it was submitted that the assessee was under bona fide belief that the
transactions had been reported to the Calcutta Stock Exchange as the constituents. The
assessee was not supposed to further chase the documentation and see with his own eyes
that the copies of form B were duly lodged with the Exchange. As to the omissions to fill
certain columns the learned counsel submitted that those columns were the obligation of
the brokers and not of the asseessee. Contract notes prepared were sufficient to serve the
requirements of the assessee as the date of transaction, number of shares, the rate per
share and the price for which bought or sold were all recorded therein. If there were any
further omissions or non observance of any of the regulatory provisions of the
Exchange/SEBI it was the broker who was answerable for those omissions and liable tom
come to grief, not the assessee company. The learned counsel argued that in business
transactions there was limited scope for any party to the transaction as respects the
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documents to be prepared by the other party. In the assessment order the Assessing
Officer had drawn for too heavily from those omissions by observing that the assessee
himself being a leading player could not be oblivious of the requirements laid down by the
stock exchange. The learned counsel argued that the Form B/Contract Notes were the baby
of the member brokers of CSE. Such compliance was called for from the assessee company.
The learned counsel referred to the decision of ITAT Mumbai F Bench in the case of
Mukesh R. Marolia v. Addl CIT (2006) 6 SOT 207 (Mumbai) and pointed out that in that
decision the Tribunal has held that the transactions outside the floor of the stock
exchange are not illegal. However unbelievable it might be, if the transactions an assessee
are well accounted for, documented and supported it would be very difficult to brush aside
the contentions of an assessee that he had purchased and sold certain shares.
62.
The learned counsel argued that there was inherent contradiction and injustice in
the assessment order. The Assessing Officer considered for certain reasons, of whatever
worth, the transactions of the assessee with the three Kolkata brokers to be paper
transactions only. True to this finding the Assessing Officer was required to reject all
trades to the assessee with those brokers but against all logic, all common-sense he did so
selectively. While he rejected the loss making trades and disallows the loss, he had no
qualms in charging to tax the substantial profit disclosed by the assessee from the other
transactions. To achieve this self-contradiction he gave spacious argument that profits
were assessable as unexplained credits. The asseessee had shown profit from these
transactions at approx. Rs. 45.26 crores and losses at aprrox Rs. 29.08 crores and non
recovery of dues of Rs. 26.44 crores. Surely the assessee must be completely out of his
sense to introduce bogus of Rs. 45.26 crores only to be offset much larger bogus debits of
Rs. 55.52 Crores. Thus, the entire approach of the Assessing Officer defied all logic and
was mind-boggling.
63.
The learned counsel for the assesee pointed out that both the Assessing Officer
and CIT(A) have disallowed the business loss on account of non-recovery of Rs. 26.44 crores
on the ground that the loss was not actually incurred, the transactions with Kolkata brokers
were on paper only and in any case the same were in violation of SEBI prescriptions. Various
arguments of the learned counsel as respects the genuineness of the trades/transactions
applied to the loss claimed by the assessee in account of non-recovery of dues also. The
learned counsel emphasized that the loss was reflected in the books of account duly
supported by cogent documents, confirmations and evidences. Money for the transactions
had gone out from the bank account of the assessee company. Shares sold had gone out
from the Demat accounts of the assessee. There was nothing to indicate that any of those
money and shares returned to the assessee in some from or the other. The loss claimed by
the assessee could not therefore be disallowed on some hypothetical objections like tome of
transaction not recorded or client code not mentioned or trade no. not mentioned. The
defects in that respect were all attributable to the documentation done by the third
parties and not the assessee who was not at fault at all. Even if he were the loss could not
be disallowed for such procedural reasons. Secondly, according to the revenue, the
appellant’s claim of loss was premature. Because there was subsequently recovery of approx.
Rs. 1 crore from Kolkata brokers the revenue contended that all hopes of recovery were not
lost and there was possibility of amounts being recovered. The learned counsel submitted
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that after constant efforts only a sum of Rs. 1 crore could be recovered over a period of
there and half years. That showed that there was slim chance of any further recovery.
Hence the circumstance relied upon by revenue should be held as establishing the assessee’s
case. The assessee doggedly pursued the issue of recovery and left no stone unturned-a
criminal complaint was filed; police investigation was involved; cheques dishonoured; and a
criminal suit was filed. All that is a matter of record.
64.
The learned counsel referred to the observations of the Mumbai Bench of the
Tribunal in the case of JCIT v. Shreyas S. Morakhia (ITA No. 2647/Mum/1999) that loss
suffered on account of defaulted stock brokers should be considered as business loss
though the recovery proceedings initiated by the exchange against the said defaulter
brokers had not been completed. He then referred to the Hon’ble Gujarat High Court
judgment in the case of Hindusthan Trading Corporation v. CIT 160 ITR 15 (Guj) and
pointed out that Hon’ble high court had held that the ale price due to the assesee from
purchasers would become a debt due to the assessee at the end of the year of account but
such debt would not become capital asset. Such debt would be a current or business asset
as distinguished from fixed asset. Debt due from a purchaser representing unpaid sale price
had the same character as stock-in-trade. Both were current or business assets. Loss of
stock-in-trade would be revenue loss. Similarly, if unpaid purchase price or debt due from a
purchaser was not recoverable, it would be revenue loss. The learned counsel pointed out
that similar views have been expressed by the Hon’ble Bombay High court in the case of
Pohoomal Bros. v. CIT 34 ITR 64 when their lordships observe, “any loss caused to the
stock-in-trade must in its very nature be a loss incidental to the trade: the cause of the
loss irrelevant.”
65.
During the course of hearing before us the learned CIT(DR) strongly reiterated the
various contentions of the Assessing Officer and CIT(A). He sought to derive support from
the judgments of Hon’ble Supreme Court in the case of Maddi Venkataraman & Co. (P) Ltd. v.
CIT 229 ITR 534 (SC) and Bombay Stock Exchange vs. Jaya I. Shah & Anr. 185 CTR 36
(SC). He also relied upon the decision of ITAT Delhi in the case of ACIT v. Subhash Chand
Shorewala 91 TTJ 57 (Del).
66.
We have carefully considered the rival submissions. The disallowances/additions
made by the Assessing Officer in relation to the transactions with the three Kolkata
brokers fall in two board categories viz. the disallowance of losses in the transactions and
the disallowance of the business loss claimed on account of non-recovery if debts. As to the
first category it is incorrect to say that the Assessing Officer has made disallowance of
the losses claimed by the assessee. According to the Assessing Officer the assessee
declared profit at approx. Rs. 45.26 Crores and losses at approx. Rs. 29.08 Crores and thus
the assessee has shown the profit of Rs. 16.18 Crores in its transactions with the kolkata
brokers. Because the assessee has claimed non-recovery of due from these brokers to the
extent of Rs. 26.44 Crores in can be said that overall there is loss of Rs. 10.26 Crores. The
Assessing Officer has however based transactions, non delivery based transactions,
speculation and segregated the transaction resulting into profit from the transactions
resulting into loss in each grouping and this manner he has worked out disallowance of
aggregate loss of Rs. 29.08 Crores. In effect, the Assessing Officer has assessed
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aggregate profit of Rs. 45.26 Crores in the assessee’s transactions with the three kolkata
brokers by accepting the transactions resulting into profits while rejected the transactions
resulting into loss by the Assessing Officer, for whatever they are worth, apply in equal
measure to the profit transactions as well as loss transactions and therefore the addition
could not exceed the sum of Rs. 10.26 Crores being the reduction in the assessee’s income
on account of transactions with the kolkata brokers. Realizing this self-contradiction the
Assessing Officer has purchased to assess the sum of Rs. 45.26 Crores as unexplained
credits. That is, obviously, a lame excuse because the assessee dies not appear to have
introduced any unexplained income in the garb of unexplained cash credits in the name of
the three Kolkata brokers and the learned counsel for the assesee has clearly stated that
more money went out of the coffers of the assessee than received from the three Kolkata
brokers. Thus there is no merit in the basis given by the authorities below for taking selfcontradictory views of the assessee’s transactions with the same three parties. It may be
stated here that the provisions of section 68 apply only to the cash credits and they do not
apply to other credits appearing in the accounts of an assessee. for that reason also the
amounts cannot be assessed as unexplained credits. Hence there is no rationale at all looking
askance at credit entries while ignoring the debit entries in one and the same account, more
so when the debit entries outnumber the credit entries and result into net deficit of Rs.
26.44 Crores and the Assessing Officer himself finds all transactions being paper
transactions only. We therefore hold that if the not genuine was to be accepted, then
looked at any which way no addition exceeding the sum of Rs. 10.26 Crores could be made
and that only as the part disallowance of the assessee’s claim of deduction on account of
business loss of Rs. 26.44 Crores.
67.
Subject to the remarks in the foregoing paragraph we proceeds examine the reason
given by the Assessing Officer for treating the transactions as non-genuine. First reason
given by the Assessing Officer is that the special auditor had made adverse comments with
regard to these transactions in his main report as well as the subsequent additional report.
Secondly, as confirmed by the CSE, these transactions had not taken place on the floor of
the Exchange nor had these transactions been reported to the Exchange by the brokers as
per the relevant rules and regulations since they were off market transactions. Further if
these transactions were spot transactions, the brokers were required to report all such
transactions on the same day to the concerned stock Exchange as per SEBI instruction. The
settlement of spot transactions had to take place within 48 hour and that was not done.
According to the Assessing Officer as these transactions were neither spot transaction nor
contracted on the floor of the Exchange nor reported to the Exchange on the same day, it
followed that these transactions were shown only in order generate loss or profit and were
not genuine shares transactions since even the concerned brokers had conformed that
there transactions should have been reported to the CSE but had indirectly admitted that
the same had not been informed to the CSE.
68.
The Assessing Officer has thus relied upon the enquiries made from three sources.
We find that none of the three sources support the findings and conclusions of the
Assessing Officer. As to the reports of the Special Auditor under section 142(2A) Lakhani
& Co., the special auditors appointed under section 142(2A) made their report on 6 th August
2004 (pages 340 to 404 of the paper-book) the Para 11 of Annexure-1 of that report (pages
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355-357 of the paper-book) the special auditor has discussed the assessee’s transactions
with the three Kolkata brokers. The special auditor takes exception to the assessee b not
furnishing the bills or contract notes from the three brokers but acknowledges five
documents titled “Delivery Bill”. These delivery bills too were not found satisfactory as they
did not brokerage amount, type of transaction (purchase or sale). At the same time the
Report acknowledges that the complete break-up of the transactions as per books of
account had been given and, “The company has received in the demat account the shares and
also delivered the shares.” (Page 356 of the paper-book) The special auditor nowhere stated
that the transactions are not genuine. In this report the Special Auditor makes only the
observations I) In the absence of bill or contract notes it can not be commented whether
the transactions ate in compliance of the provisions of the Securities Contract (Regulation)
Act, 1956 and 2) In the absence of the supporting proof in the from of contract notes,
proof of prevailing market price on the date of transactions, time of execution of the
transitions, proof of having executed the transactions through the Stock Exchange or proof
of having executed the transactions off market it is not possible to comment about the
genuineness of the speculation loss incurred. These observations of the Special Auditor are
a far cry from the conclusions of the Assessing Officer, “these transactions were shown
only in order to generate loss or profit and were not genuine shares transactions”. The
Special Auditor dies not say that the transactions are not genuine; he only says that as far
as speculation transactions are concerned the genuineness of the loss (not transactions)
could not be certified for want of voluminous date required for such certification.
Whatever sting is there in this original report much of it has been taken away in the
additional report of the special Auditor dated 26 th August 2004 (page 329 of the
paper0book). In this report he acknowledges that the assessee forwarded 1 contract notes
in form B prescribed whenever there was a transaction. He, however, pointed out that there
were columns for “Order No.”, trade No.’, and Trade Time’ but those columns had been left
blank. The additional report acknowledges that the assessee had furnished Demat Slips,
Demat statements and Clearing house statements of the brokers, However, the Special
auditor observes that those documents only confirmed the delivery of the shares and to and
from whose account it had been transferred but they did not conclusively prove that the
transactions of sales were effected on the floor of the exchange or were market trades.
Significantly, the Special Auditor certified after referring to the questions of the Calcutta
stock Exchange Association That the price at which the transactions of purchase and sales
had been disclosed were within the band of the market price respective days. (Page 331 of
the paper-book). Once the Special Auditor acknowledges that contract notes were
furnished; the shares were received in and delivered from demat account; further
supported by Demat Slips, Demat statements and Clearing house statements of the brokers
and the Special Auditor certifies after referring to the quotations of the Calcutta stock
Exchange Association that the price at which the transactions of the respective days much
of the doubt raised in the first report as respects the genuineness of speculation loss (not
transaction) goes away. As far as the assessee’s transactions with the three the
documentation did not conclusively prove that the transactions of sales were effected on
the floor of the exchange or were market trades.
69.
As to the reply received from Calcutta Stock Exchange, they only state that in the
absence of the trade numbers in the contract notes “it was not possible for the Exchange
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to confirm whether the trades done by the said person were through the trading system of
the Exchange or not”. They do state that the prescribed format (Form B) required that
Contract Note was furnished with trade no. trade time, delivery statement, difference bills
etc. These observations of CSE also are a far cry from the conclusions of the Assessing
Officer, “these transactions were shown only in order to generate loss or profit and were
not genuine share transactions”. CSE does not say that the transactions are not genuine,
they only say that it was not possible to conform whether the trades done by the three
Kolkata brokers were through the trading system of the Exchange or not.
70.
As to the enquiries made with the Kolkata brokers they all confirmed having carrier
out the transactions with the assessee. It is not the case of the Assessing Officer that the
transactions were founds not recovered or recorded differently in the books of the
brokers. As to the formalities they were required to observed at CSE the relevant part of
the statement as quoted by the Assessing Officer is, “Sir, as usual practice the above
transaction should be reported to the CSE. However, readily we can not furnish any
documentary evidence in this connection.” This statement lends no support to the
hypothesis of the Assessing Officer that the transactions were intended to generate paper
loss.
71.
As to the judgments cited by the learned CIT (DR), in the case of Maddi
Venkataraman & Co. (P) Ltd. (supra) that assessee admittedly contravened the provisions of
FERA. The defense of that assessee was that contravention was necessary to avert
business losses. The Hon’ble Supreme Court pronounced that spur of loss could not be a
justification for contravention of law. In that context the Apex Court further observed
that an assessee was expected to carry on business in accordance with law. The facts of
that case and the ratio of that judgment are not applicable to the case of the present
assessee. No infraction of law on the part of the assessee has been proved. There is no
material on record that CSE or SEBI or any other appropriate regulatory body ever
proceeded against the assessee as respects its transactions in question. It cannot be said
that the assessee was guilty of any criminal act. The second judgment relied upon by the
learned Departmental Representative in the case of Bombay Stock Exchange v. Jaya I. Shah
& Another (supra) deals with as to how the assets of a defaulting Member other than card
money and card money should be applied amongst the claim of various persons. With due
respect, we find the factual matrix of that case far too removed from that of the case
before us. Lastly the learned CIT (DR) has relied upon the tribunal decision in the case of
ACIT Vs. Subhash Chand Shorewala (supra). That case relates to the find paid by that
assessee, admittedly, as a result of this failure to adhere to the stock exchange
regulations. The tribunal held that such find paid for infraction of law was not allowable
expenditure. Not to speak of any fine or penalty imposed, there is no material that any show
cause notice was issued to the assessee for having entered into the transactions in question.
Hence, we find this tribunal decision also as of no assistance to the case of revenue before
us.
72.
As the matter stands we find that the assessee’s transactions are supported by the
movement of shares as reflected in Demat account, movement of money as reflected in the
bank account, entries in the books of account of the assessee, prevalent market quotations
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of CSE, Contract Notes and Delivery bills issues by Kolkata brokers and their statements in
response to the enquiries made by the Assessing officer. Last but not the least the
assessee has shown net profit of R. 16.18 Crores. As against these the case of revenue is
that certain material information was not given in the Contract notes and columns in that
respect were left blank. Copy of Form B was not filed in CSE. For these reasons it is not
verifiable as to whether the trades in question were done through the trading system of
the Exchange or not. The answer of the assessee to these deficiencies and irregularities is
that he could not be responsible for the same. It was not the assessee but the three
Kolkata brokers who were the member of CSE. It was the obligation of Kolkata parties to
comply with the prescriptions of Calcutta stock exchange. Be that as it may, we are of the
considered opinion that the conclusions of the Assessing Officer that” these transactions
were shown only in order to generate loss or profit and were not genuine shares
transactions” could not be reached for reason only of deficiencies and irregularities in the
documentation at the end of Kolkata brokers. The Assessing Officer does not have support
from the Special Auditors, CSE or any other quarter to that effect whereas the assessee
has relied upon cogent evidence and material. We hold that the Assessing Officer has acted
upon grossly inadequate material and his conclusions are in the realm of suspicion,
conjecture and surmise. Accordingly we direct that the profit/loss from the assessee’s
transactions with the three Kolkata brokers be assessed as shown in the books of account
of the assessee.
73.
As a corollary of the finding that the assessee’s transactions with the three Kolkata
brokers were paper transactions only and not genuine transactions the Assessing Officer
has disallowed the business loss of Rs. 26.44 Crores, claimed as deduction by the assessee,
on the ground that the loss not actually incurred. He has further held that in any case the
transactions being in violation of SEBI prescriptions the business loss was not allowable
deduction. Various arguments contained in the foregoing paragraphs, in so far as they relate
to the genuineness of the trades/transactions in question, made by the parties before us
apply to the loss disallowed as not genuine also. It is pertinent to note here that the loss is
reflected in the books of account Money for the transactions have gone out from the bank
accounts. Shares sold have gone out from the Demat accounts of the assessee. There is
nothing to indicate that any of those money and shares returned to the assessee in some
from or the other. We see force in the argument of the learned counsel for the assessee
that the loss can not therefore be disallowed on such objections like time of transaction not
recorded or client code not mentioned or trade no. not mentioned. The defects in this
respect are in the documentation done by the third parties and not the assessee. It
important to emphasize here that the disallowance on the ground of infraction of law can be
made only if there is serious breach or defiance of law or contumacious conduct. The
technical or venial default would not justify the harsh action of disallowance of an
expenditure actually incurred. Reference in this regard may be made to the landmark
judgment of Hon’ble Supreme Court in the case of Hindustan Steel Ltd. Vs. State of Orissa
83 ITR 26 SC) and the judgment of the jurisdictional high court in the case of CIT Vs.
Chemicals & Fibres of India Ltd. 142 ITR 413 (Bom). It should be kept in mind that here we
are on the question of non-recovery of dues and not any expenditure incurred by the
assessee for or in consequence of infraction of any law. Having regard to our decision as
regards the genuineness of the transactions in the foregoing paragraphs we hold that the
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denial of deduction of loss on the ground of non-genuineness or loss is untenable. In the
absence of any material to implicate the assessee in any serious breach or contravention of
law and in view of the fact that there is no material to show that the pertinent authorities
ever took exception to the assessee’s role in the transactions in question we further hold
that the disallowance of loss on the ground of infraction of law also is not tenable. It is not
as if the regulatory authorities did not come to know about these transactions. CSE was
informed of the transactions by the Assessing Officer. The three Kolkata brokers were
declared defaulters by CSE. In the absence of any adverse verdict against the assessee
from the relevant authorities we are no wind in the sail of the revenue that the loss is not
allowable on account of infraction of law.
74.
Lastly, according to the revenue, the assessee’s claim of loss was premature.
Because there was subsequently recovery of approx Rs. 1 crore from Kolkata brokers the
revenue contends that all hopes of recovery were not loss and there was possibility of
amount being recovered. The learned counsel for the assessee submitted that after
constant efforts only a sum of Rs. 1 crore could be recovered over a period of three and
half years. That showed that there was slim chance of any further recovery. Hence the
circumstance relied upon by revenue should be held as establishing the assessee’s case. The
learned counsel emphatically submitted that the assessee doggedly pursued the issue of
recovery and left no stone unturned. A criminal complaint was filed. Police investigation was
involved. Cheques dishonored. A criminal suit was filed. All that is a matter of record. We
see considerable force in these contentions of the assessee. We have discussed various
considerations and legal issues involved in relation to an assessee’s claim of deduction of a
business loss arising on account of non recovery of debts at some length while dealing with
the third ground of appeal taken by the assessee. For brevity, the same are not repeated
here. Let it suffice that for the same reasons we do not agree with the contention of the
revenue that all hopes of recovery were not lost. The assessee has submitted that soon
after the transactions he three Kolkata brokers were declared defaulters by CSE and they
ceased to operate as stock-brokers. In our view on these facts it can not be said that the
debt was not recoverable and the amounts had become a business loss incurred by the
assessee. Thus we find that the parameters laid down by the judgment of the jurisdictional
high court in the case of Jethabhai Hirji And Jethabhai Ramdas V. CIT 120 ITR 792 are
satisfied as regards the loss of Rs. 26.44 Crores claimed by the assessee being dues against
the three Kolkata brokers no longer recoverable. We therefore direct deduction of the sum
of Rs. 26.44 Crores as business loss incurred by the assessee during the year.
75.
The 14th and 15th grounds appeals of relate to the disallowance of Rs. 2,07,731 and
Rs. 5,93,239 made by the Assessing Officer under the head ‘General Expenses’ and ‘Prior
Period Expenses’ respectively. During the course of hearing before us the learned Counsel
for the assessee argued that the expenses were incurred in the normal course of the
business carried on by the assessee. The sum of Rs. 2,07,731 was arrived at after totaling a
large number of very small amounts. Having regard to the total turnover of Rs. 9218 crores
the special auditor has been uncharitable enough in taking exception to absence of
supporting documents as respects the petty expenditure of such small amounts. The learned
counsel argued that the special auditor had not appreciated “the materiality concept of
Audit”. On consideration of the matter we are of the view that it cannot be said that the
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expenses were not genuine and claimed only to reduce the incidence of tax. The aggregate
amount is far too small to lead to any such conclusion. At the same time for want of full
details it can not be said whether the expenditure had been incurred wholly and exclusively
for the purpose of the business of the assessee. After consideration we are of the view
that it would suffice if only 50% of these expenses is disallowed. We direct accordingly.
76.
As to the prior period expenses of Rs. 5,93,239 the learned Counsel pointed out
that the liability had become enforceable only during the year under consideration. The
learned Departmental Representative, on the other hand, strongly pointed out that under
the scheme of that Act only the expenditure pertaining to the year of account are liable to
be allowed. When the assessee itself says that these expenses relates to earlier year, he
cannot claim the same as deductions while computing the income for the year in question.
We have considered the rival contentions and gone through the records. In the absence of
any evidence as to the accrual of liabilities, we are unable to hold these expenses accrued
during the year of account. The expenses only pertaining to the year under consideration
can be allowed. The findings of the CIT(A) cannot be disturbed. The disallowance is
confirmed.
77.
The 16th, 17th and 18th grounds of appeal relate to the learned CIT(A) sustaining the
additions to the declared income to the extent of Rs. 26,36,117, Rs. 2,14,50,214 and Rs.
59,487 respectively as unexplained cash credits u/s 68 of the Act. The first addition was
made by Assessing Officer in respect of 13 creditors to the aggregate of Rs. 5,32,38,415
on the ground of want of confirmation from the parties shown as “Sundry Creditors” in the
balance-sheet. The second addition also was made on the same basis by the Assessing
Officer at Rs. 6,85,75,350 shown in the balance-sheet as advances from 6 customers. The
third addition was made by the Assessing Officer at Rs. 33,94,268 on account of
unexplained liabilities. The assessing Officer made these additions in a few sentences in
Para 10 of the assessment order. During the course of proceedings before the learned
CIT(A) the matter was remanded to the Assessing Officer and his remand report was
received and the same has been reproduced in the impugned order. The learned CIT(A)
deleted the addition to the extent of Rs. 5,05,99,298 from four sundry creditors and
confirmed the addition of Rs. 26,39,117 which was the outstanding balance in respect of
nine other creditors. As respects the advances from customers the addition is reduced to
Rs. 2,14,50,214 by the learned CIT(A) after deleting the addition on account of advances
from two customers. The addition on account of other liabilities has been reduced to Rs.
59,487 by the learned CIT(A) after the liabilities in respect of Audit Fees, Bank interest
and outstanding expenses were verified and accepted by the Assessing Officer.
78.
During the course of hearing before us the learned counsel for he assessee urged
that there was no basis for these additions in the special audit report. According to the
Assessing Officer the Special Auditors had been required to examine the current liabilities
and advances from the customers but they failed to do so. Hence he decided to treat these
amounts as unexplained. The learned counsel further urged that closing balances in the
creditors’ accounts cannot be treated as unverifiable when no dispute is raised about the
debits and credits in the accounts. The balances in the accounts of sundry creditors arose
from the normal business activity of the assessee and advances from the customers were
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received fro execution of orders on their behalf. Other liabilities too arose in the day to
day carrying on of the business by the assessee. There was no element of any loan or
borrowing in any of those accounts and therefore for all practical purposes the provisions
of section 68 were not attracted. The Assessing Officer was not justified to make such
huge additions when there was no adverse remark in the special audit report or any other
adverse material in his possession. At any rate, during the course of assessment
proceedings the assessee had furnished considerable evidence and material. The learned
counsel submitted that complete details and letters of confirmation with Permanent
Account Numbers had been furnished to the Assessing Officer in respect of all the
creditors. The contentions raised before the learned CIT(A) in this regard included. Letter
filed on 8th March 2006 placed at pages 270-72 of the paper-book. The particulars of the
additions sustained by the learned CIT(A) from sundry creditors’ balances were given at
page 268 of the paper-book. The learned counsel pointed out that those credit balances
were merely closing balances on the cut-off date i.e. the last date of the financial year in
the ordinary course of business. The largest amount of Rs. 17,95,085 related to the
outstanding amounts payable on that date to NSE. Complete account of the Exchange
clearing house was at pages 273 to 283 & 284 of the paper-book. No defect had been
pointed out as respects those accounts by the Assessing Officer after verifying the same
during the course of remand proceedings. The learned counsel argued that possibly the
Assessing Officer omitted to suggest deletion of those amounts in the remand report
through oversight. As to the other credits the assessee had furnished accounts as
appearing in the books of accounts of the assessee duly certified by those parties with
their PAN and in some cases the parties directly filed with the Assessing Officer even the
copies of the returns of income filed by them. The learned counsel strongly relied upon the
evidence and material given at pages 285 to 309 of the paper-book and contended that the
entire addition being uncalled for and outside the ambit of the provisions of section 68
should be deleted. As regards advances from the customers, the learned counsel referred
to the letter filed before the learned CIT(A) on 8 th March 2006 placed at pages 270-272
of the paper-book. The particulars of the addition in regard to advances from customers as
sustained by the learned CIT(A) had been given at page 269 of the paper-book. These
included the sum of Rs. 15,00,000 received from Century Consultants that the Assessing
Officer himself had accepted in Para 9.4 of the assessment order. The assessee had
furnished before the learned CIT(A) as regards Rs. 21,50,214 received from Shri Chetan
Sabharwal the copy of the letter addressed to the Assessing Officer along with the copy of
confirmation and the copies of acknowledgment of return of income filed by the party for
last two years, as per Annexure E. As regards Shri Anant Gupta the money received from
Skylite Impex Pvt. Ltd. was wrongly credited to the account of Sh. Anant Gupta. The entry
was rectified by reversal on 1st April 2001. Reference was invited to pages 314 to 319 of
the paper-book. As regards Stele International that party directly furnished to the
Assessing Officer copies of the acknowledgment of returns of income for A.Ys 2001-02 &
2004-05 as well as copy of the ledger account for the financial year 2001-01. That party
had filed copy of Intimation under section 143(1)(a) also. Confirmation of account by Stele
International, copy of the account of the party as per the books of the assessee had been
filed. Copies of those documents were placed at pages 310 to 313 and 320 to 328 of the
paper-book. The learned counsel pointed out that even then the Assessing Officer had
treated the advances as unverifiable only on the ground that the assessee failed to produce
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the customers/clients, though some of those parties had directly replied to the Assessing
Officer in response to the summons issued. The learned counsel for the assessee argued
that once the Assessing Officer was informed that the parties were assessed to tax and he
initiated inquiries by issue of summons it was for him to enforce the attendance of the
parties if he considered that necessary. It was also essential for the Assessing Officer to
refer to the assessment records of the creditors before deciding against the assessee. No
adverse inference could be drawn against the assessee from non-appearance of the parties
before the Assessing Officer. Reference in this behalf was invited to the judgments in the
cases of Niranjanlal Ramballabh v. CIT 29 ITR 459 (Nag); CIT v. U.M. Shah 90 ITR 369
(B0m); CIT v. Orissa Corporation (P) Ltd. 159 ITR 78 (SC) and so on. The Assessing Officer
wrongly treated the advances as unverifiable. The amounts received from customers were
generally adjusted against the trades executed by the assessee on behalf of such
customers. On such facts there was no question of unexplained credits. Since complete
documentary evidences were filed before the Assessing Officer, there was absolutely no
reason for treating the advances as unexplained cash credit. The addition of Rs. 59,487
was in respect of unpaid Service Tax.
79.
The learned CIT(DR) argued that under the provisions of section 68 the assessee
was required to establish all the ingredients of a satisfactory explanation of the cash
credits appearing in the accounts of the assessee. The assessee had credited huge amounts
in the names of various parties. It was therefore necessary to examine the financial
capacity of the creditors and genuineness of the transactions. Mere filing of confirmations
or statement of bank accounts was not enough. The payment received by cheque was not
sacrosanct. In support of these contentions he learned CIT(DR) relied upon the judgment
of Hon’ble Supreme Court in the case of Sreelekha Bannerjee & Others v. CIT 49 ITR 112
at p. 118 (SC). He pointed out that in that case the Hon’ble Apex Court had held that if
there was any receipt of money in the accounts of an assessee it was for that assessee to
establish that the receipt was not in the nature of income. The department at that stage
was not required to prove anything. It could ask the assessee to bring any evidence
pertinent to the assessee’s explanation. The learned CIT (DR) then referred to the
judgments in the cases of Nizam Wool Agency v. CIT 193 ITR 318 (All.); CIT v. Precision
Finance Ltd. 208 ITR 465 (Cal) and CIT v. Korlay Trading Co. Ltd. 232 ITR 820 (Cal).
80.
We find that at the assessment stage the Assessing Officer made the addition
because he found no comment either way as respects the credit balances in the balancesheet in the special audit report. While doing so he failed to realize that the provisions of
section 68 apply to cash credits and not all credits appearing in the books of an assessee.
Secondly he failed to realize that the provisions apply to cash credits and not the balances
appearing in an account on a particular date. There is immense justification in the
contention of the learned counsel for the assessee that closing balances in the creditors’
accounts cannot be assessed as income when no dispute is raised about the debits and
credits in the accounts. We find that there is no material to suggest that the assessee
received any cash credits in its account with NSE as respects the sum of Rs. 17,95,085
payable to NSE. The addition needs to be deleted for this reason alone. As regards the
other accounts it is not known as to how much cash credit was received by the assessee
during the year. There is force in the contention of the learned counsel for the assessee
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that the amounts received during the course of day to day carrying on of the business of
the assessee need to be viewed different from simple cash loans. Advances received from
the customers if adjusted against the shares purchased on their behalf would stand
explained to a large measure by the entries mentioned in the books of the assessee himself.
The revenue does not object to the transactions as recorded in the books of account but
has assessed the closing balances. Be that as it may the additions were made in the
assessment order for want of details and the letters of confirmation. From the particulars
furnished by the assessee in the paper book it is seen that both have been furnished by the
assessee during the course of remand proceedings. It has been submitted by the learned
counsel of the assessee that the letters of confirmation along with PAN had been furnished
to the Assessing Officer in all cases. As PAN was given it was essential for the Assessing
Officer to refer to the assessment records of the creditors but that has not been done.
Reliance in this behalf has been rightly placed on CIT V. Orissa Corporation (P) Ltd. 159 ITR
78 (SC). The additions have been finally made mainly on the ground that the creditors were
not physically produced. The Assessing Officer had issued the summons to the parties and
he received replies from the parties in several cases. It was for the Assessing Officer to
pursue the parties if he was still not satisfied despite considerable evidence/material
furnished by the assessee. Reference in this behalf may be made to, in addition to the case
law cited by the learned counsel for the assessee to the judgments in the cases of Addl.
CIT v. Hanuman Agarwal 151 ITR 150 (Pat); CIT v. Currency Investment Coy. Ltd. 241 ITR
494 (Cal) and CIT v. Emerald Commercial Ltd. 250 ITR 539 (Cal)
81.
We have carefully considered the case law relied upon by the learned CIT(DR). It is
true that in the case of Sreelekha Bannerjee (supra) the Hon’ble Supreme Court has held
that initial burden to establish that the cash credit is not the income of an assessee is upon
the assessee and the assessing officer can ask an assessee to furnish any material or
evidence, but their lordships have qualified that the evidence to be asked for must be
pertinent to the explanation given. In the same passage Hon’ble Supreme Court has also laid
down that the Assessing Officer must act reasonably as regards an assessee’s burden of
proof. In the case of CIT Vs. Precision Finance (P) Ltd. (supra) the ITO allowed opportunity
to that assessee for about 7 years to prove the genuineness of the cash credits. Those
opportunities were not availed of. Enquiries conducted by the Assessing Officer revealed
that either the files did not exist or the records did not tally with the facts mentioned by
that assessee expect in two cases. In all other cases creditors were not found at the
addresses given by that assessee. On such facts it was held that it was for an assessee to
prove the identity of the creditors, their creditworthiness and genuineness of the
transactions. Mere furnishing of the particulars that the transactions were done by
cheques was not enough. It is seen that in that case the assessee heavily relied upon the
transactions being routed through bank. That is not the situation in the present case. In
the case of Korlay Trading Coy. Ltd. (supra) Hon’ble Calcutta High Court held that mere
filing of the income-tax file number of the creditors is not enough. The creditor should be
identified. There should be creditworthiness. There should be a genuine transaction. It is
seen that in both the cases of Precision Finance and Korlay Trading Hon’ble Calcutta High
Court was not impressed by the emphasis laid down by those assessees on a single factor or
circumstance and the court held that all aspects must be satisfactorily explained. These
judgments do not lay down that in every case the assessee must physically produce the cash
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creditor. In fact in the case of Korlay Trading Coy. (supra) itself the Hon’ble High Court
has held that the claim of that assessee of loss could not be denied only on the ground that
the broker through whom that assessee had made the transaction in shares had failed to
produce the proper books. That judgment thus supports the case of the assessee before
us.
82.
In the light of the above discussions, the addition to the extent of Rs. 26,39,117
(ground no. 16) and Rs. 2,14,50,214 (ground no. 17) are deleted. As regards the additions of
Rs. 59,487 although the addition u/s. 68 cannot be sustained, the learned CIT(A) has
sustained u/s. 43B since the evidence of service tax payment prior to the due date of filing
was not furnished before him. In the light of the same, the said addition is confirmed.
83.
By way of the 19th ground of appeal the assessee has prayed for liberty to take
additional grounds of appeal. Thereafter, two additional grounds of appeal have been filed
on 20.04.2007 with a request for admission of those grounds. Both the additional grounds
relate to the appointment of the Special Auditor u/s 142(2A) of the Act. In the first
additional ground the assessee has objected to the Assessing Officer not providing the
assessee an opportunity of being heard before making reference under Sec. 142(2A) of the
Act for special audit. In the second additional ground, the assessee argues that reference
to the special auditor was made u/s 142(2A) of the Act only because the Assessing Officer
was interested in extending the period of limitation prescribed in Sec. 153 of the Act and
that was done without observing the principles of natural justice. The learned counsel for
the assessee argued that these additional grounds raise the question of jurisdiction of the
assessing officer and therefore merit admission by the Tribunal. Furthermore both these
grounds were on point of law that could be decided on the material already on records and
did not call for any fresh inquiry into the facts. Hence, these additional grounds were
required to be admitted and adjudicated upon.
84.
The learned counsel for the assessee argued that in the ordinary course the
assessment would have become time-barred on 31.03.2004, but with a design to avail of the
extra time the Assessing Officer sought the approval of the learned CIT-IV, Mumbai for
getting the accounts of the assessee audited u/s 142(2A) of the Act. The approval of the
CIT was conveyed to the assessee on 10.03.2004. No opportunity was given by the
Assessing Officer or the CIT to the assessee of being heard at any stage of the invocation
of the provisions of section 142(2A). The provisions of section 142(2A) were pressed into
service behind the back of the assessee as the Assessing Officer was not ready or willing
to complete the assessment within the imminent time-limit u/s 153. The learned counsel
strongly contended that the appointment of the Special Auditor u/s 142(2A) and
consequent proceedings as well as the assessment order had got vitiated on account of
violation of principles of natural justice. He strongly relied for this challenge on the
judgment of the Hon’ble Supreme Court in the case of Rajesh Kumar v. DCIT 287 ITR 91
(SC), wherein the Apex court has laid down for an opportunity to the assessee before
making a reference u/s 142(2A) of the Act. The learned counsel took us closely through the
judgment of the Hon’ble Apex Court. He pointed out that this judgment of Hon’ble Apex
Court has been made in an appeal filed against the judgment of Delhi high-court in a writ
petition fled by that assessee raising, inter alia, a question that the order impugned therein
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was vitiated in law having been passed without giving an opportunity of hearing to that
assessee Hon’ble Delhi High Court dismissed the writ petition. On further appeal by that
assessee the Hon’ble apex court has “allowed the appeal”. It therefore follows that an
order initiating special audit u/s 142(2A) in the case of an assessee without allowing that
assessee an opportunity of being heard is vitiated in law. Hence the order u/s 142(2A) in
the case of assessee was vitiated in law within the ratio of the judgment of Hon’ble
Supreme Court in the case of Rajesh Kumar (supra).
85.
The learned counsel pointed out that the observations of the Apex Court hve since
been enshrined in the Act by virtue of an amendment by Finance Act, 2007. Sub-section
(2A) of Sec. 142 is now followed by a proviso: - “Provided that the Assessing Officer shall
not direct the asessee to get the accounts audited unless the assessee has been given a
reasonable opportunity of being heard.” In view of the foregoing, there could not be any
doubt that the Assessing Officer and also the ld. CIT did not follow the basic principles of
natural justice. That made the reference for Special Audit u/s 142(2A) invalid and illegal.
86.
The learned counsel argued that the vitiated order under section 142(2A) made by
the assessing officer in the case of the assessee was a nullity and not merely a procedural
irregularity. That was quite clear from the various observations of the Apex Court in the
case of Rajesh Kumar (supra). That being so the provisions of clause (iii) of Explanation 1 to
section 153 did not operate. The assessment order was obviously barred by limitation.
87.
The learned counsel argued that this issue in the present appeal is in a way parallel
to the reasons to be recorded under section 148(2). The courts had held in a plethora of
cases that where the reasons to believe as recorded under section 148(2) are such that no
inference of escapement of income from assessment can be drawn wherefrom, the
consequential assessment order itself would become a nullity even if cogent reasons for
escapement of income from assessment may otherwise be found. Reference in that respect
was invited to the judgments reported in 103 ITR 437 (SC); 189 ITR 786 (Pat); 240 ITR 121
(Guj); 258 ITR 317 (Del) and so on. On parity of that reasoning the assessment order in the
present case was required to be treated as having been made beyond the permissible time
limit because existence of a valid direction under section 142(2A) for special audit was a
condition precedent for the operation of the provisions of Explanation 1(iii) to Section 153.
The learned counsel, therefore, submitted that the assessment order may be quashed as
having been barred by limitation prescribed under the provisions of section 153.
88.
The learned CIT (DR) opposed the additional grounds both on the question of
admission and merits. No such ground of appeal had been taken before the learned CIT(A)
and, therefore, did not arise from his order. There was nothing to suggest in the judgment
of Hon’ble Supreme Court in the case of Rajesh Kumar (supra) that an assessment order
made after reference under section 142(2A) would be barred by limitation. He strongly
relied upon the judgments in the cases of CIT v. Begum Noor Banu Alladin 204 ITR 166(AP)
(FB); Maruti Udyog Ltd. v. ITAT 244 ITR 303 (Del); Atlas Copco (India) Ltd. v. V.S. Samuel
283 ITR 0056 (Bom); Ghaziabad Urban Cooperative Bank Ltd. v. Union of India 287 ITR 473
(All); VLS Finance Ltd. v. CIT 289 ITR 286 (Del); Sahara Financial Corporation & Sahara
India (Firm) v. CIT 289 ITR 397 (Del) and Sahara India (Firm) v. CIT 289 ITR 473 (SC).
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89. The learned CIT(DR) has opposed admission of additional grounds taken by the assessee
on the ground that the assessee had not taken such plea during the course of proceedings
before the authorities below and this issue has been raised for the first time in the
proceedings before the tribunal. He has relied in this respect upon the Full Bench judgment
of Hon’ble Andhra Pradesh High Court in the case of Begum Noor Banu Alladin (supra) to the
effect that the jurisdiction of the tribunal is restricted to subject-matter before the first
appellate authority and tribunal can not allow new items or new claims for the first time.
However around the same time the Full Bench of Bombay High Court in the case of
Ahmedabad Electricity Co. Ltd. 199 ITR 351 (Bom) (FB) held that the phrase “pass such
order thereon” occurring in section 254 empowers the tribunal to permit additional grounds
to be raised even though they may not arise from the order of the first appellate authority.
This view taken by the Hon’ble Bombay High Court has held fort ever since. Moreover the
controversy in this context has been set to rest by the judgment of Hon’ble Supreme Court
in the case of National Thermal Power Co. Ltd. v. CIT 229 ITR 383 (SC). In the instant
case before us the assessee has in the additional ground objected to the legality of the
assessment order and therefore it goes to the root of the impugned order. The ground
involves mainly a question of law and can be decided on facts that are a matter of record of
the Assessing Officer. In deed, during the course of hearing before us the learned
CIT(DR) has not disputed the contention of the assessee that the reference under 142(2A)
was made without hearing the assessee n that behalf. We have therefore held that the
additional grounds taken by the assessee deserved to be admitted and ordered admission of
the additional grounds. As to the reliance placed by the learned CIT (DR) on the judgment
of Hon'ble Delhi high court in the case of Maruti Udyog Ltd. v. ITAT 244 ITR 303 (Del)
that judgment docs not curtail the power of the tribunal to admit additional ground of
appeal. That judgment prescribes that the tribunal should indicate the reasons for
admission first and then take the appeal for the final disposal. That has been done by us.
90. We have carefully considered the rival submissions. In the case of Rajesh Kumar v.
DCIT 287 ITR 91 (SC) Hon'ble Apex Court has unmistakably laid down that it is mandatory
to give an assessee an opportunity of being heard before a reference for special audit
under section 142(2A) is made in the case of that assessee. Hon'ble Supreme Court has
observed:
"A direction issued under section 142(2A) of the Income-tax Act, 1961, for
special audit of the accounts of the assessee is not administrative in nature: it is a
quasi-judicial order. In view of section 136 the entire proceeding before the
Assessing Officer being judicial, a part thereof, which indisputably is resorted to in
aid of the ultimate' order of assessment, without any statutory interdict, cannot be
called an administrative order.
The expression "having regard to" in section 142(2A) is significant. An opinion must
be formed strictly in terms of the factors enumerated therein. The expression
indicates that in exercising the power regard must be had also to the factors
enumerated therein together with all factors-relevant for the exercise of the
power. The factors enumerated in section 142(2A) are not exhaustive. Once it is
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held that the assessee suffers civil consequences and any order passed would be
prejudicial to him, the principles of natural justice must be held to be implicit. The
principles of natural justice are required to be applied inter alia to minimize
arbitrariness. If the assessee is put to notice, he could show that the nature of the
accounts is not such as would require appointment of special auditors. The assessee
could further show that what the Assessing Officer considers complex is in fact not
so. It would also be open to him to show that the same would not be in the interest
of the Revenue.
The expression "complexity" in section 142(2A) would mean the state or quality of
being intricate or complex or that it is difficult to understand. Difficulty in
understanding would, however, not lead to the conclusion that the accounts are
complex in nature. The formation of opinion under section 142(2A) that the accounts
of the assessee require an expert audit should indisputably be based on objective
considerations. No order can be passed on whims or caprice. All that is difficult to
understand should not be regarded as complex. What is complex to one may appear
simple to another. It depends upon one's level of understanding or comprehension.
Sometimes, what appears to be complex on the face of it, may not be really so if one
tries to understand it carefully. Therefore, special audit should not be directed on
a cursory look at the accounts. There should be an honest attempt to understand
the accounts of the assessee.
The power under section 142(2A) cannot be lightly exercised.
The
satisfaction of the authorities should not be subjective satisfaction. It should be
based on objective assessment regard being had to the nature of the accounts. The
nature of the accounts must indeed be of a complex nature. This is the primary
requirement for directing a special audit.
Prejudice to the assessee, if an order is passed under section 142(2A) is
apparent on the face of the statutory provisions. The assessee has to undergo the
process of further accounting despite the fact that his accounts have been audited
by a qualified auditor in terms of section 44AB.
Whereas the order of assessment can be subject of an appeal, a direction
issued under section 142(2A) is not. No internal remedy is prescribed. Judicial
review cannot be said to be an appropriate remedy in this behalf. The notice issued
may contain briefly the issues which the Assessing Officer thinks necessary. The
reasons assigned therefore need not be detailed ones. But that would not mean that
the principles of natural justice are not required to be complied with. Merely
because certain consequences would ensue if the principles of natural justice are
required to be complied with that by it would not mean that the court would not
insist on compliance with the fundamental principles of the law. If the principles of
natural justice were to be excluded Parliament could have said so expressly. The
hearing given is only in terms of section 142(3) which is limited only to the finding of
the special auditor. An appeal against the order of assessment would not serve any
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real purpose as the appellate authority would not go into such a question since the
direction issued under section 142(2A) is not an appealable order.
The assessment proceeding is a part of judicial process. When a statutory
process is exercised by the assessing authority in exercise of its judicial functions
which is detrimental to the assessee, it is not and cannot be administrative in
nature.
Principles of natural justice are based on two principles: (i) nobody shall be
condemned unheard (audi alteram partem); (ii) nobody shall be judge of his own
cause (nemo debet esse judex in propria sua causa). Duty (Head-note) (emphasis
supplied).
91.
There is force in the statement of the learned counsel for the assessee that the
reference made under section 142(2A) in the case before us is vitiated in law. The
judgment of Hon’ble Apex Court in the case of Rajesh Kumar (supra) has been made in an
appeal against the judgment of Delhi high-court. A writ petition had been filed by that
assessee before the Delhi High Court raising, inter alia, a question that the order impugned
therein was vitiated in law having been passed without giving an opportunity of hearing to
him. Hon’ble Delhi High Court dismissed the writ petition. On further appeal by that
assessee the Hon’ble apex court has “allowed the appeal”. It therefore follows that an
order initiating special audit u/s 142(2A) in the case of an assessee without allowing that
assessee an opportunity of being heard is vitiated in law. The case law relied upon by the
learned CIT DR is of no avail. In the course of judgment in the case of Rajesh Kumar
(supra) Hon’ble Apex Court have disapproved the judgment of the jurisdictional high court
in the case of Atlas Copco (India) Ltd. v. V.S. Samuel 283 ITR 0056 (Bom) that has been
relied upon by the learned CIT DR. Hence that judgment can not come to the aid of the
revenue. For the same reason the reliance placed by the learned CIT DR on the judgments
in the cases of Ghaziabad Urban Cooperative Bank Ltd. v. Union of India 287 ITR 473 (All);
VLS Finance Ltd. v. CIT 289 ITR 286 (Del); Sahara Financial Corporation & Sahara India
(Firm) v. CIT 289 ITR 397 (Del) are of no avail. On the contrary the Hon’ble Apex Court
have in the case of Rajesh Kumar v. Dy. CIT (supra) approved the judgment of Hon’ble
Calcutta High Court in the case of West Bengal State Co-operative Bank Ltd. v. Jt. CIT 267
ITR 345 (Cal) wherein it has been held that the assessing officer must give a hearing to the
assessee and such provision should be presumed to be inbuilt in the section itself.
92.
As the Hon’ble Apex Court has in the case of Rajesh Kumar (supra) held that if a
reference under section 142(2A) is made without allowing the assessee an opportunity of
being heard on the matter, such reference would be vitiated in law, we are called upon by
the additional grounds of appeal taken by the assessee to ascertain the impact of the
vitiated reference under section 142(2A) on the assessment order before us. In our opinion
because of the reference the assessing officer did not get any additional jurisdiction to
make assessment in the case of the assessee which jurisdiction he had without making the
reference under section 142(2A). The reference did not result in the enlargement of the
jurisdiction of the Assessing Officer. Hence the order of assessment is not affected on
account of vitiated reference. The judgment of Hon’ble Supreme Court in the case of Dr.
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Pratap Singh v. Director of Inspection 157 ITR 665 (SC) strengthens us in taking this view.
But in the case before us the Assessing Officer has availed of extended time limit, even if
as held by us he did not avail of any extended jurisdiction. In our view the extended time
limit as laid down by Explanation 1(iii) is not available to him for want of a valid and proper
reference under section 142(2A).
93.
It has been held by Hon’ble Karnataka High Court in the case of M.K. Srikanta Setty
v. CIT 160 ITR 517 (Kar) that strict construction should be placed on the period of
limitation. In the cases of ITO v. Murlidhar Bhagwan Das 66 ITR 586 (SC); N. KT.
Sivalingam Chettiar v. CIT 66 ITR 586 (SC); CIT v. Mohd. Shakoor Mohd. Bashir 89 ITR 57
(SC) and CIT v. Foramer France 129 Taxman 72 (SC) hon’ble Apex Court held that where
the finding or direction contained in the order of appellate authority was not necessary for
the disposal of appeal that would not save the reassessment proceedings from the bar of
limitation. The same view has been taken by the courts in section 144B related cases and it
has been held that the extended time limit provided by Explanation 1(iv) to section 153 is
not available where section 144B itself is not applicable. Reference may be made to the
judgments in the cases of CIT v. Aich Kay Farm 141 ITR 928 (MP) and CIT v. H.M.T.
Bearings Ltd. 182 ITR 183 (AP). Reference may be made to cases related to Explanation 3
to section 153 also – Rani Rajendra Kumari v. ITO 130 ITR 708 (All); CIT v. K.R. Patel 73
ITR 508 (Mys.); C.A. Gulanikar v. Ramnarain Sons (P) Ltd. 119 ITR 83 (Bom); CIT v. Mohini
Thapar Charitable Trust 160 ITR 408 (Cal) etc.
94.
The learned CIT (DR) has strongly relied upon a recent development. He pointed out
that in the case of Sahara India (Firm) v. CIT 289 ITR 473 (SC) the subsequent Bench in
the Supreme Court has expressed reservations as to the observations of the Court in the
case of Rajesh Kumar (supra) more so in relation to a regular assessment as distinguished
from block assessment under section 158 BC. He pointed out that for that reason the
subsequent Bench has referred that case to the larger Bench and therefore the judgment
of Hon’ble Supreme Court in the case of Rajesh Kumar (supra) was under reconsideration.
On a careful consideration we are unable to accept this plea. The fact is that the judgment
of Hon’ble Apex Court continues to be the law of the land. Its operation has not been
stayed, nor has its application or interpretation been varied by any subsequent judgment of
the Court or act of Parliament. We are duty-bound to obey the ratio of the judgment of
Hon’ble Supreme Court in the case of Rajesh Kumar v. Dy. CIT (supra). Reference in this
respect may be made to the recent judgment of Hon’ble Delhi high court in the case of
Nokia Corporation v. Director of Income – Tax 292 ITR 22 (Del). It has been held by the
Hon’ble Delhi High Court in that case that a judgment of superior authority, in the absence
of stay of operation would continue to be binding on subordinate authorities.
95.
Following the discussion in foregoing paragraphs we hold that the assessment order
in the instant case is bad in law as having been made beyond the statutory time limit to
make the assessment. Accordingly we annul the assessment order in consideration and allow
the assessee’s additional grounds of appeal.
96.
As we have annulled the assessment order itself as bad in law we understand that it
was quite necessary for us to get into the findings and decisions on merits of each of the
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additions as questioned in the grounds of appeal. But we have given such findings only to see
that all the grounds of appeal raised in the memorandum of appeal gets disposed off. If our
order on the assessee’s additional grounds of appeal is disturbed in further appeal, our
order on merits of these additions requires to be gone into for the complete disposal of the
grounds of appeal raised by the assessee. In a way, our findings on merits will be relevant
and shall for the present be treated as kept in suspended animation only to be revived in
the event of our order on the assessee’s additional ground is reversed or modified at any
stage.
97.
In the result while the revenue’s appeal is dismissed, the assessee’s appeal shall be
treated as partly allowed.
Order pronounced on 9th August 2007
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