2025 (8) TMI 1361 - AT - Income Tax

Partly allowed appeal: upheld opening RIL shares and TISCO gains relief; sustained NLC bond interest; recompute interest u/s 234B

ITAT-Mumbai (AT) partly allowed the appeal. The tribunal upheld the CIT(A)'s acceptance of opening RIL shares and relief on TISCO capital gains, sustained ... Unexplained investment made in purchase of shares - HELD THAT:- We notice that the AO did not recognize the fact of availability of the opening stock of shares of RIL, but the Ld.CIT(A) has considered the same and accordingly granted relief, i.e., he has accepted the 80,550 shares have been sold out of opening stock of shares of RIL. Though the revenue has challenged the said decision, yet it could not prove that the assessee was not having opening stock of shares of RIL as mentioned above. Revenue could not furnish any material to contradict the findings given by Ld CIT(A).We noticed that the Ld.CIT(A) has sustained addition to the extent of profit earned on sale of above shares and the assessee has also accepted the same. Accordingly, we are of the view that the order passed by Ld.CIT(A) does not call for any interference. Accordingly, we uphold the same. Unexplained investment in the shares on the basis of letters received from the Companies and Custodian - AR submitted that the assessing officer has not supplied the copy of documents/letters, which were the basis for making the addition - CIT(A) had deleted the addition accepting the Quantity ledger account of RIL - HELD THAT:- We have also upheld the same.MCIT(A) himself has noted down the opening quantity of 1,35,100 shares therein. Further, as per the said quantity details, the assessee was having 12,25,150 shares as on 31-03-1992, which was more than that considered by the AO for making this addition. Under these set of facts, we are of the view that the question of unexplained investment in the shares of RIL does not arise and accordingly, the AO was not correct in computing unexplained investment in shares of RIL. Accordingly, we set aside the order passed by Ld CIT(A) in respect of this addition and direct the AO to delete the same. Addition in respect of shares of Colgate Palmolive shares - This addition pertained to 9,400 and 8.050 shares of above said company noticed by the AO - CIT(A) has also not rejected the books of accounts. It is stated that the impugned purchases of 9,400 and 8,050 shares have been duly recorded in the books of accounts and they are also supported by the contract notes. Accordingly, we are of the view that the CIT(A) was not justified in deciding the issue against the assessee without verifying the relevant materials. Accordingly, we set aside the order passed by the CIT(A) in respect of this addition. Since the relevant contract notes and the ledger account were not verified by the tax authorities, we restore this issue for the limited purpose of verifying them. Accordingly, we set aside the order passed by the Ld.CIT(A) in respect of this investment and restore the same to the file of the AO with the direction to verify the relevant contract notes and also ledger account. After satisfying himself, the AO may delete this addition. Unexplained investment in respect of shares of NBS Industries -contention of the assessee that there is no company exists in the name of NBS Industries - We are of the view that there may be error in mentioning the name of the company. Since no detail was produced by the revenue also, we deem it proper to restore this addition to the file of the AO with the direction to furnish the material relating to the addition of NBS Industries Ltd to the assessee. After getting explanation from the assessee, the AO may take appropriate decision in accordance with law. Capital gain arising on sale of shares of TISCO Ltd. - AO has made this addition on the basis of selective information, while the Ld.CIT(A) granted relief on the basis of complete information. There should not be any dispute that the determination of profit on the basis of incomplete and selective information would result in incorrect results. We notice that the first appellate authority has considered all transactions of purchase and sale of shares of TISCO Ltd made during this year. Before us, the Revenue could not furnish any material to contradict the factual aspects considered by Ld CIT(A). Accordingly, we confirm the order passed by Ld CIT(A) on this issue. Addition on account of interest on 17% NTPC Bonds - CIT(A) deleted addition - We notice that the factual aspects relating to the purchase of NTPC bonds have been explained by the Co-ordinate Bench in the assessee’s own case in AY 1996-97. It has been held that the assessee cannot be considered to be the owner of NTPC bonds in view of the order passed by Hon’ble Supreme Court. When the assessee is not considered to be the owner of NTPC bonds as per the decision of Hon’ble Supreme Court, then the question of assessing accrued interest income in this year out of the said bonds will not arise. Disallowance of expenses - We are of the view that the methodology adopted by Ld CIT(A) cannot be interfered with. However, it is the contention of the assessee that the adhoc percentage of disallowance adopted by Ld CIT(A) against certain expenses is not in accordance with the decision rendered by ITAT in 1991-92. Since it is a matter of verification, we modify the order passed by the Ld.CIT(A) and restore the same to the file of the AO with the direction to compute the disallowances of various expenses as per the adhoc percentage determined in the decision rendered by ITAT in the assessee’s own case in AY 1991-92. Addition u/s 69 on the basis of a loose paper, which according to the assessee was “valuation report” of the portfolio of certain clients as on a particular date - We are of the view that the AO could not have made the addition u/s 69 of the Act on the basis of a loose document. Unexplained investment in PSU Bonds - AO collected information from Public Sector Undertakings about the investments made by the assessee - main contention of the assessee is that all the PSU bonds have been purchased by the assessee on credit from the broking firm - HELD THAT:- When the investments have been made on credit, the question of cash outflow will not arise. Hence the question of making any addition u/s 69 of the Act does not arise, in the absence of any cash outflow. We notice that the books of accounts were not produced before the AO during the course of assessment proceedings, but they were produced before Ld CIT(A). We noticed that the ITAT had directed the Ld CIT(A) to decide the issues after examining the books of accounts of the assessee. We notice that the Ld CIT(A) does not appear to have referred to the books of accounts of the assessee at all. Accordingly, we are of the view that the conditions prescribed in sec.69 of the Act for invoking that provision have not satisfied in the instant case and hence the tax authorities are not justified in making addition u/s 69 of the Act. Accordingly, we modify the order passed by Ld CIT(A) on this issue and direct the AO to delete the entire addition. Disallowance of depreciation on leased plant and machinery - HELD THAT:- It is well settled proposition of law that the tax authorities are not entitled to question the wisdom of a businessman. The purchase of machinery and leasing out the same are in the nature of commercial transactions entered into by the assessee. In our view, the AO is not entitled to question them, unless he could establish that the entire transactions are sham transactions. If the transactions are entered between two related parties, then it may instigate the AO to further probe the transaction. At the most, the AO could have established suppression of lease rental income only and even in that case, the depreciation allowable under the Act could not have been disallowed, after accepting the cost of asset. In the instant case, the AO did not carry out any enquiry with regard to the same. Tax authorities are not justified in disallowing the statutory deduction of depreciation mandatorily allowable under the Act under suspicions and surmises, that too after assessing the corresponding rental income. Hence, it is not in accordance with law. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to allow the depreciation claimed by the assessee in this year. Addition relating to the bank drafts found at the Madras Office of the assessee - There is no doubt that the assessee has not purchased the demand drafts and it was given by the four share brokers. The statements given by those brokers have not been brought on record. Even Mr Srinivasan of IAPL did not say that these demand drafts belong to the assessee, i.e., he has only stated that they were collected by him from Bombay office and handed over to the Madras office. Since the brokers who had given demand drafts had admitted that they have given them towards value of sale of shares, it is not discernible as to how the AO could not find out the real seller of the shares. It was possible to ascertain the same from the very same brokers only on the basis of the broker notes issued by them. We notice that the AO did not discuss anything about the nature of enquiry conducted with the brokers. All these facts would show that the AO has selectively relied upon certain information and accordingly drawn adverse inferences against the assessee. In our view, the same is not legally sustainable. In the absence of any proof to link the demand drafts with the assessee, we are of the view that the AO was not justified in making this addition. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition. Addition relating to value of shares seized from the assessee’s premises - It is well settled proposition of law that the Income tax authorities are entitled to assess any undisclosed income only on the basis of some credible materials, i.e., additions on the basis of presumption, surmises and conjectures are not permitted. Accordingly, if the AO is not able to furnish the evidences in support of this addition, the assessee would not be in a position to offer any explanation. In that case, we are of the view that no addition can be made on account of these investments. Further, the presumption about the ownership of the shares can be made only if it is proved that the shares have been found in the possession of the assessee and they do not belong to any other related entity. There should not be any dispute that the value of investment should be determined on the basis of actual purchase cost and not on the basis of market price on the date of seizure. Partial confirmation of addition of unexplained deposits made in bank accounts of the assessee - AO noticed that the assessee is having 11 bank accounts in cities of Bombay, Delhi, Madras and Bangalore. Even though, the assessee furnished copies of bank accounts, according to AO, the assessee did not explain the transactions details - main contention of the assessee is that all the transactions made in the bank accounts of the assessee have been duly recorded in the books of accounts and hence they cannot be considered as unexplained deposits - HELD THAT:- The important point is that the funds have been received by the assessee from the above said brokerage firm, which, in turn, has received the same by way of bill discounting from UCO Bank. Accordingly, we are of the view that the deposit of Rs. 14.14 crores cannot be considered as unexplained deposit. With regard to the remaining deposit of Rs. 3,78,154/-, we notice that the same represents 14 items of small deposits. All of them have been made available in the chart prepared by Ld CIT(A). We notice that these deposits consists of Rs. 1,130/- to Rs. 57,624/-. As noticed earlier, addition of all these deposits is not called for, when the assessee has accounted them in its books of accounts. We notice that the Ld CIT(A) has directed the AO to assess interest income on certain deposits. We notice that the assessee has not contested the direction given by Ld CIT(A). Hence, we do not interfere with those directions. In view of the above, we modify the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition relating to unexplained deposits. Addition of bill discounting charges - In view of the overwhelming evidence produced by the assessee, we are of the view that the tax authorities are not justified in assessing the bill discounting charges in the hands of the assessee, when they are aware that the assessee has not provided funds. Further, the addition has been made on the basis of materials, collected behind its back and not provided to the assessee. Addition of money market profit instead of loss - Admittedly, the debentures are different from Bonds and hence the Ld CIT(A) was not justified in referring to the rates of Debentures to take adverse view against the assessee. The ld A.R further submitted that the observation of the Ld CIT(A) that there is huge variation in the purchase and sale of bonds is not borne out of record. He submitted that the transactions were undertaken at market rates and with unrelated third parties. The Ld A.R also brought to our notice the prices at which transaction had taken place and some of the prices are also mentioned in the table extracted in the subsequent paragraphs. A perusal of the same would show that the observations made Ld CIT(A) on this point is without appreciation of correct facts. Accordingly, we are of the view that various observations made by Ld CIT(A) do not justify the disallowance of loss declared by the assessee in the month of March, 1992. There were certain transactions in which the assessee had also incurred losses. In the securities and money market transactions, the instances of incurring of losses or making of profits are routine affair. Accordingly, merely because the transactions entered into by the assessee in the month of March, 1992 have resulted into loss, the same cannot be considered to be bogus in nature. Hence they could not have rejected the loss without bringing any material on record to show that the said loss was an orchestrated/arranged one. Accordingly, it has to be held that the tax authorities have rejected the loss incurred in March, 1992 only on surmises and conjectures only, which is not permitted under the Act. Assessee has addressed every observations made by Ld CIT(A). The Ld A.R submitted that the transactions of purchases and sales of the assessee are supported by the contract notes. Accordingly, under these set of facts, we are of the view that the Ld CIT(A) was not justified in confirming the addition made by the AO. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to accept the loss from money market transactions declared by the assessee. Addition of interest income from 13% NLC Bonds - Even though there was uncertainty about the receipt of bonds and the interest income in the initial period of search, it is stated that the assessee has received interest as well as got the bonds. Accordingly, we are of the view that the accrued interest income computed by the assessing officer needs to be sustained. Accordingly, we uphold the assessment of interest income. Disallowance of claim of interest expenses - assessee did not make claim for deduction of interest expenses before the AO - We notice that the co-ordinate bench has held in the case of Pratima Hitesh Mehta [2023 (10) TMI 1474 - ITAT MUMBAI] that interest expenditure is allowable as deduction. As seen that the AO has assessed accrued interest on an investment made by the assessee. Hence, the interest expenditure is allowable as deduction under mercantile system of accounting under accrual basis. The other discussions made by Ld CIT(A) with regard to deduction of interest expenditure claim against income from Capital gains and Other sources may not be relevant, since it is seen that the assessee has not claimed deduction against those income. Thus, in effect, the only effective deficiency pointed out by the Ld CIT(A) is the lack of details relating to interest expenditure claim. There should not be any dispute that the onus is placed upon the assessee to furnish the details of expenditure claimed by it. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO for the limited purpose of examining the quantification and related details of interest expenditure claimed by the assessee. Observation of the Ld CIT(A) in directing the AO that the total income should not be assessed lower than the surrender made by Shri Harshad S Mehta u/s 132(4) - HELD THAT: - We notice that identical kind of addition made in the hands of other assessee’s of the group has been deleted by the co-ordinate benches. In the case of Smt Deepika A Mehta [2024 (4) TMI 1300 - ITAT MUMBAI] identical addition was deleted following the decision rendered by another co-ordinate bench in the case of Cascade Holding P Ltd [2021 (5) TMI 538 - ITAT MUMBAI] - thus we modify the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition even if the total income ultimately computed by him turns out to be less than Rs. 10.92 crores. Incorrect computation of interest u/s 234B - We set aside the order passed by Ld CIT(A) on this issue and direct the AO to compute interest u/s 234B of the Act after deducting tax deductible at source. 1. ISSUES PRESENTED AND CONSIDERED 1.1. Whether unexplained investment additions under s.69 can be sustained where (a) closing/opening stock and contract notes/ledgers establish availability of securities sold, (b) additions are based on third-party information not furnished to assessee, or (c) seized loose papers merely record portfolio valuations belonging to others. 1.2. Whether unexplained deposits in bank accounts can be assessed as income (s.69A) when ledger, contract notes, lead-sheets and correspondence explain receipts as business transactions (including back-to-back/bill-discounting dealings) and books of account were furnished on appeal. 1.3. Whether interest accrued on securities (including disputed ownership where special court/custodian/ Supreme Court orders subsequently determine ownership) is taxable in hands of the assessee. 1.4. Whether profit/loss from money-market operations recorded in seized ledgers (pre-search) can be preferred over final accounts showing subsequent loss, absent proof that latter adjustments are fabricated or bogus. 1.5. Whether statutory deductions (depreciation, interest expense) and specific income items (bill discounting charges, bank draft proceeds, sale proceeds from seized stocks) were rightly disallowed/assessed where (i) transactions are between related entities or routed through brokers, and (ii) books/contractual documents were not or were later produced. 1.6. Whether assessment can be anchored to composite disclosures made by a third party (surrender under s.132(4)) by apportionment across group members where books of account subsequently furnish actual incomes. 1.7. Procedural fairness: whether AO may base additions on materials collected from third parties/custodian without confronting/supplying same to assessee. 2. ISSUE-WISE DETAILED ANALYSIS 2.1. Issue: Unexplained investment additions under s.69 where opening/closing stock, contract notes and ledgers substantiate holdings and sales. Legal framework: s.69 requires (a) assessee made investments, (b) investments not recorded in books, and (c) explanation absent or unsatisfactory. Burden shifts to AO to prove investments are unrecorded and unexplained. Precedent treatment: Coordinated tribunal decisions referenced and applied where books/contract notes admitted on appeal led to deletions. Interpretation and reasoning: Where opening stock and continuous purchases/sales ledgers (quantity ledger) establish that sales were from opening stock or recorded holdings, AO's contrary conclusion based on incomplete comparison is displaced. Similarly, where conversion ratios/other factual corrections are established, additions must be recalculated. Ratio vs. Obiter: Ratio-AO cannot ignore opening stock/contract notes and sustain addition; additions must be founded on verifiable contrary material. Obiter-comments on stock market/contextual issues. Conclusion: Additions in respect of RIL shares and related quantity discrepancies set aside/deleted where ledger and contract notes proved opening/closing positions; additions sustained only to extent profit on sale accepted by assessee. 2.2. Issue: Additions based on third-party information (companies/custodian) not supplied to assessee. Legal framework: Principles of natural justice and settled tax law require that AO confront assessee with materials relied upon; additions cannot be made on material 'collected behind the back' of the assessee. Precedent treatment: Tribunal and Coordinate Benches have deleted identical additions where AO failed to supply underlying letters/documents to assessee. Interpretation and reasoning: Where AO relied upon company/custodian letters to prepare mismatch lists but did not furnish copies despite requests, additions on such basis are unsustainable. The Tribunal modified CIT(A) and directed deletion of amounts so added. Ratio vs. Obiter: Ratio-materials on which adverse additions are based must be furnished/confronted; failure mandates deletion. Obiter-reference to group litigation and consistency across related assessments. Conclusion: Deletion ordered for specified amounts where AO failed to supply/confront underlying documents (Rs.5.45 crores in identified companies etc.). 2.3. Issue: Seized loose papers/portfolio valuations treated as evidence of assessee's unaccounted investments. Legal framework: s.69 addition requires investments to be unrecorded in books; seized documents form part of evidence but ownership must be established by corroborative materials (share certificates, transfer deeds, contract notes, ledgers). Precedent treatment: Tribunal in related years deleted identical additions where brokers/records showed shares belonged to others. Interpretation and reasoning: Loose portfolio valuation sheets prepared for monitoring clients do not by themselves prove ownership; absence of physical share certificates, absence of corresponding money movements and existence of broker confirmations and reconciliation entries showing allocation to various clients weaken AO's case. Where books of account (even produced later) and corroborative broker confirmations indicate non-ownership, s.69 addition unsustainable. Ratio vs. Obiter: Ratio-value of seized loose papers alone insufficient to charge s.69 absent corroboration linking assets to assessee; ownership determined by registration/transfer and book entries. Obiter-remarks on operational realities of broking houses and portfolio statements. Conclusion: Addition of Rs.17.35 crores (and related seized-shares additions) set aside/deleted or remanded for verification with direction to furnish break-ups, share certificates and transfer deeds before AO; where proof lacking, deletion ordered. 2.4. Issue: Unexplained bank deposits (s.69A) where ledger/contract notes/books explain major receipts (bill discounting, sale proceeds routed via brokers). Legal framework: s.69A targets unexplained cash credits. Bank credits forming part of business transactions must be examined by reference to both legs of entries under double-entry bookkeeping; AO must examine books and supporting documents, not treat bank credits in isolation. Precedent treatment: Coordinate decisions directing consideration of books and deal documentation on remand. Interpretation and reasoning: Where substantial deposits are shown by contract notes/deal slips/ledgers as proceeds of sales or credit from brokers/banks (e.g., ANZ Grindlays receipt, UCO bill-discount receipts), and the assessee furnished bank/ledger extracts and contract notes on appeal, AO cannot treat full deposits as unexplained. Reliance on general reports (JPC) without transactional evidence is inadequate. If AO relied on third-party materials not supplied to assessee, additions fail. Ratio vs. Obiter: Ratio-assessed unexplained deposits must be tested against books/contractual documents; AO cannot treat bank credits as income without tracing counter-leg to show genuineness. Obiter-examples clarifying double-entry principle. Conclusion: Major deposits (Rs.10.18 cr, Rs.14.14 cr) held explained; addition deleted and issues remitted where verification required; AO directed to assess interest aspects where not contested. 2.5. Issue: Treatment of interest accrued on disputed securities (NTPC, NLC) where ownership later determined by court/custodian orders. Legal framework: Income is taxable in hands of person who is owner/entitled to receive; subsequent judicial/custodian determinations that assessee was not owner negate taxability of accrued interest. Precedent treatment: Tribunal followed earlier decision in assessee's own case and Supreme Court outcomes to hold non-ownership prevents taxing of accrued interest. Interpretation and reasoning: Where Special Court/Supreme Court/custodian rulings establish that securities and interest belong to another (e.g., SBI), AO cannot assess accrued interest in assessee's hands. Conversely, where bonds were registered in assessee's name and interest actually paid, accrual taxed. Ratio vs. Obiter: Ratio-taxability of accrued interest depends on ownership right; court/custodian rulings determinative. Obiter-timing nuances of registration and receipt. Conclusion: Interest on NTPC bonds deleted where ownership negated by higher court/custodian; interest on NLC bonds assessed where subsequently registered and interest paid (accrued interest sustained Rs.6,94,520). 2.6. Issue: Money-market profit/loss recorded in seized ledger vs. final accounts showing loss. Legal framework: Assessable income determined on proper books and substantiated entries; seized incomplete ledgers cannot displace complete books without proof that later adjustments are bogus. Precedent treatment: Tribunal favors complete transactional/material analysis and requires AO to show fabrication if rejecting post-search losses. Interpretation and reasoning: Ledger seized at search was incomplete and omitted pre-search profits; losses in March supported by contract notes and matching counterparties/bhav or deal slips; AO/CIT(A) conclusions that March losses were bogus rested on surmises (same-day reversal, no fund movement) and on Bhav copies inappropriate for bonds. Absent clear proof of orchestration, losses must be accepted. Ratio vs. Obiter: Ratio-where complete books and contract notes substantiate losses, AO cannot revert to incomplete seized ledger; rejection requires positive proof of sham. Obiter-observations on nature of back-to-back transactions. Conclusion: Addition of money-market profit set aside; AO directed to accept loss as declared and recompute income accordingly. 2.7. Issue: Depreciation and other statutory deductions where AO treated transactions as sham or assessed rental income but disallowed depreciation. Legal framework: Once income from an asset is assessed, allowable deductions (including depreciation under s.32) must be given unless transactions shown to be sham. AO must demonstrate sham with enquiry. Interpretation and reasoning: Tax authorities taxed lease rent as income but then denied statutory depreciation without proving the transaction was a sham. Partial examination of lease agreement and ignoring subsequent assessment practice was impermissible. Without established sham, statutory depreciation allowable. Ratio vs. Obiter: Ratio-statutory deductions cannot be disallowed on suspicion where corresponding income is assessed; proving sham requires inquiry beyond surmise. Obiter-comments on commercial wisdom. Conclusion: Disallowance of depreciation reversed; AO directed to allow depreciation claimed. 2.8. Issue: Additions based on composite disclosure of third party (s.132(4)) apportioned among group. Legal framework: Disclosure in s.132(4) can be relevant but apportionment across group members is inappropriate where books subsequently provide actual incomes; composite surrender cannot override verifiable books. Interpretation and reasoning: Where books of account admitted on appeal accurately reflect income, composite third-party disclosure made under pressure is not automatic basis for additional assessment of group members; tribunal deleted proportional addition in view of actual books. Ratio vs. Obiter: Ratio-apportionment of composite disclosure must yield to subsequent verified books; Obiter-policy observations on nature of surrenders made under compulsion. Conclusion: Direction that income not be assessed lower than surrender set aside; AO directed to delete apportionment and compute on books. 3. OVERALL PROCEDURAL FINDINGS 3.1. AO must confront assessee with documents/materials relied upon for adverse additions; failure mandates deletion. 3.2. Assessments based on seized loose papers require corroboration (register, transfer deeds, contract notes, bank flow) to link assets to assessee. 3.3. Where tribunal remands to appellate authority to consider books/contract notes, AO/CIT(A) must examine those records before sustaining additions; otherwise findings are set aside/remitted. 4. FINAL CONCLUSIONS 4.1. Several additions were deleted or remitted for verification (shares, bank drafts, PSU bonds, unexplained deposits, money market profits) where books/contract notes, lack of supply of third-party documents, or judicial determinations undermined AO's case. 4.2. Certain additions sustained (limited accrued interest where registration and payment occurred; confirmed profit portions accepted by assessee). 4.3. AO directed to recompute total income after applying above findings, allowing statutory deductions where appropriate and furnishing documentation to assessee where necessary.