TaxTMI 
TaxTMI 
2007 (8) TMI 481
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....argued that the decision of the Special Bench of the Tribunal in the case of Wallfort Shares & Stock Brokers Ltd. v. ITO [2005] 96 ITD 1 (Mum.) completely covers the issue in favour of the assessee. He also relied upon the decision of the Delhi High Court in the case of CIT v. Vikram Aditya Associates (P.) Ltd. [2006] 287 ITR 268 . 4. We have carefully considered the rival contentions 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 Punjab & Haryana High Court have accepted similar contentions of the assessee in the following cases : (i) Ashok Kumar Damani 'A' Bench [IT Appeal No. 7004 (Mum.) of 2004] (ii) Oxemberg Fashions Ltd. 'E' Bench [IT Appeal No. 5617 (Mum.) of 2004] (iii) Ronak Manharlal Sheth 'I' Bench [IT Appeal No. 2966 (Mum.) of 2004] although contrary views are expressed by 'E' Bench in the case of Ompraskash Agarwal [IT Appeal No. 7895 (Mum.) of 2004]. In the light of the principle laid down by the Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 and also the deci....
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....pplication 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 : CIT v. V.I. Baby & Co. [2002] 254 ITR 248 (Ker.); CIT v. United General Trust Ltd. [1993] 200 ITR 488 (SC); Waterfall Estates Ltd. v. CIT [1996] 219 ITR 563 (SC); Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 , 211 (SC); Shankar Theatres v. CIT [1984] 146 ITR 547 (Bom); Phaltan Sugar Works Ltd. v. CIT [1994] 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 utilised by the assessee in purchase of shares on behalf of CCL. The learned counsel for the assessee strongly relied on the deci....
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....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. 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 under section 14A of the Income-tax Act on account of deemed interest comprising of Rs. 17,98,947 attributable to investment made in mutual 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 under section 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 mutual funds. Similarly, the assessee earned dividend income on shares of Indian companies amounting to Rs. 50,12....
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....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 stocks and shares. 14. The learned counsel pointed out that the assessee had invested Rs. 80 crores in schemes of various mutual 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 judgme....
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....act that the dividend income was exempt in the hands of the assessee was no ground to disallow the interest. 17. The learned counsel submitted that the working of disallowance as made by the Assessing Officer was based on ad hoc disallowances and not on actual facts. The Hon'ble Bombay High Court in the case of CIT v. General Insurance Corpn. of India (No. 1) [2002] 254 ITR 203 held that the expenditure that is not directly relatable to earning of dividend income cannot be deducted from deduction under section 80M. Again in the case of CIT v. Central Bank of India [2003] 264 ITR 522 Hon'ble Bombay High Court held that only actual expenditure incurred was deductible and estimated proportionate expenditure was not deductible from gross dividend while working out deduction under section 80M. Reference was invited to the decision of the Tribunal in the case of Shaw Wallace & Co. Ltd. v. Dy. CIT [2002] 80 ITD 156 (Cal.) and of Madhya Pradesh High Court in the case of State Bank of Indore v. CIT [2005] 275 ITR 23 . In the instant case neither the Assessing Officer nor the CIT(A) had established the direct nexus between the borrowed funds and the acquisition of mutual fund units ....
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....epartmental 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 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 did 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 in Everplus Securities & Finance Ltd. v. Dy. CIT [2006] 101 ITD 151 (Delhi). 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 first instance the authorit....
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.... 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 (P.) Ltd. [1998] 232 ITR 7 and the decisions of ITAT in the cases of Mafatlal Holdings Ltd. v. Addl. CIT [2004] 85 TTJ (Mum.) 821 as also Asstt. CIT v. Eicher Ltd. [2006] 101 TTJ (Delhi) 369 where the Tribunal has held that 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'. 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. Dy. CIT [2006] 101 ITD 151 (Delhi). The facts of that case are altogether distinct from the facts of the present case. M/s. Everplus Securities ....
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.... 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 insofar as 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 Corpn. v. CIT [2000] 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 was directly attributable to earning of any exempt income. In the normal course, expenses like demat charges, stock exchange expenses 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 th....
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.... met. The learned CIT(A) agreed with the Assessing Officer and held that the amount in question was allowable neither as bad debt nor as business loss. He held also that the claim of loss was premature because the assessee had not made 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 and 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 landmark judgment of the Hon'ble Supreme Court in the case of Badridas Daga v. CIT [1958] 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 issued by Century Consultants Ltd. were not realized, the assessee tried....
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....me 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 time practically of no value at all. Secondly, the learned Assessing Officer objected to the claim of business loss on the ground that certain steps had been taken by the assessee. There again the Assessing Officer had completely misdirected himself and paid no heed to ground realities. Mere filing the suit was not a prospect of actual recovery. That was more a question of the availability of the funds with the debtor. Further, it is common knowledge that such types of litigation are long-drawn, protracted and result into mounting cost in terms of time and money generally not commensurate with the final outcome. The learned counsel relied upon the judgments in the cases of Jethabhai Hirji & Jethabhai Ramdas v. CIT [1979] 120 ITR 792 (Bom.) and A.W. Figgis & Co. (P.) Ltd. v. CIT [2002] 254 ITR 63 (Cal.). It was submitted that the revenue authorities as also....
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....d 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 the 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 lost. From the facts on record it cannot be disputed that the assessee had purchased the shares on behalf of CCL in the ordinary course of 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 [1958] 34 ITR 10. The Hon'ble Supreme Court has laid down the legal proposition in the following words: ". . . when a c....
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....not necessary to claim the bad debt. Therefore, in this case the amount should be allowed as bad debt." It is therefore seen 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 belief 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 & Jethabhai Ramdas (supra). The case law relied upon in this behalf by the learned DR is off the mark. In the case of CIT v. Hotel Ambassador [2002] 253 ITR 430 (Ker.) that assessee had not charged bad debt written off to profit & loss account at all. It did not form 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(P.) Ltd. [2005] 277 ITR 409 (Mad.) that assessee merely created "Provision for bad debts" and charged the provision to profit & loss account. Hon'ble High ....
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....e assessee had with him the security deposit of Rs. 15 lakhs 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.Classic Credit Ltd. Rs. 6,70,904 2.Fortune Investments Rs. 11,27,805 3.Ashok Mittal & Co. Rs. 25,58,584 4. Mr. Shah Rs. 1,36,438 Rs. 44,93,731 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 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 or less repeated the a....
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....Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) and Western India Oil Distributing Co. Ltd. v. CIT [1994] 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 the case of revenue from the judgment of Hon'ble jurisdictional High Court in the case of Western India Oil Dis....
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....should have considered the issue in the light of the above judgments of the Apex Court. But that has not 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 client and 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 31-1-2001 to 31-3-2001 there was a continuous debit balance in the account of AMC except on three days when the balance was in credit. The Assessing Officer....
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....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 [1979] 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 [1994] 208 ITR 989 (Bom.); Phaltan Sugar Works Ltd. v. CIT [1995] 216 ITR 479 (Bom.) and Madhav Prasad Jatia v. CIT [1979] 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 tha....
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....ddition 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 c....
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....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 to frame afresh in the light of the fresh evidence that is now produced before us 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 fast-changing 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 cases of Business Information Processing Services v. Asstt. CIT [2000....
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....looked at, one could not conclude as to whether the tour was for personal purpose or business purpose. No such effort was made by the lower authorities. The learned counsel relied upon the court pronouncements in the cases of CIT v. Indian Products Ltd. [1994] 207 ITR 647 (Cal.); CIT v. Sundaram Clayton Ltd. [1999] 240 ITR 271 (Mad.) and CIT v. Aspinwall & Co. Ltd. [1999] 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 ad hoc manner and 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 [1980] 125 ITR 293 (SC); CIT v. T.S. Hajee Moosa & Co. [1985] 153 ITR 422 (Mad.) and D.B. Madan v. CIT [2003] 261 ITR 193 (Mad.). 52. We find that the Assessing Officer has disallowed the e....
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....R 533 and argued that no firm 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 Co. Ltd. v. CIT [1968] 68 ITR 486. How the assessee dealt with the asset was material and not how 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 section 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 th....
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....the Calcutta Stock Exchange. Ground of Appeal Nos. 11 and 12 pertain to the assessee's claim of deduction of speculation loss of Rs. 15, 67, 29,843 and loss on 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 three 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 under section 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 three brokers in support of its claim of purchase and sale of shares. Though, the assessee produced five documents in the form of "Delivery Bill" those documents had various lacunas like the serial No., trade No., the time of the execution of the transactions etc. was not mentioned. In the Additional Report made subsequently t....
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....f 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 except those outstanding as on 31-3-2001 and argued that under such circumstances there could not be any doubt about the genuineness of the trades. The Assessing Officer found that from the various transactions of the assessee with the three Kolkata 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 loss 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 respects 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, treated the profit of Rs. 66,18,640 arising out of transaction in shares of Larsen & Toubro Ltd. as income from other sources. As regards the transactions at (iii) above the Assessing Officer d....
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....e report of the Special Auditor under section 142(2A) and the information supplied by Calcutta Stock Exchange but he stated what they did not state and did not state what they obviously stated. Lakhani & Co., the special auditors appointed under section 142(2A) made their report on 6-8-2004 (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 transactions 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 acknowledges 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 he makes only two kinds....
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....erved : "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 your 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 your 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 transactions 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 had confirmed that these transactions had not taken place on the floor of the Exchange. Fur....
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....d precept of evidence that the apparent state is true until contrary is proved and the burden to prove the contrary rests upon one who asserts the contrary. In this context he referred to the judgment of the Apex Court in the case of CIT v. Daulatram Rawatmull [1973] 87 ITR 349. In the present case the assessee had fully discharged the initial burden placed on him to furnish supporting evidence as respects the transactions claimed to have been carried out by him. The assessee had furnished all the evidences reasonably expected to be in his possession. As against the evidence placed by the assessee the Assessing Officer had nothing more than conjectures, surmises and suspicion. Disallowances had been made without examining the relevant evidence like, contract notes, payments made against purchases 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 produced before the Assessing Officer. In the assessment order and the appellate order no evidence or material against the assessee had been relied upon.....
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.... 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 his finding the Assessing Officer was required to reject all trades of 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 the spacious argument that profits were assessable as unexplained credits. The assessee had shown profit from these transactions at approx. Rs. 45.26 crores and losses at approx. Rs. 29.08 crores and non recovery of dues of Rs. 26.44 crores. Surely the assessee must be completely out of his senses to introduce bogus credits of Rs. 45.26 crores only to be offset by much larger bogus debits of Rs. 55.52 crores. Thu....
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.... Shreyas S. Morakhia [IT Appeal No. 2647 (Mum.) of 1999] that loss suffered on account of defaulting stock brokers should be considered as business loss though the recovery proceedings initiated by the stock 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 Corpn. v. CIT [1986] 160 ITR 15 and pointed out that Hon'ble High Court had held that the sale price due to the assessee 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 [1958] 34 ITR 64 when Their Lordships observe, "any los....
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....dition could not exceed the sum of Rs. 10.26 crores being the net reduction in the assessee's income on account of transactions with the Kolkata brokers. Realizing this self-contradiction the Assessing Officer has purported to assess the sum of Rs. 45.26 crores as unexplained credits. That is, obviously, a lame excuse because the assessee does 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 assessee 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 self-contradictory 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 in looking askance at credit entries while ignoring the debit entries in one and the same account, more so when the ....
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....he paper-book) the special auditor has discussed the assessee's transactions with the three Kolkata brokers. The special auditor takes exception to the assessee 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 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 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 states that the transactions are not genuine. In this report the Special Auditor makes only the observations (1) In the absence of bills or contract notes it cannot be commented whether the transactions are in compliance of the provisions of the Securities Contract (Regulation) Act, 1956 and (2). In the absence of the supporting proof in the form of contract notes, proof of prevailing market price on the date of transacti....
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....d sales had been disclosed were within the price band of the market price 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 Kolkata brokers are concerned the report of the Special Auditor, finally, is only that 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 to confirm whether the trades done by the said persons 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 a....
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....ons. The Tribunal held that such fine 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 of CSE, Contract Notes and Delivery bills issued 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 Rs. 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 answ....
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....n this respect are in the documentation done by the third parties and not the assessee. It is 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 defaults 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. v. State of Orissa [1972] 83 ITR 26 and the judgment of the jurisdictional High Court in the case of CIT v. Chemicals & Fibres of India Ltd. [1983] 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 denial of deduction of loss on the ground of non-genuineness of 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 ther....
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....urred 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 [1979] 120 ITR 792 (Bom.) 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 of appeal relate to the disallowances 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 totalling a large number of very small amounts. Having regard to the total turnover of Rs. 9,218 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 th....
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....rned 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 the 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 t....
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....ven 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 8th 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 acknowledgement 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 1-4-2001. Reference was invited to pages 314 to 31....
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.... 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 the learned CIT(DR) relied upon the judgment of Hon'ble Supreme Court in the case of Sreelekha Banerjee v. CIT [1963] 49 ITR 112 at p. 118. 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 [1992] 193 ITR 318 (All.); CIT v. Precision Finance (P.) Ltd. [1994] 208 ITR 465 (Cal.) and CIT v. Korlay Trading Co. Ltd. [1998] 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 balan....
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....ficer 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 [1985] 151 ITR 150 (Pat.); CIT v. Currency Investment Co. Ltd. [2000] 241 ITR 494 (Cal.) and CIT v. Emerald Commercial Ltd. [2001] 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 Banerjee (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 Precision Finance (P.) Ltd. (supra) the ITO allowed opportunity to that assessee for about 7 years to....
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....al grounds of appeal have been filed on 20-4-2007 with a request for admission of those grounds. Both the additional grounds relate to the appointment of the Special Auditor under section 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 section 142(2A) of the Act for special audit. In the second additional ground, the assessee argues that reference to the special auditor was made under section 142(2A) of the Act only because the Assessing Officer was interested in extending the period of limitation prescribed in section 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 ....
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....42 is now followed by a proviso: - "Provided that the Assessing Officer shall not direct the assessee 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 under section 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....
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....ect that the jurisdiction of the Tribunal is restricted to subject-matter before the first appellate authority and Tribunal cannot 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. v. CIT [1993] 199 ITR 351^1 ^0 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 forever 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 [1998] 229 ITR 383. 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. Indeed, during the course of hearing before us the learned CIT(DR) has not disputed the contention of t....
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....m 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....
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....ppeal 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 under section 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 Asstt. CIT [2006] 283 ITR 56 (Bom.) that has been relied upon by the learned CIT (DR). Hence that judgment cannot 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 [2006] 287 ITR 473 (All.); V.L.S....
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....posal 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 [1983] 141 ITR 928 (MP) and CIT v. H.M.T. Bearings Ltd. [1990] 182 ITR 183 (AP). Reference may be made to cases related to Explanation 3 to section 153 also - Rani Rajendra Kumari Ba v. ITO [1981] 130 ITR 708 (All.); CIT v. K.R. Patel [1969] 73 ITR 508 (Mys.); C.A. Gulanikar, ITO v. Ramnarain Sons (P.) Ltd. [1979] 119 ITR 83 (Bom.); CIT v. Mohini Thapar Charitable Trust [1986] 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 [2007] 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 u....