TaxTMI 
TaxTMI 
2012 (12) TMI 418
X X X X Extracts X X X X
X X X X Extracts X X X X
....acts and circumstances of the case, the Tribunal is right in law in confirming the assessment of income under the head 'undisclosed income'? 3. Whether, on the facts and circumstances of the case, the Tribunal is right in law in not considering the following grounds specifically raised before it and ought not to have allowed the same while disposing of the appeal?: a) Estimated expenditure relating to securities b) Disallowance of estimated expenditure relating to securities in computing the income under Section 115J of the Act. c) Disallowance of bonus d) Deletion of additional tax Even though the fourth question is not referred to in the order of admission, yet, considering the nature of the question raised, we include the following as the fourth question of law to be answered by this Court. "(4) Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal is right in law in not accepting the appellant's contention with regard to the appreciation in the value of investments and whether the Tribunal ought not to have held that the appreciation in the value of investments is not liable to be incl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Public Sector Undertakings through M/s. Chandrakala and Co as by way of additional interest on Fixed Deposits kept by the PSUs. The assessee admitted this fact vide its letter dated 16.03.1994 stating that such course of action was taken at the instance of the Bank. The Assessing Officer viewed that the assessee had not accounted for this in the books of accounts, and further the claim regarding payment of the additional interest of Rs.14,73,91,000/- on the deposits given by the Public Sector Undertakings being contrary to the Reserve Bank of India guidelines, directing interest at 8% as prevalent at that time, was against the public policy and the deduction was liable to be rejected. Thus, the additional interest made by the assessee by inflating the purchases and subsequently received back from the broker and paid through demand drafts directly to the aforesaid PSUs could not be accepted as correct reflection of the accounts. Further, the Assessing Officer pointed out to the letter dated 17.03.1994, wherein, the assessee was called upon to file the confirmation letters from the Fixed deposit holders as regards the receipt of additional interest sent by the Bank through the deman....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sented the balance in the inflated cost of security, the assessee contended that during the relevant period of year, there was difficulty in raising money from call money market to its fund requirement by paying heavy interest as high as 72%. Further, by reason of the situation faced by all the Banks all over India, Banks encouraged calling for deposits from PSUs, who had sufficient funds and were willing to invest, provided, they were compensated with reasonable return. At the relevant point of time, since the banks were advised to pay not more than 8% interest as per the RBI guidelines, on such short term deposits and the PSUs were not willing to deposit their funds on short term basis with the Banks at this rate, there was an informal negotiation between the banks and the PSUs on the basis of which it was agreed that the PSUs would be compensated at a rate marginally higher than the usual rate payable as per RBI guidelines. In order to meet the contingency, the assessee decided to purchase securities through M/s. Chandrakala and Co., by paying M/s. Chandrakala and Co., a price, which was an inflated one with a specific direction to M/s. Chandrakala and Co. that after meeting the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of securities based on the RBI guidelines on the subject, the Assessing Officer filed his report dated 11.02.2003. The Assessing Officer observed that "though the assessee submitted the details on 05.02.2003 and 07.02.2003, they explained their inability to produce books of accounts, invoices and notes related to assessment year 1987-88". However, ongoing through the materials available, the Officer observed that the assessee was preparing profit and loss account and Balance sheet as per the Banking Regulations Act 1949 and as per the balance sheet, the Government securities purchased were shown under 'Investment'. There were classification under the schedule investments. However, there was no column in the balance sheet showing Government securities as stock-in-trade ; that the profits on securities were offered as Business income and submitted that there was no change in the method of valuation of the securities from the assessment year 1987-88 to that date. 8. Going through the detailed report filed by the Assessing Officer, the Commissioner of Income Tax (Appeals) pointed out that the details were available as regards the securities held as investments and securiti....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the permissible limit, being contrary to law, was to be allowed as deduction under Section 37 of the Act. 11. Pointing out that the inflation in the cost of securities purchased and the additional amount paid to M/s. Chandrakala and Co., for onward transmission to PSUs as colourable device to make the additional payment to various PSUs, the CIT (Appeals) rejected the assesseee's case and thereby confirmed the order of the Assessing Officer. However, he rejected the Assessing Officer view that the extra money had been generated outside the books. All the transactions relating to excess payment to M/s. Chandrakala & Co., and artificial inflation in the cost of securities had passed through the books of accounts of the assessee and therefore the issue in the present case would be regarding the admissibility of deduction claimed by the Bank. Thus, when the expenditure claimed was held to be contrary to the directions of the RBI, the assessee was not entitled to the deduction of a sum of Rs.14,73,91,000/-. 12. As regards the commission retained by M/s. Chandrakala and Co., to the tune of Rs.2,01,08,420/-, the Commissioner of Income Tax (Appeals) pointed out that it ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ned counsel appearing for the assessee placed heavy reliance on the decision of the Apex Court reported in the case of UCO Bank Vs. CIT reported in 240 ITR 355 and submitted that the Apex Court had considered the question of valuation of securities held as investment and securities held as stock-in-trade and the same to be valued on cost or market value, whichever was lower. She submitted that even though under the Banking guidelines, the dichotomy is maintained for valuing the stock-in-trade at cost for the purpose of statutory balance sheet and valuation was at cost or market value, whichever is lower for the purpose of income-tax return, the investment has to be taken stock-in-trade for the purpose of granting deduction. In the circumstances, the learned counsel for the assessee submitted that the view of the Tribunal in remanding the matter back to the Assessing Officer to consider this dichotomy cannot be sustained. 19. As far as this contention is concerned, while we do not agree with the assessee's contention that parity must be maintained with regard to securities held as investment and securities held as stock in trade as stock in trade for the purpose of working....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the Bombay High Court held that in respect of securities held as trading assets, broken period interest earned by the Bank and paid by the assessee was entitled to be considered for deduction. 22. We are in entire agreement with the decision of the Bombay High Court. The said decision was followed by the decision in the case of Commissioner of Income Tax Vs. Deutche Bank reported in 266 ITR 106 (ST) and the said decision was taken on appeal by the Revenue. As already stated in the decision in the case of CIT Vs. Deutche Bank reported in 266 ITR 106(ST), the Special Leave Petition filed by the Revenue against the judgment dated 9th January 2002, following 258 ITR 601, was rejected by the Apex Court. A similar SLP filed by the Revenue in the case of CIT Vs. Union Bank was also rejected as reported in 268 ITR 216 (ST). Considering the fact that the CIT (Appeals) had considered the issue in detail after the remand report, we do not find any substance in remanding the matter once again back to the Assessing Officer for the self same exercise. Hence, we confirm the order of the CIT (Appeals) as there is no necessity for remand. The order of the Commissioner Income Tax (Appeal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssue back to the Assessing Officer. We make it clear that securities held as stock-in-trade and investment being stock in trade are to be treated on par and to be valued either at the cost or market price, whichever is lower. In the circumstances, keeping in the background the decision in the case of UCO Bank Vs. CIT reported in 240 ITR 355, we direct the Assessing Officer to redo the valuation in respect of stock-in-trade at cost or market value, whichever is lower. 25. As regards the question of disallowance on the payment of additional interest on deposits made by Public Sector Undertakings are concerned, learned counsel appearing for the assessee pointed out that the interest was made to the PSUs on the investments made by them and as per the Reserve Bank of India circular dated 27th April 1992, there is no inhibition in receiving the investment from PSUs and there is no ceiling on interest to be paid to them. She pointed out that the assessee had taken the plea that it had received deposits from PSUs, yet what was received was not deposits, but were investments. We do not think that the assessee would be permitted to change the character of the receipts at this stage....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat the payment was contrary to the RBI guidelines, yet, we find that when the Revenue had not disputed the deposits by the PSUs, the payment of interest is guided by the RBI circulars and that the assessee had paid the additional interest through Demand Drafts purchased through M/s. Chandrakala and Co, and that only in the case of three Public Sector Undertakings viz., ONGC, Nuclear Power Corporation and Bharat Dynamics, had denied the receipt of the Demand Drafts, applying the Circular, we do not find any justifiable ground on the submission made by the Revenue that payment of additional interest would be contrary to the guidelines issued by the RBI. Even in respect of three of the PSUs viz., ONGC, Nuclear Power Corporation and Bharat Dynamics Limited, it is seen from the judgment of the CBI Court that in C.C.No.17 of 99 dated 27th April 2004, which related to the criminal prosecution of M. Gopalakrishnan, the Chairman and Managing Director of Indian Bank and T.Jayachandran, Proprietor of M/s. Chandrakala and Co., that on the evidence let in, it was found that the amount paid to these PSUs were properly accounted for and disclosed to Income Tax Authorities. It is seen from the ju....