TaxTMI 
TaxTMI 
2013 (9) TMI 521
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed CIT (A) erred in deleting the disallowance made by AO in respect of sub-brokerage paid to Shri Madhusudan Kela amounting to Rs.1,19,00,000/-. 4. On the facts and circumstances of the case and in law, the learned CIT (A) erred in deleting the addition of service charges of Rs.1,83,750/-, made by AO". 3. We have heard the learned DR and the learned Counsel for assessee in detail. After considering the submissions and examining the paper book placed on record, we decide the issues as under: 4. Ground No.1 pertains to the issue of disallowance of interest of Rs.62,75,916/-. AO disallowed the interest claim on the ground that assessee borrowed interest bearing loans amounting to Rs.6,89,16,040/- and advanced loans to the following concerns without charging any interest. a) M/s Jayantilal Khandwala & Sons Rs.27,68,30,295/- (Peak debit balance as on 23-3-2002). b) Triumph Securities Pvt. Ltd Rs.2,75,00,000/- (Peak debit balance) as on 22-3-2002. 5. It was submitted before the CIT (A) that the accounts of the above two concerns in assessee's books of account showed debit balance as the two concerns are the constituents of assessee and had running accounts with assessee....
X X X X Extracts X X X X
X X X X Extracts X X X X
....0/-.The total entries on debit side is Rs.5,25,00,000/-. Since the amounts are squared up it cannot be said that there was any loan given for non business purpose. 7. In the rejoinder to the remand report, assessee vide letter dated 28-02- 2011 submitted that M/s. Jayantilal Khandwala & Sons is their client for which they purchased and sold shares as directed by them which has been also admitted by the AO in his remand report dated 11-02-2011. It was submitted that assessee is following trading practice in the business that no interest is charged in the balances in the account of sundry debtors and similarly no interest is paid on the balances in the account of sundry creditors. Therefore, following the business practice, no interest was charged on the debit balance in its account as on 31-03-2000. The AO assumed that assessee has taken interest bearing loans which were advanced by assessee for making interest free advances to Jayantilal Khandwala & Sons by relying on the observation of the special auditor. However, the AO has failed to establish the nexus between interest bearing loan taken and interest free advance given by assessee. It further placed reliance in the case of C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....th interest free and overdraft or loan taken then a presumption would arise that investment would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment. 2.3.1 I am, therefore, unable to hold that interest bearing loans taken by the appellant were utilized by it in advancing any interest free loans. Further the accounts maintained were running accounts and not represented loan transaction. In case of Triumph Securities, the AO has clearly stated in the remand report dated 11- 02-2011 that it cannot be said that thee was any loan given for non business purpose. In view of these, no disallowance of interest can be made. The decisions relied upon by the appellant are also supports its case. The AO was therefore, not correct in disallowing interest of Rs.62,75,916/-. This disallowance is deleted. Accordingly this ground of appeal is allowed". 9. The learned DR referring to the order of AO submitted that large funds are diverted to the sister concern and accordingly AO was correct in disallowing the interest claimed as interest on borrowed funds but not utilized in assessee's business. It was the sub....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sudan Kela. AO disallowed this expenditure on the ground that this person was not produced personally for examination though assessee was asked to do so. AO has also stated that the details of services rendered by Shri Madhusudan Kela were not furnished to AO. It was submitted before CIT(A) that confirmation letter dated 27-03-2001 addressed to Sri Madhusudan Kela and acknowledged by him was furnished to the AO. During the course of hearing, it was explained, that the services rendered by Sri Madhusudan Kela were mentioned to the AO. In particular it was stated before the AO that this sub broker procured business from NRI clients and other corporations like Can Bank Off Shore Mutual Fund, Alliance Capital Mutual funds, Lloyd George Mutual Funds, M/s. FR - Mann Ltd., Mr. Shyan Bhatia, Mr. Harshad Dhakkan and several others. Sri Madhusudan Kela could not be personally produced before the AO as the former was out of Mumbai at the relevant time and the time allowed to assessee by AO for producing this person was insufficient. The assessee however submitted that the full address and the Income tax PAN were furnished to the AO. The Bye-laws and Regulations of the Bombay Stock Exchange la....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Therefore, considering the finding of my predecessor CIT(A), the AO is directed to verify the receipts of payments shown by Shri Madhusudan Kela, in his I T return and if found correct then allow the claim. This ground is therefore, treated as allowed subject to verification". 14. Even though the learned DR vehemently argued that assessee has not filed any confirmation either during the special audit or before AO, in view of the factual findings given by the CIT (A), we have no other option than to accept his findings in the absence of any contrary evidence placed by the Revenue. The Revenue has also not raised any ground with reference to admission of any additional evidence which indicate that the factual aspect that assessee filed confirmation letters before AO in the course of the assessment proceedings are to be accepted. It is also seen that the learned CIT (A) directed to verify the receipt of payments given to Shri Madhusudan Kela and after examination directed AO to allow the claim. We do not see any reason to interfere with the findings of the CIT (A) on this issue. It is for AO to examine the factual aspects and allow the claim as the matter was restored to him by th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Before the CIT (A) it was contended that the following sister concerns were having debit balances in the books of assessee as on 31-03-2003: 1 M/s Khandwala Shares & Brokers Pvt Ltd Rs.2,50,01,566/- 2 Nirjay Securities Pvt. Ltd Rs.27,47,80,331/- 3 M/s Jayantilal Khandwala & Sons Rs.1,62,91,990/- It was explained that all the accounts in the above cases were running accounts; all the three concerns were constituents of assessee and the debit balances had arisen in the course of the business of assessee. It was further submitted that the debit balance in the case of the third concern M/s Jayantilal Khandwala & Sons had come down from Rs.8,33,18,432/- as on 1-04-02 to Rs.1,62,91,990/- as on 31-03-03. It was stated that the interest bearing loans taken by assessee were fully utilized in its business and were not utilized for giving interest free advances. It was submitted that the AO had not found that interest bearing loans taken by the assessee were used as advances to the above three concerns. It was argued that unless interest bearing loans were found to have been advanced as interest free loans by assessee, no interest claim could be disallowed by the AO. Reliance was ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....itted that these two accounts are running trading accounts and in one account there was reduction of old credit balances. It was submitted that assessment year 2000-01 was relied by AO while disallowing the amount, which were allowed by the CIT (A) in that year (which was considered in the Revenue appeal at Ground No.1 in above appeal). It was submitted that since assessee has utilized the funds in the course of business, these amounts are allowable as business expenditure. The learned DR however, relied on the orders of AO and the CIT (A). 25. We have examined the issue and the paper book placed on record with reference to this assessment year. In our opinion both AO and the CIT (A) did not examine the issue on factual basis but carried away by the findings in earlier years with reference to the same issue. As seen from the balance sheet and the Profit & Loss A/c particularly schedules placed in the paper book at page 34, assessee had no secured loan as on 31-03-2002, but had a term loan from Bank of India, Stock Exchange Branch to the tune of Rs.2,07,38,318/- as on 31.3.2003. Since there are no secured loans in earlier years, obtaining secured loan during the year should ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lowance of depreciation on the BSE Membership card owned by the appellant and utilized by it in its business. (b) The first appellate authority failed that the Registrar of Companies was informed by the appellant that BSE Member Ship Card was acquired from one of the Directors of the appellant for a sum of Rs.1,30,00,000/- by issuing 13,00,000 equity shares of the appellant company at Rs.10/-per share. The audited statements of account furnished by the appellant to AO also confirm this position. (c) The CIT (A) erred in observing that the BSE Membership Card owned by the appellant was not used in the relevant accounting year in the appellant's business. This is perhaps based on the presumption that AO found that the Membership Card of the appellant was suspended. This is factually not correct as the appellant carried on business as a Member of the BSE in the year ended 31-3-2003 and earned substantial commission". 27. Briefly stated, AO did not allow depreciation on the Membership Card on the reason that the Membership Card is not an asset for the purpose of depreciation and also on the reason that assessee BSE Card has also been suspended and consequently no business was ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....a separate partnership concern of assessee group ceased to do business w.e.f. 6.4.1998, whereas business is continued in the name of Jayantilal Khandwala & Sons (P) Ltd. However, this certificate was issued on 21st March 1998 w.e.f. 6.4.1998 i.e. assessment year 1999-2000. Except this document which could have led to above finding, we do not find any evidence on record to support the findings of AO that assessee's Membership Card was suspended. Therefore, in the interest of justice, we restore the issue to the file of AO to examine this aspect and give a clear finding whether assessee's Membership Card was suspended in the year under consideration. If the card is not used for the purpose of business, the question of allowing depreciation does not arise. However, if the Card is used for the purpose of business, following the principles laid down by the Hon'ble Supreme Court in the case of Technoshares & Stocks Ltd. and Others (327 ITR 323), assessee is eligible for depreciation. Moreover, the cost for the purpose of valuation of Membership Card is to be examined afresh by AO as CIT (A) has opined that assessee did not substantiate the cost of acquisition. These aspects require fresh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the expenditure as was done by the CIT (A) under the heads travelling, conveyance, staff welfare, miscellaneous expenditure etc. We direct AO to allow the amount as claimed. Ground is accordingly allowed. 34. Ground No.5 pertains to the addition of Rs.25 lakhs representing the amount received by assessee from Shri I.R. Khandwala through Khandwala Securities Ltd. Briefly stated AO observed that in the notes to the accounts, it was stated the assessee company had accepted a fraudulent unconfirmed transfer of Rs.25 lakhs which stood shown as sundry creditor. Since assessee failed to explain this non existing liability, in the absence of any explanation, the amount of Rs.25 lakhs was added by AO as unexplained credit. It was contended before CIT(A) that assessee was passing through a period of financial crises and was in need of funds. It therefore, approached Shri I.R. Khandwala for a loan. Shri I.R. Khandwala considered that if the loan was advanced to assessee, there might be difficulty in recovering the same. Therefore, he advanced a loan of Rs.25 lakhs to Khandwala Security Ltd (formerly known as Khandwala Finance Ltd) a public limited comopany and asked assessee to obt....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tilal Khandwala & Sons Pvt. Ltd. The remark that 'the assessee company had accepted fraudulent unconfirmed transfer of Rs.25,00,000/- which has been shown as sundry creditors' was correctly mentioned by him and the same can be seen from the reply received from Shri I.R. Khandwala. As from the statement of affairs as on 31-3-2002 and 31-3-2004, it is seen that Shri I.R. Khandwala is showing an amount of Rs.25,00,000/- as due from M/s Khandwala Securities Ltd and not M/s Jayantilal Khandwala & Sons Pvt. Ltd. A copy of the reply dated 6-3-2007 received from Shri I.R. Khandwala is enclosed herewith for necessary action at your end". 36. The CIT (A) confirmed the same by stating as under: "30. On careful consideration of the relevant facts and submissions and AO's comments, it is clear that on 01-04-02, the appellant had shown the amount Rs.25 lakhs as received from Mr.I.R.Khandwala through a journal entry. However this entry was not true as there was no basis for making such a transfer entry. Thus entry of the sum of Rs. 25 lakhs shown as having been received from Mr.I.R. Khandwala as on 01-04-02 was not factually correct. Besides as observed by the AO, Mr. I.R.Khandwala was n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ity and therefore, the Revenue is correct in bringing the amount to tax. 38. We have considered the issue. We are unable to understand how these transactions can be considered as unexplained cash credit. First of all there is no dispute with reference to the advance amount of Rs.25 lakhs to Khandwala Securities Ltd, a public limited company, which in turn passed on the loan to the assessee company. The entries in the earlier years in the books of account are a credit in the name of Khandwala Securities Ltd. To that extent the credit stands explained. Consequent to the dispute between the parties on 1.4.2002, a journal entry was passed by crediting to the account of Shri I.R. Khandwala and debiting to the Khandwala Securities Ltd. This journal entry was stated to be fraudulent entry and on that basis the amount was taken as unsecured loan. There is evidence on record that Shri I.R. Khandwala made a summary civil case before the Hon'ble Bombay High Court and there is no dispute with reference to the advancing the funds directly or indirectly. There is also no dispute to the fact of the payment by the assessee company to the said Shri I.R. Khandwala, evidence of which was also plac....