TaxTMI 
TaxTMI 
TaxTMI 
2017 (2) TMI 1501
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....ordingly the business carried on by the appellant is not covered in the definition of 'eligible business' as per the said section; and (b) That the deduction is only available to an assessee who is into the business of providing long-term finance for construction and purchase of houses for residential purposes and not to an assessee who is engaged in the business of providing finance to the Housing Finance Institutions for the construction and purchase of houses. 2. The learned CIT (A) was not justified in sustaining the disallowance of Rs. 35,04,28,356/- under section 36(l)(viii) of the Act on the alleged contention that the amendment made to the said section vide Finance Act 2009, wherein the appellant's sphere of activity has been specifically covered, is prospective in nature and not clarificatory in nature. 3. On the facts and in the circumstances of the case, the impugned addition and the consequent demand of tax along with interest under different provisions and penalty proposed u/s 271(l)(c) are wholly illegal and unsustainable and liable to be vacated. 4. The impugned orders having been passed by the lower authorities illegally and without any basis or ....
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....ion would be allowed by virtue of the assessee's claim for deduction being allowed as no deduction has already been allowed of the same amount. 6. The authorities below also erred in disallowing the appellant's claim rightly made u/s 36(l)(viii) of the Act on the erroneous view that in view of the amendment to the Section made by the Finance Act, 2009 being only prospective for granting deduction with effect from AY 2010-11 ignoring the fact that it is nothing but a clarificatory amendment which is clearly applicable retrospectively for all passed and pending cases as the objective is to remove unintended hardship and consequences arising from the incorrect and negative view of the Revenue which was sought to be redressed by the legislative clarificatory amendment retrospective in nature. 7. The authorities below also erred in ignoring the fact that the legislative amendment by the Finance Act, 2009 is nothing but clarificatory in nature and intended to remove unintended consequences and hence, required to be applied retrospectively as if that had been the law all times and failure to do so has vitiated the impugned orders. 8. The authorities below also erred in disal....
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.... has to be considered as part of providing long term finance. 4. The authorities below have erred in holding that had claimed deduction u/s 36(l)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the appellant that the assessee has not considered the profits from short--term housing finance for computing the deduction ; -36(l)(viii) of the Act. 5. The authorities below have also erred in holding that the claim for deduction lawfully due to the appellant would result in double deduction on the same loans/advances without even considering the explanation given by the appellant pointing out that no double deduction would be allowed by virtue of the assessee's claim for deduction being allowed as no deduction has been allowed of the same amount. 6. The authorities below also erred in disallowing the appellant's claim rightly made u/s 36(l)(viii) of the Act on the erroneous view that in view of the amendment to the Section made by the Finance Act/ 2009 being only prospective for granting deduction with effect from A Y 2010-11 ignoring the fact that it is not....
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....nstruction or purchase of residential housing in India is not covered by Section 36(l)(viii) of the Act without giving reasons for not considering the binding Circular No.72 dated 6.1.1972 issued by CBDT, binding on the Revenue which clarifies that the expression "refinance" has to be considered as part of providing long-term finance. 4. The authorities below have erred in holding that the assessee had claimed deduction u/s 36(l)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the -* appellant that the assessee has not considered the profits from shortterm housing finance for computing the deduction claimed rightly u/s 36(l)(viii) of the Act. 5. The authorities below have also erred in holding that the claim for deduction lawfully due to the appellant would result in double deduction on the same loans/advances without even considering the explanation given by the appellant pointing out that no double ^ deduction would be allowed by virtue of the assessee's claim for deduction being allowed as no deduction has already been allowed of the same amount. 6....
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.... not allowing the deduction of Rs. 53,53,45,30; u/s 36(1)(viii) of the I T Act ignoring the fact that the appellant rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the low authorities have erred in holding that refinance of housing loans 1 construction or purchase of residential housing in India is not cover by Section 36(1)(viii) of the Act without giving reasons for not considering the binding Circular No.72 dated 6.1.1972 issued CBDT, binding on the Revenue which clarifies that the expression 'refinance' has to be considered as part of providing long-term finance. 4. The authorities below have erred in holding that the assessee ha: claimed deduction u/s 36(1)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the appellant that the assessee has not considered the profits from short-term housing finance for computing the deduction claimed rightly u/s 36(1)(viii) of the Act. 5. The authorities below have also erred in holding that the claim for deduction lawfully due to the appellant would resul....
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....tances of the case, the authorities below have erred in not allowing the deduction of Rs. 21,10,00,000/- u/s 36(1)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in holding that refinance of housing loans for construction or purchase of residential housing in India is not covered by Section 36(l)(viii) of the Act without giving reasons for not considering the binding Circular No.72 dated 6.1.1972 issued by CBDT, binding on the Revenue which clarifies that the expression 'refinance' has to be considered as part of providing long-term finance. 4. The authorities below have erred in holding that the assessee had claimed deduction u/s 36(l)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the appellant that the assessee has not considered the profits from short-term housing finance for computing the deduction claimed rightly u/s 36(l)(viii) of the Act. 5. The authorities below have also erred in holding t....
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....d order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of Rs. 11,19,30,645/- u/s 36(1)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in holding that refinance of housing loans for construction or purchase of residential housing in India is not covered by Section 36(1)(viii) of the Act without giving reasons for not considering the binding Circular No.72 dated 6.1.1972 issued by CBDT, binding on the Revenue which clarifies that the expression "refinance' has to be considered as part of providing long-term finance. 4. The authorities below have erred in holding that the assessee had claimed deduction u/s 36(1)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the appellant that the assessee has not considered the profits from short-term housing finance for computing the deduction claimed rightly u/s 36(1)(viii) of....
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....and documents and case law, placed by the appellant and the impugned order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of Rs. 11,54,28,402/- u/s 36(1)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in holding that refinance of housing loans for construction or purchase of residential housing in India is not covered by Section 36(1)(viii) of the Act without giving reasons for not considering the binding Circular No.72 dated 6.1.1972 issued by CBDT, binding on the Revenue which clarifies that the expression 'refinance' has to be considered as part of providing long-term finance. 4. The authorities below have erred in holding that the assessee had claimed deduction u/s 36(1)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the appellant that the assessee has not considered the profits from short-term housing....
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....ee. 11. The assessee is a financial institution that is set up under the National Housing Bank Act, 1987. Accordingly, the main objects of the assessee were enlisted in section 14 of that Act. The assessee was enjoying exemption under the Income Tax Act 1961 by virtue of provisions of section 48 of the National Housing Bank Act, 1987. The above section was omitted w.e.f. 01.04.2002 and therefore the income of the assessee is now chargeable to tax from A Y 2002-03 onwards. The assessee provides refinance to various banks and housing finance companies and income stream of the assessee is interest on these loans and advances. It also earns revenue from investment in bonds, mutual funds, shares and securities. 12. For AY 2007-08 the assessee filed its return of income on 29.10.2007 for total income of Rs. 2015167765/-. Subsequently, it revised its original return of income on 31.03.2009 to Rs. 1703076554/- for claiming deduction u/s 36(1)(viia) and 36(1)(vii) of the Act. The assessee claimed deduction u/s 36(1)(vii) of Rs. 350428356/-. The claim was based on the belief that the main object of the assessee is to promote Housing Finance Companies. However, the ld Assessing Officer deni....
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....ut more emphasis on prompt recovery of advances rather than putting the conditions as laid out in section 36(1)(viii) of the !T Act, 1961 for the obvious reason that the main objective of NHB is promoting housing financing institutions and not the long term residential housing refinance. Since NHB is not financing long term residential housing loans on its own, thus, the fulfillment of conditions for claiming deduction u/s 36(1)(viii) will always remain in twilight. Therefore, when the public company/ financial institutions advancing housing loans originally is not eligible for deduction u/s 36(1)(viii) of the IT Act, then there is no question of allowability of deduction in case of NHB. In the case of Me Dowell & Co. Ltd Vs. CTO 154 ITR 148 (SC) and Union of India Vs. Plywood Electronics ( 1990 ) 184 ITR 308 (SC), Hon'ble Supreme Court has held that when two interpretations are possible, one leading to avoidance or evasion of tax should be avoided and that which prevents such avoidance or evasion should be adopted. In the case of the assessee, the interpretation by the assessoe leads to avoidance of tax on facts and on merits it leads to incorrect interpretation of law also.....
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.... of electricity In this connection, it may be pointed out (hat whenever the Legislature wanted to give a restricted meaning ffi the manner suggested by the learned Solicitor General, it has used the expression 'derived from' as for instance, in section 80-J. In our view,, since the expression of wider import, namely, attributable, has been used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. The scope of expression " derived'from" was again considered by the Apex court in CIT Vs. Sterling Food ( 1999) 237 ITR 579 (S) and it was held thus : " Held reversing the decision of the High Court, that the provisions of section 28 as amended made no difference. The words " derived" is usually followed by the word " from" and it mean " get" to trace from a source, arise from' originate in show the origin or formation of the source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government where under the export entitlements be....
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....on of the assessee amounts to double deduction on the same loan/ advance and if assessee's contention is accepted then this claim can be extended up to any level making each level eligible for deduction u/s 36f1)fviii) on the same loan, which certainly cannot be the intention of the Legislature and it stretches the meaning of the provisions of Section 36(1)(viii) of the IT Act. 1961 to absurdity and it is settled law that the absurd interpretation of the law cannot be construed. Moreover, section 36(1)(viii) of the IT Act, 1961 which is a specific section enacted by the Legislature and no general meaning can be assigned to it. Whatever benefit is not provided in the Incometax Act directly to the assessee cannot be claimed by the assessee indirectly. When the wordings of section is clear, no benefit can be conferred upon the assessee to misconstruing or misrepresentation of the words of the section. In the case of CIT Vs. H Begum { 1989} 176 ITR 38 (SC), Hon'ble Apex Court has observed that, "one of the pillars of statutory interpretation, viz, the literal rule, demands that, if the meaning of the statutory provisions is plain, the courts must apply it regardless of the resu....
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.... "5. I have carefully considered the facts of the case and the various judicial r-pronouncements cited by the learned AO and the learned appellate counsel. On a careful consideration of the relevant provisions of section 36(l)(viii), it is evident that the explanation of the term "eligible business" for the purpose of the above provision in case of housing activities means "business of providing of long term finance for 'construction or purchase of houses' in India for residential purposes". The term "long term finance", for the purpose of the above provision, means any loan or advances where the term in which the monies are loaned or advances provide for repayment along with interest thereof during the period of not less than 5 years. Thus, the enabling provisions of section 36(l)(viii), if strictly construed, restricts its benefit to only business of providing long-term finance for long term finance for construction and purchase of house for residential purpose and not for providing finance to Housing Finance for construction and purchase of house. 5.2 It will also be useful to take cognizance of objectives for which the National Housing Bank was set up, on going t....
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....t intended for the National Housing Bank per se which were brought on the statute originally with effect from 1/4/1972 in the case of the housing sector. The National Housing Bank, however, continued to avail tax exemption by an enabling provision built therein that overrided the provisions of the Income tax Act 1961. However, by a specific amendment brought about with effect from 1/4/2002 in the Finance Act, 2001 such an exemption was withdrawn by the Government. herefore, it is amply clear that the provisions of section 36(l)(viii) were never intended for the National Housing Bank Act 1987. This fact is further clarified by the amendment brought about in this provision vide the Finance Act, 2009, which substituted the terms "construction or purchase of houses" with "development of housing", the latter term being much wider, which includes construction or purchases of house and any other major activity leading to development of houses. 5.5 The relevant explanatory memo of the said Finance Act, 2009 reads as under "Clause (viii) of sub section (1) of section 36 (section 36(l)(viii) provides special deduction to financial corporations and banking companies of an amount not exceedi....
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....le beneficiary of the provisions of section 36(l)(viii). 5.8 Without prejudice to the above, since, the above beneficial provision is with respect to the profits derived from the long term finance activities only, I had directed the learned counsel to furnish break up of the interest income derived by the appellant bank in respect of loans and advances given for five years and above and those were originally upto 5 years only or where premature repayment of long term loans/advances was made within 5 years. The learned appellate counsel vide their letter dated 8/4/2010 had informed that out of the total interest of Rs. 11,89,58,85,883/-, the short terms loans, that were upto 5 years to Rs. 697,48,74,606/- while the interest from long term amounted to Rs. 492,10,11,277/-. Therefore, without prejudice to my decision in para 5.7 above, even if the appellant's claim was to be allowed, the quantum of deduction shall not exceed 20% of the eligible profit, which in the case of the appellant shall be computed by taking the total interest income derived by the appellant only. Therefore, the claim of deduction made by the appellant with be reduced accordingly, even if the claim of the a....
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.... the paragraph 3 of the memorandum, which explained the rational of the amendment. Therefore, he vehemently opposed the claim of the assessee and submitted that the argument of the assessee that this amendment applies retrospective does not hold water in view of the above memorandum. 17. We have carefully considered the rival contentions. The provisions of Section 36(1)(viii) for AY 2007-08 provides as under:- "(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-- (viii) in respect of any special reserve and maintained created by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent. of the profits derived from such business of providing long-term finance (computed under the head "Profits and gains of busines....
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....usiness from "long-term finance for construction or purchase of houses in India for residential purposes" to "development of housing in India". The memorandum explaining the bill has abundantly made clear about the above amendment in memorandum explaining the provisions as under:- "Special deduction under section 36(1)(viii) to National Housing Bank (NHB) Clause (viiii) of sub-section (1) of Section 36 [section 36(1)(viii)] provides special deduction to financial corporations and banking companies of an amount not exceeding 20% of the profits subject to creation of a reserve. National Housing Bank (NHB) is wholly owned by Reserve Bank of India and is engaged in promotion and regulation of housing finance institutions in the country. It provides re-financing support to housing finance institutions, banks, ARDBs, RRBs etc., for the development of housing in India. It also undertakes financing of slum projects, rural housing projects, housing projects for EWS and LIG categories etc. NHB is also a notified financial corporation under section 4A of the Companies Act. A view has been expressed that NHB is not entitled to the benefits of section 36(1)(viii) on the ground that it i....
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....as "development of Housing in India" from "construction or purchase of houses in India". Therefore, it is apparent that prior to this assessee was not eligible for deduction u/s 36(1)(viii) of the Act. in view of this Ground Nos. 1 and 2 of the appeal of the assessee which are against sustenance of disallowance of Rs. 350428356/- u/s 36(1)(viii) of the Act are dismissed. 22. Ground Nos. 3 and 4 of the appeal of the assessee are against initiation of penalty proceedings u/s 271(1)(c) of the Act. According to us these grounds are premature at this stage and hence, same are dismissed. 23. In the result appeal of the assessee in ITA No. 3704/Del/2010 for AY 200708 is dismissed. 24. Now we come to the appeal of the assessee for following Assessment years where the identical grounds with respect to disallowance u/s 36(1)(viii) is contested as under:- ITA No. AY Claim for deduction u/s 36(1)(viii) in Rs. Ground Nos 1514/Del/2013 2005-06 535345302/- 1 to 9 1515/Del/2013 2006-07 211000000/- 1 to 9 1516/Del/2013 2008-09 111930645/- 1 to 9 1517/Del/2013 2009-10 115428402/- 1 to 9 25. In view of our decision in ITA No. 3704/Del/2010 for AY 2007-08 wherein we have held....
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....s. 707.56 crores would be paid by NHB to SBI after appropriating the sum of Rs. 131.20 crores with interest accrued thereon which had been lying with the Special Court. Pursuant to the order of the Hon'ble Supreme Court dated 1/11/2002 (passed after out of court settlement by NHB and SBI). NHB paid a sum of Rs. 150.45 crores to SBI on 17/12/2002 and the assessee has claimed this amount of Rs. 1,50,45,32,696/-as business loss in its P & L Account for the previous year under consideration. D(2) It is also pertinent to mention here that assessee accounts for its income from security transactions under the head "Income from Capital Gains" and as per audit report follows mercantile system of accounting. In the current year itself, the assessee has shown Short Term Capital Gain of Rs. 11.61 crores and Long Term Capital Gain at NIL after setting off B/F capital losses. In these circumstances, assessee was asked to show cause vide this office letter dated 7/2/2005 as under: "Please explain why loss on securities transactions for 1991-1992 should be allowed as expenses in the previous year under consideration as prima facie it appears a loss of capital in nature? Your reply should a....
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....ra) on 13/7/1998 in another related dispute would get adjusted with interest @ 12% per annum - towards the present dispute which would be about Rs. 196 crores (c) Both NHB and SBI should pursue the matter before the Special Court and recover from the assets of Mr. Harshad Mehta Please find enclosed a copy of the terms of settlement dated 30/10/2002 between NHB and filed before the Supreme Court (Annexure (=). Copy of the order of the Supreme Court which was passed shortly thereafter (around November, 2002) will be submitted after obtaining a copy of it from the lawyer/court Accordingly, the assessee paid Rs. 150 45 crores to SBI during this year It is submitted that since the liability has occurred in the normal course of business and has got settled by the Supreme Court of India during the year under consideration. It has accrued and arisen during this year. It is brought to your kind notice that the assessee has included in its business receipts of a sum of Rs. 113 crores in A.Y. 2002-2003 on the same principle of settlement of a dispute by the Supreme Court on account of similar securities transactions of 1991-1992 Your kind attention is invited to the fact that the Ba....
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....riod" as expressed by yourself, then the sum of Rs. 113 crores included in A. Y. 2002-2003 is not to be included on the same ground. Similarly, any sums recovered in future on account of various claims pending in Courts -would not be includable in income and the department should follow its stand consistently. This letter may be treated as a claim for exclusion of Rs. 113 crores from income of A.Y. 2002-2003 the proceedings for which were also heard simultaneously and the orders have not yet been served on the assessee. " D(5) In the course of current proceedings, the assessee filed the following submissions vide letter dated 3/8/2010 was filed on 12/11/2010 :- " Our part submission with regard to allowance of expenditure on account of loss on security transaction of 1991-1992 amounting to Rs. 150,45,32,696/- 6.1 Regarding the payment of Rs. 150,45,32,6967-, it is respectfully submitted that learned assessing officer and learned CIT(A) had held that the Loss/payment is clearly of capital nature and cannot be allowed as business loss. 6.2 In this regard, it is respectfully submitted that in case of NHB, purchase/sale of securities is both part of trading activities as well....
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....herefore it was decided that a sum of Rs. 353.78 crore, being 50% of Rs. 707.56 crores would be paid by NHB to SB!. NHB in a separate suit had deposited Rs. 131.20 crore with the Special Court On 1307 1998 As per terms of settlement filed by the parties in the Supreme Court which was approved by Hon'ble Supreme Court, the amount of Rs, 131.20 crore along with the interest accrued thereon shall be reduced from 353.78 crore and the balance amount shall be paid by NHB to SBI. Pursuant to the order of Supreme Court dated 1.11.2002, NHB paid a sum of Rs. 150.45 crore to SBI on 17.12.2002 after appropriating the sum of Rs. 131.20 crore with interest accrued thereon and the assessee claimed this payment as business loss in its profit and loss account. The copy of the order of Hon'ble Supreme Court, terms of settlement, Supreme Court Record of Proceedings and letter from Ministry of Finance regarding the settlement has been attached for your kind reference. 6.5 From the above facts, it is clear that the loss on these securities was incurred because of non receipt of securities purchased by NHB from SBI for which the payment was made by NHB to SBI in the normal course of business,....
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....sible as expenses incurred for the purpose of the business. If the employment of agents is incidental to the carrying on of business, it must logically follow that losses which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer, and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it. If a loss by embezzlement can be said to be necessarily incurred in carrying on the trade it is allowable as deduction from profits. I an ordinary case, it springs directly from the necessity of deputing certain duties to an employee, and should therefore be allowed." The said decision was further affirmed by Hon'ble Supreme Court in the case of - CITv. Nainital Bank [1965] 55 ITR 707 (SC). In the case of NHB, the conditions as laid down by Hon'ble Supreme court for allowability of trading losses are fulfilled inasmuch as the loss was incurred because of misappropriation of funds by the emplo....
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..... 912 crores} in the financial year 2001-2002. The excess of Rs. 113 crores was shown by assessee as an income and the relevant interest paid amounting to Rs. 87 crores on the loan from RBl has been accounted as an expenditure. Thus, the assessee has shown an income of Rs. 26 crores (Rs. 113 crores - Rs. 87 crores} only as against the claimed amount of Rs. 113 crores. It is ample clear that the facts and nature of the Business Loss claimed at Rs. 150.45 crores in the asstt Year under consideration and the amount of Rs. 26 crores or Rs. 113 crores shown in the Asstt. year 2002-2003 are quite different in nature. Moreover, as each assessment year is an 'ndepsndent assessment year as confirmed by the, Hon'ble Supreme Court, tn the case of CIT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC), the Hon'ble Supreme Court has held that there is no estoppel in the Income Tax assessment proceedings Each assessment is separate and it is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessee, the correctness of which has not been questioned in past. There is no estoppel in these matters. Thus, the contentions of the asse....
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.... of the above discussion and the facts of the case, I disallow the expenditure /Business Loss claimed by the assessee in its Profit & Loss A/c. amounting to Rs. 1,50,45,32.696'- on account of securities transactions of 1991-92 being capital in nature and add back this amount to the returned income of the assessee. I am satisfied that the assessee has made inadmissible claim of expenditure/Business Loss on account of securities transactions of. 1991-92 and has thus suppressed the taxable income. Therefore, penalty proceedings u/s 271(l)(c) of the Income Tax Act, 1961 have been initiated separately for furnishing of inaccurate particulars of its income. 29. Against the order of the ld Assessing Officer the assessee preferred an appeal before the ld CIT(A) who confirmed the above loss as capital loss vide para No. 11 to 14.9 at page No. 14 to 27 of his order as under:- 11. Ground no.4 pertaining to the disallowance of loss of Rs. 150,45,42,696/-. 11.1 on perusal of the return of income Hied by the appellant, it was observed by the Assessing Officer that the appellant claimed loss amounting to Rs. 1,50,45,42,696/- on account of loss on securities transaction pertaining the yea....
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....ply should also contain complete details of the above mentioned loss". Further, vide order sheet entry dated 16.3.2005 the appellant was asked to furnish an explanation as to why loss on security transaction of 1991-92: "Please show cause why loss on security transactions of 1991-92 should not be disallowed as: (a) it was a loss of capital in nature as it was claimed to be given for purchase of securities for which no evidence produced and moreoever, assessee is showing income from security transactions under the head "capital gains" is clearly shows that this is a loss of capita! in nature and cannot be allowed as a business loss and thus as revenue expenditure. (b) the loss is also not related to the previous year under consideration." 11.3 In reply to the same, vide its letter dated 16.3.2005, the appellant submitted as under; "This has reference to various letters on the subject receiving with letter dated 07.02.2005. It is also refers to the discussions had regarding the debit of Rs. 150.45 crores to theP&L A/c: as "Loss insecurities transactions of 1991-92". Particulars regarding it have already been given at SI No. 5(ii) of Schedule-XIH- Notes to the Acco....
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....during the year resulting in a gain of Rs. 11.61 crores. These purchases and sales of securities were under the category of investments available for sales/trading investments. The gains of Rs. 11.61 crores occurring on such transactions have been shown separately and offered for tax-without showing it as a part of profits of housing finance. There have not been set off against B/F long term capital gains." D(4) The authorized representative of the assessee in its letter dated 18/3/2005 had further submitted as under: "Banks, financial Institutions, etc.. can hold securities both as investments as well as stock-in-trade. The assessee (NHB) classifies the investment in securities under "held to maturity" (HTM), available for sale (AFS) and held for trading (HFT). The Resent Bank of India permits the Bunk to change the classification once in a year from one class to another. That cheques/funds ofRs, 707.56 crores belonging to the assessee [NHB) issued in favour of State Bank of India were misappropriated or got credited by Mr Harshad Mehta to his account unauthorizedly and fraudulently in the year 1991-1992. The Bank claimed the amount from the SBI as well as Mr, Harshad Mehta ....
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.... Act describes the business of National Housing Bank clause EUR of the said section states "Buying or selling and dealing in bills of exchange, promissory notes, bonds, debentures, hundies, coupons and other instruments by whatever name called". Thus, it is evident that purchase/sale of securities is also part of the business of National Housing Bank. 6.3 Regarding the transaction is question, assessee, as .a part of its business activity, entered into back to back transactions for purchase of certain securities like Govt. Bonds, IRFC Bonds, Treasury Bills etc. for an aggregate amount of Rs. 707.56 crores (Approx.) in year 1 991 -92 with the State Bank of India (SBI) and sold the same on the same date to other banks and institutions. While on purchase of securities, NHB issued cheques in favour of SBI, however, it was credited to the account of share broker, Shri Harshad Mehta, by SBI, The Banker's receipt evidencing holding of securities on behalf of NHB was not issued by the SBI. When on due date, NHB requested the SBI to reverse the transaction or hand over the securities, SBI denied having any transaction with NHB and informed that the proceeds of the cheques received fro....
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....ehta with the-help of two employees of NHB, Mr. C. Ravi Kumar and Shri S. Suresh Babu. All the funds management operations were centralized with Shri C. Ruvi Kumar. The bucks up functions were with Shri S. Suresh Babu who reported to Mr. C. Ravi Kumar and acted under -his instructions. These two officers were solely responsible for all the fund management functions including making a deal recording the same preparing and signing BRs, custody of Brs received from counterparties etc. All the above facts has been affirmed by the Janaki Raman Committee, which was an independent committee formed to investigate the possibility of irregularities in funds management. It is also respectfully submitted that the assessee has taken disciplinary action against these officers and even terminated their service. The copy of termination orders are attached for your reference. The loss incurred by NHB due to non receipt of securities being purchased by it which resulted due to fraudulent activities is clearly a trading loss as per section 28 of the Act and should be allowed as business loss. The assessee has placed reliance on,J Allowing judicial pronouncements wherein it ,/s held that embezzlement ....
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....HB are the trading losses and are allowable as deductions while computing the taxable profits. 6.6 Learned AO also disallowed the claim stating that it relates to a prior period and even if held to pertain to this year, it is a capital loss. In this regard it is respectfully submitted that since the liability has occurred in the normal course of business and has got settled by the Supreme Court of India during the year under consideration, therefore the liability is crystallized in the current year, hence shall be considered to be accrued and arisen during the relevant assessment year. In the light of the above submission, it is requested that the payment made by NHB in lieu of settlement relating to security transactions of 1991-92 should be treated as business loss as per section 20 of the Act and deduction should be allowed accordingly. D(6) It is also important to discuss here the submissions of the assessee filed vide its letter dated 18/3/2005 that it had included a similar sum of Rs. 113crores as taxable, income in the Asstt. Year 2002-03. The AR of the assessee requested that its letter may be treated as a claim for exclusion of Rs. 113 cm res from the income of....
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....tself accepted that loss was related to transactions pertaining to -purchase of securities/investments and hence the loss in question was on account of purchase of capital asset. Therefore, the loss on securities transactions of 199192 amounting to Rs. 150,45,32,696/- was in the nature of the capital loss. The Assessing Officer observed that the loss being capital in nature cannot be allowed as business loss. To say so, the Assessing Officer relied on the judgments in the cases of CIT vs. Hashimara Industries Ltd. (1997) 230 ITR 927 (SC) and CIT vs. Nainital Bank Limited (1965) 55 ITR 707 (SC). The Assessing Officer also noted that the appellant vide its letter dated 16.3.2005 accepted that "the bank has issued certain cheques to State Bank of India during 199192 for purchase of securities". It was also noted by the Assessing Officer that the appellant did not submit anytime that the amount paid to SBI was for purchase of stock-intrade or on account of revenue transactions it was also stated that despite of giving several repeated opportunities during the original assessment proceedings to prove how it claimed loss from securities transactions of 1991-92 amounting to Rs. 150,45,32,....
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....FT) and Held to Maturity (HTM). As per RBI guidelines the securities acquired by the bank with the intention to hold them up to maturity have to be classified under Held for Maturity. And the securities acquired by the bank with the intention to trade by taking advantage of short term price have to be classified under Held for trading. The transaction in question was a back to back transaction, which in itself clears the intention of the bank that it purchased the securities not to hold it till maturity but for a very short period. 4.4 While on purchase of securities, NHB issued cheques in favour of SB/, however, it was credited to the account of share broker, Shri Harshad Mehta, by SB!. The Banker's receipt . evidencing holding of securities on behalf of NHB was not issued by the SB!. When on due date, NHB requested th_e SB! to reverse the transaction or hand over the securities, SB/ denied having any transaction with NHB and informed that the proceeds of the cheques - received from NHB in its name has been credited in the account of its customer as per the instructions of NHB. However, there were no such instructions from NHB to SB!. Subsequently, on intervention of RBI, SB....
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....resh Babu who reported to Mr. C. Ravikumar and acted under his instructions. These two officers were solely responsible for all the fund management functions including making a deal recording the same, preparing the vouchers, preparing the cheques, signing the cheques (as one of two signatories), preparing and signing BRs, custody of BRs received from counterparties etc AH the above facts have been affirmed by the janaki Roman Committee, which was an independent committee formed to investigate the possibility of irregularities in fund management It is also respectfully submitted that the appellant has taken disciplinary action against these officers and even terminated their service. The copy of termination orders are enclosed on pages of the paper book. The loss incurred by NHB due to non receipt of securities being purchased by it which resulted due to fraudulent activities is clearly a trading loss as per section 28 of the Act and should be allowed as business loss. The appellant has placed reliance on following judicial pronouncements wherein it is held that embezzlement of funds by wrong/fraudulent deals are allowable as deduction: (a) Badridas Oaga v CIT [1958) 34ITR 10 (SQ....
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....ssessee's income in a banking business. In Indian Insurance Banking corporation limited v. CIT [1963]SO ITR 123, the Hon'ble Kerala High Court held that embezzlement of cash by an employee of one of the branches of the assessee bank is a loss incidental to the business of banking and is a deductible expense It was also held-that the fact the money was not taken during office hours is irrelevant The assessee, in the case of Ramachandra Shivnarayan v. CIT[197B) 111 ITR 263, is a registered firm carrying on the business in gold, silver and gunnies. It also derived income from investment in Government securities. In the ordinary course of business of purchasing Government securities, there was loss on account of theft committed by some stranger The Court stated that if there IS a direct and proximate nexus between the business operations and the loss or it is Incidental to it, then the loss is deductible because without the business operation and doing all that is incidental to it, no profit can be earned. The decision in the case of Ramachandra Shivnarayan v, CIT (supra) was further affirmed by CIT v. Smt Pukhraj Watt Bubber [2008} 296 ITR 290, wherein the Hon 'ble Pun....
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....Hon'ble IT AT; hence the question of treating Rs. 113 crore as business income or capital gain income does not arise It is respectfully submitted that the appellant has not changed its contention rather has given the submission based on the facts. Further. Learned Assessing Officer was not justified in stating that the assessee has not filed the reply of show cause notices without considering the detailed explanation filed by the assessee vide letter dated 3.8.2010 No further information was called for by the learned assessing officer. 4.9 In the light of the above submission, it is requested that the payment made by NHB in lieu of settlement relating to security transactions of 1991-92 should be treated as business loss as per section 28 of the Act and deduction should be allowed accordingly." 14. I have carefully considered the written submissions filed by the appellant and perused the Assessing Officer's order dated 9.12.2010 and also the details submitted in the paper book. I also perused the citations of the case laws submitted and relied upon the appellant as well as the Assessing Officer and position in law. The appellant in its submissions has contended that los....
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.... cheques of Rs. 707.56 crores had been credited to the account of its customer as per the instructions of NHB. There was no such instruction issued by NHB to SBI. Subsequently on intervention of the Reserve bank: of India SBI paid the sum of Rs. 707.56 crores to NHB on 13/06/1992 under protest and filed a case against late Sh. Harshad S. Mehta-for having got wrong credit of the said amount and SBI also filed a suit no. 35 of 1995 against NHB in the special court. 14.3 The Ministry of Finance worked out proposal to resolve the dispute which was accepted both by SBI and NHB and directed that 50% of the amount was to be borne both by NHB and SBI after appropriating the sum of Rs. 131.2 crores along with interest accrued thereon which had been lying with the special court. M/s. NHB had paid a sum of Rs. 150.45 crores to SBI on 17112/2002 and has claimed this amount of settlement of Rs. 1 ,50,45,32,698/- as business loss. 14.4 The appellant has itself admitted during the course of assessment proceedings that the bank can hold securities both for trading activities and for investment purpose and that the bank had issued certificate, to State Bank of India during 1991-92 for purchase ....
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....0,45,32,696/- is of a capital nature which cannot be allowed as a business loss. This principle has been duly affirmed by the Hon'ble Supreme Court in the case ot Hasimara Industries Ltd vs. CIT (1997) 230 ITR 927 (SC), and in the case of GIT, Uttar Pradesh vs. Nainital Bank Limited (1965) 55 ITR 707 (SC). The assessee has itself accepted vide its letter dated 16/03/2005 that "the bank has issued certain cheques to State Bank of India during 1191-92 for purchase of securities. "The assessee has further made a general statement vide its letter dated 18.03.2005 that "Banks, financial, institutions, can hold securities both as investments as well as stock in trade." 14.8 No concrete evidence was produced by the appellant inspite of being given repeated opportunities during the original assessment proceedings on 15/02/2005 (vide notice dated 07/02/2005), 2/03/2005, 11/03/2005, 16/03/2005 and 18/03/2005 and subsequently during the reassessment proceedings on 03/08/2010, 12/11/2010 and 30/11/2010 to prove that how it claimed loss from securities transactions of 1991-1992 amounting to Rs. 1,50,45,32,696/- was a business loss and not a capital loss. No fresh evidence has been broug....
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....the assessee has offered that in AY 2002-03 a similar transaction have been taxed as business income and in this year on the basis of consistency the revenue cannot change its stand. He therefore, reiterated the same argument before us too. 32. The ld CIT DR vehemently supported the orders of the lower authorities and submitted that claim of the assessee has rightly been disallowed. 33. We have carefully considered the rival contentions. During the year the above loss has been incurred to assessee and the facts are stated as Schedule XIII of the balance sheet wherein it is mentioned that this amount was related to security transaction of National Housing Bank during 199192. The assessee issued cheques aggregating to Rs. 707.56 crores to State Bank of India for purchase of securities , which were credited to the account of one share broker Shri Harshad Mehta. Further, as securities were not made available to the assessee the above cheque was returned by State Bank of India on 13.06.1992 and State Bank of India filed a suit against the assessee for above sum. The assessee also filed a petition before the Hon'ble Supreme Court against the order of special court. Later on, Financ....
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....posal of the appeal filed by the SBS and NHB ini the Supreme Court. 16.3 A sum of Rs. 40.25 cores was appearing in the books of NHB as unclaimed amount since 1991-92. While passing a decree in the year 1999 in favor of NHB in the above suit against SBS, the special Court noted this fact and directed NHB to deposit a sum of Rs. 40.22 cores with the custodian, which was duly deposited. Provisions of Rs. 35.29 cores for interest has been made on the above sum from 1991-92 till date of deposit with the Custodian and thereafter on the difference amount of Rs. 0.03 croes. It is being shown under the head "other liabilities" and will be adjusted on final disposal of the appeal pending in the Supreme Court as referred above. 16.4 The disputes between NHB and SBI and NHB & Grindlays Bank have been settled and no claim exists between the parties against each other, however, any money to be received from the assets of the late Sh. Harshad Mehta by SBI and Grindlays Bank in accordance with the decrees passed in their favour by the special court will be shared by them with NHB in the agreed manner and will be a accounted for on actual receipt." 34. In view of above notes on accounts it is ....
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....f the loss is held to be business loss then it can be allowed only in the year in which it is incurred. As the reason for the loss is Shri Harshad Mehta Scam it also needs to be examined whether the loss is allowable in the year it is detected or in the year in which it crystallized. All these issues needs to be examined afresh along with the year incurring of the loss. In view of this we set aside the whole issue to the file of ld Assessing Officer to reexamine the claim of allowability of the loss of the security transaction during the year. In the result ground No. 8 of the appeal of the assessee is allowed with above direction. 35. Ground Nos. 9 and 10 of the appeal of the assessee are general in nature and no arguments were advanced before us therefore, they are dismissed. 36. In the result appeal of the assessee in ITA No. 1512/Del/2013 for AY 200304 is partly allowed. 37. Now we come to the appeal of the assessee for AY 2004-05 in ITA No. 1513/Del/2013 wherein ground No. 1 to 7 are with respect to claim of deduction u/s 36(1)(viii) amounting to Rs. 70,00,00,000/-. In view of our decision in ITA No. 3704/Del/2010 for AY 2007-08 wherein we have held that assessee is not ent....