Income Tax Appellate Tribunal - Delhi
Sahara India Financial Corpn. Ltd., New ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "H" NEW DELHI
BEFORE SHRI R.P. TOLANI AND SHRI B.C. MEENA
ITA No. 3199/Del/2013
A.Yr. 2009-10
Sahara India Financial Corpn. Ltd., Vs. DCIT Cen. Cir.6,
1-Kapoorthala Complex, New Delhi.
Aliganj, Lucknow.
PAN: AADCS 8698 C
AND
ITA No. 3512/Del/2013
A.Yr. 2009-10
DCIT Cen. Cir.6, Vs. Sahara India Financial Corpn. Ltd.,
New Delhi. 1-Kapoorthala Complex,
Aliganj, Lucknow.
( Appellant ) ( Respondent )
Assessee by : Shri Ajay Vohra Adv. &
Shri Rohit Garg CA &
Ms. Shikha Sharan CA
Respondent by : Shri R.S. Meena CIT (DR)
ORDER
PER R.P. TOLANI, J.M::
These are cross appeals, filed by the assessee as well as the revenue, against the order dated 28-03-2013 passed by the f CIT(Appeals-1), New Delhi, relating to assessment year 2009-10. Both the appeals are heard together and disposed of by a consolidated order for the sake of convenience. Respective grounds raised are as under:
Revenue's appeal: (ITA no. 3512/Del/2013):
"1. The order of Ld. CIT(A) is not correct in law and facts.
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2. On the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 26,66,105/- made by AO on account of disallowance out of interest expenditure on the basis of findings of special auditors in their audit report under section 142(2A) I.T. Act, 1961.
3. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 6,62,19,260/- made by AO on account of expenditure by invoking the provisions of section 40A(2)(b) of the I.T. Act on the basis of findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
4. On the facts and circumstances of the case the Ld. CAT(A) has erred in deleting the addition of Rs.48,15,804/- out of total disallowance of Rs.55,01,261/- made by AO on account of disallowance out of expenses as capital in nature on the basis of findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
5. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 44,05,688/- made by AO on account of treatment of expenses relating to antivirus software in the nature of the prepaid expenses on the basis of findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
6. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 66,81,102/- made by AO on account of excessive depreciation on UPS on the basis of findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
7. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 72,99,852/- made by AO on account of out of excessive depreciation on printers on the basis of findings of special auditors in their audit report under section 142(2A) of I.T. Act. 1961.
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8. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs.
1855,58,99,424/- made by AO on account of being 35% of the total amount of deposit collected during the year by the assessee under various deposits mobilization schemes, as unexplained deposit on the basis of findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
9. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 185,02,71,929/- out of total disallowance of Rs. 467,96,79,775/- made by AO on account of provision of interest as excessive on account of change in accounting policy on the basis of findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
10. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 12,98,355/- out of total disallowance of Rs. 13,10,627/-made By AO on account of invoking the provisions of section 41(1) of the Income Tax Act, 1961 on the basis of findings of special auditors in their audit report under section 142(2) of I.T. Act, 1961.
11. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 8,88,997/- made by AO under section 41(1) of the Income Tax 1961 on the basis of findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
12. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 15,04,12,669/- made by AO under section 41(1) of the Income Tax 1961 on the basis of findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
13. On the facts and circumstances of his case the Ld. CIT(A) has erred in deleting the addition of Rs. 6,91,230/- made by AO on account of expenses related to associate concerns debited in the books of the assessee company on the basis of findings of 4 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
14. On the facts and circumstances of the case the Ld. CIT(a) has erred in deleting the addition of Rs. 81,91,044/- made by AO on account of advertisement expenses on the basis of findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
15. On the facts and circumstances of the case the Ld. CIT(A) has erred in directing the AO to allow an additional relief of Rs. 21,86,37,443/- to assessee on account of payment made to BCCI.
16. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 11,86,24,109/- made by AO on account of interest on securities relating to pre- acquisition period of findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
17. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 8,14,000/- made by AO on account of prior period expenses on the findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
18. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 70,13,750/- made by AO on account of written off in the books of account of bad debts representing amounts of advance to M./s Ganesh Banzoplast Ltd. on the findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
19. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 46,26,500/- made by AO on account of diminution in the value of current investment on the findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
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20. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 150,38,35,341/- made by AO on protective basis and deleting the addition of Rs. 11,11,192/- on account of invoking the provision of section 40(a)(ia) on the findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
21. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 2,53,43,772/- made by AO on account of imputing notional interest income for which no provision was made in the accounts as the assets turned NPAs on the findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
22. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 2,00,00,000/- made by AO on account of diminution in the value of investment on the findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
23. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs. 1,25,45,009/- made by AO stock of stationary on the findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961.
24. The appellant craves leave to add, amend any/all the grounds of appeal before or during the course of hearing of the appeal.
Assessee's appeal (ITA no. 3199/Del/2013):
1(a) That the Ld. CIT(A) has erred in law and on the facts and circumstances of the case in confirming the disallowance u/s 14A of the Act to the extent of Rs. 2,19,74,418/-
1(b) That the Ld. CIT(A) has failed to appreciate that expenditure incurred by the appellant for investment yielding income 6 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
exempt from tax was made for meeting of statutory obligation and therefore, no disallowance u/s 14A of the Act was called for.
1(c) That the Ld. CIT(A) has failed to appreciate that appellant has voluntarily disallowed direct expenses relatable to earning of exempt from tax and therefore, there was no justification in invoking provisions of Rule 8D(2) of the Income Tax Rules 1962 and disallowing Rs. 2,19,74,418/- u/s 14A of the Act.
1(d) That the Ld. CIT(A) has failed to appreciate that no disallowance was called for u/s 14A as the appellant had returned loss in place of income and provisions 14A are only applicable for making disallowance out of income chargeable to tax.
1(e) That in any view of the matter and on facts and circumstances of the case, the Ld. CIT(A) is not justified for confirming the disallowance u/s 14A of the Act to the extent of Rs. 2,19,74,418/- which is overstated in any view of the matter.
2(a) That on facts and circumstances of the case as well as in law, the Ld. CIT(A) is not justified in disallowing Rs. 6,85,457/- by holding the replacement of UPS as a capital expenditure which was claimed by the appellant to be revenue in nature.
2(b) That the Ld. CIT(A) has erred in law and on fact and on circumstances of the case in observing that the replacement of UPS is an addition to the asset and, therefore, entitled to depreciation as against the claim of the appellant that the replacement of a depleted asset is in the nature of a revenue expenditure 3(a) That the Ld. CIT(A) has erred in law and on the facts and circumstances of the case in confirming the disallowance of interest to the extent of Rs. 282,94,07,846 3(b) That the Ld. CIT(A) has failed to appreciate that there was no change in the system for accounting followed by appellant and 7 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
change in provision is only because of change in accounting estimates of interest provision based on sound accounting principles and therefore, there is no justification in confirming the disallowance to the extent of Rs. 282,94,07,846/- out of interest provision.
3(c) That without prejudice, on the facts of the case as well as in law, the Ld. CIT(A) is not justified in confirming the disallowance out of interest provision to the extent of Rs. 282,94,07,846/- by deducting the actual interest paid by the appellant during the year from the provision made and working out disallowance of Rs. 282,94,07,846/- thereby which is contrary to the mercantile system of accounting and therefore, not tenable in law.
3(d) That in any view of the matter, the Ld. CIT(A) has erred in law and on the facts and circumstances of the case as well as in law in confirming of disallowance of interest provision to the extent of Rs. 282,94,07,846/-
4(a) That the Ld. CIT(A) has erred in law and on the facts and circumstances of the case in confirming addition of Rs. 150,38,35,341/- on a protective basis out of total disallowance made u/s 40a(ia) of the Act by the AO amounting to Rs. 150,49,46,533/-
4(b) That on facts and circumstances of the case, the Ld. CIT(A) has erred in law in setting aside addition u/s 40a(ia) made by the AO to the extent of Rs. 150,38,35,341/- which is beyond of his power conferred u/s 251 of the Act and further, directing the AO to get checked from the TDS Wing the quantification of the disallowance.
4(c) That without prejudice, the Ld. CIT(A) has erred in law and on facts and circumstances of the case in confirming the addition of Rs. 150,38,35,341/- on a protective bases when the substantial amount of interest stood paid during the course of relevant previous year and was not outstanding on 31st March, 8 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
2009 to be paid and as much provisions of section 40a(ia) were not applicable on the facts of the case to the extent of the quantum of interest paid.
4(d) That the Ld. CIT(A) has erred in law and on the facts and circumstances of the case in confirming on a protective basis disallowance u/s 40a(ia) made on an estimate basis which is contrary to the provisions of section 40a(ia) of the Act and not tenable in law.
4(e) That in any view of the matter, the Ld. CIT(A) has erred in law in upholding the addition of Rs. 150,38,35,341/- on a protective basis and at the same time holding that TDS default disallowance u/s 40a(ia) out of expenditure on account of interest payment cannot be made on estimate basis which is not justified on the facts and circumstances of the case as well as in law.
5(a) That the Ld. CIT (A) has erred in law and on the facts and circumstances of the case in confirming the addition of Rs. 2,25,01,961/- made by the AO on account of accrued interest on F.D.R. 5(b) That the Ld. CIT(A) has failed to appreciate that the interest of Rs. 2,25,01,961/- which was added during the year by the AO stood already subjected to tax in earlier years and the sustaining of addition thereof tantamount to double taxation of same income which is not tenable in law.
5(c) That the Ld. CIT(A) has erred in law in confirming the addition by observing that there was several remedy available to the appellant such as rectification u/s 154 of the Act or revision u/s 264 of the Act while sustaining the addition which is not tenable in law.
6(a) That the Ld. CIT(A) has erred in law and on the facts and circumstances of the case in upholding the addition made by the AO on account of mismatch with AS-26 on a protective basis amounting to Rs. 6,11,425/-
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6(b) That the Ld. CIT(A) has failed to appreciate that the appellant was not in receipt of any income nor in know of the TDS certificates uploaded by Bank of Baroda in AS-26 to the extent of Rs. 6,11,425/- and, therefore, there was no justification in confirming the addition on a protective basis.
7. That the Ld. CIT(A) is not justified in adjudicating the ground no. 32 of the grounds of appeal filed before him in which the appellant had objected to non-allowance of full credit of the tax deducted at source by the AO.
8. That the order passed by the Ld. CIT(A) is against merits, circumstances and legal aspects of the case.
9. That the appellant crave leave to add, alter, amend or withdraw any or all the grounds of appeal on or before the date of hearing.
2. Brief facts are assessee firm is an RBI registered Residuary NBFC engaged in the activity of collecting deposits mainly from rural parts of India from small depositors, which are collected through a battery of agents spread over the rural areas. Deposits are collected under various schemes like daily deposits, term deposits, recurring deposits, small deposits etc. It filed its return of income for this AY declaring total loss at Rs.9,99,48,394/-. Subsequently, a revised return was filed on 28.03.2011 showing revised loss at Rs.10,45,98,718/-.The case was selected for the scrutiny, necessary notices of hearing were issued.
2.1. According to AO assessee was asked for compliance of various information on different dates, however proper compliance was not made and assesses replies are claimed to be evasive. AO observed that assessee had a tendency to file irrelevant and voluminous details in order to be evasive. It may be mentioned that these allegations are vehemently denied by the assessee before CIT(A) and before us as well.
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2.2. According to AO the assessee's accounts were very voluminous, complex and difficult to interpret, therefore it was not possible for him to determine the true and correct taxable income of the assessee. In view of alleged complexity of the accounts and in the interest of the revenue, AO deemed it fit to appoint Special Auditor (for short SA)as provided u/s 142(2A) of the Income Tax Act, 1961. Appropriate show cause was issued on assessee calling for its comments before issue of direction for audit u/s 142(2A) of the Act. The reply of the assessee along with a proposal was sent on 20-12-2011 to the Ld. CIT(Central)-I, New Delhi for his approval for issue of direction u/s 142(2A), same was received vide letter dt.21.12.2011. The assessee thereafter was directed vide order dated 23.12.2011 u/s 142(2A) of the I.T. Act to get its accounts for F.Y. 2008-09 relevant to A.Y. 2009-10 audited by M/s Kapoor Tandon & Co., 21, Daryaganj, New Delhi who was nominated for the purpose of conducting the special audit in accordance with provisions of section 142(2A) of the I.T. Act and furnish the report of such audit in prescribed form no.6B as per rule 14A of the I.T. Rules and on terms of Reference annexed thereto as Annexure A within 60 days from the date of the receipt of the order.
2.3. AO has alleged that assessee was non cooperative in the process of special audit and was indulging in delaying tactics. The delay in this behalf is attributed to the assessee on various reasons which are detailed by AO in his order. Besides assessee did not provide proper information more particularly computer software of its accounts i.e. soft copy. Assessee insisted to provide hard copies. According to AO the assessment was completed under a non co- operative atmosphere. Based on special audit report, assessee's explanations and AO's observations narrated in details by AO, the total income of the 11 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
assessee was computed as under after various additions:-
INCOME / (LOSS) AS PER REVISED RETURN OF (-) Rs.10,45,98,718 INCOME (A) Add Interest disallowance on non-business advances as 1 discussed above in Para No1 26,66,105 Addition on account of Excessive Payments u/s 2 40(A)(2)(b) as discussed above in Para No2 6,62,29,260 Disallowance of Expenses under section 14A as 3 discussed above in Para No3 2,16,51,917 Disallowance of Capital nature as debited in profit and 4 loss account as discussed above in para no 4 55,01,261 Disallowance of expenses relating to future assessment years claimed in the year under consideration as 5 discussed above in para no 5 44,05,688 Excess claim of depreciation in UPS as discussed 6 above in para No 6 66,81,102 Excess claim of depreciation in Printers as discussed 7 above in para No 7 72,99,852 Disallowance of deposits under section 68 as discussed 8 above in Para No 8 1855,58,99,424 Disallowance of interest debited to profit and loss 9 account as discussed above in para no 9 467,96,79,775 Addition under section 41(1) as discussed above in 10 para no 10 15,26,12,293 Disallowance of expenses relating to associate concerns debited in profit and loss account as 11 discussed above in para no 11 6,91,230 Disallowance of advertisement expenses as discussed 12 above in para no 12 81,91,044 Addition of Pre Acquisition Interest reduced from the 13 interest income as discussed above in Para No 13 11,86,24,109 Disallowance of prior period expenses as discussed 14 above in Para No 14 8,11,830 Disallowance of balances written off as discussed 15 above in Para No 15 70,13,750 disallowance of provision for dimunition in investment 16 as discussed above in Para No 16 4,626,500 Disallowance under section 40(a)(ia) on account of non-deduction of TDS as discussed above in Para No 17 17 150,49,46,533 Addition of interest not recognized on non-performing 18 advances as discussed above in Para No 18 2,53,43,772
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Disallowance of provision for dimunition in Sahara asset management co. as discussed above in Para No 19 19 2,00,00,000 Addition of interest income on mercantile basis as 20 discussed above in Para No 20 2,25,01,961 Additions on account of income not disclosed but 21 appearing in 26AS as discussed above in Para No 21 26,43,175 Addition on account of change in accounting policy in case of printing and stationery expenses as discussed 22 above in Para No 22 92,51,495 2522,72,72,076 TOTAL ADDITIONS / DISALLOWANCES (B) 2522,72,72,076 TOTAL INCOME OF THE ASSESSEE (A) + (B) 2512,26,73,358 TOTAL INCOME ROUNDED OFF U/S 288A 2512,26,73,360 2.4. Aggrieved assessee preferred 1st appeal challenging all the additions. CIT(A) by detailed order dated 28-3-2013 gave substantial part relief to the assessee. Aggrieved from his order both the parties are before us.
3. Ground no 2 of the assessee is not pressed as the alternative relief in the form of 60% depreciation on UPS has been given.
3.1. A perusal of the remaining respective grounds will reveal that revenue's ground no. 6 and assessee ground no 2 pertaining to depreciation and replacement of UPS; revenue's ground no 9 and assesses's ground no 3 regarding provision of interest due to change in method of accounting estimates; and revenue's ground no 21 and assessee's no. 4 regarding protective additions u/s 40a(ia) are interconnected. Revenue's grounds no. 10, 11 &12 pertain to common issue i.e. deletion of additions u/s 41(1) on 13 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
account of cessation of liability. Rest of the grounds from both sides are by and large independent. Since main appeal is by revenue, the same is taken first for adjudication.
4. Revenue's ground no. 2: Interest on non business advances:-
4.1. The special auditor (SA) appointed by AO was of the view that out of advances amounting to Rs 21,65,39,847/- Rs 3,44,81,079/-1 was not backed by any business expediency. Therefore, a sum of Rs 26,92,972/- being interest worked on @7.81% paid to average of opening and closing deposits was proposed to be disallowed. On SA's observations AO issued a show cause notice.
4.1. Assessee replied that this disallowance comprised of -
(i) Rs 2,56,331/- being amount due from Sahara Estate- Hospitality ("SEH"), where the assessee is a member of the AOP ;
(ii) Rs 87,680/- due from Sahara Life Insurance Co. Ltd.
("SLICL"), being amount of electricity recoverable on the let out premises the assessee;
(iii) Remaining Rs 3,41,37,068/- consisted of:
a) Sale proceeds of Rs 3,28,34,832/- receivable from Ambey Valley Limited (AVL) on account of sale of assessee land; and
b) amount of outstanding lease rental from AVL.
4.2. Assessee filed explanation and raised various pleas to demonstrate that the assessee had surplus interest free funds out of which such advances were made and these out standings were also backed by business expediency, which did not find favour with AO and the disallowance was made.
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4.3. Aggrieved assessee preferred appeal before CIT(A) contending that:
(i) In the case of M/s Sahara India Mass Communication Ltd (SIMCL) in one of several accounts a sum of Rs.94,084/- was outstanding, is selectively picked up, however there are other branch accounts which have amounts payable by the assessee, which were not considered by AO. An amount of Rs.15,39,604/- was outstanding in the books of the appellant company against M/s SIML account itself and another balance of Rs.93,76,467/- was also outstanding.
These different amounts related to different units of M/s SIML like Gorakhpur, Noida, Lucknow etc. If all the debit and credit balances are aggregated it leaves a net credit balance of Rs.1,08,21,987/- which is to be paid back by assessee to MSIL. Thus there is no case at all of interest free advance given by assessee, rather the position is reverse. Besides various small amounts represent pending reconciliation of balances like staff advances occasioned by transfer of the staff to that company and stands debited in that company's account, amounts relating to recovery of outstanding rent or electricity charges of premises let out on lease etc.
(ii) Apropos Rs.3,28,34,832/- receivables from AVL, Rs.11,05,232/- were outstanding lease charges recoverable and balance Rs.3,17,29,600/- represents sale proceeds of assessee's land sold through AVL, which are pending remittance. Assessee wanted to sell a piece of land held in the vicinity of Ambey Valley, Lonawala. AVL was entrusted with the task of negotiations to fetch maximum sale price which was done. After the sale, amount was received by AVL which is holding it in trust on assesses behalf. Thus the outstanding is not in the nature of any interest free loan given to AVL, 15 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
therefore, the allegations were totally incorrect. The sale of land has been shown in assessee's accounts and offered for tax. Assessee placed reliance on the following cases for the proposition that if no interest has accrued then no addition can be made on notional income:-
- Jwala Prasad Radha Krishna 198 ITR 415 (All.);
- Highway Construction Co. Pvt. Ltd. 199 ITR 703 (Gau.);
- CIT vs. Hotel Savera 239 ITR 795;
- B & A Plantations & Industries Ltd. 242 ITR 22 (Guj.);
- CIT vs. South India Corporation (Agencies) Ltd. 293 ITR 237 (Mad.).
(iii) Besides, it was demonstrated from accounts that, in any case, the appellant had overall interest free surplus funds available in the form of share capital; reserves and surplus to the tune of Rs.1670.47 crores. The advance funds being less and there being no nexus between the borrowed funds and the alleged non business advances, there is no justification in presuming that the advances were out of borrowed funds only and to disallow notional interest thereon. For this proposition assessee relied on the landmark judgment in the case of C.I.T. vs. Bombay Samachar Ltd. 74 ITR 723 (Bom.) which has been approved impliedly in Madhav Prasad Jatia 118 ITR 200 (SC).
Further reliance was placed on Regal Theatre vs. C.I.T. 225 ITR 205 (Del.); C.I.T. vs. Centuary Flour Mills Ltd. 334 ITR 377 (Mad.); Radico Khaitan Ltd. 274 ITR 354 (All.).
(iv) Assessee further submitted that as per R.B.I. guidelines for Residuary Non Banking Companies Directions 1987 the entire mobilised deposits were to be invested in the approved securities. The 16 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
interest which has been paid on the deposits mobilised was only pursuant to a contractual relationship between the appellant and the depositors. All the conditions as provided for allowance of interest on borrowed capital in accordance with the provisions of section 36(i)(iii) of the Income Tax Act, 1961 are duly complied with, therefore, there was neither justification in making any disallowance out of the interest paid nor in presuming that the interest bearing funds were utilised for non business advance. For this proposition reliance was placed on the following case laws:-
- C.I.T. vs. Gautam Motors 334 ITR 326 (Del.);
- Madhav Prasad Jatia 118 ITR 200 (SC);
- C.I.T. vs. Tin Box Co. 135 Taxman 145.
(iv) Assessee also filed chart showing interest free amounts payable to associate concerns as under:
F.A. Code Account Head Credit Amount
335314 S.W.F. 3,716,618
567002 Sahara India 166,451,834
567122 Sahara India, Noida 2,589,743
567009 Sahara India Mass Communication, 1,539,604
Rashtriya Sahara
567073 Sahara India Mass Communication, 9,376,467
Rashtriya Sahara
567182 Sahara India Media Communication 265,395
Ltd.
567243 Sahara Net Corp Ltd. 2,048,468
(v) Assessee thus pleaded that, if it had given interest free advances
it has also received more interest free funds from associate concerns.
Besides it had ample interest free fund in form of share capital; reserves and surplus which is not disputed, therefore, there is no justification in making any disallowance by wrongly alleging them to 17 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
be non business advances. Assessee referred to explanation submitted before AO, for each and every advances explaining that all debit balances were backed by normal business exigencies of a group of associated concerns in inter unit transactions and relied on citations:-
- Bharti Televenture Ltd. 331 ITR 502 (Del.);
- C.I.T. vs. Sambandham Spinning Mills Ltd. 298 ITR 306 (Mad.);
- Smt. Chanchal Katyal Vs. C.I.T. 298 ITR 182 (All.);
- S. A. Builders Ltd vs. C.I.T. (A) 288 ITR 1 (SC).
4.4. Ld. CIT(A) held that amounts in question were recoverable payments or other receivables on behalf of its associate concerns. Out of Rs.3,44,81,079/- a sum of Rs.3,28,34,832/- are two receivables outstanding from Ambey Valley Ltd., being lease charges of property amounting to Rs.11,05,232/- and sale proceeds of appellants land amounting to Rs.3,17,29,600/- pending remittance. The appellant's claim that these amounts have already been accounted for and income from lease rent and on sale of land offered to tax is not disputed. Besides, the appellant owed payment liabilities to associate concerns for inter unit transactions totalling Rs.18,59,88,129/- for which no interest expenditure is claimed. All these receivables / payables are related to associate concerns and are in the nature of routine business transactions. Sale of land and amount receivable on that account, or lease rental receivable, from Ambey Valley cannot be said to be not for business purposes as the business of the appellant includes leasing out of and investment in property. In any case, these amounts are receivables and not advances given. The revenue has itself accepted receivables from two of the associate concerns of the appellant at Rs.3,44,011/-. Reasons given by AO for overlooking other similar transactions (receivables) are not very cogent. Assessee's another argument that it had sufficient interest free
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surplus funds available in the form of share capital and reserves and surplus to the tune of Rs.1670.47 crores was appreciated by Ld. CIT(A). It was held that there being no nexus between the borrowed funds and the alleged advances, there is no justification in disallowing the interest presuming that the advances were instead out of borrowed funds. At the most what revenue may have taken is the difference of receivables and payables; if payables were more, disallow on a pro-rata basis out of interest claim. In assessee's case the receivables are more than payables, therefore, even no such disallowance can be contemplated from any angle. Receivables from ALV were held to be not in the nature of interest free loans. The advances were further held to be backed by business exigencies, the disallowance was deleted. Aggrieved revenue is before us.
5. Ld CIT(DR) Shri R S Meena, referred to various observation of AO and CIT(A) and further contends that Assessing Officer called for the explanation of the assessee about the business expediency of interest free items under loans and advances. Assessee could not satisfactorily explain. After adverting the orders of AO and CIT (A). ld DR contends that AO was justified in treating the advance of Rs. 3,17,29,600 i.e. sale proceeds of a property through M/s Ambey Valley Ltd. was not related to any business necessity, it was not acting as an agent / broker on behalf of the assessee nor there was any formal agreement between them regarding disposal of the property in question. In this situation, it is not understood as to why the amount of Rs. 3,17,29,600/- remained with M/s Ambey Valley Ltd. as intermediary and why it was allowed to retain the money in question.
5.1. Similarly, the claim of the assessee company that there are overall credit balances in the accounts of the associate concerns does not appear to 19 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
have been examined by the AO. In view thereof the relief granted by the ld. CIT(A) is without calling for comments from AO in this behalf, relief granted is not in order, therefore, the order on this issue should be reversed.
5.2. In view of the aforesaid, the relief granted by the ld. CIT(A) without calling for comments of the AO regarding the claim of the assessee that there are credit balances in the accounts of the associate concerns is not in order.
6. Shri Ajay Vohra, ld counsel for the assessee contends that CIT(A), deleted the aforesaid disallowance by factually observing and verifying the record and holding that assessee demonstrated business expediency and also more aggregated payability of amounts to sister concerns than receivables from the sister concerns. There was consistent practice amongst the group companies not to pay / charge interest on the mutual outstanding balances as the transactions were frequent and business oriented. In any case assessee in this year is rather a beneficiary in these terms, as it has received over all more interest free funds.
6.1. The major item comprised in the amount of Rs. 3,41,37,068 is a sum of Rs.3,28,34,832 outstanding against Ambey Valley Ltd. Out of the aforesaid, Rs.11,05,232/- represented receivable lease charges , balance amount of Rs.3,17,29,600 represented sale proceeds of assessee's land sold by AVL on its behalf which payment was in trust for the appellant. 6.2. Ld. CIT(A) has held the advances to be backed by business expediency by elaborate reasons:
(a) Disallowance out of interest paid on borrowed funds can be sustained only if there is nexus between funds borrowed and advances made interest free, which nexus has to be established 20 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
by the Revenue. The amounts due from the sister concerns represented inter-company balances, which arose in the circumstances mentioned above. There were no moneys advanced by the appellant company to the sister concerns, which were outstanding as at 31.03.2009. There is no movement of funds, much less of borrowed funds, to sustain disallowance of any portion of interest paid.
(b) Expenses are incurred by group companies on behalf of each other. Similarly, moneys may be received by one company on behalf of the other group entity, which is held by the recipient company in trust for the other company, to whom the money legitimately belongs. There is no practice between the group companies of charging interest on inter-company balances as at the end of any previous year. It has not been disputed by AO that on over all consideration of such debits and credits assessee in fact owed moneys to other group entities. It was, thus, in the business interest of the appellant not to charge interest on the outstanding balances due by other group companies.
(c) The assessing officer has imputed notional interest on outstanding balances due from AVL by wrongly holding it to be an interest free advance. There is no enabling provision to charge notional or hypothetical income. Assessee reasonably explained the circumstances in this behalf. Hon'ble Bombay High Court in the case of CIT v. Bombay Samachar Ltd. 74 21 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
ITR 723 and the Hon'ble Delhi High Court in the case of Regal Theatre v. CIT : 225 ITR 205 held that so long as the capital borrowed was used for purposes of business, interest payable thereon was allowable deduction under section 36(1)(iii) of the Act and that disallowance of interest could not be sustained on the ground, set forth by the Revenue, that if the assessee had collected the outstanding amounts from various concerns, there was no necessity to borrow. It was held by the Courts that it was the prerogative of the businessman to decide how to carry business and it was not for the Revenue to suggest ways to reduce the indebtedness.
(d) As assessee's over all payability to sister concerns is more than receivability, apropos assessee it makes a prudent business decision that interest on such payable and receivables is not charged as it results in its benefit. It is a clear demonstration of business prudence. It is trite law that while ascertaining the acumen of business prudence, revenue cannot review such purely business decisions.
(e) Besides, assessee has large investible interest free funds in the form of share capital and reserves & surplus to the tune of Rs.1670.47 crores. In the absence of any nexus established by the Revenue between borrowed funds, on the one hand, and amounts due by the sister concerns, on the other, it is to be regarded that the amounts due from the sister concerns were advanced out of interest free funds only.
6.3. An alternative legal argument is made to the effect that entire amount of borrowed funds had to be invested by the appellant in the 'directed' 22 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
investments and interest thereon is fully allowable as deduction under section 36(1)(iii) of the Act. For this proposition also, the order of the CIT(A) deleting the disallowance deserves to be upheld. 6.4. Ld. counsel countered the argument of ld DR, that comments were not called from AO is misplaced. It is pleaded that all the receivable and payables are part of the balance sheet, schedules appended thereto and are the basis from where SA and AO got this information. Thus everything was on record, AO failed to apply his mind to explanation and record.
7. We have heard the rival contentions and perused the material available on record. It has not been disputed that the overall owing of the assessee from group concern is more than the receivables. If interest element is computed on such transactions the simple fact which emerges is that assessee would have to rather pay the interest and claim more interest expenditure. A convenient approach can not be adopted to reckon interest receivables and not to factor the same on similar owings of the assessee. Besides this practice has been followed by all the group entities. In view thereof, CIT(A) is justified in appreciating this plea of the assessee. 7.1. Assessee's share capital, reserves and other interest free funds, far exceed than receivables. In our view the revenues counter that why assessee borrowed does not impinge on the settled proposition that assessee in its business acumen is entitled to use its interest free funds in the manner it deems proper, there is no enabling provision empowering revenue to make such notional additions in these eventualities. 7.2. Apropos Ambey Valley receivable consisting of arrears of rentals and money held in trust, they are not the advances given by the assessee but are the moneys held in trust by it on behalf of the assessee and arrears of lease rentals. AO has drawn adverse inference as to why the assessee is not 23 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
receiving it and therefore, estimated a notional/hypothetical income thereon. Besides, considering earlier situation assessee owes more payable. In our view, here also, there is no enabling provision to sustain such addition. 7.3. Assessee's reliance on Bombay Samachar is well founded which has been followed in a catena of subsequent judgments besides other case laws cited by assessee in this behalf support its contentions. In view of the foregoings we see no infirmity in the order of CIT(A) which is upheld. This ground of the revenue is dismissed.
8. Ground no. 3: Sec 40A(2)(b) disallowance - related parties transactions:
8.1. The special auditor pointed out that while reporting transactions with related parties under section 40A(2)(b), transactions amounting to Rs 27,78,66,907 have not been disclosed by the assessee. Justification was asked as to how following transactions were at prevailing market rates in terms of section 40A(2)(b):
i) A sum of Rs 10,000 has been excessively paid to Sahara India Commercial Corporation (SICC) for 1000 liters of diesel by paying @Rs 46.36 instead of prevailing rate of Rs 36.35.
ii) A sum of Rs 20,32,08,118 has been paid on account of rent and Rs 6,72,94,604 as utility charges by the assessee co. to M/s Sahara India on account of rentals and utility charges of 1500 branches of para banking division which was excessive and unreasonable.
iii) A sum of Rs 92,466 paid on account of travelling expenses toward lease rentals of vehicles taken on hire to M/s Sahara India, was also sought to be justified u/s 40A(2)(b).
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8.2. Apropos point no i), assessee offered to tax an amount of Rs 10,000/-. Qua utility charges. ii) the impugned premises belonged to Sahara India which was being shared by assessee. AO had alleged that, assessee was comparing the utility charges received for a particular property at 40% and comparing the same with the 33% utility charges being paid by the assessee. However if the ratio of utility charges received on 'all the rented properties is compared' with the rental income then the ratio came to only 0.5%. The assessee explained that charges are being paid for utilizing the premises with full fledged infrastructure which included entire office premises, furniture, telephones, electricity, peons, security guards, washing-cleaning staff, computers, V-sat arrangements, internet connection facilities from the branch to Head office and vice versa etc. AO observed that no fixed asset register is maintained by Sahara India to record the utilization of such fixed assets by assessee for paying such utility charges. In the absence of such register, the utility charges paid were held to be excessive as assessee has not provided any market rate comparison to justify it; therefore, it was disallowed in terms of sec. 40A(2)(b). Qua travelling and conveyance, AO found that in two instances dated 25.10.2008, the vehicles have been used by Sh Manish Raj (payments Rs 13,421 and Rs 9,500) who was working for M/s Sahara India Real Estate Corporation Ltd, should have been debited to it. 50% of this amount i.e. Rs 46233 was also disallowed. 8.3. On assessee's first appeal CIT(A) found that observation about Manish Raj working for SICC (a group concern) was factually incorrect in view of Form 16 produced, therefore, the disallowance of Rs.46,233/- was deleted.
8.4. The second part of the disallowance of Rs. 6,61,73,027/- i.e. utility charges paid to Sahara India was for use of its premises and host of other 25 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
infrastructure facilities. Apropos AO's observation that the utility charges paid by are highly excessive as compared to rent of 0.5% charged by the appellant on similar use of its facilities. Assessee explained that the infrastructure available with and provided by Sahara India (Firm) are by no means comparable with assessee's let out premises chosen by AO for comparison. They are claimed to be bare premises bereft of such multitude of facilities. In few other premises which are similarly equipped, utility charges recovered by assessee were in the range of 40%-50%. Consequently AO made a skewed comparison in this behalf, ld. CIT(A) found assessee's comparison and explanation to be correct. About non maintenance of register of fixed assets, CIT(A) found no merit in the adverse inference. Apropos market comparison of utility charges, CIT(A) found merit in the assessee's explanation that the facilities and assets used are part of the regularly maintained, audited and accepted books of accounts, Department has been allowing related depreciation and expenditure, in relation to these assets and utilities year after year. CIT(A) held that, comparison of full infrastructure installed premises with bare premises by AO was not correct. Sec. 40(A)(2b) mandates a comparison based on same set of facilities and not of incomparable. It was held that AO has not been able to make out a case in this behalf these additions were deleted. Aggrieved revenue is before us.
9. Ld DR contends that ld. CIT(A) has not taken into consideration the fact that during the financial year 2008-09 relevant to A.Y. 2009-10, the business activity of M/s Sahara India had not come to an end. As in the past, M/s Sahara India was working as agent on behalf of the assessee company and other associate concerns. During the year, M/s Sahara India had mobilized deposits of Rs. 5301.68 Crore on behalf of the assessee company 26 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
which is marginally less than deposits of Rs. 6274.66 Crores in the immediately preceding year. So also during the year under consideration, commission, development and promotional expenses aggregating to Rs. 80.19 Crores and collection facility expenses Rs. 127.39 Crores have separately been incurred by the assessee company. 9.1. Thus it is hard to believe that M/s Sahara India had completely vacated the premises occupied by its 1500 branches and same were exclusively utilized by the assessee company. Further, as noted by the AO, no details of utilities, facilities and infrastructure exclusively used by the assessee company have been furnished. The assessee company was not maintaining any register of immovable properties and other utilities taken over from M/s Sahara India. Further, no comparables have been filed by the respondent company to suggest that the transactions were at arms length. AO's order is relied on.
10. Shri Ajay Vohra, ld. Counsel for the assessee contends that assessing officer made disallowance of Rs.6,62,19,260/- u/s 40A(2)(b) of the Act on the ground that the utility charges paid by the appellant to M/s. Sahara India @ 33.33% was highly excessive compared to utility charges received by the appellant @ 0.5% on use of its facilities. The finding is contrary to the record, without appreciating the correct facts of the issue, AO has compared apples with oranges and failed to notice the conspicuous difference between the letting of fully loaded business premises and bare premises. It was demonstrated that premises were leased along with host of full office automation infrastructure facilities by Sahara India (firm), including furniture, telephones, peons, security guards, sweepers, computer, V-sat, internet connection etc. It was categorically submitted that comparison 27 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
drawn by AO qua the premises leased out by the appellant was distorted since the appellant does not make available services / use of utility in respect of all such premises. The premises which were leased out along with facilities / services, the utility charges recovered by the appellant were up to the range of 40-50% of the rent. Assessee demonstrated that if like is compared with like there is no case of excessive payment in terms of sec 40A(2)(b). Thus the distorted comparison made by the assessing officer was fallacious.
10.1. Ld counsel referred to the rent agreement with Sahara India and also a detailed chart showing comparison which are placed on paper book in support of these averments. It is pleaded that ld. CIT(A) deleted the disallowance mainly holding that:
i. AO's adverse inference on there being no register of fixed assets is not based on any requirement in law, or as per accountancy practice or convention.
ii. AO was not correct in holding that assessee has not proved the reasonableness of the amount by giving details of the assets / utilities, their segregation or market comparison. It is undisputed that these assets have been regularly disclosed in the books and the department itself has been allowing depreciation, or expenditure, in relation to these assets and utilities.
iii. AO has not discharged his onus by bringing on record any independent evidence of service charges payable in comparable uncontrolled transaction, before seeking to disallow deduction by invoking section 40A(2) of the Act.
10.2. Ld counsel contends that same assessing officer has taken contradictory positions. In the case of M/s Sahara India, the AO increased 28 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
the rental income received from the appellant alleging the same to be lower and thus taxing at higher income, which according to the assessing officer should have been received by Sahara India (Firm), while holding the reverse position in the case of the appellant. It is pleaded that the order passed by the CIT(A) deleting the disallowance under section 40A(2)(b) of the Act deserves to be upheld.
11. We have heard the rival contentions and perused the material available on record. From the above facts it clearly emerges that AO has made a distorted comparison of rentals between bare premises let out by the assessee with full facilities loaded business premises hired by it. The cardinal principle of sec 40A(2)(b) postulates a fair comparison between nearly placed comparable i.e. "arms length comparables". The burden to prove lies on the AO, which has not been properly discharged, in such a case expenditure incurred by assessee cannot be held as excessive u/s 40A(2)(b). The non maintenance of register can not be a fatality in as much as revenue has not denied the existence of assets, their disclosure in books, schedule of fixed assets and balance sheet, depreciation & expenditure has been duly allowed thereon. AO has not tried to identify any other independent comparable. In consideration of all the foregoings, we see no infirmity in the order of CIT(A) on this issue, this ground of the revenue is dismissed.
12. Ground no. 4: (Assessee gr. 2) Capital vs Revenue Expenditure UPS & repairs:
12.1. The SA indicated that assessee has debited a sum of Rs 47,22,391 under the head repairs to building, though similar nature of work in the same voucher has been capitalized. Besides UPS replacement of Rs. 10,14,447/- was not properly incorporated in the books.
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12.2. Assessee filed it's explanation which did not find favour with AO. It was held that assessee had not started the new business through its para banking branches during the year, if old UPS were discarded then they ought to have been accounted for in the books of accounts or disposed off.
Similarly the para banking branches have been operating for so many years, and it was not possible that branches were operating without UPS. Accordingly a sum of Rs 10,14,477 after allowing depreciation was added to the income of the assessee. Aggrieved assessee went in first appeal. 12.3. CIT(A) found the disallowance comprised of two items - Rs.44,86,784/- as capitalisation of repairs to building and Rs.10,14,477/- as capitalisation of UPS purchased. AO held that the expenses of Rs. 44,86,784/- relating to work carried out in office was not to be allowed as revenue expenditure, as part of similar work in same building was capitalized. Assessee explained that same vendor carried out work in two different premises and not same premise. While revenue expenditure was claimed in respect of works executed at 'Sahara India Tower, 7 Kaporthala Complex', capital expenditure was claimed for construction of new structures, partitions, rolling shutters, etc., at 'Sahara India Bhawan, 1 Kapoorthala Complex. Both buildings being located in Aliganj, Lucknow' and vendor having raised a common voucher, created confusion at the AO's end. The relevant revenue expenditure was claimed on repair to another building where no new asset of enduring nature was created. CIT(A) agreed with assesses explanation.
12.4. Apropos replacement of UPS. Ld. CIT(A) agreed with the AO's stand to the extent that UPS are additions to assets the written down value of block of assets was to be reduced by the depreciated value of old equipment and enhanced by value of new equipment and allow appropriate depreciation 30 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
thereon. Any realisation from scrap sale was to be considered. Assessee's alternate ground to depreciation @ 60% on UPS treating it as computer peripheral was allowed relying on the following cases:-
- Orient Ceramics & Industries 56 DTR (Del.)397;
- Expeditors Int (India) Ltd. 118 TTJ (Del.) 652.;
- ACIT vs. RamKishan Verma 143 TTJ (UO) 1 (Jp.) Aggrieved revenue is in appeal before us.
13. ld CIT(DR) relied on the order of AO.
14. Ld counsel for the assessee contends that the expenditure of Rs.44,86,784 was for change of flooring and repairs to partitions etc., in a deferent building. It did not bring into existence any new asset or benefit of enduring nature in the capital field. Replacement of UPS has been held as capital expenditure by ld. CIT(A) by allowing depreciation thereon @ 30% (i.e., ½ of 60%). This is why assessee has not pressed ground no. 2 of its appeal.
15. We have heard the rival contentions and perused the material available on record, . From the above facts it clearly emerges that ld CIT(A) verified the facts and has given cogent findings of the fact about two different premises involved in the capital and revenue expenditure, a fact which was miss appreciated by AO. Besides CIT(A) following judicial precedents has adopted a correct approach by holding UPS as computer peripherals and allowing correct rate of 60% subject to no of user days. We see no infirmity in decision on this issue which is upheld and respective grounds of revenue and assessee are dismissed,.
16. Ground no. 5: Anti virus software expenses. 16.1. AO observed that the antivirus software purchased by assessee for Rs. 4,14,398/- had a warranty for 3 years, therefore, this expenditure needs to be
31 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
spread over a period of 3 years from the date of installation i.e. 21.10.2008. Thus the expense for a period of 2 years and 161 days will be allowable in future assessment year and the proportionate amount was sought to be allowed. Assessee replied that expenditure on antivirus software is a recurring revenue expenditure irrespective of the period of use, therefore, there was no reason to disallow Rs. 44,05,688/-. AO, however, treated it as deferred revenue expenditure resulting in disallowance of Rs 44,05,688. 16.2. In first appeal CIT(A) held that the expenditure on any custom-made software for a large business establishment is recurring revenue expenditure for maintenance of information and computing systems. Attrition in custom- made anti-virus software is high and every year upgrades are to be made at equal cost or nominally lesser amounts. The expenditure incurred was held to be allowable revenue in nature.
17. Ld DR relied on the AO's order.
18. Ld counsel for the assessee contends that the CIT(A) allowed deduction for the entire expenditure on the ground that in this era of fast moving technology, there is high risk of obsolesce and, therefore, one time expenditure incurred on anti-virus software should be allowed as deduction in the year of purchase itself. The expenditure on purchase of software licenses/ upgrades has been held to be allowable expenditure by the Delhi High Court in the cases of CIT v. Asahi India Safety Glass Ltd. 346 ITR 329; and CIT v. Amway India Enterprises: 346 ITR 341. 18.1. There is no concept of deferred revenue expenditure under the Act thus even if any part of the revenue expenditure results in benefit in the subsequent period, the same will be allowable revenue expenditure in the year of purchase. The expenditure being revenue in nature, its part 32 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
disallowance, in any case is a revenue neutral exercise, academic in nature since the appellant being a company is subjected to uniform rate of tax.
19. We have heard the rival contentions and perused the material available on record. Expenditure has been held by AO to be deferred revenue in nature and part is held allowed in this year on possible user based on warranty. There is no concept of deferred revenue expenditure in this behalf in view thereof and respectfully following above judgments of Hon'ble Delhi High Court we uphold the order of CIT(A), this ground of revenue stands dismissed.
20. Ground nos. 6 & 7: Depreciation @60% in case of UPS and Printers:
20.1. AO held that UPS and printers have a dual purpose and are not solely dependant on the computers for entire operations. Assessee's claim of computer peripherals eligible for depreciation @60% was rejected, AO held them to be items of machinery and allowed depreciation on UPS 15% resulting in disallowance of Rs 66,81,102/- and printers at Rs. 72,99,852.
20.2. In first appeal CIT(A) allowed the claim of the assessee on the reasoning adopted in ground no. 4 while disallowing the claim of replacement of printers as revenue expenditure and directing to allow depreciation @ 60% on printers.
20.3. After hearing the parties, for the same reasons and judicial precedents in ground 4, we uphold the order of CIT(A), revenue ground is dismissed.
21. Ground 8: Addition on account of Fresh cash Credits: u/s 68 of the Act.
33 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
21.1. This is the major ground of the revenue appeal. The assessee is a registered RNBFC engaged in the collection of deposits of small and medium nature by a vide network of rural agents. Every year a huge volume of deposits is collected by assessee under various schemes during the course of it. In order to verify the new deposits collected during the year, in terms of sec 68 of the Act, AO proceeded to examine them. SA submitted his report alleging that assessee has not cooperated during audit procedure, soft copies i.e. copies of accounting software was not provided. It was further mentioned that due to short time available for audit they had to face lots of difficulties. Report of special auditor in this behalf was considered, various notices were issued on the assessee for whom replies were given. AO also held that assessee was not cooperative in the assessment proceedings, as requisite information was not furnished in the desired soft copy format, identity of depositors and the proof about their genuineness was being not produced; notices served on them remained largely uncomplied with. AO has mentioned these facts in his order in details; they are not reproduced for the sake of brevity.
21.2. Gist of AO's observations is summarized as under:
i. During the year under consideration deposits under 35 different schemes under 'Daily deposit scheme', 'Monthly deposit scheme' and 'Fixed deposit schemes'. The details in respect of the deposits as given in Schedule-3 are given below:
34 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
Detail of Deposits (As per the Balance Sheet): Amount in Rs Opening Balance (including interest accrued) 180,556,912,832.00 (+) Deposits collected during the year 53,016,855,498.00 Total 233,573,768,330.00 (+) Interest Accrued during the year 12,075,786,321.00 Total 245,649,554,651.00 (-) Deposits repaid = (79,681,860,771.00) (-) Interest paid during the year (9,246,378,475.00) Total 156,721,315,405.00 (-) Amount due to Investor Education & (33,494,519.00) Protection Fund (-) Interest due to Investor Education & Provident (2,818,437.00) Fund Closing Balance (including interest accrued) 156,685,002,449.00 ii. The number of assessee's branches are stated to be more than 1500, the number of depositors are about 3 (three) Crores and the no. of agents through whom deposits are collected or repayments made were several lakhs in no. In view of various alleged complexities soft copy of Books of accounts, data etc. were asked by SA and AO to be provided by the assessee as it will help in analyzing revenue implications u/s 68, 269S, 269T, 40A(3) and TDS compliance. The soft copy was called from the assessee in view of the provisions of sec.2(12A) & sec.2(22AA) of the Income Tax Act read with clause (t) of subsection-(1) of sec. 2 of the Information Technology Act, but it was never provided. The special auditors also reported that neither software of the books of accounts, data or access to it was provided to them despite specific request.
iii. Following other inconsistencies were noticed qua deposit registers:
a. same name with same address are appearing repeatedly no. of times in the case of large number of depositors with different account numbers under the same scheme thus clubbing of various accounts of a single depositor was not provided.
b. PAN of the depositors were not given
c. In large number of cases the addresses are not complete
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Sahara India Financial Corpn. Ltd.
d. In case of repayments of deposits, account no. are not
given.
e. Some such illustrative examples are mentioned by AO.
iv. PAN of the depositors, complete addresses, mode of collection
/ repayments in respect of maturity of Rs. 20,000/- & above in respect of depositors' ledgers of 3 Gujrat branches namely (i) Kondagaon (ii) Dantewada & (iii) Godhra were not provided.
v. During the course of special audit, soft copies of the various deposit ledgers, particulars of loans and deposits attached with the tax audit report were asked but not filed by assessee. Thus, the quantifications of the tax implications under sec 269SS and 269T of the Income Tax Act, 1961 was difficult.
21.3. Assessee contended before SA that deposit ledgers are part of books of account and as per definition of books of account under section 2(12A) of the Income Tax Act it means books of account in printed form. Therefore, calling for the soft copy of appears to be beyond jurisdiction as you have been appointed as special auditors to conduct the audit under section 142(2A) of the Income Tax Act. It was reminded to SA that already print-
outs of deposit ledgers of more than 50 branches were submitted and printouts of remaining branches shall be submitted whenever SA required for the audit. Out of total 69 branches SA could check hard copies of only 53 branches.
21.4. In the course of assessment proceedings, AO again demanded soft copy holding a view that if the soft copies were not made available it was not possible to comment on the tax audit report particulars of loans and 36 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
advances. From hard copies of 69 branches called by SA, only 53 branches could be checked due to non availability of soft copy. It was observed that from hard copies that many accounts appeared with same name and addresses as new deposits during the year under consideration. The assessee was specifically required to submit branch wise details about the mode of collection and repayments of deposits in terms of secs. 269SS and 269T which are tabulated by AO in his order. Assessee filed these branch wise details.
21.5. AO further held that due to non cooperation of assessee, the special audit was initiated after a delay of almost three months. The time and efforts required to compile the information required by the auditors or the AO in the absence of data in electronic mode is highlighted in the order. According to AO assessee wantonly delayed the process by first not providing the data in electronic mode and then providing hard copies of the data at belated stage. Out of hard copies of 69 branches the auditor could check the details for 53 only, who submitted a detailed list of depositors where the provisions of 269SS and 269T were contravened. Instances in this behalf are listed by AO in his order.
21.6. According to AO, as the addresses of many of the depositors were found to be incomplete, multiple transactions pertaining to a single depositor could not be clubbed; examination of identity of the depositor became difficult. Besides the genuineness of the new deposit transactions became very doubtful. PAN certificates were not available in majority of the cases to confirm the identity of the depositor. AO held that onus in this behalf lied on the assessee in the first place.
21.7. Though SA accepted that KYC norms prescribed by RBI were followed by assessee, but the names & addresses were found incomplete in 37 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
large no. of cases on test check. Besides, KYC norms do not require any proof regarding the creditworthiness of the depositors, it was unverifiable and doubtful.
21.8. AO then issued 1126 summons on test check basis in relation to 53 branches covered in the Special Audit Report to verify the genuineness, identity and creditworthiness of the depositors on sample basis. Out of these 1126 summons, 832 summons were issued by speed post on new depositors, requiring them to furnish following details/documents :-
(1) copy of Identity Proof and address proof (2) date wise detail of Investments in deposits made, if any with M/s Sahara India Financial Corporation Ltd. during F.Y. 2008-
09 with mode of deposits, cheque/DD. no, date, amount, name of the Bank , Branch and bank account no.
(3) evidence in support of source of such deposits (4) assessment particulars if assessed viz- your PAN, Ward/Circle, (5) copy of IT Return, Balance Sheet, etc. for A.Y. 2009-10. (6) S.No., distinctive No. of certificate in respect of said deposit, if any, have been received 21.9. According to AO out of 1126 summons only 197 depositors replied; out of which 154 asked for adjournment, 346 summons returned back due to incomplete address, 78 summons returned as the person was not present there, 5 summons have been refused to be accepted, 2 summons were issued to person who have died, 3 summons were not accepted as there are many persons with the same name at the given address, 21 summons returned as the depositor had left the available address due to shifting and the remaining 474 summons were not replied. Summary of branch wise summons and 38 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
response for the same is also tabulated by AO in his order. The fate of summons is stated by AO as under:-
(i) In replies received in many cases same language, font, drafting have been used by different depositors
(ii) In many cases reply was received after 5-10 days of prescribed date.
(iii) In many cases request for adjournment were made.
(iv) Adjournment was allowed for 7 days in number of cases and the same were communicated through FAX; some of them could be sent, fax could not be sent because of PCO number. AO inferred that repluging depositors got in touch with the assessee and got the FAX no. of AO's office. It implied that the assessee in order to delay the process of verification was instigating the depositors to file adjournment petitions.
(v) In Three cases it was observed that the depositors have denied having made any investment in the assessee company.
Name of the Address Branch Dispatch
Depositors No.
Mohamed Nd 16 7th Cross Padarayan Vinayak 1973
Ajaz Napurura Bangalore Nagar
Mohamed No 16 7th Cross Padarayan Vinayak 1974
Iqbal Napur Bangalore Nagar
Noor No 16 7th Cross Padarayan Vinayak 1975
Mohamed Napur Bangalore Nagar
(vi) In two cases depositors stated that they made investments in
OFCDs of M/s Sahara India Real Estate Corporation Ltd and not stated anything about deposits with the assessee company :
39 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
Name of the Address Branch Dispatch No.
Depositors
Shiv Kumar Ab 137 Amarpuri, Paharganj 997
Dubey Paharganj, New
Delhi
Suresh Aq 136 Amarpuri, Paharganj 998
Chander Paharganj, New
Delhi
(vii) Out of the 43 replies of summons received, 33 pertained to receipt of deposits and out of the 33 received 31 have accepted that they have deposited the money in cash. Only 2 depositors have confirmed that they have deposited the money by cheque. Similarly out of 10 replies pertaining to repayments, 5 have confirmed that they have received in the money in cash.
21.10. AO noted that in earlier years similar additions were made under section 68 in the case of assessee which has been deleted by the appellate authorities. Assessee's claim that this issue is covered in its favour by earlier orders, was rejected by holding that facts of this year are distinguishable. Comparative data is tabulated by AO for distinction of the facts of year in question and earlier appellate orders in his order. Consequently AO proposed an opportunity to explain why an addition u/s 68 should not be made in respect of new deposits on "estimate basis" based upon the results of the sample verification and distinguishing facts:
Distinguishing Facts:
Facts of the Previous Assessment years Facts of the Current Assessment Year 40 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
Mobilization of the deposits is under The RBI has required the assessee the schemes approved by RBI and in to maintain proper KYC norms accordance with RNBC (RBI) for the deposits taken during the Directions, 1987. The deposits are year under consideration after monitored and supervised by RBI . 01.04.2006 and the RBI has also required that whatever KYC norms are incomplete for the previous periods in respect of deposits accepted before 01.04.2006, the same shall be completed when the deposits mature.
However, KYC norms does not require to have the proof regarding the creditworthiness of the depositors. On test check of the data of deposits, It was found that PAN of the depositors have not been given and in large number of cases the address are not complete. The fact of incomplete address have been established on sample verification.
The major portion of the deposits There has been no assessment as collected was under the 'recurring the assessment are pending for deposit' scheme in which collections want of decision of the pending were received from year to year from writs filed by the assessee before the same person and genuineness of Hon'ble Delhi High Court from deposit in the preceding assessment the A. Y. 2005-06 to 2008-09, years in certain cases have been thus this basis may not be accepted. applicable in the current year No verification of deposit was A detailed verification exercise undertaken during the assessment year was undertaken on sample basis, under appeal. It was contented that not results of which have shown that being a single iota of any depositor was only 197 depositors responded out identified as unexplained by the of 1126 summons issued to assessing officer. depositors of 53 branches.
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Additional Evidence was filed such as No such proof has been provided List of confirmations of the depositors, Confirmations of the depositors, photocopies of application forms, list of commission agents along with Code and their confirmations.
It is not a case where verification was A detailed verification exercise not made or the assessee did not was undertaken on sample basis, cooperate or on verification results of which have shown that transactions were found dubious nature only 197 depositors responded out or fake or non- genuine, rather in most of 1126 summons issued to of the matters the deposits were found depositors of 53 branches. to be verified.
(Page 44 of the CIT (A) order) 21.11. Assessee replied on 09.08.2012 gist whereof is as under:
a. It is undisputed fact that the assessee company is a RNBC company governed by the Reserve Bank of India. It is in the business of accepting the deposits from the general public at large by way of different deposit schemes, approved by Reserve Bank of India. Assessee's business is akin to a Banking industry and likewise the deposit account of public at large are opened at the behest of customer. As and when a customer deposits money in any of the scheme an account number is allotted and a deposit account is opened. The sequence of opening of deposit account and allotment of deposit account number is on first come first serve basis. The allegation regarding deposit not been maintained in alphabetic order nor being scheme wise, is made without appreciating the realties. b. every depositor particularly rural area does not have PAN allotted, non-mentioning of PAN can not be held as assessee's default. Complete details with reference to the identity of the persons, their 42 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
KYC and verifications prescribed by RBI for RNBFC's have been followed which is explicitly accepted by special auditors in their report. Not even a single deposit account has been left in which details have not been submitted. Qua repayments pointed out by AO, they are made by cheques; documents of the identity proof of the persons were also submitted with reference to their identity. c. As per RBI Regulations, the deposit ledgers maintained do not require mentioning of PAN no. of the depositor and the mode of collection of the deposit. Assessee filed a categorical reply stating that as per RBI norms in respect of KYC, there is no requirement of mentioning PAN and the mode of repayment in the depositor ledger. d. For every depositor asked by AO, it had provided proof of identity of the and his complete address on the basis of record maintained by assessee in compliance to RBI guidelines. Apropos random examination of depositor ledgers from 3 branches, some repayments of Rs.20,000/- and above were made on maturity/pre- maturity basis. It was demonstrated that these repayments were made through banking channels only, and any adverse inference in this behalf was unwarranted.
e. Special auditor's report qua TOR-12 clearly states that assessee furnished record of 69 branches as initially asked by them. The auditors could only check the addresses in respect of 53 branches only, it is accepted that all hard copies were provided to them. No further record was asked by auditors.
f. Not a single instance is quoted in effective terms, where assessee did not provided the data required by special auditors or by AO subject to the fact that it was within the parameter of RBI 43 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
regulations. Even in banks if a depositor wants to open FDRs in different denomination the bank does not insist on depositor to make only one consolidated fixed deposit.
g. The proposed adverse inference that non clubbing of depositor's accounts indicates that deposits are not genuine ignoring the other record is untenable. It is at the option of the depositor to open more than accounts which the assessee as a RNBFC cannot refuse to open. Assessee's efforts to follow the regulations of a law in this behalf cannot be used as a tool to hold such deposits as non genuine on assumption.
21.12. Apropos non mentioning of PAN, assessee replied that, the depositor base of the assessee comprises of persons of small means in wide spread rural areas, having petty income they can not be expected to possess PA. Statistically out of 120 crores Indian population about 12 crores PAN nos. only are allotted by department. Therefore, to say that non-availability of PAN No. is clinching evidence for confirmation of the identity of the depositor is totally baseless. The economy of the country is agriculture based and agriculture income is exempt from income-tax. Assessee is diligently following KYC norms as issued by the Reserve Bank of India which fact has been verified and certified by the special auditors on checking of 53 branches. They have categorically stated that due compliance of KYC norms has been verified by them in following terms:
"On a test basis, we have verified the KYC norms for the deposits taken during the year under consideration and apart from minor address corrections; we have found the same to be in order. Thus the learned assessing officer may not draw any adverse inference on the same."
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21.13. Any entity which is in the business of mobilization of deposit, be it a banking company or be it a co-operative or be it a Post Office or RNBFC, is not expected to insist for demonstrative proof of creditworthiness from the depositor lest he runs away to some other bank. That is to promote small savings, no such norms are prescribed by RBI regulations for banking industry in India.
21.14. Apropos the issue of summons, assessee replied that AO's analysis about outcome of 1126 summons does not tally with the remarks in explanation column. The correct position based on the remarks given in the list of 1126 summons issued works out as follows:-
- seven persons names have been repeated in the list supplied
- In case of Shri P.V.M. Reddy at Sl. No. 713 whose name is not traceable neither address is traceable so as to enable us to explain to whom the summon has been issued.
- As regards the balance 1118 depositors, 161 persons have acknowledged receipt of the notices out of which 44 persons have confirmed the deposit and 117 persons requested for adjournment.
- In the case of 350 summons returned due to incomplete addresses.
- In 71 cases summons returned because the persons were not there.
- In 6 cases summons returned as depositors refused to accept.
- 2 summons were issued to dead persons.
- 1 summon was refused because of many persons were available with the same name at the said address.
- 15 summons returned with remarks of the postal authorities that the depositor has left from the address.
45 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
- 512 persons have not replied inspite of receiving the notices. 21.15. As regards the persons who have accepted and responded, there is no occasion to doubt their genuineness as the summons have been received by them and have responded. Some of them may have taken adjournment for searching details and in the meanwhile, i.e. time between the issuance of notice and filing of reply they may have responded also. 21.16. As regards the summons which have been returned back due to incomplete addresses, there are number of cases where proper addresses have not been mentioned in the issued summons.
21.17. A list of 57 persons where postal address mentioned in summons is wrong, therefore, no adverse inferences is called for. 21.18. As regards the balance, in most of the cases PIN code no. has not been mentioned in case of registered letters or speed post letters the post office does not accept letters without having PIN code. Postal authorities on finding that the PIN code is not traceable, may have returned back the letters thus they could not reach the depositors.
21.19. As regards 78 persons summoned (correct figure 71 persons) which have been returned on the ground person was not present there at the time of delivery of the letter, their identity and genuineness by itself stands proved ed. This is so because the person was existing and if at the given time, depositor is not present for the postman no adverse inference is called for.
21.20. Similar is the position with reference to 5 depositors (correct figure 6 persons) who have refused to accept the summon. Once a persons has refused to accept the summon, his identity and genuineness stands impliedly established meaning thereby that the persons is existing and, therefore, also no adverse inference should be called for.
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21.21. As regards 2 summons on dead persons, the fact that these persons are accepted as dead, their identity and genuineness of these persons stand fully justified and no adverse view be taken in the matter on this count. 21.22. As regards 3 persons (correct figure 1 persons) who have not accepted the summons as there are many persons with the same name on the same address, it cannot be presumed that the persons are non-existing and calls for no adverse view.
21.23. As regards 21 summons (correct figure 15 persons) returned with the remarks that the depositor is not available at the address, it is to be appreciated that there are number of persons who might have changed their addresses over a period of time and, therefore, no adverse view in this respect is called for.
21.24. As regards 474 summons (correct figure 512) which are served and for which reply has not been received signifies that the identity and genuineness of the depositors stands explained and, no adverse inference can be taken in the matter.
21.25. Assessee enclosed account opening form of all the depositors to whom summons were issued alongwith their identity proof. Since in majority of cases the account stood matured as on date, the proof of re-
payment of their deposit accounts at its maturity or pre-maturity which were mostly by cheques, were also filed.
21.26. A chart about these 1126 depositors with enclosures was filed. They were details about the details of cases in which PAN nos. have been supplied by the depositors, form no.15G/H given by the depositors, cases in which TDS was not deducted and payment has been made through banking instruments. Besides some copies of Form 16 issued by assessee in respect of TDS deducted on testbasis.
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21.27. Assessee thus claimed that reasonable and due compliance for discharge of primary onus has been discharged by the assessee, no adverse inferences is called for. Year-wise summary, containing details about the depositors who had opened the account in respect of 1126 (Correct number 1118) qua which the summons were issued, was also filed. These accounts were opened in F.Y.2001-02 onwards and, therefore, after 10 years if a depositor's address is found to be different, same does not call for any adverse inference. The depositors may change their address or they might have left their places because of which the summons which were issued in respect of deposits which were started in the F.Y.2001-02 onwards may not have been received by them.
21.28. The maturity vouchers/documents also contain KYC document of the respective depositors to whom repayment has been made during the year wherein his identity/address etc. as on the date of taking of the maturity proceeds stand duly mentioned and the depositor should be traceable with reference thereto.
21.29. Due to some adverse publicity, Reserve bank of India put assessee under strict survillance and by an order imposed directions, during the relevant previous year, to close the business of the assessee. Dispute went to Hon'ble Supreme Court and, thereafter, the business was again started and no new account has been opened after 30.06.2010 after the receipt of the RBI order to close the existing business by 2015. After 30.06.2011 no further installments/ renewals are taken and assessee is only servicing maturity of the deposits.
21.30. Further the deposits in question were obtained by the assessee through the services of its main agent in the earlier years M/s. Sahara India who, in turn, had a team of field workers of lacs of persons through whom 48 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
deposit were being procured from wide spread areas mainly rural. The field workers were in touch with the agent and assessee, complete details of KYC norms of the field workers and their identity etc. were available with the assessee and the field workers on the other hand were directly in touch with the depositors.
21.31. Since 2011, no deposit is being mobilized by the assessee company and, therefore, there are no commission agents/field workers on roll of the assessee company. In these circumstances, if a depositor whose deposit has matured does not reply, it does not lead to any adverse inference because assessee has no direct control over the depositor any more. The assessee company does not possess any legal force or authority so as to enforce the attendance of the depositor or reply to the summon issued. 21.32. As regards the depositors who have not replied to notices, the matter was placed before the Board of the assessee company, which following RBI directions marked a lien on such depositors, if the account is existing and not matured as on 31.07.2012 that repayments will only be made through banking channels after taking their complete KYC, affidavit and confirmation. Thus on RBI directive KYC compliance on maturity is ensured.
21.33. Apropos rest of the depositors, assessee filed complete details with reference to the payment of their maturity proceeds and KYC documents showing their identity. Assessee responded to various paras of AO's letter - Para 9.aa listed two cases whose confirmations were received through Fax with the observations that no Fax number was provided to the depositor by AOs office. Para 9.b.- 4 cases in which same language, same font and drafting was used and in para c. 3 cases where replies were received late after a gape of 4 - 5 days of appointed date. d. in a number of cases 49 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
where request for adjournment was received, and in para e. where the request for adjournment was made through Fax and in several cases to which reply fax could not be sent as the transmitting number was found to be that of P.C.O. Assessee objected to AO's considering these irrelevant aspects for arriving at a conclusion that summoned depositors got in touch with the assessee and got the Fax number of the office and the assessee is thus a party in delaying the process of verification.
21.34. There is no harm in helping the depositors who approached the assessee to give them in understanding the issue and comply with summons. In order to promote the process of verification they were supplied with the requisite information like Fax number, address and proforma for furnishing requisite information. It was beneficial for verification as depositors feel scared by income tax notices and approached assessee for guidance in compliance. There is no reason to misconceive assesses good efforts into adverse inferences.
21.35. Assessee claimed that there were no distinguishing features in the observations with reference to the facts of earlier years. Introduction of KYC norms, rather helped everybody in the system, as proof of identity of the depositors became stronger. Consequently by KYC norms, genuineness of deposit and its repayment got automatically strengthened. The introduction of KYC norms and the deposits being under RBI guidelines are akin to banks, this clear proposition of law strengthens the assessee case on these aspects. After introduction of KYC norms, there should not be any doubt left in relation to the identity and genuineness of the deposits and repayments. Thus compliance of provisions of sec. 68 as propounded by various judicial decisions on banking industry, these requirements stand fulfilled. Appreciating all the relevant factors and judicial precedents, 50 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
appellate authorities have deleted such additions in various earlier years. Some facts rather strengthened by KYC norms and RBI watch exist in this year. Thus the facts of creditworthiness of the depositor are same and strengthened by introduction of KYC norms. It was claimed that this compliance by assessee constitutes reasonable discharge of primary onus u/s sec 68. Thus facts and circumstances about these deposits were claimed to be same with earlier years.
21.36. Major portion of the deposits are under recurring schemes coming from earlier years, a fact accepted by appellate authorities, consequently their genuineness cannot be challenged again year after year. 21.37. Another distinguishing fact mentioned by AO, about assessee's pending writ petitions challenging the orders for special audit passed under section 142(2A) before the Hon'ble Drlhi High Court, has no relevance, as assessee is defending its legal rights. AO without any justification or logic has erroneously held it as a distinguishing fact vis a vis earlier years. Besides, no deposit was accepted under the F.D. scheme from June, 2007 onwards and only MIS scheme was operative which also stands closed in June, 2008. Thus looking from any angle there is no justification in distinction of facts amongst earlier and current year. Rather the strong parity of the facts amongst preceding years and current year stands on stronger footing in this year in favour of the assessee. 21.38. Assessee enclosed 10,000 application forms in respect of accounts opened during the year to demonstrate that for each deposit was allowed to be opened after submission of duly filled account opening form containing proper details about address, introduction by the field agent whose complete KYC details were available with the assessee. Such details in 40 volumes were produced before SA and AO. Thus there was no change 51 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
at all in the facts as compared to earlier years on various counts i.e. major deposits being recurring in nature, R.B.I. supervision under its regulations, nature of deposits, KYC norms etc. The factual position in the preceding years is similar in all material terms for all these years consequently the findings of earlier appellate orders accepting deposits u/s 68 are applicable and binding on assessee's case.
21.39. Without prejudice to these arguments, assessee raised a legal plea that the deposits mobilized by it are not in the nature of unexplained credits to which the provisions of section 68 of the Income Tax Act are applicable, it 68 reads as under:
"Where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of Assessing Officer, satisfactory, the sum so credited may be charged to Income Tax as the income of the assessee of that previous year."
21.40. Section postulates two important factors for consideration:
a) That the addition in respect of unexplained credits can only be made qua each deposit and not on a generalized basis or pro rata basis on the whole amount of deposit.
b) AO is vested with a judicious discretion to hold any deposit as explained or otherwise which is evident by use of words 'may' and not 'shall' by the legislature. Thus AO has to judicially examine issues in the light of explanation furnished by the assessee and considering all relevant facts.
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21.41. The section in clear terms provides that AO's power of verification to be qua a specific cash credit, which clear means each person and cash credit. AO has no power to go beyond the express wordings of this deeming provision. By no stretch of imagination, AO has power to adopt an adhoc method to change its estimate every year and adopt 35% of all the fresh deposits in the current year, majority of which are recurring deposits from earlier year, as unexplained cash credits u/s 68. This estimated adhoc addition is untenable contrary to the specific mandate of deeming fiction of sec. 68 and without any enabling provision in this behalf. 21.42. Catena of judicial precedents hold that the routine yardsticks of ingredients of sec 68 are not be applied to banking industry and compliance of KYC norms is reasonable discharge of primary onus. It is not judicious to give a complete go bye to RBI regulations. In long history of assessee's litigation in which deposits have been held to be genuine by appellate authorities year after year, have been willy nilly distinguished. The department is not allowing the issue to settle in income tax proceedings which are non-adversarial in nature. SA and AO have been trying to pose the assessee as adamant and non cooperative, ignoring the voluminous compliance made by it. The late commencement of audit, space constraints of auditors which are attributable to their problems have been conveniently ignored and every blame is being put on the assessee. 21.43. AO however did not agree with assesses submissions and made the additions of Rs. 1855,58,99,424/- u/s 68 in this behalf by detailed observations mentioned in his order.
21.44. In first appeal where CIT(A) deleted this estimated adhoc addition, gist of relevant observations and conclusions are as under:
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i. This type of additions u/s 68 has been on going since AY 1994- 95, which have not found favour with the appellate authorities i.e. the CIT(A) and the ITAT. It is undisputed that assessee is a RNBC with over 3 crore depositors, consisting mainly of micro, small and medium self-employed, business and house-hold savers, spread over large parts of the country. AO appointed SA contending that there are complexities in accounts. Assessee provided the information not in the particular software format but furnished hard copies of information along with explanation in support of its legal contentions. AO in past also conducted a sample checks, and held a part ranging from 15% to 100% of the deposits as unexplained credits. Appellate authorities have consistently rejected this type of estimated, generalization and adhoc disallowance by holding that it is not permissible u/s 68. ii. The dispute is same as earlier years, as against earlier 15-100%, estimate disallowance, now 35% are held to be unexplained. In all earlier years this type of estimated additions by way of assessment, reassessment and revisionary order u/s 263 for AY 1994-95, have been deleted and decided in assessee's favour by CIT(A) or the ITAT. The parity of facts, circumstances and issue amongst the current and earlier years is tabulated by ld. CIT(A) as under:
Sl. Observations of AO Findings during appeal proceedings 1 Books of accounts as defined Appellant's defence, that books of u/s 2(12A) / 2(22A) of the accounts as defined under the Act alone Income Tax Act, 1961 (the is to be considered, is not acceptable as Act) r.w.s. 2(1)(t) of the electronic record cannot be said to be Information Technology Act, not covered within the definition of 2000 were requisitioned but books of account.
not produced by appellant.
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2 Sample verification / test While the method may be valid, adverse check method is valid and inference that deposits are unexplained can be applied to the universe cannot be generalized. Any such of deposits. adversarial conclusion has to be drawn only on the basis of facts and not on assumption as it will lead to penal consequences including prosecution under the Act.
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3 No satisfactory explanation -
(i) only two depositors i) There is no requirement under the any accepted that they had law to make deposits in cheque only - deposited through account banks, post-offices, etc., accept cash payee cheques; deposits - these queries raised futile in such cases;
(ii) summons returned back (ii) many addresses found to be due to incomplete address; incorrectly recorded, most cases had already matured and repaid by the appellant (Ref. Para-12.3 B above);
(iii) persons not found by (iii) most cases had already matured and postal authorities; repaid by the appellant (Ref. Para-12.3 C above);
(iv) persons did not reply; (iv) their non-reply cannot be held against the appellant as the persons undisputedly exist;
(v) persons had left the place; (v) appellant has no control over semi-
employed or self-employed people
migrating for better economic
opportunities;
(vi) many persons by the (vi) normal socio-cultural phenomenon same name; in India;
(vii) persons refused to accept (vii) their refusal cannot be held against the letter; the appellant as the persons undisputedly exist;
(viii) persons were dead. (viii) cases had already matured and repaid by the appellant.
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4 Unsatisfactory replies -
(i) details as required not (i) queries were complex and in furnished; English, most depositors are people of small means and would not know the language;
(ii) replies received by fax (ii) depositors approached appellant's though no such no. furnished; branches who facilitated responses to summons;
(iii) same language, font, (iii) appellant's branches facilitated drafting used, even from responses when approached by the different places; depositors, one branch office may cover several places;
(iv) replies received after 5- (iv) has no significance since replies 10 days from the date given were in fact received;
in summons;
(v) request for adjournment; (v) it is a right of any person summoned, at least some response was received and cannot held against the appellant;
(vi) adjournments given (vi) in small places (villages, blocks, through fax, which were even district towns), people do not have found to be PCOs. personal faxes and use the local PCO for long-distance calls or sending faxes.
5 Basic ingredients of cash It is not a normal case of cash credits. credit not satisfied. Appellant is a RNBC under regulation of the RBI and follows KYC norms as admitted by special auditor / revenue.
6 Identity and genuineness As in Sl.5 above.
doubtful.
7 Creditworthiness of As deposits are insignificant / small / depositors not established. not very large, the creditworthiness of depositors has no significance.
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8 Onus of assessee not General onus to produce documents in discharged. electronic form not discharged, case-
specific documents were produced and thus onus was discharged.
9 Defects in documents The defects noted were found to be produced (Para-8.3.13 of either incorrect or not material to the assessment order. matter in issue; as under:
(a) applicant and introducer are same -
this is possible if the agent is himself the depositor;
(b) introducer signature not present -
applicant identified by photograph, address and signature or thumb impression; introducer signature found on second / subsequent page;
(c) applicant signature not present -
thumb impression & KYC documents present;
(d) left thumb impression of applicant / introducer not present - applicants being ladies, right thumb impression was taken; introducer's signature present in first / second / subsequent pages;
(e) name and code of collector not present - introducer and collector being the same person, name mentioned in the introducer column;
(f) nominee signature not present - no requirement under any law for nominee signature;
(g) photo not present - no requirement for photo, KYC document present.
21.45. Thus it has been repeatedly held that the deposits collected by assessee under various RBI regulated schemes, without there being any adverse observations of RBI, can not be held as unexplained credits u/s 68. It is held that on principle of consistency, bringing finality of repetitive 58 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
issues in income tax proceedings and principles of judicial discipline the assessee deserved to succeed. Reliance was placed on Hon'ble Supreme Court in: UOI v. Kamlakshi Finance Corp. Ltd. [AIR 1992 SC 711]; Khalid Automobiles v. Union of India [4 SCC (Suppl.) 653] Pannalal Binjraj v. Union of India [1957] 31 ITR 565 (SC);
21.46. In CIT v. Simon Carves Ltd. (1976) 105 ITR 212 (SC), the Apex Court held that:
"The taxing authorities exercise quasi-judicial powers and in doing so they must act in a fair and not a partisan manner. Although it is part of their duty to ensure that no tax which is legitimately due from the assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that scales are weighted against the assessee. It is impossible to subscribe to the view that unless those authorities exercise the power in a manner most beneficial to the revenue and consequently most adverse to the assessee, they should be deemed to have exercised it in a proper and judicious manner."
21.47. Ld. CIT(A) summarized his conclusions, about AO's test-check as under:
A. There is no surviving instance of denial of deposit. Out of 5 cases cited by the revenue, all five accounts had matured and been refunded by cheque. While one of these persons had died, two persons had replied in the negative to the AO's query whether they had made any fresh deposit during the year. As the deposits made by these 2 persons were old, their reply was correct. Eventually, the revenue does not mention any case of denial in the concluding Para-8.3.14 of the assessment order. This fact alone, that there was no denial, together with the fact that the appellant is a RNBC engaged in the business of 59 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
collecting deposits from small investors, leads to a conclusion in favour of the appellant.
B. The revenue pointed out that 361 query letters / summons were returned back with the postal remark 'incomplete address'. Records produced before me show that actually there were 352 such cases (and not 361 cases) out of which only 5 cases were live, i.e. deposits had not matured, and in all the remaining 347 cases the deposits had already matured. In 234 cases the payments had been made by cheques. In the remaining 113 cases payments had been made by cash and in all the cases the payments were below Rs.20,000/-. It was found that in all the cases KYC norms prescribed by the RBI had been followed, as also observed by the special auditor. C. The revenue further pointed out that 78 persons (correct figure is found to be 71 as claimed by appellant) were not found by the postal authorities. Records produced before me show that all were matured deposit cases. In 48 cases the payments had been made by cheques. In the remaining 23 cases payments had been made by cash and in all the cases the payments were below Rs.20,000/-. It was found that in all the cases KYC norms prescribed by the RBI had been followed, as also observed by the special auditor.
D. In respect of other categories of responses or lack of responses to verification by the revenue, no adverse inference can be drawn against the appellant if the letters were served, or could not be served due to natural (death) or socio-economic reasons.
21.48. Thus CIT(A) held that assessee's case was favourably covered by series of earlier decisions which are on same facts in assesses own case. Ingredients of sec 68 about identity, genuineness and creditworthiness were 60 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
to be applied on the basis of yard stick laid down by various judicial precedents in respect of banking industry. Assessee being registered RNBFC fell in the category of banking industry and the nature of primary onus lying on assessee was akin to banking industry. Compliance with RBI regulations and KYC norms was reasonable discharge of the assessees's onus u/s 68. The allegation about non compliance of summons has been wrongly inferred by AO. There is no basis to hold that assessee was instigating depositor to be non cooperative. Compliance of summons cannot be enforced by assessee. It was also upheld that sec 68 can not be applied in estimated, adhoc or generalized manner. In order to make legally sustainable addition u/s 68 each specific deposit i.e. cash credit was to be identified as unexplained. AO was obliged to judicially ascertain the nature of primary onus cast on assessee, it's discharge and after considering the assessee's explanation, holding it to be unsatisfactory in effective manner, only specific deposit can be held to be unexplained and added u/s 68. There was no justification in changing estimate every year and holding deposits to be unexplained @ 35% in this year without appreciating glaring facts that majority of deposits were recurring in nature coming from earlier years, made these unjustified addition, which was deleted. CIT(A) has passed a detailed order for sake of brevity gist has been mentioned.
Aggrieved revenue is before us.
22. Ld. CIT(DR) Shri R S Meena contends that failure in discharging its onus in terms of sec 68 is further compounded by the non cooperation in proper audit and assessment is summarized as under:
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1. Delay in Audit and non-cooperation of the assessee .
22.1. The work of audit started around mid-march'2012, about 85 days were lost due to assessee's non-cooperation besides extensions of audit period was granted at the request of the assessee for four times each for 30 days each in February, March, April & May 2012.
22.2. The direction for special audit u/s 142(2A) was issued on 23.12.2012, despite repeated reminders from AOs office as well as by the auditors, the assessee did not provide the books of accounts, necessary records, information's to the special auditors to ensure timely commencement of the work of audit. The special audit in the case of the assessee for the A.Y.-
2009-10 concluded on 15th June'2012 and two copies of the special audit report were furnished to the assessee by the auditors on 15.06.2012. On completion of the special audit, special audit reports consisting of seven volumes were submitted by the assessee company on 19.06.2012.
2. Reasons to estimate the addition u/s 68:
22.3. Assessee refused to provide software copy of the ledger accounts to SA by contending that providing soft copy was not covered in the definition of books of account under the IT Act 1961, complicated the situation. The stand taken by the assessee is untenable in law on following propositions:
a. As per section 2(12A) of the IT Act 1961, the books of account have been defined to include the following:- "books or books of account" includes ledgers, day-books, cash books, account-books and other books, whether kept in the written form or as-print-outs of data stored in a 62 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
floppy, disc, tape or any other form of electro-magnetic data storage device;] b. Further, as per section 2(22AA) of the Act ,the documents are defined as under:-
"document" includes an electronic record as defined in clause (t)7 of sub-section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000);] c. As regards definition of electronic record under the Information Technology Act, 2000, as per section 2(1)(t) the "electronic record" has been defined as under:-
"electronic record" means data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro fiche;
22.4. A conjoint reading of above provisions and provisions of clause (iii) of sub section (1) of section 142 of the IT Act 1961, the Assessing Officer held that it was within his Jurisdiction to call for:
(ii) to produce, or cause to be produced, such accounts or documents as the [Assessing] Officer may require, or
(iii) to furnish in writing and verified in the prescribed manner information in such form and on such points or matters (including a statement of all assets and liabilities of the assessee, whether included in the accounts or not) as the [Assessing] Officer may require:
22.5. Thus the non-cooperative attitude of the assessee is writ large in the proceedings, which needs to be taken into consideration while deciding the revenue ground.
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22.6. Ld CIT (DR) responding to query by bench as to whether any summons under section 131 of the IT Act, 1961 was issued on the appellant company contends that as per the provisions of clauses (ii) and (iii) of sub section (1) of 142 of the IT Act, 1961, the AO can call for not only books of accounts but also documents along with information in such a form and on such points or matters as he may require.
4. AO's difficulties in discharging statutory functions due to non cooperation 22.7. The difficulties faced for the purposes of verification of identity / genuineness / creditworthiness or violation of section 269SS/269T or violation of 40A(3) aspects are highlighted in the assessment order. The information provided in these ledgers pertaining to violation of section 269SS & 269T as details were maintained neither branch-wise nor in alphabetical order nor scheme-wise. It was not possible to carry out any useful analysis of the data or conduct proper investigation for the purpose of a proper assessment. Therefore, AO rejected the books of accounts and framed the assessment to the best of his judgment including estimation of 35% unexplained cash credits. AO has mentioned the deficiencies is compliances including as under:-
a. same name with same address are appearing repeatedly no. of times in the case of large number of depositors with different account numbers under the same scheme which indicated that clubbing of accounts in case of a single depositor have not been, b. PAN of the depositors have not been given c. In large number of cases the address are not complete d. In case of repayments, account no. are not given.
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22.8. Assessee provided the auditors with hard copies of 69 branches, out of which the auditor could check the details for 53 branches only. The special auditor has submitted a detailed list of depositors where the provisions of 269SS and 269T have been contravened. From the list of depositors AO observed that many addresses are incomplete, the special auditor had also pointed out in the report that many deposits have been accepted during the year which are appearing in the name of the same person. Provisions of sec. 68 are applicable to recurring deposit also. To verify the genuineness, identity and creditworthiness of the depositors on sample basis from available information total of 1126 summons were issued by speed post to various of audited 53 branches. 22.9. Out of 1126 summons only 197 depositors replied and out of which 154 has asked for adjournment, 346 summons returned back due to incomplete address, 78 summons returned as the person is not present there, 5 summons have been refused to be accepted, 2 summons have been issued to person who have died, 3 summons have not been accepted as there are many persons with the same name at the given address, 21 summons returned as the depositor has left the available address having shifted and the remaining 474 summons remained pending reply. 22.10. The assessee has not questioned the sample size but at many places tried to point out that there was no need of drawing out this sample as in its earlier year assessments before the Income Tax Appellate Tribunal in the case of Deputy Commissioner Of Income Tax Vs. Sahara India Financial Corpn. dtd. 20 May, 2003 81 TTJ (Luc) same method has been adopted. Apart from non compliance, replies received from the depositors in response 65 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
to the summons were found to be not satisfactory by AO on following observations;-
i) In number of cases details as required in the summons have not been furnished,
ii) While going through the replies received from creditors, it has been observed that although no fax number was mentioned in the summons issued from this office but still large no. of replies were received by Fax.
iii) In many cases, same language, font, drafting were used by different depositors, in some cases by depositors of different places.
iv) In many case Replies were received after 5-10 days from the date given in the summons.
v) In number of cases details as required in the summons have not been furnished and instead request for adjournment have been made.
vi) In number of cases Adjournment has been allowed for 7 days and communications in this regard were resent through FAX on the numbers through which adjournment petitions were received. In several cases, it could not be sent because the FAX No. belonging to PCO. Examples of such cases showing above observations were also cited in the show-cause dt. 26.07.2012. 22.11. AO observed that it was clear that summoned depositors came in touch with the assessee and got the FAX no. of his office, which transpires that the assessee put in its best efforts in delaying the process of verification by way of instigating the depositors to file adjournment petitions. In two cases it has been observed that creditors have denied of having made any 66 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
investment in assessee company. In almost all the cases selected on sample basis, the depositors have failed to provide the necessary documentary evidence to satisfy the three basic ingredients of cash credits i.e. the proof of identity, capacity of the creditor and genuineness of the transaction for examination during the present assessment proceedings. 22.12. The identity and genuineness of the transactions involving receipt of deposits was held to be doubtful on following points: -
a) PAN is not available in large no. of the cases,
b) The transactions are almost in cash and not through the normal
banking channels and the same has also been confirmed by the depositors who have responded. i.e. Out of 48 depositors who have responded and confirmed the deposits, 46 have stated that the deposits have been made in cash.
C) Credit worthiness of the depositors was held as not established since no documentary evidence was produced regarding proof of income or wealth of the depositors in most of the cases.
22.13. AO was of the view that onus lies on the assessee to explain the cash credits in terms of sec 68 and the burden can only be discharged by furnishing the requisite details, documents, explanations, clarification etc. including the personal deposition of the lender before the assessing officer and the assessee has failed to discharge the said burden. Therefore in these facts and circumstances, the three required tests i.e. identity, genuinity and creditworthiness of the depositor are not satisfied in case of the assessee. 22.14. The method of test checking is well recognized and is also accepted by the Institute of Chartered Accountants.
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22.15. The entire explanation of the assessee revolves around the KYC norms. However on random test check, it was found to be not proper as in many cases applications forms were incomplete. In many cases the photograph of the depositors was not there, in substantial no. of cases signature of the applicants did not appear, in lots of the cases the nominees signature was not there, in several cases the applicant and the introducer were same. The assessee has claimed it's business to be akin to banks, but there these norms are very strict and entire KYC norms are followed correctly. The facts and circumstances and the practices followed by the assessee with regard to collection of deposits are entirely different and can be easily distinguished from that of the banks. Clubbing of several deposit accounts belonging to the same depositor is a key requirement of the KYC norms and all the banks today maintain the entire list of accounts belonging to a particular depositor. In these circumstances it cannot be said that KYC norms have been correctly followed by the assessee, which not only talk about the identity but also talks about the proof of residence 22.16. The factual matrix of the arguments is summarized by ld. CIT(DR) as under:-
1. The assessee either do not wish that the information be furnished or wants to avoid certain information from coming to the notice of revenue authorities.
2. Only 69 hard copies of branches out of more than 1500 branches was provided to the special auditor and the data in soft copies was always denied and not provided. The act of not furnishing the soft copies clearly proves that though the information was ready but the same is 68 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
being avoided, obviously for some deliberate reasons best known to the assessee.
3. Inspite of granting repeated opportunities to discharge the onus under section 68, the assessee has failed to discharge its onus to explain the credits in its books stated to be the deposit collection as the basic three ingredients of the cash credits i.e. (i) the identity, ii) capacity of creditors and iii) genuineness of the transaction have not been satisfied and that too when the onus as per the act squarely lies solely on the assessee to suo-moto discharge the same..
4. Therefore the provisions of section 68 of the Income Tax Act are applicable on unexplained credits given the colour of part of the deposit collections.
5. Results of enquiry/investigations on a sample size can be equally applied to the entire universe of deposits considering the sheer volume of data/information and the peculiar facts of the case.
22.17. Ld DR contends that in view of the above facts, circumstances and arguments, it is clear that the assessee has failed to discharge the onus which squarely lied on it to prove Identity, Creditworthiness and Genuineness of the deposits in terms of sec 68. Since AO worked under constraints mentioned by him and as the assessee failed to discharge its onus with respect to deposits, same pattern of addition as made in A.Y.s 1999-2000, 2000-20001, 2001-2002, 2002-2003, 2003-2004 & A.Y. 2004-05 was adopted. Keeping into mind the business of the assessee, all related facts, the outcome of sample verification and the previous years pattern AO was justified in estimating the quantum of addition @ 35% of the net collection of deposits during the year.
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22.18. CIT(A) held the assessee's case favourable, covered by earlier orders in appellant's own case, overlooking the distinguishing facts tabulated by assessing officer. Support is drawn by CIT(A) from Supreme Court decision in UOI v. Kamlakshi Finance Corp. Ltd. [AIR 1992 SC 711] and Khalid Automobiles v. UOI [4 SCC (Suppl.) 653] and Pannalal Binjraj; and Simon Carves Ltd. (supra) has no relevance.
22.19. Ld DR contends that the findings recorded by the ld. CIT(A) indicate that relevant issues involved in the case have been mis-appreciated including the fact that the assessee did not co-operate with the Assessing Officer. Ld. CIT(A)'s finding that the books of account as defined under the Act alone are to be considered for examination, is not tenable as electronic records are covered within the definition of books of account. It is pleaded that ld. CIT(A) completely abdicated his statutory responsibility and restricted himself to criticizing and finding faults with the Assessing Officer. Ld. CIT(A) has a responsibility on his shoulders to not only correct the mistakes committed by the Assessing Officer but also has the power to strengthen his findings recorded by the AO and if need be, to go for enhancement of assessment.
22.20. Reliance is placed on observations of Hon'ble Delhi high court in the case of Nova Promoters and Finleas (P) Ltd. 342 ITR 167 for the observation.
"The Commissioner of Income-tax (Appeals) has observed that if summons had been served it would mean that the parties were present at the addresses and even if they were not found by the inspector at the addresses furnished by the assessee, it was for the Assessing Officer to have made enquiries from the post officer regarding the whereabouts of the addressees. We do not 70 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
think that there was, in this case, any such duty cast on the Assessing Officer.
It is rather unfortunate that the assessee seems to have sent the Assessing Officer on a vain chase."
22.21. The Hon'ble Apex Court in the case of Jute Corporation of India Ltd, has held that the AAC has all plenary power which an Assessing Officer has. The Apex Court again in the case of Kapur Chand Shrimal vs. CIT 131 ITR 451 has held that the appellate authority has Jurisdiction as well as duty to correct errors committed by the AO and he can give further directions to him.
22.22. A careful examination of the decision rendered by ITAT Lucknow Bench in Appeal nos. ITA. No. 747/All/2000 and ITA no. 304/Luck/2001 for A.y. 96-97 will reveal that facts of the assessment year under consideration are distinguishable on following respect:
(a) In the assessment year 96 -97, there was no suggestion by the special auditors about any non co-operation, not providing requisite records / information or deliberate delay on the part of the assessee company.
(b) In assessment year 96 - 97, the AO refused to accept the approach adopted by the auditors to examine the deposits on sample test check basis, whereas in this year no such situation exists. In fact, the AO himself has chosen to make verification of the genuineness and correctness of the deposits on test check basis and accordingly notices were issued only to 1118 depositors. In the year consideration, it is the assessee company which is objecting to the sample size picked up by the special auditor
(c) In the assessment year 96 - 97, the CIT(A) set- aside the issue of deposits and directed the AO to conduct inquiries in respect of 100 71 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
branches and there-after take a reasonable view of the matter. Whereas in this year learned CIT(A) has summarily disposed of the matter without affording any such opportunity to the AO to make further inquiries nor did he make any attempt on his own part.
(d) In the assessment year 96 -97, the assessee company itself was insisting that the special auditors were fully justified in making verification of deposits on sample test check basis (reference is invited to Para 9 and 13 of order of the ITAT dated 26.05.2003). However, in the year under consideration the assessee company has contradicted its own stand.
(e) In the assessment year 96 -97, the Assessing Officer had brought to tax the entire deposits whereas in the year under consideration only 35% of the fresh deposits have been held to be unexplained.
(f) In the assessment year 96 -97, the AO did not take inquiries to logical end and did not adopt any systematic approach to collect and confront the adverse material with the assessee company. Whereas, in the year under consideration the AO has carried out detailed investigation in at least 1118 cases and result of enquiry was duly communicated to the assessee before taxing 35% of the fresh deposits.
(g) While disposing of ITA. Nos. 747/All/2000, no relief was granted to the assessee company and the Hon'ble ITAT upheld the decision of the CIT(A) where in directions for further inquiries were given by him.
(h) AO in assessment year 96 - 97, brought to tax the 100% deposits including opening balance of deposits as unexplained which was not in keeping with the additions of 15%, 20% and 50% made by the revenue in earlier years. However, in the year under consideration 72 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
only 35% of the fresh deposits have been brought to tax which is consistent with the approach of the department in the earlier years, as assessee succeeded on the arguments in A.Y. 96 -97 that the same deposits could not be brought to tax twice.
(i) In the assessment year 96 -97, learned CIT(A) made detailed independent investigation and fresh material/evidence was called for by him, in this year no such attempts were made. It is trite that the first appellate authority has co-terminus powers which the Assessing Officer has besides it is settled position of law that it is not only the power but obligation of the appellate authority to correct Assessing Officer's mistakes but also strengthen his order.
(j) In the order dated 22.07.2005, the Hon'ble ITAT Lucknow did not agree with the revenue mainly because there was unexplainable delay of 18 months on the part of the AO to take up the reassessment proceedings which was deviation from compliance of directions issued by the CIT(A) and AO exceeded the mandate given by the CIT(A).
22.23. Ld. CIT(DR) contends that there is no merit in the observations of the learned CIT(A) and claim of the assessee that the issue of cash credits is covered in its favour by the order of the ITAT Lucknow in A.Y. 96 -97is not correct. Rather some findings of the ITAT in A.Y. 96 -97 support the AO's approach, as :
a. In Para 13 of the order it has been held that - "Considering the circumstances under which the Special Audit was done and also the time limit for completing the special audit and in view of the huge material in the shape of ledger and owner account books, the auditors could not have been excepted to do more than what has been done i.e. if the audit work was to be done by examination and scrutiny of all the books of account of 1100 branches of the sister concern and all the 73 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
books of the assessee, then such exercise could have consumed not only several months but several years. Hence, the only proper method was to make sample scrutiny by taking up some of the Branches and some of the documents. The method of test checking is well recognized and is also accepted by the Institute of Chartered Accounts. Even the A.O. has adopted the same course."
b. In Para 17 it is observed that unless there is a valid reason for rejecting the report of the special auditors, the same should be relied upon.
c. In Para 54 of order it is held that - "We are fully alive to the legal position that as per requirement of 68 of the Act, the assessee is under obligation to prove entries which are found recorded in the books of account and admittedly amounts of deposit are there."
22.24. Adverting to cases relied on by the assessee viz
1. CIT v. Divine Leasing & Finance Ltd. ( 299 ITR 268 )
2. CIT v. Oasis Hospitalities P. Ltd. ( 333 ITR 119)
3. CIT v. Value Capital Services (P) Ltd. ( 307 ITR 334 )
4. Assessee's Own case ITA No. 747/Alld/2000, A.Y. 96-97
5. Assessee's Own case ITA No. 304/Luc/2001, A.Y. 96-97
6. CIT v. Kinetic Capital Finance Ltd. ( 354 ITR 296 )
7. CIT v. Citizen Urban Co-op Bank Ltd. ( 336 ITR 62 )
8. ACIT v. Citizen Urban Co-Op Bank Ltd. ( 120 ITD 513 )
9. CIT v. Pragati Co-Operative Bank Ltd. ( 278 ITR 170 )
10.DCIT v. Dhanlakshmi Bank Ltd. ( 76 TTJ 439 )
11.Citizen Co-op. Society v. ACIT (ITA No. 1003/Hyd/2011) 22.25. Ld DR pleads that the cases at serial nos. 1 to 4 deal with the nature of primary onus on assessee in the case of application of share capital. Other judgments were not rendered in the background of non cooperation by the assessee. In this case the assessee company was fully aware of the 74 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
difficulties being faced by the revenue. Apropos Judgments at serial nos. 7 to 12, they do not have universal application being in the context of facts of individual cases:
22.26. In the case of CIT v. Kinetic Capital Finance Ltd. 354 ITR 296, the Hon'ble Delhi High Court deleted addition u/s 68, observing that necessary verification was made by the Assessing Officer and in remaining four cases the verification was done at the first appellate stage. In this case the Assessing Officer was could not even verify the details of aggregate deposits in individual cases and ld CIT(A) also did not make any independent verification at his own level.
22.27. Apropos assessee's contention that section 68 provides for addition in respect of individual and specific credits appearing in the books of accounts qua which assessee fails to furnish satisfactory explanation - it is pleaded by ld DR that AO has enumerated various difficulties faced due to non-furnishing of information in soft copies during the special audit as well assessment proceedings. Constrained by these difficulties AO was left with no alternative but to adopt the method of estimation. In view of the these facts also the cited judgments are not applicable to the instant case.
22.28. The decision of CIT v. Citizen Urban Co-op bank Ltd. 336 ITR 62 (P&H), is based on the facts that assessee bank cooperated in discharging it's primary onus qua the identity of the members of the society and their credit worthiness. Similarly in the case of CIT v. Pragati Co-Operative Bank Ltd. 278 ITR 170 (Guj) also, facts are different as assessee bank was enjoying tax exemption u/s 80P and therefore, the Hon'ble Court held that
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"there could exist no reason for the assessee bank to indulge in any activity which would yield undisclosed income."
22.29. In the cases of DCIT v. Dhanlakshmi Bank Ltd. 76 TTJ 439 facts are clearly distinguishable. The issue in question pertained to FDRs where the depositors do not remain in regular touch with the Bank besides branch manager extended necessary co-operation to AO regarding identity of the FDR holders and in some cases even the payment was withheld.
22.30. It is submitted that the cases relied upon by the assessee are clearly distinguishable on facts. Ld DR further contends that assessee's claim to follow KYC norms and by their compliance the primary onus qua the identity, credit worthiness and genuineness of deposits is claimed to be discharged. However even KYC information of individual depositors is not ascertainable from the details obtained in the prescribed format furnished by assessee. These deficiencies have been discussed in detail by the AO at Para 8.1.10 (Page 50) and at Para 8.3.12 to 8.3.13 (Pages 97 to 113) to the effect that the KYC norms prescribed by the RBI for the Banks are not fulfilled from the format devised by the assessee.
22.31. Assessee admits that it is difficult to club together the deposits obtained in the name of a particular depositor for various reasons; thus the conditions based on KYC norms in this behalf are not satisfied. Assessee has filed a paper book containing a trail of documents pertaining to the procedure followed for opening a new account under KYC norms on 9.08.2012, few days before the passing of impugned assessment order on 16.08.2012. It was not humanly possible for the AO to scrutinize such a voluminous record with in a period of seven days. Therefore, to this extent it 76 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
should be held that AO could not verify this record. Assessee adopted a device by initially avoiding furnishing requisite information to the Assessing Officer and there-after to submit voluminous record towards the end of the assessment claiming that requisite information was duly made available.
22.32. Apropos assessee's argument that the department itself has allowed commission and interest with respect to the deposits in question, it is contended that this observation has been noticed note of by the department and CIT(C)-1, New Delhi and necessary remedial action as per law shall be initiated in due course. Besides, a mistake committed by the Assessing Officer will not entitle the assessee to claim that the deposits in question should be accepted as genuine.
22.33. Ld. DR further contends that plain reading of Section 68 makes it clear that the legislature has not made any distinction between a credit entry found recorded in the case of an RNBC and that of the books of an ordinary person. Therefore, it is against the spirit of law to argue that assessee is required to comply with conditions laid down u/s 68 on KYC and other parameters, otherwise its RNBC business may be finished. When the provisions of law are clear and unambiguous the courts have to give effect to such provisions irrespective of difficulties and hardships which may be caused to an assessee. Reliance is placed on - Tarulata Shyam and others (108 ITR 345) (SC)- & Patil Vijay Kumar and others (151 ITR 48) (Kn). It is pleaded that the order of CIT(A) may be reversed. Ld. DR has filed written submissions which are considered.
23. In reply assessee's counsel shri Ajay Vohra contends that during the year under consideration, an amount of Rs. 5300 crores was mobilized by the assessee RNBC from several depositors under various schemes floated 77 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
with the approval of RBI. The assessing officer, however, on estimate basis made addition of 35% of the deposits during the year, holding it to be a legally permissible and reasonable estimate alleging that assessee has failed to discharge its primary onus in terms of section 68. Since AY 1994-95 the issue of discharging of primary onus in terms of sec 68 has been raging between assessee and department. The facts about RNBFC status of assessee, RBI regulations, nature of banking business, no. of deposits in crores and lacs of deployed field works by the assessee or its collection agents etc. which are material to the issue have not been disputed. The status of earlier litigation history is demonstrated as under:
A.Y. 1994-1995 15% of opening balance of deposits & 30% of deposits collected during the year are treated as income of the appellant.
A.Y. 1995-1996 15% of opening balance of deposits & 30% of deposits collected during the year are treated as income of the appellant.
A.Y. 1996-1997 100% deposits collected are treated as unexplained A.Y. 1997-1998 100% deposits collected are treated as unexplained A.Y. 1998-1999 100% deposits collected are treated as unexplained A.Y. 1999-2000 35% deposits collected are treated as unexplained A.Y. 2000-2001 35% deposits collected are treated as unexplained A.Y. 2001-2002 35% deposits collected are treated as unexplained A.Y. 2002-2003 35% deposits collected are treated as unexplained A.Y. 2003-2004 35% deposits collected are treated as unexplained A.Y. 2004-2005 35% deposits collected are treated as unexplained 23.1. Consequent to action u/s 263 of the Income Tax Act orders for the A.Y. 1994-95 and 1995-96 were set aside, in the second innings the Assessing Officer treated the entire deposits collected by the appellant RNBFC as unexplained income except for Rs.1 Lac in the A.Y. 1994-95. These additions made in earlier years have been deleted at the first appellate
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stage. For the A.Y. 1994-95, ITAT upheld the decision of CIT(A) deleting such additions.
23.2. In A.Y. 1996-97 original addition was set aside by the Ld. CIT(A), the action was confirmed by the Tribunal. In second round once again 100% of the deposits were added as unexplained by AO which was deleted by Ld. CIT(A). Revenue challenged this order and ITAT was pleased to upheld the CIT(A)'s order deleting these additions.
23.3. Against first round order of CIT(A) for AY 1996-97 in revenue appeal, ITAT by order dated 26.05.2003 from page 13 onwards the Tribunal made various observations gist thereof is as follows:-
i.The A. O. has not considered the nature of the business of the assessee while making addition u/s 68, the assessee is a non banking financial institution, which was recognized by the Reserve Bank of India which was in force.
ii. It had engaged the services of M/s Sahara India as its agent. Assessee company is akin to a banking and the deposits received by it are not in nature of taking of any loan or deposit as in a routine business.
iii. If the total deposits mobilized during the year were found to be unexplained credits u/s 68, there was no justification to allow reimbursement of expenses at 3% of the deposits mobilized. Secondly, the deposits made were not the fresh deposits during this year, but the deposits were coming from the earlier years and in earlier years, a part of the deposits were treated as genuine. Thus, if the action of the A. O. is upheld, it shall lead to absurdity, inasmuch as the deposits which have been treated to be genuine in earlier years have to be treated as non-genuine during subsequent year.
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iv. Prior to assessment year 1993-94, no such addition was made and in AYs 1994-95 and 1995-96, addition of 15% of the opening balance and 30% of the closing balance was made and in AY 1996-97 i.e. the assessment year under consideration, addition on account of 100% deposits has been made. In the reassessment for AY1992-93, vide order dated 15.03.2002, the A. O. has estimated the unexplained deposits to the extent of 50% of the deposits collected during the year. Thus, there is no consistency in the approach of the Department. v. The schemes are run by the assessee under the direct supervision of Reserve Bank of India, accounts are audited by the Tax Auditors, Statutory Auditors and Special Auditors. Even in writ petitions the investigation is called for. The assessee has filed the copy of judgment of Hon'ble Delhi High Court dated 12th May 2000 in the case of Mr. B.S. Sehgal Vs Governor of R.B.I. consequent to a PIL the allegations of irregularities were made against Sahara Groups of Companies also. Although the allegations were regarding utilization of funds, but it has been observed at page 1613 of the paper book that Sahara India Financial Corporation was inspected by R.B.I. and the allegations were not found correct, no merit is found against the allegations made in PIL against Sahara group. By this judgment name of Sahara Groups of company was deleted from the array of parties by the Hon'ble High Court. This reflects the scrutiny of the affairs of the assessee by different agencies from time to time.
vi. A.O. asked the assessee to produce the depositors having deposit of Rs.20.000/- or more however, addition of entire deposits was made. Before the Ld. CIT(A) additional evidence about confirmations etc. was filed.
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The assessee had offered to get the examination of all the deposits relating to one branch as a sample checking.
In the case of Life Insurance Corporation of India Vs. CIT, 219 ITR 410 in a different context, the Hon'ble Supreme Court of India has observed that law does not contemplate or require the performance of impossible act "Lex non cogit ad impossibilia".
The Department relied on Kale Khan Mohammad Hanif Vs. CIT, 50 ITR 1 (SC), CIT Vs Precision Finance Private Limited, 208 ITR 465, which were found to be distinguishable on facts.
vii. The primary burden of proof lies on the assessee to prove the identity of the depositors etc. but the nature and volume of the business of the assessee has to be duly considered. In the case of the assessee, even verification from some of the depositors was filed, which was not doubted by Department and if the verification in filed in respect of some depositors and particular transactions were found to be genuine, then general addition u/s 68 cannot be justified. ix. ITAT placed reliance on the cases of CIT Vs. Smt. P. K. Noorjehan, 237 ITR 570 (SC) & CIT Vs Roohini Builders, 256 ITR 360 (Guj), in later case it has been held that unsatisfactory ness of the explanation of the assessee does not mean and need not automatically result in deeming the amount credited in the books as income of the assessee. The Special Leave Petition filed by the Revenue was also dismissed. Thus, the provisions of Section 68 cannot be applied without having regard to the nature of deposits etc. In the case of Dy. CIT Vs. Dhanlaxmi Bank Limited, 76 TTJ Cochin 439, the Cochin Bench of ITAT, while considering the scope of burden of proof in the case of cash credit has observed as under :
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"Failure of Branch Manager, who identified certain deposits alone is not sufficient to treat the deposits as income of the assessee and add the same in the hands of the assessee u/s 68".
x. The Bench found force in the argument of the assessee's counsel that if the Revenue Suspects genuineness of the deposits it would have been proper to instruct the assessee to stop payment till the depositors appeared before the A.O. and satisfied him.
As a consequence, the Board of directors of the assessee also passed a resolution putting a lien on the repayment of deposits which are unpaid as on date.
23.4. After making such observations which has been summarized above ITAT held that:
i. In view the above facts and circumstances and also considering the past history of its case it is clear that primary onus cast on the assesssee in terms of nature of business read with sec. 68 has been duly discharged.
ii. The allegations of non cooperation are based on wrong adverse inferences, which are contrary to material available on record and proceedings and can not be applied to assesssee's case. Besides assessee being RNBFC having complied with KYC norms and RBI regulations: it cannot be held that despite this compliance addition under provisions of Section 68 of the Income Tax Act in relation to the deposits mobilized by the assessee company can be made. iii. The applicability of sec. 68 in cases of banking industry and including NBFC has been held settled by various judicial pronouncements. According to these judicial precedents compliance 82 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
of KYC norms prescribed by RBI guidelines amounts to discharge of primary onus by banking establishments.
iv. Earlier case history of the assessee clearly demonstrates that such additions made u/s 68 have been deleted. There being no change in business activity, parity and similarity on facts of all these years is accepted.
23.5. Ld counsel after addressing assessee's past history adverted to the facts of year in question and assessing officers allegations. CASE OF THE ASSESSING OFFICER I. Re: Non-Production of soft copies of books of account 23.6. The assessee during the course of special audit, volunteered to make available print outs of the computerized books of accounts including deposit ledgers, in a manner desired by the special auditor. Looking at the space constraint of the special auditor, as an initial instalment, deposit ledgers for 69 branches were furnished. It was further agreed that after the verification / test check of available 69 branches is completed, remaining record of branches, print outs etc. will be made available as desired by the auditor. The special auditor, however, out of 69 branches could complete verification of 53 branches only. No further requisition from the special auditor for producing further record of any other branch was received by assessee, in such eventuality it cannot be held that assessee was non cooperative for branches. It is a travesty of justice that despite their being no further requisition from auditors for the reasons best known to them, it has been unjustifiably held that assessee is adamant and non cooperative. The facts and arguments will unfold that assesses in reasonable terms discharged its 83 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
primary onus. The allegations are generalized assumptions, presumptions, surmises and to paint a wrong and prejudiced image of the assessee.
Re : Non production of soft copies of books of accounts:
23.7. As per section 2(12A) of the Act, 'books of account' has been defined to include print out of the data stored in a floppy, disk, tape or any other form of electronic device. In other words, what the law mandates is only furnishing print outs of the electronically stored data instead of furnishing such data electronically. Reference, in this regard, may be made to the decision of the Delhi Bench of the Tribunal in the assessee's own case for assessment years 1999-2000 to 2000-03 wherein the Tribunal while deleting levy of penalty under section 272A(1)(c) of the Act, held as under:
"7. We have carefully considered relevant facts and arguments advanced. It is not in dispute that the information called for was filed. The information called for was filed by filing print out of the computer record. Penalty u/s 272A(1)(c) is attracted if any person to whom a summon is issued to give evidence or books of accounts or other documents omits to produce books of accounts or documents. However, in the present case, the assessee has not omitted to produce the books of accounts or documents. The word 'document' as defined in section 2(22AA) includes an electronic record. The definition is not an inclusive definition so as to restrict the meaning of the word 'document' as only an electronic record will be considered as a document. The print out of the record will also be considered as a document and it will be a sufficient compliance whether an information called for is furnished either by way of filing print outs of computer record or by filing soft copy of electronic data. Thus, it cannot be said that there was any omission on the part of assessee to produce books of accounts nor documents as required in a summon issued u/s 131(1) of the Act. We, therefore, cancel the penalty levied in all cases."
23.8. This decision has been accepted by revenue as no appeal has been preferred department on this issue before the High court. In view of this 84 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
tribunal decision which vindicates its stand and which is accepted by the department that furnishing of print outs is sufficient compliance of notices. Besides the assessee had never denied furnishing of the deposit ledger in physical form and print outs for any of the branches. 1st instalment of deposit ledgers of 69 branches was furnished as agreed with the Special Auditors, out of which, verification of only 53 branches could be done by them. Thus on one hand auditors were not able to verify what was in their possession and on the other hand the assessee has been blamed for non supply of information.
II. Re: Non-adherence to KYC norms 23.9. The assessing officer on test check of the deposits held that the assessee failed to adhere to the KYC norms laid down by the RBI. This is in direct contradiction to the categorical observations of Special Auditor appointed by him. SA after carrying out verification of the deposit accounts, accepted that the assessee had fully complied with the KYC norms as mandated by RBI which is writ large on the Special Auditor's report observing as under:
"On test check basis, we have verified the KYC norms for the deposits taken during the year under consideration and apart from minor address corrections; we have found the same in order. Thus the learned assessing officer may not draw any adverse inference on the same."
23.10. Thus the finding of the assessing officer that the assessee had not complied with KYC norms is based on ignoring the audit report, record and is an attempt to blow minor deficiencies out of proportion., III. Summons issued by the assessing officer 85 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
23.11. During the course of assessment proceedings, the assessing officer issued summons to 1126 depositors. The status of response received / not received is summarized as under:
a) Out of 1126 summons, 229 depositors had replied (out of those 133 had requested for adjournment ,46 had accepted having made deposit in cash and 2 accepted having made payment by account payee cheques).
b) 361 summons were returned back due to incomplete address.
c) 80 persons were not found at the given address.
d) 5 persons had refused the summons.
e) 2 were reported dead.
f) In 3 cases, there were many persons by the same name on the
said address and, therefore, the summons were returned.
g) In 22 cases, persons had left the place.
h) In 424 cases no response had been received till date.
23.12. Though assessee explained the full implication of results of the summons, ignoring the same and making guess work assessing officer held that the deposit accounts accepted by the assessee on which SA and RBI had no issue at all, as non-genuine by 35% of the new deposits. In terms of provisions of section 68 of the Act, the primary onus lies on the assessee to explain the nature and source of the amount found to be credited. The expression `nature' means bringing on record evidence about nature of the receipt, like- loan, advance, share application money, etc. The expression `source' envisages establishing the identity and creditworthiness of the source/ person from whom the amount is received. The onus is primary in 86 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
nature thus once reasonable explanation, evidence and circumstances, are furnished by the assessee, it amounts to discharge of primary onus and then onus effectively shifts to the Revenue to prove it otherwise. In rebuttal general assumptions and surmises cannot be considered as effective rebuttal, which requires counter evidence and cogent reasons.
23.13. Section 68 has been subject matter of judicial interpretation by various Courts/Tribunal. The ratio emanating from these decisions may be summarized as under:
(i) The assessee has to prima facie provide documents to prove the identity of the creditor as well as the genuineness of the transaction.
(ii) The identity stands established if information regarding PAN or other identity/ document of the creditor is provided.
(iii) The creditworthiness of the said depositor needs to be proved by the assessee to establish that the creditor was having sufficient source wherefrom credit has been giver. However, the assessee is not required to prove source of source.
(iv) The genuineness of the transaction shall, prima facie, stand established where the amount has been transmitted through banking or other indisputable channels.
(v) Once identity of the creditor, genuineness of transaction and creditworthiness of the creditor is prima facie established, the burden shifts to the Revenue.
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(vi) The Revenue, then, in order to invoke the provisions of section 68 of the Act has to bring on record further, evidence to controvert the evidence furnished by the assessee.
23.14. Thus it is settled law that once the primary onus is discharged and there is nothing to effectively for rebuttal with the AO, no addition can be made under section 68. In view of this legal position, it is imperative to analyze whether the assessee has, discharged its primary burden under section 68 of the Act or not. The peculiar business model of the assessee's RNBFC for acceptance of deposits, is as under:
Procedure for accepting deposit & making maturity payments:-
I. In case of FDR(s): At the stage of acceptance of deposits
1. Agent approaches the depositors.
2. Gets account opening form filled & collected money. KYC documents are collected from all the depositors and in case, amount of deposit exceeds Rs. 50,000, PAN of respective depositor is also obtained.
3. Submitted the filled forms in the branch office and money so collected.
4. Branch issues receipt and certificate of FDR after opening of the account which is given to depositor.
5. Commission on deposit received calculated at day end and credited in Field worker ledger.
6. Field worker can, thereafter, withdraw his commission as per his requirement.
7. Credit for interest in the accounts of depositors on year to year basis.
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At the stage of premature withdrawal/maturity:
8. Advice for payment is issued by Registered Office to Branch Office before maturity date.
9. On due date of maturity or thereafter, account holder approaches the branch, fills maturity withdrawal form, submit KYC documents, surrenders FD certificates and receives maturity amount.
II. In case of Monthly Accounts: At the stage of acceptance of deposits
1. Agent approaches the depositors.
2. Gets account opening form filled and collects amount of first instalment. KYC documents are collected from all the depositors and in case amount of deposit exceeds Rs. 50,000, PAN of respective depositor is also obtained wherever applicable.
3. Submits the account opening form and amount of first instalment, at branch office.
4. Branch issues receipt of money so collected and pass book.
5. Initial commission on deposit received calculated at day end and credited in Field worker ledger.
6. Field worker can withdraw his commission as per his requirement
7. Thereafter, every month agent collects instalments from depositors, deposits the same at the branch and branch issues receipt(s) for amount collected and updates pass book of depositor.
8. Commission credited to account of field worker on the amount collected from month to month.
At the stage of premature withdrawal/maturity:
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1. Depositor at the time of last instalment or thereafter submits application at branch for maturity payment.
2. Advice for maturity payment is issued by Registered Office to Branch Office.
3. The information of advice received at branch is given by agent to depositor.
4. Depositor surrenders pass book, submits the documents required as per KYC norms and receives maturity.
III. In case of daily scheme: At the stage of acceptance of deposits a. Agent approaches the depositors.
b. Gets account opening form filled and collects amount of first instalment.
c. Submits the account opening form and amount of first instalment at branch.
d. Branch issues receipt of money so collected and pass book. e. Thereafter, account is allotted to collector of that area who collects instalments on daily collection sheet, deposits the same at the branch and branch issues a collector receipt to collector for total amount deposited by him.
f. At the end of the fortnight, branch issues a consolidated depository receipt to depositor for total deposit received in that fortnight and also updates pass book of depositor.
g. Initial commission calculated after receiving 25 instalments and credited in Field worker ledger.
h. Field worker can withdraw his commission as per his requirement.
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At the stage of premature withdrawal/maturity:
1. Depositor at the time of last instalment or thereafter submits application at branch for maturity payment.
2. Advice for maturity payment is issued by Registered Office to Branch Office.
3. The information of advice received at branch is given by agent to depositor.
4. Depositor surrenders pass book, submits the documents as required under KYC norms and receives maturity amount.
Common processes applicable for all Schemes
(i) At every day end, encrypted data file of all the transactions of that day/demand of maturity/loan is prepared through software and transferred to registered office via internet in electronic form.
(ii) Commission on Instalments (Daily & Rd Schemes) and overriding commission calculated at registered Office and provided to Branches every month in the form of electronic advice. Branches load the advice data through software and commission is credited in the respective field worker account.
23.15. This entire process is carried out through customized Software. Branch cannot alter the data once generated, all the advices related to maturity, commission etc are provided electronically in encrypted form. During the course of proceeding, assessee explained the aforesaid process of acceptance of deposits by bringing on record the following documentary evidences, on sample basis:
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a) Copy of the application form of one of the depositor (refer pg 35 of PB filed on 01.10.2103).
b) Copy of the voter identity card of the depositor received by the assessee for complying with KYC norms (refer pg 55 of PB filed on 01.10.2103).
c) Copy of daily collection sheet prepared by the collector showing that the amount was received from the depositor (refer pg 37-42 of PB filed on 01.10.2103).
d) Copy of the passbook of the depositor with entries reflecting collection of cash (refer pg 43-51 of PB filed on 01.10.2103).
e) Copy of the ledger account of the depositor maintained in the books of the assessee(refer pg 52 of PB filed on 01.10.2103).
f) Copy of the application form submitted by the depositor for pre- mature withdrawal / withdrawal on maturity of the deposit account(refer pg 53 of PB filed on 01.10.2103).
g) Copy of advice issued by the registered office of the assessee company for making final payment due to the depositor (refer pg 54 of PB filed on 01.10.2103).
h) Copy of the relevant extracts of the bank statement of assessee company showing the payment made to the depositor (refer pg 56 of PB filed on 01.10.2103).
i) Copy of the TDS certificate issued to the depositor in respect of the tax deducted at source from the payment of interest, wherever applicable (refer pg 77-80 of PB filed on 01.10.2103).
j) Copy of the statement showing commission due to the agent on the above depositor's account (refer pg 57 of PB filed on 01.10.2103).
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k) Copy of the TDS certificate issued by assessee company to the above commission agent showing that tax was duly deducted on the amount paid to collector(s) as commission (refer pg 58-66 of PB filed on 01.10.2103).
23.16. It is contended that before accepting any particular deposit from the depositor, the assessee has to mandatorily follow several important steps. Assessee being a registered RNBFC, several checks and controls have been put in place in the system. They by necessary implication are inbuilt in the above process of acceptance of the deposit(s). Assessee is one of the biggest small deposit collector in India having over 3.5 crores deposit accounts which are serviced through over 1500 branches with the help of around 4 lacs commission agents and around 5000 staff members. The exercise is carried out by customized software complaint to RBI directors, which can not be tempered with by field staff. In such a scenario it is impossible that a deposit account can be opened without following aforesaid steps. Further, it is highly improbable that assessee will connive with so many people would together to enable it to launder its alleged unaccounted money through RBI regulated channels. No iota of evidence has been brought on record or whispered by SA or AO in this behalf to support the alleged laundering..
23.17. Nature of Deposits is undisputedly under various schemes floated by assessee RNBC as per the approval and conditions stipulated by the RBI including further investment of collected funds in specified or nominated securities. Thus there is no direct advantage to the assessee as deemed by the AO to support his unfounded allegations.
Evidences regarding identity of the depositors:
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23.18. As a Residuary Non Banking Company ("RNBC") duly registered with Reserve Bank of India ("RBI"), the assessee has to mandatorily adhere to Residuary Non Banking Company (Reserve Bank) Directions, 1987 issued by the RBI. In terms of the said directions, the assessee has to strictly comply with KYC norms, maintenance of register of deposits, filing of return with RBI etc. In compliance of these directions, the assessee had, during the relevant previous year, scrupulously and meticulously followed KYC norms before accepting any deposits. Additionally, keeping in mind the earlier directions of the ITAT, assessee has insisted on the depositor(s) to again comply with the KYC norms before releasing payment on pre-mature withdrawal or maturity of the deposit account(s). 23.19. The assessee had filed monthly / annual returns with the RBI giving details of the deposits accepted during the year. Copy of one such return is placed at pg 165-184 of PB. During this year, the assessee had over 3 crores deposit accounts having denomination of less than Rs.10,000 per deposit and only 44,006 deposit accounts with denomination more than Rs.50,000 per deposit. The RBI has also undertaken routine and periodic inspection of the books of accounts and records maintained by the assessee company and made no adverse comments and/or reported any discrepancy, vis-a-vis the genuineness of the activity of collection and repayment of deposits. 23.20. In several cases, depositors filed Form 15G/15H requiring the assessee for non deduction of tax at source from the interest due. The Assessee has duly submitted relevant returns as mandated in section 197A of the Act read with Rule 29C of the Income-tax Rules, 1962, on monthly basis to the concerned CIT. There has never been any adverse remarks by the department about the correctness of such prescribed TDS related returns 94 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
23.21. In many cases, the depositors had indicated their PAN in the application form and tax was deducted at source out of interest paid to some of the depositors wherever interest paid exceeded the minimum amount as prescribed in section 194A of the Act. In cases where repayment of deposit alongwith interest exceeded Rs. 20,000/-, the payment was made by accounts payee cheques except in certain unavoidable circumstances, which demonstrates that the identity of the depositors had been established. Evidences regarding genuineness of the transactions:
23.22. RBI regulations and conditions about collection of deposits have never been claimed by anybody i.e. RBI, internal auditors or special auditor to have been violated by assessee. The deposits collected are duly reported in the monthly / annual returns filed with RBI in terms of statutory rules i.e. Residuary Non Banking Company (Reserve Bank) Directions, 1987. There is no allegation by Special Auditor or the ld AO that assessee has violated any RBI condition for collection of deposit including KYC norms. The deposits being in compliance with regulatory prescriptions of applicable statutory rules and regulations, leaves no doubt about the genuineness of the deposits.
Regarding creditworthiness of the depositors: 23.23. Assessee's onus in respect of creditworthiness of the depositors is to be tested in the context of the nature of business of the assessee and not divorced therefrom. For any RNBC registered with RBI engaged in the business of mobilizing deposits, it is well nigh impossible to insist on the depositor to submit documents to establish creditworthiness of the prospective depositors before accepting the deposit. Such a stand is against the banking business regulations and would have serious adverse effect on the banking business. Assessee's insistence of conditions which is not asked 95 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
by other similar banking institution will make the depositors run away to some other institution. Assessee cannot run the risk of being branded as a depositor unfriendly nasty and snooping RNBC, which requires for papers and questions which are not asked by others. Such an exercise is likely to finish its business.
23.24. As a matter of customary practice and RNBC regulations, bank never enquiries or insistence on proof about the source of such deposit or creditworthiness of such depositor. It is to be properly appreciated that in the context of assessee's business, which is akin to banking business, the primary onus on the assessee would stand discharged if the assessee is able to show compliance of KYC norms, which are insisted upon by RBI as a condition precedent for opening the account. Thus once the RNBFC had complied with the KYC norms a fact which is admitted by the special auditor, the primary onus on the assessee to prove the creditworthiness of the depositors stood discharged, following decisions are relied:
ACIT v. Citizen Urban Co-op Bank Ltd.:120 ITD 513(Amritsar Tribunal) 23.25. The relevant extracts of the Tribunal decision is as under:
"26. We have heard the parties and have perused the material on record. The facts are not in dispute. The issue is as to whether the provisions of section 68 of the Act are applicable and whether it has rightly been applied to the assessee-bank. The learned CIT(A), while deleting the addition made, has observed that the assessee's case was subject to rules laid down under the Banking Regulation Act, as also the regulations of the RBI; that all the banking operations are under audit and report in this regard goes to the RBI; that, therefore, the case of the assessee-bank could not be put at par with the cases of other persons, since the bank does not have any control in respect of the amounts credited in its accounts; that the bank is to maintain 96 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
accounts of its customers, which accounts can be operated only by those customers and the bank does not have any control over the amounts in the accounts. While holding in favour the assessee, the learned CIT(A) has duly taken into consideration the provisions under section 68 of the Act, which are explicit.
27. As per section 68 of the Act, where any sum is found credited in the books of an assessee maintained for any previous year and the assessee offers no explanation about the nature and source thereof, or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income- tax as the income of the assessee of that previous year. The business of the assessee-bank is to carry on banking transactions. The bank, for all its banking activities, is strictly governed by the Banking Regulation Act, 1949. The said Act defines a banking company as a company which transacts the business of banking. 'Banking' is described as accepting, for the purpose of lending or investment of money, due from the public repayable on demand or otherwise and withdrawal by cheque, draft order or otherwise. Thus, the deposits held by the assessee are its stock in trade. The amounts in the accounts maintained by the assessee-bank were not in the control of the assessee-bank. They are the deposits in the savings accounts of the customers of the assessee-bank. To these deposits, section 68 of the Act is not attracted. In the cases of banking companies like the assessee, the customer's identity is required to be taken by the bank with proper introduction, photographs and address, etc. This is so, because any person from the general public can open the account with the bank. The other cases of acceptance of deposits cannot be equated with that of the bank. In those cases, normally, deposits are accepted from the people connected with or known to the depositees. It is in accordance with the terms of section 131 of the Negotiable Instruments Act that this requirement is there. As such, if introduction of the customer had duly taken by the bank, the bank would not be liable in case of a fraud. Moreover, pertinently, if the customer seeks to operate the account with cash only, the bank can open an account without introduction and without proper identification. Further, the bank is not obliged to question the source of deposits made by its 97 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
customers. Also, the customers can retain the amount in his savings bank account with the assessee-bank for any period. The amount has to be repaid by the bank to its customers immediately on demand. These features distinguish the case of the bank from other ordinary assessees. Therefore, the provisions of section 68 of the Act are not applicable to the bank as they are in the cases of the other assessees. Still further, under section 35 of the Banking Regulation Act, 1949, a banking company is subject to periodical inspections and audit by the RBI and in case any default is found, the bank is liable for heavy monetary penalty, besides cancellation of its license. This is not the case with other assessees. A bank, under the RBI guidelines, in order to maintain confidentiality in respect of the information collected by a bank relating to its customers, such information is not to be divulged to outsiders. There is no such obligation with other assessees.
28. Despite the RBI guidelines providing maintenance of secrecy with regard to the information regarding the customers of the bank, the assessee furnished to the Assessing Officer whatever information it had in its possession. The addresses of the account holders, as mentioned in the bank ledgers, as also the addresses of the introducers of the accounts were furnished to the Assessing Officer. Now if the addresses of the customers of the assessee-bank were found to be incomplete, this cannot form the basis for making the addition in question. Undisputedly; the assessee-bank did not violate any of the relevant guidelines of the RBI. In the Master Circular of the RBI (copy at page 75 of the assessee's paper book), introduction by an existing account holder by the bank has been held to be one of the proper methods of introduction of a customer to the bank for opening an account. The bank was not required to go for detailed verification of the addresses/whereabout of its customers, though this position has now changed and at present the requirement in this regard calls for a much more stringent compliance. In Bapulal Premchand v. Nath Bank Ltd. AIR 1946 (Bom.) 482, as pointed out, it has been held, inter alia, that there is no absolute obligation on a bank to make inquiries about a proposed customer, so as to avail of the protection under section 131 of the Negotiable Instruments Act. In Union of India v. National Overseas & Grindlays Bank Ltd. [1978] 48 98 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
Comp. Cas. 277 (Delhi) referring to the Bapulal Premchand's case (supra), it was held that the bank could rely on the introduction of any old customer and that if the bank bona fide acted on the reference of a customer, it can avail of the protection under section 131 of the Negotiable Instruments Act. So far as regards non-obtaining of photographs of the account holders, it is true that the same were not obtained in the normal course. Pertinently, in savings bank accounts where cheque facilities were not provided, RBI guidelines (page 76 of the assessee's paper book) provided exemption. Thus, in respect of accounts with only cash transactions, even the rule of proper introduction did not operate strictly. All this shows that the assessee-
bank did not commit any infringement in taking proper introduction and, therefore, it is incorrect that there was any deliberate attempt on the part of the assessee to accommodate tax dodgers.
23.26. This decision has been approved by the Punjab & Haryana High Court in the case of CIT v. Citizen Urban Co-op Bank Ltd.:336 ITR 62 (P&H). CIT v. Pragati Co-operative Bank Ltd.: 278 ITR 170 (Guj.) 23.27. The relevant extracts from the above decision of the High Court are reproduced as under:
"15. Applying the settled legal position to the facts of the case, it is apparent that the assessee had furnished the details which would discharge the onus which lay on the assessee considering the fact that deposits were made by third parties, viz., customers of the bank. It is nobody's case that the deposits were made either by the directors of the assessee-bank or any of the relatives of the directors. As to what would be the scope of the inquiry and the degree of proof that would be required in such circumstances, is not required to be dealt with in the fact situation of the present case. The opinion expressed by the Patna High Court has been impliedly approved by the Apex Court in the case of CIT v. Orissa Corporation (P.) Ltd. [1986] 159 ITR 782 (SC) when it is stated that, once the assessee had given the names and addresses of the alleged creditors and it was in the knowledge of the Revenue that the said creditors were income-tax assessees, if the 99 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
Revenue did not make any effort to pursue the so-called alleged creditors, the assessee could not do anything further and the assessee had discharged the burden that lay on the assessee. It was for the Revenue to examine the source of income of the alleged creditors to find out their creditworthiness.
16. The finding by the Tribunal that the assessee-bank cannot have any undisclosed income has to be appreciated in the context of finding by the CIT(A) that the activities of the assessee-bank are regulated by the provisions of the Banking Regulations Act, 1949, and the guidelines issued by RBI. This is apart from the fact that under provisions of section 80P of the Act, entire income from banking activities is exempt in the hands of the assessee, a co-operative bank. Thus, there can exist no reason for the assessee-bank to indulge in any activity which would yield undisclosed income."
DCIT v. Dhanlakshmai Bank Ltd.: 76 TTJ 439 (Cochin Tribunal) 23.28. The pertinent observations of the Tribunal are reproduced as under:
".........We find considerable force in the argument of the assessee's learned counsel that if the Revenue suspects the genuineness of the deposits, it would have been proper to instruct the assessee to stop payment till the depositors appear before the AO and satisfies him. It is difficult to hold that when thousands of deposits are made with the assessee-bank, the assessee should be in a position to identify each and every depositor. It is true that as far as the taxing authorities are concerned banks and individuals or for that matter any institution are liable to be taxed and treated equally. At the same time, it is also true that law does not demand impossible. Looking to the facts and circumstances of the case, we are of the view that the order of the learned first appellate authority does not warrant any interference....."
Citizen Co-op Society v. ACIT: ITA No. 1003/ Hyd/2011 100 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
9. It is further observed that the Society has opened a SB account wherever it has accepted deposit from its members to credit interest periodically. There is facility for the depositor to withdraw interest. There is no dispute with regard to payment of interest. The customers have regularly withdrawn the amount from their SB accounts which are proved that the amount deposited belongs to the depositor and not belongs to the assessee.
10. The society has maintained systematic records and books of accounts for its business. It has accepted all the documents as required under KYC norms. It has issued a proper deposit certificate and credited the interest as well as the maturity proceeds directly credited its depositor savings bank account. In no occasion it has directly paid the deposits directly to the depositor. In the present case the assessee Society is subjected to rules laid down by multi-state Co- operative society Act and Rules. The society books of accounts are subjected to audit by the regulatory bodies every year. Therefore, the assessee cannot be equated with other normal business concerns. Since the assessee has no control over the deposits as it is the property of the depositors and the Society required to pay on demand. The customers usually go the bank for making deposit to earn better interest. The customers will go the banks where they get more interest. There is no dispute in these assessment years the assessee has been carrying out the Banking business. Whether or not the business is carried out with or without permission, it is bound by the Banking Regulations Act, 1949. The deposits and loans are just buying and selling activity for the assessee. The amounts maintained at the customers account is not in the control of the society as it is required to pay the deposits on demand. In the present case what is required to be done before accepting the deposit is to take proper proof of address, identity, photograph and introduction for opening and accepting the deposits. Once the assessee complied with the requirement it is not the assessee Society duty to question about the source of depositor and it is not its duty to seek any other particulars. Only the requirement is, to report to the controlling authorities wherever suspicious transactions are reported or doubt about the Anti Money Laundering Act. Therefore these features distinguish the case of the assessee from other normal assessee. Further the assessee has to maintain the confidentiality in respect of information collected from its customers, such information cannot be divulged to outsiders. There 101 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
is no findings from the assessing officer that the assessee violated the regulatory authorities. Usually the banks are not required to go for verifying the correctness of the details furnished by the depositor and sources of the amount deposits. The deposits accepted and repaid is part of the assessee business, if it put hard rules and conditions its business may not be as usual. Therefore it cannot be said that it has violated the provisions and did commit any infringement or it is incorrect to say that there was any deliberate attempt to accommodate block money. The society is acted in bon fide manner and complied with the KYC norms as prescribed for banking institutions and due diligence. Therefore, in our opinion the Society discharged the onus of proof in respect of identity and genuineness of the transactions as for as a banking is concerned. The facts of the case are similar to that of ITAT Pune Bench in the case of Sri Mahavir Nilgari Sahakari Pat Sanstha Ltd vs. DCIT reported in 74 TTJ 793 and the decision of the Hon'ble Gujarath High Court in the case of CIT vs. Pragathi Co- operative Bank Ltd., reported in 278 ITR 170. Therefore the onus on the assessee to prove the credit is limited to the maintenance of systematic records comply the KYC norms. It is not obligatory on the part of the assessee to verify the creditworthiness of the depositor. Therefore, we hold that the assessee discharged the onus caste on him in this regard. ............
- Hon'ble Delhi High Court in the case of CIT vs. Value Capital Services Ltd: 307 ITR 334 and again, in the case of CIT vs. Oasis Hospitalities Private Ltd: 333 ITR 119 has held that before an amount credited in the books of the assessee could be taxed as assessee's undisclosed income under section 68 of the Act, the Revenue had to discharge further burden of proving that the amount found credited in the books of the assessee actually emanated from the coffers of the assessee. In the absence of the Department leading evidence to prove the aforesaid, the onus that shifted to Revenue could not be considered to have been discharged so as to justify the addition under section 68 of the Act.
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- It is further pleaded that ingredients of sec 68 i.e. identity, genuineness and creditworthiness have been applied by courts depending on the nature business, regulatory norms and practical aspects.
23.29. Hon'ble Delhi High Court in the case of CIT v. Divine Leasing & Finance Ltd: 299 ITR 268 laid down various parameters for discharge of primary onus:
"16. In this analysis, a distillation of the precedents yields the following propositions of law in the context of section 68 of the Income-tax Act. The assessee has to prima facie prove (1) the identity of the creditor/sub-scriber; (2) the genuineness of the transaction, namely: whether it has been transmitted through banking or other indisputable channels; (3) the creditworthiness or financial strength of the creditor/subscriber; (4) If relevant details of the address or PAN identity of the creditor/subscriber are furnished to the Department along with copies of the Shareholders Register, Share Application Forms, Share Transfer Register etc. it would constitute acceptable proof or acceptable explanation by the assessee. (5) The Department would not be justified in drawing an adverse inference only because the creditor/subscriber fails or neglects to respond to its notices; (6) the onus would not stand discharged if the creditor/subscriber denies or repudiates the transaction set up by the assessee nor should the Assessing Officer take such repudiation at face value and construe it, without more, against the assessee. (7) The Assessing Officer is duty-bound to investigate the creditworthiness of the creditor/subscriber the genuineness of the transaction and the veracity of the repudiation."
This decision has been duly approved by the Supreme Court vide SLP(C) 375/2008:216 CTR 195.
23.30. It is interesting that the assessing officer has allowed deduction of the interest paid on these new deposits as well as commission paid to the agent for mobilizing the deposits. AO has thus contradicted himself by allowing 103 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
all the incidental expenses for collection of these very deposits and interest paid to depositors. The stand adopted by AO is contrary to facts, law and material available on record. AOs action is self contradictory in view of:
(a) allowing deduction of interest paid on the deposits; and
(b) allowing commission paid for mobilizing deposit(s); and
(c) levying penalty under sections 271D/271E of the Act for acceptance/repayment of deposits in cash exceeding Rs.20,000 qua, thus holding the deposits as genuine deposits liable for penalties on default of receiving them in cash.
(d) Sec. 68 specifically creates the fiction for examining the identity, genuineness and creditworthiness qua each cash credit and not on adhoc basis. There is no enabling provision in sec 68 to hold the deposit as not proved are to held so by an estimate on ad-hoc basis. It unambiguously mandates the addition qua a specific deposit and specific depositor. Thus the guess work based ad hoc addition made by the assessing officer holding the 35% of the deposits mobilized during the year, as unexplained cash credit, is not sustainable in the eyes of law. This proposition is supported by the decision of the Hon'ble Delhi High Court in the case of CIT v. Kinetic Capital Finance Ltd.: 354 ITR 296.
(e) Reliance is also placed on the decision of Hon'ble ITAT in appellant own case of A.Y. 1996-97 dated 22.07.2005 wherein simillar decision of CIT(A) deleting addition u/s 68 on account of unexplained deposit, has been upheld.
23.31. Case laws cited by ld. DR are distinguished and it is contended that Nova promoters is a case of share capital of private company and not 104 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
RNBFC. Besides, Lovely Exports (SC) (supra) has been impliedly followed there.
24. We have heard the rival contentions and perused the material available on record, and proceed to decide the issues in following order:
(i) Whether assessee's filing of hard copies or the print outs of the record asked to be produced in soft copy is sufficient compliance to the requirements of SA and AO's notices under the Income Tax Act ?
- In view of the earlier judgment in the case of assessee for AY 1999-2000 to2002-03 ITAT while deleting the penalty u/s 271E and D, ITAT has held that the production of printouts of the computer record will be sufficient compliance of the requirements asked by notices or summons u/s 131. Thus the ITAT judgment in assessee's makes it clear that supply of hard copies or print outs, by assessee, is a proper compliance of notices or summons in this behalf. Respectfully following the decision of ITAT in assessee's own case we decide this question in favour of the assessee
(ii) Whether assessee deliberately failed to cooperate in producing its record?
- From the facts, circumstances and record it emerges that Special Auditor required deposit ledgers of 69 branches in 1st instalment and completed audit of only 53 branches. No further requisition about deposit ledgers was made by SA as there is no finding about such requisition. Apropos 53 branches SA has given a clear findings that assessee's record is by and large in compliance of KYC norms and no adverse observation is called for in this behalf. In these circumstances, assessee having furnished print outs for what was asked for, it can not be held that it did not cooperate in production 105 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
of record. Such a view can not be adopted on general assumptions and has to be based on cogent material. For the record not asked by the SA no adverse inference can be drawn against assessee.
(iii) Whether apropos the process of summons issued by AO and adverse inference drawn by the AO is justified?
- Assessee furnished detailed explanation before AO about each category of summons issued and its defense about the proposed adverse inference. AO neither considered the explanation nor rebutted it and held that summons are uncomplied and made the additions @35% estimated basis. Assessee endeavored to demonstrate that by implications most of the summons are to be construed as not suggesting the deposits to be non genuine. Besides enforcing attendance of summoned depositors was not in the hands of the assessee looking at the huge deposit base. AO's inference that assessee was conniving with depositors to ensure summons are non complied and verification process is obstructed is without any cogent basis. Before CIT(A) assessee reiterated the pleadings and on consideration thereof by detailed observations CIT(A) held that the conclusions arrived at by AO in this behalf were without any basis. After considering all the facts and circumstances we uphold the findings of CIT(A) that the conclusions and adverse inference drawn by AO on this issue was not justified.
(iv) Whether facts and circumstances or assesses case are similar to earlier years and ITAT judgments in assesses own case or to be followed?
- Assessee has a long history of litigation with department on various issues including sec 68, the same is tabled above. AO has made a 106 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
chart contending that there are distinguishing features in earlier years. CIT(A) has referred to all these issues and by objective findings in a tabulated chart held that facts and circumstances of the earlier and currents years are by and large the same. Assessee continues to RNBFC under the same regulatory regime of RBI, business model and the pattern of collecting deposits remain practically same. Rather in this year the Board of Directors and auditors were appointed as suggested by the RBI. Thus assessee's banking business affairs were under RBI watch with a revamped Board and auditors as recommended and approved by RBI. In the entirety of facts and circumstances we have no hesitation to hold that facts and circumstances of this year are on reasonable parity with earlier years. This being so we have to respectfully follow the ITAT judgments in earlier years rendered in assesses own case deleting such additions.
(v) Whether assessee business of collection of deposits as RNBFC is akin to banking business and the primary onus u/s 68 is to be discharged in terms of judicial precedents in this behalf?
- This proposition has not be disputed by the AO or ld DR. The contention advanced by the ld DR. is to the effect that RBI norms by themselves are not conclusive for sec. 68 and there were deficiencies in assessee's record qua maintenance of KYC record as prescribed by RBI. Since the issue about RNBFC being banking activity is not disputed the answer is in affirmative. Apropos the contention that KYC norms and RBI regulations are not conclusive. The proposition in this behalf has been settled by various court/ ITAT judgments like Citizen Urban Co-opt. Bank (Amritsar) which is confirmed by P & H high court (supra); Pragati Co-opt. Bank(Guj); Citizen co-opt.
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Society(Hyd); Dhablaxmi Bank(Cochin); Shri Mahavir Nilgari Sahkari Pat Sanstha(Pune) (all supra). It shall be appreciated that Hon'ble Supreme court in Lovely Exports and other cases and Hon'ble Delhi High Court in Oasis Hospitalities, value capital, Dwarkadhish investments (supra) and various other judgments have held that nature of primary onus and discharge thereof in terms of sec. 68 is a question of facts and is not a static proposition. The nature of business, regulatory norms, rules, regulation and various other factors under which deposits are collected is to be properly considered. The fact that legislature has not prescribed any fixed parameters in this behalf, sec. 68 being a deeming fiction and AO being entrusted the duty of satisfying himself in objective terms underline these relevant aspects. The primary onus and discharge thereof is to be examined by the AO with objectivity. That is how the onus u/s 68 qua share capital applications, banking industry and other statutorily regulated enterprises has been differently treated in terms of primary onus. It is to be appreciated that majority of the deposits are recurring deposits coming from earlier years. Besides assessee has about 3 crores of depositors belonging small income group people who may not be very educated and a big net work of field agents spread over various rural and other areas, many of them may also not be very literate. It has not been disputed that possible deficiencies in KYC compliance has been noted by the Board and as suggested by RBI, lien has been put on such accounts and not to repay unless these KYC deficiencies are made good. Under these facts and circumstances expecting the substantial rural and agro based citizenry to possess PAN card and drawing adverse inference therefrom is not justified in these facts and 108 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
circumstances. We have already held that earlier ITAT orders in assesses own case are to be respectfully followed. In view thereof it is to be held that assessee's business is akin to banking business and the discharge of primary onus by the assessee has to be on the same lines that of banking industry. A catena of judgments has been already referred in this behalf. In consideration of overall facts and circumstances, history of earlier litigation and ITAT judgment in assessee's own case, we hold that assessee discharged its primary onus in terns of sec 68.
24.1. Apropos assessee's legal contention that fiction created by deeming provisions of sec 68 contemplate any addition at all, refers to a specific deposit and there is no provision for making estimated adhoc addition @ 35%. Besides department on a sample check basis has been adopting varying rates without any reasonable basis. It has been ignored that most of the deposits are recurring deposits coming from earlier years. We are of the view that the scope of a deeming fiction, and the method of specific addition of deposit is to be followed strictly. A plain reading of sec. 68 contemplates that the satisfaction of AO has to be exercised qua each deposit or cash credit. It does not prescribe any adhoc or estimated addition. Therefore, we are inclined to agree with the reasoning adopted by ld. CIT(A) on this issue and uphold his findings that such addition can not be made u/s 68. 24.2. In consideration of the aforesaid discussions and observations we uphold the order of CIT(A) deleting this addition, this ground of the revenue is dismissed.
25. Revenue's ground no 9 & Assessee's ground no 3:
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Addition on account of change in accounting estimate/policy on interest:
25.1. During the course of proceedings the assessee has made a request for admission of additional evidence being board resolutions qua the change in provision of estimate on the lines suggested by RBI in terms of Rule 29 of the ITAT Rules, 1963. After hearing both the parties, we are of the view that these documents being assesses statutory record are necessary for proper adjudication of the issue. In view thereof the same is admitted. 25.2. Brief facts are: Special auditor found that average balance of opening and closing deposits of earlier years has increased by 3% as compared with the earlier assessment year, a short provided interest of earlier years was fully provided in this year. According to AO, this amounted to departure from mercantile system of accounting followed by the assessee. Justification in this behalf was asked, assessee replied on 30.07.2012 contending that:
i. The figure of interest provision has wrongly been taken by auditor at Rs. 1218,36,28,517/-, the correct figure and % thus was Rs. 1216,83,23,131/- and 7.80%. The increased provision of interest was made on the resolution of reconstituted Board of directors and Audit Committee's suggestions. They suggested and resolved to make the interest provision based on behavior pattern of the deposit on a mercantile basis. The provision amounted to change of rate of interest which at best is nothing but change in calculation of an accounting estimate for which there was no requirement of making a disclosure in the notes to accounts. Schedule 15clause (b) of the financial statements were significant policies are mentioned refers to allowable accounting estimates under accepted accounting policies. Deposit schemes up to 31st March 2008, were mainly of recurring nature and 110 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
the provision of accrued interest liability thereon was estimated earlier at the minimum interest rate payable on maturity of a fully compliant deposit. Fully compliant of deposits were eligible for some rebates, however many of the deposits were not fully complied by the depositors and rate of interest payability was decided at the time of repayment. Additional interest, if any payable, for full maturity account was accounted in the year of maturity.
ii. RBI's order on June 04, 2008, prohibiting assessee from accepting any deposit from public was challenged by it; thereafter RBI issued another order on 17th June 2008 directing company to wind up its deposit receiving activity by 31st March 2015. RBI further put conditions that the company will appoint auditors as well as independent directors nominated by RBI, in compliance thereto assessee appointed auditors as well as directors nominated by RBI. In discharge of their official functions they reviewed the rate and method of interest accrual and suggested these changes in rate of interest provision the official meetings. It was recommended that interest accrual qua each deposit account should be made depending on the status of deposit at the time of making provision for accrual of interest. The rate for accrual provision was to be applied as applicable to the status of the deposit i.e. regular, or lapse deposit. As only rate of % of accrued interest was changed because of regulatory exigencies, it was only change of rate in an accounting estimate and not a change in accounting policy. Assessee also sought opinion from the accounting experts (copy on record)who also opined like wise. Following of this pattern of accounting estimate as suggested by new board & auditor's 111 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
consequent to RBI direction & opined by accounting experts resulted in increase in the provision of interest during the year. In earlier years as well, shortfall of interest provided on maturity of deposit has been duly allowed by the department in the year of such provision. In this year it was done based on suggested lines under aegis of RBI regime. 25.3. AO however was of the view that it was a significant change in accounting policy and not a mere change in accounting estimate. Even if it was to be held as change in accounting estimate, it was not disclosed in the financial statements. AO referred to CBDT Notification No. SO 69(E), dated 25-1-1996, applicable to assessment year 1997-98 onwards which is reproduced in his order. It was held that this notification proposed an important concept of prudence stating that provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information. As per the notified accounting standards the assessee should have made such provision year after year, as the interest liability was always a known liability. AO held that, there was a clear departure from the notified Prudence basis of accounting, which has been wrongly termed as "a change in accounting estimates."
25.4. AO thus held that it was not a change in accounting estimate as it amounted to change in accounting policy in the name of behavioral pattern of the deposits. Even if it is held as a change in the accounting estimate then also as per the CBDT notification mentioned above the assessee was required to disclose all material facts impacting financial statements, which it has not done.
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25.5. Assessee's contention that the interest provision creates a revenue neutral position was rejected holding each assessment year to be a separate and independent from other years and correct income of each year was to be calculated on the similar lines, details of the same are tabulated by AO in his order. It was held that because of the change in accounting policy the assessee has excessively provided Rs.467,96,79,775/- (being 3% of average of opening and closing deposits). Amount was disallowed as change in Mercantile System of accounting and not accounting estimates. It was further held that it is not bona fide as it was adopted to evade tax. 25.6. In first appeal, ld. CIT(A) referred to historical data with regard to deposits raised and repaid, interest provided and paid as under:
TABLE OF DEPOSITS & INTEREST PAID FINANCIAL YEAR ---> 2004-05 2005-06 2006-07 2007-08 2008-09 OB 8510.64 11042.75 14823.77 17058.82 16933.85 COLL 6391.64 7922.63 6915.89 6274.66 5301.68 DEPOSITS (DEP) TOTAL 14902.28 18965.38 21739.66 23333.48 22235.53 PAID 3859.53 4141.61 4680.84 6399.63 7971.53 CB 11042.75 14823.77 17058.82 16933.85 14264.01 OB 292.91 494.5 737.42 1048.82 1121.86 PROV 572.06 624.16 651.8 815.09 1207.57 INTEREST (INTT) TOTAL 864.97 1118.66 1389.22 1863.91 2329.43 PAID 370.47 381.24 340.4 742.05 924.91 CB 494.5 737.42 1048.82 1121.86 1404.52 OB 3.44 4.48 4.97 6.15 6.62 PROV 5.18 4.21 3.82 4.81 8.47 INTT / DEP (%) TOTAL 5.80 5.90 6.39 7.99 10.48 PAID 9.60 9.21 7.27 11.60 11.60 CB 4.48 4.97 6.15 6.62 9.85 AVG DEP 9776.70 12933.26 15941.30 16996.34 15598.93 AVG INTT 393.71 615.96 893.12 1085.34 1263.19 AVG INTT / DEP % 4.03 4.76 5.60 6.39 8.10 INTT DISALLOWED 467.97 LEGEND 113 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
OB OPENING BALANCE COLL COLLECTIONS DURING THE YEAR PROV PROVISION MADE DURING THE YEAR PAID AMOUNT ACTUALLY PAID / REPAID DURING THE YEAR CB CLOSING BALANCE AVG AVERAGE
CIT(A) after analysing this data observed that there is wide variation in the interest provided as a component of net deposits from year to year. It ranged from 4.81% to a high of 11.6% in FYs 2007-08 and 2008-09. In this variable scenario, a more accurate method to calculate the real income should be made to account for both interest income and expenditure, which is the major component of P&L account. Earlier accounting of accrual of interest on mercantile basis resulted in inaccuracies, which were pointed out by the auditors appointed by the RBI. The interest paid as proportion of deposits repaid has been higher than the component of interest provision as proportion of net deposits, ranging from 7.27% against 3.82% (FY 2006-07) to 11.6% against 4.81% (FY 2007-08), which indicated that assessee's interest provisioning earlier has been on a lower side. The endeavour of RBI and its audit would be ensure a safer state of financial affairs from the point of view of depositor protection, which could have resulted in higher provisioning for interest than the real interest expenditure. Referring to assesses stand that there is no change in the accounting policy and it was simply a case of change of rat e of accrual in accounting estimate, CIT(A) agreed with it. It was held that there is no change in accounting policy, but only a change in estimate within the existing policy.
25.8. Despite this finding, CIT(A), however was of the view that as per paragraph-11 of the CBDT Notification No. SO 69(E), dated 25-1-1996, any change in accounting estimate was also to be disclosed and quantified in the 114 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
final accounts which is not done. He also held that for change in method of accounting in income tax law (section 145),only requirements is that the method should be regularly followed, and any such change in the method of accounting or accounting estimate also was required to be incorporated in the statement to the final accounts (AS-I & AS-II notified vide Notification No. SO 69(E), dated 25-1-1996). After adverting to various case laws CIT(A) held that the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his right. Existence or absence of entries in the books of account can not be decisive or conclusive in the matter {Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)}.There is no estoppel in such matters, and the officer is not bound by the method followed in earlier years {CIT v British Paints India Ltd. [1991] 188 ITR 44 (SC)}. The ITO, even when he accepts the assessee's method of accounting, is not bound by the figures of profits shown in the accounts {CIT v McMillan & Co. [1958] 33 ITR 182 (SC)}. It was held in Southern Technologies Ltd. v DCIT(2010) 320 ITR 577 (SC) that real income has to be charged to tax and method of accounting or RBI guidelines / directives will have no consequence on the chargeability of income under the Income Tax Act. 25.9. CBDT Notification No. SO 69(E), dated 25-1-1996 is clear in paragraph-11, that any change in the accounting estimate has also to be disclosed and quantified in the final accounts. ITAT, Delhi has upheld its view, that the interest expenditure provided then in its accounts was correct (ITAT order dated 12.10.2003 in ITA Nos.667/Luck/2002 for AY 1994-95 & 101/Luck/2000 for AY 1990-91). About the correctness of assessees earlier accounting estimate of interest provision or the one recommended by RBI auditors, CIT(A) observed that both estimates cannot be correct at the 115 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
same time. Assessee may have provided for lower interest to project better financial health and the RBI and its auditor may project higher interest expenditure estimates to arrive at a more conservative estimate of financial health to protect depositor interests.
25.10. CIT(A) though held that it was change of accounting estimate, nevertheless held that interest provision now made was excessive. He found that the actual payment of interest at Rs.924,63,78,475/- during the relevant previous / financial year (2008-09) is lower than the provision of interest at Rs.1207,57,86,321/- by Rs.282,94,07,846/-. In view of these facts he restricted the disallowance of Rs.467,96,79,775/- to this extent, as otherwise it will result in the anomaly that interest provision at Rs.739,61,06,546/- (Rs.1207,57,86,321/- minus Rs.467,96,79,775/-) which will go below the interest actually paid by the appellant at Rs.924,63,78,475/- during the previous year. The ground was accordingly disposed by confirming Rs.282,94,07,846/- and giving relief of Rs.185,02,71,929/- to assessee. Aggrieved both parties are before us.
26. Ld CIT(DR) contends that despite holding it to be change in accounting estimate due to non compliance with CBDT notification, finally CIT(A) modified the estimate of provision of interest made by the assessee as well as by AO. Out of total claim of interest of Rs.1207,57,86,321/- ,assesses claim to the extent of actual payment of Rs.924,63,78,475/- is allowed, resulting into relief of Rs.185,02,71,929; which is challenged by the revenue. On the other hand, the assessee is contesting the disallowance of Rs.282,94,07,846/- confirmed by the CIT(A).
26.1. Assessee's case is - firstly there has been no change in accounting policy during the year and it has continued to follow mercantile system of accounting as in the past. Only accounting estimates have been changed to 116 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
provide for rate of interest interest in line with the directives of the RBI, auditors and board of directors. Secondly, even if there is a change in accounting policy, the same is permissible under the law subject to the condition that the change is bonafide and is regularly followed by the assessee. The ld. CIT(A) held that there was no change in accounting policy, but there was change in accounting estimates only. 26.2. Ld. CIT(A) further held that there is no doubt the assessee has a right to choose the method of accounting, and the only requirement under the income tax low is that the method should be regularly followed, and any change in the method of accounting or accounting estimates is required to be incorporated in the statement of final accounts. Thus, the ld. CIT(A) concludes that the tax payer is free to adopt either cash system of accounting or mercantile system of accounting and the Department is bound to accept the assessee's choice of method regularly employed and AO is permitted to intervene in case it is found that the income, profits or gains cannot be arrived at by the change employed by the assessee. Entitlement to a particular deduction will depend on the provision of law relating thereto and not on assessees view. Existence or absence of entries in the books of accounts cannot be decisive; it is not only the right but the duty of the AO to decide whether or not the books disclose true state of accounts and correct income.
26.3. It emerges that the system being followed by the assessee up to financial year 2007-08 was more accurate and realistic as the same was followed after taking into consideration the behavioral pattern of the depositors during the entire period of deposits in question. It is a matter of common knowledge that the reconciliation of accounts is more realistic and correct when the same is effected at the time of final settlement of accounts.
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Thus, providing interest on quarterly basis will only add to the confusion and uncertainty during the intervening period. Therefore, it is against common sense that the RBI would issue such an instruction/directive. According to DR, there is no evidence on record to suggest that any such direction was issued by the RBI or its nominees. The RBI directives/prudential norms issued with respect to an RNBC would only ensure that the stakeholders have proper information with respect to the actual state of affairs and no material information is suppressed in regard to financial health of the company.
26.4. Ld CIT(A)'s findings are not correct - in as much as they are not based on the factual matrix of the present case. Whether there has been any change in accounting policy or estimate is to be ascertained on the basis of facts and relevant material on record. It emerges that assessee has not cooperated in the assessment proceedings and relevant information and records were properly not made available. Therefore, the claim of the assessee and the findings recoded by the CIT(A) are to be viewed in the background of non-cooperation. One of the objectives for bringing in the change in accounting policy/accounting estimates is claimed to present more realistic and correct position of deposit accounts as mandated by the Reserve Bank of India and its appointees. There is no evidence to suggest that the Reserve Bank of India or its nominee directors or the auditors issued any such directions to the appellant company. Even the additional evidence do not contain any such directions. The provisioning of interest on the basis of behavioral pattern of individual accounts is also not as per the established history of the individual depositor's accounts, the submissions made before CIT(A) also do not reflect such fact. It is not established that the change in 118 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
accounting policy or accounting estimates was brought in line with the directives issued by the RBI.
26.5. The additional evidence also show that on 6th December, 2008 a meeting of the Board of directors of the appellant company was held at Hotel Sahara Star,Mumbai. As per the document one of the items of agenda of the meeting was provisioning of interest on deposits. However, a close reading of the minutes suggest that the Board discussed and authorized Shri R.S. Dubey Executive Director (Finance, Accounts& Taxation) to prepare a note to see the overall impact on the financial position of the company by preparing two sets of balance sheet, one as per established practice and other by making provisioning of interest as advised by the statutory auditors to facilitate an appropriate decision could be taken in the next Audit Committee meeting. However, there is no evidence to suggest that such a note was prepared or placed before the Audit Committee. It is equally important to note that the statutory auditors M/S Kalyaniwalla & Mistry, were not present in the said meeting.
26.6. The document sought to be filed as additional evidence is extract of the minutes of the meeting of Audit Committee held on 3rd February, 2009 at the same venue. It is mentioned that after discussions it was decided that for the financial year 2008-09 and onwards, interest accrual on outstanding deposit accounts shall be made account wise depending upon the status of accounts as on the date of accrual of interest for the purpose of computation of ALD of the company at the each quarter commencing from the quarter ending on 31st March,2009. It was further provided that the approval of the Board of Directors of the company with regard to change in method of computation of accrual of interest on deposits be obtained through circular resolution and the RBI be informed accordingly. It is still not known 119 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
whether the aforesaid approval of the Board of Directors was actually obtained as no evidence thereof has been placed on record. 26.7. These facts clearly suggest that the accrual of interest was to be calculated on quarterly basis only for the purpose of computation of aggregate liability to depositors of the company. Further, this was to commence from the quarter ending on 31st march, 2009 and not earlier. In such situation there was no requirement on the part of the appellant company to provide for the interest liability for the earlier years as no such decision was taken by the Board of Directors nor any direction to this effect was given by the RBI.
26.8. Besides seeking approval of the nominee directors and statutory auditors appointed by the RBI is one issue and bringing about changes in accounting estimates is entirely different issue. Therefore, in the absence of any evidence, the claim of the appellant company that the necessary change had to be brought about in line with the directions of the RBI is factually incorrect. The change is unilateral act of the appellant, aimed at artificially reducing profits and consequent tax liability.
26.9. CBDT notification no. SO 69(E), dtd 25-1-1996, direction in paragraph-11 lays down that any change in the accounting estimate is also to be disclosed and quantified in the final accounts. Not following the CBDT notification, or doing anything contrary to the notification, is bound to attract adverse decision. Assessee's contention that ITAT, Delhi has upheld the view that interest expenditure provided in its accounts was correct (ITAT order dated 12.10.2003 in ITA Nos. 667/Luck/2002 for AY 1994-95 & 101/Luck/2000 for AY 1990-91), is not emanating from the order. Therefore, either the appellant's earlier accounting estimate of interest 120 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
provision was correct, or the estimate made after audit by RBI auditors is correct. Both estimates cannot be correct at the same time. 26.10. It is settled position of law that while computing real income, method of accounting or RBI guidelines\ directives will have no consequence on the chargeability of income under the IT Act, which is a self contained Code. Reliance is placed on the following judgments of the Hon'ble Supreme Court:-
- Kedarnath Jute Mfg. Co. Ltd. V.CIT;
- CIT v.British Paints India Ltd.
- CIT v.McMillan & CO. ;
- Southern Technologies Ltd. V DCIT 26.11. Assessee has to close its business relating to obtaining of deposits latest by 31.03.2015 as mandated by the RBI and this has already started reflecting in decreasing balance of ALD. In a case where the winding up of operations is certain in near future , it will be impossible to ensure that the change brought in by the assessee would be followed regularly. Therefore, viewed from any angle, the action of the AO is fully justified and deserves to be sustained.
27. Ld. Counsel for the assessee on the other hand contends that appellant accepts deposits from public under various schemes on which interest is payable. The rate of interest on such deposits is contingent upon its regularity. If the account is regular, the interest is paid at the agreed regular rate; in case of default, interest is payable at the agreed reduced rates.
27.1. Up to immediately preceding year assessment year 2008-09, the appellant was providing for interest on a conservative basis, i.e., at the lowest rate assuming that the accounts of all depositors would be irregular i.e. there would be default by the depositors. If any deposit was found to be 121 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
regular, payment of interest in excess qua such deposit was also charged to the profit and loss account and claimed as deduction in that year itself. Thus this system of provisioning of interest on deposits and excess actual payment was consistently and regularly followed earlier also. 27.2. In the current year, RBI taking note of some adverse media reports against assessee, issued prohibitory order dated 04.06.2008 debarring the appellant from accepting further deposits and repay them on maturity. The said order was modified by the RBI vide their letter dated 17.06.2008 to the extent that the appellant was allowed to accept deposits up to 30.06.2011 and thereafter, wind down the activities completely by 30.06.2015. RBI further directed the appellant to appoint statutory auditors from the panel of auditors approved by the RBI and also directed to induct 50% of the directors nominated by the RBI on the Board of Directors. In compliance of these RBI directions, appellant appointed M/s G.D. Apte & Co., Chartered Accountants and M/s. Kalyaniwalla & Mistry, Chartered Accountants as joint special statutory auditors for the previous year ended 31.03.2009. Mr. H.N. Sinor, Mr. A.K.D. Jadhav and Mr. T.N. Manoharan were appointed as independent directors on the Board. The audit committee was directed to be chaired by Mr. T.N. Manoharan, nominated by the RBI. 27.3. The new statutory auditors subsequent to their appointment undertook detailed examination of accounting policy adopted, including the method of providing interest. According to the newly appointed statutory auditors, earlier estimates policy adopted by the appellant for provisioning of interest resulted in underprovided or interest liability. The statutory auditors, therefore, recommended to the assessee's Board for change in the accounting estimate in this behalf, from providing interest at the lowest base rate to provisioning on rate of the regularity of deposit. Pursuant to the 122 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
recommendation of the statutory auditors, the Board of Directors of the appellant company, in the meeting held on 03.02.2009 decided to accordingly modify the accounting estimate and base rate of providing interest. Accordingly, in the annual accounts for the year ended 31.03.2009, assessee made provision for interest on deposits of Rs. 1207,57,86,321/-.
27.4. The assessing officer not accepting the change in the basis of such provision disallowed the interest provided in the books of accounts on the ground that the interest provision was excessive. The AO held that interest provision @ 3% of the average of opening and closing deposits was excessive and thus, disallowed a sum of Rs.467,96,79,775/- ( 3% of Rs.15598,93,25,833/- being average deposit).
27.5. On appeal, the CIT(A), while accepting that there was no change in the accounting policy i.e. the same remained to be mercantile system, observed that the change in the rate of interest adopted for provisioning, was simply a change in accounting estimate only. Further, the CIT(A) held that I T Act entitles the appellant to change the method of accounting, provided the provision made earlier was not accurate, change was bonafide and it was further required to be consistently and regularly followed. Despite giving these categorical favourable findings ld. CIT(A), mistakenly held that the interest provision made during the relevant previous year was excessive, impliedly adopting unpermissible hybrid system of accounting. Thus on this misunderstanding finding applied wrong basis that the actual payment of interest during the relevant previous year at Rs.924,63,78,475 was lower than the provision of interest at Rs.12,07,57,86,321 by an amount of Rs.282,94,07,846. Consequently ld. CIT(A) restricted the disallowance to Rs.2,82,94,07,846 out of Rs.467,96,79,775 made by AO. The order of ld.
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CIT(A) becomes contradictory in as much as change is held to be bonafide and a change of accounting estimate and not of accounting method. At the same time instead of following the consistent mercantile method, he has allowed the interest on cash basis, which results in making the system hybrid which is not permitted by sec. 145. Having upheld the principle, entire interest liability ought to have been allowed as a natural consequence. 27.6. It is submitted that in this case, the appellant has merely changed its accounting estimates with respect to provision of rate of interest on deposits. Assuming for the sake of argument that such a change is to be regarded as change in accounting policy. Then also it is to be accepted in view of the statutory right that an assessee is entitled to change the method of accounting if the same is bona fide and the changed method is consistently followed thereafter. Reliance is made to the decision of Hon'ble Calcutta High Court in the case of Snow White Food Products Co. Ltd. v. CIT: 141 ITR 861:
"All that the section lays down that if an assessee regularly employs a method of accounting his income should be computed in accordance therewith. The section, in its terms, does not require any enquiry into the bona fides of the assessee in following a regular method.
A recognised method of accounting followed regularly would necessarily result in a proper computation of the assessee's real income. Even if one regular method of accounting is substituted by another regular method the same result will follow. Only in a case where the assessee changes his regular method of accounting by another method and does not follow the change regularly thereafter it might be possible for the assessee by introducing successive changes in his methods of accounting to exclude items of his income from being included in the computation of his total income. Therefore, when an assessee changes his regular method of accounting by another regular method the question of his bona fides have little relevance.
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Only in the year where a change in the method of accounting is introduced for the first time, it is to be examined by the Revenue authorities whether the change introduced is meant to be regularly followed or not. It appears to us that it is in this context only that the expression "good faith" and "bona fide" occur in the observations in the earlier judgment noted earlier.
In our opinion, where it is found that an assessee has employed (changed ) his regular method of accounting by another recognised method and has followed the latter method regularly, thereafter, it is not open to the revenue authorities to go into the question of bona fides of the introduction and continuance of the change. For the above reasons the assessee succeeds in this reference. The question referred to us are both answered in the negative and in favour of the assessee. In the facts and circumstances, there will be no order as to costs."
27.7. The method of provisioning for interest hitherto followed by the appellant was not found to be rational by renominated auditors and Board at the recommendations of RBI. They were of the view that present estimate resulted in under provisioning of interest by adopting the lowest base rate. Interest was actually agreed to be paid at higher rate on regular deposits. It was not in consonance with the accrual method of accounting and conservative principles of prudence which required to provide for anticipated losses while not recognizing anticipated gains. It is precisely for this reason that the RBI approved auditors recommended change in the method of accounting to reflect true and fair view of income in this year, by changing the base rate of interest.
27.8. As per the Accounting Standard-1 ('AS-1') on "Disclosure of Accounting Policies" issued by the Institute of Chartered Accountants of India, the major consideration governing the selection and application of accounting policy(ies) are:
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"a) Prudence In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information.
b. Substance over Form The accounting treatment and presentation in financial statements of transactions and events should be governed by their substance and not merely by the legal form.
c. Materiality Financial statements should disclose all "material" items, i.e. items the knowledge of which might influence the decisions of the user of the financial statements."
27.9. On this concept of prudence closing stock is valued at lower of cost or market value. In other words the prudence norm lays down that, while anticipated losses (or fall in market value) is taken into account, anticipated / unrealized profits are not taken into account while determining the correct profits. Reliance in this behalf is placed on Chainrup Sampatram v. CIT :24 ITR 17 (SC); CIT vs. Woodward Governor India (P) Ltd. and Honda Siel Power Products Ltd. 312 ITR 254 (SC)@263-264.
27.10. Accounting Standard AS -1 has been notified by the Central Government vide Notification No. SO69(E) dated 25.01.1996 for purposes of section 145(2) and is, thus, mandatory for determining the income of an assessee chargeable under the head "profits and gains of business or profession" as per the method of accounting followed by that assessee, in terms of sub-section (1) of section 145 of the Act. Consequently the changed method of estimate for interest is in accordance with (a) concept of prudence, (b) reflects true and fair value of the accounts, (c) has been adopted on the suggestion of the statutory auditors nominated by RBI, (d) is 126 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
a more scientific change and a rational method of accounting, (e) the change is bonafide.
27.11. Considering that the changed method for providing for interest has been consistently followed in all subsequent years, it is contended by the assessee that the change in the rate of estimate deserves to be accepted. Consequently the provision of interest on the basis of this change is to be allowed deduction in it totality.
27.12. Adverting to arguments of ld. CIT DR that the change in the method of accounting should not be accepted in view of the following:
a) The facts on record do not support the bonafides of the appellant in effecting the change inasmuch as (i) there is no evidence to suggest that RBI or its nominated directors or the statutory auditors issued any directions to the appellant company for adopting the changed basis and (ii) the earlier system being followed for providing for interest after taking into consideration the behavioral pattern of the investors during the entire period of deposit was more accurate / realistic.
b) Considering that the appellant company had to wind up the business activities by 31.03.2015, it would be impossible to ensure that the changed method would be regularly followed.
c) Assessee did not place on record the note submitted by Mr. R. S. Dubey, Executive Director (Finance, Account and Taxation), as directed by the Board, to see the overall impact on the financial position of the company, by preparing two sets of balance sheet -one, as per established practice and the other by making provisioning of interest as advised by the statutory auditors of the company, so that 127 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
appropriate decision could be taken in the next Audit Committee meeting.
27.13. It is submitted that assessee has placed on record various documents in support of the submission that the change in the method of accounting was made by the appellant pursuant to the suggestion made by the new independent statutory auditors appointed during the relevant previous year including:
- Copy of prohibitory order passed by RBI restraining the appellant company to carry on present business (pages 2365-2366 of the paper book).
- Copy of extracts of the minutes of meeting of the Audit committee of the appellant held on 03.02.2009- filed as additional evidence.
- Copy of extracts of minutes of meeting of the Board of Directors of the applicant held on 25.08.2009- filed as additional evidence.
- Copy of expert opinion sought by the appellant with respect to accounting treatment of creation of provision of interest payable to depositors (pages 2367-2371 of the paper book).
- Accounts are audited by statutory auditors, final statements, notes and annual accounts are approved and published by the Boar of Directs. At every stage RBI's presence is discernable. These facts cannot be ignored to arrive at a conjecture that due to some hypertechnical deficies the entire exercise is contrived or the decision is taken without considering the proper record.
27.14. All the facts and circumstances indicate that the auditors and Board of Directors took proper note of the suggestions of the auditors and approved the recommended and necessary change in the estimate of accounting for interest on deposits, including the note prepared by Shri R. S. Dubey, as directed by the Board in the meeting held on 06.12.2008.
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27.15. In any case, it is be independently evaluated, whether the earlier method followed by the appellant which admittedly resulted in under provisioning of interest, was more scientific / rational vis-à-vis the changed method adopted by the assessee in this year. It takes into account the behavioral pattern up to the date of provisioning of interest. A dispassionate analysis will yield to the conclusion that the changed method is in line with the accrual method of accounting in as much as the same observes the principle of prudence; reflects true and fair value of the accounts of the appellant; is a more scientific and rational method of provisioning for interest. The gamut of background facts corroborate that the change is bonafide and the interest deserves to be allowed fully. 27.16. Even though, on RBI direction the appellant has to wind up accepting deposits by 31.03.2015, even then the changed method would be followed by the appellant for seven years - which is a long period of time. It cannot be assumed as pointed by ld DR that there is no possibility that changed method would be regularly followed. Future events cannot be anticipated on surmises, seven years is a long time and regulations may also change, the assessee undertakes to follow the changed method till the time of its existence.
27.18. It has been pleaded by revenue that the Board had only authorized the change for only the last quarter of the relevant previous year 2008-09. It shall be noted that provision of interest is always made at the end of the year and not on quarter to quarter basis. It is not the case of revenue that for three quarters already provision was made for. Therefore, the approval by the board signifies provision of interest for the entire previous year 2008-09, relevant to AY 09-10.
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27.19. Apropos the issue, whether arrears of interest of earlier years could be allowed in this year pursuant to the change, it is submitted that once the changed basis of accounting for interest was adopted, as a natural consequence assessee has to recalculate interest payable on deposits as on 31.03.2009. Once the change in the method was bonafide, allowance of short provision of interest for the earlier years is fate accompli to such change. It is to be borne in mind the assessee was not in good light with RBI, to prove its credentials it was necessary to abide with RBI directives which included their nominee auditors and directors. Non compliance would have resulted in RBI and regulators getting displeased. Thus looking from any angle the change is bonafide and tenable. There is no merit in departments allegation that assesses carried out this exercise for evading income tax. 27.20. An analogy is cited from Accounting Standard-6 ('AS-6') on "Depreciation Accounting" to support the argument that the arrears of interest relating to earlier years had to be necessarily adopted and allowed in the year of change in the basis of provisioning for interest. AS-6 provides that once there is a change in the method of calculating depreciation, then, depreciation admissible thereon is to be recalculated from the first day of use of asset and further, that the arrears of depreciation are necessarily to be charged to the profit of the year in which the basis for providing for depreciation was changed.
27.21. So is the case with change in warranty provision. Reliance in this regard is also placed on the decision of the Hon'ble Delhi High Court in the case of CIT v. Whirlpool of India Ltd.: 242 CTR 245, wherein changed arrears caused by change rate of provision for warranty, relating to sales effected in earlier years was held allowable in the year in which the changed provision was created. It is contended that interest depreciation and 130 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
warranty provision stand on exact parity, both are charged to P & L a/c, therefore, Whirlpool judgment is fully applicable to asessee's case. 27.22. Further reliance in this connection is placed on following decisions (though rendered in the context of section 115J of the Act):
- Apollo Tyres Ltd. vs CIT : 255 ITR 273 (SC)
- Bombay Tyres International Ltd. vs. DCIT : 51 ITD 339 (Mum.)
- DCIT v. Eicher Goodearth : 64 TTJ 208 (Del.) 27.23. Besides change in the method of valuation of closing stock also stands on same analogy, courts have held that even though the change in valuation of stock may result in lesser income, it is not possible to change the opening stock of that year as well
- CIT v. Carborandum Universal Ltd. 149 ITR 759 (Mad.) − CIT v. Mopeds India Ltd.: 173 ITR 347 (A.P.) 27.24. Entire issue in dispute revolves around the year(s) of allow ability of interest, which, on a macro level, is revenue neutral, given that interest payable on deposits is allowable in one year or the other. Assessee in appeals in several earlier years, in that case the claim being otherwise genuine ITAT to ensure a proper assessment has to issue directions to allow the corresponding interest in the respective year. This will result in reducing taxable income of earlier years, thus making the entire exercise revenue neutral at macro level. A useful reference can be made to observations of Hon'ble Bombay High Court in the case of CIT vs. Nagri Mills Co. Ltd. : 33 ITR 681 (Bom) @ pg 684 as under:-
"We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax 131 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of the character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other."
27.25. The same has been quoted with approval by the Delhi High Court in CIT vs. Shriram Pistons & Rings Limited : 220 CTR 404, extracted as under
:
"17. Finally, we may only mention what has been articulated by the Bombay High Court in CIT v. Nagri Mills Co. Ltd. [1958] 33 ITR 681 as follows :
"We have often wondered why the income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the department would not fritter away its energies in fighting matters of this 132 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
kind. But, obviously, judging from the references that come up to us every now and then, the department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the department is likely to collect from him whether in one year or the other." (p. 684)
18. In the reference that is before us there is no doubt that the assessee had incurred an expenditure. The only dispute is regarding the date on which the liability had crystallized. It appears that there was no change in the rate of tax for the assessment year 1983-84 with which we are concerned. The question, therefore, is only with regard to the year of deduction and it is a pity that all of us have to expend so much time and energy only to determine the year of taxability of the amount."
27.26. In view of the aforesaid, it is contended that the change in the basis for providing for interest needs to be approved and provision of interest made by the assessee be allowed.
28. We have heard the rival contentions and perused the material available on record. It has been contended by the department that while deciding this issue the assessee's non cooperation in the proceedings shall be kept in mind. In our view, the issue of provision of interest and accounting estimate are issue of principle and not of verification of facts. The quantification and disallowance has been worked by AO and CIT(A), which establishes that relevant facts were on record. To decide whether it is a change of method of accounting or interest estimate is based on interpretation of sec. 145, reasons for change and applying the findings is a question of interpretation. Thus we are unable to accept this contention that alleged non cooperation has any role to decide this issue and adverse inference in this behalf may be taken.
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28.1. It has not been disputed that assessee came under the watchful glare of RBI, pursuant thereto said prohibitory order was passed. RBI further directed the assessee to appoint independent directors and auditors on its panel. Ld. DR has pleaded that the board meeting impliedly refers to change of interest estimate for last quarter and it is not clear whether Shri R K Gupta submitted any comparative report as resolved in the board meeting was not considered. We are unable to subscribe to both the contentions, Assessee in past had not made provision for interest on quarterly basis and it is conservative accounting practice to make any provision at the end of the year. The fact that auditors and board approved the changed provision and final audited accounts takes in its stride that they must have looked into all the relevant aspects. It cannot be presumed that Mr. Gupta did not submit the report and auditors and board glossed over the relevant requirements before accepting the accounts and results. This also belies ld. DRs contention that it is not clear whether RBI and its appointees gave such recommendation. Plethora of correspondence in this behalf has been referred including RBI's prohibitive order and reconstitution of board and auditors they demonstrate that the changes were bona fidely made under these facts and circumstances. Therefore, there is no gainsaying that the process seems to be suspicious. Thus we are of the view that the exercise of change of interest provision is carried out in the backdrop of recommendations of board and auditors nominated under RBI directions.
28.2. Now the major issue which is to be decided is whether the change in rate of interest provision amounts to change in accounting estimates or change in method of accounting? In our considered view to create provision of interest is essential part of the income recognition process. Mercantile system permits debiting provision of interest on accrual basis, rate of accrual 134 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
of interest are never prescribed. Simillarly there is no accounting standard or principle that once assessee adopts a particular rate of interest it can never be changed. The creditors may change, interest payable to them is also subject to change in various exigencies. Thus in routine course an assessee has discretion to change the rate of interest including with retrospective effect on outstanding balances depending on circumstances. Thus change in rate of accrual of interest cannot tantamount to change in method of accounting. This is how no interest is provided in respect of sticky loans and there cannot be fetter in assesses business acumen to increase or decrease the rate of accrued interest at the closing of the year. It is not envisaged by the accounting standards sec. 145 or other income tax provisions to treat every change in rate of interest upward or downward as change in system of accounting. Thus change in rate of interest has been rightly held by CIT(A) to be a change in estimate.
28.3. This view is supported by Hon'ble Delhi high court in Whirlpool India (supra) judgment where change in provision of warranty is allowed retrospectively, the facts of Whirlpool judgment are at parity with assesses case. In the assessee's case change is not a unilateral act of the assessee but a commercial decision taken on the recommendations and concurrence of regulatory stake holders. Apropos the disclosure in accounts we are unable to agree with AO that in case of change of rate of estimate also it ought to have been specifically mentioned in notes. We find merit in the arguments of ld counsel that CBDT direction has been misread, it may be for guidance and do not create a legal binding as long as the assessee is able to comply with AS. In any case all the disclosures are manifest by auditors and boards suggestion, expert opinion and detailed working.
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28.4. Even if it is assumed that it is a change in method of accounting even than the change is to be allowed. Sec. 145 enables the assessee to change its method of accounting provided it is bonafide. In our considered view there cannot be any doubt about bonafides of the assessee. Consider a situation where assessee does not comply with the recommendation of auditors and reconstituted board on this issue. Assessee, who is already in the eye of RBI is sure to earn a bad name by not accepting them and will best try to avoid. Thus the change is not only bonafide but also in the interest of health of its business. Consequently even assuming it a change in method of accounting it has to be allowed in terms of sec 145.
28.5. Our views are supported by aforementioned judgments in the cases of Apollo tyre ltd.; Bombay Tyres Int.; Eicher Goodearth Ltd.; Corborandum Universal and Moped India (all supra) 28.6. Assessee is in perineal litigation with department and earlier years are pending at one stage or other. The proposal not to allow the interest of earlier years even accepting the change is revenue neutral at macro level. Having accepted for this year it becomes admitted liability and assessee has aright to claim it in earlier years as a consequential relief in years under litigation. In this situation going by judgments of Nagri Mills which is approved by Hon'ble Delhi high court in Shriram Pistons(supra), the exercise becomes academic and revenue neutral exercise, which is of no avail. This view has been further upheld by Hon'ble supreme Court in the recent case of Excel Industries 358 ITR 259.
28.7. In our view the claim of assessee qua provision of interest is fully justified. Having held it to be a change in accounting estimate, CIT(A) should not have retained part of provision by applying cash system of accounting for interest provision and indirectly converting it into hybrid 136 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
system is not permissible u/s 145. Consequently revenue ground no 9 is dismissed and ground no. 3 of assessee is allowed.
29. Revenue Ground nos. 10: Additions on account of sec 41(1) Rs 13,10,627.19/-
29.1. SA and AO proposed cessation of liabilities u/s 41(1) as under::
a. In 21 cases amounting to Rs 13,10,627/- excess assessee though wrote off provisions pertaining to expenditure accounts and credited to the profit and loss account. However same was reduced in the computation of income. Accordingly assessee was asked as to why the above amount of Rs 13,10,627.19/- should not be added to the total income of the assessee in accordance with provisions of section 41(1).
29.2. Assessee replied that item no. 5 depreciation, i.e. Rs. 1,07,631/- is allowable at the prescribed rates hence its write back cannot be subjected to tax. Items No. 12, i.e. Pension Fund amounting to Rs. 38,806/- and Sl. No. 2, i.e. bonus to staff amounting to Rs. 39/- is being claimed on payment basis only. If these three items are reduced from the figure of Rs. 13,10,627/-, the balance comes to Rs. 11,64,150/-. Out of this a sum of Rs. 11,51,878/-
stands already surrendered by the assessee in the return for the A.Y. 2008-09 on account of excessive provision made, it cannot be taxed again in this year. The remaining balance of Rs. 12,272/- was surrendered voluntary to buy peace.
29.3. AO mistakenly held that assessee's revised computation of income is neither available on the assessment record of assessment year 2008-09 nor it could have been filed after 19.01.2010 as revised return i.e. the date of 137 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
processing of the return, no cognizance thereof can be taken. Even otherwise these provisions were written back in the year under consideration and amount of Rs 13,10,627 are liable to be included in the total income u/s 41(1) of the Act.
29.4. Apropos 12 cases of sundry creditors amounting to Rs 8,88,997/- outstanding as on 31.03.2009 since a period of more than 3 years, assessee replied that these creditors are appearing in the books of account and are acknowledged as liabilities. These accounts are pending settlement with them due various reasons/disputes and will be settled in due course. Since they are acknowledged as liability sec 41(1) cannot be applied. 29.5. Apropos liabilities pertaiing to reconciliation of certain cheques in certain accounts outstanding as on 31.03.2009, special auditor summed up that out of cheques issued but not paid, a sum of Rs 10,86,42,931/- is outstanding and no specific reply is given by assessee, sec. 41(1) was proposed. Besides assessee has submitted that a sum of Rs.4,16,18,900/- is outstanding as unpaid commission up to 31.03.2009.On a similar footing the rent payable amounting to Rs.1,50,838/-which remained unadjusted for more than 3 years was also proposed u/s 41.
29.6. In was submitted that provisions of section 41(1) cannot be applied qua
1.Cheques issued but not presented Rs. 10,86,42,931/-
2.Commission payable Rs. 25,81,00,086/-
3.Rent payable Rs. 1,50,838/-
29.7. The first item represented "cheques issued but not presented" which has been credited on 31.03.2009. The basic purpose of creation of this head is that these cheques were issued but not presented for payment till 138 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
31.03.2009. They may not be reflected in the bank reconciliation statement and may appear separately in the accounts of the assessee. These reconciliation entries as a matter of accounting system were reversed on Ist April,2009 by debiting cheques issued but not presented account and crediting respective bank accounts. This clearly meant that on 1st April, 2009 the head once again merged with the respective accounts to which the cheques related and were reflected in the respective accounts.
29.8. As regards the second item, i.e. commission payable, these amount represented commission payable to the field-force which was paid in the subsequent period. It is known liability and acknowledged by the assessee. The auditors have themselves pointed out that major portion of the provision stands already paid by May, 2010.Consequently there was no justification in adding it u/s 41(1). The third item, i.e. rent payable, is also an acknowledged liability its deferment of cannot lead to invoking the provisions of section 41(1).As long as the liability is acknowledged, it is allowable time limit is not relevant for provisions of section 41(1).
29.9. AO held this reply also to be unsatisfactory and added the amounts 41(1).
29.10. Aggrieved assessee preferred 1st appeal. CIT(A) verified the material available on record and was of the view that AO had not referred to his own records before adding these amounts as cessation of business liabilities u/s 41(1). Assessee's reply on each item was held to be satisfactory. It was held that there was no cessation of business liability except Rs.12,272/- surrendered by it. Resulting in relief of Rs.12,98,355/- (Rs.13,10,627/- - Rs.12,272/-).
Aggrieved revenue is before us.
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30. Ld. CIT(DR) relied on the order of AO.
31. Assessee contends that proper explanation filed by it was not appreciated by AO. CIT(A) examined the issues and after due verification found that these amounts had not been claimed and allowed deduction in the earlier years, the write back of the same could not, attract the mischief of section 41(1) of the Act; and (b) the amounts had already been taxed / offered for taxation in the earlier years. Rs.1,07,631/- represented write back of provision for depreciation made in earlier years it was recalculated and claimed only as per the provisions of the Act. Relief is given on following reasons:
1) Reversal of Rs.38,806 representing contribution to pension fund and Rs.39 representing bonus to staff were being claimed on payment basis in terms of section 43B of the Act while the provision made thereof was added back in the computation of income.
2) Rs.11,51,878 was already added back in the return for assessment year 2008-09.
3) Rs.12,272 was surrendered by the appellant in the year under appeal.
It is pleaded that order of the CIT (A) does not warrant interference.
32. We have heard the rival contentions and perused the material available on record. It is a settled proposition of law that liabilities which are acknowledged in books by the assessee can not be construed to have ceased u/s 41(1). The time limit for enforcing a suit for debt is not applicable to them, as the right to legally enforce a suit does not extinguish the debt which can be adjusted by creditor against any other sum of the debtor and by acknowledging each year the limitation gets extended. On other issues also CIT(A) after due verification has given the relief on facts We see no infirmity in the order on these issues, revenue ground is dismissed.
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33. Ground no. 11 : addition of Rs.8,88,997/-outstanding creditors u/s 41(1) 33.1. Qua disallowance u/s 41(1) in respect of outstanding creditors detailed at page 135 of the assessment order amounting to Rs.8,88,997/-,assessee explained that these accounts were pending settlement for various disputes/reasons and were to be settled in due course. They are acknowledged liabilities; therefore, provisions of section 41(1) will not be attracted. Assessing Officer added the amounts under section 41(1) holding that appellant has not provided any correspondence to prove the dispute of the liabilities.
33.2. Aggrieved assessee preferred 1st appeal and put forth its explanation. CIT(A) placed reliance on Hon'ble Delhi High Court in the case of Commissioner of Income TaxVs.Shri Vardhman Overseas Limited343 ITR 408 (Del.)holding that:
"the assessee had not unilaterally written back the accounts of the sundry creditors in its Profit & Loss Account. The liability was shown in the balance sheet as on 31.03.2002. The assessee being a limited company, this amounted to acknowledging the debt in favour of the creditors for purposes of section 18 of the Limitation Act, 1963. The assessee's liability to the creditors, thus subsisted and did not cease nor was it remitted by the creditors. The liability was enforceable in a court of law. The amount was not assessable under section 41(1)."
33.3. Further reliance was placed on the following judgments for similar view has been proposition:-
- C.I.T. vs. Jaipur Jewellers (Exports)187 Taxman 169(Del.)
- C.I.T. vs. G.P. International Limited186 Taxman 229(P&H)
- C.I.T. vs. Smt Sita Devi Juneja187 Taxman 96 (P&H)
- C.I.T. Vs. Eastern Medikit Limited135 ITD 461 (Del.) (Trib.) 141 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
- C.I.T. v Tamilnadu Warehousing Corporation 292 ITR 310(Mad.) 33.4. Ld. CIT(A) for the same reasons as mentioned in ground no 10 held that these being acknowledged liabilities, in the books of assessee, there was justification in adding theseamount u/s 41(1) and allowed the ground. Aggrieved revenue is before us.
34. Lld. DR relied on the order of AO.
35. Ld. Counsel for the assessee contends that, ld. CIT(A) following the decision of the jurisdictional High Court in the case of CIT v. Shri Vardhman Overseas Limited : 343 ITR 408 and other judicial precedents has rightly held that in such a situation, there was no remission / cessation of liability so as to warrant invocation of section 41(1) of the Act. Further reliance is placed on:
- CIT v. Mohan Meakin Ltd. 205 Taxmann 43 (Del.)
- CIT v. Jaipur Jewellers (Exports) 187 Taxmann 169 (Del.)
- CIT v. G.P. International Limited 186 Taxmann 229 (P&H)
- CIT v. Smt Sita Devi Juneja 187 Taxmann 96 (P&H)
- CIT v. Tamilnadu Warehousing Corporation 292 ITR 310 (Mad.)
- CIT v. Eastern Medikit Limited 135 ITD 461 (Del.) (Trib.) 35.1. The order passed by the CIT(A) being in accordance with law, does not call for any interference.
36. We have heard the rival contentions and perused the material available on record. Since these amounts represent acknowledged liabilities.
In view of catena of judicial precedents cited by ld CIT(A) and for the same reasons as taken while deciding ground no 10 we find no infirmity in the order of CIT(A). Same is uphold, revenue ground is dismissed.
37. Ground no. 12: Addition ofRs.15,04,12,669/- u/s 41(1) of the Act.
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37.1. This addition comprises of:
a) Rs.10,86,82,931/- Representing cheques which were issued but not presented for payment on last date of the previous year i.e. 31.3.2009.
b) Rs.4,16,18,900/- Out of Commission payable.
c) Rs.1,50,838/- On account of rent payable.
37.2. Apropos first item, it was explained that a sum of Rs.10,86,82,931/- represented cheques issued but not presented which was credited in the separate account on 31.03.2009. To make bank reconciliation statement more clear, the entries of outstanding cheques were credited to a separate account so that accounts as on 31.03.2009 reflect a true and fair view of the position. These entries were reversed on 01.04.2009 by debiting to such account, i.e. cheques issued but not presented and once again they merged with the respective bank account on which the cheque was issued. Thus by only transferring the entry of cheques issued but not presented and crediting them to a separate account does not tantamount to any cessation of a liability, more so as on the next 1st of April, the same has been reversed. Besides these are acknowledged debts which do not entail to provisions of section 41(1).
37.3. As regards the second item, i.e. outstanding commission payable, to the field-force used for collection of deposits. Assessee follows mercantile system of accounting and consequent thereof the commission was being credited in the account after due deduction of TDS where applicable. AO however made an addition of Rs.4,16,18,900/- u/s 41(1). 37.4. Apropos third item it was explained to be rent payable for which provision has been made as per mercantile system of accounting. Mode and time of payment of rent was an issue between the landlord and the tenant.
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The rent is payable, pursuant to an agreement in respect of the premises being used for its business purposes and the expenses have been duly allowed. Outstanding acknowledged rent can not be termed as cessation of liability 41(1). AO however made the addition.
37.5. In 1st appeal, CIT(A) relying on the same reasons and case laws as mentioned for grounds no 10 and 11 held that, it is a well settled law that till the time debt is acknowledged in assessee's books of account it cannot be disallowed u/s 41(1).
Aggrieved revenue is before us.
38. Ld CIT(DR) relied on the order of AO.
39. Ld counsel for the assessee contends that CIT(A) duly considered that:
a) Amount of Rs.10,86,82,931 represented cheques issued but not presented for payment as on the last date of the previous year. The same were credited in a separate account at the end of the relevant year and subsequently reversed on 1.04.2009. An entry entered in books only for the purposes of management accounting can not result in any cessation of liability so as to attract the mischief of section 41(1) of the Act;
b) Commission payable to field force is duly acknowledged liability in the books of accounts. There was no basis to hold that liability in this behalf has ceased.
c) Amount of Rs. 1,50,838 represents rent payable to sister concern, which is duly acknowledged as liability.
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For the reasons adopted by ld. CIT(A), the does not warrant any interference.
40. We have heard both the parties, facts and issues in question in principle are similar to ground no 10 & 11, following our order on these grounds revenue ground is dismissed.
41. Ground13:Disallowance of Rs 6,91,230/- in relation associate concerns:
41.1. AO found that many of the bills debited by assessee under the head Telephone/Travelling expenses were in the name of Sahara Parivaar or Sahara India. Assessee explained that these related to visits of various officers who are posted in its branch/region/area/zone offices. Assessee was using M/s. Sahara India's total infrastructure and branches, therefore, in most of the cases their address is mentioned as c/o Sahara Parwar. There is no entity in the group by the name of Sahara India Pariwar. In public perception group concerns are commonly known as Pariwar. Many times vendor make the bills in this name, however the fact remains that these services are used by the assessee. Two bills of Rs. 16,044/- and Rs. 71,318/-
drawn by M/s Sahara Global and the same relates to traveling expenses incurred by assessee's employee and the bill is debited in its books. Assessee also filed a chart setting out the reasons in respect of each item of listed expenditure to demonstrate that this expenditure are relatable to its employees along with their employee code no. and copy of form no. 16 issued to them.
41.2. AO however disallowed this expenditure as not incurred for assessee.
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41.3. In first appeal CIT(A) held that expenses claimed are actually incurred on appellant's employees, explanation about exigencies which lead to use name ofSahara India in the bills was accepted and addition was deleted. Aggrieved revenue is before us.
42. Ld CIT(DR) relied on the order of AO.
42.1. Assessee's counsel in reply contends that ld CIT(A) after verification has given a clear finding of fact that the expenses were incurred by and on behalf of the employees of the appellant and were, therefore, incurred wholly and exclusively for its business. Ld. CIT(A) has taken into account the evidences including a chart setting out the reasons as to how they were relatable to the business of the appellant. Claim is further supported by code numbers of employees and Form -16 issued by the appellant. The order of the CIT(A) being based on factual findings and proper reasons deserves to be upheld.
43. We have heard the rival contentions and perused the material on record. From the factual verification and findings of ld. CIT(A) it clearly emerges that the expenditure in question was incurred wholly and exclusively for the business of the appellant on its employees and expenses are actually incurred by the assessee. There is no allegation that entity c/o whom the bills are issued has doubly claimed it. Consequently, we find no infirmity in the order of CIT(A) on this issue, which is upheld. This revenue ground is dismissed.
44. Ground no. 14: Disallowance of expenditure in relation to disproportionate allocation of advertisement expenses:
44.1. Special auditor pointed out that, for the BCCI sponsorship contract, 10% expenditure is allocated to the assessee, wherein other advertisement a/c i.e. as for other consultancy charges paid to Percept (debited in retainer 146 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
ship fees account) assessee has allocated 25% of the expenditure amounting to Rs.1,36,51,740/-. Out of same Rs 1,01,12,400/- has been booked under the head retainer ship fees whereas Rs 35,39,340 has been booked under the head advertisement. The assessee was required by AO to justify that if allocation in case of BCCI is 10%, then in the other case why the expenditure allocation can be allowed at 25%. Besides, why advertisement expenses in respect of payment to M/s B.C.C.I. has been booked only in two companies and not of the other group companies, consequently Rs 81,91,044 were propose to be disallowed under section 37.
44.2. Assessee vide letter dated 30.07.2012 explained that B.C.C.I. had entered into an agreement with M/s Sahara Airlines Limited(SAL) on 19.02.2005 for sponsorship of the Indian Cricket Team to display logo Sahara on their uniform. Subsequently on 06.01.2006 SAL approached M/s B.C.C.I. and requested that it may be permitted to assign the acquired rights to other concern as at that time negotiations for takeover of M/s Sahara Airlines Limited by M/s Jet Airways were in progress. B.C.C.I. acceded to the request to allow SAL to assign the right to any group concern. Pursuant thereto SAL assigned this right to assessee to carry on and continue the agreement. It was apprehended that R.B.I. intervention may result in curtailing of assesses business, therefore, it approached M/s Sahara India Commercial Corporation Limited(SICCL) which at that time, was the major business concern of the group. It was engaged in the business of development of infrastructure projects of Ambey Valley City, with Sahara City Homes and other housing projects through various other group concerns. Maximum brand value of Sahara Logo on Indian Cricket Team was useful for benefit of SICCL, consequently an agreement was entered into between M/s Sahara India Financial Corporation Limited the assessee 147 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
company and SICCL on 20.02.2006.It was agreed that 10% of the payment to BCCI would be borne by assessee and balance 90% will be borne by SICCL. This agreement is valid from 20.02.2006 onwards and was also applicable during the relevant previous year. There was no other company wherein brand value for advertising with BCCI was required and it was a management decision to share these expenses between assessee and SICCL. This being a commercial/ business decision taken by the Board of both the companies and the agreement was contractually binding, therefore, there is no justification in drawing any adverse inference in this regard.
44.3. It is well settled law that revenue cannot claim to put itself in the arm chair of a business man and assume the role as to how much expenditure should have been incurred by whom. There is no law which can enable revenue to re-write and substitute the terms of parties to a valid and binding agreement.
44.4. As regards allocation of expenses of 25%, they stood altogether on a deferent footing and related to neon sign boards and retainership of M/s Percept Finserve Pvt. Ltd. and M/s Percept H. Pvt. Ltd. for other advertisement modes. For a consolidated fee they arrange advertisement for group concern. It has been agreed amongst major beneficiaries group concerns that the same shall be shared equally. Consequent thereto 25% of the expenditure is shared by assessee and the balance 3/4th expenses are shared by other 3 concerns viz. M/s Sahara India, SICCL and M/s Sahara India Mass Communication respectively. Under these circumstances the expenditure is directly, wholly and exclusively attributable to assessee's business. Since conditions of section 37 are fulfilled, there is no justification to restrict the same to 10% on assumptions and comparing BCCI fees with 148 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
altogether deferent mode of advertisement i.e. neon sign boards and consultancy.
44.5. The reply of the assessee was not found to be satisfactory by AO. It was held that it was not following a consistent system of accounting and cost allocation resulting in disallowance of Rs 81,91,044/-. 44.6. In first appeal, CIT(A) considered the turnover of group companies which were beneficiaries in advertisement of Indian cricket team. Reference was made to CIT(A)s order in the case of associate concern Sahara India Mass Communication (SIMC) for AY 2005-06 vide order dated 17.12.2012 as under:
"9.4 I have considered the assessment order and the submissions filed by the appellant. The fact of expenditure is not disputed. The only dispute is regarding the nature of nexus between the expenditure and the business of the five / six entities belonging to the Sahara Group, including the appellant firm, which according to the AO is not established. It is a well- known fact that in advertisements of Sahara Group what is projected is the brand "Sahara Pariwar". This is supposed to advance the commercial interest of the group as a whole. It is not the case that any company- specific advertisements is charged under this head. Therefore, the group had apportioned 1/6th of such expenditure to its following six concerns, viz. (i) Sahara India, (ii) Sahara India Mutual Benefit Co. Ltd., (iii) Sahara India Airlines Ltd., (iv) Sahara India Mass Communication appellant), (v) Sahara India Housing Ltd. (later known as SICCL) and (vi) Sahara India Financial Corp. Ltd. (SIFCL). This was in accordance with revenue's assessment order dated 23.04.1999 for AY 1996-97 in the case of SIFCL. Following the revenue's above order, the group has been apportioning the expenditure under this head equally among these six entities. After the takeover and merger of Sahara India Airlines Ltd. with Jetlite, this expenditure is now being apportioned equally (1/5th each) among the remaining five entitiesof the group, including the appellant. This was accepted by both the revenue and the Sahara group and, 149 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
therefore, thisposition had attained finality. Thereafter, in the absence of any evidence to controvert the claim of the appellant, for the revenue to raise the plea that the nexus between the advertisement expenditure on "Sahara Pariwar" is not proved is, in my opinion, not appropriate and tantamount to the revenue going back on its decision. It has also been pointed out that in other assessments relating to various entities of the group, such as SIFCL (AYs 2002-03 to 2004-05) and Sahara India Commercial Corporation Ltd (SICCL, AYs 2005-06 & 2006-07); no such disallowance had been made. The rule of consistency will, therefore, also come into play. In this view of the matter, the disallowance made is not legally tenable and, therefore, this ground of appeal is allowed. Appellant gets relief of Rs.6,46,13,848/-." ...............
It now appears that the expenditure on advertisements is being shared among four group concerns equally @ 25%, viz. Sahara India (firm), SIMC and SICCL, apart from the appellant. Earlier, the advertising expense was shared by Sahara India Mutual Benefit Co. Ltd. also, which now stands merged with SICCL. As equal apportionment is being followed according to an earlier decision of the revenue, no disallowance should be made by the revenue at this stage. This ground of appeal is allowed. Appellant gets relief of Rs.81,91,044/-."
Aggrieved revenue is before us.
45. Ld. DR relied on the order of AO.
46. Ld. Counsel for the assessee contends that ld. CIT(A) deleted the above disallowance relying upon his own order dated 17.12.2012 in the case of Sahara India Mass Communication Ltd. in appeal No. 75/09-10 for assessment year 2005-06. Department had in the past accepted that expenditure on advertisement incurred on advertising the brand "Sahara Pariwar" and was allowed to be apportioned @ 25% to the group companies including the appellant:
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46.1. Since the order passed by ld. CIT(A) is based on proper verification and appreciation of facts about agreement, role of group concerns and expenditure was incurred wholly and exclusively for assesses business, it deserves to be upheld. Besides the orders have been accepted by revenue relying on the past history of the case; on the principle of consistency also CIT(A)s order deserves to be upheld.
47. We have heard the rival contentions and perused the material available on record. In our considered view AO was not correct in comparing BCCI fee with neon sign advertisement. Both modes are entirely deferent and extent of one mode of expenditure cannot be applied to other on surmises and conjectures. CIT(A) has given detailed and justifiable reasons to allow them. Besides his orders for earlier years have been accepted by the department, there exist no new facts or circumstances to take another view. In view thereof this ground of the revenue is dismissed.
48. Ground no. 15 - Disallowance of sponsorship payment made to BCCI 48.1. Ld. DR argued that as per grounds of appeal raised before the ld.
CIT(A), the appellant has not agitated the issue of additional expenditure on sponsorship of Indian National Cricket team. Therefore, ld. CIT(A) should not have granted additional relief of Rs. 21,86,37,443/-. Assessee has also admitted that the relief granted by the ld. CIT(A) is as a consequential relief due to associate companies appellate order. In the absence of a specific ground in assessee's appeal, CIT(A) has erred in providing additional relief.
48.2. Ld. Counsel for assessee is heard who claims that CIT(A) allowed the additional relief suo-motu as a consequence to this, order of a group concern, namely SICCL (Appeal No.65/12-13 for AY 2009-10) vide order dated 28.02.2013, holding that expenditure on sponsorship to BCCI had to 151 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
be apportioned in the ratio of turnover of the various group companies. On that basis, the CIT(A) following this order held that the appellant was entitled to additional deduction of Rs.21,86,37,443 on the basis of allocation of expenditure on turnover basis. The SICCL is in appeal before the Tribunal against the above CIT(A)'s. In these facts the order of the CIT(A) on this issue may be set aside to the assessing officer with the direction to allow relief, if any, in the light of or by ITAT decision in the appeal of SICCL. 48.3. After hearing both the parties, we are of the view that assessee group consists of various concerns and mutually sharing expenditure on various parameters. In the case of SICCL it has been held that apportionment was disproportionate and it was disturbed. As it had a consequent effect on assesses share, CIT(A) endeavored to a holistic view. In our view being appellate authority he has the power to modify the assessment including granting relief which is found to be due to the assessee though not specifically claimed. However the distribution will depend on the outcome of ITAT judgment, since consequential relief may be awarded. In the interest of substantial justice we set aside the issue back to the file of AO. This ground of the revenue is thus allowed for statistical purpose.
49. Ground 16: Pre-acquisition interest incurred at the time of purchases:
49.1. SA found that the a sum of Rs.11,86,24,108.95/- being pre-acquisition interest incurred at the time of purchase of securities is claimed as revenue expenditure in accordance with AS-13. As per Supreme Court ruling in the case of CIT v Vijaya Bank Ltd 187 ITR 541, pre acquisition interest is part of cost of securities and cannot be reduced from interest earned. AO asked assessee as to why expenditure of Rs.11,86,24,108.95 in this behalf should not be disallowed.
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49.2. Assessee replied that it is following Accounting Standard-13 in respect of investment as prescribed and laid down by the ICAI. The observations of the Hon'ble Supreme Court in the case of Vijaya Bank were not applicable to its case for which detailed reasoning was offered. Explanation regarding CBDT circular and AS-13 was filed. 49.3. AO held that though CIT (Appeals) has deleted similar disallowance in earlier years but department has not accepted this decision and further appeals on this issue are pending. In this case reliance is placed on the judgment of the Hon'ble Supreme Court in the case of C.K. Gangadharan & another vs. CIT reported in (2008) 304 ITR 61, holding "that the department has not preferred an appeal in one case would not operate as a bar for the department to prefer an appeal in another case where there is just cause for doing so or it is in the public interest to do so for a pronouncement by higher court when divergent views are expressed by the Tribunals or the High Courts. Thus the claim in this regard was disallowed, adding a sum of Rs 11,86,24,108.95 to income of the assessee.
49.4. In first appeal, CIT(A)referred to his order dated 15 03.2013 in the case of Sahara India Life Insurance Corporation Ltd. (SILICL) in Appeal No.340/11-12 for AY 2004-05, holding as under:
"6.2 I have considered the assessment order and the submissions made. The judgment of Hon'ble Supreme Court cited by the AO in the case of Vijaya Bank Vs. Addl. CIT (187 ITR 541) will not be applicable to the present case as it was rendered in the context of chargeability of income under the head 'interest on securities' which has since been removed from the law, and also for the reason that the said decision was applicable in the case of banking companies which have inter- bank borrowings, at rates called 'LIBOR', whereas the present case is of a company in the insurance business to which inter- bank borrowings and interest rates are not applicable.
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6.3 The appellant had invested in Govt. securities, of the central as well as state government, as prescribed by the RBI guidelines. These instruments, also known as guilt-edged securities, are dated interest bearing bonds, traded freely in the money market. When an investor purchases these securities from the open market, the cost paid is the price of the bond increased by the interest accrued on the instrument from the date of issue to the date of purchaseand adjusted with the discount prevailing in the market based on demand and supply. Therefore, the appellant rightly credited the face value along with accrued interest on the bonds to its balance-sheet. The effect on P & L account would be a reduction of the interest component of the cost paid for the bonds. Thus, there was no infirmity in the method of accounting adopted by the appellant, and the income and the expenditure with regard to the interest accrued and paid on Govt. securities was properly accounted for in the P & L account. In this view of the matter also, the amount cannot be brought to taxation." ............
19.3 Following my own order in associate group case (M/s Sahara India Life Insurance Corporation Ltd.; Appeal No.340/11-12; AY 2004-05; order dated 15.03.2013) on similar issue, and following the earlier orders in the appellant's own case as well as case laws relied upon, I hold that addition on account of interest on securities relating to pre-acquisition period is not sustainable and is deleted. Appellant gets relief of Rs.11,86,24,109/-.
Aggrieved, revenue is in appeal before us.
50. Ld Dr relied on the order of AO.
51. Ld counsel in reply contends that in view of the relevant factors like RBI guidelines, CBDT circulars, ratio of above judicial precedents and consistent accounting system followed by the appellant. These securities are purchased on cum-interest basis i.e. cost plus interest due, which is unpaid till the date of purchase. The interest subsequently received thereon is 154 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
credited to interest a/c, like wise interest paid in advance to seller is debited to interest a/c. In other words supposing assessee purchases these securities "on minus interest basis" in that case it will have to pay only the cost and subsequent interest due will be handed over and become income of the seller. On same analogy the amount paid for transaction, includes actual cost of security plus the interest receivable thereon which can be calculated, as securities are fix interest bearing. Thus both components are worked out separately and do not become consolidated price merely because they are paid under the same agreement. By this established commercial practice, assessee pays the seller amount receivable as interest on such securities in advance, it retains the character of advance interest paid simplicitor and does not assume the nature of component of cost of security. It is a widely used practice in this trade. This advance interest is on revenue a/c to be earned there on when received. Therefore, rightly the cost portion is debited to securities investment a/c and interest portion up to the date of purchase, to the interest a/c and offered to tax as revenue of the year of receipt. Whenever the securities are sold, the profit / loss arising thereon, has been offered consistently under the head "profit and gains of business or profession". The income is computed by deducting from the sale value, the purchase price of the investment less interest accrued / received up to the date of purchase. Interest received up to the date of sale in respect of securities purchased cum-interest is offered for tax as business income on sale of security. This is recognized matching principle of accounting which is also a recognized accounting practice, consistently followed by the assessee supported by judicial precedents in following cases:
- American Express International Banking Corporation v. ACIT: 258 ITR 601 (Bom.).
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- CIT v. CITI Bank NA. 130 Taxman 334 (Bom)
- CIT v. Nedungadi Bank Ltd. 264 ITR 545 (Ker)
- CIT v. South Indian Bank Ltd. 241 ITR 374 (Ker) 51.1. Ld counsel contends that the claim is also backed by doctrine of consistency method followed by the appellant and CIT(A)s several orders deleting the additions in A.Y. 1999-00, 2000-01, 2001-02, 2002-03, 2003-04 & 2004-05. The addition has been repeatedly deleted by the CIT(Appeals) year after year by verification of facts, consistent treatment followed by the appellant & applying the judicial decisions on the issue in the cases of the appellant and other associated companies. The assessing officer has failed to appreciate the components of cost of securities and distinctly calculated unpaid interest thereon. It has been erroneously held both deferent components to be one. Addition has been repeated solely by following his own earlier orders only. The order of the CIT(Appeals) is relied on.
52. We have heard the rival contentions and perused the material available on the record. In our considered view, the amount paid for acquiring securities consists of two distinct elements, cost price of the security and future interest due thereon. Due to advance payment of interest some discount etc. is transacted depending on the market conditions qua the interest element. The amount paid thus contains these two elements. After acquisition assessee on matching principle debits the cost of security to investment a/c and interest component to interest a/c, the due interest when received is credit to interest a/c. The whole issue has arisen as AO failed to appreciate the nuances of components of amount paid for transfer of securities. Instead of appreciating two distinct components both have been held to be attributable to cost, which in our view is not correct. In 156 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
consideration of entirety of facts and circumstances we find that CIT(A)s order is based on correct appreciation of facts and application of judicial precedent. Therefore, no interference is called for. Revenue ground is dismissed.
53. Ground no. 17 (mistakenly typed as 18)- Disallowance of Expenditure in relation to Prior Period Expenses:
53.1. Brief facts are: AO found that in 5 cases amounting to Rs 13,54,009/-
the expenses pertain to prior period, assessee was requested to justify it. Assessee in its reply contended that
i) first item is a bill of Voltas ltd. being maintenance charges for the period 01.03.2008 to 31.03.2008. The invoice was received in this year, after verification, payment was made on 01.07.2008 after deduction of T.D.S. As the bill was received and acknowledged during the year the expenditure crystallized in this year, therefore, it is allowable.
ii) the second item represents air traveling expenses for 28.03.2008 and 31.03.2008, these bills were given by the travel agent on 10.05.2008 and were allowed on 14.05.2008 the liability crystallized during this year, hence allowable.
iii.) Delivery of software is dated 10.07.2008, bill is dated 17.07.2008 (it only mentions date of agreement as 17.11.2004), bill was approved on 15.11.2007. The delivery of the software is made in the current year only.
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iv.) Rs. 5,05,442/- and Rs. 34,567/- are against municipal taxes, it has been already debited to prior period expenses in the enclosure IX of the tax audit report.
53.2. The reply was found to be unsatisfactory and disallowed by AO holding that these items represented prior period expenses. 53.3. In first appeal CIT(A) considered the facts and held that issue depends on the year of crystallization of liability. The amounts may relate to the earlier period, the finalization and crystallization of the expenditure has taken place in this year. The appellant has been recognizing expenses on accrual and crystallization basis. This policy has been consistently followed by the appellant over the years. The factum of expenses has not been disputed by the revenue. The appellant is a company having several branches spread across the country and accounts consolidation may be a genuine problem. Further, there is little chance of deriving any tax advantage by shifting expenses from one year to another in view of the same rate of tax. Therefore, on principle of consistency revenue neutrality and judicial precedents cited by assessee, claim was allowed.
54. Ld DR relied on AO's order.
55. Ld counsel contends that assessing officer disallowed an amount of Rs. 8,14,000/- as prior period expenditure as under:
- Bill of M/s Voltas Ltd. - Rs.20,365
- Travelling expenses - Rs.51,135
- Bill of M/s Credence Analytics - Rs.7,02,500
55.1. Apropos Voltas bill assessee received bill of Rs.1,22,192 during the relevant previous year relating to the period 1.3.2008 to 31.8.2008, i.e., for a period of six months. The assessing officer on proportionate basis 158 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
disallowed Rs.20,365 for the period 1.3.2008 to 31.3.2008, on the ground that the same related to the preceding year.
55.2. The second bill represents expenditure on travelling which was undertaken between 28.3.2008 to 31.3.2008. The bill was raised by the travel agent in the relevant previous year for the period 28.3.2008 to 06.04.2008. AO disallowed the entire amount of Rs.51,135 on the ground that the travel was undertaken in the preceding year, the expenditure pertained to that year.
55.3. Apropos M/s Credence Analytics, it is raised by the vendor in this year on completion of Phase III of the implementation as Software and customization charges, in July, 2008. The assessing officer, however, treated the same as prior period expenditure solely on the basis that the bill contains reference of agreement dated 07.11.2004 and approval dated 05.11.2007.
55.4. The CIT (Appeals) deleted the above disallowance on the basis that the liability in respect of the aforesaid amounts had crystallized during the relevant previous year on receipt of bills by the assessee, even though it may pertain to earlier period. In coming to this conclusion CIT(A) relied on following cases for the proposition that liability is deductible in the year of crystallization thereof even though such liability related to the earlier years:
- CIT v. Exxon Mobil Lubricants P. Ltd: 328 ITR 17 (Del.)
- Saurashtra Cement and Chemical Industries Ltd. v. CIT: 213 ITR 523 (Guj)
- CIT v. Modi Pon Ltd.: 334 ITR 102 (Guj.)
- ACIT v. Birla Soft Ltd.: 46 SOT 437 (Del.) 55.5. That apart, it is submitted that the question of allowability of prior period expenditure in essence a revenue neutral exercise as held in the following cases:
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- CIT v. Triveni Engineering & Industries Ltd: 336 ITR 374 (Del.)
- CIT v. Shri Ram Pistons and Rings Ltd.: 174 Taxman 147(Del)
- CIT v. Nagri Mills Co. Ltd.: 33 ITR 681 (Bom.) 55.6. The order passed by the CIT(Appeals) deserves to be upheld and is relied on.
56. We have heard the rival contentions, in our view the travelling bills were submitted, approved and paid by the assessee in this year. The software was delivered in this year, merely because periodical supply or up gradation of software was governed by an earlier agreement, will not detract from the fact that it is supplied in this year. On other issues also we see no infirmity in the orders of CIT(A). The liabilities crystallized in this year and disallowances being revenue neutral as the assessee and department are in perpetual litigation. No interference is called for. This revenue ground is dismissed.
57. Ground no. 18:Disallowance of Expenditure in relation to Write off of Principal Amount of Ganesh Benzoplast NCD's:
57.1. Brief facts are: AO found that a sum of Rs.70,13,750/- debited under the head sundry balances written off is on account of settlement of claim with M/s. Ganesh Benzoplast P Limited (GBPL) NCD's as is of principal amount and not to any income, provisions of 36(1)(vii) do not apply and cannot be allowable as a bad debt.
57.2. Assessee replied that it is a RNBC governed by RBI directions and undisputedly making of such investments is a part of its business activities. In pursuance of business it invested Rs. 5 crore on 10th May 1997 in 19% 160 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
Non Convertible Debentures of GBPL due for redemption on 07th July 2002. The Debentures were secured by pari passu first charge on company's fixed assets. GBPL regularly serviced the interest upto 07th October 2000 but defaulted thereafter. GBPL became a sick industry and was registered with BIFR on 24-11-2006. In this bleak scenario assessee entered into a One Time Settlement (OTS) according to which GBPL agreed to pay an amount of Rs. 3.50 crores in five equal yearly installments. It once again defaulted in making the payment as per the terms of the OTS and paid only a sum of Rs.69,86,250/- as against the due amount of Rs. 1,28,62,500/- upto April 2008. GBPL once again requested to settle the dues by paying an additional amount of Rs. 2.10 crores towards the full and final settlement. Assessee agreed on the condition that the same shall be paid on or before 31st July 2008, which paid Rs. 2.10 crores on 31st July 2008 consequently remaining Rs. 70,13,750/- was proposed for are write off.
57.3. Board of Directors approved the proposal of write off and pursuant thereto the amounts were written off in the accounts in nature of trade advance. They have been written off on satisfaction of conditions of both sections. 36(1)(vii) & 36(2) of the Income Tax Act and are fully allowable deduction.
57.4. AO however held that reply of the assessee was not satisfactory as it has been accepted that this money was an investment as per RBI guidelines. Even if the submissions of the assessee are accepted then also this amount should have been written off in the financial year 2006-07 and not the current financial year as the first OTS with GBPL was approved on 24th November 2006 and the OTS agreed in April 2008 is just an extension of the same. Thus Rs 70,13,750 was added back.
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57.5. In first appeal CIT(A) held that, assessee was carrying on business of investment, during the course thereof the amount of Rs. 5 crores was advanced as a trade asset and interest was to be earned thereon. If such trade advance becomes bad, sections 36(1)(vii) read with section 36(2) allow such write off as a permissible deduction. After 1st April, 1989 it is not necessary for the assessee to conclusively establish that the debt or business advance, actually has become bad and irrevocable. It is enough if this amount is written off as irrevocable in the accounts of assesses {TRF Ltd. v CIT [2010] 323 ITR 397 (SC)}. CIT(A) allowed the claim of write off and the ground of appeal was allowed.
Aggrieved revenue is before us.
58. Ld. CIT(DR) relied on AOs order.
58.1. Ld. Counsel for assessee contends that the assessing officer disallowed the above write-off on the grounds that (a) the write-off should have been made in financial year 2006-07 when the first OTS was entered with M/s. Ganesh Benzoplast Ltd.; and (b) that the amount written off was in the nature of investment and not trade debt / trade advance. Ld. CIT(A) verified that interest accrued on these GBPL debentures was duly offered to tax in the earlier years and, therefore, the conditions in sections 36(1)(vii) read with 36(2) of the Act relating to allowability of bad debts write off were fully complied with. Relying on the decision of the Supreme Court in Vijaya Bank Ltd. v. CIT: 323 ITR 166 and TRF Ltd. v. CIT: 323 ITR 397, it was submitted that deduction allowable in the year of write off. 58.2. The CIT(Appeals) accepted that the investment in non-convertible debentures of GBP was made in course of business as a RNBC, the investments held by the appellant were in the nature of stock-in-trade. Besides, it is only in this year the amount finally became bad and is written 162 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
off. The decision of the CIT(Appeals) being in accordance with law does not warrant any interference.
59. We have heard the rival contentions and perused the material available on record. The first question to be decided is whether investment of Rs. 5 crs. In GBPL was trade investment or advance or not? As per the facts on record, assessee offered the interest as business income. As a RNBC it has to carry on the business of investment in RBI approved investments. This fact has not been disputed by AO, in these facts and circumstances CIT(A) is right in holding it to be business investment. Any loss of business investment or stock is allowable as write off or loss. Besides, reliance on Hon'ble Supreme Court in the case of TRF ltd (supra) is justified. It is clear that it is in this year only the advance is finally treated as bad and written off, therefore, it is eligible to be allowed in this year. This ground of the revenue is dismissed
60. Ground no. 19: Disallowance of provision for diminution in investment:
60.1. The assessee claimed a sum of Rs.46,26,500/- as provision for diminution in investment. AO was of the view that assessee treated its income from securities, fixed deposits and loans and advances as business income and not capital gains. In that case securities are to be carried at cost or market value whichever is lower. The claim of diminution was not in line with consistent method of accounting.
60.2. Assessee explained that in fact there is no adverse impact of taxable income. The effect of the entry was explained that by debiting the difference between market value and the cost to P/L a/c., consequently, the value of securities reflected in the accounts reflect at market rates. It was sought to be 163 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
explained by an example - if the cost of the closing stock is say Rs. 1,000/- while its market value is only Rs. 900/-. There are two ways to reflect the reduction in the value of Rs. 100/-. The first way is to show the value of the closing stock at Rs. 900/-. Thus Rs. 100/- will be automatically absorbed by the gross profit and it will become lower by Rs. 100/-.
60.3. By showing closing stock in trading account at Rs. 1,000/- and debiting the account on diminution of value of investment by Rs. 100/- and charging it to the P/L A/c. It will work out real taxable income of the year. In the balance sheet, in both cases the closing stock will be reflected at Rs. 900 (Rs. 1000-100).
60.4. It was pleaded that the reduction/ diminution in value has been claimed following this proper method and calls for no adverse inference on this count.
60.5. AO however was of the view that assessee's stand was inconsistent if it is compared with the stand in write off effected in the case of GBPL, claim was disallowed.
60.6. In first appeal CIT(A), allowed the claim considering that assessees business was to raise deposits from the public and to deploy them in investments agreeable to RBI. The income from such investments is treated as assesses business income and they are in the nature of stock-in-trade. It is settled law that diminution in the value of stock-in-trade is an allowable business deduction. AO cannot deny it on the ground that entries were posted in different manner. Besides GBPL was case of write off of bad business advance and valuation of closing stock were two separate issues. The impact on book results was same as proposed by SA, AO and assessee.
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Thus market value and consequent entries made by the assessee were correct i.e. dicrease in the value of business investments which is an allowable business expenditure u/s 28 or u/s 37(1). In any case, revenue was adequately protected by the write back of increase in value up to cost-level, and booking of income at sale minus cost on disposal of the asset. Aggrieved, Revenue is before us.
61. Ld. CIT(DR) relied on the order of AO
62. Ld. Counsel for the assessee submits that As part of its business, the appellant holds investments in various securities, which are, in the nature of stock-in-trade and are consistently valued at lower of cost or market value. The AO disallowed the provision for diminution in the value of current investment on the ground that since the appellant had treated all income earned from investments as business income, there was no question of allowing deduction for provision of diminution. 62.1. On appeal, it was submitted before the CIT (Appeals) that the appellant being a RNBC has to make "directed" investment in Government securities, mutual funds, FDRs as per the prescribed limits. In terms of the mandatory Reserve Bank of India Prudential Norms read with Accounting Standard-13, current investments are to be valued at lower of cost or market value and diminution with reference to cost thereof has to be debited to the profit and loss account. It was further pointed out to the ld. CIT(Appeals) that this method has been consistently followed by the appellant since inception.
62.2. Ld. CIT(Appeals) agreed with assessee and deleted the disallowance, held as under:
"22.3 I have considered the rival claims. One part of the business of the appellant is to raise deposits from the 165 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
public. Another part of its business is to deploy the deposits raised in investments according to RBI directives applicable to RNBCs. The income from such investments, and the interest paid to the public on the deposits, form the mainstay for the amounts credited or debited to the P&L account. The income from the investments, both by way of benefits from the investment or disposal thereof, are accounted for as income under the head business. Therefore, these investments are in the nature of stock-in-trade for the business of the appellant. It is trite that diminution in the value of stock-in-trade is an allowable business deduction. Further, the diminution in the value of investments further impacts the balance sheet of the appellant, wherein the value of the investments, at cost or market value, gets reduced. In this view of the matter, I am of the opinion that diminution in the value of business investments is an allowable business expenditure u/s 28 or u/s 37(1) in the context of the appellant a RNBC. It is not in the nature of bad debt allowable u/s 36(1)(vii) and 36(2) only when it is written off in the accounts, as opined by the revenue, because a realizable debt written off and reduction in value of an investment are two completely different things. In any case, revenue is adequately protected by the write back of increase in value up to cost-level, and booking of income at sale minus cost on disposal of the asset. In the circumstances, I am inclined to allow the claim of the appellant. This ground of appeal is allowed. Appellant gets relief of Rs.46,26,500/-."
62.3. Ld. Counsel relied on following decisions, wherein it has been held that current investments are valued at lower of cost or market value:
- CIT v. State Bank of Patiala: 212 ITR 59(Stat.)
- American Express International Banking Corp. v. CIT:258 ITR 601 166 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
62.4. The order passed by the CIT(Appeals) being in accordance with the laws, mandatory prudential directions of the RBI and applicable accounting standard, in consonance with deserves to be upheld.
63. We have heard the rival contentions and perused the material available on record. It emerges that these investments were held as stock-in-
trade and either ways the income thereon i.e. profits from the investment or disposal thereof, are accounted for as business income. Assessee follows this method consistently. Looking at the entirety of facts and circumstances of the case, we are of the opinion that diminution in the value of business investments is an allowable business expenditure u/s 28 or u/s 37(1), it is not a case of write off of bad debt as tried to be compared by AO with GBPL. CIT(A)s is right in holding that in any case, revenues interest is protected by the write back of increase in value up to cost-level, and booking of income at sale minus cost on disposal. Reliance placed on CIT v. State Bank of Patiala and American Express International Banking Corporation is justified. In view thereof we uphold the order of CIT(A), revenue ground is dismissed
64. Ground no 20:& assessee's Ground no. 4(a) to 4(e): Disallowances u/s 40(a)(ia) expenditure on which TDS is not deducted.
64.1. On special auditor observations AO was of the opinion that on interest of Rs.2,20,26,731/- paid to branches TDS was not been deducted. On test basis it was found that the ratio between total interest and on which TDS was not deducted came to about 12.78%. The assesse was asked to furnish details of TDS payments and explanation in this behalf. 64.2. Assessee contended that observations are not correct for the following reasons :
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1) It is observed that few accounts have been mentioned by the auditors in their list at two places meaning thereby that there is duplicacy in their reporting of that expenditure.
2) There are number of accounts in which the auditors have pointed out non-deduction of tax at source but in fact in these accounts tax has been deducted at source and duly deposited with the Government Treasury.
3) There are number of account which have been pointed out by the auditors in which no tax has been deducted at source in their list which payments were not subject to deduction of tax at source in light of the facts that the depositors had submitted form no. 15G/15H in respect of interest for non-deduction of tax at source.
4) There are number of accounts in which the amount mentioned by the auditors is incorrect.
5) There are number of accounts in which there is an error in mention of the account numbers because of which we have not been able to verify the veracity of the auditor's statement in respect of TDS on such accounts.
6) There are number of cases where even clubbing of accounts of person of same name and address amount of interest is less then Rs. 5,000/-.
64.3. Proper TDS deduction has been made wherever it was applicable and stands deposited in the Government Treasury also. TDS returns have been 168 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
duly filed and the assessment of TDS is completed by the department thus, there is no justification in drawing any adverse inferences.
64.4. Payment made to M/s. Bloomberg Services (India) Pvt. Ltd. is in the nature of subscription to Data Base and not for carrying out any work pursuant to any contract and is not covered u/s 194C. It was opined by legal advisors also that no contractual services were rendered by Bloomberg, therefore, there is no TDS liability, no disallowance u/s 40(a)(ia) was called for.
64.5. Apropos payments made to M/s. Sahara Hospitality Ltd.(HPL) for arranging meetings and conferences, a sum of to Rs. 88,312.71/- ( wrongly mentioned as Rs. 8,77,797.51/- by SA) reference was made to three bills. The charges are mainly for room rent or business centre use etc., no contract has been entered into between the assessee and HPL. This expenditure is incurred at prevailing rates and not under any contract.
64.6. Payment of Rs.2,07,337/- to M/s. Amby valley Ltd. Represents charges for rooms and fooding etc., paid by asssessee as a regular customers and not under any contract. Payment of regular lodging and boarding are not liable for TDS. Consequently section 40(a)(ia) is not attracted. 64.7. AO however did not agree with the assessee and by detailed observations (they are not reproduced for brevity as they have been dealt by ld. CIT(A)) held that these payments are covered by section 40(a)(ia) due to non deduction of TDS. Thus the total amount of Rs 150,49,46,533/- (Rs 150,38,35,341/- +Rs 9,03,855/- +2,07,337), was added to the income of the assessee.
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64.8. In first appeal, assessee contended that special auditor has made mistakes as in most of the cases interest was below Rs.5,000/-. In cases of 23 lakh depositors where declarations for non deduction of TDS were filed have been ignored. Clubbing of interest is not possible as there are inter- branch deposits, and it is not possible even when there are intra-branch deposits by different agents or due to passage of time or the depositors investing in different types of accounts / schemes. The appellant further contended that TDS assessments on its liabilities have been made by the Income Tax Department itself and no adverse view has been reported in this behalf on TDS compliance.
64.9. Payments to M/s. Bloomberg are for subscription to Data Base, it is in the nature of purchase of a service and thus no TDS was liable to be deducted. Payments of Rs.2,07,337/- to M/s. Aamby Valley Ltd., were on account of booking of rooms and conference hall for holding assesses meetings as regular guest/customer from time to time. Rs.8,77,797/- to M/s. SHL were for arranging them. Assessees claim that these payments were at market rates and not in pursuance to any contract liable for TDS u/s 194Cwas found by CIT(A) to be correct.
64.10. Assessee demonstrated that the conclusions reached by the SA and AO are incorrect on various counts. The percentage of default was initially worked out by the revenueat 12.78% and subsequently reduced to 12.34%.Consequently of a sum of Rs.150,38,35,341/- was disallowed out of the total interest of Rs.1218,36,28,517/- provided by the appellant during the year. In CT(A)s opinion, for TDS default disallowance cannot be made on estimate basis as law does not provide for it. This contention of assessee was upheld.
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64.11. However, CIT(A) further observed that the department has a full- fledged TDS wing which ensures implementation of TDS provisions and its assessment. It would be appropriate to get the matter checked by the TDS wing, the addition of Rs.150,38,35,341/- is, for the time being, upheld on protective basis. In case it is found through the TDS wing that TDS defaults have taken place, to the extent of such defaults the addition shall be upheld. If it is found that there is no substantiated default, the addition shall be deleted. The exercise shall be completed within a period of six months, i.e. by 30.09.2013. The balance disallowance of Rs.11,11,192/- (Rs.9,03,855/- + Rs.2,07,337/-) was deleted.
Aggrieved revenue is before us.
65. Ld. CIT(DR) contends that the assessee has not maintained systematic records to aggregate interest payable and payment a to individual depositors. In the absence of such records it is not possible to club together the interest payment to individual persons. Further, the assessee company has failed to cooperate with the AO/ SA and the soft copy of ledger accounts were not supplied. In view of such non compliance, there is no justification for sustaining the disallowance on protective basis. 65.1. The claim of the assessee company is factually incorrect and not tenable in law. The submissions made by assessee before CIT(A) militates against the assessee's own claim. It is to be appreciated that unless the tax payer maintains a systematic record of the aggregate deposits and amount of interest payable to a particular creditor, it is difficult to verify compliance of TDS provisions. Assessee itself admits that out of 3 crore accounts, only 23 lakh accounts have been clubbed which is very insignificant for verification. The returns of TDS filed on the basis of such incomplete records cannot be considered to be proper compliance to the TDS provisions. Difficulties faced 171 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
by the assessee cannot be claimed to avoid a statutory liability. There should not have been any difficulty in maintaining proper records of individual depositors and the aggregate amount of interest payed/credited to their accounts looking at the facilities of work force assessee enjoys.
65.2. After referring to the quotation of Justice Rowlatt reliance is placed on the case of Tarulata Shyam and others (108 ITR 345), the Hon'ble Apex Court has held that:-
"once it is shown that the case of the assessee comes within the letter of law, he must be taxed, however greater the hardship may appear to the judicial mind to be".
65.3. Similar views have been expressed by Hon'ble Karnataka High Court in the case of Patil Vijay Kumar and others (151 ITR 48). According to the Hon'ble Court:-
"when the meaning of the words is clear and unambiguous, the Court has to give effect to it whatever be the consequences ,as the court has no jurisdictions to mitigate harsh consequences of the statue, if any."
65.4. Consequent to directions of the ld. CIT(A), the verification was to be done by the AO with the help of the TDS wing of the department on or before 30.9.13 which could not be done. AO vide his letter dated 8.10.2013 has submitted that "CIT TDS, Lucknow has already been requested for proper verification of TDS defaults in the above case on 19.09.2013 and a meeting was also held in the chamber of CIT (c) - 1, New Delhi with CIT TDS, Lucknow and CIT (Appeals)-XXVI on 20.9.2013 regarding verification of TDS in the case of M/s Sahara India Financial Corporation Limited. In the meeting, CIT (TDS), Lucknow stated that as the assessee is not 172 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
cooperating and the data is voluminous, the process of verification of TDS cannot be completed in the given time."
65.5. In view thereof, it is requested by ld. CIT(DR) that the revenue may be granted further extension of six months for logical verification, assessee may be directed to cooperate in a proper manner.
66. Ld. Counsel for the assessee contends that aforesaid ground relating to deletion of disallowance under section 40(a)(ia) of the Act has two parts:
(a) disallowance of Rs.1,50,38,35,341/-; ( Qua interest to depositors)
(b) disallowance of Rs.11,11,192/- (Rs. 9,03,855 M/s Bloomberg +Rs.2,07,337 AVL) 66.1. Ld. CIT(Appeals) after verification held that payment to M/s Bloomberg was for subscription to data base which was in the nature of purchase of services not liable for TDS. Payments made to M/s. AVL is on account of booking of rooms and conference halls from time to time as regular guests/ customers, not by way of contract. Therefore, there is no TDS liability. For TDS verification, assessee has no objection to extension of 6 months from last due date and assures cooperation.
67. We have heard the rival contentions and perused the material available on record. Apropos the issue about Bloomberg, Amby Valley and SHL it has been verified and findings of fact have been given by ld. CIT(A), that these payments are for purchase of services , hospitality or arrangement thereof; paid as a regular customer in normal course and not by any contract.
These facts have not been materially rebutted by the department in view thereof we uphold the order of CIT(A) qua these payments.
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67.1. Apropos issue of TDS on interest to individual depositors, CIT(A) on proper considerations held:
a) That the provisions in respect of TDS and sec. 40a(ia) do not provide any power to hold non deduction of TDS on estimate basis, similarly sec. 40a(ia) also does not provide for any estimated disallowance. Thus specific item of expenditure which was liable for TDS is to be identified and disallowed. There is a reason for that as if the TDS is paid in the subsequent year then corresponding expenditure is to be allowed. Thus non identification of expenditure qua which the TDS is not deducted is to be specified. Adoption of estimated default on these provisions; which by very nature are amount and item specific, will render the provisions unworkable, which cannot be the intention of legislature. In our considered view ld CIT(A) has taken a proper conclusion in the matter to hold that such disallowance cannot be made on estimated basis. Having held so there was no need for CIT(A) to go further for any protective addition, be that as it may since verification has been directed to protect the interest of revenue, now we deal with the time limit extension request of department.
b) Assessee claims that it has duly complied with provisions by filing of TDS returns. Department has carried out TDS assessments on such returns and no adverse observations whatsoever have been reported. However, ld. CIT(A) allowed further verification of TDS assessment within a period of 6 months ending on 30-9-2013, keeping in view the interest of revenue. Revenue so far has not been able to comply with this direction and verification schedule. Ld. DR during 174 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
the course of hearing has made an earnest request to extend the time of verification for a further period of 6 months from last date. Ld. counsel for the assessee vehemently argued that CIT(A) having held that estimated addition u/s 40a(ia) cannot be made on estimate basis, ground raised by assessee should have been allowed. There is no occasion for upholding protective addition and directing further verification by TDS wing. He thus objected to extension contending that assessee is being taken on a spree of repetitive proceeding. It is being assumed that departmental authorities do not carry out proper TDS verification, for which assessee is at receiving end. However ld. Counsel agreed for a shorter extension. After hearing both the parties and In the interest of substantial justice, department was orally allowed a further extension of 6 months as prayed i.e. from 30-9- 2013, protective addition cannot be upheld, the matter is therefore, restored back to AO, if department fails to carry out the exercise in this extended time i.e. up to 31-3-2014, order of ld. CIT(A) will become final requiring no interference. If AO comes in possession of any specific information then the issue shall be decided accordingly keeping in mind that CIT(A) has already given a finding that estimated disallowance u/s 40a(ia) cannot be made, after giving the assessee an adequate opportunity of being heard. This grounds of the revenue and assessee in this behalf are accordingly partly allowed.
68. Ground no. 21:Additions of interest earned on non-performing assets not recognized as income:
68.1. On SA's objection, AO was of the opinion that a sum of Rs 1,72,63,565/- being interest earned on the non-performing assets as classified by the assessee and a sum of Rs 80,80,207/- being overdue interest 175 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
earned on the non-performing assets was not provided by assessee on the pretext that the advances have become bad. Accordingly show cause was issued by AO as to why an amount of Rs 2,53,43,772/- may not be added to the income as per mercantile system.
68.2. The assessee vide its reply dated 30.07.2012 submitted that special auditors have relied on NBFC Prudential norms (Reserve Bank directions 1998) in their report. As per the RBI Prudential Norms of Income Recognition, no interest is required to be provided on sticky/ sub-standard assets, even if the interest has been provided during the year under consideration in which the advance becomes sub-standard, then interest earned up to the period till it becomes sub-standard needs to be reversed. Thus as per RBI norms the assessee is right in not providing the interest.
68.3. The special auditors have worked out accrued interest and overdue interest of Rs. 1,72,63,565/- and Rs. 80,80,207/- as under:
Sr. Particulars O/s FV as on Income not Overdue
No. 31.03.2009 Provided Interest @36%
during the year
1 Pranik Shipping and Services 36010288.86 7922263.55 5041440.00
Ltd. (22%)
2 Prakash Industries Ltd. 33764082.00 9116302.14 3038768.00
(27%)
3 15% Garware Nylon 1500000.00 225000.00
Total: 17263565.69 8080207.00
68.4. As regards M/s. Pranik Shipping & Services Ltd., assessee gave a loan of Rs. 5.50 crore to M/s. Pranik Shipping & Services Ltd. against English mortgage of property situated at 15th floor of Maker Chambers IV Nariman 176 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
Point Mumbai. The whole principal was due for repayment on 24th January 1999 and interest was payable on quarterly rests. The Company has paid Rs. 52.50 lakhs towards the principal and cleared the entire interest till 24th January 1999. This property was given on Leave & License basis to M/s. Tamara Capital Advisors Pvt. Ltd. vide agreement dated 1st March 2005 for a period of 33 months The monthly rental of Rs. 4,87,300/- received from Tamara Capital Advisors Pvt. Ltd was adjusted in the amount outstanding. The total outstanding Principal as on 31st March 2009 was Rs. 3,60,10,288.86/- and a provision of Rs. 1,80,05,144.43/- was made as per prudential norms direction of RBI.
68.5. As regards M/s. Prakash Industries Ltd., a loan of Rs 5.00 crore was given @ 28% for 180 days vide agreement dated 23.07.1996 against the security of 33,86,400 equity shares of the company. At the time of maturity the company expressed its inability to pay the debts and on their request for principal along with interest of Rs. 65.00 lacs was rescheduled for a period 63 months. The company paid installments up to 1st April 1998 and defaulted, thereafter company incurred huge losses and was declared a 'Sick Industrial Company' under the provisions of sick industrial Companies (Special Provision) Act 1985 (SICA). Assessee filed a case under section 138 of Negotiable Instrument Act 1881 & the same is due for cross examination. Total outstanding principal as on 31-3-2009 was Rs. 3,37,64,082/- and a provision of Rs. 1,68,82,041/-was made as per prudential norms of RBI.
68.6. As regards 15% Garware Nylon Ltd., an amount of Rs. 15,22,500/- was invested in their 15% debentures, it incurred huge losses and networth was substantially eroded, subsequently it was also registered with BIFR.
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They have not paid any amount from last few years. The total outstanding Principal as on 31st March 2009 was Rs. 15,22,500/- and a provision of Rs. 15,22,500/- was made as par prudential norms of RBI.
68.7. In light of the above facts and circumstances, assessee claimed that these assets have turned as NPA, as per the Prudential Norms guidelines of the R.B.I only. The assessee is prohibited to provide for any income thereon on accrual basis. Guidelines are mandatory issued under chapter IIIB of RBI Act, 1934 and interest, if any, realized subsequently is recognized on receipt basis. This practice is being consistency followed by assessee since the introduction of Prudential Norms Directions by RBI.
68.8. To show consistency of this method and practice of NPA income, assessee demonstrated that in the case of advance to M/s. Udbhav, loan was NPA in earlier assessment year on settlement arrived at in assessment year 2001-02 interest realized on settlement has been offered AY 2001-02.
68.9. In case of one Shri CD Shah, assessee advanced a secured loan of Rs. 5.25 crore by a mortgage of property on 4-12- 1996 @ 34% interest, payable quarterly and repayment was due on 24-9- 1997. The borrower defaulted in payments, consequently assessee sold the mortgaged property for a consideration of Rs. 7.75 crore on 18-7- 2003 (i.e. in F.Y. 2003-04) and adjusted Rs. 4,14,77,380/- against principal, Rs.11,71,153.85/- towards misc. expenses and remaining Rs. 3,48,51,466.15/- towards interest account. Thus in this case assessee settled the loans on July, 2003 by sale of property mortgaged by the borrower. Following the RBI directions the interest income was recognized in F.Y.2003-04 relevant to A.Y. 2004-05 and whole of it was offered to tax in this year.
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68.10. Assessee filed further submission pleading before AO that ld. CIT(A) in appellant's own case in earlier years has deleted similar disallowances in AYs 1999-00, 2000-01, 20001-02, 2002-03, 2003-04 & 2004-05.
68.11. AO considered the reply and not found it to be satisfactory. Relying on C.K. Gangadharan & anothers vs. CIT (2008) 304 ITR 61 (SC). AO held that though, the CIT(A) has allowed similar relief but the department has not accepted them and is in appeals. Further reliance was placed on State Bank of Travancore vs. CIT (SC) ; CIT Vs. Mercantile Bank Ltd. In 237 ITR 676(Bom). AO held that, as the interest has accrued to the assessee as per mercantile system of accounting, it was to be taxed by making an addition of Rs2,53,43,772/- to the income of the assessee.
68.12. In first appeal CIT(A) held that, it is well settled that RBI directives and income-tax law operate in separate and independent spheres. While the objective of RBI is to ensure that Banks / NBFCs / RNBCs do not overstate their profits but project a more realistic picture by provisioning for NPAs and also not recognizing incomes on such assets. Hon'ble Delhi High Court judgment in CIT Vs. Vasisth Chay Vaapar Ltd. 330 ITR 440(Del.), where following the 'real income theory' proposed in Southern Technologies Ltd.(supra) it is held that:
"The dispute before the Apex Court centered around deductibility of provision for NPA. After analyzing the provisions of the RBI Act, their Lordships of the Apex Court observed that insofar as the permissible deductions or exclusions under the Act are concerned, the same are admissible only if such deductions/exclusions satisfy the relevant conditions stipulated therefor under the Act. To that extent, it was observed that the Prudential Norms do not override the provisions of the Act. However, the Apex Court made a distinction with regard to "Income Recognition" and held that income had to be recognized 179 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
in terms of the Prudential Norms, even though the same deviated from mercantile system of accounting and/or section 45 of the Income-tax Act. It can be said, therefore, that the Apex Court approved the 'real income' theory which is engrained in the Prudential Norms for recognition of revenue by NBFC."
68.13. Hon'ble Delhi high court held that income not provided for under the RBI Prudential Norms was not to be brought to tax under the Income Tax Act, 1961. There is a distinction in as much as the present case is that of a RNBC and not of NBFC, but both classes of entities are regulated by similar RBI Directions. It has been held by the Hon'ble Supreme Court in Union of India v Kamlakshi Finance Corp. Ltd.[AIR 1992 SC 711] and Khalid Automobiles v Union of India [4 SCC (Suppl.) 653]that the decisions of the jurisdictional High Court and the Tribunal are binding on the income-tax authorities without any reservation. CIT(A) thus relying on binding precedent allowed the ground and relief.
Aggrieved revenue is before us.
69. Ld. CIT(DR) relied on AO's order.
70. Ld. Counsel for the assesse contends that assessee explained all the facts and circumstances leading the advances becoming NPAs in the cases of M/s. Pranik Shipping & Services Ltd., M/s. Prakash Industries Ltd. and Garware Nylon Ltd. As the advances had turned into Non-Performing Assets ('NPA'), as per the mandatory Prudential Norms guidelines of the RBI. Assessee cannot provide for any interest thereon on accrual basis. Subsequently realized interest was to be recognized on receipt basis, this is consistently followed by the appellant since the introduction of Prudential Norms issued by RBI. The settled legal position apropos accrual of interest on NPAs is as under:
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70.1. Income chargeable under the head "profits and gains of business or profession" is to be determined as per the method of accounting consistently followed by an assessee. Sub-section (1) of 145 of the Act clearly prescribes the method of accounting to be followed by an assessee for computing income chargeable under the head "profit and gains of business or profession". This provision mandates that income chargeable under the head "profits and gains of business or profession" shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
70.2. Section 209(3) of the Companies Act, 1956, however, makes it mandatory for companies to keep accounts on accrual basis only. The accounts prepared by an assessee must conform to the mandatory Accounting Standards issued by the Institute of Chartered Accountants of India, the premier accounting body in the country. Further, Section 211 of the Companies Act, 1956 requires that the financial statements of companies should be prepared in compliance with the Accounting Standards. Further, sub-section (2) of section 145 of the Act mandates that an assessee shall be required to follow the accounting standards that may be notified by the Central Government. Vide Notification No. SO 69(E) dated 25.1.1996, the Central Government has, for purposes of section 145(2) of the Act, notified Accounting Standard-1 relating to "Disclosure of Accounting Policies". 70.3. Para 16 of Accounting Standard-1 relating to "Disclosure of Accounting Policies" provides that the accounting policy adopted by an assessee should be such so as to represent a true and fair view of the state of affairs of the business of the assessee. Para 17 of the said Accounting Standard further provides that selection and application of accounting policy must be governed, inter alia, by "prudence" meaning "In view of the 181 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
uncertainty attached to future events, profits are not anticipated but recognized only when realised though not necessarily in cash. 70.4. Under the mercantile system of accounting, income is taxable when the same accrues or is earned, irrespective of the time of receipt. However, even under the mercantile system of accounting, it is the real income which has accrued in a practical sense that is to be brought into account for tax purposes. In other words, accrual has to be of income for which there is certainty that the same would ultimately be received. Where there is uncertainty regarding ultimate collection of income, such as interest, the accrual thereof is postponed till the time uncertainty exists as per Accounting Standard 9 (AS-9) on "Revenue Recognition". 70.5. The Courts have held that even under the accrual system of accounting, it is illusory to take credit for interest where the principal itself is doubtful of recovery. Reliance isplaced on the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT v Ferozepur Finance (P) Ltd.: 124 ITR 619 wherein it was held that unless income accrued, there could be no tax liability and that even under mercantile system of accountancy, an assessee could forgo the whole or part of a debt, which was irrecoverable, and the same could not be added to the income of the assessee. The Hon'ble Court, referring to the decision of the Hon'ble apex Court in the case of Shoorji Vallabhdas, 46 ITR 144, observed "A reading of the aforesaid passage clearly shows that income-tax is levied on income, whether mercantile system of accountancy is maintained or on cash basis. If income does not result at all, there cannot be levy of tax. It was further held that even if an entry of hypothetical income is made in the books of account, but if the income does not result at all, when there is neither accrual nor receipt of income, no tax can be levied."The Department's Special Leave 182 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
Petition against the above case was dismissed by the Hon'ble Supreme Court vide SLP (Civil) No.8158 of 1981. [144 ITR (St.) 50]. 70.6. The aforesaid principle was reiterated in the later judgment of the Hon'ble Madras High Court in the case of CIT v Motor Credit Co. (P) Ltd.:
127 ITR 572; In this case, too, the Hon'ble Supreme Court dismissed the Revenue's Special Leave Petition vide SLP (Civil) No. 2806 of 1981 [149 ITR (St.) 93].
70.7. In the following cases, hon'ble Supreme Court has further recognized the theory of real income and held that notwithstanding that an assessee may be following the mercantile system of accounting, the assessee could only be taxed on real income and not any notional/ hypothetical / illusory income.
Further reliance is placed on Hon'ble Supreme court judgments in the case of CIT v Shoorji Vallabhdas and Co: 46 ITR 144; CIT vs. A. Raman And Co.: 67 ITR 11; Godhra Electricity Co Ltd. v CIT: 225 ITR 746 ;UCO Bank v CIT: 237 ITR 889.
70.8. Section 45Q of the Reserve Bank of India Act, 1934, which provides as follows:
"Chapter IIIB to override other laws.
45Q. The provisions of this Chapter shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law."
70.9. Thus, by virtue of Section 45Q of the RBI Act, 1934, the provisions of Chapter IIIB of the said Act shall override the provisions of all other Acts, including the Income-tax Act, 1961. In terms of the Prudential Norms (issued by the RBI in exercise of the powers available under Chapter IIIB of the RBI Act), interest or any other charge on NPA shall be recognized only 183 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
when it is actually realized. The relevant RBI directions in this behalf confirm assesses claim.
70.10. The has held that where an Act makes a provision, such as in section 45Q of the RBI Act, 1934 to the effect that the provisions of the said Act would override the provisions of all other Acts, it would be the said Act that would prevail. In that view of the matter, the provisions of section 45Q of the RBI Act, 1934 and the Prudential Norms issued thereunder would prevail over the provisions of the Act. Accordingly, no interest even otherwise could be said to have accrued on loans classified as NPAs. 70.11. Further, reliance is placed on the decisions of the Madras High Court in case of CIT v India Equipment Leasing Ltd: 293 ITR 350; Hon'ble Supreme Court in the case of TRO v Custodian, Special Court Act, 1934:
293 ITR 369; CIT v Elgi Finance Ltd: 293 ITR 357 (Mad);India Equipment Leasing Ltd reported in 293 ITR 350(Mad); Vasisth ChayVyapar Ltd: 330 ITR 440 (Del); ITAT, Delhi Bench in the case of Deputy Commissioner of Income -Tax, Circle 2(1) v. Bhartiya Samruddhi Finance Ltd.: [2013] 58SOT 141.
70.12. Ld counsel contends that in view of these pleadings, settled judicial propositions that notional interest cannot be added, order of the CIT(Appeals), deserves to be upheld.
71. We have heard the rival contentions and perused the material available on record. The legal position about the real income theory has been elucidated by the ld counsel by way of catena of case laws mentioned above.
The advances/loans in question had become NPA and sticky there is no dispute on these facts. AO has relied on the Supreme court judgment in the case of Southern Technologies apropos ld. CIT(A) has relied on Hon'ble 184 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
Dlhi High Court judgment in the case of Vasisrh Chaya Vaapar ltd. (supra) which after considering the southern technologies case has held that income not provided for under the RBI Prudential Norms is not to be brought to tax under the Income Tax Act, 1961. The distinction between Vasisth chhaya being NBFC and assessee being RNBC also has been considered by CIT(A) and a right conclusion has been arrived at that both classes of entities are regulated by similar RBI Directions. In view of the fact of advances becoming NPAs on the concept of real income, prudential RBI norms and relevant AS issued by ICAI and case laws, we see no infirmity in the order of CIT(A) on this issue. This ground of the revenue is dismissed.
72. Ground no. 22:Rs. 2 Crores - diminution in the value of investment 72.1. In ground no. 22, the revenue is challenging the relief of granted by the ld. CIT(A). In our considered view, issue is similar to ground no 19. Same arguments and contentions are raised by both the parties. Issue being contended to be similar, following our order on ground no. 19, this ground of the revenue is dismissed.
73. Ground no. 23:Disallowance of expenditure on stationery 73.1. On SA's objection, AO observed that qua the opening stock of stationery Rs. 92,51,945 assessee has not shown any closing stock . It is not possible that the entire stationery purchased on 31/03/2009 for Rs.1,25,45,009/- cannot be consumed on the same day.
73.2. Assessee submitted that stationery items are being purchased for the purpose of its own consumption and not for any resale. Entries for purchase of stationery items of Rs.1,25,45,009/- contains a list of various earlier bills which are included there in. The aggregate amount includes several bills for supply of stationery made in January, February and beginning of March. The 185 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
stationery purchased through these bills stand consumed by the assessee and because of huge network of branches it was not possible to maintain a meaningful stock register. Assessee as a matter of prudence and efficiency decided to claim the stationery as consumed on purchase. The exercise was revenue neutral and cost effective as it avoided mammoth work of identifying petty stationery items at various branches. Such consumable purchases as allowable as revenue expenditure, thefore, closing balance was not appearing.
73.3. AO however added rejected the explanation and added the amount. 73.4. In first appeal, CIT(A) found that the claim was correct in as much as the undisputedly bills related to various dates in the period January to March, 2009, in institutional purchases bills are usually raised after supply. The appellant has crores of small depositors spread over a large rural expanse. Naturally, for maintaining the large data / records assessee requires substantial consumables like stationery. The appellant, having branches spread across the country, is bound to have time lag between accounting in the branches and its consolidation while preparing the final accounts in HQ, hence the journal entry was passed. The stationery being a consumable and exercise of AO at the end of the day was effectively revenue neutral, the addition was deleted.
Aggrieved revenue is in appeal.
74. Ld DR contends that the addition is restricted by the AO to the purchases of stationery made by the appellant company towards the end of the financial year and therefore, unutilized stock of stationery should have been either shown in the closing stock or the same should have been reduced from the actual consumption.
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75. Ld. Counsel contends that the purchases related to several bills for supply of stationery in January, February and beginning of March, 2009, which stationery stood consumed by the appellant. The closing stock method was avoided to avoid mammoth inventory, to save - efforts, cast and hassels for accounting and management efficiency. Stationery in any case is a consumable item, allowable as revenue expenditure beside the exercise is revenue neutral. Order of ld. CIT(Appeals) is relied on.
76. We have considered the rival submissions and perused the material. Ld. CIT(A) has given proper and detailed reasoning for holding that substantial purchases related to earlier months, stationery is a consumable revenue expenditure. Dispensing with closing stock inventory was for efficiency and exercise was revenue neutral. We uphold his order, revenue ground is dismissed.
77. In the result revenue appeal is partly allowed.
Assessee's appeal:
78. Ground nos. 1(a) to 1(e): Disallowance under Section 14A :
78.1. On SA reporting AO was of the view that assessee had offered only disallowance of Rs.26,646/- of expenses in terms of sec. 14A(2) r/w rule 8D.
It owns deposits earning tax free income, claimed to acquired out of share capital and reserves. Consequently a show cause notice was issued as to why a proper disallowance should not be made.
78.2. The assessee submitted that a plain reading of the sec 14A and rule 8D prescribes that power to determine such expenditure incurred by referring to method prescribed can only be exercised if and only if the AO having regard to the accounts of the assessee, is not satisfied with the 187 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
correctness of its claim. It has already offered a disallowance of Rs.26,646/- under section 14A the working of which has been given in the tax audit report itself. No satisfaction has been recorded by AO that it is not a correct working. The assessee maintains a separate investment division looking after the total investments as per RBI guidelines. The entire expenditure incurred by this investment division, is identifiable. For working out the disallowance its tax auditors have considered the total expenditure of the investment division by identifying exempt and not exempt income on pro rata working of total investments. Therefore, no further disallowance u/s 14A r.w. rule 8D of the Income Tax Act was required 78.3. The working proposed by the special auditors in TOR-7 was defective in various respects like- figures of interest taken is incorrect, average of investment from which income does not form part of total income is incorrect and the amount of disallowance worked out by them is also incorrect, assessee without prejudice also offered alternative calculations claiming to be on proper parameters.
78.4. AO held assesse's reply as unsatisfactory, it was held that interest expense should have also been considered while calculating the disallowance under section 14A. No nexus is established by the assessee that share capital and reserves and surplus were used for acquisition of such income generating assets. Consequently disallowance of Rs 2,16,51,917/- was made as per calculation mentioned in the order.
78.5. In first appeal before CIT(A) it was pleaded that qua exempt income of Rs. 68,37,583/- earned by assessee on UTI 64 Bonds, which also have matured during the year. The appellant is maintaining a separate and independent Investment Division at Mumbai, maintaining its set of accounts, 188 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
in accordance with R.B.I. Guidelines. The total expenditure of this Division was taken into consideration vis-à-vis total income derived from the Investment Division and on a pro rata basis resultant disallowance of Rs.26,646/- was offered u/s 14A for assessment.
78.6. Special auditors worked out disallowance by treating interest paid by the appellant as direct expenditure for the purposes of disallowance by treating the expenditure as indirect expenditure. Assessee pointed out that it has share capital of Rs.913,04,87,300/- and Reserve & Surplus of Rs.757,42,50,160/-. Meaning thereby, the total interest free funds which were available with the appellant were to the tune of Rs.1670,47,37,460/- qua which tax free income came to Rs.61,11,38,800/-. The investments being old ignoring assessee's specific reply, AO has not established any nexus to the effect that any borrowed funds were used for their acquisition. The working of disallowance adopted by AO was incorrect as the correct working resulted in disallowance of Rs.216,51,917/- only as against proposed Rs.96,53,24,600/-. All these facts and working were submitted before the AO by the appellant along with reply dated 23.07.2012. 78.7. Ld. AO took an adverse view by erroneously holding that the onus lies on the assessee to prove that the investment in interest bearing securities was made out of its surplus non interest bearing funds. Issue of onus is other way round, if AO was not satisfied then it was his onus to prove that assessee's claim was wrong. It is well settled law that there can be no disallowance under section 14A on presumption only, reliance was placed on the judgments of the Delhi ITAT in the cases of:-
- Minda Investments Ltd. vs D.C.I.T. 52 DTR (Trib.) (Del.)
- C.I.T. vs Metalman Auto Pvt. Ltd. 336 ITR 434 (P & H)
- C.I.T. vs Hero Cycles Ltd. 323 ITR 518 189 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
78.8. On another material aspect ld. AO has not given any finding with reference to the fact that the amount of expenditure in relation to earning of the exempted interest income is not determinable. In the case of Maxopp Investment Ltd. & Another Vs C.I.T. 247 CTR 162 Hon'ble Delhi High Court has held that "Rule 8D also makes it clear that where AO, having regard to the accounts of the assessee, is not satisfied with (a) correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to exempted income, shall determine the amount of the expenditure to such income in accordance with the provisions of sub-rule 2 of Rule 8D. Rule 8D(1) places the provisions of section 14A(2) and (3) in the correct perspective. It is therefore, clear that determination of amount of expenditure in relation to exempt income under Rule 8D will be applicable if apart from objective criteria, AO gives a reasonable opportunity in order to satisfy himself about the correctness of assesses claim. It has also been held that in case the Assessing Officer is not satisfied then after giving assessee an opportunity may reject the claim after stating cogent reasons for doing so. 78.9. In the case of the appellant without rejecting its claim Ld. Assessing Officer has applied Rule 8D only based on the opinion of the special auditors without appreciating that it was his onus to prove the nexus which is erroneously held as assessee's onus to establish the nexus. Thus without citing any cogent reason for rejection of the claim and only on presumptions the disallowance has been made.
78.10. Section 14A of the Income Tax Act, 1961 reads as follows:-
"14A(1) - For the purpose of computing the total income under this Chapter, no deduction shall be allowed in respect of 190 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
expenditure incurred by the assessee in relation to income which does not form part of total income under this Act.........."
78.11. The total income has been defined under section 2(45) to mean the total amount of income referred to in section 5 computed in the manner laid down in this Act. Section 5 of the Income Tax Act let out the scope of total income and lays down as to which incomes are to be included in the total income for the purpose of the Act. Income has been defined under section 2(24) of the Income Tax Act to included profits and gains, dividends and other items mentioned therein but none of the definition which has been mentioned herein above speaks of a situation of computation of a loss.
78.12. Assessee returned a loss of Rs.10,45,98,718/- in the revised return filed by it. Since income returned was a loss there was no justification in invoking the provisions of section 14A. Word "loss" has not been defined under the Income Tax Act nor it can be equated with income. The word loss has a separate connotation and transpires from the Income Tax Act itself in as much as under section 271(1)(c) Explanation-4 for the purpose of definition of the expression "the amount of tax sought to be evaded" the reference to loss declared has been given and any deduction to the loss declared or its conversion into income has to be considered for finding out difference which will tantamount to concealed income. Provisions of section 14A are applicable for making disallowance out of income, there being loss in assesee's case, no disallowance under section 14A can be made. 78.13. According to RBI guidelines assessee invested in US 64 Units consequent to great share market crash by govts. intervention, on a mandatory basis, large unit holders of US 64 were allotted tax free interest US 64 Bonds in lieu thereof. Thus, the investment was not made by the 191 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
appellant voluntarily but it was mandatory act of regulator to convert UTI usable (which is a Government Organisation) into tax free Bonds. 78.14. The Cochin Tribunal in the case of State Bank of Travancore vs. ACIT 318 ITR (AT) 171 (Cochin) has held that if an investment is made for meeting any statutory obligations which yield tax free interest income no disallowance under section 14A can be made. Assessees case falls on exact parity as the original investment which was not tax free, has been converted into tax free income by directives of the R.B.I. Compulsory conversion of US 64 units in the Tax Free US 64 Bonds is also by govt. organization UTI. Both cases are of regulatory mandates, following this judgment also no disallowance under section 14A is called for.
78.15. It was contended that amount of disallowance is patently arbitrary as against tax free income of Rs.68,37,583/- disallowance under section 14A has been made at an exorbitant amount of Rs.2,16,51,917/- over and above disallowance of Rs.26,646/- offered. There is no justification in making such exorbitant disallowance under section 14A, exceeding the tax free income earned by the assessee. Reliance for this proposition was placed on ACIT Vs.Punjab State Coop-Mkt Fed. Ltd (ITA No. 548/Chd/2011). In the decision of the Bombay High Court in the case of C.I.T. vs. Delite Enterprises (2009(2) TMI 498), it has been held if there is no income no disallowance under section 14A should be made. Applying the same principles there is no justification in such disallowance which far exceeds tax free income.
78.16. Delhi Tribunal in the case of DCI T vs. Maharashtra Seamless Ltd. 52 DTR (Trib.) (Del) 5 held as follows:-
"It remains undisputed that the funds are mixed and it is not possible to ascertain as to whether the investment in 192 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
tax free bonds was out of assessee's own funds. The source of investment in tax free bonds are not identified. The A. O. did not establish any nexus between the borrowed funds and the investment in tax free bonds. The cash flow of the assessee was not seen, therefore, the Ld. CIT(A) is correct in opining that the apportionment on a pro rata basis was improper in absence of anything brought by the Assessing Officer to rebut assessee's stand that the investment in tax free bonds has been made out of funds of the share-holders of the assessee."
78.17. Mumbai ITAT in the case of Bunge Agri Business (India) (P) Ltd. 64 DTR (Mum) (Trib.) 201, held that if funds are available for both interest free and interest bearing income, then right presumption can be drawn that interest free funds are first used for tax free investment and no disallowance of interest should be made section 14A.
78.18. In following cases it has been held that if there no nexus is established between borrowed funds and non-business advances and if the assessee has sufficient net owned funds, no disallowance of interest can be made:
- Regal Theatre vs. C.I.T. 225 ITR 205 (Del.) - C.I.T. vs. Radico Khaitan Ltd. 274 ITR 354 (All.)
78.18. Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd. 313 ITR 340 has held in the last paragraph as follows :-
"If there be interest free funds available to the assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from interest free funds available. In our opinion the Supreme Court in the case of East India Pharmaceutical Works Ltd. vs. C.I.T. 224 ITR 627 (SC) had the occasion to consider the decision of the Kolkata High Court in the case of Wool Combers of India Ltd. 134 ITR 219 (Kol.) where similar issue had arisen before the Supreme Court. It was argued that it should have been presumed that in essence and true character the tax was paid out of the profits of the 193 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
relevant year and not out of overdraft account for the running of the business and in those circumstances the appellant was entitled to claim the deduction." ........
"The principles, therefore, would be that if there are funds available both interest free and overdraft and/or loans taken then a presumption would arise that investment would be out of interest from funds generated or available with the company, if the interest free funds available were sufficient to meet the investment. In this case this presumption is established considering the finding of facts both by CIT and ITAT."
78.19. Mumbai ITAT in the case of Bayer Biosings (P) Ltd. vs. Addl. CIT 72 DTR 371 also has taken similar view as under:-
"In the absence of any finding whatsoever that expenses were incurred by the assessee directly or indirectly for the purpose of earning tax exempt income and in view of the admitted position that the assessee had sufficient non interest bearing funds to make the investment on which tax exempt income has been earned, disallowance of Rs. 1,66,000/- offered by the assessee itself is to be accepted as fair and reasonable and, therefore, no further disallowance could be made under section 14A by applying Rule 8D".
78.20. CIT(A) decided the issue by following observations 7.2 I have considered the assessment order, the submissions made and the case laws cited. Firstly, Rule 8D is applicable with effect from AY 2008-09 and is, therefore, applicable to the present AY. Secondly, the separate account maintained for the investment division of the appellant at Mumbai allocates only some administrative expenses amounting to Rs.26,646/- directly attributable to that activity but does not include interest or other expenditure allocable. Thirdly, public deposits raised by the appellant, an RNBC, are invested in accordance with the RBI directives, which include a component of investments in securities / funds that yield tax free incomes. Therefore, it cannot be concluded that amount invested in assets generating exempt income is from share capital and reserves, or that there 194 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
is no nexus between interest bearing funds and such investments. In any case this claim of the appellant has not been established. Fourthly, the fact that the returned income of the appellant for this AY is a loss will have no bearing on working out the expenditure relating to exempt income under Rule 8D for the reason that 'income' includes 'loss', or negative income, that may get reduced or enhanced impacting the tax leviable on the appellant. In the circumstances, I hold that the expenditure in relation to exempt income of the appellant shall be determined in accordance with Rule 8D. I also find that the special auditor, the AO and the appellant have worked out different figures, pointing to the fact that there is difference of opinion on the issue. With these observations, the expenditure under Rule 8D is worked out in the subsequent Para.
7.3 The amounts to be taken into consideration as pre balance-sheet of the appellant are (i) interest paid on deposits at Rs.1216,83,23,131/- (as per Schedule-13 to the Balance Sheet, and not Rs.1218,36,28,517/- mentioned by AO which is gross interest); (ii) investments in financial assets yielding exempt income at Rs.61,11,33,800/- (the amount shown as invested in shares in Schedule-5 to the Balance Sheet is Rs.149,98,54,208/- as on 31.3.2009 and Rs.164,93,57,517/- as on 31.03.2008 and no investment is separately shown for Units / Mutual Funds, thus the basis of the figure taken is not known nor indicated in the assessment order or the submissions filed, however I am taking this figure as it is undisputed); and (iii) average of total assets at Rs.18208,85,44,666/- (i.e. average of Rs.17380,00,68,014/- as on 31.03.2009 and Rs.19037,70,21,317/- as on 31.03.2008, and not Rs.18501,05,04,993/- taken by the AO which appears incorrect). The working as per Rule 8D is as under:-
Recalculation under Rule 8D Exempt Income 68,37,583 195 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
Interest expenditure on deposits 12,16,83,23,131 = A Assets yielding exempt income As on 01.04.2008 (i) 0 As on 31.03.2009 (ii) 61,11,33,800 Average (i + ii) / 2 30,55,66,900 = B Total assets As on 01.04.2008 (i) 1,90,37,70,21,317 As on 31.03.2009 (ii) 1,73,80,00,68,014 Average (i + ii) / 2 1,82,08,85,44,666 = C Rule = 8(2)(i) Direct expenses 26,646 D 8(2)(ii) Indirect interest expenditure (A x B / C) 2,04,19,938 1/2 % of average value of assets yielding 8(2)(iii) exempt income 15,27,835 Expenditure relatable to exempt income 2,19,74,418 = E Addition to be made (E-D) 2,19,47,772 7.4 Accordingly, I hold that expenditure relating to exempt income disallowable u/s 14A, as calculated under Rule 8D in Para-7.3 above, to be Rs.2,19,74,418/-. As the appellant has already offered Rs.26,646/- in the computation, the net amount of Rs.2,19,47,772/- shall be added to the returned income of the 196 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
appellant. There is a marginal increase in the amount of addition, but that is only due change in existing figures and not on account of any enhancement of income. The addition made by the revenue is upheld and revised marginally upward as above. The ground of appeal is dismissed.
79. Ld counsel for the assessee Shri Ajay vora contends that, on on facts and in law 14A disallowance as confirmed by the ld. CIT(A), is not sustainable:
i. It has not been disputed that assessee is maintaining an exclusive investment division, for which separate books of accounts are maintained. While filing the return of income, suo moto itoffered an amount of Rs.26,646 under section 14A calculated on the basis of proportionate expenditure of investment division, as relatable to earning of tax free income. No other expenditure is incurred in relation to earning of exempt income. Legal positions for applicability of section 14A read with Rule 8D is summarized as under:-
(a) Section 14A requires disallowance of expenditure incurred in relation to exempt income. The said section requires consideration of actual expenditure only for the purpose of disallowance and not any notional disallowance.
(b) Sub-sections (2) and (3) of the aforesaid section empower the assessing officer to apply the formula given in Rule 8D of the Rules subject to his recording satisfaction that the claim of the assessee in respect of expenditure incurred in relation to exempt income is incorrect. Where the assessee claims that no expenditure is incurred or claims that certain expenditure is incurred in relation to exempt income, the 197 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
assessing officer, before proceeding to apply the formula given in Rule 8D of the Rules must, in both situations record his prima facie satisfaction as to why the assessing officer does not agree with the claim of the assessee.
(c) On being satisfied and after recording satisfaction required under sub-section (2), the assessing officer can proceed to make disallowance as per Rule 8D of the I.T. Rules.
ii. Hon'ble Supreme Court in the case of CIT v. Walfort Share and Stock Brokers (P) Limited.326 ITR 1 observed that for attracting section 14A of the I.T. Act, there has to be a proximate case for disallowance, which is its relationship with the tax exempt income. Following this decision, the Hon'ble High Court in the case of Godrej & Boyce Manufacturing Company Limited vs. DCIT :328 ITR 81 observed as under:
"..... In order to determine the quantum of the disallowance, there must be a proximate relationship between the expenditure and the income which does not form part of the total income. Once such a proximate relationship exists, the disallowance has to be effected. All expenditure incurred in the earning of income which does not form part of the total income has to be disallowed subject to compliance with the test adopted by the Supreme Court in Walfort and it would not be permissible to restrict the provisions of Section 14A by an artificial method of interpretation."
Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. v. CIT :347 ITR 272 observed that the expression "expenditure incurred" refer to actual expenditure and not some imagined 198 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
expenditure. The Court observed that as a necessary corollary, if no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A of the I.T. Act. As regards the application of Rule 8D for assessment year 2008-09, the Court observed as under:
"29. Sub-section (2) of Section 14 A of the said Act provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub- section (3) applies to cases where the assessee asserts
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that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same."
iii. The provisions of sub-sections (2) and (3) of section 14A of the Act, permits the assessing officer to apply the procedure of computing disallowance by applying the formula prescribed in Rule 8D of the Rules, if and only if, the AO records satisfaction that the expenditure disallowed by the assessee under that section is not correct and/or sufficient. Thus recording of such satisfaction becomes a must. 79.1. In this case, the assessing officer except referring to SA's observations has not recorded any satisfaction nor brought on record any evidence, whatsoever, to hold that suo-moto disallowance offered in the return of income under section 14A of the Act is incorrect or insufficient. No cogent reasons has been cited and AO has not been able to point out as to how according to him, actual expenditure incurred in relation to the exempt income was more than the suo-moto disallowance of Rs.26,646 made by the 200 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
appellant. Thus statutory onus cast by statute has not been discharged by AO.
79.2. Circular No. 14/2006 dated 28th December 2006, containing Explanatory notes on provisions of Finance Act, 2006, explains the legislative intent behind insertion of the aforesaid provisions as under-
"11. Method for allocating expenditure in relation to exempt income 11.1 Section 14A of the Income-tax Act, 1961, provides that for the purposes of computing the total income under Chapter-IV of the said Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Income-tax Act. In the existing provisions of section 14A, however, no method of computing the expenditure incurred in relation to income which does not form part of the total income has been provided for. Consequently, there is considerable dispute between the taxpayers and the Department on the method of determining such expenditure.
11.2 In view of the above, a new sub-section (2) has been inserted in section 14A so as to provide that it would be mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to such income which does not form part of the total income in accordance with such method as may be prescribed. However, the Assessing Officer shall follow the prescribed method if, having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income. Provisions of sub-section (2), will also be applicable in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income. (emphasis supplied) 201 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
79.3. A simple analysis reveals that provision has been inserted to first record a satisfaction on cogency of reasons that assessing officer is not satisfied with the correctness of the claim of the assessee with reference to the accounts of the assessee. Thereafter it provides a mandatory method/procedure to determine the expenditure incurred in relation to exempt income. Mandatory recording of a discernable finding that AO is not satisfied with the correctness of the claim of the assessee regarding such expenditure is also clear from Circular No. 14/2006 (supra) explaining the scope of amendment made in section 14A of the Act. 79.4. It is contended that sub-sections (2) and (3) of section 14A of the Act, being only procedural provisions, cannot override the substantive provision contained in sub-section (1) and, therefore, what could be disallowed under this section is only the amount actually incurred in relation to exempt income. Reliance for this proposition is placed on the decisions:
- SIL Investment Ltd. v. ACIT: 148 TTJ 213 (Del.)
- PTC India Ltd. v. DCIT: ITA Nos. 580 and 581 (Del) 2009 (Del. Trib.)
- M/s. Auchtel Products Ltd. v. ACIT: I.T.A. No. 3183 /Mum/2011 (Mum.) 79.5. In following decisions also the Courts have, in the context of disallowance of interest expenditure under section 14A of the Act have repeatedly held that in the absence of any finding of dissatisfaction and cogent material to hold that interest expenditure related directly or indirectly to the exempt income, no part of interest expenditure could be disallowed.
- CIT v. Hero Cycles: 323 ITR 518 (P&H)
- CIT v. Metalman Auto P. Ltd.: 336 ITR 434 (P&H)
- CIT v. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom.) 202 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
- CIT v. K. Raheja Corporation Ltd.: ITA No. 1260/2009 (Bom.)
- Dishman Pharmaceuticals &Chemicals Ltd. v. Dy. CIT: 45 SOT 37 (Ahd.) (URO)
- Minda Investments Ltd. v. Dy. CIT: 138 TTJ 240 (Del)
- ACIT v. Champion Commercial Co Ltd: ITA No. 644/ Kol ./2012(Kol.)
- Eimco Elecon (India) Ltd. v. Addl. CIT: [2013] 33 taxmann.com 476 (Ahd.)
- Dy. CIT v. Jammu & Kashmir Bank Ltd.: 142 ITD 553 (Asr.) 79.6. In view of the above, it is only the common interest expenditure, incurred on borrowed funds, not directly attributable to any particular activity (taxable or non-taxable), which can only be considered for apportionment under Rule 8D(2)(ii).
79.7. In assesses case in investment in US-64 units of UTI long time took when dividend from US-64 units of UTI was taxable in those years. It is well known that UTI ran into rough weather raising lot of hue and cry from general investors. To surmount it, by govt intervention all US-64 Units were mandatorily converted into tax free bonds of UTI. The dividend earned in earlier years was offered to tax and taxed by the department. Since they have been converted by UTI into tax free bonds by regulatory intervention. 79.8. Apart from above, the appellant has investments in shares of companies as part of the portfolio of "directed investments" made in accordance with the policy direction of Reserve Bank of India ("RBI") as applicable to Residuary Non-banking Company ("RNBC"). Such investment in shares has been brought forward from earlier years and there is no fresh investment made during the year under appeal wherefrom exempt income has been earned. Assessee claims that investment in securities 203 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
yielding tax free income was out of interest free owned funds in the form of share capital and reserves & surplus, in earlier years. For that reason, interest paid on deposits at Rs.12,16,83,23,131 has not be allocated to securities / instruments yielding tax free income. Further, the instruments being in the nature of "directed investments", which in the case of RNBC are in the nature of "stock-in-trade", no disallowance under section 14A of the Act is called for. Reference in this regard may be made to the decision of the Karnataka High Court in the case of CCI Ltd. v. JCIT: 250 CTR 291 (Kar.) 79.9. Ld counsel raised further plea of ' Mixed Pool of Funds' contending that:
(a) It is an admitted position that the appellant has mixed pool of funds comprising of interest free owned funds as well as borrowed moneys in such a situation, the apportionment of funds should be done in a manner beneficial to the appellant, viz, the investment in securities yielding tax free income should be presumed to have come out of owned funds while the borrowed funds should be taken to have been used for purposes of business. Reliance is placed on Indian Explosives Ltd. vs. CIT: 147 ITR 392 (Cal). In the case of mixed pool of funds were used in the investment in securities yielding tax free income. It has been held that such investment should be presumed to have come out of owned funds and not out of borrowed money.
Reliance is placed on Woolcombers of India Ltd vs. CIT: 134 ITR 219 (Cal); Alkali & Chemical Corporation of India Ltd vs. CIT (Cal):
161 ITR 820 impliedly approved in 220 ITR 627 @ 632.
(b) The CIT(A), therefore, erred in allocating indirect interest expenditure to the extent of Rs.2,04,19.938. Further ½% of average 204 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
value of assets yielding exempt income qualified by the CIT(A) at Rs.15,27,835 in terms of Rules 8(2)(iii) is uncalled for considering that the investments made by the appellant are "directed investments"
in terms of RNBC Directives, 1987 issued by RBI and there is no substantial movement in the portfolio / there are infrequent transactions of purchase and sale.
(c) Without prejudice to the above, it is contended that the disallowance made at Rs.2,16,51,917 (enhanced by CIT(A) at Rs.
2,19,47,772) is much above the tax free income of Rs.68,37,583 earned by the appellant during the relevant year. It is submitted that the above disallowance under section 14A of the Act, at best, should be maximum to the tax free income earned by the appellant as held by the Chandigarh Bench of the Tribunal in the case of ACIT vs. Punjab State Co-op. & Marketing Federation Ltd. (ITA No. 548/Chd/2011).
80. Ld CIT (DR) Shri R. S. Meena contends that the claim of the assessee regarding availability of interest free funds i.e. share capital and reserves and surplus is factually incorrect. As per assessees balance sheet, share capital of Rs. 913,04,87,300/- was available as on 31.03.2009 out of which share capital of Rs.750 Crores was raised by the assessee company by issue of preference shares during the financial year under consideration. Thus, at the beginning of the financial year under consideration, share capital of Rs.163.04 Crores only was available with the appellant. Similarly, out of total reserves of Rs.757.42 Crores, reserves and surplus of Rs. 205.26 Crores were only available for disposal and balance amount represents share premium account, capital reserve, revaluation reserves and special reserves u/s 45IC of the RBI Act.
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80.1. There is no evidence that the appellant invested in tax free investments only out of equity share capital and paid up reserves. This fact has been clearly noted by the special auditors as per Page 133 of the Paper book Volume-1 filed by the appellant company. As on 31.03.2009, assessee had fixed assets valuing at Rs. 304.76 Crores and investments of Rs. 11011.32 Crores which aggregate to Rs. 11315 Crores and the same could not have been invested out of interest free funds of Rs. 368.30 Crores (share capital Rs. 163.04 Crores and disposable reserves and surplus Rs. 205.26 Crores).
80.2. In view of the aforesaid, there is no merit in the claim of the appellant company that the investment in tax free bonds and securities was made out of interest free funds available at the disposal of the appellant company. In such a situation, the provisions of rule 8D(2) and 8D(3) read with section 14A of the IT Act 1961, particularly clause (ii) of rule 8D(2) are clearly applicable to the facts of the case, which are adverted to by ld. CIT (DR). Assessing Officer has made a disallowance of Rs. 216,51,917/- which was duly examined by the learned CIT(A) in light of the submissions made on behalf of the appellant company and after consideration thereof, the findings of the AO have been sustained by him.
80.3. The decision of the learned CIT(A) is keeping in line with the facts of the case and the statutory provisions of IT Act and IT Rules. In fact, the learned CIT(A) could have gone for enhancement in this case on the basis of observation by the CIT(A) in Para 7.3 of his order that the investment in shares as on 31.03.2009 and 31.03.2008 was Rs. 149,98,54,208/- and of Rs. 164,93,57,517/- respectively. Therefore, the value of average investment 206 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
yielding tax free income should have been taken at Rs.157,46,05,586 as against which he has taken the average value of assets yielding exempt income at Rs. 30,55,66,900/- only.
80.4. Further, there is no merit in the argument of the appellant company that during the year under consideration it had earned exempt income of Rs. 68,37,583/- and the disallowance should have been restricted to the extent of exempt income. The Hon'bel special Bench of ITAT, Delhi has, in the case of Cheminvest Ltd. Vs ITO, 121 ITD 318(Delhi), held that expenditure in relation to exempt income is to be disallowed u/s 14A even when no exempted income is earned during the year.
80.5. The claim of the appellant is devoid of merit, that the investment in securities and bonds has been made by the assessee company in compliance to the directions of the RBI and therefore interest free income earned on such investments would not call for any disallowance. Firstly, the law does not make any such distinction between the investment made by an assessee in normal course of business and the investment made in-compliance to directions of the RBI. For the purposes of disallowance u/s 14A, what is to be seen is whether there is any investment which has potential to yield exempt income. Once it is held that the investment is capable of yielding exempt income, the provisions of section 14A of the IT Act 1961 would apply. Secondly, there is no evidence suggesting specific directions by the RBI to make investment in a particular security or bond. It was a commercial decision taken by the management of the appellant company to utilize interest bearing funds for investment in bonds and securities.
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80.6. Adverting to the case laws relied upon by the appellant company, it may be seen that Judgements at serial nos. (a) to (e) are distinguishable on facts. In all the cases relied upon by the appellant company the assessees were having mixed/common pool of funds and the interest free funds were sufficient to take care of investment yielding exempt income. Therefore, it was held in the aforesaid cases that since the volume of interest free funds was sufficient enough to take care of tax free investments, no disallowance u/s 14A of the Act was called for. However, as submitted here in before, in the present case the appellant company did not have sufficient interest free funds to take care of the investment.
80.7. It may be relevant to mention here that the Hon'ble Calcutta High Court, has in the case of Dhanuka & Sons Vs CIT reported in 339 ITR 319, held that the assessee has to establish nexus between the interest free funds and investment thereof in shares, securities and bonds etc. The Hon'ble Court has gone to the extent to hold that if the assessee has made investment in earlier years, then he has to establish availability of interest free funds and investment thereof in shares in the earlier years. Some of the citations deal with the cases where the assessees were holding shares as stock in trade. However, in the instant case the disallowance had been made in respect of bonds and securities held as investments and not as stock in trade. As submitted earlier, only average investment of Rs. 30,55,66,900 has been taken into consideration by the AO and CIT(A) for disallowance u/s 14A of the IT Act 1961. Therefore, the ratio laid down in the aforesaid cases does not apply to the facts of the assessee's case.
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81. We have heard the rival contentions and perused the material available on record. It has not been disputed that the administration, expenses and books of accounts of investment division are separately carried out and maintained by the assessee. No infirmity has been found by the department in this behalf. One of the main issue is on whom lies the onus to establish nexus of available funds with free and taxable income. Similarly courts have held that a finding in objective terms about assessee working being unsatisfactory is to be recorded by AO in the order. Chandigarh Bench of the Tribunal in the case of ACIT vs. Punjab State Co-op. & Marketing Federation Ltd. (ITA No. 548/Chd/2011) has held that in any case the disallowance u/s 14A cannot exceed tax free income of the assessee. If mechanical method of rule 8D is applied, it leads to manifestly absurd results in as much as for tax free income of Rs.68,37,583/- disallowance of Rs.2,16,51,917 (enhanced by CIT(A) at Rs. 2,19,47,772) is made u/s 14A which is way too much than the exempt income. As the interpretation of provisions of sec. 14A r/w rule 8D is leading to unanticipated absurdities which cannot be the intention of legislature. Under these circumstances help of external aids of construction for interpretation of statute is called for. Looking at the varying interpretation offered by various courts and benches of tribunal in relation to sec. 14A, it is quite arduous to precisely decide the issue. In given facts and circumstances without going into all the issues, in our view it is appropriate to take guidance from Chandigarh bench judgment in the case of Punjab state coopt mft. Fed.(supra) holding that the disallowance of expenditure in any case cannot exceed the income earned. In our view this judgment takes a holistic view that disallowance in terms of sec. 14A can be maximum to the extent of exempt income, there is no dispute that in this case which is at Rs. 68,37,583/-. This judgment implies 209 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
that reasonable expenditure less than the exempt income can be disallowed. In our considered opinion, in the interest of justice, it will be reasonable to estimate and disallow, 50% of exempt income (Rs.68,37,583/-) as relatable to exempt income u/s 14A r/w rule 8D. We do not go into various plea taken by both sides offering diverse views based on judicial citations. This ground of the assessee is partly allowed.
82. Ground no. 2 is not pressed by assessee hence already dismissed.
83. Ground nos. 3(a) to 3(d) of the assessee have been already allowed while deciding ground no. 9 of Revenue's appeal regarding provision of interest approving change in rate of interest provision.
84. The issue raised in ground nos. 4 of the assessee's appeal has been already set aside along with ground no. 17 of revenue's appeal supra.
85. Grounds of Appeal Nos. 5(a) to 5(c) - Double taxation 85.1. Assessee was alleged to have short provided interest on FDRs by Rs.2,25,01,961/-. Assessee replied that it had provided excess interest in this behalf in the earlier years by netting of interest earned and paid on accrual basis and it stands taxed accordingly. AO, however, added the same. 85.2. In first appeal ld. CIT(A) did not dispute these facts and observed that if the amount is brought to tax in this year, the corresponding amounts would have to be reduced from the income of earlier years and it cannot be taxed twice. However, he held that it is trite that income is taxable in the right year when accrues or arises. Therefore, the correct amount of interest income on FDRs accruing to the appellant should be taxed in this year. So far as double taxation of excess amounts in earlier years is concerned, the appellant has already submitted year-wise details to the revenue and has several alternative remedies, such as rectification u/s 154 or revision u/s 264, 210 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
which may be pursued by it. Therefore the action of the AO was upheld and assessee's ground of appeal is dismissed.
85.3. Aggrieved assessee is an appeal, ld counsel contends that it is undisputed that interest on these FDRs has been accounted and offered to tax in earlier years. Assessee is liable to tax at uniform rate, thus there is no occasion of any loss to the revenue. Besides the appeals of earlier years are also pending, it is not the case of revenue that they want to tax the same income twice. In this background in any case appellate authorities will be pleased to either delete the double taxation or direct the AO to identify the relevant years where the income is taxed and reduce the income accordingly. This will lead to avoidable burden on both the parties, and there being no loss to revenue, there will be no meaningful yield. Reliance is placed on above referred judgments Hon'ble Delhi High Court in the case of Shriram Pistons & Rings & Bombay High Court in Nagri Mills (supra). 85.4. It is pleaded that the addition deserves to be deleted.
86. Ld. DR relied on the orders of lower authorities.
87. We have heard the rival contentions and perused the material available on record. It emerges from record that there is no dispute on the fact that impugned FDR interest stands taxed in earlier years. Ld. CIT(A) held that there should be no double taxation. Taking a technical plea that right income should be taxed in right year, the addition has been confirmed on the reason that alternative remedy should be pursued by the assessee. In our view CIT(A) has plenary powers to decide the issue as it is one of the remedy. Mere existence of alternate remedy cannot be a ground to deny the due relief when the eligibility to relief is also expressed by CIT(A). In our view this type of relief based on consideration of avoiding unnecessary exercise in case of revenue neutral issues has been granted to assessee. Our 211 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
view is further supported by recent Supreme Court Judgment in the case of CIT Vs. Excel Industries 358 ITR 295 holding in this behalf as under:
"32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers."
87.1. In view thereof and respectfully following the above judgments the addition is deleted, this ground of the assessee is allowed.
88. Ground no.6 -Bank of Baroda entry not offered by the assessee:
88.1. On special auditor's indication AO asked the assessee to explain that while verifying Form 16A it is found the assessee has not offered income of Rs 82,83,607.77/- in the books as per the 26AS available. A sum of Rs 22,29,675/- being TDS deducted has also not been claimed on the above income. The details of the same are as under:
Particulars/Section Amount as per details TDS claimed as per enclosed in the letter details enclosed enclosed in the letter 193 3501179.00 793368.00 194A 4512301.77 1403465.00 194C 55000 1246 194D 79190 17594 212 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
Particulars/Section Amount as per details TDS claimed as per enclosed in the letter details enclosed enclosed in the letter 194H 110937 11427 194J 25000 2575 Total(Rs) 8283607.77 2229675.00 88.2. The assessee offered following comments were offered:
(1) At Sl. No. 48 a sum of Rs. 7,93,368/- has been reported where deductor is Mahindra & Mahindra and the relatable income to this TDS is Rs. 35,01,179/. The said amount also finds place at Sl. No. 47 of the list meaning thereby that it is loaded in the list at two places.
As regards income of Rs. 35,01,179/- and relatable to TDS of Rs. 7,93,368/-, the same has already been shown by us and the TDS stands claimed.
As regards repetition of the same amount and relatable TDS thereon, we had approached M/s Mahindra & Mahindra in this regard and they have informed us that it was an inadvertent mistake committed on their part in loading TDS returns and they will be revising their returns shortly. Copy of correspondence in this respect is enclosed herewith and, therefore, your honour will appreciate that the TDS of Rs. 7,93,368/- which has been shown in 26AS at two places actually relates to only one TDS certificate and the other amount was a duplicacy because of error committed by M/s Mahindra & Mahindra and, therefore, no income with reference to duplicacy is chargeable to tax in the hands of the assessee and neither the assessee has claimed any TDS with reference thereto (Annexure-24).
(2) As regards the item mentioned at Sl. No. 95 to 459 due to clerical mistake while filing the form no. 26Q at the Hyderabad Zone Office of the assessee company, PAN Number of the assessee was wrongly mentioned in place of PAN of the deductee as a result of which TDS which was deducted and 213 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
deposited in the account of the respective deductees is appearing in 26AS relatable to the assessee company. The income which is relatable to such TDS is Rs. 3,34,698/- while TDS totals to Rs. 34,495/-. Revised form 26Q has been filed by the Hyderabad Zone Office and we have downloaded revised AS-26 and copy of the same is being enclosed herewith, on a perusal of which your honour will appreciate our submissions in this respect (Annexure-25).
(3) As regards mismatch mentioned at Sl. No. 586, Canara Bank while loading their TDS return had wrongly mentioned TDS figure which was excessive by Rs. 2,60,276/-.
On pointing out the mistake to Canara Bank, they have revised their return and have corrected the figure earlier taken at Rs. 72,86,054/- to Rs. 70,25,778/- with this revision the total TDS as per AS-26 of deducted by Canara Bank tallies with T.D.S. deducted as shown by us at Rs. 780,63,060/- the income in respect thereto stands already offered for assessment and this fact is verifiable with reference to the revised AS-26 relatable to the assessee company as downloaded, a copy of which is enclosed herewith.
(4) As regards sl. No.619 to 622, TDS Certificates were not made available to us by the bank although relatable income sands offered for assessment. Now, we have obtained TDS certificates and, therefore, it is prayed that credit thereof may kindly be allowed which amount of TDS totals to Rs. 1,323/-. The income relatable thereto is verifiable in the details of interest accrued on bank deposits which has been filed before your honour (Enclosed T.D.S. Certificate as Annexure-26).
(5) As regards Sl. No. 90, income from FDR of PNB stand offered to tax in F.Y.2007-08 and T.D.S. thereon also stands claimed in F.Y.2007-08 because the income relate to F. Y.2007-08 only (Enclosed is relevant portion of return of A. Y. 2008-09 Annexure-27).
(6) As regards Sl. No. 717 to 721, Indusind Bank limited the observation of auditor are totally incorrect in as much as the income stands offered and T.D.S. Certificate stands claimed in 214 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
F.Y.2008-09 relevant to year under assessment and T.D.S. Certificate is made at Sl. No. 374 to 378 in Return of Income. (Enclosed is relevant portion of return of A. Y. 2009-10 Annexure-28).
(7) As regards Sl. No. 892, Tata Asset Management Limited the income of Rs. 25,000/- relatable to TDS Certificate stands already offered to tax. However claim of T.D.S. of Rs. 2,575/- was not made as the certificate was not available with assessee. Now, we have obtained the T.D.S. Certificate and therefore it is requested that claim may kindly be allow to the assessee of Rs. 2,575/- (Enclosed T.D.S. Certificate as Annexure-29). (8) As regards Sl. No. 860, Indusind Bank limited the income of Rs.
1,10,937/- relatable to TDS Certificate stands offered to tax already. However claim of T.D.S. of Rs. 11,427/- was not made as the certificate was not available with assessee. Now, we have obtained the T.D.S. Certificate and therefore it is requested that claim may kindly be allow to the assessee of Rs. 11,427/- (Enclosed T.D.S. Certificate as Annexure-30).
(9) As regards Sl. No. 824 to 826 and 833 to 858, the same relates and T.D.S. claim in respect of Star Health and Allied Insurance Company Limited against income from commission which stands duly accounted for in the books of CMSD Division. However T.D.S. claim of Rs. 17,594/- was not made as the certificate were not available with assessee. One persuasion, Star Health and Allied Insurance Company Limited has given a consolidated certificate for Rs. 21,445/- which is being enclosed herewith (Annexure-31). You are requested to kindly allow credit of Rs. 17,594/- as balance T.D.S. already stand already claimed.
(10) As regards Sl. No. 822, income from ICICI Prudential Mutual Fund stands already offered to tax in F.Y.2007-08. However, since the T.D.S. Certificate was not available with assessee. The claim of the same was not taken by assessee. Now, we have obtained the T.D.S. Certificate you are requested to kindly allow credit of T.D.S. of Rs. 566/- either in F.Y.2007-08 or F.Y.2008-09 (Enclosed T.D.S. Certificate as Annexure-32).
215 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
(11) As regards Sl. No. 70, Bank of Rajasthan Limited the observation of auditors are incorrect in as much as the income stand offered to tax and TDS stands claimed by assessee. However from figure of income a reversal entry has been netted off (46,038 - 14,300 = 31,738) in Return of Income.
As regards Sl. No. 66, Bank of Rajasthan Limited the claim of TDS of Rs. 119/- has not been made because TDS certificate is not available with us. However total income from Bank of Rajasthan Limited stands offered to tax and it is requested that the claim of T.D.S. be allowed to us.
(12) As regards. Sl. No. 462 to 473, 475 to 486 and 488 to 499 Bank of Baroda, it has been apprehended that Bank of Baroda had deducted certain TDS / bank charges etc. due to which assessee could not account for income of Rs.20,31,750/-. Assessee is offering the same to tax with the request TDS deducted thereon Rs.4,18,541/- and Rs.41,854/- may also be allowed to the assessee. Bank has not provided these certificate to us. We have also written a letter to the bank for providing T.D.S. Certificate (Copy of which is enclosed as Annexure-33).
As regards Sl.No.500 to 501, Bank of Baroda the income mentioned appears incorrect also we could not find out detail of TDS of Rs.5,69,571/-.
(13) As regards, Sl.No.786, ICICI Bank Limited the TDS certificate is not available with us hence the same has not been claimed. Further, income stands offered to tax and it is prayed that the claim of TDS be allowed to us.
(14) As regards Sl. No. 821, HDFC Asset Management Company income stands already offered to tax in F.Y.2007-08. However, since the T.D.S. Certificate was not available with assessee. The claim of the same was not taken by assessee. You are requested to kindly allow credit of T.D.S. of Rs. 680/- either in F.Y.2007-08 or F.Y.2008-09.
88.3. On perusal of the submissions AO observed that a sum of Rs 20,31,750 has been offered to tax which needs to be added to the income. Further for a sum of Rs 5,69,571 and a sum Rs 41,854 appearing on L-99 of 216 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
volume I of the special audit report, the assesse has not offered any satisfactory explanation, which is to be added. Accordingly, a sum of Rs 26,43,175 (Rs.20,31,750 + Rs.5,69,571 + Rs.41,854) wass added to the income of the assessee.
88.4. On appeal, the CIT(A) sustained the addition on protective basis, observing as under:
"I have considered the assessment order, the submissions made and the records produced before me. The correspondence between the appellant and the Bank clearly indicates that there was confusion in the matter. The undisputed amount of Rs.20,31,750/- was already added back by the appellant. The other amounts of Rs.5,69,571/- and Rs.41,854/- were unclear and disputable. The matter should have been verified from the bank by the revenue before taking an adverse view. The factual position shall be verified / clarified in the matter and correct income brought to tax in the relevant year. The AO and appellant are directed accordingly. ... ..."
89. After arguments, ld. Counsel though agreed for set aside, however, contends that it is peculiar case. It is submitted that it will be more appropriate to set aside the matter the file of the AO with a direction that this issue may be taken up with the Bank of Baroda to verify, if any income has accrued to assessee on such verification, same may be taxed and credit for corresponding TDS may be allowed.
90. We have heard the rival contentions and perused the material available on record, department has no objection to this proposition. In view thereof matter is accordingly set aside to AO.
91. Ground no. 7: Non-adjudication of ground 32 raised before CIT(A) 91.1. After hearing both the parties, it emerges that ld CIT(A) has not adjudicated this around. Since various issues including TDS verification are 217 3199 & 3512/D/2013 Sahara India Financial Corpn. Ltd.
set aside to AO, in our considered view it will be expedient to restore this issue also to AO, to decide it a fresh after giving the assessee an adequate opportunity of being heard.
92. Grounds 8,9 & 10 are claimed to be general in nature, hence not pressed are accordingly dismissed.
93. Assesses appeal is partly allowed.
94. As a result appeals filed by the revenue and assessee both are partly allowed.
Order pronounced in open court on 10- 01-2014.
Sd/- Sd/-
(B.C. MEENA ) ( R.P. TOLANI )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 10-01-2014.
MP
Copy to :
i. Assessee
ii. Assessing officer
iii. CIT(A)
iv. CIT
v. DR, ITAT.