Income Tax Appellate Tribunal - Mumbai
Asstt. Cit, Rg. 4(1) vs Claridges Investments And Finances (P) ... on 9 August, 2007
ORDER
1. These cross appeals arise out of the order dated 31-3-2006 of the Commissioner (Appeals) for the assessment year 2001-02. We have heard these appeals together and dispose the same by this consolidated order.
2. The first dispute in the revenue's appeal is directed against the disallowance of loss of Rs. 13,11,01,153 relating to purchase and sale of units of mutual funds. The learned Commissioner (Departmental Representative) vehemently relied upon the discussions in the assessment order and the case of the revenue according to him is fully supported by the decision of the Hon'ble Punjab & Haryana High Court in the case of Vaneet Jain v. CIT (2007) 294 ITR 432 (P&H).
3. The learned Counsel for the assessee, on the other hand, strongly argued that the decision of the Special Bench of the Tribunal in the case of Wallfort Shares & Stock Brokers Ltd. v. ITO (2005) 96 ITD 1 (Mum) completely covers the issue in favour of the assessee. He also relied upon the decision of the Delhi High Court in the case of CIT v. Vikram Aditya Associates (P) Ltd. .
4. We have carefully considered the rival contentions and have gone through the record. In our view, the order of the Commissioner (Appeals) does not require any interference. The Mumbai Benches of the Tribunal after considering the decisions of the Delhi High Court and the Punjab & Haryana High Court have accepted similar contentions of the assessee in the following cases:
(i) Ashok Kumar Damani 'A 'Bench (IT Appeal No. 7004 (Mum.) of 2004)
(ii) Oxemberg Fashions Ltd. 'E' Bench (IT Appeal No. 5617 (Mum.) of 2004)
(iii) Ronak Manharlal Sheth I Bench (IT Appeal No. 2966 (Mum.) of 2004) although contrary views are expressed by 'E' Bench in the case of Ompraskash Agarwal (IT Appeal No. 7895 (Mum.) of 2004). In the light of the principle laid down by the Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. and also the decision of the jurisdictional High Court in the case of Siemens India Ltd. v. K. Subramanian ITO (1983) 143 ITR 1202 (Bom.) when there is conflict between the judgments of non-jurisdictional High Courts, then the view favourable to the assessee should be adopted. Respectfully following the Special Bench decision in the case of Wallfort Shares & Stock Brokers Ltd. (supra), we confirm the order of the Commissioner (Appeals).
5. The next ground in the revenue's appeal relates to the disallowance of interest amounting to Rs. 3,84,41,309. During the year in question the assessee company carried out the transactions in BSE for a company named Classic Credit Ltd. ('CCL' in short). These transactions included shares purchases for Rs. 14,24,98,050 on 20-12-2000 and Rs. 21,32,23,650 on 17-2-2001. The assessing officer noted that the assessee had given delivery of the shares thus purchased to Mr. Ashok Mittal who was one of the directors of the assessee-company. On both the dates, the assessee had overdrawn balances in the overdraft accounts and even after the credit balances in other bank accounts the assessee had overdraft bank-balance. As against the purchases above mentioned the assessee received payments of Rs. 2,09,77,950 on 23-3-2001 and of Rs. 13,54,58,250 on 24-3-2001. The balance amount of Rs. 19,92,85,000 was received by the assessee in the first week of April 2001. On these facts the assessing officer concluded that the assessee had borrowed funds for the purchase of shares. He further concluded that the assessee diverted its borrowed funds for financing the purchases made by CCL. He calculated interest attributable on the borrowed funds from the date of settlement till the date of recovery at Rs. 3,84,41,309 and made a disallowance of that amount while computing the assessee's income chargeable to tax.
6. Before the Commissioner (Appeals) it was contended that the transactions for CCL were done in its ordinary course of business and the assessee charged brokerage on these transactions. Moreover till such time the payments were received the assessee had sufficient interest-free advances from its group concerns like Regulus Freight Forwarders Pvt. Ltd., indicating thereby that there was no deployment of borrowed funds as pointed out by the assessing officer. The learned Commissioner (Appeals) was of the view that the assessing officer failed to establish the nexus between the borrowed funds and the application of the funds and there was any sort of collision between two parties to result in a reduction of its income by not accounting notional income in the accounts.
7. The learned Departmental Representative strongly supported the findings of the assessing officer. He relied on the following decisions:
CIT v. V.I. Baby & Co. ;
CIT v. United General Trust Ltd. ;
Waterfall Estates Ltd. v. CIT ;
Madhav Prasad Jatia v. CIT ;
Shankar Theatres v. CIT ;
Phaltan Sugar Works Ltd. v. CIT .
According to him the learned Commissioner (Appeals) certain erred in deleting the aforesaid disallowances. The learned Counsel for the assessee drew our attention to the bare facts, which clearly establishes that there was no necessary nexus between the borrowed funds and the application of such borrowed monies. It is not even a special auditor appointed by the department who had identified the borrowed funds allegedly utilised by the assessee in purchase of shares on behalf of CCL. The learned Counsel for the assessee strongly relied on the decision of the Hon'ble Calcutta High Court in the case of Woolcombers of India Ltd. v. CIT and the Hon'ble Bombay High Court decision in the case of CIT v. Bombay Samachar Ltd. as also the principle laid down by the Hon'ble Supreme Court in the case of Madhav Prasad Jatia (supra).
8. We have carefully considered the submissions made by either sides and also gone through the authorities relied upon by both the sides. In our view, the disallowances are not properly made. The debt has been created in the ordinary course of business of the assessee. The amounts against CCL arose not on account of any loan or advance given by the assessee to that party but because the assessee had made purchases on behalf of the party with a view to earn brokerage, which was a major business activity of the assessee. In our view, there is no case for making any disallowance on the interest paid on the monies borrowed as the facts clearly reveal that the borrowed funds have been utilized for the purpose of business. Merely because there was huge overdraft account it cannot be held that such borrowed funds were utilized for non-business purpose. The assessee had sufficient interest-free funds taken from its group concerns, which should have been considered by the department before framing the disallowances. In any case, the learned Commissioner (Appeals) has gone through these factual aspects and has rightly deleted the disallowances. In these facts and circumstances of the case, we see no reason to interfere with his order on this issue.
9. The third ground in the revenue's appeal relates to disallowance of Rs. 9,47,559 notionally computed by the assessing officer in respect of the assessee's interest-free advances to Kumbh Trading Pvt. Ltd. The arguments by both the sides on the issue are on the same lines as advanced on the previous issue. We have gone through the assessment order and find that the assessing officer has not established any nexus between the borrowed funds and the interest-free advances given to Kumbh Trading Pvt. Ltd. Therefore, in that situation the disallowance of any part of interest paid on monies borrowed does not arise. The Bombay High Court in the case of Bombay Samachar Ltd. (supra), has held that if an assessee advances its own funds interest-free and carries on the business with the aid of borrowed funds there would be no disallowance if the borrowed funds are not diverted to any non-business purpose. The order of the Commissioner (Appeals), in our view, does not call for any interference on the issue. It is accordingly upheld
10. In the result, the appeal filed by the revenue is dismissed.
11. Now we take up the assessee's appeal. The first ground in the assessee's appeal is directed against the disallowance of an aggregate sum of Rs. 1,17,82,179 under Section 14A of the Income Tax Act on account of deemed interest comprising of Rs. 17,98,947 attributable to investment made in mutual funds and Rs. 99,83,323 attributable to investment made in shares. The assessee had invested Rs. 80,00,00,000 in 6 schemes of mutual funds and received income from those schemes aggregating to Rs. 11,14,36,242 that were claimed exempt from tax under Section 10(33) of the Act. The assessing officer noted that the entire investment of Rs. 80 crores had been drawn from the overdraft accounts with bank of Punjab. He worked out interest attributable at Rs. 17,98,947 on borrowed funds employed to earn tax-free income from mutual funds. Similarly, the assessee earned dividend income on shares of Indian companies amounting to Rs. 50,12,257 that too was exempt under Section 10(33) of the Act. The assessing officer computed interest paid attributable to the dividend income at Rs. 99,83,232. He held that prior to exemption the dividend was chargeable to tax under the head "Income from other sources", even if the dividend arose incidental to the business carried out by the assessee and, therefore, the argument of the assessee that it was not his intention to earn dividend and the dividend was incidental to his business was without merit. He disallowed both the amounts viz., Rs. 17,98,947 and Rs. 99,83,232 purporting to apply the provisions of Section 14A. The assessee's appeal on this point not being accepted the assessee has raised this issue in the second appeal before us.
12. During the course of hearing before us the learned Counsel for the assessee pointed out that while making the disallowance, the assessing officer did not take into consideration the judgment of the Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corpn. v. CIT and also the judgment of the Hon'ble Bombay High Court in the case of CIT v. Tata Chemicals Ltd. , which the assessee had relied on. The assessing officer also brushed aside the assessee's argument that it required substantial funds to deal in securities in the Stock Exchanges, which was met from the borrowed funds in addition to own funds. During the year under consideration, the total turnover of the company in shares was Rs. 9,218 crores. According to the requirements of the Stock Exchange, the company had to keep margin money of 20 per cent of its turnover. Therefore, the company had to utilize borrowed funds for payment of this huge margin money to the Stock Exchange. When borrowed funds were utilized for day-to-day running of the business, there could not be any justification for disallowance of interest.
13. Coming to the provisions of Section 14A of the Act, the learned Counsel submitted that those provisions were applicable in respect of the expenditure incurred in relation to the exempt income. As the assessee had received dividend income, expenditure incurred in relation to that income only would be covered by the provisions of Section 14A of the Act. It was submitted that the borrowed funds were utilized by the assessee for running of the business and also for paying the margin money to the Stock Exchange, and not for earning dividend. There was no direct nexus between the utilization of borrowed funds and earning of dividends. On the other hand, the nexus was clearly between the borrowed funds and running of the business as a trader in stocks and shares.
14. The learned Counsel pointed out that the assessee had invested Rs. 80 crores in schemes of various mutual funds from which the assessee earned income of Rs. 11,14,36,242 for which the assessing officer worked out interest attributable at Rs. 17,98,947. The assessee had earned dividend income on shares of Indian companies amounting to Rs. 50,12,257 and on that amount the assessing officer worked out interest attributable at Rs. 99,83,232. The fallacy in the reasoning of the revenue was apparent in the fact that no prudent businessman would spend interest on borrowed funds to the tune of Rs. 99,83,232 just to earn dividend income of Rs. 50,12,257. In addition, the assessing officer had further disallowed the sums of Rs. 8,92,914 and Rs. 21,92,812 as Demat charges and administrative expenses attributable to dividend income from shares of Indian companies.
15. The learned Counsel referred to the landmark judgment on the question of allowability of interest on borrowed capital in the case of CIT v. Malayalam Plantations Ltd. , wherein the Hon'ble Supreme court observed that the expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. The Apex Court has thus clearly held that if the payment of interest is for the purpose of business, it has to be allowed. Similar views were expressed by the Hon'ble Bombay High Court in the cases of CIT v. Shree Changdeo Sugar Mills Ltd. and CIT v. Belapur Co. Ltd. . In the case of CIT v. Kanoria Investments (P) Ltd. the Hon'ble Calcutta High Court held that once the capital was borrowed for the business it was immaterial how the borrowed money was applied. Even if the borrowed money is applied in making investment which yield dividend, the entire interest paid on borrowing should be allowed as deduction for computing business income and no part of interest should be apportioned and deducted from dividend. Thus, this judgment of Hon'ble Calcutta High Court answered the stand taken by the assessing officer based on the legal provisions of Section 56(2)(i) making dividend compulsorily chargeable to tax under the head "Income from other sources".
16. The learned Counsel for the assessee strongly relied upon the Hon'ble jurisdictional High Court's recent judgment in the case of CIT v. Emrald Co. Ltd. (2006) 284 ITR 586 (Bom.). He pointed out the following observations of Their Lordships:
Therefore, in the case of a dealer in shares, as in the present case, the dividend retains the character of business income though assessed under Section 56. The interest on the borrowings is paid for the purpose of business and, therefore, allowable under Section 36(1)(iii). The interest paid is not expenditure laid out or expended wholly or exclusively for the purpose of earning the dividend as required under Section 51(iii) and, therefore, should not be reduced under Section 57 from the dividend income.
The learned Counsel pointed out that in the case of Mafatlal Holdings Ltd. v. Addl. CIT the Tribunal held that the expression "for the purpose of the business" in Section 36(1)(iii) is wider in scope than "for the purpose of earning profits". Fact that the dividend income was exempt in the hands of the assessee was no ground to disallow the interest.
17. The learned Counsel submitted that the working of disallowance as made by the assessing officer was based on ad hoc disallowances and not on actual facts. The Hon'ble Bombay High Court in the case of CIT v. General Insurance Corpn. of India (No. 1) held that the expenditure that is not directly relatable to earning of dividend income cannot be deducted from deduction under Section 80M. Again in the case of CIT v. Central Bank of India Hon'ble Bombay High Court held that only actual expenditure incurred was deductible and estimated proportionate expenditure was not deductible from gross dividend while working out deduction under Section 80M. Reference was invited to the decision of the Tribunal in the case of Shaw Wallace & Co. Ltd. v. Dy. CIT (2002) 80 ITD 156 (Cal) and of Madhya Pradesh High Court in the case of State Bank of lndore v. CIT (2005) 275 ITR 233 (MP). In the instant case neither the assessing officer nor the Commissioner (Appeals) had established the direct nexus between the borrowed funds and the acquisition of mutual fund units or shares of Indian companies on which income/dividend was received by the assessee. A large amount of dividend was received by the assessee on shares purchased by the clients whom delivery was made after the record date. Thus the estimated disallowance as had been made was contrary to the judgments of jurisdictional High Court in the cases of General Insurance Corpn. of India (No. I) (supra) and Central Bank of India (supra). The learned Counsel strongly placed reliance in this regard on the decision of Tribunal in the case of Asstt. CIT v. Eicher Ltd. . It has been held in that case that the expenditure which assessing officer seeks to disallow under Section 14A should be actually incurred and 'so incurred with a view to producing non-taxable income'. There being no material with the assessing officer to show that any expenditure was actually incurred in earning dividend income, the Tribunal held that nothing could be disallowed under Section 14A on estimate basis. In the case of the assessee also no amount was borrowed for earning of dividend income but for the purposes of (dealing in shares and dividend had been received only incidental to dealing in shares. Moreover, the revenue had made the disallowance of interest merely on estimate. Hence the decision of Tribunal in the case of Eicher Ltd. (supra) was squarely applicable.
18. The learned Counsel then referred to the decision of Maruti Udyog Ltd. v. Dy. CIT (2005) 92 ITD 119 (Delhi). It was pointed out that in that case the Tribunal has held that the burden of proof is on the person who alleges the existence of a fact and on that reasoning the burden of proof that the borrowed funds related to acquisition of shares that yielded tax-free income is on the revenue under the provisions of Section 14A. In that decision the Tribunal has further held that the nexus between borrowed funds and investment can be said to be established only where it is shown that interest-free funds were not available with the assessee. In the case of Maruti Udyog Ltd. (supra) that assessee was not a dealer in shares that the present assessee is, still the Tribunal held that since interest-free funds available exceeded the funds invested in shares no disallowance under Section 14A was called for. Following that decision also the disallowance under Section 14A was not sustainable.
19. The learned departmental representative strongly relied upon the order of the assessing officer and the learned Commissioner (Appeals). He emphasized that the provisions of Section 14A are widely worded and, therefore, if there was any income that was exempted by any provisions of the Act the expenditure relatable to such income had to be disallowed. It did not matter that no expenditure was separately incurred for the purpose of earning such income. As long as there was exempt income and expenditure that could be related to that exempt income the provisions of Section 14A mandated disallowance of expenditure relatable to exempt income. The judgment of Hon'ble Supreme Court was delivered prior to the enactment of the provisions of Section 14A and did not come in the way of the operation of the provisions of Section 14A. The learned departmental representative strongly relied upon the decision of the Tribunal in Everplus Securities & Finance Ltd. v. Dy. CIT (2006) 101 ITD 151 (Delhi).
20. We have carefully considered the rival submissions and are of the view that the disallowance made by the assessing officer and upheld by the learned Commissioner (Appeals) is assailable on several counts. In the first instance the authorities below have merely applied an ad hoc formula and made no attempt to make the disallowance on actual basis. This approach cannot be permitted as held by the Hon'ble jurisdictional High Court in the cases of General, Insurance Corpn. of lndia Ltd. (supra) and Central Bank of India Ltd. (supra). The hollowness of the revenue's approach is exposed from the fact that a disallowance of interest attributable has been worked out at Rs. 99,83,232 just to earn dividend income of Rs. 50,12,257. We therefore see considerable justification in the contention of the assessee that it required substantial funds to deal in securities in the Stock Exchanges, which was met from the borrowed funds in addition to own funds. During the year under consideration, the total turnover of the company in shares was Rs. 9,218 crores. According to the requirements of the Stock Exchange, the company had to keep margin money of 20 per cent of its turnover. Therefore, the company had to utilize borrowed funds for payment of this huge margin money to the Stock Exchange. When borrowed funds were utilized for day-to-day running of the business, there could not be any justification for disallowance of interest. Secondly, the assessing officer as also the Learned Commissioner (Appeals) have simply assumed that all the shares had been purchased out of borrowed funds. We do not accept that merely because the payments were made from the overdraft account it entailed utilization of borrowed funds as distinguished from the assessee's own funds. There is direct authority of the judgment of Hon'ble Calcutta High Court in the case of Woolcombers of India Ltd. (supra) against such assumptions. As held by the Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. (supra) the burden of proof as respects utilization of borrowed funds, for the purposes of the provisions of Section 14A, is on revenue.
21. As a matter of legal proposition also it is not possible to accept that even in the case of a dealer/broker in shares as distinguished from an investor in shares the borrowed funds utilized for acquisition of shares should be related to earning of dividends. Where the shareholding is on trading account or on behalf of a third party the interest expenditure cannot be said to have been incurred for earning of dividend. There is force in the contention that the dividend income in the case of the present assessee has been to a large extent merely incidental income for which no borrowing was made. The legal position in this regard is not altered by the provisions of Section 14A that apply only when there is expenditure in relation to an exempt income. These provisions do not create any legal fiction to deem any expenditure as expenditure incurred in relation to exempt income. This legal view of the matter is well supported by the judgment of Hon'ble Calcutta High Court in the case of CIT v. Kanoria Investments (P) Ltd. and the decisions of ITAT in the cases of Mafatlal Holdings Ltd. v. Addl. CIT as also Asstt. CIT v. Etcher Ltd. where the Tribunal has held that the expenditure which assessing officer seeks to disallow under Section 14A should be actually incurred and 'so incurred with a view to producing non-taxable income'. As against these authorities the learned Departmental Representative has relied upon the decision of the Tribunal in the case of Everplus Securities & Finance Ltd. v. Dy. CIT (2006) 101 ITD 151 (Delhi). The facts of that case are altogether distinct from the facts of the present case. M/s. Everplus Securities & Finance Ltd. made investment out of borrowed funds in the shares of Jindal group of companies as a part of acquiring controlling interest in those group companies. The Tribunal has repeatedly enumerated in para 5.28 of that order that that assessee was not a trader in shares and there was no trading activity. We see no assistance to the case of the revenue from that decision. At any rate the legal position in this respect is put beyond debate as respects the dividend earned on shares acquired for trading purposes by the judgment of Hon'ble jurisdictional High Court in the case of CIT v. Emrald Co. Ltd. (2006) 284 ITR 586 (Bom.). The following observations of the Hon'ble court put the legal position in this regard in no uncertain terms:
Therefore, in the case of a dealer in shares, as in the present case, the dividend retains the character of business income though assessed under Section 56. The interest on the borrowings is paid for the purpose of business and therefore, allowable under Section 36(1)(iii). The interest paid is not expenditure laid out or expended wholly or exclusively for the purpose of earning the dividend as required under Section 57(iii) and therefore, should not be reduced under Section 57 from the dividend income.
22. In view of the discussion in the foregoing paragraphs we hold that the learned Commissioner (Appeals) erred in upholding the disallowance of Rs. 1,17,82,179 under Section 14A of the Income Tax Act. We direct the assessing officer to delete this disallowance.
23. The second ground of appeal is directed against the disallowance of Rs. 30,85,726 under Section 14A of the Act out of Demat charges, stock exchange expenses and administrative expenses. According to the assessing officer, a part of these expenses is attributable to investment made towards equity shares and units of mutual funds resulting into tax-free dividend on equity shares and income from units of mutual funds. He, therefore, made a proportionate disallowance out of all the three heads of expenditure. The learned Commissioner (Appeals), while confirming the disallowance, has stated that 'the methodology adopted by the assessing officer for making the disallowance is both technically and commercially correct and reasonable'.
24. The learned Counsel argued that no weightage was given to the assessees's argument that the demat cost was not a cost of purchase or sale but was only a transaction cost, and that stock exchange expenses had no relation with the dividend income of the assessee and were levied on the broker who dealt for his clients in the stock exchange. The 1 earned counsel further submitted that various case law and arguments mentioned in the submissions in regard to ground of appeal No. 1 insofar as they apply to ground of appeal No. 2 also should be taken into consideration. He relied heavily upon the judgment of the Apex court in the case of Rajasthan State Warehousing Corpn. v. CIT . Further the learned Counsel argued that the assessee's business was dealing in shares and securities, which was indivisible. All the expenses were incurred in connection with the appellant's business and not in connection with earning of dividend. Not a single item of expenditure was directly attributable to earning of any exempt income. In the normal course, expenses like demat charges, stock exchange expenses or administrative expenses could not have been claimed by the appellant as deduction against the income from dividend. Such expenses, therefore, should not have been forcibly attributed to the dividend income and then disallowed by the assessing officer. The learned Departmental Representative reiterated the same arguments as in relation to ground of appeal No. 1 above.
25. On consideration of rival submissions we find that the same principles as in relation to the first ground do apply to this ground as well. It is true that while the disallowance disputed in ground of appeal No. 1 relates to deductions claimed under Section 36(1)(iii) the disallowance in this ground of appeal is of deductions claimed under Section 37(1), but the fact remains that these expenses also cannot be said to have been incurred in relation to dividend income. The assessee purchased shares of Indian companies or units of mutual funds for trading or on behalf of third party. None of the purchases have been shown on investment account. Hence no expenditure can be directly related to dividend/income that in the case of the instant assessee is only incidental to trading or brokerage income. Besides, in relation to these disallowances also the approach, assumptions and working made by the learned assessing officer suffer from the same numerous flaws and deficiencies as discussed at length in relation to ground of appeal No. 1 above. Following our reasoning as in relation to ground of appeal No. 1 we allow this ground of appeal also and direct the assessing officer to delete the disallowance.
26. The third ground of appeal relates to the disallowance of the loss amounting to Rs. 2,47,34,748 claimed on account of transactions with Century Consultants Ltd. The assessee purchased shares of Cyberspace Info Ltd. on behalf of Century Consultants Ltd. on 18-1 -2001 and the total amount receivable on this account was Rs. 2,47,69,500.69, which according to the assessee it did not receive, as the two cheques issued by the party of Rs. 1,25,00,000 each bounced. The assessee, therefore, claimed that the sum of Rs. 2,47,69,500 be allowed as business loss/bad debt. The assessing officer held that since the assessee had 6,40,000 shares of Cyberspace worth Rs. 74,56,000 and also the margin money of Rs. 15,00,000, the loss of Rs. 2,47,69,500 could not have been claimed by the assessee. The assessing officer held that the assessee's claim for allowing this amount was not acceptable as the amount had not been written off also in the books of account and the requirements of the provisions of Section 36(2) were not met. The learned Commissioner (Appeals) agreed with the assessing officer and held that the amount in question was allowable neither as bad debt nor as business loss. He held also that the claim of loss was premature because the assessee had not made efforts of any sort to recover the debt and made claim of business loss in undue haste.
27. The learned Counsel for the assessee informed us that copies of account of the party for the transactions at BSE & NSE are given at pages 60 and 70 of the paper-book respectively. Copies of the two bounced cheques are given at pages 540 to 542 of the paper-book. The legal principle in this respect was elucidated in the landmark judgment of the Hon'ble Supreme Court in the case of Badridas Daga v. CIT and if the guiding principle as laid down in that judgment, is applied to the assessee's case there could not be any doubt that the loss was incurred by the assessee in the course of carrying on of the business and that the nature of sale proceeds realizable was on income account and, therefore, it resulted in revenue loss. The learned Counsel explained that as the cheques issued by Century Consultants Ltd. were not realized, the assessee tried its level best to sell the shares in the open market. However, the shares could not be sold, as the market was falling and the quantity being traded off in the exchange was negligible. As the shares held by the assessee did not have any significant value, the assessee treated the realizable value thereof as nil As regards the margin money of Rs. 15,00,000 remaining with the assessee, the same was retained on account of Century Consultants to enable the company to defend itself on account of various transactions executed for and on behalf of that company. Hence while determining the loss arising on account of transactions done in the shares of Cyberspace Info Ltd. for and on behalf of Century Consultants, the entire amount which had become irrecoverable was written off in the books of account and claimed as trading loss section It was emphatically clarified that the observation of the assessing officer that the amount was not written off by the assessee was not correct. The learned Counsel reiterated that the amount due from Century Consultants was written off in the books of account.
28. The learned Counsel argued that there was little merit in the objections of the lower authorities. The main objection related to the assessee having in its possession as at the end of financial year 2000-01.6,40,000 shares of Cyberspace Info Ltd. and relying on the alleged rate of Rs. 11.68 as at the end of the financial year the assessing officer held that the assessee retained with himself the shares of the market value of Rs. 74,56,000. Further the assessee had held the margin money of Rs. 15,00,000. At the outset, based on this reasoning the authorities below should have restricted the disallowance to Rs;. 89,56,000 whereas the disallowance had been made of the entire claim of Rs. 2,47,34,748. More importantly, the assessing officer had completely misdirected himself while valuing the shares at Rs. 74,56,000 at the rate of Rs. 11.68. In that regard reference was invited to the assessee's submissions before the Special Auditor at pages 419- 420 of the paper-book. The post dated cheques of Rs. 1,25,00,000 each were deposited by the assessee on 18-3-2001. The same were returned as bounced on 19-3-2001. Immediately, the assessee tried to sale the shares but there were no takers. From 19th to 22nd March on an average one trade took place and during those four days the total volume of the shares transacted in the Exchange was 19 shares only le., less than 5 shares per day. Thereafter the quoted price at BSE plummeted to Rs. 2 only and that too for minuscule quantity of shares. The assessee simply could not have sold 6,44,000 shares in its possession for complete want of buyers. Those shares were at that time practically of no value at all. Secondly, the learned assessing officer objected to the claim of business loss on the ground that certain steps had been taken by the assessee. There again the assessing officer had completely misdirected himself and paid no heed to ground realities. Mere filing the suit was not a prospect of actual recovery. That was more a question of the availability of the funds with the debtor. Further, it is common knowledge that such types of litigation are long-drawn, protracted and result into mounting cost in terms of time and money generally not commensurate with the final outcome. The learned Counsel relied upon the judgments in the cases of Jethabhai Hirji & Jethabhai Ramdas v. CIT and A.W. Figgis & Co. (P) Ltd. v. CIT . It was submitted that the revenue authorities as also the special auditor appointed by them had not taken note of the letter and spirit of the Accounting Standard 4 requiring the note to be taken of and the effect to be given to "contingencies and events occurring after the balance sheet date" that are reasonably known as at the time of closure of accounts and the actual date of signing of the balance-sheet. Further the Courts have time and again emphasized in a plethora of cases that in such matters the correct view cannot be taken on the basis of a dogmatic approach but on the basis of what a prudent man of commerce would recognise to be the correct state of affairs. As to the assessing officer taking a severe exception to the account of Century Consultants Ltd. not being squared up in the books of the assessee, the learned Counsel pointed out that the assessee's claim was that of business loss and not of bad debt under Section 36(1)(vii) and therefore there was no pre-condition of write off. Even as respects the bad debts also the condition laid down by the statute refers to write-off in the books of account of the assessee and not necessarily in the personal ledger account of the debtor. In the case of the present assessee the debt was written off in the books of account even though the account of the party was not squared up.
29. The learned Departmental Representative strongly emphasized the contents of the orders of the authorities below. He relied upon the following judgments:
1. CIT v. Hotel Ambassador (2002) 253 ITR 4302 (Ker).
CIT v. Micromax Systems (P) Ltd. (2005) 277 ITR 4093 (Mad).
South India Surgical Co. Ltd. v. Asstt. CIT (2006) 287 ITR 624 (Mad).
30. We have carefully considered the rival submissions. Basically, the reasons given for the disallowance of the assessee's claim of business loss are three-fold First, in view of the provisions of Section 36(2) the assessee could not claim bad debt in relation to the amount expended for purchase of shares on behalf of Century Consultants. The assessee could claim bad debt in respect only of unrecovered brokerage. Secondly, according to the assessing officer there is no business loss because the assessee had held valuable security against the debt. We are in substantial agreement with the contention of the learned Counsel for the assessee that this argument holds good only to the extent of the value of the security and no more. If the full value of the debt was not covered by the net value of the security, the assessee was justified to claim the business loss to the extent of the unsecured debt. Thirdly, the learned Commissioner (Appeals) holds that the assessee's claim of business loss was premature.
31. As to the first contention the assessing officer is correct that the condition precedent as enumerated in Section 36(2) is not satisfied as respects the amount expended for purchase of shares on behalf of Century Consultants. From that it does not follow that the assessee could not at all claim deduction of money lost. From the facts on record it cannot be disputed that the assessee had purchased the shares on behalf of CCL in the ordinary course of its profit-making activity. Any bona fide loss arising in the ordinary course of carrying on of business which is of revenue nature is to be allowed as business loss even if the provisions relating to deduction of bad debt do not apply. The leading case law on the subject is the judgment of the Apex Court in the case of Badridas Daga v. CIT . The Hon'ble Supreme Court has laid down the legal proposition in the following words:
...when a claim is made for a deduction for which there is no specific provision in Section 10(2) (of the old Act), whether it is admissible or not will depend on whether, having regard to accepted commercial practice and trading principles, it can be said to arise out of the carrying on of the business and to be incidental to it. If that is established, then the deduction must be allowed, provided of course there is no prohibition against it, express or implied, in the Act.
The aforesaid principle has been applied in suitable cases time and again without qualification. We therefore do not find merit in the argument of the assessing officer that the assessee's claim of deduction should fail for want of satisfaction of Section 36(2) requirement.
32. As to the contention of the learned Commissioner (Appeals) that the loss was claimed in undue haste he has relied upon no material to arrive at this finding and, therefore, the same is not warranted on the facts and in the circumstances of the case. The assessee has demonstrated that there was sharp erosion in the value of the shares of Cyberspace that had become dud. The cheques issued by CCL bounced. It is not understood as to how the Commissioner (Appeals) has termed it 'undue haste'. If the events unfolded quickly that cannot be blamed upon the assessee. There is no mandatory procedure that the assessee did not comply with. In the case of Jethabhai Hirji & Jethabhai Ramdas v. CIT . Hon'ble jurisdictional High Court has held:
It is now well settled that the fact that the assessee has not taken steps by way of legal proceedings against the debtor would not automatically justify the finding that he was not entitled to write off the amount as a bad debt. In our opinion, the fact that an assessee, subsequent to the write off of the debt, continues with legal proceedings against the debtor need not necessarily lead to the conclusion that the write off was improper or lacked bona fides.
Similarly, in the case of A.W. Figgis & Co. (P) Ltd. v. CIT Hon'ble Calcutta High Court has held as under:
If the assessee knew it well that filing of the suit would not in any way help the assessee but rather burden the assessee with additional financial expenses. If the assessee feels that in spite of the suit, the loan will not be recovered, the filing of a civil suit for recovery of debt is not necessary to claim the bad debt. Therefore, in this case the amount should be allowed as bad debt.
It is therefore seen that there is hardly any force in the contention of the learned Commissioner (Appeals) as respects the efforts of recovery not made by the assessee. The assessee, on an honest appraisal of ground realities came to an honest belief that the amounts outstanding against Century Consultants had resulted into a business loss. Hence the case of the appellant falls within the parameters laid down by the Hon'ble jurisdictional High Court in the case of Jethabhai Hirji & Jethabhai Ramdas (supra). The case law relied upon in this behalf by the learned Departmental Representative is off the mark. In the case of CIT v. Hotel Ambassador (2002) 253 ITR 4302 (Ker) that assessee had not charged bad debt written off to profit & loss account at all. It did not form part of audited books of account. Moreover, the claim of bad debt was first made in reassessment proceedings. Facts of that case are altogether different. In the case of CIT v. Micromax Systems(R) Ltd. that assessee merely created "Provision for bad debts" and charged the provision to profit & loss account. Hon'ble High Court held that bad debt was not written off in the books of account and the precondition laid down in the provisions of Section 36(1)(vii) as after the amendment with effect from 1-4-1989 was not satisfied. Facts of that case also are altogether different. In the case of South India Surgical Co. Ltd. v. Asstt. CIT (2006) 287 ITR 624 (Mad.) there were dues from government hospitals and they had acknowledged the claim. Non payment was possibly from fund-flow problems. In respect of other hospitals also that assessee did not produce any relevant material to show that the debt had become bad. Thus facts of all the three judgments relied upon by the learned Commissioner (Departmental Representative) are altogether different and those judgments cannot be applied on the facts of the case before us.
33. We are now left with the main objection of the assessing officer that there was security of Rs. 15 lakhs and the assessee had in his custody6,40,000 shares of Cyberspace purchased on behalf of CCL. We see force in the contention of the learned Counsel for the assessee that on this ground the assessing officer could not disallow the entire business loss of Rs. 2,47,34,748 when as per the assessing officer himself Cyberspace shares were worth Rs. 74,56,000 only. Even as regards that value alleged by the assessing officer the learned Counsel for the assessee has pointed out that the post-dated cheques of Rs. 1,25,00,000 each were deposited by the assessee on 18-3-2001. The same were returned as bounced on 19-3-2001. Immediately, the assessee tried to sale the shares but there were no takers. From 19th to 22nd March on an average one trade took place and during those four days the total volume of the shares transacted in the exchange was 19 shares only i.e., less than 5 shares per day. Thereafter the quoted price at BSE plummeted to Rs. 2 only and that too for minuscule quantity of shares. These submissions of the assessee made before the special auditor in the assessee's letter as placed at pages 419-420 of the paper-book have not been controverted by the assessing officer and the learned Commissioner (Appeals) in any manner. There is no material relied upon or any argument in the learned Commissioner (Departmental Representative's) submissions either. We therefore hold that the value of chose shares at the material time should be taken approximately Rs. 2 only. However we cannot accept the entire amount being claimed as business loss when the assessee had with him the security deposit of Rs. 15 lakhs and in his custody 6.40 lakh shares. We, therefore, taking into consideration the security deposit and the value of the shares in the custody, sustain the disallowance to the tune of Rs. 27,80,000. The assessing officer is directed to allow the balance amount of business loss as claimed by the assessee.
34. The fourth ground of appeal relates to the addition of Rs. 44,93,731 made by the assessing officer being the amounts of excess brokerage debited to some clients. The appellant subsequently reversed such excess brokerage income in respect of the following parties:
1.
Classic Credit Ltd.
Rs. 6,70,904
2. Fortune Investments Rs. 11,27,805
3. Ashok Mittal & Co.
Rs. 25,58,584
4. Mr. Shah Rs. 1,36,438 Rs. 44,93,731 While making the addition, the assessing officer has stated in his order that no valid and justifiable reason for reversal of income was provided by the assessee, and that the major portion of such reversal is in favour of Ashok Mittal & Co. which is a proprietary concern of Shri Ashok Mittal, a director of the assessee-company. The learned Commissioner (Appeals) more or less repeated the arguments of the assessing officer while confirming the addition. The assessee had explained before the assessing officer that there was no reversal of brokerage income chargeable from the above clients. Brokerage was originally calculated at a fixed percentage with the help of an accounting package, and later adjusted in some cases according to the terms that had been agreed upon. Thus adjustment entries were passed in order to give effect to the agreed rates. The contentions of the assessee have not been accepted by the assessing officer and the learned Commissioner (Appeals). They are of the view that the agreed rates are unreliable and collusive.
35. During the course of hearing before us the learned Counsel for the assessee submitted that both the assessing officer and the learned Commissioner (Appeals) have not applied their minds while deciding on the issue. Neither of them appreciated that brokerage was to be charged in accordance with the terms and conditions agreed upon. If there was excess charging of brokerage, the excess amount had to be reversed in the account of the affected client. All the four parties had confirmed that they had received credits for excess brokerage charged. The learned Counsel pointed out that brokerage income on the trades executed by the assessee on behalf of its constituents were fully and truly recorded in the accounts, and that brokerage charged in excess of the agreed terms alone was reversed by passing necessary accounting entries. In the case of Ashok Mittal & Co. the lower rate of brokerage should be viewed in the light of the volume of transactions entered into by that client as also the shares lent by him to the assessee-company for being offered as security against the loans taken from banks. It was argued that as a prudent businessman the assessee had agreed to charge brokerage at a particular rate out of commercial expediency. In support of these contentions the learned Counsel relied upon the judgments in the cases of Travancore Titanium Products Ltd. v. CIT ; Shahzada Nand & Sons v. CIT ; Sasoon J. David & Co. (P) Ltd. v. CIT and S.A. Builders Ltd. v. CIT (2007) 288 ITR 12 (SC).
36. The learned Commissioner (Departmental Representative) strongly relied upon the observations in the assessment order and the order of the learned Commissioner (Appeals). He supported the addition with the judgments in the case of State Bank of Travancore v. CIT (1986) 158 ITR 1023 (SC) and Western India Oil Distributing Co. Ltd. v. CIT (1994) 206 ITR 3594 (Bom).
37. We have carefully considered the rival submissions. We find that the learned Commissioner (Departmental Representative) has erroneously relied upon the judgment of Hon'ble Supreme Court in the case of State Bank of Travancore (supra). That judgment related to the case where the assessee-bank did not provide for the accrued interest on sticky loans on the ground that the loans were sticky and there was dim prospect of actual recovery of interest. Hon'ble Supreme Court held that so long as an assessee followed the mercantile system of accounting interest income had to be recognized on accrual basis. The facts of the assessee before us are vastly different. Here adjustment entry is explained not because of any doubt as regards recovery but being rectification of mistake. The judgment in the case of State Bank of Travancore (supra) does not prohibit rectification of mistake in the books of account by reversal of an erroneous entry. For the same reason there is no assistance to the case of revenue from the judgment of Hon'ble jurisdictional High Court in the case of Western India Oil Distributing Co. Ltd. (supra). As to the orders of the authorities below the assessing officer has disbelieved the explanation given by the assessee on the ground that Shri Ashok Mittal, one of the directors of the assessee-company was the proprietor of Ashok Mittal & Co. That fact does not necessarily make the transactions of the assessee with that concern collusive transaction. There is no application of mind on the explanation of the assessee that the volume of business with M/s. Ashok Mittal & Co. and the shares pledged by them as security for the assessee's business justified the lower rate of brokerage. Further there is no basis at all given as respects the other three parties. There is no material to suggest that the assessee received any brokerage, in cash or kind, outside the books of account. There is no law-making it obligatory upon an assessee to maximize his profits. Income-tax is a charge upon the income earned and not upon the income that could have been earned. In the recent case of S.A. Builders Ltd. v. CIT (2007) 288 ITR 1, the Hon'ble Supreme Court have elucidated the meaning of the expression, "commercial expediency" and made the following observations:
The expression 'commercial expediency' is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Decisions relating to Section 37 will also be applicable to Section 36(1)(iii) because in Section 37 also the expression used is 'for the purpose of the business'. 'For the purpose of business' includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.... Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits.
Both the assessing officer and the learned Commissioner (Appeals) should have considered the issue in the light of the above judgments of the Apex Court. But that has not been done. The addition made by the assessing officer is based on suspicion, surmises and conjectures. There is no material in the possession of the assessing officer that the reversed amounts were indeed collected from the clients. The addition is, therefore, totally unjustified and contrary to the provisions of the Act, and accordingly directed to be deleted.
38. The fifth ground of appeal relates to the addition of Rs. 41,33,919 made by the assessing officer by way of the assessment of deemed interest on the funds allegedly diverted to M/s. Ashok Mittal & Co. (AMC). The assessing officer, while admitting that AMC was a client of the assessee- company who regularly purchased and sold shares on behalf of AMC, stated that over and above the relationship of a client and a broker the assessee-company advanced funds from time to time to AMC and also received funds from AMC. It is pointed out by the assessing officer that from 31-1-2001 to 31-3-2001 there was a continuous debit balance in the account of AMC except on three days when the balance was in credit. The assessing officer further observed that the debit balance was due to funds advanced by the assessee-company to AMC and also due to debits on account of business transactions. On these facts, the assessing officer disallowed the interest attributable to the period between 31-1-2001 and 31-3-2001 amounting to Rs. 41,33,919. The learned Commissioner (Appeals) agreed with the views of the assessing officer and observed that Sri Ashok Mittal enjoyed substantial amount of interest-free funds for a considerable period of time.
39. The learned Counsel for the assessee strongly objected to the addition and stated that the same was made by the assessing officer and confirmed by the learned Commissioner (Appeals) without any valid reason. There was no justification for looking at the accounts of the last quarter only and to ignore the earlier quarters and even earlier years. Secondly, the lower authorities did not appreciate that there was a written understanding (Page 98 of the paper-book) with AMC about transfer of funds from the assessee-company to AMC and vice versa for business purposes of each other and there was no transaction not guided by the commercial expediency of the assessee's own business. Thirdly, Shri Ashok Mittal had agreed to pledge his own shares as security for the huge bank loans taken by the assessee. Reference in this regard was invited to pages 559 to 561 of the paper-book. The learned Counsel argued that the principal of commercial expediency as enunciated in the judgments of the Hon'ble Supreme Court in the cases of CIT v. Walchand & Co. (P) Ltd. ; Travancore Titanium Products Ltd. v. CIT ; Shahzada Nand & Sons v. CIT ; Sasoon J. David & Co. (P) Ltd. v. CIT and S.A. Builders Ltd. v. CIT (2007) 288 ITR 12 (SC) duly supported the transactions of the assessee-company with AMC.
40. Lastly, the learned Counsel submitted that neither the learned Special Auditor nor the assessing officer had identified the borrowed funds allegedly utilized by the assessee in making any uncalled for advance to AMC. In fact the working of disallowance had been made purely notionally by applying a rate of 17 per cent on the outstanding amounts in the accounts of AMC. Such course of action was contrary to the judgment of the jurisdictional High Court in the case of CIT v. Bombay Samachar Ltd. . The debt in the account of AMC was partly a consequence of the shares purchased by the assessee on their behalf and that was the normed business of the assessee. It could not be said that the conditions laid out in Section 36(i)(zii) were not met. The learned Counsel relied upon in this behalf on Hon'ble Apex court judgment in the case of Madhav Prasad Jatia v. CIT (1979) 118 ITR 2003.
41. The learned Commissioner (Departmental Representative) relied upon the assessment order and the order of the learned Commissioner (Appeals). He sought to support their orders by placing reliance upon the judgments in the cases of Phaltan Sugar Works Ltd. v. CIT ; Phaltan Sugar Works Ltd. v. CIT and Madhav Prasad Jatia v. CIT (1979) 118 ITR 2003, 211 (SC).
42. We have carefully considered the rival submissions. In the case of Bombay Samachar Ltd. (supra) the Hon'ble jurisdictional High Court has held that the view that an assessee could have decreased the extent of his borrowing by collecting its outstanding and, therefore, would not been titled to claim interest paid on borrowed capital is untenable. If it is undisputed that no part of the borrowed capital was utilized for purpose other than business purpose the entire interest paid on such borrowed capital would be an allowable deduction under Section 10(2)(iii) of 1922 Act, now Section 36(1)(iii) of 1961 Act. The judgments of the jurisdictional High court in the cases of Phaltan Sugar Works Ltd. (supra) relied upon by the learned Commissioner (Departmental Representative) relate to the diversion of interest-bearing borrowed capital for non-business purposes and do not lay down that an assessee ought to charge interest on all the loans and advances. The same is the position as regards certain observations of the Apex Court in the case of Madhav Prasad Jatia (supra) relied upon by the learned Commissioner (Departmental Representative). It is therefore essential to prove diversion of borrowed funds for non-business purpose before disallowing interest paid on borrowed capital. No such - material has been relied upon in the orders of the authorities below, nor has the learned Commissioner (Departmental Representative) brought any such material on record. The addition has been made purely notionally by applying a rate of 17 per cent on the outstanding amounts in the accounts of AMC. No such interest has been charged by or accrued to the assessee. As pointed out earlier income-tax is a charge upon income earned and not the income that could have been earned. The addition made is, therefore, liable to be deleted on this short ground alone. The learned Counsel for the assessee has, however, relied further upon principle of commercial expediency and the fact that the assessing officer has taken into consideration only broken period of three months and not viewed the transactions of the assessee with AMC as a whole. Taking into account all these aspects we see no merit in this addition and direct deletion thereof.
43. The Sixth ground of appeal is directed against the addition of Rs. 1,47,01,000 sustained by the learned Commissioner (Appeals). The relevant facts in this regard are that during the course of assessment proceedings the assessee stated that the dividend income credited in the books of account of the assessee and offered for assessment included the dividend to the tune of Rs. 38, 25,147 that had been received on shares bought for the clients but received by the assessee because the delivery of those shares was given after record date for the receipt of dividend declared on those shares. In the assessment order the assessing officer held that the assessee could not substantiate this explanation and he made addition of Rs. 45,34,19,215 representing undisclosed investment in shares on which the dividend had been disclosed in the books of account of the assessee. However, during the course of the appeal before the learned Commissioner (Appeals) the assessing officer submitted a Remand Report. In that report the assessing officer, inter alia, accepted that the assessee had by and large established the explanation given by relevant details and documentary evidence but the assessee could not furnish documentary evidence as respects the shares of the value of Rs. 1,47,01,000. The learned Commissioner (Appeals) therefore sustained the addition as made by the assessing officer to that extent.
44. During the course of hearing before us the learned Counsel submitted that the assessee had in the proceedings of special audit as well as assessment proceedings pointed out that the receipt of dividend had been recorded in the books of account of the assessee and, therefore, there could not be any unexplained investment outside the books of account. The assessee had identified the shares on which dividend was received and pointed out that he had kept separate accounts of the purchases on own account as well as on account of the clients and all shares were paid for from the assessee's bank accounts. The assessing officer, however, insisted upon the full documents of each and every purchase and for want of some supporting record, for which no proper or adequate opportunity was given to the assessee, he made the addition of Rs. 45,34,19,215. There was neither any application of mind on the part of the assessing officer nor any judicious approach by him as a quasi-judicial authority. The learned Commissioner (Appeals) also failed to take a practical and rational view of the matter. During the course of proceedings before the learned Commissioner (Appeals) the assessing officer furnished a remand report and recorded that barring two buyers of shares for the aggregate consideration of Rs. 1,47,01,000, the assessee had furnished the relevant documents to prove that those shares did not belong to him. The learned Counsel strongly objected to assessment of unexplained investments in relation of the transactions that were admittedly recorded in the books of account. From the remand report of the assessing officer, which had been made a part of the appellate order, it transpired that reasonable opportunity was not given to the assessee for submission of documentary evidences when summons issued to the clients came back unserved. The assessee was not confronted with the findings of the assessing officer. Merely because dividend on the shares was received by the assessee, it could not be hypothetically assumed that the investments in the shares were made by the assessee and that those investments were unexplained whereas the books of account showed that soon afterwards those shares were delivered to the clients and all such clients had been identified. Without prejudice, the learned Counsel submitted that documentary evidence was available in respect of the transactions amounting to Rs. 1,47,01,000 and the assessee had moved separately an application under Rule 29 in this behalf. It was pointed out also that the name of the client was Anant Gupta and not Anand Gupta as stated by the assessing officer. Summons sent to Anand Gupta might have come back unserved as the name was wrongly written.
45. The learned Commissioner (Departmental Representative) argued that the assessing officer had examined the issue at length. The assessee could not establish its explanation as regards shares purchased to the extent of Rs. 1,47,01,000. Hence, the addition was rightly sustained by the learned Commissioner (Appeals).
46. We have carefully considered the rival submissions. In our view on the facts and in the circumstances of the case and the manner in which this issue has been framed we accept the additional evidences furnished in this regard. In the light of the same the disputed issue stands restored to the assessing officer with a view to frame afresh in the light of the fresh evidence that is now produced before us and also in the light of the evidences the assessee may produce in this behalf.
47. The seventh ground of appeal relates to upholding of the disallowance of expenses on purchase of software to the tune of Rs. 3,24,508. The assessing officer treated the expenditure as capital expenditure. The learned Commissioner (Appeals) has held that the kind of software purchased by the assessee, being a systems' software, should be treated as capital expenditure. The learned Counsel for the assessee strongly urged that in this fast-changing technology era expenditure on purchase of computer software could not be said to have resulted in any enduring benefit. He relied upon the Tribunal decisions in the cases of Business Information Processing Services v. Asstt. CIT (2000) 73 ITD 304 (Jp.) and Vinod Kothari Consultants Ltd. v. Dy. CIT (2004) 91 ITD 153 (Kol.)(TM). The learned Commissioner (Departmental Representative), on the contrary, relied upon the decision of ITAT Mumbai 'H' Bench in ITA No. 2323 /Mum./2002 and of ITAT Delhi in the case of Maruti Udyog Ltd. v. Dy. CIT (2005) 92 ITD 119 (Delhi).
48. On consideration of the arguments on both sides we hold that the assessee should succeed on this point. The entire expenditure is of Rs. 3,24,508 only. The total turnover of the company in shares during the year under consideration is Rs. 9,218 crores. Having regard to the scale of operations of the assessee company the expenditure is too low to be regarded as resulting into any long term benefit. It is not the case of the revenue that any part of this expenditure relates to any software custom made/installed for the assessee on standalone basis. We therefore direct deletion of the disallowance.
49. The eighth ground of appeal relates to the disallowance of Rs. 7,92,192 sustained by the learned Commissioner (Appeals). The disallowance has been made by the assessing officer out of the expenses incurred by the assessee towards promotion of business. Out of the total claim of Rs. 9,39,150, expenses involving payments in foreign currency to the tune of Rs. 6,45,235 have been fully disallowed by the assessing officer on the ground of absence of full details. Out of the balance amount of Rs. 2, 93,915, a sum equal to50 per cent, i.e., Rs. 1,46,957 has been disallowed on estimate as having been incurred for non-business purposes. The learned Commissioner (Appeals) has enumerated certain items of expenses and held that the assessing officer was fully justified in making the disallowance.
50. The learned Counsel argued that the learned Commissioner (Appeals) had only identified certain items of expenditure incurred on hotel bills and departmental stores and stated that the addition was justified. He submitted that the assessee had furnished reasonable amount of details to the Special Auditor as also the assessing officer. Reference in this regard was invited to pages 562 to 628 of the paper-book. The lower authorities did not go into the details of expenses to find out as to whether the expenses were incurred for the purposes of business. Foreign tours by the directors and their wives were not necessarily personal as assumed by the assessing officer and the learned Commissioner (Appeals). Unless the purpose of the tour was looked at, one could not conclude as to whether the tour was for personal purpose or business purpose. No such effort was made by the lower authorities. The learned Counsel relied upon the court pronouncements in the cases of CIT v. Indian Products Ltd. ; CIT v. Sundaram Clayton Ltd. and CIT v. Aspinwall & Co. Ltd. . In the assessee's case, an objective analysis of the purpose of foreign tours had not been done, which was evident from both the assessment order and the appellate order. The disallowance had been made in an ad hoc manner and without appreciating the facts of the case. Entire disallowance was therefore liable to be deleted. The learned Counsel emphasized further that the provision of Section 37(2A) had been omitted with effect from 1-4-1998.
51. The learned Commissioner (Departmental Representative) supported the orders of the authorities below and relied upon the judgments in the cases of L.H. Sugar Factory & Oil Mills (P) Ltd. v. CIT ; CIT v. T.S. Hajee Moosa & Co. (1985)153 ITR 4222 (Mad) and D.B. Madan v. CIT (2003) 261 ITR 1933 (Mad).
52. We find that the assessing officer has disallowed the entire expenditure in foreign currency for want of details. During the course of assessment proceedings the assessee furnished only the credit card statements and stated that the payments had been made through account payee cheques and the expenditure was recorded in the books of account. We see justification in the stand taken by the revenue that unless the purpose of expenditure was substantiated the expenditure did not qualify to be deducted under Section 37(1). The assessee has not furnished any evidence that the foreign tours by the directors and their family members had been undertaken for the business purpose of the assessee. The disallowance of foreign currency expenses is therefore confirmed. As to the domestic currency expenses it is seen that the expenditure is by way of hotel & restaurant bills or by way of purchase of luxury goods. The authorities below have allowed 50 per cent of the expenditure as business expenditure. The disallowance has been made because here also the objective of the expenditure is not substantiated with any further evidence or information. On consideration we do not see any reasons to interfere in the order of the learned Commissioner (Appeals) in this behalf. Hence this ground of appeal is rejected.
53. The ninth ground of appeal relates to the assessment of Rs. 2,67,73,684 made by the assessing officer under the provisions of Section 45(2). The assessee had disclosed investments in equity shares at Rs. 1,332.48 lakhs in the audited balance sheet as on 31-3-2000. On 2-4-2000 these investments were converted into stock-in-trade by passing a journal entry in the books of account. The market value of the shares on the date of conversion was Rs. 1,064.74 lakhs. The market value was based on the valuation as on 31-3-2000, as 1-4-2000 was Saturday and 2-4-2000 was Sunday. The assessing officer treated the difference between the cost of investments (Rs. 1,332.48 lakhs) and the market value (Rs. 1,064.74 lakhs) as capital loss as against the appellant's claim as business loss, and did not allow the benefit of set off of the loss against business income of the appellant. The learned Commissioner (Appeals) agreed with the assessing officer and upheld the treatment given by the assessing officer.
54. During the course of hearing before us the learned Counsel referred to the judgment of Hon'ble Supreme Court in the case of Investments Ltd. v. CIT and argued that no firm conclusion could be drawn from the description in the balance-sheet as investment or stock-in-trade. To the same effect was the judgment of Hon'ble Supreme Court in the case of Dalhousie Investment Trust Co. Ltd. v. CIT (1968) 68 ITR 486 (SC). How the assessee dealt with the asset was material and not how he described it in the books of account. Based on this reasoning the learned Counsel argued that investments appearing in the balance-sheet were actually stock-in-trade. In order to rectify the apparent mistake of showing the stock-in-trade as investments, the appellant converted these investments as stock, and did trading on that converted stock. The loss arose as a sequel to the conversion. There was no reason for showing this loss as capital loss, as Section 45(2) did not permit this. The section dealt with only 'profits or gains arising from the transfer by way of conversion' and not 'losses' arising from such transfer. The loss could, therefore, only be shown as business loss.
55. The learned Commissioner (Departmental Representative) referred to the provisions of Section 45(2) and argued that the legal fiction created by those provisions had to be given effect to. He relied upon the Tribunal decision in Dy. CIT v. Jindal Exports Ltd. .
56. We have carefully considered the rival submissions. The treatment given by the assessing officer is in accordance with the statutory provisions of Section 45(2). We do not see force in the argument that these provisions come into play only when there is profit or gain and not when there is loss. For that matter even the provisions of Section 45(1) speak of "profits or gains arising from the transfer of a capital asset" only but in computation of income chargeable to tax the capital loss also has to be given effect to. The expression "Profit" in that sense includes negative profit. The stand taken by the revenue has its statutory foundation in the provisions of Section 71(3) of the Act. As to the contention of the assessee that there was merely a rectification of mistake no such case has been set up with relevant evidence. Moreover, the provisions of Section 45(2) do not draw any distinction depending upon an assessee's reasons for conversion of a capital asset into or treatment as stock-in-trade. We hold that in the impugned order the learned Commissioner (Appeals) has rightly upheld the assessment order in this behalf. Accordingly we reject this ground of appeal.
57. Grounds of appeal Nos. 10, 11, 12 and 13 are directed against various disallowances /additions made by the assessing officer in Para 9.12 from pages 39 to 56 of the assessment order. These grounds of appeal are interrelated and have certain common facts. These were argued together by the learned Counsel for the assessee and the learned Commissioner (Departmental Representative). For convenience we are considering the same together. During the year under consideration the assessee entered into various transactions in shares through three Kolkata-based brokers, M/s. Dinesh Kumar Singhania & Co., M/s. Doe Jones Investments & Consultants Pvt. Ltd., and M/s. Arihant Exim Scrips Pvt. Ltd. According to the assessing officer those transactions were not genuine and he has therefore made various disallowances/additions. By ground No. 10, the assessee has challenged the disallowance of Rs. 7,20,93,640 made by the assessing officer of the loss claimed in respect of delivery-based transactions. The assessing officer made the disallowance because the three Kolkata brokers through whom the assessee had made the transactions did not report the transactions to the Calcutta Stock Exchange.
Ground of Appeal Nos. 11 and 12 pertain to the assessee's claim of deduction of speculation loss of Rs. 15,67,29,843 and loss on non-delivery based transactions of Rs. 6,19,10,450 disallowed by the assessing officer on the similar basis. Furthermore, the assessee had claimed business loss of Rs. 26,44,07,332 on the ground that the three Kolkata based brokers (supra) had defaulted in making payments, on account, to the assessee to that extent. That claim too has been disallowed by the assessing officer on similar reasoning and is disputed by the assessee by ground of appeal No. 13. For making these disallowances the assessing officer has drawn from the report of the Special Auditor made under Section 142(2A). In the Audit report it was stated that the assessee-company did not produce any bills or contract notes from any of the three brokers in support of its claim of purchase and sale of shares. Though, the assessee produced five documents in the form of "Delivery Bill" those documents had various lacunas like the serial No. , trade No. , the time of the execution of the transactions etc. was not mentioned. In the Additional Report made subsequently the Special Auditor acknowledges that 11 memos of confirmations/contract-note issued by the three brokers in Form B were furnished by the assessee. The Audit report states also that the assessee-company had received the shares in the Demat Account and also delivered the shares. The assessing officer made enquiries with Calcutta Stock Exchange to find out the status of the transactions made through the three brokers. CSE could not throw much light on the transactions it only stated that as no trade No. was furnished by the three brokers it was not possible to confirm whether the said trades were done through the trading system of the Exchange or not. CSE, however, stated that it was necessary to furnish details of off market trades to the Exchange but the three brokers had not submitted details of any off market trades made with the assessee. CSE confirmed that it was mandatory from 30-10-2000 to put client code in the system at the time of placing orders but there was no record of any client code pertaining to the assessee in the Exchange. The Exchange also reported that the three brokers were declared defaulters on 26-3-2001 and expelled from membership of the Exchange with effect from 25-9-2001. The assessing officer confronted the assessee with the results of the enquiry made with Calcutta Stock Exchange. It was stated by the assessee that the transactions were effected off market, and in view of contract notes in Form B prescribed by SEBI received from the brokers the assessee had considered the trades as good as on market trades. The assessee furnished the copies of contract notes and demat-slips to the assessing officer. A certified true copy of the bank statement of Dinesh Kumar Singhania & Co evidencing receipt of Rs. 20,03,68,022 was also produced. The assessee pointed out to the assessing officer that due to a big market crash many members of the CSE including the above three brokers were declared defaulters for non-payment of the commitments. Pursuant to the investigation, SEBI filed prosecution against the three broking firms. The said brokers of CSE were also debarred by SEBI from associating with securities market activities and dealing with securities market till the completion of investigation under Sections 11 and Sections 1 IB of SEBI Act. The assessee clarified that the loss was incurred due to purchase and sale of securities in the normal course of the business, and that all the transactions were recorded in its books of account. The assessee contended that the shares were delivered to the constituents and payments were received except those outstanding as on 31-3-2001 and argued that under such circumstances there could not be any doubt about the genuineness of the trades. The assessing officer found that from the various transactions of the assessee with the three Kolkata brokers the following position emerged:
(i) Business loss of Rs. 6,54,75,600 on account of Delivery based transactions;
(ii) Speculation income of Rs. 36,71,67,890;
(iii) Speculation loss of Rs. 13,98,80,283;
(iv) Business loss on account of non-recovery of outstanding amount of Rs. 26,44,07,332 as respects the transactions (i), (ii) and (iii) above.
As respects the Delivery based transactions as at (i) above the assessing officer did not accept the assessee's clarifications and disallowed the loss of Rs. 7,20,93,640 as not being genuine. He, however, treated the profit of Rs. 66,18,640 arising out of transaction in shares of Larsen & Toubro Ltd. as income from other sources. As regards the transactions at (iii) above the assessing officer disallowed the loss of Rs. 15,67,29,843 but assessed the profit of Rs. 1,68,49,560 as income from other sources. Further the assessing officer assessed as income from other sources speculation profit of Rs. 42,90,78,343. Lastly, he disallowed the assessee's claim of business loss of Rs. 26,44,07,352 as not genuine/not proved. The assessing officer further held that the loss had not crystallized during the relevant financial year. He pointed out that the appellant had received a sum of Rs. 1 crore subsequently from the three brokers, which indicated that the business loss claimed by the assessee was premature and not crystallized during the financial year 2000-01 as claimed by the assessee. The assessing officer held that from the reply received from Calcutta Stock Exchange it was established that the trades in question had not taken place at the floor of the Exchange nor had the three brokers informed the details of any off market trades made with the assessee. The three brokers, when examined, merely stated that as per the usual practice the transactions with the assessee had to be reported to the CSE but they were readily unable to furnish any documentary evidence in that connection. The assessing officer held that whereas the assessee's claim of loss could not be allowed, profits from trades as shown by the assessee were assessable under the head "Income from other sources" being unexplained credits.
58. The learned Commissioner (Appeals) held that the undisputed facts of the case were that the transactions on which loss was claimed were never executed on the floor of exchange and were thus against the rules and regulations framed by SEBI, a statutory regulatory body. Under the circumstances there was no doubt that the transactions did not have any lawful foundation nor were carried out in normal business methodology. As to the loss of Rs. 26,44,07,332 claimed on account of non-recovery the learned Commissioner (Appeals) held that the loss had not actually crystallized as was evident from the fact that a sum of Rs. 1 crore had been received by the assessee subsequently.
59. The learned Counsel for the assessee contended that the orders of the authorities below in this behalf are devoid of all merits. The assessing officer had acted on irrelevant and non-existing material and had ignored obvious material since that went entirely in favour of the assessee. He purported to act upon the report of the Special Auditor under Section 142(2A) and the information supplied by Calcutta Stock Exchange but he stated what they did not state and did not state what they obviously stated Lakhani & Co., the special auditors appointed under Section 142(2A) made their report on 6-8-2004 (pages 340 to 404 of the paper-book). In Para 11 of Annexure-I of that report (pages 355-357 of the paper-book) the special auditor has discussed the assessee's transactions with the three Kolkata brokers. The special auditor says that the appellant did not produce any bills or contract notes from the three brokers but produced five documents titled "Delivery Bill" that did not contain serial number, the time (not date) of execution of the transactions, separate brokerage amount, type of transaction (purchase or sale). At the same time the Report acknowledges that the complete break-up of the transactions as per books of account had been given and most significantly, "The company has received in the Demat Account the shares and also delivered the shares." (page 356 of the paper-book). The special auditor nowhere stated that the transactions are not genuine. In this report he makes only two kinds of observations viz- (A) In the absence of bills or contract notes he is not in a position to comment whether the transactions are in compliance of the provisions of the Securities Contract (Regulation) Act, 1956 and (B). In the absence of the supporting proof in the form of contract notes, proof of prevailing market price on the date of transactions, time of execution of the transactions, proof of having executed the transactions through the Stock Exchange or proof of having executed the transactions off market he is not in a position to comment about the genuineness of the speculation loss incurred. In other words, the special auditor admitted that he found not an iota of material to suggest that the transactions were not genuine. He only abstained from certifying the profit/loss as shown by the assessee as genuine because the contract notes were not given. Lakhani & Co. the special auditor supplemented their report dated 6-8-2004 by Additional report dated 26-8-2004 (page 329 of the paper-book). In this report he acknowledged that the assessee forwarded 11 contract notes in Form B prescribed whenever there was a transaction between two brokers' constituents, in support of the transactions in question. He, however, pointed out that there were columns for 'Order No. ', 'Trade No. ' and 'Trade Time' but no information as regards those items had been given. The additional report acknowledged that the assessee had furnished Demat Slips, Demat statements and Clearing house statements of the brokers. However, the Special auditor observed that those documents only confirmed the delivery of the shares and to and from whose account it had been transferred but they did not conclusively prove that the transactions of sales were effected on the floor of the exchange or were market trades.
Significantly, the Special Auditor certified after referring to the quotations of the Calcutta Stock Exchange Association that the price at which the transactions of purchase and sales had been disclosed were within the price band of the market price of the respective days, (page 331 of the paper-book).
60. The learned Counsel for the assessee further pointed out that the Calcutta Stock Exchange (CSE) in their letter dated 22-9-2004, reproduced in the assessment order; did not at any place refute the correctness or genuineness of the transactions in question. They only observed:
It is not possible for the Exchange to confirm whether the trades done by the said persons were through the trading system of the Exchange or not unless the trade numbers are furnished in the contract notes.
Calcutta Stock Exchange further clarified:
It is not possible to state that the documents as submitted by your assessee are genuine or not as these documents do not contain trade numbers. The assessee is supposed to furnish Contract Note with trade No. , trade time, delivery statement, difference bills etc. We are enclosing herewith one specimen copy of Form B of contract note for your ready reference.
Thus the learned Counsel argued that there was no adverse finding in the letter of CSE. The letter, of course, pointed out certain deficiencies in the documents but CSE did not pronounce the transactions to be not genuine or even illegal. On comparison of the Special Audit Report and the response from Calcutta Stock Exchange with the findings of the assessing officer it was apparent that the assessing officer had added his own imagination when he stated that the CSE had confirmed that these transactions had not taken place on the floor of the Exchange. Furthermore, he allowed his flight of fancy to overtake the contents of the aforesaid documents when he concluded:
It therefore follows that these transactions are shown only in order to generate loss or profit and are not genuine share transactions since even the concerned brokers in this regard have confirmed that these transactions should have been reported to the CSE but have indirectly admitted that the same have not been informed to the CSE. The relevant reply of the brokers is reproduced here:
...7. Sir, as usual practice the above transaction should be reported to the CSE. However, readily we cannot furnish any documentary evidence in this connection.
The correct position in this respect was that CSE stated that it was not possible to confirm that the trades were done through the trading system of the Exchange and the brokers stated that they could not readily furnish the details. Rest was entirely the assessing officers' flight of fancy. The assessing officer had in his zeal to make fanciful additions to the declared income not seen the material that was staring him in face. All the transactions were duly recorded in the books of account (the special auditor had confirmed that in his original report). The appellant had received all the shares purchased in the Demat account and likewise had delivered the shares sold from Demat account (the special auditor had confirmed that too in his original report). The shares were purchased or sold at the prevalent market price on the date of trade (the special auditor took pains to verify and he accepted the price shown, in the Additional report). At the request of the assessing officer CSE supplied the quotations of the material period to the assessing officer and he had kept mum in regard thereto, obviously because he found the price shown by the appellant supported by the data furnished by CSE. All the payments received or made were routed through the regular bank accounts of the assessee. The assessee furnished five Delivery Bills and later eleven Contract Notes duly signed and confirmed by Kolkata brokers. Last but not the least, none of the alleged irregularities could be attributed to the assessee because if at all, the same were the obligation of the three brokers who were the members of CSE and not the assessee.
61. The learned Counsel for the assessee argued that it was the time-honoured precept of evidence that the apparent state is true until contrary is proved and the burden to prove the contrary rests upon one who asserts the contrary. In this context he referred to the judgment of the Apex Court in the case of CIT v. Daulatram Rawatmull . In the present case the assessee had fully discharged the initial burden placed on him to furnish supporting evidence as respects the transactions claimed to have been carried out by him. The assessee had furnished all the evidences reasonably expected to be in his possession. As against the evidence placed by the assessee the assessing officer had nothing more than conjectures, surmises and suspicion. Disallowances had been made without examining the relevant evidence like, contract notes, payments made against purchases and received against sale of shares, delivery instructions, respective credit and debit in the demat statements, relevant entries appearing in the bank statement of the assessee and in the bank statement of Kolkata brokers, which were all produced before the assessing officer. In the assessment order and the appellate order no evidence or material against the assessee had been relied upon. As already pointed out neither the special audit report nor CSE communication recorded that the transactions of the assessee were not genuine. The only circumstance relied upon by the revenue was that certain columns in the Contract Notes had been left blank and that the three Kolkata brokers did not furnish Form B to CSE that they were supposed to do. None of those irregularities were committed by the assessee. At the assessment stage, it was submitted that the assessee was under bona fide belief that the transactions had been reported to the Calcutta Stock Exchange as the assessee had received the contract note in Form B, and delivered all the shares to the constituents. The assessee was not supposed to further chase the documentation and see with his own eyes that the copies of Form B were duly lodged with the Exchange. As to the omissions to fill certain columns the learned Counsel submitted that those columns were the obligation of the brokers and not of the assessee. Contract notes as prepared were sufficient to serve the requirements of the assessee as the date of transaction, number of shares, the rate per share and the price for which bought or sold were all recorded therein. If there were any further omissions or non-observance of any of the regulatory provisions of the Exchange/SEBI it was the broker who was answerable for those omissions and liable to come to grief, not the assessee-company. The learned Counsel argued that in business transactions there was limited scope for any party to the transaction as respects the documents to be prepared by the other party. In the assessment order the assessing officer had drawn far too heavily from those omissions by observing "hat the assessee himself being a leading player could not be oblivious of the requirements laid down by the stock exchange. The learned Counsel argued that the Form B/Contract Notes were the baby of the member brokers of CSE. No such compliance was called for from the assessee-company. The learned Counsel referred to the decision of ITAT Mumbai T" Bench in the case of Mukesh R. Marolia v. Addl. CIT (2006) 6 SOT 247 (Mum) and pointed out that in that decision the Tribunal has held that the transactions outside the floor of the stock exchange are not illegal. Howsoever unbelievable it might be, if the transactions of an assessee are well accounted for, documented and supported it would be very difficult to brush aside the contentions of an assessee that he had purchased and sold certain shares.
62. The learned Counsel argued that there was inherent contradiction and injustice in the assessment order. The assessing officer considered for certain reasons, of whatever worth, the transactions of the assessee with the three Kolkata brokers to be paper transactions only. True to his finding the assessing officer was required to reject all trades of the assessee with those brokers but against all logic, all common-sense he did so selectively. While he rejected the loss-making trades and disallows the loss, he had no qualms in charging to tax the substantial profit disclosed by the assessee from the other transactions. To achieve this self-contradiction he gave the spacious argument that profits were assessable as unexplained credits. The assessee had shown profit from these transactions at approx. Rs. 45.26 crores and losses at approx. Rs. 29.08 crores and non recovery of dues of Rs. 26.44 crores. Surely the assessee must be completely out of his senses to introduce bogus credits of Rs. 45.26 crores only to be offset by much larger bogus debits of Rs. 55.52 crores. Thus, the entire approach of the assessing officer defied all logic and was mind-boggling.
63. The learned Counsel for the assessee pointed out that both the assessing officer and Commissioner (Appeals) have disallowed the business loss on account of non-recovery of Rs. 26.44 crores on the ground that the loss was not actually incurred, the transactions with Kolkata brokers were on paper only and in any case the same were in violation of SEBI prescriptions. Various arguments of the learned Counsel as respects the genuineness of the trades/transactions applied to the loss claimed by the assessee on account of non-recovery of dues also. The learned Counsel emphasized that the loss was reflected in the books of account duly supported by cogent documents, confirmations and evidences. Money for the transactions had gone out from the bank accounts of the assessee-company. Shares sold had gone out from the Demat accounts of the assessee. There was nothing to indicate that any of those money and shares returned to the assessee in some form or the other. The loss claimed by the assessee could not therefore be disallowed on some hypothetical objections like time of transaction not recorded or client code not mentioned or trade No. not mentioned. The defects in that respect were all attributable to the documentation done by the third parties and not the assessee who was not at fault at all. Even if he were the loss could not be disallowed for such procedural reasons. Secondly, according to the revenue, the appellant's claim of loss was premature. Because there was subsequently recovery of approx. Rs. 1 crore from Kolkata brokers the revenue contended that all hopes of recovery were not lost and there was possibility of amounts being recovered. The learned Counsel submitted that after constant efforts only a sum of Rs. 1 crore could be recovered over a period of three and half years. That showed that there was slim chance of any further recovery. Hence the circumstance relied upon by revenue should be held as establishing the assessee's case. The assessee doggedly pursued the issue of recovery and left no stone unturned - a criminal complaint was filed; police investigation was involved; cheques dishonoured; and a criminal suit was filed. All that is a matter of record.
64. The learned Counsel referred to the observations of the Mumbai Bench of the Tribunal in the case of Jt. CIT v. Shreyas S Morakhia (IT Appeal No. 2647 (Mum.) of 1999) that loss suffered on account of defaulting stock brokers should be considered as business loss though the recovery proceedings initiated by the stock exchange against the said defaulter brokers had not been completed. He then referred to the Hon'ble Gujarat High Court judgment in the case of Hindusthan Trading Corpn. v. CIT (1986) 160 ITR 151 (Guj) and pointed out that Hon'ble High Court had held that the sale price due to the assessee from purchasers would become a debt due to the assessee at the end of the year of account but such debt would not become capital asset. Such debt would be a current or business asset as distinguished from fixed asset. Debt due from a purchaser representing unpaid sale price had the same character as stock-in-trade. Both were current or business assets. Loss of stock-in-trade would be revenue loss. Similarly, if unpaid purchase price or debt due from a purchaser was not recoverable, it would be revenue loss. The learned Counsel pointed out that similar views have been expressed by the Hon'ble Bombay High Court in the case of Pohoomal Bros. v. CIT when Their Lordships observe, "any loss caused to the stock-in-trade must in its very nature be a loss incidental to the trade; the cause of the loss is irrelevant".
65. During the course of hearing before us the learned Commissioner (Departmental Representative) strongly reiterated the various contentions of the assessing officer and Commissioner (Appeals). He sought to derive support from the judgments of Hon'ble Supreme Court in the cases of Maddi Venkataraman & Co. (P) Ltd. v. CIT and Bombay Stock Exchange v. Jaya I. Shah (2003) 185 CTR (SC) 36. He also relied upon the decision of ITAT Delhi in the case of Asstt. CIT v. Subhash Chand Shorewala (2005) 91 TTJ (Delhi) 57.
66. We have carefully considered the rival submissions. The disallowances/additions made by the assessing officer in relation to the transactions with the three Kolkata brokers fall in two broad categories viz. the disallowance of losses in the transactions and the disallowance of the business loss claimed on account of non-recovery of debts. As to the first category it is incorrect to say that the assessing officer has made disallowance of the losses claimed by the assessee. According to the assessing officer the assessee declared profit at approx. Rs. 45.26 crores and losses at approx. Rs. 29.08 crores and thus the assessee has shown the profit of Rs. 16.18 crores in its transactions with the three Kolkata brokers. Because the assessee has claimed non-recovery of dues from these brokers to the extent of Rs. 26.44 crores it can be said that overall there is loss of Rs. 10.26 crores. The assessing officer has however divided the transactions with Kolkata brokers into several groupings such as delivery based transactions, non-delivery based transactions, speculation and segregated the transactions resulting into profit from the transactions resulting into loss in each grouping and in this manner he has worked out disallowance of aggregate loss of Rs. 29.08 crores. In effect, the assessing officer has assessed aggregate profit of Rs. 45.26 crores in the assessee's transactions with the three Kolkata brokers by accepting the transactions resulting into profits while rejecting the transactions resulting into loss as non-genuine. The learned Counsel for the assessee has pointed out that the reasons given by the assessing officer, for whatever they are worth, apply in equal measure to the profit transactions as well as loss transactions and therefore the addition could not exceed the sum of Rs. 10.26 crores being the net reduction in the assessee's income on account of transactions with the Kolkata brokers. Realizing this self-contradiction the assessing officer has purported to assess the sum of Rs. 45.26 crores as unexplained credits. That is, obviously, a lame excuse because the assessee does not appear to have introduced any unexplained income in the garb of unexplained cash credits in the name of the three Kolkata brokers and the learned Counsel for the assessee has clearly stated that more money went out of the coffers of the assessee than received from the three Kolkata brokers. Thus there is no merit in the basis given by the authorities below for taking self-contradictory views of the assessee's transactions with the same three parties. It may be stated here that the provisions of Section 68 apply only to the cash credits and they do not apply to other credits appearing in the accounts of an assessee. For that reason also the amounts cannot be assessed as unexplained credits. Hence there is no rationale at all in looking askance at credit entries while ignoring the debit entries in one and the same account, more so when the debit entries outnumber the credit entries and result into net deficit of Rs. 26.44 crores and the assessing officer himself finds all transactions being paper transactions only. We therefore hold that if the finding of the assessing officer that the transactions with the three Kolkata brokers are not genuine was to be accepted, then looked at any which way no addition exceeding the sum of Rs. 10.26 crores could be made and that too only as the part disallowance of the assessee's claim of deduction on account of business loss of Rs. 26.44 crores.
67. Subject to the remarks in the foregoing paragraph we proceed to examine the reasons given by the assessing officer for treating the transactions as non-genuine, first reason given by the assessing officer is that the special auditor had made adverse comments with regard to these transactions in his main report as well as the subsequent additional report. Secondly, as confirmed by the CSE, these transactions had not taken place on the floor of the Exchange nor had these transactions been reported to the Exchange by the three brokers as per the relevant rules and regulations since they were off market transactions. Further if these transactions were spot transactions, the brokers were required to report all such transactions on the same day to the concerned stock Exchange as per SEBI instruction. The settlement of spot transactions had to take place within 48 hours and that was not done. According to the assessing officer as these transactions were neither spot transactions nor contracted on the floor of the Exchange nor reported to the Exchange on the same day, it followed that these transactions were shown only in order to generate loss or profit and were not genuine share transactions since even the concerned brokers had confirmed that these transactions should have been reported to the CSE but had indirectly admitted that the same had not been informed to the CSE.
68. The assessing officer has thus relied upon the enquiries made from three sources. We find that none of the three sources support the findings and conclusions of the assessing officer. As to the reports of the Special Auditor under Section 142(2A) Lakhani & Co., the special auditors appointed under Section 142(2A) made their report on 6-8-2004 (pages 340 to 404 of the paper-book). In Para 11 of Annexure -1 of that report (pages 355-357 of the paper-book) the special auditor has discussed the assessee's transactions with the three Kolkata brokers. The special auditor takes exception to the assessee not furnishing the bills or contract notes from the three brokers but acknowledges five documents titled "Delivery Bill". These delivery bills too were not found satisfactory as they did not contain serial number, the time (not date) of execution of the transactions, separate brokerage amount, type of transaction (purchase or sale). At the same time the Report acknowledges that the complete break-up of the transactions as per books of account had been given and, "The company has received in the Demat account the shares and also delivered the shares" (page 356 of the paper-book). The special auditor nowhere states that the transactions are not genuine. In this report the Special Auditor makes only the observations (1) In the absence of bills or contract notes it cannot be commented whether the transactions are in compliance of the provisions of the Securities Contract (Regulation) Act, 1956 and (2). In the absence of the supporting proof in the form of contract notes, proof of prevailing market price on the date of transactions, time of execution of the transactions, proof of having executed the transactions through the Stock Exchange or proof of having executed the transactions off market it is not possible to comment about the genuineness of the speculation loss incurred. These observations of the Special Auditor are a far cry from the conclusions of the assessing officer, "these transactions were shown only in order to generate loss or profit and were not genuine share transactions". The Special Auditor does not say that the transactions are not genuine; he only says that as far as speculation transactions are concerned the genuineness of the loss (not transactions) could not be certified for want of voluminous data required for such certification. Whatever sting is there in this original report much of it has been taken away in the additional report of the Special Auditor dated 26-8-2004 (page 329 of the paper-book). In this report he acknowledges that the assessee forwarded 11 contract notes in Form B prescribed whenever there was a transaction between two brokers' constituents, in support of the transactions in question. He, however, pointed out that there were columns for 'Order No. ', 'Trade No. ' and 'Trade Time' but those columns had been left blank. The additional report acknowledges that the assessee had furnished Demat Slips, Demat statements and Clearing house statements of the brokers. However, the Special Auditor observes that those documents only confirmed the delivery of the shares and to and from whose account it had been transferred but they did not conclusively prove that the transactions of sales were effected on the floor of the exchange or were market trades. Significantly, the Special Auditor certifies after referring to the quotations of The Calcutta Stock Exchange Association that the price at which the transactions of purchase and sales had been disclosed were within the price band of the market price of the respective days (page 331 of the paper-book). Once the Special Auditor acknowledges that contract notes were furnished; the shares were received in and delivered from Demat account; further supported by Demat Slips, Demat statements and Clearing house statements of the brokers and the Special Auditor certifies after referring to the quotations of The Calcutta Stock Exchange Association that the price at which the transactions of purchase and sales had been disclosed were within the price band of the market price of the respective days much of the doubt raised in the first report as respects the genuineness of speculation loss (not transaction) goes away. As far as the assessee's transactions with the three Kolkata brokers art; concerned the report of the Special Auditor, finally, is only that the documentation did not conclusively prove that the transactions of sales were effected on the floor of the exchange or were market trades.
69. As to the reply received from Calcutta Stock Exchange, they only state that in the absence of the trade numbers in the contract notes "it was not possible for the Exchange to confirm whether the trades done by the said persons were through the trading system of the Exchange or not". They do state that the prescribed format (Form B) required that Contract Note was furnished with trade No. , trade time, delivery statement, difference bills etc. These observations of CSE also are a far cry from the conclusions of the assessing officer, "these transactions were shown only in order to generate loss or profit and were: not genuine share transactions". CSE does not say that the transactions are not genuine, they only say that it was not possible to confirm whether the trades done by the three Kolkata brokers were through the trading system of the Exchange or not.
70. As to the enquiries made with the Kolkata brokers they all confirmed having carried out the transactions with the assessee. It is not the case of the assessing officer that the transactions were found not recorded or recorded differently in the books of the brokers. As to the formalities they were required to observe at CSE the relevant part of the statement as quoted by the assessing officer is, "Sir, as usual practice the above transaction should be reported to the CSE. However, readily we cannot furnish any documentary evidence in this connection." This statement lends no support to the hypothesis of the assessing officer that the transactions were intended to generate paper loss.
71. As to the judgments cited by the learned Commissioner (Departmental Representative), in the case of Maddi Venkataraman & Co. (P) Ltd. (supra) that assessee admittedly contravened the provisions of FERA. The defence of that assessee was that contravention was necessary to avert business losses. The Hon'ble Supreme Court pronounced that spur of loss could not be a justification for contravention of law. In that context the Apex Court further observed that an assessee was expected to carry on business in accordance with law. The facts of that case and the ratio of that judgment are not applicable to the case of the present assessee. No infraction of law on the part of the assessee has been proved. There is no material on record that CSE or SEBI or any other appropriate regulatory body ever proceeded against the assessee as respects its transactions in question. It cannot be said that the assessee was guilty of any criminal act. The second judgment relied upon by the learned Departmental Representative in the case of Jaya I. Shah (supra) deals with as to how the assets of a defaulting Member other than card money and card money should be applied amongst the claims of various persons. With due respect, we find the factual matrix of that case far too removed from that of the case before us. Lastly the learned Commissioner (Departmental Representative) has relied upon the Tribunal decision in the case of Subhash Chand Shorewala (supra). That case relates to the fine paid by that assessee, admittedly, as a result of his failure to adhere to the stock exchange regulations. The Tribunal held that such fine paid for infraction of law was not allowable expenditure. Not to speak of any fine or penalty imposed, there is no material that any show-cause notice was issued to the assessee for having entered into the transactions in question. Hence, we find this Tribunal decision also as of no assistance to the case of revenue before us.
72. As the matter stands we find that the assessee's transactions are supported by the movement of shares as reflected in Demat account, movement of money as reflected in the bank account, entries in the books of account of the assessee, prevalent market quotations of CSE, Contract Notes and Delivery bills issued by Kolkata brokers and their statements in response to the enquiries made by the assessing officer. Last but not the least the assessee has shown net profit of Rs. 16.18 crores. As against these the case of revenue is that certain material information was not given in the Contract notes and columns in that respect were left blank. Copy of Form B was not filed in CSE. For these reasons it is not verifiable as to whether the trades in question were done through the trading system of the Exchange or not. The answer of the assessee to these deficiencies and irregularities is that he could not be held responsible for the same. It was not the assessee but the three Kolkata brokers who were the member of CSE. It was the obligation of Kolkata parties to comply with the prescriptions of Calcutta Stock Exchange. Be that as it may, we are of the considered opinion that the conclusions of the assessing officer that, "these transactions were shown only in order to generate loss or profit and were not genuine share transactions" could not be reached for reason only of deficiencies and irregularities in the documentation at the end of Kolkata brokers. The assessing officer does not have support from the Special Auditors, CSE or any other quarter to that effect whereas the assessee has relied upon cogent evidence and material. We hold that the assessing officer has acted upon grossly inadequate material and his conclusions are in the realm of suspicion, conjecture and surmises. Accordingly we direct that the profit/loss from the assessee's transactions with the three Kolkata brokers be assessed as shown in the books of account of the assessee.
73. As a corollary of the finding that the assessee's transactions with the three Kolkata brokers were paper transactions only and not genuine transactions the assessing officer has disallowed the business loss of Rs. 26.44 crores, claimed as deduction by the assessee, on the ground that the loss was not actually incurred. He has further held that in any case the transactions being in violation of SEBI prescriptions the business loss was not allowable deduction. Various arguments contained in the foregoing paragraphs, insofar as they relate to the genuineness of the trades/ transactions in question, made by the parties before us apply to the loss disallowed as not genuine also. It is pertinent to note here that the loss is reflected in the books of account. Money for the transactions have gone out from the bank accounts. Shares sold have gone out from the Demat accounts of the assessee. There is nothing to indicate that any of those money and shares returned to the assessee in some form or the other. We see force in the argument of the learned Counsel for the assessee that the loss cannot therefore be disallowed on such objections like time of transaction not recorded or client code not mentioned or trade No. not mentioned. The defects in this respect are in the documentation done by the third parties and not the assessee. It is important to emphasize here that the disallowance on the ground of infraction of law can be made only if there is serious breach or defiance of law or contumacious conduct. The technical or venial defaults would not justify the harsh action of disallowance of an expenditure actually incurred. Reference in this regard may be made to the landmark judgment of Hon'ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa and the judgment of the jurisdictional High Court in the case of CIT v. Chemicals & Fibres of India Ltd. . It should be kept in mind that here we are on the question of non-recovery of dues and not any expenditure incurred by the assessee for or in consequence of infraction of any law. Having regard to our decision as regards the genuineness of the transactions in the foregoing paragraphs we hold that the denial of deduction of loss on the ground of non-genuineness of loss is untenable. In the absence of any material to implicate the assessee in any serious breach or contravention of law and in view of the fact that there is no material to show that the pertinent authorities ever took exception to the assessee's role in the transactions in question we further hold that the disallowance of loss on the ground of infraction of law also is not tenable. It is not as if the regulatory authorities did not come to know about these transactions. CSE was informed of the transactions by the assessing officer. The three Kolkata brokers were declared defaulters by CSE. In the absence of any adverse verdict against the assessee from the relevant authorities we see no wind in the sail of the revenue that the loss is not allowable on account of infraction of law.
74. Lastly, according to the revenue, the assessee's claim of loss was premature. Because there was subsequently recovery of approx. Rs. 1crore from Kolkata brokers the revenue contends that all hopes of recovery were not lost and there was possibility of amounts being recovered. The learned Counsel for the assessee submitted that after constant efforts only a sum of Rs. 1 crore could be recovered over a period of three and half years. That showed that there was slim chance of any further recovery. Hence the circumstance relied upon by revenue should be held as establishing the assessee's case. The learned Counsel emphatically submitted that the assessee doggedly pursued the issue of recovery and left no stone unturned. A criminal complaint was filed. Police investigation was involved. Cheques dishonoured. A criminal suit was filed. All that is a matter of record. We see considerable force in these contentions of the assessee. We have discussed various considerations and legal issues involved in relation to an assessee's claim of deduction of a business loss arising on account of non-recovery of debts at some length while dealing with the third ground of appeal taken by the assessee. For brevity, the same are not repeated here. Let it suffice that for the same reasons we do not agree with the contention of the revenue that all hopes of recovery were not lost. The assessee has submitted that soon after the transactions the three Kolkata brokers were declared defaulters by CSE and they ceased to operate as stock-brokers. In our view on these facts it cannot be said that the assessee could not as an honest businessman have arrived at an honest belief that the debt was not recoverable and the amounts had become a business loss incurred by the assessee. Thus we find that the parameters laid down by the judgment of the jurisdictional High Court in the case of Jethabhai Hirjiand Jethabhai Ramdas v. CIT are satisfied as regards the loss of Rs. 26.44 crores claimed by the assessee being dues against the three Kolkata brokers no longer recoverable. We therefore direct deduction of the sum of Rs. 26.44 crores as business loss incurred by the assessee during the year.
75. The 14th and 15th grounds of appeal relate to the disallowances of Rs. 2,07,731 and Rs. 5,93,239 made by the assessing officer under the head 'General Expenses' and 'Prior Period Expenses' respectively. During the course of hearing before us the learned Counsel for the assessee argued that the expenses were incurred in the normal course of the business carried on by the assessee. The sum of Rs. 2,07,731 was arrived at after totalling a large number of very small amounts. Having regard to the total turnover of Rs. 9,218 crores the special auditor has been uncharitable enough in taking exception to absence of supporting documents as respects the petty expenditure of such small amounts. The learned Counsel argued that the special auditor had not appreciated "the materiality concept of Audit". On consideration of the matter we are of the view that it cannot be said that the expenses were not genuine and claimed only to reduce the incidence of tax. The aggregate amount is far too small to lead to any such conclusion. At the same time for want of full details it cannot be said whether the expenditure had been incurred wholly and exclusively for the purpose of the business of the assessee. After consideration we are of the view that it would suffice if only 50 per cent of these expenses is disallowed. We direct accordingly.
76. As to the prior period expenses of Rs. 5,93,239 the learned Counsel pointed out that the liability had become enforceable only during the year under consideration. The learned Departmental Representative, on the other hand, strongly pointed ou t that under the scheme of that Act only the expenditure pertaining to the year of account are liable to be allowed. When the assessee itself says that these expenses relates to earlier year, he cannot claim the same as deductions while computing the income for the year in question. We have considered the rival contentions and gone through the records. In the absence of any evidence as to the accrual of liabilities, we are unable to hold these expenses accrued during the year of account. The expenses only pertaining to the year under consideration can be allowed. The findings of the Commissioner (Appeals) cannot be disturbed. The disallowance is confirmed.
77. The 16th, 17th and 18th grounds of appeal relate to the learned Commissioner (Appeals) sustaining the additions to the declared income to the extent of Rs. 26,39,117, Rs. 2,14,50,214 and Rs. 59,487 respectively as unexplained cash credits under Section 68 of the Act. The first addition was made by the assessing officer in respect of 13 creditors to the aggregate of Rs. 5,32,38,415 on the ground of want of confirmation from the parties shown as "Sundry Creditors" in the balance-sheet. The second addition also was made on the same basis by the assessing officer at Rs. 6,85,75,350 shown in the balance-sheet as advances from 6 customers. The third addition was made by the assessing officer at Rs. 33,94,268 on account of unexplained liabilities. The assessing officer made these additions in a few sentences in para 10 of the assessment order. During the course of proceedings before the learned Commissioner (Appeals) the matter was remanded to the assessing officer and his remand report was received and the same has been reproduced in the impugned order. The learned Commissioner (Appeals) deleted the addition to the extent of Rs. 5,05,99,298 from four sundry creditors and confirmed the addition of Rs. 26,39,117 which was the outstanding balance in respect of nine other creditors. As respects the advances from customers the addition is reduced to Rs. 2,14,50,214 by the learned Commissioner (Appeals) after deleting the addition on account of advances from two customers. The addition on account of other liabilities has been reduced to Rs. 59,487 by the learned Commissioner (Appeals) after the liabilities in respect of Audit Fees, bank interest and outstanding expenses were verified and accepted by the assessing officer.
78. During the course of hearing before us the learned Counsel for the assessee urged that there was no basis for these additions in the special audit report. According to the assessing officer the Special Auditors had been required to examine the current liabilities and advances from the customers but they failed to do so. Hence he decided to treat these amounts as unexplained. The learned Counsel further urged that closing balances in the creditors' accounts cannot be treated as unverifiable when no dispute is raised about the debits and credits in the accounts. The balances in the accounts of sundry creditors arose from the normal business activity of the assessee and advances from the customers were received for execution of orders on their behalf. Other liabilities too arose in the day-to-day carrying on of the business by the assessee. There was no element of any loan or borrowing in any of those accounts and therefore for all practical purposes the provisions of Section 68 were not attracted. The assessing officer was not justified to make such huge additions when there was no adverse remark in the special audit report or any other adverse material in his possession. At any rate, during the course of assessment proceedings the assessee had furnished considerable evidence and material. The learned Counsel submitted that complete details and letters of confirmation with Permanent Account Numbers had been furnished to the assessing officer in respect of all the creditors. The contentions raised before the learned Commissioner (Appeals) in this regard included letter filed on 8-3-2006 placed at pages 270-72 of the paper-book. The particulars of the additions sustained by the learned Commissioner (Appeals) from sundry creditors' balances were given at page 268 of the paper-book. The learned Counsel pointed out that those credit balances were merely closing balances on the cut-off date i.e., the last date of the financial year in the ordinary course of business. The largest amount of Rs. 17,95,085 related to the outstanding amounts payable on that date to NSE. Complete account of the Exchange clearing house was at pages 273 to 283 & 284 of the paper-book. No defect had been pointed out as respects those accounts by the assessing officer after verifying the same during the course of remand proceedings. The learned Counsel argued that possibly the assessing officer omitted to suggest deletion of those amounts in the remand report through oversight. As to the other credits the assessee had furnished accounts as appearing in the books of account of the assessee duly certified by those parties with their PAN and in some cases the parties directly filed with the assessing officer even the copies of the returns of income filed by them. The learned Counsel strongly relied upon the evidence and material given at pages 285 to 309 of the paper-book and contended that the entire addition being uncalled for and outside the ambit of the provisions of Section 68 should be deleted. As regards advances from the customers, the learned Counsel referred to the letter filed before the learned Commissioner (Appeals) on 8-3-2006 placed at pages 270-272 of the paper-book. The particulars of the addition in regard to advances from customers as sustained by the learned Commissioner (Appeals) had been given at page 269 of the paper-book. These included the sum of Rs. 15,00,000 received from Century Consultants that the assessing officer himself had accepted in Para 9.4 of the assessment order. The assessee had furnished before the learned Commissioner (Appeals) as regards Rs. 21,50,214 received from Shri Chetan Sabharwal the copy of the letter addressed to the assessing officer along with the copy of confirmation and the copies of acknowledgement of return of income filed by the party for last two years, as per Annexure E. As regards Shri Anant Gupta the money received from Skylite Impex Pvt. Ltd, was wrongly credited to the account of Sh. Anant Gupta. The entry was rectified by reversal on 1-4-2001. Reference was invited to pages 314 to 319 of the paper-book. As regards Stele International that party directly furnished to the assessing officer copies of the acknowledgement of returns of income for assessment years 2001-02 & 2004-05 as well as copy of the ledger account for the financial year 2000-01. That party had filed copy of intimation under Section 143(1)(a) also. Confirmation of account by Stele International, copy of the account of the party as per the books of the assessee had been filed. Copies of those documents were placed at pages 310 to 313 and 320 to 328 of the paper-book. The learned Counsel pointed out that even then the assessing officer had treated the advances as unverifiable only on the ground that the assessee failed to produce the customers/clients, though some of those parties had directly replied to the assessing officer in response to the summons issued. The learned Counsel for the assessee argued that once the assessing officer was informed that the parties were assessed to tax and he initiated inquiries by issue of summons it was for him to enforce the attendance of the parties if he considered that necessary. It was also essential for the assessing officer to refer to the assessment records of the creditors before deciding against the assessee. No adverse: inference could be drawn against the assessee from non-appearance of the parties before the assessing officer. Reference in this behalf was invited to the judgments in the cases of Niranjanlal Ramballabh v. CIT ; CIT v. U.M. Shah ; CIT v. Orissa Corpn. (P) Ltd. and so on. The assessing officer wrongly treated the advances as unverifiable. The amounts received from customers were generally adjusted against the trades executed by the assessee on behalf of such customers. On such facts there was no question of unexplained credits. Since complete documentary evidences were filed before the assessing officer, there was absolutely no reason for treating the advances as unexplained cash credit. The addition of Rs. 59,487 was in respect of unpaid Service Tax.
79. The learned Commissioner (Departmental Representative) argued that under the provisions of Section 68 the assessee was required to establish all the ingredients of a satisfactory explanation of the cash credits appearing in the accounts of the assessee. The assessee had credited huge amounts in the names of various parties. It was therefore necessary to examine the financial capacity of the creditors and genuineness of the transactions. Mere filing of confirmations or statement of bank accounts was not enough. The payment received by cheque was not sacrosanct. In support of these contentions the learned Commissioner (Departmental Representative) relied upon the judgment of Hon'ble Supreme Court in the case of Sreelekha Banerjee v. CIT . He pointed out that in that case the Hon'ble Apex court had held that if there was any receipt of money in the accounts of an assessee it was for that assessee to establish that the receipt was not in the nature of income. The department at that stage was not required to prove anything. It could ask the assessee to bring any evidence pertinent to the assessee's explanation. The learned Commissioner (Departmental Representative) then referred to the judgments in the cases of Nizam Wool Agency v. CIT ; CIT v. Precision Finance (P) Ltd. (1994) 208 ITR 4652 (Cal.) and CIT v. Korlay Trading Co. Ltd. .
80. We find that at the assessment stage the assessing officer made the addition because he found no comment either way as respects the credit balances in the balance-sheet in the special audit report. While doing so he failed to realize that the provisions of Section 68 apply to cash credits and not all credits appearing in the books of an assessee. Secondly he failed to realize that the provisions apply to cash credits and not the balances appearing in an account on a particular date. There is immense justification in the contention of the learned Counsel for the assessee that closing balances in the creditors' accounts cannot be assessed as income when no dispute is raised about the debits and credits in the accounts. We find that there is no material to suggest that the assessee received any cash credits in its account with NSE as respects the sum of Rs. 17,95,085 payable to NSE. The addition needs to be deleted for this reason alone. As regards the other accounts it is not known as to how much cash credit was received by the assessee during the year. There is force in the contention of the learned Counsel for the assessee that the amounts received during the course of day-to-day carrying on of the business of the assessee need to be viewed different from simple cash loans. Advances received from the customers if adjusted against the shares purchased on their behalf would stand explained to a large measure by the entries mentioned in the books of the assessee himself. The revenue does not object to the transactions as recorded in the books of account but has assessed the closing balances. Be that as it may the additions were made in the assessment order for want of details and the letters of confirmation. From the particulars furnished by the assessee in the paper book it is seen that both have been furnished by the assessee during the course of remand proceedings. It has been submitted by the learned Counsel of the assessee that the letters of confirmation along with PAN had been furnished to the assessing officer in all cases. As PAN was given it was essential for the assessing officer to refer to the assessment records of the creditors but that has not been done.
Reliance in this behalf has been rightly placed on Orissa Corpn. (P) Ltd. . The additions have been finally made mainly on the ground that the creditors were not physically produced. The assessing officer had issued the summons to the parties and he received replies from the parties in several cases. It was for the assessing officer to pursue the parties if he was still not satisfied despite considerable evidence/ material furnished by the assessee. Reference in this behalf may be made to, in addition to the case law cited by the learned Counsel for the assessee to the judgments in the cases of Addl. CIT v. Hanuman Agarwal ; CIT v. Currency Investment Co. Ltd. and CIT v. Emerald Commercial Ltd. .
81. We have carefully considered the case law relied upon by the learned Commissioner (Departmental Representative)., It is true that in the case of Srcelekha Banerjee (supra) the Hon'ble Supreme Court has held that initial burden to establish that the cash credit is not the income of an assessee is upon the assessee and the assessing officer can ask an assessee to furnish any material or evidence, but Their Lordships have qualified that the evidence to be asked for must be pertinent to the explanation given. In the same passage Hon'ble Supreme Court has also laid down that the assessing officer must act reasonably as regards an assessee's burden of proof. In the case of Precision Finance (P) Ltd. (supra) the Income Tax Officer allowed opportunity to that assessee for about 7 years to prove the genuineness of the cash credits. Those opportunities were not availed of. Enquiries conducted by the assessing officer revealed that either the files did not exist or the records did not tally with the facts mentioned by that assessee except in two cases. In all other cases creditors were not found at the addresses given by that assessee. On such facts it was held that it was for an assessee to prove the identity of the creditors, their creditworthiness and genuineness of the transactions. Mere furnishing of the particulars that the transactions were done by cheques was not enough. It is seen that in that case the assessee heavily relied upon the transactions being routed through bank. That is not the situation in the present case. In the case of Korlay Trading Co. Ltd. (supra) Hon'ble Calcutta High Court held that mere filing of the income-tax file number of the creditors is not enough. The creditor should be identified. There should be creditworthiness. There should be a genuine transaction. It is seen that in both the cases of Precision Finance (P) (Ltd.) (supra) and Korlary Trading Co. Ltd. (supra) Hon'ble Calcutta High Court was not impressed by the emphasis laid down by those assessees on a single factor or circumstance and the court held that all aspects must be satisfactorily explained. These judgments do not lay down that in every case the assessee must physically produce the cash creditor. In fact in the case of Korlay Trading Co. Ltd. (supra) itself the Hon'ble High Court has held that the claim of that assessee of loss could not be denied only on the ground that the broker through whom that assessee had made the transaction in shares had failed to produce the proper books. That judgment thus supports the case of the assessee before us.
82. In the light of the above discussions, the addition to the extent of Rs. 26,39,117 (ground No. 16) and Rs. 2,14,50,214 (ground No. 17) are deleted. As regards the additions of Rs. 59,487 - although the addition under Section 68 cannot be sustained, the learned Commissioner (Appeals) has sustained under Section 43B since the evidence of service tax payment prior to the due date of filing was not furnished before him. In the light of the same, the said addition is confirmed.
83. By way of the 19th ground of appeal the assessee has prayed for liberty to take additional grounds of appeal. Thereafter, two additional grounds of appeal have been filed on 20-4-2007 with a request for admission of those grounds. Both the additional grounds relate to the appointment of the Special Auditor under Section 142(2A) of the Act. In the first additional ground the assessee has objected to the assessing officer not providing the assessee an opportunity of being heard before making reference under Section 142(2A) of the Act for special audit. In the second additional ground, the assessee argues that reference to the special auditor was made under Section 142(2A) of the Act only because the assessing officer was interested in extending the period of limitation prescribed in Section 153 of the Act and that was done without observing the principles of natural justice. The learned Counsel for the assessee argued that these additional grounds raise the question of jurisdiction of the assessing officer and therefore, merit admission by the Tribunal. Furthermore both these grounds were on point of law that could be decided on the material already on records and did not call for any fresh inquiry into the facts. Hence, these additional grounds were required to be admitted and adjudicated upon.
84. The learned Counsel for the assessee argued that in the ordinary course the assessment would have become time-barred on 31-3-2004, but with a design to avail of the extra time the assessing officer sought the approval of the learned Commissioner-IV, Mumbai for getting the accounts of the assessee audited under Section 142(2 A) of the Act. The approval of the Commissioner was conveyed to the assessee on 10-3-2004. No opportunity was given by the assessing officer or the Commissioner to the assessee of being heard at any stage of the invocation of the provisions of Section 142(2A). The provisions of Section 142(2A) were pressed into service behind the back of the assessee as the assessing officer was not ready or willing to complete the assessment within the imminent time-limit under Section 153. The learned Counsel strongly contended that the appointment of the Special Auditor under Section 142(2A) and consequent proceedings as well as the assessment order had got vitiated on account of violation of principles of natural justice. He strongly relied for this challenge on the judgment of the Hon'ble Supreme Court in the case of Rajesh Kumar v. Dy. CIT (2006) 287 ITR 911 (SC), wherein the Apex Court has laid down for an opportunity to the assessee before making a reference under Section 142(2A) of the Act. The learned Counsel took us closely through the judgment of the Hon'ble Apex Court. He pointed out that this judgment of Hon'ble Apex Court has been made in an appeal filed against the judgment of Delhi High Court in a writ petition filed by that assessee raising, inter alia, a question that the order impugned therein was vitiated in law having been passed without giving an opportunity of hearing to that assessee. Hon'ble Delhi High Court dismissed the writ petition. On further appeal by that assessee the Hon'ble Apex Court has "allowed the appeal". It therefore follows that an order initiating special audit under Section 142(2A) in the case of an assessee without allowing that assessee an opportunity of being heard is vitiated in law. Hence the order under Section 142(2A) in the case of the assessee was vitiated in law within the ratio of the judgment of Hon'ble Supreme Court in the case of Rajesh Kumar (supra).
85. The learned Counsel pointed out that the observations of the Apex Court have since been enshrined in the Act by virtue of an amendment by Finance Act, 2007. Sub-section (2A) of Section 142 is now followed by a proviso:- "Provided that the assessing officer shall not direct the assessee to get the accounts audited unless the assessee has been given a reasonable opportunity of being heard." In view of the foregoing, there could not be any doubt that the assessing officer and also the learned Commissioner did not follow the basic principles of natural justice. That made the reference for Special Audit under Section 142(2A) invalid and illegal.
86. The learned Counsel argued that the vitiated order under Section 142(2A) made by the assessing officer in the case of the assessee was anullity and not merely a procedural irregularity. That was quite clear from the various observations of the Apex Court in the case of Rajesh Kumar (supra). That being so the provisions of Clause (iii) of Explanation 1 to Section 153 did not operate. The assessment order was obviously barred by limitation.
87. The learned Counsel argued that this issue in the present appeal is in a way parallel to the reasons to be recorded under Section 148(2). The courts had held in a plethora of cases that where the reasons to believe as recorded under Section 148(2) are such that no inference of escapement of income from assessment can be drawn wherefrom, the consequential assessment order itself would become a nullity even if cogent reasons for escapement of income from assessment may otherwise be found. Reference in that respect was invited to the judgments in ITO v. Lakhmani Mewal Das (1976) 103 ITR 437 (SC); CIT v. Agarwalla Bros. ; Desai Bros. v. Dy. CIT ; United Electrical Co. (P) Ltd. v. CIT (2002) 258 ITR 317 (Delhi) and so on. On parity of that reasoning the assessment order in the present case was required to be treated as having been made beyond the permissible time limit because existence of a valid direction under Section 142(2A) for special audit was a condition precedent for the operation of the provisions of Explanation 1 (iii) to Section 153. The learned Counsel, therefore, submitted that the assessment order may be quashed as having been barred by limitation prescribed under the provisions of Section 153.
88. The learned Commissioner (Departmental Representative) opposed the additional grounds both on the question of admission and merits. No such ground of appeal had been taken before the learned Commissioner (Appeals) and, therefore, did not arise from his order. There was nothing to suggest in the judgment of Hon'ble Supreme Court in the case of Rajesh Kumar (supra) that an assessment order made after reference under Section 142(2A) would be barred by limitation. He strongly relied upon the judgments in the cases of CIT v. Begum Noor Banu Alladin ; Maruti Udyog Ltd. v. ITAT (2000) 244 ITR 303 (Delhi); Atlas Copco (India) Ltd. v. V.S. Samuel, Asstt. CIT (2006) 283 ITR 565 (Bom.); Ghaziabad Urban Co-operative Bank Ltd. v. Union of India (2006) 287 ITR 473 (All.); V.L.S. Finance Ltd. v. CIT ; Sahara India Financial Corpn. & Sahara India (Firm) v. CIT and Sahara India (Firm) v. CIT (2007) 289 ITR 473 (SC).
89. The learned Commissioner (Departmental Representative) has opposed admission of additional grounds taken by the assessee on the ground that the assessee had not taken such plea during the course of proceedings before the authorities below and this issue has been raised for the first time in the proceedings before the Tribunal. He has relied in this respect upon the Full Bench judgment of Hon'ble Andhra Pradesh High Court in the case of Begum Noor Banu Alladin (supra) to the effect that the jurisdiction of the Tribunal is restricted to subject-matter before the first appellate authority and Tribunal cannot allow new items or new claims for the first time. However, around the same time the Full Bench of Bombay High Court in the case of Ahmedabad Electricity Co. Ltd. v. CIT held that the phrase "pass such order thereon" occurring in Section 254 empowers the Tribunal to permit additional grounds to be raised even though they may not arise from the order of the first appellate authority. This view taken by the Hon'ble Bombay High Court has held forever since. Moreover the controversy in this context has been set to rest by the judgment of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT . In the instant case before us the assessee has in the additional ground objected to the legality of the assessment order and, therefore, it goes to the root of the impugned order. The ground involves mainly a question of law and can be decided on facts that are a matter of record of the assessing officer. Indeed, during the course of hearing before us the learned Commissioner (Departmental Representative) has not disputed the contention of the assessee that the reference under Section 142(2A) was made without hearing the asssessee on that behalf. We have therefore held that the additional grounds taken by the assessee deserved to be admitted and ordered admission of the additional grounds. As to the reliance placed by the learned Commissioner (Departmental Representative) on the judgment of Hon'ble Delhi High Court in the case of Maruti Udyog Ltd. v. ITAT\2000\244 ITR 303 (Del) that judgment does not curtail the power of the Tribunal to admit additional ground of appeal. That judgment prescribes that the Tribunal should indicate the reasons for admission first and then take up appeal for the final disposal. That has been done by us.
90. We have carefully considered the rival submissions. In the case of Rajesh Kumar (supra) Hon'ble Apex Court has unmistakably laid down that it is mandatory to give an assessee an opportunity of being heard before a reference for special audit under Section 142(2A) is made in the case of that assessee. Hon'ble Supreme Court has observed:
A direction issued under Section 142(2A) of the Income Tax Act, 1961, for special audit of the accounts of the assessee is not administrative in nature: it is a quasi-judicial order. In view of Section 136 the entire proceeding before the assessing officer being judicial, a part thereof, which indisputably is resorted to in aid of the ultimate order of assessment, without any statutory interdict, cannot be called an administrative order.
The expression 'having regard to' in Section 142(2A) is significant. An opinion must be formed strictly in terms of the factors enumerated therein. The expression indicates that in exercising the power regard must be had also to the factors enumerated therein together with all factors relevant for the exercise of the power. The factors enumerated in Section 142(2A) are not exhaustive. Once it is held that the assessee suffers civil consequences and any order passed would be prejudicial to him, the principles of natural justice must be held to be implicit. The principles of natural justice are required to be applied inter-alia to minimize arbitrariness. If the assessests put to notice, he could show that the nature of the accounts is not such as would require appointment of special auditors.