Income Tax Appellate Tribunal - Mumbai
Asstt Cit vs Grasim Industries Ltd. on 17 November, 2006
ORDER
O.K. Narayanan, Accountant Member
1. The appeal is filed by the revenue. The Cross Objection is filed by the assessee. The appeal and the cross objection are directed against the order passed by the Commissioner (Appeals)-VI at Mumbai dated 11-1-2002. The relevant assessment year is 1992-93. They arise out of the assessment completed under Section 143(3) r.w.s. 147 of the Income Tax Act, 1961.
2. The original assessment in this case was completed under Section 143(3) on 31-3-1995. The assessee-company had invested money and units issued by Unit Trust of India (UTI) and owned by it with Citibank N.A. under a scheme known as Portfolio Management Scheme (PMS). In the said scheme, Citibank acted as the investment-facilitator of the assessee-company. In the original return filed by the assessee, it has offered an income of Rs. 17,19,22,744 as income from the said PMS Accounts. The assessee-company has also claimed a deduction of Rs. 56,93,55,216 by way of interest eligible for deduction under Section 36(l)(iii). The interest expenditure related to the new units set up by the assessee, but prior to the commencement of their operations.
3. In the original scrutiny-assessment completed under Section 143(3), the income offered by the assessee-company under PMS was accepted and the interest expenditure claimed by way of deduction was allowed. The said assessment was taken in first appeal on certain other grounds and finally the income was determined at Rs. 105,11,65,009. This income has been determined on the basis of the order passed by the Assessing Authority w.r.t. Section 250 of the Act on 25-6-1998.
4. Later on, in the course of assessment proceedings relating to the succeeding assessment year 1993-94, the assessing officer came across certain materials which might have bearing on the assessment of the impugned assessment year 1992-93. According to the Assessing Authority, these materials were availed from the details furnished by Citibank and also from examination/ cross examination of the officials of the assessee-company and the Citibank. On the basis of those materials collected in the course of assessment proceedings relating to the succeeding assessment year 1993-94, the assessing officer came to a conclusion that there was an income of more than Rs. 130 crores from the PMS Accounts for the assessment year 1992-93 which was not offered for taxation either by the assessee-company or by the Citibank. He accordingly came to a conclusion that the income earned out of PMS Accounts has been grossly understated:
5. In the light of the above scenario, the Assessing Authority initiated Income Escaping Assessment proceedings against the assessee-company for the impugned assessment year 1992-93. Notice under Section 148 was issued on 28-6-1996. The notice was challenged by the assessee-company before the Hon'ble High Court of Mumbai, both before Single Bench as well as Division Bench but ultimately dismissed by the Hon'ble Court. But, the Hon'ble court did not examine the merits of the case and retained the right of the assessee-company to agitate the entire matter in the appropriate statutory Fora. Thereafter, the Assessing Authority completed the Income Escaping Assessment in consequence to the notice issued under Section 148. The assessing officer has worked out the income of the assessee from PMS Accounts at Rs. 143,93,60,151 as against the income accepted in the original assessment at Rs. 17,19,22,744. The assessing officer has also held that the interest income allowed in the original assessment was in fact of capital in nature and did not qualify for deduction for the assessment year 1992-93. Therefore, the said amount of Rs. 56,93,55,216 has also been added back to the income of the assessee-company. Thus the Income Escaping Assessment has been completed by the Assessing Authority on a total income of Rs. 288,26,72,270 through his or-der dated 14-6-2000.
6. The assessing officer has passed a detailed assessment order running to 38 pages including 4 Annexures A, B, C & D forming part of the assessment order. The computation of income from PMS is provided in paragraph 38 of the assessment order. It comprised of short-term capital gains and dividends and interest.
7. The Income Escaping Assessment was taken in first appeal. The first ground raised by the assessee before the Commissioner (Appeals) was against the legality of the re-opening of assessment. It was the case of the assessee before the Commissioner (Appeals) that the details of income and expenditure were furnished before the Assessing Authority in the course of original assessment itself and the reopening was made only for a change of opinion. On the basis of a detailed discussion from pages 2 to 18 of his order, the Commissioner (Appeals) held that issue of notice under Section 148 was justified at least at the time of initiation of the proceedings. Accordingly, the said legal ground was dismissed.
8. The second ground raised by the assessee before the Commissioner (Appeals) was that the assessing officer has erred in adding back the interest expenditurc of' Rs. 56,93,55,216. The ground was considered by the Commissioner (Appeals) in detail in pages 18 to 24 of his order. The assessing officer has added back the interest expenditure relying on various decisions including Challapalli Sugars Ltd. v. CIT Madras Industrial Investment Corpn. Ltd. v. CIT Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT
9. The assessing officer had also distinguished the decisions relied on by the assessee such as CIT v. Alembic Glass Industries Ltd. , CITv. Prithvi Insurance Co. Ltd. etc. The Commissioner (Appeals) after considering the various judgments, facts of the case and the reasoning given by the assessing officer, ultimately found that the sayne issue was decided by ITAT Mumbai 'A' Bench in assessee's own case for the assessment year 1993-94 in ITA No. 1523/Mum./1997. In fact, the urging factor for adding back the interest expenditure was that the order of the Commissioner (Appeals) on the very same issue for the assessment year 1993-94 was not accepted by the department and the matter was taken in appeal before the Tribunal. The Commissioner (Appeals) found that the Tribunal has confirmed the order of the Commissioner (Appeals) for the assessment year 1993-94 and the basic reason given by the assessing officer to make the add-back, no more existed. Therefore, following the order of the Tribunal, the Commissioner (Appeals) allowed the contention of the assessee and deleted the add back of the interest expenditure of Rs. 56,93,55,216.
10. The third ground raised by the assessee was that the substantive addition on the alleged excess income from PMS Accounts should have been made on Citibank and not on the assessee. This ground was dismissed by the Commissioner (Appeals). The fourth ground raised by the assessee was against the alleged violation of the principles of natural justice. The said ground also was apparently rejected by the Commissioner (Appeals).
11. The first ground raised by the assessee before the Commissioner (Appeals) related to the crucial issue involved in this appeal and relating to the alleged income of the assessee earned from PMS. The case of the assessee was that the assessing officer had no materials before him to work out an income of Rs. 143,93,60,151 from the PMS Accounts of Citibank as against the returned income of Rs. 17,19,22,744. This crucial ground has been considered by the Commissioner (Appeals) in an extensive manner in his order. The discussion on this issue has been made by the Commissioner (Appeals) in pages 29 to 108 of his order. The detailed arguments made by the assessee- company before the Commissioner (Appeals) were briefly the following:
(i) The assessee-company has made the investment in the PMS Accounts of Citibank for earning a specified amount of income and not for the entire profit that the Citibank might generate through the PMS Account.
(ii) The Citibank has not brought any material to show that the assessee-company was paid anything more what has been disclosed and returned by the assessee.
(iii) The report of the Jankiraman Committee appointed by the Central Government to enquire into the PMS scheme and other matters of Security Scam and also the report of Joint Parliamentary Committee have consistently indicated Citibank for a number of violations and manipulations in respect of the PMS Accounts and have held that Citibank has fiddled away funds from the PMS Accounts.
(iv) No agencyhas found out any evidence against the assessee-company or passed any adverse comments on the assessee-company in respect of the PMS Accounts managed by Citibank.
(v) The unlawful conduct of the Citibank is evidenced by the penalty levied by Reserve bank of India.
(vi) The Citibank has issued certificates on 1-4-1992 and 3-1-1995 certifying that the returns passed over to the assessee from PMS Accounts were Rs. 171,19,22,744.
(vii) The officials who made statements before the assessing officer were the officials of Citibank who had no personal knowledge of transactions made under PMS Accounts.
(viii) The real character of the PMS Accounts with Citibank, was that of a deposit account with assured returns and the assessee-company never had any right to any flexible income that could have been generated in the PMS Account operated by Citibank. But on the otherhand Citibank had all the access, control and manoeuvreability over the PMS Accounts. The bank was bound only to pay the assured returns to the assessee-company and could appropriate the balance of income if any, at its own will.
(ix),The Citibank has not so far questioned the certificates of returns issued by it to the assessee-company on 1-4-1992 and 3-1-1995.
(x) The assessee-company had maintained four accounts with Citibank under PMS. The PMS Account No. 1 was opened by the assessee on 1-11-1988. The Citibank by its letter dated 1- 11- 1988 has assured a return of 13 per cent per annum and assured that they would try to obtain higher return. The said account was a running account and assessee had deposited funds from time to time or withdrawn the funds, on assured return basis. PMS Account Nos. 2 & 3 related to lending of units of Unit Trust of India. Those accounts were opened on 12-4-1991 and 31-7-1991. The Citibank had submitted proposal to the assessee on plain paper stating inter alia that additional return of 0.75 per cent would be given to the assessee which was finally agreed at 1 per cent. It was on the basis of that understanding the units were lent (units physically remained in the possession of the assessee) and return of 1 per cent paid by the bank. This fact has been confirmed by the Citibank in its letter dated 27-1-1995 addressed to the Assessing Authority by stating that Citibank had paid return of 1 per cent on PMS Account Nos. 2 & 3 deal with units. Unit Trust of India has certified that the units were always registered in the name of assessee. In account No. 4, the amount deposited by the assessee was pertaining to Non-Convertible Debentures issue of Rs. 155 crores which was entirely subscribed by the bank. The account was opened on 14-10-199 1. The bank submitted a proposal to the assessee on plain paper that pending utilisation of funds, the amount of Rs. 155 crores should be invested with them. As per the stipulation of the Controller of Capital issue, the amount could be invested only in fixed duration deposits /instrument with National bank, UTI and other financial institutions. The bank has confirmed in its letter dated 27-12-1991 that the bank has invested the amount only in security permitted by Controller of Capital Issues. The understanding between the assessee and the Citibank was that it was entitled to 1 per cent return on unit lending (PMS Account Nos. 2 & 3) and 17 per cent on funds placed with bank (PMS Account Nos. 1 & 4). The assessee had received returns from the bank on the basis of this understanding. The assessee was not entitled to receive anything over and above the assured return nor has it received any higher amount from the bank. The above understanding is clear from a series of letters addressed by the bank to the assessee and vice versa during the period 1988 to 1992.
(xi) M/s. Chandrakant & Seventilal, Chartered Accountants, in their interim report furnished to the assessing officer have pointed out a series of discrepancies in the script-wise details submitted by the bank. Some of the discrepancies highlighted by the Chartered Accountants are difference in purchase/sale rate on the same date for the same securities; Variation in Stock Exchange Quotation and Transaction rate; Transactions recorded when stock market was closed; Inter se Transaction in different accounts of the assessee; statement of profit booked in same day transactions on interest bearing securities; Statement of amount overdrawn. The discrepancies were also pointed out by the assessee to the assessing officer.
(xii) As the assessing officer did not comply with the request of the assessee, the assessee was constrained to file Writ Petition before the Hon'ble Bombay High Court seeking direction to the assessing officer to summon the transactional document from Citibank. The Hon'ble High Court disposed of the said Writ Petition on 17-4-2000 directing the assessing officer to summon the transactional documents to explain the glaring discrepancies pointed out by the assessee-company in the script-wise list furnished by the bank. The Hon'ble Bombay High Court directed that the following transactional documents would reveal the correct income on the PMS account and also ascertain as to whether the said income had accrued to the assessee-company: Deal Slip, Contract Note, Brokers Note, Brokers Advice regarding delivery, Cost Memos and Brokers bill.
(xiii) The bank has filed various letters before the assessing officer furnishing their explanation on the various discrepancies pointed out by the assessee. The bank has furnished Xerox copies of transactional documents except Deal Slips and Delivery Memos in respect of 438 transactions out of about 5,250 transactions which constitute about 8 per cent of the total transactions and even in those 8 per cent cases complete details were not furnished by the bank.
(xiv) The assessing officer himself has stated in para 35 of the assessment order that it is pertinent that the transactions were as old as nine years which related to the financial year 1991-92 and therefore it did not appear possible for Citibank to produce all documents relating to each and every transaction as observed by the High Court that too, within a short period of two months as the assessment had to be completed by 16-6-2000. This itself is a speaking testimony to bring home the point that the Citibank did not produce all the transactional documents as directed by the High Court and the assessing officer has come to the conclusion without verifying such documents and only on the basis of arbitrary presumptions.
(xv) The basic requirements as per the regulations issued by the Reserve bank of India for opening and operating PMS Accounts were not complied with the Citibank.
(xvt) The assessment order does not contain any clear indication of the materials used in computing and estimating the PMS Accounts income.
(xvit) The officials who handled the PMS ope ' ration of Citibank were not made available for examination and cross-examination by the assessee. It has rendered the evidentiary value of the whole reassessment proceedings questionable.
12. The assessing officer has also placed his strong arguments before the Commissioner (Appeals). His contentions and submissions before the Commissioner (Appeals) are briefed below:
(i) The transactions in the Four PMS Accounts have resulted in profit/ income that has not been accounted, according to the respective transactions either by the assessee or by the Citibank. The assessee-company maintains that they were to receive assured /guaranteed/ fixed return on its PMS Accounts whereas Citibank maintained that the assessee was entitled to receive entire profit/to incur loss from the PMS Accounts and it was not a case of assured returns.
(ii) Script-wise accounts of transactions received from Citibank were handed over to the assessee-company and the copies of registers containing date-wise transactions etc. were also made available to the assessee-company and the finding of the Assessing Authority was on sound basis.
(iii) It is clear from the Reserve bank of India circulars that PMS Accounts would be opened only at the customer's risk without guaranteeing a pre-determined return. The investment accounts are handled on behalf of the parties. The Citibank has submitted that the transactions were carried out strictly in accordance with the terms and conditions and guidelines issued in this regard and in accordance with the directions given by the assessee-company from time to time and from account to account.
(iv) The documents of the assessee-company are not fool proof so as to support the stand taken by the assessee-company.
(v) Shri S.K. Saboo, one ' of the Seniormost Executives of the company had filed an affidavit before the Bombay High Court wherein copy of the letter received from Citibank was extracted, where the bank has stated that rate of returns was 13 per cent per annum net and also Citibank could try to obtain higher returns.
(vi) The assessee-company had passed a Board Resolution and also signed Account Opening Forms authorising Citibank to invest in shares and securities on their behalf.
(vii) The assessee has written a letter to the Assessing Authority dated 27-5-1995 clearly mentioning therein that the Citibank has not assured a specific returns. There was no written agreement for assured returns.
(viii) There are various letters written by the assessee-company to Citibank on its investment Plans in Portfolio Accounts which support the view that the PMS Accounts were operated by the assessee and the profit and loss as the case may be, belonged to the assessee-company.
13. On going through the contentions and arguments of the assessee as well as the Assessing Authority, the Commissioner (Appeals) thought it fit to provide a further opportunity to the Assessing Authority as well as the assessee to produce further materialsand evidences if any, so that their contentions could be appreciated in a proper perspective. For that purpose, the Commissioner (Appeals) directed the Assessing Authority to file a remand report. He has also written letter to the assessee-company to submit any more material that the company might like to rely on. After considering the arguments, the contents of the remand report and the submissions of the assessee-company, the Commissioner (Appeals) framed 15 points/ questions, the answers to which would help to come to a proper finding on this crucial issue of income earned by the assessees from PMS Accounts. The conclusions and answers arrived at by the Commissioner (Appeals) against the points /questions framed by him are discussed in paragraphs 16.11 to 16.27 from pages 96 to 108 of his order. Those findings and conclusions arrived at by the Commissioner (Appeals) are as follows:
(i) The assessing officer has not been able to prove that there was sufficient materials to support the reassessment order. The assessing officer has not complied with the directions of the Hon'ble Bombay High Court given in the course of writ proceedings regarding the transactional documents on the basis of which the enquiries had to be made.
(ii) The Hon'ble Bombay High Court has specifically directed the assessing officer to verify the Deal Slip of every transaction supposed to be maintained by Citibank, among other items of transactional documents. The court has held that the Deal Slip is the basic document of the transaction. In para No. 35 of the order, the assessing officer has stated that the transactions are as old as nine years, relating to financial year 1991-92 and therefore it would not be possible for Citibank to produce all documents relating to each and every transaction within a short period of two months, as the assessment was to be completed by 16-6-2000. The assessing officer has stated therein that following the guidelines issued by the Hon'ble Bombay High Court, he has used his discretion and did not call for details.
(iii) It is abundantly clear that the assessing officer has not called for the transactional documents from Citibank so as to arrive at a correct conclusion regarding the transactions and to evaluate the discrepancies pointed out by the independent Accountants appointed by the assessee-company.
(iv) The assessing officer has also ignored the findings of the High Power Committees like Janakiraman Committee and Joint Parliamentary Committee. He has also not considered the report of the independent Accountants M/s. Chandrakant & Seventilal, Chartered Accountants, who have in their report pointed out glaring discrepancies. Therefore, there are no materials on record for the assessing officer to come to a conclusion that the assessee had received any income more than the income reported by it from the PMS Accounts maintained with Citibank.
(v) One of the materials relied on by the assessing officer to make out his proposition is the affidavit filed by Shri Venkatchalam, Vice President, (Taxation), Citibank before the Hon'ble Bombay High Court in the course of writ proceedings. Another document relied on by the assessing officer is the Accounts Opening Forms. The fact is that those forms were never intended by Citibank to be acted upon. The assessing officer has also relied on the letter of Shri Ajay Baori dated 27-5-1995. No other significant materials or evidences have been brought out by the assessing officer to substantiate his action except relying on the version of the Citibank. The evidences relied on the assessing officer has no legal force as those evidences have been controverted by the assessee-company.
(vi) The assessing officer has not communicated the details of the working of the concealed income to the assessee-company and has not furnished the details of the computation before the Commissioner (Appeals) either.
(vii) When the materials relied on by the assessing officer to frame the case against the assessee-company are reexamined, it is very clear that he has arrived at an arbitrary finding in contrast to the findings given by High Power Committees like Janakiraman Committee and Joint Parliamentary Committee.
(viii) Wherever interest and dividends are credited in the PMS accounts of the assessee-company with Citibank, tax has been deducted at source as per law. The credit for the TDS amounts were claimed and availed by the Citibank and not by the assessee-company. In view of this fact, it is very clear that the income from dividend and interest were the income of Citibank and that is why Citibank has claimed credit for the TDS. This action clearly shows that the income by way of interest and dividends never belonged to the assessee-company.
(ix) Either in the assessment order or even in the remand report submitted before the Commissioner (Appeals), the assessing officer has not discussed anything about the documentary evidences availed from the Citibank to support the finding of the assessing officer that the alleged income was earned on behalf of the assessee-company. Equally there was not a piece of documentary evidence to support the case that the Citibank had paid any amount to the assessee-company over and above what has been accounted and reported by the assessee-company.
(x) The Citibank was obliged to produce the transactional documents identified by the Hon'ble High Court. Wherever such documents were produced by the Citibank and when they were verified, it was found that the income reflected in those transactional documents have already been accounted in the books of account of the assessee-company and disclosed as income in the original return of income filed by the assessee-company. No evidence was filed by Citibank to support the payment of any additional income disputed in this appeal.
(xi) One of the pertinent questions that was to be answered by the assessing officer in his remand report was whether the assessee-company had any direct control over the PMS accounts maintained by the Citibank in the name of the assessee-company. In the remand report, the assessing officer has replied that the PMS accounts were operated as per the instructions issued by the customers in the Account Opening Forms. Therefore, it is clear that except for the formal and standard directions attached to Account Opening Forms, no other directions were given by the assessee-company in operating the PMS Accounts.
(xii) There was nothing on record to show that the assessee-company was having direct control over the PMS Accounts maintained with Citibank. The Account Opening Form which were never intended to be acted, upon by the Citibank cannot lead to a conclusion that the assessee-company was having direct control over the PMS Accounts. The certificates given by Citibank from time to time relating to the income which has already been offered by the assessee for tax.
(xiii) All these matters bring home the fact that the assessee-company had no direct control over the accounts maintained by Citibank in the name of the assessee-company.
(xiv) The assessing officer has not been able to collect the transactional documents observed by the Bombay High Court and accordingly the relevant evidence could not be collected to support the transactions alleged to be made by Citibank in the name of the assessee-company.
(xv) The Citibank has expressed many times its inability to locate the transactional documents that has defeated the whole case of the Assessing Authority. Regarding the accounts relating to UTI Units, the assessing officer has not been, able to prove any adverse evidence, which were lent by the assessee-company to the bank.
14. In the light of the above findings and conclusions, the Commissioner (Appeals) held that there are no materials or any other convincing reason to make an addition by way of short-term capital gains and dividends and interest to the returned income of the assessee-company with reference to the PMS accounts maintained with Citibank. The addition was accordingly deleted and relief was granted to the assessee.
15. In addition to the grounds discussed hitherto before, the assessee-company had also raised grounds No. 6,7 and 8 relating to classifying the income as short-term capital gains instead of income from other sources, relating to deduction available under Section 80M etc. These grounds have been dismissed by the Commissioner (Appeals) as infructuous as the main subject matter of the appeal, the addition itself being deleted.
16. The assessee has also raised another additional ground before the Commissioner (Appeals) on the ground that no income could be conceived for the impugned assessment year 1992-93, as there was a mandatory lock-inperiod of one year on the PMS account operated with Citibank. This ground also has been dismissed by the Commissioner (Appeals) as infructuous.
17. Another additional ground raised by the assessee before the Commissioner (Appeals) was regarding levy of interest under Section 234B. The Commissioner (Appeals) held that in view of the amended provisions of Section 234B, interest is to be charged on the assessed income and not on the returned income and on that reason, he dismissed this additional ground and it does not survive.
18. Now the revenue is highly aggrieved by the orders passed by the Commissioner (Appeals) giving relef to the assessee-company in respect of the income attributable to PM accounts with Citibank as well as with reference to the deduction of interest expenditure. The grounds raised by the revenue in this appeal are extracted below:
1. On the facts and in the circumstances of the case in law, the learned Commissioner (Appeals) erred in deleting the addition of Rs. 56,93,55,216 being interest paid on monies borrowed relying on the order dated 20-12-2001 of the ITAT for assessment year 1993 -94 in the assessee's own case which has not reached finally and without appreciating the legal position that the Hon'ble Supreme Court in various case cited in (98 ITR 167), (225 ITR 802) and (227 ITR 172) decided the issue in favour of the department and these decisions are squarely applicable in the assessee's case.
2. On the facts and in the circumstance of the case and in law the Commissioner (Appeals) erred in holding that the order under Section 143(3) read with Section 147 dated 14-6-2000 was passed violating the principles of natural justice without appreciating all the evidence on record, the opportunities of being heard given to the assessee and the legal position of the case.
3. On the facts and in the circumstance of the case and in law the learned Commissioner (Appeals) erred in deleting the addition of Rs. 1,26,21,52,048 consisting of short-term Capital Gain of Rs. 1,12,15,29,082 and dividend and interest totalling to Rs. 14,06,22,966 without appreciating the evidence on record and the legal position.
19. The grounds raised by the assessee in its cross objection are against the decisions of the Commissioner (Appeals) wherever he dismissed the grounds as well as the additional grounds for the reason that those grounds and addition ground were infructuous.
20. Shri U.K. Shukla, the learned Commissioner of Income-tax appeared for the revenue and argued the case at length. In addition to a comprehensive argument note, the learned Commissioner has placed before us elaborate paper books in two volumes. The Paper books contain the copies of relevant documents and papers examined and relied on by the Assessing Authority including the agreements that the assessee-company had entered into with Citibank and also the script-wise details of security transactions entered into by Citibank through the PMS accounts maintained by the assessee.
21. The learned Commissioner has taken great pains to explain the intricacies of this case as the facts related mainly to tailor made accounts maintained by banks and also because of the involvement of the accounts in security transactions. The relevant arguments advanced by the learned Commissioner may briefed as below:
(i) In the course of assessment proceedings for the subsequent assessment year 1993-94, the assessing officer has discovered that as per the details submitted by Citibank, the assessee-company had earned about 130 crores of income for the impugned assessment year 1992-93 out of the PMS Accounts operated through Citibank. The above finding and conclusion of the Assessing Authority havc been arrived at on the basis of formidable evidences.
(ii) There is no reason in the argument of the assessee that the details of the transactions have not been furnished by the Assessing Authority. The assessee had maintained 4 accounts with Citibank under the Portfolio Management Scheme. The assessing officer has handed over to the assessee-company's representative the copies of register containing date-wise transactions as well as Security-wise transactions made through the PMS accounts for the relevant period.
(iii) The assessing officer in para-17 of the assessment order has examined the features of PMS Accounts/ scheme. Reserve bank of India has issued strict regulations and guidelines to administer the PMS accounts. As per those regulations and guidelines, the Portfolio/ fund management services could be provided only at the customers risk and without guaranteeing any amount of pre-determined return. This position defeats the argument of the assessee-company that the transactions through PMS accounts with Citibank were entered for a guaranteed amount of return.
(iv) The assessing officer has further explained in paragraph- 19 of the assessment order that a responsible executive of the assessee- company has written a letter to the Assessing Authority of Citibank stating that Citibank had not assured any specific return to the assessee-company under the PMS.
(v) The same issue has been further discussed by the assessing officer in paragraphs 21 to 25 of the assessment order. At one instance, the assessee claimed that the return was 13 per cent net. At the same time, one Shri Venkatchalam, Executive of the Citibank has filed an affidavit before the Hon'ble Bombay High Court stating that the assessee-company were expecting any additional income earned in PMS account to be paid over to them.
(vi) The assessing officer has also dealt with the strong arguments of the assessee-company that the particulars furnished bythe Citibank could not be relied on for the reason that Citibank has been highly indicated by various committees like Janakiraman Committee and Joint Parliamentary Committee.
(vii) The assessing officer has explained in detail a series of reasons for taxing the income in the hands of the assessee-company.
(viii) The assessee-company has passed Board Resolution and has signed Account Opening Forms authorising Citibank to invest in shares and securities on their behalf and to pass on any income arising from those accounts to the assessee-company.
(ix) The assessee-company has written a letter to the Assessing Authority of Citibank on 27-5-1995 stating that Citibank has not assured any specific retturn to the assessee-company on its PMS accounts.
(x) Transactions were carried out through the PMS accounts resulting in profit to the assessee-company, which were not disclosed by them.
(xi) It is to be seen that there was no written agreement for any assured return and the defence of assessee-company was that everything was managed only on oral understanding. This position has been denied by Citibank.
(xiz) The assessee-company had written a number of letters and sent communications to Citibank directing investments in PMS accounts and these acts on the part of the assessee-company signified that the accounts were operational at the directions and instance of the assessee- company.
(xiii) In paragraph-38 of the assessment order, the assessing officer has clearly stated that he is computing short-term capital gains at Rs. 112.15 crores and 14.06 crores as dividends and interest and both are in addition to the income of Rs. 17.19 crores already declared by the assessee-company.
(xiv) The contention of the assessee-company that they had entered into an oral agreement with the Citibank for fixed return on investments is not supported by the facts and evidences brought out by the Assessing Authority. On the other hand, the finding and conclusion of the Assessing Authority are supported by various Board resolutions of the assessee-company placed on pages 386 to 388 of the paper book. Board resolution dated 4-11-1998 authorised Shri S.K. Saboo, Senior Vice President of the assessee-company to deal with the PMS account etc.
(xv) The assessing officer has referred to the guidelines issued by Reserve Bank of India regarding Portfolio/Fund Management Services and those guidelines are enclosed as Annexure 'E' to the assessment order. It has been clearly stated that the services may be undertaken only at the customers risk and without guaranteeing a pre-determined return.
(xvi) Reserve Bank of India has further fortified the earlier guidelines through a letter dated 18-1-1991 issued to the Chairman/Chief Executive of Commercial Banks stating that PMS accounts should be in the nature of investment consultancy/management for fee, entirely at the customers risk without guaranteeing either directly or indirectly a pre-determined return. The letter continue to state that banks should only charge a definite fee for the services rendered independent of the return to the clients.
(xvii) When the present case is examined in the light of the above guidelines of Reserve Bank of India, it is crystal clear that there is no basis for the argument of the assessee-company that it had made investments in the PMS accounts operated by Citibank for a guaranteed amount of return and not for the entire profit.
(xviii) That the Citibank has filed an affidavit before the Hon'ble Bombay High Court reiterating the above position pointed out in the assessment order. The statement of Shri Venkatchalam, the Vice President of Citibank that the understanding was a fixed return of 13 per cent per annum needs to be read, along with the PMS agreements signed by the assessee-company.
(xix) The terms and conditions laid down in the application cum-magreement, acknowledged and signed by Shri S.K. Saboo, Senior Vice President of the assessee-company could not be considered in a casual manner as Shri Saboo is a Senior Executive of the assessee-company has been authorised by the Board of Directors of the assessee-company to look after the matters relating to PMS Accounts. It is highly improbable that Senior Executives who are answerable to the Board of Directors of the assessee-company could ever enter into an oral understanding with Citibank, overriding the written agreement entered into between them.
(xx) Shri S.K. Saboo through his letter dated 12-4-1991 has informed the Citibank that the assessee-company desired to receive the dividends on the Units directly in their name and therefore to hold the units in the name of the assessee in the month of June, 1991.
(xxi) The civil dispute between the assessee-company and Citibank cannot cover up the fact that PMS accounts income has accrued to the assessee-company who was the original investor. The Citibank has written its letter dated 1-6-2000 to its Assessing Authority that the PMS accounts and the profits thereof belonged to the assessee-company.
(xxii) The assessee-company also has written to the Assessing authority of the Citibank that Citibank had not assured any specific return.
(xxiii) All the above materials available on record show that Citibank was only facilitating the operation of PMS Accounts of the assessee-company and obviously all the income arising out of the said PMS accounts should be attributed in the hands of the assessee-company.
(xxiv) When the assessee challenged the notice under Section 148 before the Hon'ble Bombay High Court, the petition was dismissed stating that the assessing officer has given reasons to establish a bona fide belief that income chargeable to tax had Escaped Assessment. The Hon'ble High Court also observed that investments made by the assessee-company belonged to the assessee itself and not to the Citibank. A PMS customer deploys funds by appointing the bank as its Manager. Thereafter enters into purchase/sale of securities with various parties and brokers at rates which would secure the maximum return for customers. The difference in the buying/ selling rates in a transaction results in the profit/loss which arose in their PMS Accounts.
22. The learned Commissioner further stated that there was a settlement dated 23-3-1993 between the assessee-company and the Citibank with reference to the PMS Accounts for a sum of Rs. 55.5 crores. On an examination of the assessment order for the assessment year 1993-94 passed in the case of the assessee- company, it is noticed that although there was substantial income in its PMS Account for the impugned assessment year 1992-93 to the tune of Rs. 143 crores, there was loss to the extent of Rs. 78.41 crores in the succeeding assessment year 1993-94. The working of the said loss has been made by the Assessing Authority in paragraph 5.7 of the assessment order for the assessment year 1993-94. The difference of income as computed by the Assessing Authority for the assessment year 1992-93 and loss for the assessment year 1993-94 works out to Rs. 65 crores approx. The Commissioner continued to state that although there is no working available on record as to how the figure of settlement of Rs. 55.5 crores had been arrived at by the assessce, but it is possible to hold that the settlement of Rs. 55.5 crores is the direct outcome of the said differential amount of Rs. 65 crores. This factual position clearly confirms the finding of the Assessing Authority that the assessee-company had earned a substantial income of about Rs. 143 crores out of its PMS accounts for the impugned assessment year as against Rs. 17 crores offered for taxation.
23. The learned Commissioner submitted that in the facts and circumstances of the case as explained above, the order of the Commissioner (Appeals) on this point may be set aside and the addition made by the assessing officer may be restored.
24. The learned Commissioner of Income-tax further argued on the point ofthe interest expenditure of Rs. 56,93,55,216 and submitted that the order of the assessing officer on this point is self-explanatory and supported by cogent facts and therefore the Commissioner (Appeals) should not have allowed the expenditure as a deduction in computing the income of the assessee-company.
25. Shri J.D. Mistry, the learned Counsel appearing for the assessee argued the case again at length. His contentions are summarised as below:
(i) The Citibank has certified two times, on 1-4-1992 and 3-1-1995 that the Citibank has not paid anything to the assessee-company more than the amount disclosed by the assessee- company. These certificates have never been controverted by the assessing officer or by the Citibank.
(ii) Commissioner has referred to letter of Shri S.K. Saboo of the assessee-company on 12-4-1991 where he has directed the Citibank to hold the units in assessee's own account for the month of June, 199 1. But it is to be noted that Shri Saboo has further stated in the same letter that the Citibank was free to deploy the proceeds of this Portfolio as per Schedule 'B' for the balance period. This is a strong supporting evidence to show that Citibank was utilising the funds at its own will and the assessee-company was supposed to receive only on guaranteed return.
(iii) The letter written by Citibank clearly stated that the assessee-company was entitled for a fixed return of 13 per cent per annum.
(iv) No documentary evidence has been relied by the Citibank or the assessing officer to bring on record that the assessee- company was paid anything more what has been accounted by it and returned for the purpose of taxation.
(v) In spite of all the submissions and statements made by the Executives of the Citibank, they have not stated ever that Citibank had paid any amount to the assessee-company in excess of the income accounted by the assessee-company. This is a very crucial point to be considered by the Tribunal while deciding the matter. The Citibank has continued to state that the entire income belonged to the assessee-company, but at the same time the Citibank did not explain the mode of payment of such income to the assessee-company if any such payments were ever made by the Citibank.
(vi) The whole case belongs to the period when the entire stock market was involved in the security scam. The Reserve bank of India has appointed a committee known as Janakiraman Committee to go into the entire episode in a meticulous manner. The Janakiraman Committee had examined volumes and volumes of documents, number of persons involved in the whole affair and has submitted a detailed report on the entire episode of security scam. In the said report, the Committee has indicated Citibank by name that Citibank had fiddled away large sums of amount from the PMS accounts operated by it on behalf of its customers. The Janakiraman Committee has further observed that Citibank has fluted each and every regulation and guideline issued by the Reserve bank of India in matters of operating PMS Accounts.
(vii) The security scam was also enquired into by the Joint Parliamentary Committee (JPC). The JPC also has come to analogous findings arrived at by Janakiraman Committee. JPC has also indicated Citibank for its manipulation and mismanagement of PMS Accounts by fluting of the rules and regulations framed by Reserve bank of India.
(viii) The whole case of the revenue is built on the proposition that the PMS Accounts are operated strictly in accordance with the regulations and guidelines issued by the Reserve bank of India. In its regulations and guidelines, Reserve bank of India has clearly stipulated that the transactions in a PMS Account would be entered into at the sole risk of the customer and on behalf of the customer and the bank would be entitled only for a specified rate of remuneration and the customer alone would be entitled for the profit and responsible for the loss. There is no dispute on the above statutory framework designed by the Reserve bank of India. But the case is thdt Citibank has fluted all the guidelines and regulations. It is on record of the reports of High Power Committees appointed by Reserve bank of India and Government of India. Those reports categorically stated that the Citibank has not followed the rules and regulations and guidelines framed by the Reserve bank of India. In such circumstances what is the sanctity of the argument of the revenue to frame the case on the strength of those Rules and Regulations designed by Reserve bank of India. If Citibank had followed the regulations and guidelines, of course there is a case against the assessee-company. Citibank never followed the rules. therefore, the guidelines and regulations framed by the Reserve bank of India cannot be taken as a basis for making an allegation that the entire profit derived out of PMS Account were enjoyed by the assessee-company. That is against the facts of the case.
(ix) In the course of writ proceedings before the Hon'ble Bombay High Court, the High Court has clearly directed the Citibank to produce all the transactional documents so that the assessee could find out the real character of the transactions carried out through PMS Accounts of the assessee-company. The Hon'ble Bombay High Court has highlighted the importance of 'Deal Slip'which could be produced by Citibank so that the details of every transaction could be looked into. The Citibank has not produced such transactional documents and particularly the'Deal Slip'for the verification of the assessee-company.
(x) The revenue argues that security-wise transaction details furnished by the Citibank were transmitted to the assessee-company so that the details were available with the assessee-company. That is only a half truth. Wherever the assessing officer has transmitted such details of transaction to the assessee-company, it has been verified by the ass essee- company and explained before the Assessing Authority that the income attributable to those transactions have already been disclosed in its accounts and offered for taxation.
(xi) The assessing officer himself has stated in the assessment order that it would not be possible to the Citibank to produce the transactional documents which are nine years old and therefore instead of the materials he was relying on his discretion to come to a finding. This attitude is a blatant violation of the specific direction given by the Hon'ble Bombay High Court.
26. Shri J.D. Mistry further argued that the assessee does not know whether somebody has made any additional income from the PMS Accounts operated by Citibank on behalf of the assessee-company. The asscssee-company is concerned about the income to be received by the assessee-company and the income actually received by the assessee-company. As far as the PMS Accounts supported by Unit Trust of India, the clear agreement was that the assessee would be getting additional return of 1 per cent. In respect of the remaining deposit accounts, the assessee-company would be getting a return higher than the bank rate. Apart from signing the formal Account Opening Forms, the assessee-company has never given any instructions or directions to the Citibank.
27. In these circumstances, it is nothing but arbitrary and whimsical to attribute any amount of additional income in the hands of the assessee-company by exonerating the Citibank whose activities have been highly indicated by the competent committees in their enquiry reports. The assessing officer has not gathered any materials on record to rebut the findings of those High Powered Committees. The assessing officer acted only on the submissions and explanations offered by the Citibank which always suited to their own interest.
28. The learned Counsel therefore submitted that the finding made by the Assessing Authority towards additional income from PMS Account is just imaginary and nothing else. He, therefore, submitted that the order of the Commissioner (Appeals) on this point is just, proper and lawful and therefore to be upheld by this Tribunal.
29. The learned Counsel further explained the point raised by the Commissioner of Income-tax on the settlement of accounts between the assessee-company and the Citibank. The Citibank entered into the settlement with assessee on 23-3-1993 and agreed to pay Rs. 55.55 crores as full and final settlement of all dues in PMS accounts of the assessee. However, the actual amount paid by the Citibank on the same date was Rs. 69.69 crores. The statement showing the calculation of return on amounts deposited with the Citibank in respect of PMS accounts No. 1 & 4, the assessee received 17 per cent which is consistent with the understanding it had with Citibank. The learned Counsel therefore submitted that the nexus tried to be established by the Commissioner between the settlement amount and the amount of Escaped income is only an unsupported hypothesis.
30. We heard both sides in detail and considered the paper books filed by both the sides. We have also carefully perused the orders of the assessing officer as well as the Commissioner (Appeals) and Annexures thereto. In the light of the above exercises, we proceed to examine the issue of addition relating to the income attributable to the PMS Accounts operated by Citibank.
31. The principles of interpretation of tax matters are drafted from the principles followed in civil matters. There seems to be no disagreement on this point. The rule of evidence to be applied, therefore, in tax adjudication is the preponderance of probabilities. This is an off-quoted principle in tax adjudication proceedings. When we go through the mass of materials placed before us and made up of contentions and arguments right from the assessing officer to the learned Commissioner of Income-tax who argued the case before us, there is an impulse to hold a view that the arguments advanced by the revenue are almost near to the line of probability. If we again scan through the forceful arguments of the learned Commissioner of Income-tax, there is an impression that the line of probability transforms into a line of reasonable evidence itself.
32. But it is not possible for any court to proceed, so unilaterally. It has to equally consider the challenging arguments advanced by the assessee. The task of the Tribunal would, therefore, be to analyse the materials relied on by both the sides and evaluate the relative merits and reliability. It is sometimes in the nature of a comparative exercise to measure the degree of reliability between the materials relied on by the revenue and the materials relied on by the assessee. This degree of reliability seems to be the crucial test in the present case in applying the principles of preponderance of probability. We think that this is the way to proceed to find a balance of convenience on which alone it might be possible for us to come to a fair decision.
33. The crucial issue to be decided here is the income that might have been generated from PMS Accounts operated by Citibank for and on behalf of the assess ee -company. The assessee-company has accounted and offered an income of Rs. 17.19 crores as income from the four PMS Accounts maintained by it with Citibank. The case of the assessee-company is that it had not received anything more than that. The basis of the said argument is that the investments were made by the assessee-company in the PMS accounts in the nature of deposit accounts for a guaranteed amount of return and not for enjoying the entire income that might have been generated in those accounts through the operations carried out by the Citibank. The case of the revenue is that the assessee-company has grossly understated its income from the four designated PMS Accounts and it had in fact received more then 130 crores by way of income from those PMS accounts. The basis of the proposition made out by the revenue is that the PMS accounts were operated by Citibank for and on behalf of the assessee-company and the entire profit arising out of the PMS accounts would be the income of the assessee-company and the assessee- company alone would be responsible for the losses incurred if any. For this reason, revenue has relied on the guidelines and circulars issued by the Reserve bank of India wherein it has been stated that the PMS accounts should be operated only at customers risk and the customers alone will be entitled for the profit and the customers alone would be responsible for the losses. The Reserve bank of India had directed the Commercial banks to deal in PMS account only for a specified amount of fees by way of remuneration.
34. The contention of the assessee-company is that in spite of the regulations and guidelines issued by the Reserve bank of India, the Citibank has not followed those regulations and guidelines. The Citibank has fluted all the directions of the Reserve bank of India. That is why Reserve bank of India has imposed penalty on Citibank. it is the case of the assessee-company that the true conduct of the Citibank in the whole scenario of the Management of PMS accounts has been observed by Janakiraman Committee appointed by the Reserve bank of India and also by Joint Parliamentary Committee. Both the committees have indicated Citibank for its lapses and manipulations and have made a definite finding that Citibank has not followed the norms of discipline prescribed for operating PMS accounts.
35. When we examine the issue in the light of the above nuances, we find that the materials relied on by the revenue mainly of almost comprised of the statements made by the executives of the Citibank. As pointed out by the Commissioner (Appeals), the assessing officer or the Citibank has not explained the means by which the additional income was transmitted to the assessee-company. There is no evidence on that crucial point.
36. It is true that the Janakiraman Committee and the Joint Parliamentary Committee have indicted the conduct of the Citibank as violative of the regulations and manipulative of funds management. The committees have categorically held that the Citibank has fiddled out funds from the PMS accounts to carry on its own business and operations in securities. The assessing officer himself states as the foundation of the reopening of the assessment that there was an income of more than Rs. 130 crorcs out of the four PMS accounts and the doubt that the income would have been either received by the assessee-company or by the Citibank.
37. The whole edifice of the case of the revenue is built on this contingent statement that the income would have been enjoyed either by the assessee-company or by the Citibank.
38. In such circumstances, the Citibank itself is in a fluid position. Therefore, obviously every statement given by the responsible executives of Citibank would be to protect its own self-interest and not for protecting the interest of the assessee or revenue or for that matter to bring out the true facts of the case. They may be justified in doing so because nobody would move against ones own self-interest. But in a judicial process, we can consider the statements of the executives of the Citibank only as selfserving evidences. They are interested witnesses. Therefore, the overwhelming support drawn by the Assessing Authority out of the statements and submissions of the Executives of the Citibank does not command the support of law.
39. Apart from the inadequacy of the materials relied on by the revenue, the assessee-company has advanced certain definite points of evidences to support its arguments. The first such argument is regarding the two certificates issued by Citibank itself stating that what has been disclosed by the assessee-company is the returns paid by the Citibank to the assessee-company against the PMS accounts. That certificates have not been so far controverted either by the assessing officer or by the Citibank. The second most important point is that the credit for the TDS against the interest and dividends credited in the PMS accounts have been claimed by Citibank and not by the assessee-company. Neither the Citibank nor the assessing officer has ever met this formidable objection raised by the assessee-company.
40. The most formidable objection raised by the assessee-company is that the assessing officer has not complied with the specific directions issued by the Hon'ble Bombay High Court. While disposing the writ proceedings before it, the Hon'ble Bombay High Court has directed the Citibank to produce the transactional documents of every deal so that the assessee could examine the nature and colour of every transaction passed through the PMS accounts. The Hon'ble High Court has specifically mentioned about the 'Deal Slip' which contains the primary deiails of every transaction. But the assessing officer has stated in the assessment order that the transactions were as old as nine years, relating to financial year 1991-92 and therefore it would not be possible for Citibank to produce all documents relating to each and every transaction. The assessing officer himself is bailing out the Citibank which is otherwise an equally coaccused in the present case which is evident from the doubt expressed by the assessing officer himself at the beginning that the additional income has been enjoyed either by the assessee-company or by the Citibank. instead of following the directions of the Hon'ble High Court, he has stated that he has used his discretion and did not call for further details. The deal slips, the soul of the evidence, were not made available to the assessee-company for verification. This itself has shaken the credibility of the entire recomputation of the profit allegedly to have been earned by the assessee-company from the PMS Accounts.
41. It is also to be seen as pointed out by the Commissioner (Appeals) that the assessing officer has not discussed anything about the documentary evidences availed from the Citibank to support the finding of the assessing officer that the alleged income was earned by the assessee-company.
42. In these facts and circumstances of the case, we are of the considered opinion that the balance of convenience is apparently tilting in favour of the assessee-company and therefore we have to agree with the Commissioner (Appeals) in holding that there is no evidence or materials to support the case of the revenue that the assessee-company had earned any income from the four PMS accounts operated through Citibank over and above what has been accounted and returned by it for taxation purpose.
43. Therefore, the principal ground raised by the revenue regarding the income addition is dismissed.
44. Next we will consider the ground regarding the deduction of interest payment. Similar interest claimed by the assessee-company by way of deduction for the succeeding assessment year 1993-94 was similarly allowed by the Commissioner (Appeals). The department contested the matter in second appeal before the Tribunal. The Tribunal after examining the factual aspects of the claim confirmed the view of the CTT(A) in its order in ITA No. 1523/Mum./1997 (ITAT Mumbai 'A' Bench). The disallowance has been made by the assessing officer for the impugned assessment year 1992-93 and for the assessment year 1993-94 on same premises. The Commissioner (Appeals) has allowed the contention of the assessee following the order of the Tribunal rendered for the assessment year 1993-94. The main grievance of the revenue also was that similar decision for the assessment year 1993-94 was not accepted by the department. Now the matter being settled by the Tribunal for the assessment year 1993-94, the Commissioner (Appeals) could not have taken any other view but to allow the contention of the assessee. We find no error in the order of the Commissioner (Appeals). Therefore, the second ground relating to deduction of interest expenditure is also dismissed.
45. Revenue fails in its appeal filed before us.
46. Next we have to consider the Cross Objection filed by the assessee. The cross objection relates to the various alternate grounds raised by the assessee before the Commissioner (Appeals) both on law and facts, but dismissed by the Commissioner (Appeals) as infructuous for the reason that the main question of addition has been decided in assessee's favour. As we have already confirmed the order of the Commissioner (Appeals) on the said point of addition, we have to state that the grounds raised by the assessee in this cross objection have become infructuous before the Tribunal also.
47. The assessee fails in its cross objection filed before us.
48. In result, this appeal filed by the revenue as well as the cross objection filed by the assessee are dismissed.