TMI Blog2003 (5) TMI 230X X X X Extracts X X X X X X X X Extracts X X X X ..... l auditor has not given a correct audit report. 5. The allegation of the Department is that the special audit Report, which was incomplete and did not furnish the details required in the notice under s. 142(2A), could not be relied upon. Since the grounds No. 1 to 4 are argumentative in nature, we do not consider to reproduce the same here. 6. The facts concerning this issue has been set out in the assessment order and in the appellate order in detail. However, we consider it proper to briefly mention the facts relating in the special audit. There facts are as under: (i) The assessee-company carried on the business as a residuary non-banking company (RNBC) as defined in Art. 2 of Part II of the residuary non-banking companies (Reserve Bank) Directions 1987. During the assessment year under consideration, it mobilized deposits from its members under seven different schemes. The total amount of deposits was at Rs. 85,52,52,37,618. The assessee had also collected service charges directly from depositor at Rs. 28,23,37,872. (ii) The assessee-company filed its original return of income on 30th Nov., 1996, for the asst. yr. 1996-97. The return was processed under s. 143(1)(a) on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained in para 4.5 of his order is as under: "4.5 It would be found from a close reading of the provisions of s. 142(2A) that a direction under that section can only be issued to the assessee and not to the special auditor and in the instant case also the assessee was directed to get the accounts audited by the special auditor within the time allowed. So, it was the responsibility of the assessee to get the audit done comprehensively in accordance with the specific directions given to it by me under s. 142(2A). If the assessee felt that the time provided was not sufficient to comply with my directions it was open to it to approach me for an extension of time which would have been granted by me upto the maximum period of 6 months as provided in s. 142(2A). But the assessee did not do that. In fact, the time originally allowed was fixed at one month keeping in mind that the assessee did not co-operate in getting the special audit done in the asst. yrs. 1994-95 and 1995-96 and there was a possibility that they might not co-operate this year also in which case allowing a longer time initially would unnecessarily delay the assessment and would serve no useful purpose. At the sametime ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... while framing the assessment. In para 4.7 of the assessment order the AO says that the special auditor has furnished the expenses on the basis of the figures furnished by the assessee. It is not known as to from where the auditor will manufacture the figures and in any case the relevant figures as required by the auditor have to be furnished by the appellant only. I, therefore, hold that the assessment order has to be framed in accordance with the observations of the special auditor unless the AO proves that the special auditor has not given a correct audit report." 7. The Department has challenged the above observations by taking grounds on 1 to 4 before us. 8. The learned senior Departmental Representative Shri S.C. Sen has assailed the audit report on various grounds. In doing so, he has mainly supported the order of the AO, who has treated the report as incomplete and demonstrative only According to Shri Sen, the special auditor appointed by the AO was to submit the report as per the terms of reference and if there was any difficulty with the special auditor, he should have made representation through the assessee and not directly to the AO. His next contention was that sin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... report and submitted that having regard to the nature and complexity of the accounts, the special auditor was appointed and, therefore, the task assigned to him was to be done by him alone. According to the learned authorised representative, the auditor had discussed the matter with the AO and submitted that report only after such consultations. In this regard, it was argued by him that the AO, who is a statutory authority to make such appointment, has inherent power to modify the directions and extend the time for sufficient and good reasons. It was also pointed out that since the directions are issued by the Department to the special auditor and further since the special auditor is appointed by the Department, therefore, the empowerment by the AO to the special auditor is fully justified. The learned counsel also pointed out that in the case of the assessee as well as in the case of its sister-concern, special auditing is done almost every year and it was the third consecutive year in which the special audit was directed. Regarding the demonstrative aspect of the report, it was submitted by the learned counsel that in a case involving voluminous documents, the special audit is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow, and the test checking done and disclosures in the report are demonstrative but not exhaustive or full. However, it was discussed with the authorities mentioned hereinbefore and only upon their orally agreeing for demonstrative reporting, audit was started, hence, figures reported are on the basis of test vouching and ledger scrutiny of books specified in terms (i) hereinbefore. In our opinion and to the best of our information and according to the explanations given to us, the said accounts give a true and fair view: (a) In the case of the balance sheet of the state of the above named assessee s affairs as at 31st March, 1996; and (b) In the case of P L a/c of the profit of the above named assessee for the accounting year ending on 31st March, 1996. The prescribed particulars and such other particulars as were required by the (AO), the Asstt. CIT CCI, Lucknow, by his order Ref. No. ACIT/CC-I/LKC/98-99 dt. 25th Jan., 1999, are annexed hereto. In our opinion and to the best of our information and according to explanation given to us, these are true and correct." 12. The learned CIT(A) has also reproduced the above portions of the letter is para. 18 of his order and afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not binding upon the AO, because, if such a view is taken, then the statutory power conferred upon the AO under s. 144 and 145 shall not be available to him and he shall be bound to make the assessment only on the basis of such a report alone. This is not the object of s. 142(2A). The report of the DVO also cannot be equated with the report of the special auditor, because sub-cl. (6) of s. 16A of the WT Act, 1957, provides that on receipt of the order under sub-s. (3) or sub-s. (5), from the valuation cell, the AO shall, so far as the valuation of the asset in question is concerned, proceeds to complete the assessment in conformity with the estimate of the Valuation Officer. It is to be pointed out that no such provision has been made in IT Act, 1961, for making assessment in conformity with the special audit report. 17. The caption of s. 142 and s. 142(2A) is "Inquiry before assessment". This caption suggests that the AO can make inquiry and for such an inquiry, he can, at any stage of the proceedings, direct the assessee to get the account audited by an accountant. The modalities of appointment of the auditor are set out in this provision. However, it is nowhere provided th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required details, then the AO was expected to grant further time to the special auditor and to issue further directions. In case, the report was not satisfactory then other special auditor could have been appointed under s. 142(2A), such course is not barred. Under s. 142(3), it is provided that the assessee shall be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry conducted under sub-s. (2) or any audit report under sub-s. (2A) and proposed to be utilized for the purposes of the assessment. This provision is as under: "(2A) If, at any stage of the proceedings before him, the AO, having regard to the nature and complexity of the accounts of the assessee and the interests of the Revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief CIT or CIT, direct the assessee to get the accounts audited by the accountant, as defined in the Explanation below sub-s. 2 of s. 288, nominated by the Chief CIT or CIT in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e kept in mind that the expenses of special auditor are borne by the assessee. Hence, the financial burden cast upon the assessee should always be kept in mind. 22. In view of the above, we do not accord our approval to the approach of AO and to the treatment given by him to the report of special auditor. However, on perusal of the order of the learned CIT(A), it is found that the learned CIT(A) has also not gone by the report of the special auditor, although he has observed that the assessment order had to be framed in accordance with the observations of the special auditor. He has considered other evidence and other material while adjudicating various issues. Although the learned CIT(A) was not justified in holding that the special audit report was binding but in the context of the facts and circumstances of the present case, which have been narrated above, the report should have been duly considered alongwith other material. However, since neither the AO has accepted the report nor the learned CIT(A) has placed absolute reliance on such report alone for deciding the various issues, the discussion remains only of academic interest. The grounds taken by the Department are, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Kerala High Court in Edayanal Constructions vs. CIT (1990) 183 ITR 671 (Ker) and the decision of Delhi High Court in the case of CIT vs. Sofia Finance Limited (1993) 113 CTR (Del) 472 : (1994) 205 ITR 98 (Del). 25. The addition of Rs. 8,55,25,37,618 was challenged before the learned CIT(A). He has considered the issue in detail and has set aside the finding of the AO and has restored the matter back to him for deciding the issue afresh. The relevant findings and directions of the learned CIT(A) are contained in paras 168 to 171, which are as under: "168. The AO in the assessment order has said that there was very little time available for making test checks out of the deposits, whose details were furnished by the appellant. The appellant also claims that the time given to him was too short to furnish such details because the details of 2 branches themselves out of the 100 branches called for vide notice dt. 8th March,1999, were running into 37579 pages and 30 volumes and there was no reply to the appellant s letter dt. 4th Jan., 1999, by which the appellant offered to furnish the complete details of all deposits. The appellant submitted that with respect of 192 branches det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove identity of the depositors, the genuineness of the transactions and the capacity of the depositors, despite repeated directions, the AO was fully justified in making addition under s. 68 of the IT Act, 1961, He also contended that, in view of the provisions contained under s. 68 of the IT Act, 1961, the Department is entitled and is rather under a legal obligation to inquire about the nature and source of sums credited in the books of account of the assessee. After making reference to several directions notices and also inquiries made by the AO, the learned Sr. Departmental Representative submitted that the response pattern of the assessee was not co-operative and, therefore, the AO was left with no option but to make inquiries independently. According to him, therefore, the AO cannot be blamed for not providing sufficient opportunity to the assessee. According to him, the learned CIT(A) has not properly appreciated the observations of the AO, which go to show that there was sufficient room for doubting the genuineness of the transaction of the assessee. 27. On the other hand, the contention of the learned counsel for the assessee was that the assessee had always co-operated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sal of the order of learned CIT(A) and particularly paras 168 to 171, we find that whereas he has totally rejected the approach of the AO in making the addition of Rs. 8,55,25,37,608 and has deleted this addition as observed by him in para 168. However, vide para 171, he has restored the matter back to the AO for deciding the issue afresh. Hence, his own approach appears to be inconsistent and self-contradictory. However, since the direction of the learned CIT(A) contained in para 171 has been given effect by the Department and fresh assessment has been made by adjudicating the issue de novo, there remains little scope to reverse the findings of the learned CIT(A) on the ground of inconsistency. In any case after going through the entire material and, in particular, paras 162 to 169 of the order of the learned CIT(A). We do not find any force in the grounds taken by the Department as we are unable to uphold the approach adopted by the AO. Our reasons for coming to this conclusion are as under: (i) The AO has not considered the nature of the business of the assessee while making addition under s. 68. The assessee is a non-banking financial institution, which was recognized by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. (iii) The approach of the AO in making addition on account of total deposits of Rs. 833 crores collected by the assessee is not in consonance with the approach of the Department adopted in earlier years. It was submitted on behalf of the assessee that prior to asst. yr. 1993-94, no addition was made and in asst. yr. 1994-95 and 1995-96, addition of 15 per cent of the opening balance and 30 per cent of the closing balance was made and in asst. yr. 1996-97 i.e., the assessment year under consideration, addition on account of 100 per cent deposits have been made. It was also pointed out that in the asst. yr. 1992-93 while making fresh assessment under s. 141(3)/254/148 of IT Act, 1961, vide order dt. 15th March, 2002, the AO has estimated the unexplained deposits to the extent of 50 per cent of the deposits collected during the year. Thus, there is no consistency in the approach of the Department. (iv) So far as the verification part is concerned in the case of the assessee, books of account are put to check and test by the authorities. The schemes are run by the assessee under the direct supervision of Reserve Bank of India. The accounts of the assessee are audited by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO 7 branches Complete ledgers filed by the appellant (Basti and Khalilabad) 2 branches One branch details submitted on 4th Jan., 1999 (Gomtinagar) 1 branch Branches examined in the case of appellant s agent 8 branches Branch examined in the case of Sahara India Mutual Benefit Co. Ltd. 1 branch Branches checked by the special auditor 173 branches 192 branches (vii) Before the learned CIT(A) also, further fresh evidence was filed. The list of confirmation from depositors is available at pp. 1232 and 1233 of the paper book. Even the photocopy of the applications and confirmations etc. have been filed, which are available at pp. 1235 to 1291. The list of commission agent with code has also been given at p. 1292 and their confirmations have also been filed. Thus, before the learned CIT(A), the assessee had filed lot of material and after examining the same, the learned CIT(A) deleted the addition. Thus, it is not the case where verification was not made or the assessee did not co-operate or on verification, transactions were found to be of dubious nature or fake or non-genuine, r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t found satisfactory and the discretion has to be exercised keeping in view facts and circumstances of the particular case. (xi) In the case of CIT vs. Rohini Builders (2003) 182 CTR (Guj) 373 : (2002) 256 ITR 360 (Guj) it was held that unsatisfactorieness of the explanation of the assessee does not mean and need not automatically result in deeming the amount credited in the books as income of the assessee. In that case, the Tribunal had observed that the assessee was not expected to prove the genuineness of the cash deposit in the bank of these creditors, because under law, an assessee can be asked to prove the source of credits in its books of account, but not the source of source. This view of the Tribunal was upheld by the Hon ble High Court and the SLP filed by the Revenue against the judgment of the Gujarat High Court was also dismissed. Thus, the provisions of s. 68 cannot be applied without having regard to the nature of deposits etc. (xii) In the case of Dy. CIT vs. Dhanalakshmi Bank Ltd. (2002) 76 TTJ (Cochin) 489, the Cochin Bench of ITAT, while considering the scope of burden of proof in the case of cash credit has observed as under: "Failure of brach manager, who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... um account and to state whether the company is listed with stock exchange or not, so, if list price of share at the time of issue of shares. If not listed, to furnish the valuation of unquoted shares as per IT Rules, and to state why share premium amount may not be treated as its income." 34. According to the observations of the AO recorded in para 11.2, the reply of the assessee was that the shares were mobilized by way of private placement through more than 1200 branches maintained by its Agent, namely, M/s Sahara India it is also mentioned that the assessee furnished a list of persons to whom shares of more than Rs. 1 lakh were issued, which included the names of only three Directors. According to the AO, the assessee took several adjournments, but did not furnish the relevant material rather only the details of share applications were in two volumes were furnished. The AO also mentioned that the Departmental inspectors were deputed to collected the information directly from the shareholders, but most of the shareholders were not available. He also issued notices to the assessee as to why addition on account of unexplained credit under s. 68 may not be made. In reply, the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court also on page 105 in their judgment in the case of Sophia Finance Ltd. held as below: "The ITO would be entitled to enquire and it would indeed be his duty to do so, whether the alleged shareholders do in fact exist or not. If the shareholders exist, then possibly no further enquiry need be made. But if the ITO finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital." 206 On the same page the Delhi High Court has further held: "If the shareholders are identified and it is established that they have invested money in the purchase of shares then the amount received by the company would be regarded as capital receipt." 36. The learned CIT/Departmental Representative, Shri Sen has challenged the view taken by the learned First Appellate Authority. He has placed reliance on the observations and the findings of the AO, which are contained in para Nos. 11.1 to 11.9 of the assessment order. According to the learned Sr. Departmental Representative, the assessee did not discharge the burden which lay upon it for proving the identity of the investors, genuineness of transaction and the capacity of the depos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Constitution." In view of the above observation of the Hon ble Supreme Court of India, the decision of Hon ble Delhi High Court in the case of Steller Investment, stands merged with the order of the Hon ble Supreme Court of India and in view of that decision, the rest laid down by the Hon ble Delhi High Court in Steller s case stands approved by the Hon ble Supreme Court of India and in view of the legal position emerging from the decision of the Hon ble Supreme Court of India, the concept of proof identity of shareholder as a genuine investor cannot be uphold as a legally sound test. (ii) In the case of Sophia Investment also, the Full Bench of Hon ble High Court, has observed that if the shareholder exists, then possibly no further inquiry need be made. This is clear from the following portion of the Hon ble Court: "If the amount credited is a capital receipt then it cannot be taxed but it is for the ITO to be satisfied that the true nature of the receipt is that of capital. Merely because the company chooses to show the receipt of the company as capital, it does not preclude the ITO from going into the question whether this is actually so. Sec. 68 would clearly empow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted money in the purchase of shares, then no further inquiry can be made against the company for the purposes of making addition under s. 68 of the IT Act, 1961, but in case after the above test is satisfied, an additional test of proving shareholder as genuine investor is applied, then his capacity to invest has also to be examined, which test will not be even in consonance even with the test laid down in the decision of Full bench of Hon ble Delhi High Court in the case of Sophia Finance. (iii) In the case of CIT vs. Smt. P.K. Noorjahan,, the Hon ble Supreme Court of India has affirmed the decision of Hon ble Kerala High Court. In that case, the issue related to investments made by the assessee, a Muslim lady aged 20 years, in the purchase of land, which was not found recorded in the books of accounts. The explanation of the assessee as to the source for the purchase money for the investment was not found to be satisfactory by the AO, who made addition under s. 69. The AAC concurred with the findings of the AO. The Tribunal found the explanation about the nature and source of purchase money unsatisfactory, but it was of the opinion that although the explanation was liable to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion does not mean and need not automatically result in deeming the amount credited in the books as income of the assessee. The Tribunal found that the assessee had discharged the initial burden, which lay on it in terms of s. 68 by proving the identity of the creditors by giving their complete addresses, GIR Nos./PAN and copies of assessment orders, wherever readily available, that it had also proved the capacity of the creditors by showing that the amounts were received by the assessee by account-payee cheques drawn from bank accounts of the creditors. It was further observed by the Tribunal that the assessee was not expected to prove the genuineness of the cash deposit in the bank of those creditors, because under law an assessee can be asked to prove the source of creditors in its books of accounts, but not the source of the source. On this basis, the addition of Rs. 12,85,000 was deleted by the Tribunal. The Hon ble High Court dismissed the appeal against the order of the Tribunal. The SLP filed by the Revenue against the judgment of Gujarat High Court (2002) 254 ITR (St) 275, was dismissed. Thus, the view of the Tribunal was upheld upto the stage of Hon ble Supreme Court of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, even the Department has to be in possession of sufficient and adequate materials." The Hon ble Patna High Court has further observed as under: "The ITO s rejection, not of the explanation of the assessee, but of the explanation regarding the sources of income of the depositors, could not by itself lead to any inference regarding non-genuine or fictitious character of the entries in the assessee s books of account." (vii) The issue relating to onus of the assessee for proving the genuineness of the deposits under s. 68 also came before this Bench of Tribunal in the case of Krishna Avtar, M/s Krishna Agencies (ITA No. 6289/Del/94 and ITA No. 6256/Del/94). These appeals were decided by us following the decision of the Hon ble Patna High Court referred to above and the other decisions. (viii) The Hon ble Allahabad High Court has also considered the issue in the case of Nanak Chandra Laxman Das vs. CIT (1982) 28 CTR (All) 280 : (1983) 140 ITR 151 (All). In that case, the following observations were made by the Hon ble Court: "Held, (i) that a mere confirmation letter from the alleged creditor could not be treated as sufficient evidence to prove the genuineness of the loan a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppearing in his or its account merely on the ground that he or it could not explain the capacity of the investor or source of the source." 39. In view of the above, the legal position is clear i.e., the assessee has to show that the shareholders or the investors exist and if their identity or existence is proved by the assessee and it is further proved that they have invested the money, then no further inquiry can be conducted from the assessee regarding the capacity of the shareholders. In the instant cases, therefore, the learned CIT(A) was fully justified in holding that the inquiry shall be conducted by the AO and the addition shall be confined only in those cases, where the shareholders are found to be non-existent. Thus, we uphold the approach of the learned CIT(A) and reject ground Nos. 8 9. 40. Ground No. 10 is directed against deletion of addition of Rs. 81,50,93,679 on account of reimbursement of expenses. The facts concerning this matter are as under: (I) The assessee-company was collecting deposits under various schemes and for mobilizing the resources, it entered into an agreement and an MoU was executed between the assessee and the agent i.e., M/s Sahara Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India shall regularly in a manner as may be agreed upon from time to time with Sahara India Financial Corporation Ltd. furnish details of the percentage of expenses which are to be borne by Sahara India Financial Corporation Ltd. Sahara India Financial Corporation Ltd. shall always have the right to verify these expenses. If it wants to do so, at any time and Sahara India will have no objection to Sahara India Financial Corporation Ltd. verifying the expenses. The MoU was executed for a period of three years and became effective from 1st April, 1995. Hence, for the assessment year under consideration, the clauses of this MoU regulate the payments of expenditure etc. to the agent by the assessee for rendering the services in carrying out its business activities. In view of this agreement/MoU, the agent issued debit notes to the assessee-company for claiming reimbursement of expenses. (II.) So far as the assessment year under consideration is concerned, the assessee had claimed following amounts as expenditure on account of expenses reimbursed to its agent under the terms and conditions of the MoU referred to above: (a) Rs. 1,01,10,35,500 This amount was claimed in the origina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure incurred for running the schemes which are directly relatable to the business of the assessee giving the nature, mode and date of incurring of these expenditure. (IV) The special auditor submitted the special audit report to the AO Regarding the expenses incurred by the assessee, following observations have been made in the special audit report: "Expenditure directly relatable to the business of the assessee : There are 2 types of expenses: (1) Incurred directly by the assessee in the ordinary course of its carrying out the business activities and (2) Incurred by its agent M/s Sahara India (Firm). The expenses incurred by the agent M/s Sahara India (Firm) are again of 2 types: (i) Directly relatable to procurement of business and collection charges paid to collectors for collecting instalments from the depositors, and (ii) Deposit service charges which are reimbursed by the Principlal in accordance with the agreement with the said agent. The details of the expenses reimbursed to the agent are given hereunder: Particulars of expenditure Amount reimbursed to M/s Sahara India (Firm) (Rs.) (a) Commission 52,53,17,942 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the other principal namely M/s Sahara India Mutual Benefit Co. Ltd. The share of the assessee out of this amount was at Rs. 28,21,80,818. (C) The expenditure incurred by the agent for its own agency business Rs. 11,99,63,788. (D) The expenditure incurred during financial year 1996-97, but accounted for in the subsequent year at Rs. 8,14,55,626. The share of the assessee, after this amount is worked out at Rs. 3,25,70,026. VII. Before rejecting the books of account of the assessee, the AO issued show cause notice dt. 8th March, 1999, under s. 142(1). In reply to this notice, the assessee filed written submission dt. 5th April, 1999. Regarding the claim of expenditure, following submission was made. "As already explained to your honour on the last date of hearing, the expenses which are reimbursed to the agent are in accordance with the terms of Memorandum of Understanding. The direct expenses are reimbursed on actual basis. These expenses, comprise of daily collection facility charges, commission, promotional and development expenses. The indirect expenses are reimbursed on pro rata basis. These expenses comprise of salary, incentive, rent, travelling, stationery, Bank charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92-93 wherein the Tribunal had allowed expenses at a specific percentage of the total deposits mobilized by the assessee during the relevant years (4.5%). The submission of the assessee vide reply dt. 5th April, 1999, regarding verification of the expenditure was that all the vouchers in respect of various heads of expenditure reimbursed by the assessee to the agent had been examined by the AO at the time of examination of the books of account of the agent, M/s Sahara India whose examination have been taken by the AO on a number of occasions and this fact is verifiable from the assessment record of the agent. However, this submission of the assessee was not accepted by the AO who observed that the expenses which are claimed by the assessee have to be verified from the books of account of the assessee itself and not from the books of account of its agent. The AO also examined the books of account of the agent, M/s Sahara India with reference to the expenses claimed by the said assessee. The Assessing Officer has further stated in para. 7.3 of the assessment order that he made effort to test-verify certain expenses, namely commission and other expenses about Rs. 1,00,000 by obtaining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed return works out to Rs. 81,50,93,579." XIII. The AO also examined the issue from a different angle. According to him, out of the expenses of Rs. 9,79,39,855 shown by the agent, namely M/s Sahara India is its own expenses. The AO observed that out of it, the share allocable to the assessee was at Rs. 5,89,30,410 and this amount could have been allocated to the assessee, but then he concluded that since he had already allowed reimbursement of expenses at Rs. 25,65,76,128 as per para 7.8, this amount of Rs. 5,89,30,410 shall stand disallowed. XIV. The assessee challenged the addition of Rs. 85,04,86,984 by taking ground No. 6 before the learned CIT(A). This ground is as under: "6. That the learned AO has erred in law and facts on record in disallowing a sum of Rs. 85,04,86,984 out of claim of reimbursement of expenses to agents in original return as well as revised return and revised computation as under: (a) Rs. 75,44,59,372 being reimbursement of expenses to agent (b) Rs. 5,51,81,673 being reimbursement of expenses to agent (c) Rs. 54,52,534 being collection charges to agent. (d) Rs. 28,23,379 being service charges to agent. (e) Rs. 3,25,70,026 being reimbursement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of the expenditure on reasonableness thereof." 41. Before us Shri S.C. Sen, CIT (Central) submitted that reliance on debit note was not justified because the debit note is issued by the agent which is a sister-concern of the assessee. According to him, provisions of s. 40A(2) are also attracted in the case of the assessee. The learned CIT also submitted that although the AO has not invoked provisions of s. 40A(2), but it is within the power of the Tribunal to consider such plea. The learned CIT(A) also submitted that the AO doubted the legitimacy of the expenses and mere fact that in the case of M/s Sahara India tax was paid on the receipt of income will not be material, as the burden of profit is on the assessee who claims expenditure. In support, the learned CIT placed reliance on the decision in the case of CIT vs. Motor General Finance (P) Ltd. (2002) 173 CTR (Del) 123 : (2002) 254 ITR 449 (Del) and also on the decision reported in Goodlas Narolac Paints Ltd. vs. CIT (1982) 28 CTR (Bom) 186 : (1982) 137 ITR 58 (Bom). He also placed reliance on the following decisions: 1. Smt. Indermani Jatia vs. CIT (1951) 19 ITR 342 (All) 2. J.K. Woollen Mfrs. (P) Ltd. vs. CIT (19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y us by passing a detailed order on 13th Feb., 2003, on the ground that since the learned CIT(A) has himself made mention of these affidavits in his order, the assessee is not filing fresh material before us. In our view, therefore, the learned CIT(A) was fully justified in taking into account the material filed before him in the shape of confirmatory letters and affidavits. 45. During the course of hearing the learned CIT took another objection by pleading that provisions of s. 40A(2) are attracted in the present matter and the expenditure can be disallowed on that basis also. Since this issue was not raised nor decided by the AO, nor agitated before the learned CIT(A), such plea cannot be entertained by us at this stage. It may also be pointed out even before the Tribunal, the assessee has not taken any ground in this regard. Since detailed investigation on facts is needed for considering such an oral plea taken before us, such plea cannot be considered at the stage of hearing the appeal. 46. It may be pointed out that since the learned CIT(A) has considered the facts relating to this issue in detail and has also made reference to entire relevant material including the orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have been made in respect of such items which were not found to be genuine or were found to be fake or were found non-verifiable. The question of estimating the expenditure, therefore, does not arise in the context of the present matter. 49. The AO rejected the claim of the assessee on the ground of non-verifiability of the expenses. The whole structure of the business of the assessee has not been properly appreciated. The assessee was doing the business through its agent and incurred only nominal expenditure in its head office as the entire expenditure in the business activity of the assessee i.e., in running the schemes, and collecting the deposits was incurred by the agent. Hence, question of producing vouchers by the assessee for verifying the expenditure does not arise. The AO, therefore, was not at all justified in rejecting the claim of the assessee on the ground of unverifiability of the expenses. 50. In the context of the above, it may further be pointed out that the AO was simultaneously examining the books of account of the agent-firm. As pointed out by the learned CIT(A) in para 76 of his order in the case of M/s Sahara India, queries were made by the AO for fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of direct expenses and for indirect expenses, the allocation was to be made in proportion to the deposit. These conditions have been totally changed in the MoU dt. 22nd March, 1995. So far as this MoU is concerned, no distinction has been made between direct and indirect expenses and the assessee agreed to bear maximum of 60 per cent of the total expenditure incurred by the agent in consideration of M/s Sahare India acting as agent for and on behalf of the assessee. Thus, the AO was not justified in comparing the case and facts of the assessee for asst. yr. 1996-97 to the facts of asst. yrs. 1991-92 and 1992-93 as there is no similarity of facts pertaining to these assessment years with the present assessment year. 52. Another aspect of the matter in asst. yr. 1992-93 is that the Tribunal had estimated expenditure by applying percentage of 4.5 per cent of the total deposits. While doing so, the Tribunal also observed in para 63 of its order as under: "This is a common knowledge that after a particular point, progress requires considered efforts and more often than not incurring of heavy expenditure. On the basis of this observation, the Tribunal raised the percentage fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of material required to prove the claim has to be considered in relation to the particular facts of the case. In a case where the assessee is himself incurring the expenditure, it will be completely justified to ask such assessee to produce vouchers etc. and verify the expenses, but in a case where the assessee is getting the work done through other assessee, then asking for vouchers maintained by such assessee will be a cumbersome process. To iterate, if such vouchers are examined in the case of such assessee and are not found to be non-genuine or if the expenditure is not found to be the un-verified and consequently not disallowed in the case of such assessee, then demanding such vouchers again from the principal shall not be a correct approach. 56. The Department has placed reliance on the following decisions: (a) CIT vs. Rayala Corporation (P) Ltd. (1995) 215 ITR 883 (Mad) (b) Manian Transports Ors. vs. S. Krishna Moorthy, ITO (1991) 191 ITR 1 (Mad) (c) Lachminarayan Madan Lal vs. CIT 1972 CTR (SC) 418 : (1972) 86 ITR 439 (SC) (d) Bhavna Chemicals Ltd. vs. CIT (1998) 149 CTR (SC) 336 : (1998) 231 ITR 507 (SC) (e) Goodlas Narolac Paints Ltd. vs. CIT (f) CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of managing partner. Hence, this decision is not relevant. (D) In the case of CIT vs. Rayala Corporation, the issue related to the Power of Attorney. Thus, this case is not directly applicable. (E) Similar is the position with Hon ble Supreme Court of India in the case of Bhavna Chemicals Ltd. vs. CIT (F) On the other hand, the issue relating to allowability of expenditure has been considered in the case of Godavari Sugar Mills Ltd. vs. CIT (1985) 46 CTR (Bom) 197 : (1985) 155 ITR 306 (Bom). In that case the ITO can disallow expenditure on the ground that such expenditure is excessive or unreasonable. It was further held that unless it can be shown that the transaction in question is sham one or unless the value shown was not the value in the books of account or unless it was not a bona fide transaction, it is not open to the Taxing Authorities to disregard the figures of the transaction shown in the books of account of the assessee. (G) In the case of Siddho Mal Sons vs. ITO (1980) 122 ITR 839 (Del), the Hon ble Delhi High Court considered the issue relating to allowability of expenditure and held that an expenditure is to be allowed if it satisfied the test of commercia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch a way that the agent makes a profit. Any rate of commission which will not cover the expenses of the selling agent per se, will not be a business proposition. Consequently, It cannot be considered excessive or unreasonable. Therefore, the expenses incurred by the company in this case is a very material point to decide whether the agency commission is excessive or unreasonable. We, therefore, do not accept the Department s contention that the expenses of the company are not relevant to this issue." In view of the above approach of the AO in estimating the expenditure at 3 per cent cannot be upheld. 57.A It may also be pointed out that in the case of the assessee, in asst. yr. 1992-93, the Tribunal had allowed expenditure at 4.5 per cent and after recalling the order of the Tribunal, the matter was restored to the AO for readjudication. Thus, the order of the Tribunal for asst. yr. 1992-93 allowing expenditure at 4.5 per cent did not remain final. In our order dt. 31st Jan., 2001 rendered in ITA No. 374/All/96, while restoring the matter to the AO for deciding the same afresh, we have directed that the issue should be decided after taking into account the relevant material a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n these aspects. In view of the above, we do not uphold the findings of the learned CIT(A) as such, but direct the AO to work out the relief to the assessee by taking into consideration the allowance or acceptance of expenditure in the case of the agent in this assessment year and in the light of our observation in para 57, 58, and 59. 62. So far as the expenditure of Rs. 8,14,55,626 is concerned, it is further directed that the AO shall further verify that this expenditure which is claimed in this assessment year and accounted for in the subsequent assessment year, is not claimed in the subsequent assessment year and in case it is found that such an expenditure has also been claimed for asst. yr. 1997-98, then the claim shall not be considered in this assessment year. On the basis of the above, ground No. 10 is decided accordingly. Ground No. 11: 63. The assessee had also claimed a sum of Rs. 2,92,66,756 on account of rent. This figure was included in the total sum of Rs. 1,01,10,35,500 claimed under the head "Reimbursement of Expenses to the Agent" Under the head "Administrative and Other expenses", which totalled at Rs. 7,19,62,174, the amount of rent was shown at Rs. 2, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered this issue in paras 103 and 104 of his order. He has deleted the addition by observing as under: "104. Shri Thakkar submitted that vide letter dt. 24th Dec., 1998, the details of rent were furnished and the complete details were as below: M/s Champion Engg. 72,87,073 Rent for staff residence 1,50,000 Paid to M/s Sahara India 2,40,000 Paid to M/s Sahara Estates (P) ltd. 1,32,000 Misc payment below Rs. 50,000 9,000 78,18,973 Whereas the AO has allowed the first two amounts mentioned above, for no reason he has disallowed the remaining 3 amounts even though the complete details were furnished before him. 105. I have considered the submissions raised on behalf of the appellant and it appears that the AO without assigning any reason has overlooked the balance 3 payments made by the appellant. Accordingly, I delete the addition of Rs. 3,81,000 made by the AO." 66. Before, us, it was submitted that since the AO did not consider the letter dt. 24th Dec., 1998, which has been considered by the learned CIT(A), the addition was being wrongly made by him. After considering the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ize and invest the same in no time to earn maximum return therefrom as it has to incur interest payable on the deposits collected with effect from the very day on which the same is collected. This rationale does not find place in the MoU or the actual transactions which took place between the agent and the Principal in the instant case. The assessee-company unduly allowed the interest bearing funds belonging to it to be retained by the Agent to be remitted to it according to the sweet will and convenience of the Agent in the absence of any specific stipulation in the MoU. Hence, it can not be said that the entire amount of interest Rs. 20,10,34,2054 determined by me as otherwise allowable was incurred wholly and exclusively for the purpose of business of the assessee under s. 37(1) of the IT Act, 1961. Accordingly I disallow a sum of Rs. 4,85,82,767, worked out by applying the minimum rate of interest of 8 per cent p.a. paid by the assessee on deposits and adopting the monthly product balance method (as for Annexure B) out of the total interest of Rs. 20,10,34,205 found otherwise allowable by me. Thus, the total interest allowed by me under s. 37(1) comes to Rs. 1,45,24,51,438 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fresh, in our view, there should be no grievance to the Department. Thus, in view of the above the entire issue shall be considered and examined de novo and shall be decided afresh after providing opportunity to the assessee of being heard and the observations of the CIT(A) shall not effect the decision of the AO. The ground is, therefore, allowed for statistical purposes. Ground No. 13. 72. This ground is direct against the deletion of addition of Rs. 4,85,82,467 being disallowance of interest in respect of funds retained by the sister-concern. The learned CIT(A) deleted the disallowance by observing as under: "134. I have carefully considered the submissions raised on behalf of the appellant and this issue was involved in 1994-95 and 1995-96 and the appeals for these two years were decided by me. For the detailed reasons given by me in my order for asst. yrs. 1994-95 and 1995-96. I do not find any justification of making any addition with respect to the notional interest chargeable on the money pending for transmission with the agent. Accordingly, the addition of Rs. 4,85,82,757 (sic)." 73. The same issue has been considered by the Tribunal and the addition on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 76,14,468 is deleted. 74. Since the facts relating to these assessment years are not dissimilar, we respectfully follow the order of the Tribunal and delete the disallowance made by the AO. Ground No. 14 75. This ground runs as under: "The learned CIT(A) has erred in law and on facts in allowing the assessee s claim albeit partially, for deduction of share issue expenses of Rs. 11,62,770 by wrong application of s. 35D of the Act." 76. The AO has considered the matter regarding disallowance of share issue expenses in para 12 of his order. He has made addition of Rs. 11,62,77,802 by observing as under: "12. The assessee claimed deduction for the entire amount of capital issue expenses amounting to Rs. 1,16,27,702 in the computation of income filed alongwith the revised return. On verification it is found that the same represents expenses incurred in connection with issue of shares. Hence, the same represents capital expenditure. But the assessee has claimed the same as revenue expenditure. The claim of the assessee is not acceptable as from the nature of the expenses itself it is clear that the same are capital in nature. These expenses are covered by the expenditure men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany, the disallowance is not justified, because personal use of telephone is not to be considered in the case of the company. Hence, the learned CIT(A) was justified in deleting the addition of Rs. 2,42,120. His findings are contained in para. 238. The same is, therefore, upheld. Ground No. 16 81. This ground is of general nature, which does not require any specific adjudication 82. In the result, the appeal is partly allowed for statistical purposes. C.O. No. 4/Luc/2002: 83. In the cross objection, the assessee has taken fifteen grounds. 84. Grounds No. 1, 2, 5, 8, 9, 10, 13 and 14 have not been pressed at the time of hearing of the appeal in the cross-objection. 85. So far as ground No. 11 is concerned, in view of our findings on ground Nos. 5 to 7 of the ground of appeal in ITA No. 747/All/2000, this ground has become infructuous and is not required to be adjudicated. 86. Ground No. 12 relates to, the addition on account of share capital issue. 87. We have considered the issue while deciding ground Nos. 8 9 in ITA No. 747/All/2000. Thus, our findings in relation to grounds No. 7 8 of appeal shall also apply to ground No. 12 of the cross-objection. Hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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