TMI Blog2007 (8) TMI 481X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee, on the other hand, strongly argued that the decision of the Special Bench of the Tribunal in the case of Wallfort Shares Stock Brokers Ltd. v. ITO [2005] 96 ITD 1 (Mum.) completely covers the issue in favour of the assessee. He also relied upon the decision of the Delhi High Court in the case of CIT v. Vikram Aditya Associates (P.) Ltd. [2006] 287 ITR 268 . 4. We have carefully considered the rival contentions and have gone through the record. In our view, the order of the CIT(A) does not require any interference. The Mumbai Benches of the Tribunal after considering the decisions of the Delhi High Court and the Punjab Haryana High Court have accepted similar contentions of the assessee in the following cases : ( i ) Ashok Kumar Damani A Bench [IT Appeal No. 7004 (Mum.) of 2004] ( ii ) Oxemberg Fashions Ltd. E Bench [IT Appeal No. 5617 (Mum.) of 2004] ( iii ) Ronak Manharlal Sheth I Bench [IT Appeal No. 2966 (Mum.) of 2004] although contrary views are expressed by E Bench in the case of Ompraskash Agarwal [IT Appeal No. 7895 (Mum.) of 2004]. In the light of the principle laid down by the Hon ble Supreme Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer failed to establish the nexus between the borrowed funds and the application of the funds and there was any sort of collision between two parties to result in a reduction of its income by not accounting notional income in the accounts. 7. The learned Departmental Representative strongly supported the findings of the Assessing Officer. He relied on the following decisions : CIT v. V.I. Baby Co. [2002] 254 ITR 248 (Ker.); CIT v. United General Trust Ltd. [1993] 200 ITR 488 (SC); Waterfall Estates Ltd. v. CIT [1996] 219 ITR 563 (SC); Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 , 211 (SC); Shankar Theatres v. CIT [1984] 146 ITR 547 (Bom); Phaltan Sugar Works Ltd. v. CIT [1994] 208 ITR 989 (Bom.). According to him the learned CIT(A) certain erred in deleting the aforesaid disallowances. The learned counsel for the assessee drew our attention to the bare facts, which clearly establishes that there was no necessary nexus between the borrowed funds and the application of such borrowed monies. It is not even a special auditor appointed by the department who had identified the borrowed funds allegedly utilised by the assessee in purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces its own funds interest-free and carries on the business with the aid of borrowed funds there would be no disallowance if the borrowed funds are not diverted to any non-business purpose. The order of the CIT(A), in our view, does not call for any interference on the issue. It is accordingly upheld. 10. In the result, the appeal filed by the revenue is dismissed. 11. Now we take up the assessee s appeal. The first ground in the assessee s appeal is directed against the disallowance of an aggregate sum of Rs. 1,17,82,179 under section 14A of the Income-tax Act on account of deemed interest comprising of Rs. 17,98,947 attributable to investment made in mutual funds and Rs. 99,83,323 attributable to investment made in shares. The assessee had invested Rs. 80,00,00,000 in 6 schemes of mutual funds and received income from those schemes aggregating to Rs. 11,14,36,242 that were claimed exempt from tax under section 10(33) of the Act. The Assessing Officer noted that the entire investment of Rs. 80 crores had been drawn from the overdraft accounts with Bank of Punjab. He worked out interest attributable at Rs. 17,98,947 on borrowed funds employed to earn tax-free income from m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the borrowed funds were utilized by the assessee for running of the business and also for paying the margin money to the Stock Exchange, and not for earning dividend. There was no direct nexus between the utilization of borrowed funds and earning of dividends. On the other hand, the nexus was clearly between the borrowed funds and running of the business as a trader in stocks and shares. 14. The learned counsel pointed out that the assessee had invested Rs. 80 crores in schemes of various mutual funds from which the assessee earned income of Rs. 11,14,36,242 for which the Assessing Officer worked out interest attributable at Rs. 17,98,947. The assessee had earned dividend income on shares of Indian companies amounting to Rs. 50,12,257 and on that amount the Assessing Officer worked out interest attributable at Rs. 99,83,232. The fallacy in the reasoning of the revenue was apparent in the fact that no prudent businessman would spend interest on borrowed funds to the tune of Rs. 99,83,232 just to earn dividend income of Rs. 50,12,257. In addition, the Assessing Officer had further disallowed the sums of Rs. 8,92,914 and Rs. 21,92,812 as Demat charges and administrative expense ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal held that the expression "for the purpose of the business" in section 36(1)( iii ) is wider in scope than "for the purpose of earning profits". Fact that the dividend income was exempt in the hands of the assessee was no ground to disallow the interest. 17. The learned counsel submitted that the working of disallowance as made by the Assessing Officer was based on ad hoc disallowances and not on actual facts. The Hon ble Bombay High Court in the case of CIT v. General Insurance Corpn. of India (No. 1) [2002] 254 ITR 203 held that the expenditure that is not directly relatable to earning of dividend income cannot be deducted from deduction under section 80M. Again in the case of CIT v. Central Bank of India [2003] 264 ITR 522 Hon ble Bombay High Court held that only actual expenditure incurred was deductible and estimated proportionate expenditure was not deductible from gross dividend while working out deduction under section 80M. Reference was invited to the decision of the Tribunal in the case of Shaw Wallace Co. Ltd. v. Dy. CIT [2002] 80 ITD 156 (Cal.) and of Madhya Pradesh High Court in the case of State Bank of Indore v. CIT [2005] 275 ITR 23 . In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded the funds invested in shares no disallowance under section 14A was called for. Following that decision also the disallowance under section 14A was not sustainable. 19. The learned Departmental representative strongly relied upon the order of the Assessing Officer and the learned CIT(A). He emphasized that the provisions of section 14A are widely worded and, therefore, if there was any income that was exempted by any provisions of the Act the expenditure relatable to such income had to be disallowed. It did not matter that no expenditure was separately incurred for the purpose of earning such income. As long as there was exempt income and expenditure that could be related to that exempt income the provisions of section 14A mandated disallowance of expenditure relatable to exempt income. The judgment of Hon ble Supreme Court was delivered prior to the enactment of the provisions of section 14A and did not come in the way of the operation of the provisions of section 14A. The learned Departmental representative strongly relied upon the decision of the Tribunal in Everplus Securities Finance Ltd. v. Dy. CIT [2006] 101 ITD 151 (Delhi). 20. We have carefully considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... behalf of a third party the interest expenditure cannot be said to have been incurred for earning of dividend. There is force in the contention that the dividend income in the case of the present assessee has been to a large extent merely incidental income for which no borrowing was made. The legal position in this regard is not altered by the provisions of section 14A that apply only when there is expenditure in relation to an exempt income. These provisions do not create any legal fiction to deem any expenditure as expenditure incurred in relation to exempt income. This legal view of the matter is well supported by the judgment of Hon ble Calcutta High Court in the case of CIT v. Kanoria Investments (P.) Ltd. [1998] 232 ITR 7 and the decisions of ITAT in the cases of Mafatlal Holdings Ltd. v. Addl. CIT [2004] 85 TTJ (Mum.) 821 as also Asstt. CIT v. Eicher Ltd. [2006] 101 TTJ (Delhi) 369 where the Tribunal has held that the expenditure which Assessing Officer seeks to disallow under section 14A should be actually incurred and so incurred with a view to producing non-taxable income . As against these authorities the learned Departmental Representative has relied upon t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer for making the disallowance is both technically and commercially correct and reasonable . 24. The learned counsel argued that no weightage was given to the assessees s argument that the demat cost was not a cost of purchase or sale but was only a transaction cost, and that stock exchange expenses had no relation with the dividend income of the assessee and were levied on the broker who dealt for his clients in the stock exchange. The learned counsel further submitted that various case law and arguments mentioned in the submissions in regard to ground of appeal No. 1 insofar as they apply to ground of appeal No. 2 also should be taken into consideration. He relied heavily upon the judgment of the Apex Court in the case of Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450. Further the learned counsel argued that the assessee s business was dealing in shares and securities, which was indivisible. All the expenses were incurred in connection with the appellant s business and not in connection with earning of dividend. Not a single item of expenditure was directly attributable to earning of any exempt income. In the normal course, expenses like demat cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee. The Assessing Officer held that the assessee s claim for allowing this amount was not acceptable as the amount had not been written off also in the books of account and the requirements of the provisions of section 36(2) were not met. The learned CIT(A) agreed with the Assessing Officer and held that the amount in question was allowable neither as bad debt nor as business loss. He held also that the claim of loss was premature because the assessee had not made efforts of any sort to recover the debt and made claim of business loss in undue haste. 27. The learned counsel for the assessee informed us that copies of account of the party for the transactions at BSE NSE are given at pages 60 and 70 of the paper-book respectively. Copies of the two bounced cheques are given at pages 540 to 542 of the paper-book. The legal principle in this respect was elucidated in the landmark judgment of the Hon ble Supreme Court in the case of Badridas Daga v. CIT [1958] 34 ITR 10 and if the guiding principle as laid down in that judgment, is applied to the assessee s case there could not be any doubt that the loss was incurred by the assessee in the course of carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee on 18-3-2001. The same were returned as bounced on 19-3-2001. Immediately, the assessee tried to sale the shares but there were no takers. From 19th to 22nd March on an average one trade took place and during those four days the total volume of the shares transacted in the Exchange was 19 shares only i.e., less than 5 shares per day. Thereafter the quoted price at BSE plummeted to Rs. 2 only and that too for minuscule quantity of shares. The assessee simply could not have sold 6,44,000 shares in its possession for complete want of buyers. Those shares were at that time practically of no value at all. Secondly, the learned Assessing Officer objected to the claim of business loss on the ground that certain steps had been taken by the assessee. There again the Assessing Officer had completely misdirected himself and paid no heed to ground realities. Mere filing the suit was not a prospect of actual recovery. That was more a question of the availability of the funds with the debtor. Further, it is common knowledge that such types of litigation are long-drawn, protracted and result into mounting cost in terms of time and money generally not commensurate with the fina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer there is no business loss because the assessee had held valuable security against the debt. We are in substantial agreement with the contention of the learned counsel for the assessee that this argument holds good only to the extent of the value of the security and no more. If the full value of the debt was not covered by the net value of the security, the assessee was justified to claim the business loss to the extent of the unsecured debt. Thirdly, the learned CIT(A) holds that the assessee s claim of business loss was premature. 31. As to the first contention the Assessing Officer is correct that the condition precedent as enumerated in section 36(2) is not satisfied as respects the amount expended for purchase of shares on behalf of Century Consultants. From that it does not follow that the assessee could not at all claim deduction of money lost. From the facts on record it cannot be disputed that the assessee had purchased the shares on behalf of CCL in the ordinary course of its profit-making activity. Any bona fide loss arising in the ordinary course of carrying on of business which is of revenue nature is to be allowed as business loss even if the provisions rel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee knew it well that filing of the suit would not in any way help the assessee but rather burden the assessee with additional financial expenses. If the assessee feels that in spite of the suit, the loan will not be recovered, the filing of a civil suit for recovery of debt is not necessary to claim the bad debt. Therefore, in this case the amount should be allowed as bad debt." It is therefore seen that there is hardly any force in the contention of the learned CIT(A) as respects the efforts of recovery not made by the assessee. The assessee, on an honest appraisal of ground realities came to an honest belief that the amounts outstanding against Century Consultants had resulted into a business loss. Hence the case of the appellant falls within the parameters laid down by the Hon ble jurisdictional High Court in the case of Jethabhai Hirji Jethabhai Ramdas ( supra ). The case law relied upon in this behalf by the learned DR is off the mark. In the case of CIT v. Hotel Ambassador [2002] 253 ITR 430 (Ker.) that assessee had not charged bad debt written off to profit loss account at all. It did not form part of audited books of account. Moreover, the claim of bad d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner. There is no material relied upon or any argument in the learned CIT(DR s) submissions either. We therefore hold that the value of those shares at the material time should be taken approximately Rs. 2 only. However we cannot accept the entire amount being claimed as business loss when the assessee had with him the security deposit of Rs. 15 lakhs and in his custody 6.40 lakh shares. We, therefore, taking into consideration the security deposit and the value of the shares in the custody, sustain the disallowance to the tune of Rs. 27,80,000. The Assessing Officer is directed to allow the balance amount of business loss as claimed by the assessee. 34. The fourth ground of appeal relates to the addition of Rs. 44,93,731 made by the Assessing Officer being the amounts of excess brokerage debited to some clients. The appellant subsequently reversed such excess brokerage income in respect of the following parties: 1.Classic Credit Ltd. Rs. 6,70,904 2.Fortune Investments Rs. 11,27,805 3.Ashok Mittal Co. Rs. 25,58,584 4. Mr. Shah Rs. 1,36,438 Rs. 44,93,731 While making the addition, the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sons v. CIT [1977] 108 ITR 358 (SC ); Sasoon J. David Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 (SC) and S.A. Builders Ltd. v. CIT [2007] 288 ITR 1 (SC). 36. The learned CIT (DR) strongly relied upon the observations in the assessment order and the order of the learned CIT(A). He supported the addition with the judgments in the case of State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC) and Western India Oil Distributing Co. Ltd. v. CIT [1994] 206 ITR 359 (Bom.). 37. We have carefully considered the rival submissions. We find that the learned CIT (DR) has erroneously relied upon the judgment of Hon ble Supreme Court in the case of State Bank of Travancore ( supra ). That judgment related to the case where the assessee-bank did not provide for the accrued interest on sticky loans on the ground that the loans were sticky and there was dim prospect of actual recovery of interest. Hon ble Supreme Court held that so long as an assessee followed the mercantile system of accounting interest income had to be recognized on accrual basis. The facts of the assessee before us are vastly different. Here adjustment entry is explained not because of any doubt as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits. " (Head-note) [Emphasis supplied] Both the Assessing Officer and the learned CIT(A) should have considered the issue in the light of the above judgments of the Apex Court. But that has not been done. The addition made by the Assessing Officer is based on suspicion, surmises and conjectures. There is no material in the possession of the Assessing Officer that the reversed amounts were indeed collected from the clients. The addition is, therefore, totally unjustified and contrary to the provisions of the Act, and accordingly directed to be deleted. 38. The fifth ground of appeal relates to the addition of Rs. 41,33,919 made by the Assessing Officer by way of the assessment of deemed interest on the funds allegedly diverted to M/s. Ashok Mittal Co. (AMC). The Assessing Officer, while admitting that AMC was a client of the assessee-company who regularly purchased and sold shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified the borrowed funds allegedly utilized by the assessee in making any uncalled for advance to AMC. In fact the working of disallowance had been made purely notionally by applying a rate of 17 per cent on the outstanding amounts in the accounts of AMC. Such course of action was contrary to the judgment of the jurisdictional High Court in the case of CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 (Bom.). The debt in the account of AMC was partly a consequence of the shares purchased by the assessee on their behalf and that was the normal business of the assessee. It could not be said that the conditions laid out in section 36(1)( iii ) were not met. The learned counsel relied upon in this behalf on Hon ble Apex Court judgment in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 . 41. The learned CIT(DR) relied upon the assessment order and the order of the learned CIT(A). He sought to support their orders by placing reliance upon the judgments in the cases of Phaltan Sugar Works Ltd. v. CIT [1994] 208 ITR 989 (Bom.); Phaltan Sugar Works Ltd. v. CIT [1995] 216 ITR 479 (Bom.) and Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 , 211 (SC). 42. We hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edited in the books of account of the assessee and offered for assessment included the dividend to the tune of Rs. 38, 25,147 that had been received on shares bought for the clients but received by the assessee because the delivery of those shares was given after record date for the receipt of dividend declared on those shares. In the assessment order the Assessing Officer held that the assessee could not substantiate this explanation and he made addition of Rs. 45,34,19,215 representing undisclosed investment in shares on which the dividend had been disclosed in the books of account of the assessee. However, during the course of the appeal before the learned CIT(A) the Assessing Officer submitted a Remand Report. In that report the Assessing Officer, inter alia, accepted that the assessee had by and large established the explanation given by relevant details and documentary evidence but the assessee could not furnish documentary evidence as respects the shares of the value of Rs. 1,47,01,000. The learned CIT(A) therefore sustained the addition as made by the Assessing Officer to that extent. 44. During the course of hearing before us the learned counsel submitted that the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It was pointed out also that the name of the client was Anant Gupta and not Anand Gupta as stated by the Assessing Officer. Summons sent to Anand Gupta might have come back unserved as the name was wrongly written. 45. The learned CIT(DR) argued that the Assessing Officer had examined the issue at length. The assessee could not establish its explanation as regards shares purchased to the extent of Rs. 1,47,01,000. Hence, the addition was rightly sustained by the learned CIT(A). 46. We have carefully considered the rival submissions. In our view on the facts and in the circumstances of the case and the manner in which this issue has been framed we accept the additional evidences furnished in this regard. In the light of the same the disputed issue stands restored to the Assessing Officer with a view to frame afresh in the light of the fresh evidence that is now produced before us and also in the light of the evidences the assessee may produce in this behalf. 47. The seventh ground of appeal relates to upholding of the disallowance of expenses on purchase of software to the tune of Rs. 3,24,508. The Assessing Officer treated the expenditure as capital expenditure. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonable amount of details to the Special Auditor as also the Assessing Officer. Reference in this regard was invited to pages 562 to 628 of the paper-book. The lower authorities did not go into the details of expenses to find out as to whether the expenses were incurred for the purposes of business. Foreign tours by the directors and their wives were not necessarily personal as assumed by the Assessing Officer and the learned CIT(A). Unless the purpose of the tour was looked at, one could not conclude as to whether the tour was for personal purpose or business purpose. No such effort was made by the lower authorities. The learned counsel relied upon the court pronouncements in the cases of CIT v. Indian Products Ltd. [1994] 207 ITR 647 (Cal.); CIT v. Sundaram Clayton Ltd. [1999] 240 ITR 271 (Mad.) and CIT v. Aspinwall Co. Ltd. [1999] 235 ITR 106 (Ker.). In the assessee s case, an objective analysis of the purpose of foreign tours had not been done, which was evident from both the assessment order and the appellate order. The disallowance had been made in an ad hoc manner and without appreciating the facts of the case. Entire disallowance was therefore liable to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (Rs. 1,332.48 lakhs) and the market value (Rs. 1,064.74 lakhs) as capital loss as against the appellant s claim as business loss, and did not allow the benefit of set off of the loss against business income of the appellant. The learned CIT(A) agreed with the Assessing Officer and upheld the treatment given by the Assessing Officer. 54. During the course of hearing before us the learned counsel referred to the judgment of Hon ble Supreme Court in the case of Investments Ltd. v. CIT [1970] 77 ITR 533 and argued that no firm conclusion could be drawn from the description in the balance-sheet as investment or stock-in-trade. To the same effect was the judgment of Hon ble Supreme Court in the case of Dalhousie Investment Trust Co. Ltd. v. CIT [1968] 68 ITR 486. How the assessee dealt with the asset was material and not how he described it in the books of account. Based on this reasoning the learned counsel argued that investments appearing in the balance-sheet were actually stock-in-trade. In order to rectify the apparent mistake of showing the stock-in-trade as investments, the appellant converted these investments as stock, and did trading on that converted stock. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd., and M/s. Arihant Exim Scrips Pvt. Ltd. According to the Assessing Officer those transactions were not genuine and he has therefore made various disallowances/additions. By ground No. 10, the assessee has challenged the disallowance of Rs. 7, 20,93,640 made by the Assessing Officer of the loss claimed in respect of delivery-based transactions. The Assessing Officer made the disallowance because the three Kolkata brokers through whom the assessee had made the transactions did not report the transactions to the Calcutta Stock Exchange. Ground of Appeal Nos. 11 and 12 pertain to the assessee s claim of deduction of speculation loss of Rs. 15, 67, 29,843 and loss on non-delivery based transactions of Rs. 6,19,10,450 disallowed by the Assessing Officer on the similar basis. Furthermore, the assessee had claimed business loss of Rs. 26,44,07,332 on the ground that the three Kolkata based brokers ( supra ) had defaulted in making payments, on account, to the assessee to that extent. That claim too has been disallowed by the Assessing Officer on similar reasoning and is disputed by the assessee by ground of appeal No. 13. For making these disallowances the Assessing Officer has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers of the CSE including the above three brokers were declared defaulters for non-payment of the commitments. Pursuant to the investigation, SEBI filed prosecution against the three broking firms. The said brokers of CSE were also debarred by SEBI from associating with securities market activities and dealing with securities market till the completion of investigation under sections 11 and 11B of SEBI Act. The assessee clarified that the loss was incurred due to purchase and sale of securities in the normal course of the business, and that all the transactions were recorded in its books of account. The assessee contended that the shares were delivered to the constituents and payments were received except those outstanding as on 31-3-2001 and argued that under such circumstances there could not be any doubt about the genuineness of the trades. The Assessing Officer found that from the various transactions of the assessee with the three Kolkata brokers the following position emerged : ( i )Business loss of Rs. 6,54,75,600 on account of Delivery based transactions; ( ii )Speculation income of Rs. 36,71,67,890; ( iii )Speculation loss of Rs. 13,98,80,283; ( iv )Business loss on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,07,332 claimed on account of non-recovery the learned CIT(A) held that the loss had not actually crystallized as was evident from the fact that a sum of Rs. 1 crore had been received by the assessee subsequently. 59. The learned counsel for the assessee contended that the orders of the authorities below in this behalf are devoid of all merits. The Assessing Officer had acted on irrelevant and non-existing material and had ignored obvious material since that went entirely in favour of the assessee. He purported to act upon the report of the Special Auditor under section 142(2A) and the information supplied by Calcutta Stock Exchange but he stated what they did not state and did not state what they obviously stated. Lakhani Co., the special auditors appointed under section 142(2A) made their report on 6-8-2004 (pages 340 to 404 of the paper-book). In Para 11 of Annexure-I of that report (pages 355-357 of the paper-book) the special auditor has discussed the assessee s transactions with the three Kolkata brokers. The special auditor says that the appellant did not produce any bills or contract notes from the three brokers but produced five documents titled "Delivery Bill" that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferring to the quotations of the Calcutta Stock Exchange Association that the price at which the transactions of purchase and sales had been disclosed were within the price band of the market price of the respective days, (page 331 of the paper-book). 60. The learned counsel for the assessee further pointed out that the Calcutta Stock Exchange (CSE) in their letter dated September 22, 2004, reproduced in the assessment order; did not at any place refute the correctness or genuineness of the transactions in question. They only observed : "It is not possible for the Exchange to confirm whether the trades done by the said persons were through the trading system of the Exchange or not unless the trade numbers are furnished in the contract notes." Calcutta Stock Exchange further clarified : "It is not possible to state that the documents as submitted by your assessee are genuine or not as these documents do not contain trade numbers. The assessee is supposed to furnish Contract Note with trade No., trade time, delivery statement, difference bills etc. We are enclosing herewith one specimen copy of Form B of contract note for your ready reference." Thus the learned counsel ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta furnished by CSE. All the payments received or made were routed through the regular bank accounts of the assessee. The assessee furnished five Delivery Bills and later eleven Contract Notes duly signed and confirmed by Kolkata brokers. Last but not the least, none of the alleged irregularities could be attributed to the assessee because if at all, the same were the obligation of the three brokers who were the members of CSE and not the assessee. 61. The learned counsel for the assessee argued that it was the time-honoured precept of evidence that the apparent state is true until contrary is proved and the burden to prove the contrary rests upon one who asserts the contrary. In this context he referred to the judgment of the Apex Court in the case of CIT v. Daulatram Rawatmull [1973] 87 ITR 349. In the present case the assessee had fully discharged the initial burden placed on him to furnish supporting evidence as respects the transactions claimed to have been carried out by him. The assessee had furnished all the evidences reasonably expected to be in his possession. As against the evidence placed by the assessee the Assessing Officer had nothing more than conjectures, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the Form B/Contract Notes were the baby of the member brokers of CSE. No such compliance was called for from the assessee-company. The learned counsel referred to the decision of ITAT Mumbai F Bench in the case of Mukesh R. Marolia v. Addl. CIT [2006] 6 SOT 247 and pointed out that in that decision the Tribunal has held that the transactions outside the floor of the stock exchange are not illegal. Howsoever unbelievable it might be, if the transactions of an assessee are well accounted for, documented and supported it would be very difficult to brush aside the contentions of an assessee that he had purchased and sold certain shares. 62. The learned counsel argued that there was inherent contradiction and injustice in the assessment order. The Assessing Officer considered for certain reasons, of whatever worth, the transactions of the assessee with the three Kolkata brokers to be paper transactions only. True to his finding the Assessing Officer was required to reject all trades of the assessee with those brokers but against all logic, all common-sense he did so selectively. While he rejected the loss-making trades and disallows the loss, he had no qualms in charging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a period of three and half years. That showed that there was slim chance of any further recovery. Hence the circumstance relied upon by revenue should be held as establishing the assessee s case. The assessee doggedly pursued the issue of recovery and left no stone unturned - a criminal complaint was filed; police investigation was involved; cheques dishonoured; and a criminal suit was filed. All that is a matter of record. 64. The learned counsel referred to the observations of the Mumbai Bench of the Tribunal in the case of Jt. CIT v. Shreyas S. Morakhia [IT Appeal No. 2647 (Mum.) of 1999] that loss suffered on account of defaulting stock brokers should be considered as business loss though the recovery proceedings initiated by the stock exchange against the said defaulter brokers had not been completed. He then referred to the Hon ble Gujarat High Court judgment in the case of Hindusthan Trading Corpn. v. CIT [1986] 160 ITR 15 and pointed out that Hon ble High Court had held that the sale price due to the assessee from purchasers would become a debt due to the assessee at the end of the year of account but such debt would not become capital asset. Such debt would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner he has worked out disallowance of aggregate loss of Rs. 29.08 crores. In effect, the Assessing Officer has assessed aggregate profit of Rs. 45.26 crores in the assessee s transactions with the three Kolkata brokers by accepting the transactions resulting into profits while rejecting the transactions resulting into loss as non-genuine. The learned counsel for the assessee has pointed out that the reasons given by the Assessing Officer, for whatever they are worth, apply in equal measure to the profit transactions as well as loss transactions and therefore the addition could not exceed the sum of Rs. 10.26 crores being the net reduction in the assessee s income on account of transactions with the Kolkata brokers. Realizing this self-contradiction the Assessing Officer has purported to assess the sum of Rs. 45.26 crores as unexplained credits. That is, obviously, a lame excuse because the assessee does not appear to have introduced any unexplained income in the garb of unexplained cash credits in the name of the three Kolkata brokers and the learned counsel for the assessee has clearly stated that more money went out of the coffers of the assessee than received from the three K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions should have been reported to the CSE but had indirectly admitted that the same had not been informed to the CSE. 68. The Assessing Officer has thus relied upon the enquiries made from three sources. We find that none of the three sources support the findings and conclusions of the Assessing Officer. As to the reports of the Special Auditor under section 142(2A) Lakhani Co., the special auditors appointed under section 142(2A) made their report on 6-8-2004 (pages 340 to 404 of the paper-book). In Para 11 of Annexure - I of that report (pages 355-357 of the paper-book) the special auditor has discussed the assessee s transactions with the three Kolkata brokers. The special auditor takes exception to the assessee not furnishing the bills or contract notes from the three brokers but acknowledges five documents titled "Delivery Bill". These delivery bills too were not found satisfactory as they did not contain serial number, the time (not date) of execution of the transactions, separate brokerage amount, type of transaction (purchase or sale). At the same time the Report acknowledges that the complete break-up of the transactions as per books of account had been given a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price at which the transactions of purchase and sales had been disclosed were within the price band of the market price of the respective days (page 331 of the paper-book). Once the Special Auditor acknowledges that contract notes were furnished; the shares were received in and delivered from Demat account; further supported by Demat Slips, Demat statements and Clearing house statements of the brokers and the Special Auditor certifies after referring to the quotations of The Calcutta Stock Exchange Association that the price at which the transactions of purchase and sales had been disclosed were within the price band of the market price of the respective days much of the doubt raised in the first report as respects the genuineness of speculation loss (not transaction) goes away. As far as the assessee s transactions with the three Kolkata brokers are concerned the report of the Special Auditor, finally, is only that the documentation did not conclusively prove that the transactions of sales were effected on the floor of the exchange or were market trades. 69. As to the reply received from Calcutta Stock Exchange, they only state that in the absence of the trade numbers in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by the learned Departmental Representative in the case of Jaya I. Shah ( supra ) deals with as to how the assets of a defaulting Member other than card money and card money should be applied amongst the claims of various persons. With due respect, we find the factual matrix of that case far too removed from that of the case before us. Lastly the learned CIT(DR) has relied upon the Tribunal decision in the case of Subhash Chand Shorewala ( supra ). That case relates to the fine paid by that assessee, admittedly, as a result of his failure to adhere to the stock exchange regulations. The Tribunal held that such fine paid for infraction of law was not allowable expenditure. Not to speak of any fine or penalty imposed, there is no material that any show-cause notice was issued to the assessee for having entered into the transactions in question. Hence, we find this Tribunal decision also as of no assistance to the case of revenue before us. 72. As the matter stands we find that the assessee s transactions are supported by the movement of shares as reflected in Demat account, movement of money as reflected in the bank account, entries in the books of account of the assessee, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as not genuine also. It is pertinent to note here that the loss is reflected in the books of account. Money for the transactions have gone out from the bank accounts. Shares sold have gone out from the Demat accounts of the assessee. There is nothing to indicate that any of those money and shares returned to the assessee in some form or the other. We see force in the argument of the learned counsel for the assessee that the loss cannot therefore be disallowed on such objections like time of transaction not recorded or client code not mentioned or trade No. not mentioned. The defects in this respect are in the documentation done by the third parties and not the assessee. It is important to emphasize here that the disallowance on the ground of infraction of law can be made only if there is serious breach or defiance of law or contumacious conduct. The technical or venial defaults would not justify the harsh action of disallowance of an expenditure actually incurred. Reference in this regard may be made to the landmark judgment of Hon ble Supreme Court in the case of Hindustan Steel Ltd. v. State of Orissa [1972] 83 ITR 26 and the judgment of the jurisdictional High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he third ground of appeal taken by the assessee. For brevity, the same are not repeated here. Let it suffice that for the same reasons we do not agree with the contention of the revenue that all hopes of recovery were not lost. The assessee has submitted that soon after the transactions the three Kolkata brokers were declared defaulters by CSE and they ceased to operate as stock-brokers. In our view on these facts it cannot be said that the assessee could not as an honest businessman have arrived at an honest belief that the debt was not recoverable and the amounts had become a business loss incurred by the assessee. Thus we find that the parameters laid down by the judgment of the jurisdictional High Court in the case of Jethabhai Hirji and Jethabhai Ramdas v. CIT [1979] 120 ITR 792 (Bom.) are satisfied as regards the loss of Rs. 26.44 crores claimed by the assessee being dues against the three Kolkata brokers no longer recoverable. We therefore direct deduction of the sum of Rs. 26.44 crores as business loss incurred by the assessee during the year. 75. The 14th and 15th grounds of appeal relate to the disallowances of Rs. 2,07,731 and Rs. 5,93,239 made by the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was made by the Assessing Officer in respect of 13 creditors to the aggregate of Rs. 5,32,38,415 on the ground of want of confirmation from the parties shown as "Sundry Creditors" in the balance-sheet. The second addition also was made on the same basis by the Assessing Officer at Rs. 6,85,75,350 shown in the balance-sheet as advances from 6 customers. The third addition was made by the Assessing Officer at Rs. 33,94,268 on account of unexplained liabilities. The Assessing Officer made these additions in a few sentences in para 10 of the assessment order. During the course of proceedings before the learned CIT(A) the matter was remanded to the Assessing Officer and his remand report was received and the same has been reproduced in the impugned order. The learned CIT(A) deleted the addition to the extent of Rs. 5,05,99,298 from four sundry creditors and confirmed the addition of Rs. 26,39,117 which was the outstanding balance in respect of nine other creditors. As respects the advances from customers the addition is reduced to Rs. 2,14,50,214 by the learned CIT(A) after deleting the addition on account of advances from two customers. The addition on account of other liabilities has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... those accounts by the Assessing Officer after verifying the same during the course of remand proceedings. The learned counsel argued that possibly the Assessing Officer omitted to suggest deletion of those amounts in the remand report through oversight. As to the other credits the assessee had furnished accounts as appearing in the books of account of the assessee duly certified by those parties with their PAN and in some cases the parties directly filed with the Assessing Officer even the copies of the returns of income filed by them. The learned counsel strongly relied upon the evidence and material given at pages 285 to 309 of the paper-book and contended that the entire addition being uncalled for and outside the ambit of the provisions of section 68 should be deleted. As regards advances from the customers, the learned counsel referred to the letter filed before the learned CIT(A) on 8th March, 2006 placed at pages 270-272 of the paper-book. The particulars of the addition in regard to advances from customers as sustained by the learned CIT(A) had been given at page 269 of the paper-book. These included the sum of Rs. 15,00,000 received from Century Consultants that the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee on behalf of such customers. On such facts there was no question of unexplained credits. Since complete documentary evidences were filed before the Assessing Officer, there was absolutely no reason for treating the advances as unexplained cash credit. The addition of Rs. 59,487 was in respect of unpaid Service Tax. 79. The learned CIT(DR) argued that under the provisions of section 68 the assessee was required to establish all the ingredients of a satisfactory explanation of the cash credits appearing in the accounts of the assessee. The assessee had credited huge amounts in the names of various parties. It was therefore necessary to examine the financial capacity of the creditors and genuineness of the transactions. Mere filing of confirmations or statement of bank accounts was not enough. The payment received by cheque was not sacrosanct. In support of these contentions the learned CIT(DR) relied upon the judgment of Hon ble Supreme Court in the case of Sreelekha Banerjee v. CIT [1963] 49 ITR 112 at p. 118. He pointed out that in that case the Hon ble Apex Court had held that if there was any receipt of money in the accounts of an assessee it was for that asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the learned counsel of the assessee that the letters of confirmation along with PAN had been furnished to the Assessing Officer in all cases. As PAN was given it was essential for the Assessing Officer to refer to the assessment records of the creditors but that has not been done. Reliance in this behalf has been rightly placed on Orissa Corpn. (P.) Ltd. [1986] 159 ITR 78 (SC). The additions have been finally made mainly on the ground that the creditors were not physically produced. The Assessing Officer had issued the summons to the parties and he received replies from the parties in several cases. It was for the Assessing Officer to pursue the parties if he was still not satisfied despite considerable evidence/material furnished by the assessee. Reference in this behalf may be made to, in addition to the case law cited by the learned counsel for the assessee to the judgments in the cases of Addl. CIT v. Hanuman Agarwal [1985] 151 ITR 150 (Pat.); CIT v. Currency Investment Co. Ltd. [2000] 241 ITR 494 (Cal.) and CIT v. Emerald Commercial Ltd. [2001] 250 ITR 539 (Cal.). 81. We have carefully considered the case law relied upon by the learned CIT(DR). It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books. That judgment thus supports the case of the assessee before us. 82. In the light of the above discussions, the addition to the extent of Rs. 26,39,117 (ground No. 16) and Rs. 2,14,50,214 (ground No. 17) are deleted. As regards the additions of Rs. 59,487 - although the addition under section 68 cannot be sustained, the learned CIT(A) has sustained under section 43B since the evidence of service tax payment prior to the due date of filing was not furnished before him. In the light of the same, the said addition is confirmed. 83. By way of the 19th ground of appeal the assessee has prayed for liberty to take additional grounds of appeal. Thereafter, two additional grounds of appeal have been filed on 20-4-2007 with a request for admission of those grounds. Both the additional grounds relate to the appointment of the Special Auditor under section 142(2A) of the Act. In the first additional ground the assessee has objected to the Assessing Officer not providing the assessee an opportunity of being heard before making reference under section 142(2A) of the Act for special audit. In the second additional ground, the assessee argues that reference to the special auditor wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hi High Court dismissed the writ petition. On further appeal by that assessee the Hon ble Apex Court has "allowed the appeal". It therefore follows that an order initiating special audit under section 142(2A) in the case of an assessee without allowing that assessee an opportunity of being heard is vitiated in law. Hence the order under section 142(2A) in the case of the assessee was vitiated in law within the ratio of the judgment of Hon ble Supreme Court in the case of Rajesh Kumar ( supra ). 85. The learned counsel pointed out that the observations of the Apex Court have since been enshrined in the Act by virtue of an amendment by Finance Act, 2007. Sub-section (2A) of section 142 is now followed by a proviso: - "Provided that the Assessing Officer shall not direct the assessee to get the accounts audited unless the assessee has been given a reasonable opportunity of being heard." In view of the foregoing, there could not be any doubt that the Assessing Officer and also the ld. CIT did not follow the basic principles of natural justice. That made the reference for Special Audit under section 142(2A) invalid and illegal. 86. The learned counsel argued that the vitiated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aziabad Urban Co-operative Bank Ltd. v. Union of India [2006] 287 ITR 473 (All.); V.L.S. Finance Ltd. v. CIT [2007] 289 ITR 286 (Delhi); Sahara India Financial Corpn. Sahara India (Firm) v. CIT [2007] 289 ITR 397 (Delhi) and Sahara India (Firm) v. CIT [2007] 289 ITR 473 (SC). 89. The learned CIT(DR) has opposed admission of additional grounds taken by the assessee on the ground that the assessee had not taken such plea during the course of proceedings before the authorities below and this issue has been raised for the first time in the proceedings before the Tribunal. He has relied in this respect upon the Full Bench judgment of Hon ble Andhra Pradesh High Court in the case of Begum Noor Banu Alladin ( supra ) to the effect that the jurisdiction of the Tribunal is restricted to subject-matter before the first appellate authority and Tribunal cannot allow new items or new claims for the first time. However, around the same time the Full Bench of Bombay High Court in the case of Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 1 0 held that the phrase "pass such order thereon" occurring in section 254 empowers the Tribunal to permit additional g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dicates that in exercising the power regard must be had also to the factors enumerated therein together with all factors relevant for the exercise of the power. The factors enumerated in section 142(2A) are not exhaustive. Once it is held that the assessee suffers civil consequences and any order passed would be prejudicial to him, the principles of natural justice must be held to be implicit. The principles of natural justice are required to be applied inter alia to minimize arbitrariness. If the assessee is put to notice, he could show that the nature of the accounts is not such as would require appointment of special auditors. The assessee could further show that what the Assessing Officer considers complex is in fact not so. It would also be open to him to show that the same would not be in the interest of the revenue. The expression complexity in section 142(2A) would mean the state or quality of being intricate or complex or that it is difficult to understand. Difficulty in understanding would, however, not lead to the conclusion that the accounts are complex in nature. The formation of opinion under section 142(2A) that the accounts of the assessee require an expert au ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial process. When a statutory process is exercised by the assessing authority in exercise of its judicial functions which is detrimental to the assessee, it is not and cannot be administrative in nature. Principles of natural justice are based on two principles: (i) nobody shall be condemned unheard (audi alteram partem); (ii) nobody shall be judge of his own cause ( nemo debet esse judex in propria sua causa ). Duty to assign reasons is, however, judge-made law. ..." (Head-note) [Emphasis supplied] 91. There is force in the statement of the learned counsel for the assessee that the reference made under section 142(2A) in the case before us is vitiated in law. The judgment of Hon ble Apex Court in the case of Rajesh Kumar ( supra ) has been made in an appeal against the judgment of Delhi High Court. A writ petition had been filed by that assessee before the Delhi High Court raising, inter alia , a question that the order impugned therein was vitiated in law having been passed without giving an opportunity of hearing to him. Hon ble Delhi High Court dismissed the writ petition. On further appeal by that assessee the Hon ble Apex Court has "allowed the appeal". It therefor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed of extended time limit, even if as held by us he did not avail of any extended jurisdiction. In our view the extended time limit as laid down by Explanation 1 ( iii ) is not available to him for want of a valid and proper reference under section 142(2A). 93. It has been held by Hon ble Karnataka High Court in the case of M.K. Srikanta Setty v. CIT [1986] 160 ITR 517 that strict construction should be placed on the period of limitation. In the cases of ITO v. Murlidhar Bhagwan Das [1964] 52 ITR 335 (SC); N. KT. Sivalingam Chettiar v. CIT [1967] 66 ITR 586 (SC); CIT v. Mohd. Shakoor Mohd. Bashir [1973] 89 ITR 57 (SC) and CIT v. Foramer France [2003] 129 Taxman 72 Hon ble Apex Court held that where the finding or direction contained in the order of appellate authority was not necessary for the disposal of appeal that would not save the reassessment proceedings from the bar of limitation. The same view has been taken by the courts in section 144B related cases and it has been held that the extended time limit provided by Explanation 1 ( iv ) to section 153 is not available where section 144B itself is not applicable. Reference may be made to the judgments ..... X X X X Extracts X X X X X X X X Extracts X X X X
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