TMI Blog2013 (8) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... ich it had invited applications from all employees for sponsoring their higher education - Had Employee was not son of Directors, his education expenses would have not been met by company. assessee claimed that higher education of Employee would give benefit of more than R.50,000/- per month to assessee company but who has checked credentials of Employee and what salary he would claim in open market. Without there being any material on record, how assessee can say that decision to sponsor education of Employee was not influenced by parental love and affection of Directors - Following decision of CIT vs. R.K.K.R. Steels Pvt. Ltd. [2001 (11) TMI 20 - MADRAS High Court], M. Subramanium Brothers vs. CIT [2000 (12) TMI 67 - MADRAS High Court] and CIT vs. Hindustan Hosiery Ind. [1993 (9) TMI 42 - BOMBAY High Court] - Decided against assessee. Disallowance u/s 14- Computation of disallowance on basis of Rule 8D - Held that:- It is only if Assessing Officer is not satisfied with correctness of claim of assessee, in both cases, that Assessing Officer gets jurisdiction to determine amount of expenditure incurred in relation to such income which does not form part of total income under sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted:- 31-5-2013 - Rajpal Yadav and B C Meena, JJ For the Appellant : Ms Premlata Bansal, Adv. For the Respondent : Shri D K Mishra, DR ORDER:- Per: B C Meena The assessee is in appeal before us. In Assessment Year 2007-08, it has filed three appeals, ITA No.1975/Del/2011 emanates from the order of CIT (A) dated 28.02.2011 passed u/s 250 of the Income-tax Act, 1961 (hereinafter referred to as Act ), ITA No.5198/Del/2011 emanates from an order of the ld. CIT (A) dated 27.10.2011 passed u/s 154 of the Act and ITA No.1354/Del/2012 emanates from the order of CIT (A) dated 11.11.2011 which was passed on the appeal of the assessee against the order u/s 154/250 dated 09.05.2011 passed by the Assessing Officer. ITA No.195/Del/2010 emanates from the order of CIT (A) dated 12.11.2009 passed u/s 250 of the Act in Assessment Year 2006-07. The issues involved in all these appeals are interconnected with each other, therefore, we heard all the appeals together and deem it appropriate to dispose off them by this common order. 2. Firstly, we take ITA No.1975/Del/2011 and if we find any ground interconnected with the grounds of appeal raised in this year, then we will take up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liable to adjusted against other income of the assessee company. 14. That the CIT (A) was wrong in disallowing expenses of Rs.49,12,798/- alleged to have been incurred to-wards speculation business and thus increasing the speculation loss to that extent. 15. That the disallowance of expenses of Rs.49,12,798/- is against the facts and circumstance of the case as such expenses had been disallowed without mentioning specific section of I.T. Act." 4. In ground nos.1 2, assessee is impugning the confirmation of an addition ofRs.2,05,00,000/- which was made by the Assessing Officer with the aid of section 68 of the Act. The brief facts are that assessee is a company engaged in the business of stocks and shares broker and dealing in shares and securities. It has filed in its return of income on 28.10.2007 declaring a loss of Rs.2,62,08,560/-. The case of the assessee was selected for scrutiny assessment and notice u/s 143(2) was issued and served upon the assessee. In response to the notice, Shri Dinesh Mittal, Chartered Accountant duly authorized by the assessee has appeared before the Assessing Officer from time to time and submitted the requisite details. On scrutiny of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of certain applicants, the cheques issued by the subscribers were credited in the accounts of the assessee. It was also contended that Assessing Officer had made an observation that out of 13 applicants, 4 applicants were managed by hawala operators and these companies were engaged in providing accommodation entries. According to the assessee, no material to substantiate this conclusion was supplied to the assessee. Therefore, such an inference by the Assessing Officer is not sustainable. The assessee has relied upon a large number of decisions. The ld. First Appellate Authority has considered arguments of the assessee as well as decisions relied upon by it. The ld. CIT (A) has concurred with the conclusion of the Assessing Officer. It is advantageous to take note of the findings recorded by the ld. CIT (A) which read as under :- "4. I have carefully considered the submissions made on behalf of the appellant company and the findings recorded by the ld. AO. I have also very carefully gone through the judgments relied upon by the ld. Counsels for the appellant. On consideration I find that during the course of assessment proceedings, the appellant company has filed copies of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that it is the appellant which is claiming receipt of huge amount of Rs.20500000 from the 13 parties. Therefore, in my view, it is the responsibility of the appellant company only to establish 3 necessary things, namely, (i) identity of investors, (ii) their creditworthiness/investments and (iii) genuineness of the transactions. 4.1 The ld. Counsels have placed reliance on a plethora of judgments to buttress the arguments that once the initial burden of proving existence and creditworthiness of the share applicants is proved, no addition can legitimately be made in the hands of the appellant company. In this regard, I would like to make a reference to a recent judgment of the Hon'ble Jurisdictional Delhi High Court in the case of Vijay Power Generators Ltd Vs Director of Income Tax Other wherein after making detailed reference to most of the judgments delivered by the on Hon'ble Apex Court and other High Courts, has made the following important observations: "When we keep in mind the principle of law laid down in the ratio in the aforesaid decisions and apply the same to the facts of this case, it is difficult to find fault with the approach of the Tribunal. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e who had submitted his reply dated 10.02.2004, which is even reproduced in the order and thereafter the CIT (A) discussed the same in the light of certain decision cited before him and came to the conclusion that the assessee had not given satisfactory evidence to discharge the onus. It had merely given names of the arties without anything more. That would not be sufficient compliance. Even the an statement of the assessee which was submitted has not been proved. 46. For all these reasons, we are of the view that the assessee had not been able to discharge the onus ptomaine and addition was rightly made. We, therefore, answer the question in the negative and dismiss this appeal of the assessee." 4.2 When the facts of the present case are analyzed in the light of the aforesaid observations of the Hon'ble Court, it becomes clear that the evidences filed by the appellant company in order to discharge initial/primary burden which lay upon it were rebutted by the AO by way of going for spotting enquiries. As stated earlier, in the course of spot enquiries neither the share applicant companies were found existing at the given addresses nor any whereabouts of the responsible pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existing as is evident from the website of the Ministry of Company Affairs. d) Assessee had filed confirmations which were reflecting the amounts subscribed by the share subscribers, Cheque no, date of Cheque and the name of the bank on which, Cheque was drawn, also stating the no of shares allotted with face value and the date of allotment of the said shares. Thus assessee had proved identity of the shareholders. e) Assessee had established identity of the shareholders from PAN because before issuing PAN, Department requires address proof of the assessee. Similarly, even ROC requires address proof of the registered office of the assessee Co. Even from the Income Tax Returns, identity was established, moreover, banks also requires address proof before opening the accounts of the customers. Since the assessee had produced bank statement of all the 13 companies, identity had been duly established. f) That the AO has made a reference to the information being available with the Department that M/s Ethnic Creations Pvt. Ltd, M/s Fair N Square Export Pvt. Ltd, M/s Sehgal Fluid Line Equipments Pvt. Ltd and M/s Shattarchi Finance Leasing Ltd were appearing in the list o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en confirmations and other documents which were more than sufficient to establish their identity. Some of them had expresses their disgust / anger. Therefore, assessee had requested that the Department is empowered under the Income Tax Act to summon a person and also direct him to produce any document, it wants in connection with the assessment proceeding. However, the AO did not issue any summons to the shareholders. He did not make any inquiry which he was supposed to do, he closed the proceeding on 14.12.2009 itself and passed the order on 17.12.2009. Thus no proper opportunity has been given by the AO to the assessee. k) It is submitted that the assessee had discharged the initial and primary onus laid upon it and this fact has also been accepted by the CIT(A) himself that the assessee had discharged the onus laid upon him. However, CIT(A) was wrong in saying that this onus had been rebutted by the AO by way of going for spot inquiries, during which, it was found that parties were not existing. The CIT(A) is also wrong in saying that vide order-sheet entry dated 08.12.2009, AO had brought the result of inquiry made by the Inspector to the notice of the counsel of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come tax returns, PAN, copies of companies master details obtained from ROC, the amount subscribed Cheque No, date of Cheque, name of the bank on which, cheques had been drawn, no of shares allotted with face value, date of allotment, bank statement of the shares subscribers indicating the debit entries against Cheque issued to the assessee and the copy of bank statement of the assessee showing that the cheques were credited in the bank account of the assessee. The AO has made the additions without rejecting the material placed before him. AO has not made any efforts to make inquiry from the AO of these share subscriber companies. It needs to be mentioned that in the case of CIT vs Sofia Finance Ltd (205 ITR 98) (Del) (FB), it has been held that if the shareholders are identified and it is established that they have invested money for the purchase of shares then the amount received by the assessee Co. would be regarded as a capital receipt and no additions can be made u/s 68 of the Act. p) In r/o genuineness of the deposits, it is submitted that all the payment had been received by way of Account Payee Cheques. On a perusal of bank account statements of the respective sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... holding that the assessee had discharged its onus of proving the identity of the share subscribers. Had any suspicion still remained in the mind of the AO, he could have initiated coercive process but this course of action had not been adopted. Similar are the facts of the present case, assessee had discharged the onus laid upon it. If the AO had any suspicion in his mind on the basis of ITI report, he could have initiated coercive process but he had not issued even the summons u/s 131 of the Act. This judgement have been upheld by the Hon'ble Supreme Court in the case of CIT vs Lovely Exports (P) Ltd. (216 CTR 195, (319 ITR ST 5). v) Thereafter, the judgement of the Delhi High Court in the case of CIT vs Oasis Hospitalities (P) Ltd. (333/119), wherein it is held that where the assessee had filed copies of PAN, acknowledgement of filing ITRs of the companies, there bank account statements for the relevant period but had not produced the Directors of the Co., the addition made by the AO could not be sustained as the primary onus had been discharged by the assessee. The AO had not investigated whether the modus operandi by the entry operator discussed by the Investigation Wing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had closed the proceedings. Accordingly, the Hon'ble Court held that in the absence of inquiries and non-verification of the details at the time of assessment proceeding, the factual finding recorded by the AO were incomplete. y) In the case of CIT vs Expo Globe India Ltd.(ITA NO.1257 of 2011 decided on 20.07.2012), Hon'ble Delhi High Court had again deleted the additions on similar facts holding that the assessee had produced considerable material including ITRs, Balance Sheets, ROC particulars, bank statements etc. and on consideration of the same, CIT(A) had deleted the additions. Even ITAT had confirmed the order of CIT(A) and thus Hon'ble High Court dismissed the appeal filed by the Revenue. z) The recent order of the ITAT Delhi Bench in the case of ITO vs India Texfab Marketing Ltd. (ITA NO.1177/Del/2012 decided on 05.10.2012) is worth noting. In this case, the Tribunal has considered all the judgement including Nova Promoters on the subject and thereafter deleted the addition made by the AO on account of share application money. Hon'ble Bench observed that there was an adverse material against the assessee in the case of Nova Promoters which was not there in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer for not accepting the explanation offered by the assessee as not satisfactory should be based on proper appreciation of material and other attending circumstances. Ld. DR on the strength of Hon'ble Supreme Court s decision in the case of Sumati Dayal vs. CIT reported in Suppl. (2) SCC page 453 has apprised us how to appreciate the material available on record. He also relied upon the decision of Hon'ble Supreme Court in the case of CIT vs. Durga Prasad More reported in 82 ITR 540 and submitted that evidence available on the record has to be weighed according to the human probabilities. 8. We have duly considered the rival contentions and gone through the record carefully. Section 68 of the Act contemplates that where any sum found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee for that previous year. A plain reading of section 68 would indicate that when any money is found to be credited in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see at the time of assessment proceedings and, therefore, its cognizance cannot be taken. For buttressing this contention, ld. Counsel for the assessee relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Pradeep Kumar Gupta reported in 303 ITR 95 . Thus, according to the ld. Counsel for the assessee, if this report is excluded from the record on the ground that assessee was not granted an opportunity to explain its position qua the report, then, there is no evidence available with the Assessing Officer to doubt the evidences submitted by the assessee. She had relied upon number of judgments, namely, Sofia Finance Ltd (205 ITR 98) (Del) (FB), CIT vs. Value Capital Services P. Ltd. reported 307 ITR 334, CIT vs. Divine Leasing and Finance Ltd. 299 ITR 268 and CIT vs. Lovely Exports P. Ltd. (2008) 216 CTR (SC) 195 She has also relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Kamdhenu Steel Ltd. reported in 248 CTR 33/206 Taxman 254 and apprised us as to how this Tribunal should not remand the matter back to the Assessing Officer for further investigation. 8.1 On an analysis of these case laws, we find that time and again, this contro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shes to rely on the report of the investigation authorities, some meaningful enquiry ought to be conducted by him to establish a link between the assessee and the alleged hawala operators; such a link was shown to be present in the case of Nova Promoters Finlease (P) Ltd. (supra) relied upon by the revenue. We are therefore not to be understood to convey that in all cases of share capital added under Section 68, the ratio of Lovely Exports (supra) is attracted, irrespective of the facts, evidence and material." In the case of Kamdehenu Steel Ltd., Hon'ble Delhi High Court has made the following observations which was emphasized by the ld. Counsel for the assessee :- "12. What does follow from the aforesaid? It is not in doubt that the assessee had given the particulars of registration of the investing/applicant companies; confirmation from the share applicants; bank accounts details; shown payment through account payee cheques, etc. As stated by us in the beginning, with these documents, it can be said that the assessee has discharged its initial onus. With the registration of the companies, its identity stands established, the applicant companies were having bank accounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se applicant companies have PAN and assessed income tax. No effort was made to examine as to whether these companies were filing the income tax return and if they were filing the same, then what kind of returns these companies were filing. If there was no return, this could be another factor leading towards the suspicion nurtured by the AO. Further, if the returns were filed and scrutiny thereof reveals that such returns were for namesake, this could yet another be contributing factor in the direction AO wanted to go. Likewise, when the bank statements were filed, the AO could find out the address given by those applicant companies in the bank, who opened the bank accounts and are the signatories, who introduced those bank accounts and the manner in which transactions were carried out and the bank accounts operated. This kind of inquiry would have given some more material to the AO to find out as to whether the assessee can be convicted with the transactions which were allegedly bogus and or companies were also bogus and were treated for namesake. We say so with more emphasis because of the reason that normally such kind of presumption against the assessee cannot be made as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which was laid down, for this "negligence" on the part of the AO(s), he cannot be provided with "fresh innings". The order of the AO(s) had merged in the order of the CIT(A) and in some of the cases before us and before the CIT(A), the assesses had succeeded. This court is acting as appellate court and has to act within the limitations provided under section 260 of the Act. The appeals can be entertained only on substantial questions of law. In the process, this Court is to examine as to whether the order of the Tribunal is correct and any substantial question of law arises therefrom. The Tribunal has passed the impugned orders, sitting as appellate authority, on the basis of available record. When the matter is to b examined from this angle, there is no reason or scope to remit the case back to the AO(s) once it is found that on the basis of material on record, the order of the Tribunal is justified. Even the Tribunal acts purely as an appellate authority. In that capacity, the Tribunal has to see whether the assessment framed by the AO, all for that matter, orders of the CIT(A) were according to law and purportedly framed on facts and whether there was suffici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, the inferences drawn by the AO were justified and warranted. The Appellate Commissioner and the Tribunal fell into error in directing their deletion. 13. For the above reasons, this Court is of opinion that the revenue s appeal has to succeed. The questions framed are answered in the affirmative, in favour of the revenue; the impugned order (and that of the Appellate Commissioner), are hereby set aside and the order of the AO is restored. The Appeal is therefore allowed." Similarly, it is also worth to take note of Hon'ble Court s observation in the case of CIT vs. N.R. Portfolio (P.) Ltd. reported in (2013) 29 taxmann.com 291 (Delhi) rendered in ITA No.134 of 2012, which read as under :- "8. This court is conscious of a view taken in some of the previous decisions that the assessee cannot be faulted if the share applicants do not respond to summons, and that the state or revenue authorities have the wherewithal to compel anyone to attend legal proceedings. However, that is merely one aspect. An assessee s duty to establish that the amounts which the AO proposes to add back, under Section 68 are properly sourced, does not cease by merely furnishing the names, addre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come. There is ample authority for the position that where an assessee fails to prove satisfactorily the source and nature of certain amount of cash received during the accounting year, the Income-tax Officer is entitled to draw the inference that the receipt are of an assessable nature. The conclusion to which the Appellate Tribunal came appears to us to be amply warranted by the facts of the case. There is no ground for interfering with that finding, and these appeals are accordingly dismissed with costs." 9. Having regard to the totality of facts and circumstances, particularly the remand report, which was not considered by the Commissioner (Appeals) and the ITAT in its proper perspective, this Court is of the opinion that the question of law requires to be answered in favour of the revenue, and against the assessee. The appeal is therefore, allowed, but without any order as to costs." On an analysis of the authoritative pronouncements of Hon'ble High Court in various judgments, some of which referred by us in the foregoing paragraphs, it emerges out that Hon'ble Court has categorized this issue in two segments. One segment is where Assessing Officer has received informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... some substance in the plea of the assessee. By merely pleading that it has approached the shareholders for appearing before the Assessing Officer, who refused to appear, would not absolve the assessee from its duty to file correct and latest addresses, more particularly when it is claiming the bona fide and honesty in its dealing. This type of statement is a self-serving statement only to make space for raising arguments in higher appellate forum. We have independently examined the other details submitted by the assessee. Ld. Counsel for the assessee during the course of hearing placed on record certain details in tabular form. Let us consider the details of first share applicant in these details, i.e. Bhalotia Industries. It has submitted that this company has a share capital of Rs.1 crore as on 31.07.2007. It has reserves and surpluses of unsecured loans and the total balance is of Rs.4,02,72,000/-. The audit report of this company ha been placed on page 229 of the paper book. This report is for the accounting period ending on 31.03.2008. The auditor has observed that this company has no fixed assets. This company has no stock. The company has not granted any loans secured or uns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the son of the Directors. It is a closely held company where majority shares are being held by Shri Lalit Poddar, Smt. Saroj Poddar and Kaladhar Impex Traders Limited, who is controlled by Shri Lalit Poddar and Smt. Saroj Poddar, who are the father and mother of Dushyant Poddar. Therefore, according to the Assessing Officer, the personal expenditure for educating one s progeny has been tagged with the company. He disallowed the claim. 10. On appeal, the ld. CIT (A) has confirmed the disallowance. Findings of ld. CIT (A) in Assessment Year 2007-08 read as under :- "5.1 However, on a careful consideration, I find that the issue in question is covered against the assessee vide by my own order dated 12-11-2009 for the AY 2006-07 in the assessee' s own case wherein the following findings have been recorded : "3.4 In order to find out the factual position, as aforesaid, the learned counsels for the appellant company were requested to submit the copy of application made by Shri Dushyant Poddar for seeking admission for doing MBA alongwith all necessary declarations etc made for admission alongwith the sources of finance to meet the educational expenses. This was done bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned AR for the assessee relied upon the written submissions which read as under :- "a) Expenditure incurred by the assessee on education and training of the employee is eligible for deduction u/s 37(1) of the Act. Copy of Section 37(1) is annexed at page 14. b) As per provisions of Section 37(1) of the Act, any expenditure not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profit Gains of Business or Profession". c) As stated in the bio-data produced by the assessee before the CIT(A), Mr Dushyant Poddar was an employee of the assessee Co. from 01st April 2004 to 16th August 2005 and 20th September 2006 till date. Salary paid by the assessee to Mr Dushyant Poddar had been allowed by the AO in all the 03 years i.e. AY 2005-06, 2006-07 and in the year under consideration. Merely because Mr Dushyant Poddar is a son of Directors, assessee Co. does not loose the eligibility for deduction. Salary paid to Mr Du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was spent. Once it is established that there was nexus between the expenditure and the purpose of the business, the revenue cannot justifiably claimed 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. i) In the present case, incurring of expenditure has not been doubted. Mr Dushyant Poddar was a degree holder in Economic (Hons) having experience in the stock market. He was sent for further study in Business Administration subject to the condition that after coming back, he will serve the Co. at least for 05 years and in breach of contract, he will be liable to reimburse the entire expenditure incurred by the assessee. There was a direct nexus between the expenditure incurred and the business of the assessee and therefore, the expenditure incurred was wholly and exclusively for the purposes of the business, eligible for deduction u/s 37(1) of the Act. It is needless to say that reasonableness of the expenditure can be gone into by the AO only u/s 40A(2) of the Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed similar expenditure to the assessee holding that the expenditure so incurred was not in the nature of capital expenditure or for personal expenses but was expended wholly and exclusively for the purpose of the business of the assessee. o) Delhi High Court in Netco Exports Pvt. Ltd. vs CIT (206 Taxmann 491) has dismissed the appeal of the assessee on the ground that the daughter of Director had not executed any bond that she would work for assessee company and that on failure, she will return the money spent. It is submitted that in the present case, similar bond has been executed by Shri Dushyant Poddar. He has agreed to work for the assessee company for 05 years after completing his studies and in breach of the same, he would return the expenses to the assessee company. Hence the expenses are to be allowed. p) In CIT vs RAS Information Technologies (P) Ltd. (238 CTR (KAR) 76), Karnataka High Court has allowed foreign education expenses incurred by the company on the son of a Director. q) Madhya Pradesh High Court in CIT vs Naidunia News Networking (P) Ltd. (210 Taxmann 73), has allowed similar expenses holding that the same were incurred wholly and exclusiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned counsel for the parties, we are of the view just because the two directors were children of the managing director, of the company, cannot be a ground for the AO to reject the claim of the assessee, until and unless. It is established that these two children of the managing director, sponsored to acquire higher education are not connected with the business of the company, even though they are directors. Since the vital issue has not been considered by the AO and such a mistake is committed by the CIT(A) as well as the Tribunal, we have no other business, except to set aside all the orders and remand the matter to the AO for fresh consideration without answering questions of law framed herein, keeping open all the contentions since the order of dismissal is in the nature of best judgment assessment." 3. Section 37 of the Act postulates that expenditure which is wholly and exclusively incurred for the purpose of business can be allowed as a deduction in computing the taxable business income. The twin conditions must be satisfied. The onus is on the assessee to show and establish that the twin conditions are satisfied. Personal expenses cannot be claimed under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o. Ltd. Vs JCIT (supra) and Sakal Paper P. Ltd. Vs. CIT (Supra), on which the appellant relied, are not applicable to the present case as these decisions had been distinguished later on is Mustang Mouldings P. Ltd. Vs ITO 306 ITR 361 (ITAT Mum) where the assessee company was controlled by the family members and it was held that the expenditure on higher education of a child was personal expenditure of father/parents. Reference can be made to the case law of Mac Explotec Pvt. Ltd. Vs Cit 286 ITR 378 (Kar) where the High Court held that the expenses incurred by the assessee company in sending its director s son aboard for training in general management were not allowable since the training did not pertain to the assessee's business. In doing so, the Karnataka High Court concurred with the ratios of case laws of CIT vs. Hindustan Hosiery Ind. 209 ITR 383, M. Subramanium Brothers vs. CIT 250 ITR 769 and CIT vs. R.K.K.R. Steels Pvt. Ltd. 258 ITR 306. As there is no business connection between the expenditure incurred on higher education of Ruchika Grover who went abroad for doing M.Sc. in Entrepreneurship immediately after completing her graduation and there being no history of the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reason to interfere in the orders of the ld. CIT (A) on this issue. The grounds of appeal in both the years are rejected. 14. Ground Nos.5 to 7: These grounds of appeal are interconnected with ground no.2 in Assessment Year 2006-07. The grievance of the assessee relates to the confirmation of disallowance u/s 14A read with Rule 8D of the Income-tax Rules. The brief facts of the case are that in Assessment Year 2007-08, the Assessing Officer has observed that assessee company had received dividend of Rs.6,19,091/-. However, it has not shown any expenditure for disallowance u/s 14A. Similarly, in Assessment Year 2006- 07, it has shown dividend income of Rs.7,03,311/- and it has not shown any expenditure which is relatable to earning of exempt income. In Assessment Year 2007-08, ld. Assessing Officer has straightway computed the disallowance on the basis of Rule 8D. He relied upon the order of ITAT s Special Bench in the case of Daga Capital reported in 117 ITD 169 (Mum). In Assessment Year 2006-07, he made an addition of R.2 lacs on an estimate basis. 15. The appeal to the CIT (A) did not bring any relief to the assessee. 16. The ld. Counsel for the assessee has placed elabora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TR ST 178 at page 190. h) Circular no.14 of 2006 dated 28.12.2006 giving explanatory notes on the relevant provision relating to Finance Act 2006 is reported in 288 ITR ST 09 at page 19 in Para 11. i) Looking to the amended provision, it appears that Section 14A is applicable only if the AO, having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in r/o expenditure in relation to income which does not form part of total income. The provisions are amended because the existing provision had not provided the method of computing the expenditure incurred in relation to the income which does not form part of total income and there was dispute between the tax payer and the Department on the method of determining such expenditure. The satisfaction has to be recorded in writing. The opinion of the AO has civil consequences and therefore, due opportunity has to be given to the assessee before applying the provisions. In the present case, before applying sub-Section (2) (3), no opportunity has been given by the AO to the assessee. j) The Bombay High Court in the case of Godrej Boyce Manufacturing Company Ltd. vs Deputy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,34,50,010/- and Rs.25,02,24,463/- respectively reveals that the intention of 1he assessee was to resale the shares and not to hold the same. Merely because assessee had incidentally received some dividend, it will not convert the business expenditure into no expenditure or the expenditure related to exempted income. 193 ITR 321 (SC) Radha Soami Satsang vs CIT n) Again in the present case, the assessee had the paid-up share capital of Rs.7,79,68,550/- whereas the shares were held to the tune of Rs. 6,66,11,001/- as on 01.04.2006 and of Rs. 6,57,63,752/- as on 31.03.2007. Thus there is a strong presumption that the assessee had purchased the shares out of its own funds. The loans whether secured or unsecured were taken by the assessee purely for the purposes of its business dealing, which is voluminous in nature and therefore, any interest paid on such loan is eligible for deduction u/s 36(1)(iii) of the Act and does not call for any disallowance u/s 14A of the Act. o) It is needless to say that the dividend received by the assessee was incidental and ancillary to its business activity and therefore, even if it is assessed as income from other sources, it is to be treated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Section 14A cannot be ascribed a narrow meaning. However, the expression "expenditure incurred" refers to actual expenditure and not to some imagined expenditure. It is also made clear that the actual expenditure that is in contemplation u/s 14A(1) of the Act is the "actual" expenditure in relation to or in connection with or pertaining to exempt income. The corollary to this is that if no expenditure is incurred in relation to the exempt income, no disallowance can be made u/s 14A of the Act. It is further held that the Assessing Officer is to satisfy himself with the claim of assessee with regard to the expenditure or no expenditure, as the case may be, the Assessing Officer is to accept the claim of the assessee in so far as the quantum of disallowance u/s 14A is concerned. In such eventuality, the Assessing Officer cannot embark upon a determination of the amount of expenditure for the purposes of Section 14A(1). In case, the Assessing Officer is not, on the basis of subjective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Havin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 09.50 has been received by the assessee on shares purchased during the year and have been held as closing stock. This shows that the dividend has been received by the assessee incidentally due to his business activity. x) In CCI Ltd. vs Joint Commissioner of Income Tax (2012) (20 Taxmann.com 196), Karnataka High Court have held that section 14A cannot be invoked when dividend is received by the assessee, dealer in shares, from unsold stock." 17. Ld. DR, on the other hand, submitted that though Assessing Officer has made the disallowance on the strength of Special Bench order of ITAT in the case of Daga Capital but ld. First Appellate Authority has considered the judgment of Hon'ble Mumbai High Court in the case of Godrej Boyce vs. DCIT, 328 ITR 81 (Mum.) and thereafter confirmed the disallowance on an estimate basis. Therefore, no interference is required to be made. 18. We have duly considered the rival contentions and gone through the record carefully. The assessment years involved herein are Assessment Years 2006-07 and 2007-08. As per the decision of Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT reported in 347 ITR 272, the Hon'ble Court has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. The prescribed method being the method stipulated in Rule 8D of the said Rules. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. Rule 8D 30. As we have already noticed, sub-section (2) of Section 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is - "such method as may be prescribed". We have already mentioned above that by virtue of Notification No.45/2008 dated 24/03/200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one half percent of the average value of the investment, income from which does not or shall not form part of the total income, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11. Though the assessee has taken number of arguments in its grounds of appeal but its grievance revolves around three issues, namely, whether the activity of the assessee in purchase and sales of the shares is to be treated as a speculative activity by applying Explanation to section 73, if yes, then, how much loss is to be computed under the head Speculation loss . The next contention is whether assessee is entitled to claim set off of the additions made u/s 68 against the brought forward business losses of earlier years as well as it is entitled to claim set off of the additions in this year against the losses in the share trading activities. The Assessing Officer has not applied Explanation appended to section 73 of the Act for treating the activity of sale and purchase of shares as a speculative activity but the ld. CIT (A) while exercising his powers co-terminus to the Assessing Officer had issued a notice u/s 251(2) of the Act on 04.02.2011 inviting the explanation of the assessee as to why assessee be not treated as indulging in speculative business as per Explanation appended to section 73 of the Act. In response to the query of the CIT (A), the assessee has filed detaile ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion business. The loss incurred of share transaction is to be treated as speculation loss. The ld. First Appellate Authority thereafter computed the speculation loss and adjudicated the expenses for earning such speculative income. 21. Dissatisfied with the order of CIT (A) dated 28.02.2011, assessee has filed an application u/s 154 and apprised the ld. CIT (A) that it has committed certain factual errors while computing the speculative losses. Ld. CIT (A) has disposed off this application vide order dated 27.10.2011 and arrived at a conclusion that there are certain apparent errors which crept in the order. Ld. CIT (A) has rectified those errors and directed the Assessing Officer to verify the facts and then computed the speculative losses. 22. In compliance to the order of the CIT (A) dated 28.02.2011, ld. Assessing Officer has passed an order giving effect on 09.05.2011. The assessee was not satisfied with this order and filed an appeal before the CIT (A). This appeal has been disposed off by order dated 11.11.2011. 23. The ld. Counsel for the assessee has made elaborate arguments before us and also filed written submissions. Her written submissions read as under:- " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 on 01.01.1990 and since then was declaring the income in the same manner as is declared in the present year. Explanation to Section 73 had been inserted by the Taxation Laws (Amendment) Act 1975 w.e.f. 01.04.1977 and in none of the years Revenue had treated part of income as speculation loss. Always the income had been treated as normal business income. Even the CIT(A) himself had decided the appeal of the same very assessee for immediately preceding year 15 months back i.e. on 12.11.2009 and no such action had been initiated. Facts and circumstances in this very year had not been changed and therefore, CIT(A) is not justified in initiating the proceeding for disallowance under Explanation to Section 73 of the Act, in view of the judgement of Supreme Court in the case of Radha Soami Satsang (193 ITR 321), Rule of Consistency would apply to the present year as well. Also see 244 ITR 734 (Del) DIT(E) vs Apparel Export Promotion Council 245 ITR 492 (Del) CIT vs Neo Polypack (P) Ltd. 281 ITR 346 (Del) CIT vs Dalmia Promotors Developers 300 ITR 75 (Del) DIT vs Escorts Cardia Diseases Hospital f) CIT(A) has exceeded its jurisdiction while making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the ambit of such companies. i) The term "Speculation business" has not been defined in the Section or under the Act, though the terms speculation transaction has been defined in Section 43(5). Speculative transactions means a transaction in which, a contract for purchase or sale of commodity including stocks and shares is settled otherwise than by actual delivery or transfer of the commodity or scrips. There are exceptions provided for hedging, jobbing or arbitrage transactions and from A Y 2006-07 trading in derivatives covered by Section 2 of Securities Contracts (Regulation) Act 1956 carried on in a recognized stock exchange. Therefore, speculation business envisaged under Explanation to Section 73 does not include such transactions i.e. hedging, jobbing etc., particularly in view of the fact that speculation business incorporated in Explanation has not been given any other meaning. j) In the present case, assessee had entered into the transactions markto- mark (F O) which cannot be treated as part of speculation business in view of proviso (d) to Section 43(5). In the recent judgement of Bombay High Court in the case of CIT vs Shri Bharat R Ruhia (HUF) (19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.1,94,82,909/- The loss of Rs. 76,21,701.91 can further be bifurcated as under : Loss due to valuation of stock as per mercantile Method Rs. 1,78,80,662.29 Less Profit on sale of stock during the year Rs. 1,02,58,960.38 Rs. 76,21,701.91 If the provisions of Explanation to Section 73 are read carefully then it becomes evident that the business of purchase and sale of shares shall be deemed to be a speculation business only to the extent to which the business consist of purchase and sale of shares. Thus the deeming provision is applicable only to the loss incurred by the assessee on transfer of shares. In the present case, assessee has earned profit of Rs.1,02,58,960/- from purchase and sale of shares. Loss is pertained to the valuation of stock as on 31.03.2007. It is needless to say that closing stock of the present year is the opening stock of the subsequent year and therefore, no prejudice is caused to the Department. Since long, assessee is adopting the method "cost or market value whichever is lower" for valuation of closing stock. Due to this method adopted by the assessee that the loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to show that the assessee is a company controlled by a business house and that the share transactions have been effected with a view to manipulate and reduce its taxable income. In the present case also, CIT(A) have not shown that the assessee is a company controlled by a business house and that the share transactions have been effected with a view to manipulate and reduce the taxable income. There is no evidence to show that the requirements of Para 19.2 of the Circular issued by CBDT have been satisfied. Therefore, the loss has to be treated as normal business loss. Kindly see Godawari Capital Ltd. vs Dy CIT (2004) (91 ITD 274, 278-79, 279) (Hyd) Apportionment of Expenses by CIT(A) a) CIT(A) has erred in treating a sum of Rs. 85,82,975/- as establishment expenses when the said figure pertains to clearing difference. As per Profit Loss A/c annexed at page 145, a sum of Rs. 59,54,517/- are establishment expenses. Without admitting, even if it is presumed that the establishment expenses are to be allocated to brokerage income, share trading and exempted dividend income then also a sum of Rs. 59,54,517/- is to be allocated. CIT(A) have treated 20% of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x Explanation.-Where any part of the business of a company [other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources"], or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.]" A bare perusal of the provision would suggest that any loss computed in respect of speculation business carried on by the assessee shall not be set off except against any profit and gains arose from another speculation business. The Explanation to the section provides that if any part of the business of a company consists in the purchase and sales of shares of other companies, then, such company shall for the purpose of this section be deemed to be treated as carrying on speculation business to the extent of which the business consist of purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ority and ld. First Appellate Authority while dealing with this argument has observed that definition u/s 43(5) are general in nature and do not lay down that the same would have overriding effect on any other provision of the Act. The deeming fiction provided in Explanation to section 73 is for specific and for a limited purpose, which suggests that if an assessee has losses in respect of speculation business, then, such losses would only be allowed against another speculation business. The Explanation further explained the scope and make it mandatory that if any company whose any part of the business is related to sale and purchase of shares and that company does not fall within the exception of four classes of companies, then, such activity would be considered as carrying on a speculative business. Therefore, this argument has no more relevance in this case. At the strength of Hon'ble Bombay High Court decision in the case of Bharat R. Ruia HUF reported in 199 Taxman 87, it was contended that exchange traded derivative transactions were not speculative transactions after the insertion of Proviso (d) to section 43(5) w.e.f. 01.04.2006. Thus, according to the assessee, the loss ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to speculative transactions. Since there was no speculative income, therefore, these were also added to the speculative losses. 27. On an application of the assessee for rectification of the order, ld. CIT (A) has realized these mistakes and rectified the order. The finding of the CIT (A) in the rectification order dated 27.10.2011 reads as under :- COMPUTATION OF INCOME Nature of Income Income/(Loss) As per Profit Loss A/c as accepted by the A.O. and CIT (A) Allocation of expenses Brokerage Paid Allocation of Establishment Expenses (Rs.85,82,975/- wrongly taken by CIT (A)) Correct Figure (Rs.59,54,517/- 548360 - 100000) Balance Profit Loss Normal Business Income Brokerage 1138060.05 809793.40 1716595.00 1061232.00 (-) 732965 Speculation Business (alleged) Share Trading Mark to Mark (F O) Clearing Difference (-) 7621702.00 (-) 3278412.99 (-) 8582975.68 (-)19483090.67 4912978.00 2291524.00 (-) 21774615 Capital Gain Profit on sale Of car 16315.00 Income from o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in a speculation business, and such loss cannot be or is not only set off against income under any head of income in accordance with the provision of section 71....... "Thus, it may be seen that only normal business loss is eligible for set off against income under any head of income and there is a clear restriction on setting off of speculation business loss against income under any head of income. In view of the aforesaid, the third issue raised by the appellant company is being rejected and dismissed. 5. The AO is directed to modify the order giving effect to the appellate order dated 28.02.2011 in accordance with the directions contained here-inabove. 6. In the result, rectification application filed by the appellant company is being partly allowed." 28. As per grounds no.8 9 in ITA No.1975/Del/2011, the assessee has pleaded that CIT (A) was unjustified in treating the loss of Rs.19,41,82,909/- as speculation loss. This figure has ultimately been determined at Rs.2,25,12,939/- in the order of Assessing Officer dated 09.05.2011. It includes deprecation of Rs.2,19,635/-. In the chart extracted supra, this figure has been worked out by the assessee at Rs.2,17,74,615/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer shall decided independently how much expenses out of the total sum of Rs.59,54,517/- is to be allocated towards day-to-day business activities and how much is to be worked out u/s 14A and how much is to be allocated towards speculation business. The ld. Assessing Officer shall not be influenced by our observation. He will decide independently and assessee will be at liberty to submit any explanation in support of its case for this quantification. 30. The next contention of the assessee is that the speculation losses be set off against brought forward business losses of earlier years. Ld. CIT (A) has specifically held that u/s 73, speculation losses can only be set off against speculation profit. It cannot be set off with normal business profits of current year or earlier years. Therefore, we do not find any merit in this contention. 31. The ld. Counsel for the assessee also raised alternative contention on the strength of the Hon'ble Delhi High Court decision in the case of M/s. Lavish Apartment Pvt. Ltd. vs. ACIT rendered in ITA No.254 / 2006. She contended that in case an addition of Rs.2.5 crores on account of share application money is confirmed, then, it be set off ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen and then only need to be set off against the loss from other heads of income in terms of section 71. Chapter IV of the Income-tax Act deals with "COMPUTATION OF TOTAL INCOME" under various heads of income. Section 14, which enumerates head of income, falls under Chapter IV and reads as under: CHAPTER IV Computation of Total Income Heads of income Heads of income. 14. Save as otherwise provided by this Act, all income shall, for the purposes of charge of income-tax and computation of total income, be classified under the following heads of income:- A. - Salaries B. - [omitted by the Finance Act 1989] C. - Income from house property. D. - Profits and gains of business or profession. E. - Capital gains. F. - Income from other sources. 11. Some of the salient features of section 14 in so far as they have material bearing on the issue under appeal are as under: (i) Section 14 merely classifies the income under various heads of income for the purpose of computation of total income under them. Section 14 does not deal with aggregation of income; it merely deals with classificat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous heads of income in terms of Chapter IV of the IT Act. (ii) Computation of income under each head of income in terms of Chapter IV requires determination of excess of gross receipts over expenses legally permissible in that behalf under the relevant head of income. Aggregation of income under Chapter VI does not provide for any deduction towards any expenditure. It brings the entire sum to the charge of income-tax and thus there is no element of 'computation' of income under Chapter VI as in the case of income falling under specific heads in terms of Chapter IV. It could be for this reason that the sums taxed under Chapter VI have been kept outside the computational provisions of Chapter IV. (iii) Amounts are taxed under the provisions of Chapter VI for the reason that their nature and source are not known. Once their nature and source are known, they have to be pegged to that source/head of income and taxed under the respective heads of income as enumerated in Chapter IV and not under the provisions of Chapter VI. Conversely, if the nature and source of such amounts are not known, they have to be taxed under the specific provisions of Chapter VI. It therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The aforesaid two Chapters are completely different in their nature, scope and effect. Though the incomes assessable under them are part of total income as defined in sections 2(45)/4/5 of the I-T Act yet that does not mean that the income assessable under section 68 has to be assessed u/s 56. In the case before us, source of unexplained cash credits is not known and hence they cannot be linked to any known source/head of income including income from other sources. In order to constitute income from "other sources", the source, namely, the "other sources", has to be identified. Income from unexplained or unknown sources cannot therefore be considered or taxed as income from other sources. The aforesaid view is fortified by the judgment of the Hon'ble Gujarat High Court in Fakir Mohmed Haji Hasan v. CIT [2001] 247 ITR 290/[2002] 120 Taxman 11 in which the Hon'ble High Court has held as under:- "The scheme of sections 69, 69A, 69B and 69C of the Income tax Act, 1961, would show that in cases where the nature and source of investments made by the assessee or the nature and source of acquisition of money, bullion, etc., owned by the assessee or the source of expenditure incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncomes under any of these various heads, will not be attracted in the case of deemed incomes which are covered under the provisions of sections 69, 69A, 69B and 69C of the Act in view of the scheme of those provisions." 16. In view of the foregoing, we are unable to hold that unexplained cash credits assessed u/s 68 are to be assessed as income from other sources u/s 56. 17. The ld. counsel for the assessee, however, relied upon the judgments in Lakhmichand Baijnath's case (supra) and Kevalchand Nemchand Mehta's case (supra). We have carefully gone through them. They have been rendered in the context of old Indian Income tax Act of 1922 in which there was no provision corresponding to section 68 or Chapter VI of the Income-tax Act 1961. In the absence of any specific provision in the old Indian Income-tax Act of 1922, a view was taken that unexplained cash credits would be assessable as income from other sources. Section 68 under Chapter VI has been inserted in the present Income-tax Act to provide that any sum found recorded in the books of the assessee would be taxed as income of the assessee if he failed to satisfactorily explain the nature and source thereof. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X
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