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TMI Blog2013 (8) TMI 662X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 all those grounds together. 3. The grounds of appeal taken by the assessee read as under :- "1. That the CIT (A) was not justified in sustaining addition of Rs.2,05,00,000/- made by the Assessing officer as unexplained income u/s 68 towards share capital. 2. That CIT (A) had not properly appreciated the facts of the case and vital evidence produced in support of the genuineness of the share capital received from corporate entities. 3. That the CIT (A) was unjustified in sustaining addition of Rs.5.48 lacs made by the Assessing officer on account of education expenses of Shri Dushyant Poddar. 4. That CIT (A) failed to consider the necessary evidence in support of claim to-wards education expenses of Shri Dushyant Poddar. 5. That the CIT (A) committed an error in confirming the addition of Rs.19,53,402/- regarding disallowance of expenditure made u/s 14A of the Income Tax Act. 1961. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,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 the accounts, it revealed to the Assessing Officer that assessee had shown receipts of share application money amounting to Rs.2.05 crores from 13 parties. In order to fulfill the conditions contemplated in section 68 of the Act for explaining the source of investment, ld. Assessing Officer called for explanation of the assessee. It emerges out from record that assessee has filed confirmations from all the 13 applicants, copies of acknowledgement of IT return in 8 cases and copies of bank statement in 10 cases. The remaining details were not filed by the assessee. The ld. Assessing Officer deputed an Inspector in order to verify the identities of the companies. The Inspector submitted hers report on 07.12.2009, whereby she communicated to the Assessing Officer that on local enquiries on the premises of the companies at Sl.Nos.5, 6, 9, 11 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; "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 confirmations, copies of acknowledgments of IT returns in the cases of all the 13 share applicants. In 10 cases, the appellant company has also filed copies of bank statements so as to establish the fact that the amount of Rs.20500000 was paid out of the bank accounts of the share applicants. Therefore, I find myself in agreement with the ld. Counsels that the initial burden of proving identity of the share applicants was duly discharged. However, as stated earlier, having received the documents filed by the appellant company, the ld. AO made scrutiny of such documents and also took into consideration the fact that out of 13 companies, 4 companies, namely, M/s. Ethnic Creations (P) Ltd., M/s. Fair N Square (P) Ltd., M/s. Shegal Fluid Line & Equipment (P) Ltd. and M/s. Shattarchi Financial & Leasing Ltd. were found to be involved i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to keep in mind that the ratio in a decision cannot be applied in each case. The facts and circumstances of each case are to be weighed and examined as to whether a particular ratio decided in a particular case could be applied. As noted above, the initial onus is upon the assessee to establish three things necessary to obviate the mischief of Section 68 of the Act. These are: (i) Identity of investors; (ii) their creditworthiness/investments and (iii) genuineness of the transaction. Only when these three ingredients are established prima facie, it is only then the Department is required to .undertake further exercise as discussed above. In the instant case, no such documents are filed and no steps taken by the assessee which could establish the aforesaid three ingredients. 44. Additional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 persons could be gathered by her. The AO has recorded a finding of facts that having received the report of the inspector, the fate of the enquiry was duly brought to the notice of the ld. Counsel of the appellant company and it was only thereafter that he was requested to produce the concerned parties for examination. In view of the aforesaid fact situation and keeping in view the result of enquiry got conducted by the ld. AO in the course of assessment proceedings and also keeping in view the basic parameters laid down by the Hon'ble Court in the case of Vijay Powers Generators Ltd (supra), I am of the view that the assessee had not been able to discharge the onus ptomaine and the addition of Rs.20500000 has been rightly made by the ld.AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of accommodation entry providers. However, neither a copy of report of the Investigation Wing had been provided nor any statement of the Directors of the above said companies was provided stating that the assessee Co. had received cheques in lieu of cash paid to such companies on payment of commission. It was not available as to when this report was made available by the Investigation Wing, whether the statement was recorded even before receiving the Cheque by the assessee Co. etc. The finding of the AO was not based on any evidence or material. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 assessee and required him to produce the concerned parties. It was also wrong on the part of CIT(A) that the request of the assessee to the AO to provide an opportunity to cross examine the Directors / Promoters of the share applicant companies in case, was unacceptable. l) It is a well established principle of law that any evidence collected by the Department at the back of the assessee and used against him in framing the assessment without confronting the same to the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 share subscribers, it is amply clear that the respective shareholder had credits in their bank account by way of clearing, no cash had been deposited before issuing Cheque to the assessee companies. q) The identity and creditworthiness of the shareholder and genuineness of the deposit has been in the present case more than establishe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 existed in the present case or not. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oceedings. 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 ..... the Assessing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on tenable grounds. In case he wishes 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 appl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot be treated as the conclusive factor. As pointed out above, these 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 suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... To put it otherwise, once the assessee had discharged their onus and the burden shifted on the AO(s), they could not come out with any cogent evidence to make the additions. No doubt, as indicate by us above, the AO(s) could have embarked upon further inquiry. If that is not done and the AO(s) did not care to discharge the onus 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... termed as a fatal infirmity in his order. Even if that material were to be ignored, the pattern of share money infusion was the same; amounts were usually deposited in the account of the share applicants a few days before the issue of the shares. Moreover, the material provided about the share applicants' financial and fiscal standing was sketchy; they did not respond to summons under Section 131. Under these circumstances, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceipts are shown in the account books of a firm of which the appellant and Govindaswamy Mudaliar were partners. When he was called upon to give explanation he put forward two explanations, one being a gift of Rs. 80,000 and the other being receipt of Rs. 42,000 from business of which he claimed to be the real owner. When both these explanations were rejected, as they have been it was clearly upon to the Income-tax Officer to hold that the income must be concealed income. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lio (P.) Ltd. that in a private limited company, share applicants are known to the Directors of the assessee company. Had the assessee submitted to the ld. Assessing Officer vide letter dated 14.12.2009 that these are the Principal Officers/Directors of the share applicant companies and these are their residential addresses, you issue the summons and send the process server with the representative of the assessee to effect the service on those persons, then, there could be 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Finance) in UK and the assessee took the responsibility of his expenses. He executed a bond of five years for working with the assessee company at a salary ranging between Rs.10,000/- to Rs.25,000/-. According to the assessee, it is a profitable exercise for the assessee and it will save at least Rs.50,000/- per month for the next five years after the return of Dushyant Poddar. Ld. Assessing Officer has rejected the claim of the assessee on the ground that Dushyant Poddar 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 dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employment bond. 3.6. Therefore, in the above fact situation, I do not find myself in agreement with the appellant company in so for as the claim that the expenditure of Rs.23,16,942/- was in connection with and necessitated out of business expediency of the appellant company. Accordingly, the disallowance of Rs. 23,16,942/- is being up-held." 5.2 In view of the aforesaid and looking to the commonality of circumstances, the disallowance made b the ld.AO is being sustained." 11. Before us, the learned 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 " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness Administration) in the business of purchase and sale of shares. h) It is needless to say that the commercial expediency has to be seen from the view point of the businessman. As stated by the Jurisdictional High Court in the case of CIT vs Dalmia Cement (B) Ltd (254 ITR 377), the jurisdiction of the Revenue u/s 37(1) of the Income Tax Act is confined to deciding the reality of the business expenditure viz. whether the amount claimed as deduction was factually expended or laid out and whether it was wholly and exclusively for the purpose of business. The reasonableness of the expenditure could be gone into only for the purpose of determining whether, in fact, the amount 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. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the trainee had secured both a degree and training which would be of assistance to the assessee Co. and she had, in fact, served the Co. on her return to India. m) Calcutta High Court in the case of Hindustan Aluminium Corporation Ltd vs CIT (159 ITR 673) have allowed the expenditure incurred by the assessee on 28 employees for advance training in foreign country, in order to enable the assessee to run its factory efficiently and competently. In the present case also, assessee had incurred expenditure on the training of his employee, being the son of the Directors, to run its business efficiently and competently. n) Madhya Pradesh High Court in the case of CIT vs Kohinoor Paper Products (226 ITR 220) have also allowed 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation including the findings of CIT (A) in that case :- "2. Ld. counsel for the appellant relies upon paragraph 3 and 5 of the impugned order and submits that in the present case, the Tribunal has erred in holding that the expenditure incurred on education of one of the directors Ms. Ruchika Grover, who had undergone a course called Master of Science in Entrepreneurship at United Kingdom from University of Nottingham, was not expenditure wholly and exclusively incurred for the purpose of business. Ld. counsel for the appellant relies on decision of the High Court of Karnataka in Krishna Fabrications Ltd. Vs. Joint Commissioner of Income Tax (2010) 192 Taxman 287 (Kar). The relevant quote from the decision of Karnataka High Court reads as under :- "After hearing 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st Patel Nagar, New Delhi-110008 is mortgaged to Union Bank of India with rider that he shall automatically cease to be the director of appellant company as and when the property is released from mortgage of the Bank meaning thereby that Sh. Naresh Inderpal Singh has no say in the day-to-day running of the appellant company. Ms. Ruchika Grover did Commerce from one of the very reputed institution of Delhi University is concerned and if the argument of the appellant company that higher studies shall benefit the appellant company then the same reasoning is applicable as far as doing graduation from Delhi University and the appellant or for that matter all other assessees doing business shall start taking the plea that the studies are in connection with the business and hence to be allowed as "business expenditure". 3.2.1 The case laws of JB Advani & Co. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applications from all the employees for sponsoring their higher education. Rather we have confronted ld. Counsel to show whether any policy in principle is available in the company to provide assistance for higher education. The reply of the ld. Counsel was a negative. Had Dushyant Poddar was not the son of the Directors, his education expenses would have not been met by the company. The assessee claimed that higher education of Dushyant Poddar would give a benefit of more than R.50,000/- per month to the assessee company but who has checked the credentials of Dushyant Poddar and what salary he would claim in the open market. Without there being any material on record, how the assessee can say that the decision to sponsor education of Dushyant Poddar was not influenced by the parental love and affection of the Directors. After taking into consideration the evidence on record, we do not see any 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity. Expenses had been incurred only for the purpose of its business activity of purchase and sale of shares, positive I negative income of which, had been declared under the head "Business Income". Merely because assessee had received dividend on some of its shares, which could not be sold or are held during the year, it will not change the nature and character of expenditure. Since the assessee had not incurred any expenditure in relation to earning the dividend income, provisions of Section 14A are not attracted. e) Section 14A has been amended by the Finance Act 2006 w.e.f. 01.04.2007 whereby the provision which was already existing was renumbered as sub-Section (1) and thereafter sub-Section (2) & (3) are inserted. f) Notes on relevant clause of the Finance Bill is reported at 281 ITR ST 131 at page 139. g) Similarly, memorandum explaining the relevant provision of the Finance Bill is reported at 281 ITR 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) Look ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racter of the expenditure has not been changed with insertion of Section 14A. Therefore, Rule of consistency would demand that the AO cannot disallow the business expenditure invoking provisions of section 14A of the Act. m) Throughout all the years, assessee had shown the assets as trading assets and not as investment on capital account. As held by the Hon'ble Supreme Court in the case of G Venkatswarny Naidu & Co. vs CIT (35 ITR 594), it is the intention of the assessee at the time of making the purchase which is relevant. Where he purchase has been made solely and exclusively with the intention to resell at a profit and the purchaser has no intention of holding the property for himself or otherwise enjoying or using it, it would raise a strong presumption that the transaction is an adventure in the nature of trade. The presumption may be rebutted. In the present case, the AO has accepted that the assessee was in the business of dealing in shares, huge amount of sale and purchase i.e. Rs.24,34,50,010/- 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 incidenta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Also see 318 ITR 417 (Bom) CIT vs Shapoorji Pallonji & Co. 319 ITR 204 (P&H) CIT vs Winsome Textile Industries Ltd. 193 ITR 321 (SC) Radha Soami Satsang vs CIT q) Even Supreme Court in the case of CIT vs Wallfort Share & Stock Brokers (P) Ltd (326 ITR 01 AT 17) have held that for attracting Section 14A, there has to be a proximate cause for disallowance of expenditure, which it is its relationship with the tax exempt income. This judgement has also been discussed by the Bombay High Court in 328 ITR 81 point (X) at page 117. r) Section 14A does not authorize estimating the expenditure alleged to "have been" incurred CIT vs Printers House (322 ITR St. 7)(SC)-dismissing SLP of the Revenue against the order-dated 14.04.2009 passed by this Hon'ble Court in ITA No.227 of 2009. CIT vs Sushma Kapur (319 ITR 299)(Del) CIT vs Chemical & Metallurgical Design Co. Ltd. (ITA No.803 of 2008) (Del) s) The similar iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oria (238 ITR 777) (Bom) CIT vs Amrita Ben R Shah (210 ITR 991) (Cal) CIT vs Jardine Handersion Ltd (284 ITR 586) (Bom) CIT vs Emerald Co. Ltd (183 Taxmann 159) (Bom) CIT vs Srishti Securities (P) Ltd. u) In CIT vs Frick India Ltd. (ITA No.1185/2008), ITAT has accepted 10% of the dividend income as reasonable for earning dividend income following the principle laid down in Section 80HHC and the same has been upheld by the Hon'ble Jurisdictional High Court. v) It is submitted that as held by the Bombay High Court in the case of Godrej Boyce Manufacturing Company Ltd. vs Dy GIT (328 ITR 81) Rule 80 does not apply to AY 2007-08. It is observed at page 134 that it is a trite principle of law that the law which would apply to an A Y is the law prevailing on the first day of April. Consequently, Rule 80 which has been notified on March 24, 2008 would apply w.e.f. AY 2008-09. w) It is also to be stated that the dividend received during the year reveals that out of a sum of Rs.6,19,091/-, amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of subsection (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other words, sub-secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve. As we have already seen, while discussing the provisions of Sub-sections (2) and (3) of Section 14A, the condition precedent for the Assessing Officer to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of the said Rules. 31. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of all the assessment years prior to the assessment year beginning on or before the 1st day of April, 2001, concluded assessments could not be disturbed despite the fact that Section 14A had been expressly made retrospective with effect from 01.04.1962. The provisions of Section 14A, which were retrospective with effect from 01.04.1962 are now encapsulated in sub-section (1) of Section 14A. It is also clear that sub-sections (2) and (3) of Section 14A were introduced subsequently by virtue of the Finance Act, 2006 and were introduced with effect from 01.04.2007. However, although subsections (2) and (3) had been introduced with effect from 01.04.2007, they remained empty shells inasmuch as the expression "such method as may be prescribed" got meaning only by the introduction of Rule 8D by virtue of the Income-tax (Fifth Amendment) Rules, 2008 which was notified by the Central Board of Direct Taxes by its notification No.45/2008 dated 24/03/2008." Respectfully following the judgment of Hon'ble jurisdictional High Court, we deem it appropriate to set aside this issue to the file of the Assessing Officer for re-adjudication. Ld. Assessing Officer shall keep in mind the judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness of shares since its inception. Thus, the income from business that is share dealing, share brokering, etc. is a composite business which has to be taken as a whole. If all these factors are located together then it would suggest that assessee is an investment company and Explanation appended to section 73 would not be applicable upon the activities of the assessee. 20. The ld. First Appellate Authority has rejected the contention of the assessee. According to the ld. First Appellate Authority, sub-section (1) to section 73 provides that any loss computed in respect of speculation business carried on by an assessee shall not be set off except against profits and gains, if any, of another speculation business. Ld. CIT (A) has observed that Explanation provides the definition of expression "speculation business" for the purpose of section 73. It is not meant either to clarify any provision of law nor it is directed towards removing any ambiguities in the implementation of any statutory provisions. The ld. First Appellate Authority has held that out of the total income of Rs.24,43,85,488/-, income from sales of shares and securities is Rs.24,34,50,010/-. Thus, it indicates that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd deal in stocks and shares. Memorandum is enclosed at page 64. b) In order to achieve these objects, assessee had registered itself with SEBI and was, during the relevant year, dealing in shares. c) As per the Para 2 of the assessment order itself, the assessee Co. is engaged in the business of stocks and share broker and dealing in shares and securities and making investments. d) The assessee had during the year, purchased the shares and had sold them either on behalf of its constituents or on its own behalf. From the constituents, it had charged the commission and reflected the same as brokerage income in the Profit & Loss Ale. Similarly, assessee had purchased the shares and sold them on its own behalf. The profit / loss earned / incurred on shares and securities purchased and sold during the day itself had been shown as clearing difference whereas the shares which could not be sold during the day itself, were carried forward to the next cay and so on. As and when the same were sold, profit/loss earned/incurred thereon was reflected in the Trading and Profit & Loss Ale itself. Profit/loss earned / ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Wanchoo Committee, which is reported in the commentary of Sampath Iyanger, 10th edition, Vol-3, page 5002: "A tax avoidance device often resorted to by business houses controlling group of companies is manipulation of results from dealing in shares of the companies controlled by them. In our opinion, such manipulation in share dealings for the purpose of tax avoidance can be checked effectively if the results of dealing in shares by such companies are treated for lax purposes in a manner analogous to speculation. No doubt, companies whose main business activities center around investment in shares will have to be left out. Accordingly, we recommend that the results of dealing in shares by companies, other than investment, banking and finance companies, should be treated in a manner analogous to speculation business". h) The provisions of Explanation to Section 73 are remedial in nature. Before inserting the Explanation, the loss of a speculation business was not being allowed against profit and gains of any other business. However, as per Wanchoo Committee's Report, the business housing controlling groups of companies wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (273 ITR ST 139 AT 149) & Memorandum explaining provisions (273 ITR ST 187 AT 207) are enclosed at page 41 to 42 and 43 to 45. k) It is submitted that as stated in preceding paras, business of the assessee is a composite business i.e. dealing in shares on behalf of customers and on his own behalf. Therefore, the same cannot be bifurcated into the speculation business and non-speculation business. Entire profit/loss earned / incurred by the assessee is a normal business loss. The transactions involving purchase of shares which could not be sold during the day were carried forward to be subsequent date and sold thereafter. The loss incurred by the assessee from the transactions settled during the day itself had been shown by the assessee as clearing difference though the same is not speculation business. It is also to be stated that the shares are held by the main broker in Demat form on behalf of the assessee and therefore, it cannot be said that assessee was carrying on speculation business. I) It is also to be stated that as per the AO himself, assessee has shown income from brokerage, dividend and interest and loss from share dealing. The AO has allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting year if; a necessary part of the process of determining the trading result of that period, it can in no sense be regarded as source of such profits. The source of the profit and gain of a business is indubitably the business. It is submitted that the income can be taxed only if such has been accrued or arose during the course of business. It is the trading activity of the assessee due to which profit arises. Moreover, the closing stock of the present year will become the opening stock of the subsequent year and therefore there is no loss to the revenue. In CIT vs Shah Doshi & Company (133 ITR 23), Gujarat High Court have held that no profit could be said to arise out of the valuation of closing stock. The purpose of showing closing stock in the Trading Account is to adjust the cost of only those goods which are sold during the year, so as to determine the true profit generated during the year out of business activities. The closing stock itself do not generate any profit. It is again, though at the cost of repetition, stated that the loss on account of clearing difference may first be adjusted against the profit of Rs. 1,02,58,960.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had losses under all the 03 heads and therefore, Section 73 cannot be applied. b) CIT(A) has also held that the speculative loss of Rs. 1,94,82,909/- and the expenses of Rs. 49,12,978/- (this is incorrect figure as stated in preceding Para) have to be disallowed and added back. It is submitted that the additions made by the AO have also to be adjusted against this loss only. c) Without prejudice to the aforesaid contention, even if it is presumed that the additions are not adjusted against the so called speculation loss then also the said additions can be adjusted against the brought forward losses. In the case of M/s Lavish Apartment (P) Ltd. vs Assistant Commissioner of Income Tax (ITA NO.254 of 2006 decided on 23.07.2012), Hon'ble Delhi High Court have held that the brought forward losses can be adjusted against other income i.e. income from other expenses of the current year in view of correct interpretation of the provisions of section 72(1) of the Act. 24. On the other hand, ld. DR relied upon the order of the CIT (A). He further relied upon the order of ITAT in the case of SPFL Securities Limited vs. DCIT rendered in 6 SOT 562. He also relied upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ouse property', 'Capital gains' and 'Income from other sources' or whose principal business is of banking or granting of loans. The activities of the assessee do not fall in the ambit of the nature of business provided in the Explanation. The main business of the assessee includes sales of shares. It has shown losses of Rs.76,21,702/- on such activities. Thus, prima facie, Explanation appended to section 73 is clearly applicable on the facts of the assessee's case. The first contention raised by the ld. Counsel for the assessee is based upon the principle of consistency. She submitted that assessee company was incorporated in 1989-90. Since then it was declaring the income in the same manner as is declared in the present year. Explanation to section 73 has been inserted w.e.f. 01.04.1977 and in none of the years, revenue had treated part of the income as a speculation loss. She made reference to the judgments of Hon'ble Delhi High Court as well as Hon'ble Supreme Court. On due consideration of her arguments, we are of the view that under the Act, every year is an independent year. If assessee has shown losses in the share trading activities and its case falls within the mischief of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment was altogether different. Applicability of Explanation appended to Section 73 was not called for in that case. It was a case of section 43(5). We have gone through the replies of the assessee available on pages no.328 to 333 before the CIT (A). It has nowhere raised this plea and it was nowhere submitted this bifurcation in the reply. More so trading of derivative at exchange may not be speculative transaction as per section 43(5), but it is trading in shares, which would also trigger the deeming fiction available in Explanation to section 73. The next contention raised by the ld. Counsel for the assessee is that CIT (A) has computed a sum of Rs.1,94,82,909/- as a speculation loss. It has a loss of Rs.1,78,80,662/- on account of valuation of stock which will be an opening stock for the next year. It has a profit on sale of stock at Rs.1,02,58,960/- and the resultant loss of Rs.76,21,701/-. Thus, according to the assessee, it has earned profit of Rs.1,02,58,960/- from purchase and sales of shares. Loss is pertained to the value of stock as on 31.03.2007. We have gone through the submissions of ld. Counsel but we do not find any substance in them. The valuation of a stock on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deration, I find that the allocation made by the Id. counsel is in order and deserves to be accepted. Accordingly, the AO is directed to re-calculate the activity wise Profit & Loss as per the computation furnished by the Id. counsel for the appellant and reproduced here as-in above. 3.2 Further, the Id. counsel for the appellant has also pointed out that the expenses claimed under the head depreciation are not included in the establishment expenses of Rs.5954517/- and therefore, the depreciation expenses also require to be allocated in the ratio of income under different categories. On consideration, this argument of the Id. counsel has also been found to be correct. The AO is directed to allocate the depreciation in the ratio of income/receipts shown under different categories of income. 3.3 It is pertinent to note here that in compliance to the aforesaid directions there may be a situation that there is resultant loss in the activity of brokerage, income from dividend and interest on debentures and FDRs. Therefore, the Id. AO would be required to first compute the Profit & Loss activity wise and thereafter, record finding with reference to carry forwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions. We are of the view that this plea was duly considered by the CIT (A) and it is part of assessee's main activity, i.e., sale and purchase of shares. It cannot be excluded separately on the strength of Hon'ble Bombay High Court decision rendered altogether on different facts. In grounds no.14 & 15, assessee has pleaded that CIT (A) ha erred in disallowing expenses of Rs.49,12,798/-. This was accepted by the CIT (A) as a factual error. What had happened is that CIT (A) took into consideration expenses allocable to establishment at Rs.85,82,975/-. She directed that 20% of these expenses are to be attributed towards daily administrative expenses which comes out a figure of Rs.17,16,595/-. The balance amount remained at Rs.68,66,380/-. The ld. CIT (A) further debited the expenses disallowed u/s 14A at Rs.19,53,402/-. The balance Rs.49,12,978/- was treated as allocable towards speculative transactions. When it was pointed out to the ld. CIT (A) that he took an incorrect figure of Rs.85,82,975/- and the correct figure was Rs.59,54,517/-. The ld. CIT (A) realized the mistake in the rectification order which is discernible from the chart extracted above. Thus, this ground no more sur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record carefully. In the case of Lavish Apartment Pvt. Ltd., Hon'ble Delhi High Court on an analysis of section 72 observed that as far as heads of income are concerned, they are irrelevant for the purpose of setting off of the profit and gains of the business against the losses of earlier years. The Hon'ble Court has observed that if rental income, commission income, etc. are earned on commercial principles, though assessed under the different heads as per the Act, that is, income from house property or income from other sources, but for the purpose of setting off of the profits against loss u/s 72, they can be set off. The heads of income would not be relevant. It is profit and gains of a business which is earned on commercial principles though assessed under different heads. Thus, in other words, it is not necessary to make adjustment of the income under each head against the losses computed under each head. However, we find that this judgment may not be very helpful to the assessee for the simple reason that addition made u/s 68 are not the profit and gains of the business. Such an income has not been generated on the basis of commercial principles. It is an addition on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deal with aggregation of income; it merely deals with classification of income under various heads of income. "Computation of total income under various heads of income" under Chapter IV is altogether different from "Aggregation of income" under Chapter VI of the Income-tax Act. They do not mean one and the same thing. They are fundamentally different from each other. (ii) Section 14 is not a charging section; it merely classifies income under various heads of income. It is total income of the previous year and not the head of income which is chargeable to income-tax u/s 4. (iii) Opening words of section 14 are "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 heads of income specified therein. Thus, section 14 is subject to the other provisions of the I-T Act. Taxability of income under the specific provisions of the I-T Act outside Chapter IV is not affected by heads of income as classified in section 14. As a corollary, it follows that income liable to be taxed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /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 necessarily follows that what is taxed under the specific provisions of Chapter VI cannot be pegged to any of the sources/heads of income as specified in Chapter IV. 14. The aforesaid view is supported by the scheme of taxation under the Income-tax Act. Section 2(45) defines "total income" as "the total income referred to in section 5, computed in the manner laid down in this Act". It is relevant to note that the principal charging section 4 makes the "total income of the previous year" subject to the charge of income-tax. Section 5 defines the scope of total income referred to in the principal charging section. Section 14 classifies the heads of income while sections 15 to 59 provide for its quantification. Chapter VI of the Income-tax Act provides for aggregation of income and set off or carry forward of loss. Thus Chapter VI is in two parts; first part deals with aggregation of income wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder:- "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 incurred by the assessee are not explained at all, or not satisfactorily explained, then, the value of such investments and money or the value of articles not recorded in the books of account or the unexplained expenditure may be deemed to be the income of such assessee. It follows that the moment a satisfactory explanation is given about such nature and source by the assessee, then the source would stand disclosed and will, therefore, be known and the income would be treated under the appropriate head of income for assessment as per the provisions of the Act. However, when these provisions apply because no source is disclosed at all on the basis of which the income can be classified under one of the heads of income under section 14 of the Act, it would not be possible to classify such deemed income under any of these heads including income from "other sources" wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 view of the matter, unexplained cash credits have to be brought to tax under section 68 and not under section 56. Both the aforesaid sections operate in the fields reserved for them. It cannot therefore be said that what is assessable as income u/s 68 must be assessed as income from other sources u/s 56. Judgments rendered in the context of the old Income-tax Act are therefore hardly relevant to decide the issue under appeal. 18. The assessee claims set off of loss from business assessed by the AO u/s 28 against the income being unexplained cash credits assessed by the AO u/s 68 on the ground that income assessed by the AO u/s 68 is income from other sources u/s 56. Section 71 permits set off of loss from one head against income from another head of income as enumerated in section 14. We have alrea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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