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TMI Blog2013 (11) TMI 1316X X X X Extracts X X X X X X X X Extracts X X X X ..... 21,92,68,519/-. 4. This issue has been discussed by the AO in his order at length. Firstly, the AO discussed the findings of the Special Auditor under Section 142(2A) of the Act, then he has reproduced the written submission filed on behalf of the assessee i.e. recorded upto to page 13 of the order of the AO. Thereafter the finding of the AO has been recorded at page 13 to 19 of his order. The AO has placed reliance on the finding of Special Auditor. The Auditor has given a finding that there was no proprietary sense or profit motive since inception in undertaking above transaction. The special auditor has categorically identified trade transactions where assessee has incurred interest and claim of interest on each and every trade transactions exceeds the brokerage income. In each such transaction, the assessee has incurred loss on commercial sense. There was no justifiable commercial necessity to undertake such transaction where assessee has incurred excess interest cost and SEBI Turnover Fee over the brokerage income earned to the extent of Rs.5,95,49,965/-. Accordingly, the Special Auditor gave their finding that the assessee has carried out huge volume of trade on which it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d appeal before the CIT(A). The CIT(A) by observing that on identical facts the issue has been decided in favour of the assessee for the assessment year 2000-01 and accordingly, he allowed the issue in favour of the assessee for the year under consideration. 6. Learned DR vehemently objected the finding of the learned CIT(A). The attention of the bench was drawn on para 34 of the order of the CIT(A) for the assessment year 2000-01, wherein it has been observed that "I fail to understand as to how the investigations carried in the subsequent years has a bearing on the transactions carried out by the assessee during the year. The subsequent inquiries can not cast a shadow on the transactions carried out by the assessee during the year and the AO should not have allowed the subsequent happenings to prejudice his mind." Accordingly, it was stated that the order of CIT(A) clearly shows that he is allowing the contention of the assessee for the assessment year 2000-01 on the facts of that year and not on the facts of subsequent years's enquiry. It was submitted that in fact, in subsequent year i.e. for the assessment year 2001-02, which is under consideration, the SEBI has given a repor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration numerous decision of the Hon'ble Supreme Court and various High Court, which have been incorporated in the order in para 25 onwards, which have not been considered by the learned DR while placing reliance on the para 34 of the order of the CIT(A). It was further submitted that the transactions of the assessee are not illegal as he was authorized to do the transactions and has taken loan from various companies to finance the various traders from whom he was earning brokerage. This is not interest paid by the assessee for borrowing funds, which was advanced for earning of interest. The funds were borrowed for financing various traders from whom the assessee has earned brokerage which is more than the interest expenditure. The AO has ignored the fact that brokerage of the assessee has been increased substantially in this year i.e. from 67.44 crore or odd to 108.85 crore or odd in the year under consideration and this fact has also been examined by the learned CIT(A) while allowing the issue in favour of assessee for assessment year 2000-01. It was submitted that if the business of the assessee is illegal then the income and expenditure has to be treated as illegal. It is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : "The authority opined: "The special auditors are required to verify the correctness of the claim of various allowances made by the assessee in respect of the above mentioned points and to work out the income, allowances correctly with reference to the books of account maintained by the assessee and in accordance of the provisions of the income-tax law." The aforesaid function is that of the Assessing Officer and not that of the special auditor." 8. Further, and in any event and without prejudice to the above, the above abdication, by the AO of his functions under the Act, vitiates the Assessment order itself. The serious vitiation of the assessment order and the serious abdication by the AO of his functions, is shown inter alia, by the fact that the Special Auditor in his report asked the AO to: (1) look into the entitlement of the claim of depreciation on BSE card; and (ii) make an estimation of expenses disallowable under section 14A on a pro rata method. 9. Similarly in his audit report, the Special Auditor clearly asked the A.O. to look into other items of disallowances and opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions by reading proviso as remaining period shall be extended by 60 days. If it is construed that remaining period is extended by 60 days, it means Assessing Officer would get 7 days + 60 days. But this reading is not correct as done by Assessing Officer. He has construed that remaining period is extended by 60 days and has passed the order on 29.08.2003 which in fact should have been passed on or before 23.08.2003 to-this effect assessment is barred by limitation. Since this is in valid assessment, 'the same-needs to be cancelled. 13. Regarding other charges involved by assessee against Assessing Officer that directions of the A.O. was illegal, invalid etc are not being adjudicated. upon as the issue has already been decided on facts. 14. Coming to the merits of the case, first ground of appeal relates to disallowance of interest of Rs.7,67,39;402/-. Assessing Officer has observed that assessee has borrowed huge funds from banks and also in the form of inter Corporate deposits etc. Assessing Officer has also referred the matter to special audit under provisions of section 142(2A), to study issue of utilization of the borrowed funds. Assessing Officer ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock. V is submitted that similarly, in the case of sale transaction, the broker would receive stocks from the client and pay the sale proceeds to the client before 'pay out' date and the stocks would then be delivered to the Clearing House of' the Exchange on or before 'pay-in' date in order to meet his 'pay-in' obligation. It is submitted that practice of settling transactions on DVP basis is in fact, a widely prevalent practice not only in India but also in international markets. It is stated that assessee was neither providing any monetary assistance to the clients against security of shares nor was the client under any obligation to repay the assessee, the monies so received. It is also submitted that funds received by the clients were not borrowed by them, but funds, which legally and beneficially belonged to them. It is stated that this was pointed out to the A.O. that this practice was in fact also followed by Stock Holding Corporation of India. 17. Assessee further submitted that Assessing Officer grossly erred in basing his disallowance on the ground that assessee has not offered any interest Income earned from its client on which he has suffered interest cos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17th March 1997 issued by BSE, it is stated that notice, inter alia, lists out the following two reasons, which compel stockbrokers like the assessee to charge Nil brokerage: 1. In several, cases, the members execute 'net rate' orders in the market on behalf of their constituents, particularly the Indian financial institutions and foreign institutional investors and hence do not end up specifically charging brokerage on same trades. 2. In certain cases, with a view to maintain long term business relations, members do not consider it appropriate to charge any brokerage. 21. Assessee further stated that by maintaining such relationship with clientele where brokerage was charged was lower, some times no brokerage was charged, brokerage income of the assessee took quantum jump from Rs.67,44,07,631/- to Rs.108,85,84,105/- for the previous year ended on 31.3.2001.. Assessee has also relied on various decisions in support of its contention such as Patnaik & Co. Ltd. Vs. CITCIT, Orissa 161 ITR 365 (SC); Adl CIT Vs. B.M.S'.( P) Ltd. 119 ITR 321 (Madras), CIT Vs. Dhanrajgiri Raja Narasingirji 91 ITR 544 (SC), CIT Vs. Birla Cotton Spinning and Weaving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ledge, a bailee of the jeweler and was in law required to take as much care of the pledged jewellery as a person of ordinary prudence would take under similar circumstances of his own jewellery of the same, bulk, quantity and value, and the bank having provided an adequate number of watchmen, it was not liable for the loss of the property pledged................... The question is not about the strict enforcement of the legal rights and obligation between the bank and its constituents. The sole question is whether the bank in incurring the expenditure acted in the interest, of and for the purpose of its business." 24. Further from the details furnished by assessee it could be seen that assessee has not suffered any loss on account of finance expenditure in the form of interest cost. Though assessee has incurred around Rs. 12 crores of interest cost, it brokerage income for the year was to the tune of nearly Rs. 67 crores which was more than 5 times of the interest cost. In fact Assessing Officer has analysed the transaction in a very narrow prospective. Assessing Officer has analysed view isolated transactions and jumped to conclusion that assessee's interest cost in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Bom), Similarly, Supreme Court has held hi the case of Eastern Investments Ltd. Vs. CIT 20 ITR 1 that "In our opinion, the law on this point has been correctly summarised in the judgement of the High Court. The following principles are relevant: 26. It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned: Moore Vs. Stewarts and Lloyd's and Usher's case. 27. It is enough to 5how that the money was expended "not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business" . British Insulated and Helsby Cables Ltd. Vs. Atherton. 28. ....................Most commercial transactions are entered into for the mutual benefit of both sides, or at any rate each side hopes to gain something for itself. The. test for present purposes is not whether the other party benefited, nor indeed whether this .was a prudent transaction which resulted in ultimate gain to the assessee but whether it was properly entered into as a part of the assessee's legitimate comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns in the very nature of things have to be respected by authorities, no matter that it may appear to be latter that expenditure incurred was unnecessary and unavoidable. .There can be hardly any dispute that businessman is the best judge to determine the business expediency and he claims to have incur certain expenditure. for business expediency," on his version should ordinarily be accepted. This principle however, does not debar the Assessing Officer inquire and investigate as to whether such expenditure was actually incurred by businessman and if incurred whether the same was incurred wholly and exclusively for business consideration. (CIT Vs. Motor Industries Co. Ltd. 223 ITR 112 Kar, Jaipur Electro (P) Ltd. Vs. CIT 223 ITR 535 Raj.) 32. Thus in view of several Supreme Courts and High Courts decisions, it S very clear that assessee is the best judge of the expenditure. The expenditure incurred by assessee may found to be unnecessary and unavoidable. Still the same has to be accepted by department if it is for the purpose of business. There need not be any legal obligation to incur expenditure, but the principles of commercial expediency will ultimately prevail and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestigations carried on in the subsequent years has a bearing on the transactions carried out by the assessee during the year the year. The subsequent inquiries can not cast a shadow on the transactions carried out by the subsequent happenings to prejudice his mind. 35. Even assuming for a while that the assessee has violated stock exchange and, as a result the provisions of Securities & Exchange Board., the A.O has grossly erred in disallowing the part of the interest expenditure alone. This is for the reason that if, the activity of the assessee is considered as an illegal activity the only income arising therefrom can be taxed by the Assessing Officer and so, if the brokerage earned by the assessee from such illegal activities is taxed, the deduction of interest expenditure incurred to earn that brokerage has to be allowed. It is well settled that even from the illegal business, only income can be taxed and not the gross receipts. The subsequent amendments carried out to sec. 37empower the AO only to disallow illegal expenditure incurred while carrying on legal business. Hence, even the activity of the assessee is treated as entirely illegal, still the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure about Rs.12 crore or odd against which the assessee has shown brokerage income of Rs.67,44,07,631/-. This fact has been noted by the learned CIT(A) while allowing the issue in favour of the assessee for assessment year 2000-01. The main contention of the department in denying the claim of the interest expenditure is that the SEBI has passed an order giving adverse report against the assessee. We have seen the report of the Special Auditor and in the note the Special Auditor has noted that the activity of the assessee indulging in financing activity may construe that the assessee is indulged in illegal activity. For a moment if it is accepted that the assessee is indulged in unauthorized activity of financing in respect to purchase and sell of shares on behalf of others, in that case, we are of the view that the interest expenditure has to be set off against brokerage earned by the assessee because the interest expenditure is incurred by the assessee on borrowed money for the purpose of buying shares or making purchases of shares on behalf of others. Huge brokerage is charged, which is much more as compared to interest expenditure. This is not expenditure, which is prohibited un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee on prevailing market rate. Therefore, it cannot be said that the interest expenditure incurred by the assessee was on account of any illegal activity. 12. The department has also taken a plea that on certain transaction even no brokerage has been charged by the assessee. This is well known and settled position of law that this is business man, who knows how to run its business activities. If by any reason the assessee does not charge any brokerage from certain parties, that may be on account of commercial expediency and to earn brokerage in future. It is not the case of the department that the assessee has not charged brokerage from a particular party from whom heavy transaction has been made by the assessee and heavy interest expenditure have been incurred by the assessee. Figure of interest expenditure against brokerage income has been tabulated somewhere above in this order. Brokerage income is much more than the interest expenditure. 13. Keeping in view of all these facts and circumstances of the case and the finding of the learned CIT(A) for earlier year, which has been followed by the learned CIT(A) for the year under consideration, we are of the view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmediately preceding year i.e. assessment year 2000-01. It was seen by the CIT(A) that the assessee has been reflecting the service tax return, the brokerage on accrued basis but in profit and loss account the brokerage has been shown on actual basis on the basis of constant method adopted by the assessee. It was further noticed by the CIT(A) that sometime the assessee is required to reduce the brokerage at the request of the assessee during the final settlement of the bills and some time the assessee is also required to waive part of the brokerage disputed by the clients. Therefore, difference as per the service tax return and as per profit and loss account was found explainable. This is a minor difference, which has been reconciled by the assessee. Therefore, we see no reason to interfere in the finding of the CIT(A) in this respect also. 16. The next issue relates to deleting the disallowance of Rs.26,54,791/- on account of prior period expenses. 16.1 The AO made this disallowance by noticing that these expenses relate to earlier year and, therefore, not allowable during the year under consideration. Learned CIT(A) deleted this addition following his earlier order. CIT(A) exam ..... X X X X Extracts X X X X X X X X Extracts X X X X
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