TMI Blog2014 (1) TMI 1597X X X X Extracts X X X X X X X X Extracts X X X X ..... held that UPS is a part of computer peripheral, depreciation @ 60% should be allowed confirmed. Antivirus software expenses Held that:- The expenditure is to be allowable revenue in nature - There is no concept of deferred revenue expenditure under the Act - Decision in CIT v. Asahi India Safety Glass Ltd. [2011 (11) TMI 2 - DELHI HIGH COURT] followed. Addition on account of Fresh cash Credits u/s 68 Held that:- Compliance with RBI regulations and KYC norms was reasonable discharge of the assessees onus u/s 68 - There is no basis to hold that assessee was instigating depositor to be non-cooperative - Compliance of summons cannot be enforced by assessee - sec. 68 cannot be applied in estimated, ad hoc or generalized manner Decision in Commissioner of Income Tax Versus SAHARA INDIA FINANCIAL CORPORATION LTD. [2012 (9) TMI 845 - DELHI HIGH COURT] followed. Change in rate of interest, whether amount to change in method of accounting - Held that:- Assessee has discretion to change the rate of interest including with retrospective effect on outstanding balances depending on circumstances. Thus change in rate of accrual of interest cannot tantamount to change in method of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of principal amount of NCD's Held that:- As a RNBFC the assessee has to carry on the business of investment in RBI approved investments - It is in this year only the advance is finally treated as bad and written off, therefore, it is eligible to be allowed in this year - CIT(A) was right in holding it to be business investment Decision in TRF Ltd. v. CIT [2010 (2) TMI 211 - SUPREME COURT] followed - Any loss of business investment or stock is allowable as write off or loss in the year of write-off. Provision for diminution in investment Held that:- Investments are in the nature of stock-in-trade for the business of the appellant - Assessee follows this method consistently - Diminution in the value of business investments is an allowable business expenditure u/s 28 or u/s 37(1) - CIT(A) was right in holding that in any case, revenues interest is protected by the write back of increase in value up to cost-level, and booking of income at sale minus cost on disposal Decision in CIT v. State Bank of Patiala and American Express International Banking Corporation [2002 (9) TMI 96 - BOMBAY High Court] followed. Additions of interest earned on non-performing assets not rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he basis of findings of special auditors in their audit report under section 142(2A) of IT. Act, 1961. 4. On the facts and circumstances of the case the Ld. CAT(A) has erred in deleting the addition of ₹ 48,15,804/- out of total disallowance of ₹ 55,01,261/- made by AO on account of disallowance out of expenses as capital in nature on the basis of findings of special auditors in their audit report under section 142(2A) of IT Act, 1961. 5. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of ₹ 44,05,688/- made by AO on account of treatment of expenses relating to antivirus software in the nature of the prepaid expenses on the basis of findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961. 6. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of ₹ 66,81,102/- made by AO on account of excessive depreciation on UPS on the basis of findings of special auditors in their audit report under section 142(2A) of IT. Act, 1961. 7. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in deleting the addition of ₹ 81,91,044/- made by AO on account of advertisement expenses on the basis of findings of special auditors in their audit report under section 142(2A) of IT. Act, 1961. 15. On the facts and circumstances of the case the Ld. CIT(A) has erred in directing the AO to allow an additional relief of ₹ 21,86,37,443/- to assessee on account of payment made to BCCI. 16. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of ₹ 11,86,24,109/- made by AO on account of interest on securities relating to pre-acquisition period of findings of special auditors in their audit report under section 142(2A) of I.T. Act, 1961. 17. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of ₹ 8,14,000/- made by AO on account of prior period expenses on the findings of special auditors in their audit report under section 142(2A) of IT. Act, 1961. 18. On the facts and circumstances of the case the Ld. CIT(A) has erred in deleting the addition of ₹ 70,13,750/-made by AO on account of written off in the books of account of bad debts representi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iled to appreciate that appellant has voluntarily disallowed direct expenses relatable to earning of exempt from tax and therefore, there was no justification in invoking provisions of Rule 8D(2) of the Income Tax Rules 1962 and disallowing ₹ 2,19,74,418/- u/s 14A of the Act. 1(d) That the Ld. CIT(A) has failed to appreciate that no disallowance was called for u/s 14A as the appellant had returned loss in place of income and provisions 14A are only applicable for making disallowance out of income chargeable to tax. 1(e) That in any view of the matter and on facts and circumstances of the case, the Ld. CIT(A) is not justified for confirming the disallowance u/s 14A of the Act to the extent of ₹ 2,19,74,418/- which is overstated in any view of the matter. 2(a) That on facts and circumstances of the case as well as in law, the Ld. CIT(A) is not justified in disallowing ₹ 6,85,457/- by holding the replacement of UPS as a capital expenditure which was claimed by the appellant to be revenue in nature. 2(b) That the Ld. C1T(A) has erred in law and on fact and on circumstances of the case in observing that the replacement of UPS is an addit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 009 to be paid and as much provisions of section 40(ia) were not applicable on the fact of the case to the extent of the quantum of interest paid. 4(d) That the Ld. C1T(A) has erred in law and on the facts and circumstances of the case in confirming on a protective basis disallowance u/s 40a(ia) made on an estimate basis which is contrary to the provisions of section 40a(ia) of the Act and not tenable in law. 4(e) That in any view of the matter, the Ld. CIT(A) to erred in law in upholding the addition of ₹ 150,38,35,341/- on a protective basis and at the same time holding that TDS default disallowance u/s 40a(ia) out of expenditure on account of interest payment cannot be made on estimate basis which is not justified on the facts and circumstances of the case as well as in law. 5(a) That the ld. CIT (A) has erred in law and on the facts and circumstances of the case in confirming the addition of ₹ 2,25,01,961/- made by the AO on account of accrued interest on F.D.R. 5(b) That the Ld. CIT(A) has failed to appreciate that the interest of ₹ 2,25,01,961/- which was added during the year by the AO stood already subjected to tax in earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egations are vehemently denied by the assessee before CIT(A) and before us as well. 2.2. According to AO the assessee's accounts were very voluminous, complex and difficult to interpret, therefore it was not possible for him to determine the true and correct taxable income of the assessee. In view of alleged complexity of the accounts and in the interest of the revenue, AO deemed it fit to appoint Special Auditor (for short SA)as provided u/s 142(2A) of the Income Tax Act, 1961. Appropriate show cause was issued on assessee calling for its comments before issue of direction for audit u/s 142(2A) of the Act. The reply of the assessee along with a proposal was sent on 20-12-2011 to the Ld. CIT(Central)-1, New Delhi for his approval for issue of direction u/s 142(2A), same was received vide letter dt.21.12.2011. The assessee thereafter was directed vide order dated 23.12.2011 u/s 142(2A) of the I.T. Act to get its accounts for F.Y. 2008-09 relevant to A.Y. 2009-10 audited by M/s Kapoor Tandon Co., 21, Daryaganj, New Delhi who was nominated for the purpose of conducting the special audit in accordance with provisions of section 142(2A) of the I.T. Act and furnish the report of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1855,58,99,424 9. Disallowance of interest debited to profit and loss account as discussed above in para no. 9 467,96,79,775 10. Addition under section 41(1) as discussed above in para no. 10 15,26,12,293 11. Disallowance of expenses relating to associate concerns debited in profit and loss account as discussed above in para no. 11 6,91,230 12. Disallowance of advertisement expenses as discussed above in para No. 12 81,91,044 13. Addition of Pre Acquisition Interest reduced from the interest income as discussed above in Para No. 13 11,86,24,109 14. Disallowance of prior period expenses as discussed above in Para No. 14 8,11,830 15. Disallowance of balances written off as discussed above in Para No. 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s ground no. 3 regarding provision of interest due to change in method of accounting estimates; and revenue's ground no. 21 and assessee's no. 4 regarding protective additions u/s 40a(ia) are interconnected. Revenue's grounds no. 10, 11 12 pertain to common issue i.e. deletion of additions u/s 41(l) on account of cessation of liability. Rest of the grounds from both sides are by and large independent. Since main appeal is by revenue, the same is taken first for adjudication. 4. Revenue's ground no. 2: Interest on non-business advances:- 4.1. The special auditor (SA) appointed by AO was of the view that out of advances amounting to ₹ 21,65,39,847/- ₹ 3,44,81,079/-! was not backed by any business expediency. Therefore, a sum of ₹ 26,92,972/- being interest worked on @7.81 % paid to average of opening and closing deposits was proposed to be disallowed. On SA's observations AO issued a show cause notice. 4.1A Assessee replied that this disallowance comprised of- (i) ₹ 2,56,331/- being amount due from Sahara Estate-Hospitality ( SEH ), where the assessee is a member of the AOP ; (ii) ₹ 87,680/- due from Sahar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s behalf. Thus the outstanding is not in the nature of any interest free loan given to AVL, therefore, the allegations were totally incorrect The sale of land has been shown to assessee's accounts and offered for tax. Assessee placed reliance on the following cases for the proposition that if no interest has accrued then no addition can be made on notional income:- - Jwala Prasad Radha Krishna 198 ITR 415 (All.); - Highway Construction Co. (P.) Ltd. 199 ITR 703 (Gau.); - CIT v. Hotel Savera 239 ITR 795; - B A Plantations Industries Ltd. 242 ITR 22 (Guj); - CIT v. South India Corpn. (Agencies) Ltd. 293 ITR 237 (Mad.). (iii) Besides, it was demonstrated from accounts that, in any case, the appellant had overall interest free surplus funds available in the form of share capital; reserves and surplus to the tune of ₹ 1670.47 crores. The advance funds being less and there being no nexus between the borrowed funds and the alleged non-business advances, there is no justification in presuming that the advances were out of borrowed funds only and to disallow notional interest thereon. For this proposition assessee relied on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot disputed, therefore, there is no justification in making any disallowance by wrongly alleging them to be non-business advances. Assessee referred to explanation submitted before AO, for each and every advances explaining that all debit balances were backed by normal business exigencies of a group of associated concerns in inter unit transactions and relied on citations:- - Bharti Televenture Ltd. 331 ITR 502 (Del.); - CIT v. Sambandham Spinning Mills Ltd. 298 ITR 306 (Mad.); - Smt. Chanchal Katyal v. CIT 298 ITR 182 (All.); - S.A. Builders Ltd v. CIT (A) 288 ITR 1 (SC). 4.4. Ld. CIT(A) held that amounts in question were recoverable payments or other receivables on behalf of its associate concerns. Out of ₹ 3,44,81,079/- a sum of ₹ 3,28,34,832/- are two receivables outstanding from Ambey Valley Ltd., being lease charges of property amounting to Rs. l1,05,232/- and sale proceeds of appellants land amounting to ₹ 3,17,29,600/- pending remittance. The appellant's claim that these amounts have already been accounted for and income from lease rent and on sale of land offered to tax is not disputed. Besides, the appellant owed pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... situation, it is not understood as to why the amount of ₹ 3,17,29,600/- remained with M/s Ambey Valley Ltd. as intermediary and why it was allowed to retain the money in question. 5.1. Similarly, the claim of the assessee company that there are overall credit balances in the accounts of the associate concerns does not appear to have been examined by the AO. In view thereof the relief granted by the ld. CIT(A) is without calling for comments from AO in this behalf, relief granted is not in order, therefore, the order on this issue should be reversed. 5.2 In view of the aforesaid, the relief granted by the ld. CIT(A) without calling for comments of the AO regarding the claim of the assessee that there are credit balances in the accounts of the associate concerns is not in order. 6. Shri Ajay Vohra, ld counsel for the assessee contends that CIT(A), deleted the aforesaid disallowance by factually observing and verifying the record and holding that assessee demonstrated business expediency and also more aggregated playability of amounts to sister concerns than receivables from the sister concerns. There was consistent practice amongst the group companies not to pay / cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Regal Theatre v. CIT : 225 ITR 205 held that so long as the capital borrowed was used for purposes of business, interest payable thereon was allowable deduction under section 36(1)(iii) of the Act and that disallowance of interest could not be sustained on the ground, set forth by the Revenue, that if the assessee had collected the outstanding amounts from various concerns, there was no necessity to borrow. It was held by the Courts that it was the prerogative of the businessman to decide how to carry business and it was not for the Revenue to suggest ways to reduce the indebtedness. (d) As assessee's over all payability to sister concerns is more than receivability, apropos assessee it makes a prudent business decision that interest on such payable and receivables is not charged as it results in its benefit. It is a clear demonstration of business prudence. It is trite law that while ascertaining the acumen of business prudence, revenue cannot review such purely business decisions. (e) Besides, assessee has large investible interest free funds in the form of share capital and reserves surplus to the tune of ₹ 1670.47 crores. In the absence of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hypothetical income thereon. Besides, considering earlier situation assessee owes more payable. In our view, here also, there is no enabling provision to sustain such addition. 7.3 Assessee's reliance on Bombay Samachar is well founded which has been followed in a catena of subsequent judgments besides other case laws cited by assessee in this behalf support its contentions. In view of the foregoings we see no infirmity in the order of CIT(A) which is upheld. This ground of the revenue is dismissed. 8. Ground no. 3: Sec 40(2)(b) disallowance - related parties transactions: 8.1 The special auditor pointed out that while reporting transactions with related parties under section 40A(2)(b), transactions amounting to ₹ 27,78,66,907 have not been disclosed by the assessee. Justification was asked as to how following transactions were at prevailing market rates in terms of section 40A(2)(b): (i) A sum of ₹ 10,000 has been excessively paid to Sahara India Commercial Corporation (SICC) for 1000 liters of diesel by paying @ ₹ 46.36 instead of prevailing rate of ₹ 36.35. (ii) A sum of ₹ 20,32,08,118 has been paid on account of ren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Apropos AO's observation that the utility charges paid by are highly excessive as compared to rent of 0.5% charged by the appellant on similar use of its facilities. Assessee explained that the infrastructure available with and provided by Sahara India (Firm) are by no means comparable with asset's let out premises chosen by AO for comparison. They are claimed to be bare premises bereft of such multitude of facilities. In few other premises which are similarly equipped, utility charges recovered by assessee were in the range of 40%-50%. Consequently AO made a skewed comparison in this behalf, ld. CIT(A) found assessee's comparison and explanation to be correct. About non-maintenance of register of fixed assets, CIT(A) found no merit in the adverse inference. Apropos market comparison of utility charges, CIT(A) found merit in the assessee's explanation that the facilities and assets used are part of the regularly maintained, audited and accepted books of account, Department has been allowing related depreciation and expenditure, in relation to these assets and utilities year after year. CIT(A) held that, comparison of full infrastructure installed premises with bare ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding furniture, telephones, peons, security guards, sweepers, computer, V-sat, internet connection etc. It was categorically submitted that comparison drawn by AO qua the premises leased out by the appellant was distorted since the appellant does not make available services / use of utility in respect of all such premises. The premises which were leased out along with facilities / services, the utility charges recovered by the appellant were up to the range of 40-50% of the rent. Assessee demonstrated that if like is compared with like there is no case of excessive payment in terms of sec 40A(2)(b). Thus the distorted comparison made by the assessing officer was fallacious. 10.1 Ld. counsel referred to the rent agreement with Sahara India and also a detailed chart showing comparison which are placed on paper book in support of these averments. It is pleaded that ld. CIT(A) deleted the disallowance mainly holding that: i. AO's adverse inference on there being no register of fixed assets is not based on any requirement in law, or as per accountancy practice or convention. ii. AO was not correct in holding that assessee has not proved the reasonableness of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 10,14,447/- was not properly incorporated in the books. 12.2 Assessee filed its explanation which did not find favour with AO. It was held that assessee had not started the new business through its para banking branches during the year, if old UPS were discarded then they ought to have been accounted for in the books of account or disposed off. Similarly the para banking branches have been operating for so many years, and it was not possible that branches were operating without UPS. Accordingly a sum of ₹ 10,14,477 after allowing depreciation was added to the income of the assessee. Aggrieved assessee went in first appeal. 12.3 CIT(A) found the disallowance comprised of two items -Rs.44,86,784/- as capitalisation of repairs to building and Rs.l0,14,477/- as capitalisation of UPS purchased. AO held that the expenses of ₹ 44,86,784/- relating to work carried out in office was not to be allowed as revenue expenditure, as part of similar work in same building was capitalized. Assessee explained that same vendor carried out work in two different premises and not same premise. While revenue expenditure was claimed in respect of works executed at 'Sahara India T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. 16.1. AO observed that the antivirus software purchased by assessee for ₹ 4,14,398/- had a warranty for 3 years, therefore, this expenditure needs to be spread over a period of 3 years from the date of installation i.e. 21.10.2008. Thus the expose for a period of 2 years and 161 days will be allowable in future assessment year and the proportionate amount was sought to be allowed. Assessee replied that expenditure on antivirus software is a recurring revenue expenditure irrespective of the period of use, therefore^ there was no reason to disallow ₹ 44,05,688/-. AO, however, treated it as deferred revenue expenditure resulting in disallowance of ₹ 44,05,688. 16.2. In first appeal CIT(A) held that the expenditure on any custom-made software for a large business establishment is recurring revenue expenditure for maintenance of information and computing systems. Attrition in custom-made anti-virus software is high and every year upgrades are to be made at equal cost or nominally lesser amounts. The expenditure incurred was held to be allowable revenue in nature. 17. Ld. DR relied on the AO's order. 18. Ld. counsel for the assessee contends that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a registered RNBFC engaged in the collection of deposits of small and medium nature by a vide network of rural agents. Every year a huge volume of deposits is collected by assessee under various schemes during the course of it. In order to verify the new deposits collected during the year, in terms of sec 68 of the Act, AO proceeded to examine them. SA submitted his report alleging that assessee has not cooperated during audit procedure, soft copies i.e. copies of accounting software was not provided. It was further mentioned that due to short time available for audit they had to face lots of difficulties. Report of special auditor in this behalf was considered, various notices were issued on the assessee for whom replies were given. AO also held that assessee was not cooperative in the assessment proceedings, as requisite information was not furnished in the desired soft copy format, identity of depositors and the proof about their genuineness was being not produced; notices served on them remained largely uncomplied with. AO has mentioned these facts in his order in details; they are not reproduced for the sake of brevity. 21.2 Gist of AO's observations is summarized as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depositors with different account numbers under the same scheme thus clubbing of various accounts of a single depositor was not provided. b. PAN of the depositors were not given. c. In large number of cases the addresses are not complete. d. In case of repayments of deposits, account no. are not given. e. Some such illustrative examples are mentioned by AO. iv. PAN of the depositors, complete addresses, mode of collection / repayments in respect of maturity of ₹ 20,000/- above m respect of depositors' ledgers of 3 Gujarat branches namely (i) Kondagaon (ii) Dantewada (iii) Godhra were not provided. v. During the course of special audit, soft copies of the various deposit ledgers, particulars of loans and deposits attached with the tax, audit report were asked but not filed by assessee. Thus, the quantifications of the tax implications under sec 269SS and 269T of the Income Tax Act, 1961 was difficult. 21.3 Assessee contended before SA that deposit ledgers are part of books of account and as per definition of books of account under section 2(12A) of the Income Tax Act it means books of account in printed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 21.7 Though SA accepted that KYC norms prescribed by RBI were followed by assessee, but the names addresses were found incomplete in large no. of cases on test check. Besides, KYC norms do not require any proof regarding the creditworthiness of the depositors, it was unverifiable and doubtful. 21.8 AO then issued 1126 summons on test check basis in relation to 53 branches covered in the Special Audit Report to verify the genuineness, identity and creditworthiness of the depositors on sample basis. Out of these 1126 summons, 832 summons were issued by speed post on new depositors, requiring them to furnish following details/documents :- (1) copy of Identity Proof and address proof (2) date wise detail of Investments in deposits made, if any with Ms Sahara India Financial Corporation Ltd. during F.Y. 2008-09 with mode of deposits, cheque/DD. no. date, amount, name of the Bank, Branch and bank account no. (3) evidence in support of source of such deposits (4) assessment particulars if assessed viz- your PAN, Ward/Circle, (5) copy of IT Return, Balance Sheet, etc. for A.Y. 2009-10. (6) S.No., distinctive No. of certificate in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Dispatch No. Shiv Kumar Dubey Ab137Amarpuri, Paharganj, New Delhi Paharganj 997 Suresh Chander Aq136Amarpuri, Paharganj, New Delhi Paharganj 998 (vii) Out of the 43 replies of summons received, 33 pertained to receipt of deposits and out of the 33 received 31 have accepted that they have deposited the money in cash. Only 2 depositors have confirmed that they have deposited the money by cheque. Similarly out of 10 replies pertaining to repayments, 5 have confirmed that they have received in the money in cash. 21.10. AO noted that in earlier years similar additions were made under section 68 in the case of assessee which has been deleted by the appellate authorities. Assessee's claim that this issue is covered in its favour by earlier orders, was rejected by holding that facts of this year are distinguishable. Comparative data is tabulated by AO for distinction of the facts of year in question and earlier appellate orders in his order. Consequently AO proposed an opportunity to explain why an addition u/s 68 should n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No such proof has been provided. It is not a case where verification was not made or the assessee did not cooperate or on verification transactions were found dubious nature or fake or non-genuine, rather in most of the matters the deposits were found to be verified. (Page 44 of the CIT(A) order) A detailed verification exercise was undertaken on sample basis, results of which have shown that only 197 depositors responded out of 1126 summons issued to depositors of 53 branches. 21.11. Assessee replied on 09.08.2012 gist whereof is as under: (a) It is undisputed fact that the assessee company is a RNBC company governed by the Reserve Bank of India. It is in the business of accepting the deposits from the general public at large by way of different deposit schemes, approved by Reserve Bank of India. Assessee's business is akin to a Banking industry and likewise the deposit account of public at large are opened at the behest of customer. As and when a customer deposits money in any of the scheme an account number is allotted and a deposit account is opened. The sequence of opening of deposit account and allot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39;s accounts indicates that deposits are not genuine ignoring the other record is untenable. It is at the option of the depositor to open more than accounts which the assessee as a RNBFC cannot refuse to open. Assessee's efforts to follow the regulations of a law to this behalf cannot be used as a tool to hold such deposits as non genuine on assumption. 21.12. Apropos non mentioning of PAN, assessee replied that, the depositor base of the assessee comprises of persons of small means in wide spread rural areas, having petty income they cannot be expected to possess PA. Statistically out of 120 crores Indian population about 12 crores PAN Nos. only are allotted by department. Therefore, to say that non-availability of PAN No. is clinching evidence for confirmation of the identity of the depositor is totally baseless. The economy of the country is agriculture based and agriculture income is exempt from income-tax. Assessee is diligently follows KYC norms as issued by the Reserve Bank of India which fact has been verified and certified by the special auditors on checking of 53 branches. They have categorically stated that due compliance of KYC norms has been verified by them i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplete addresses, there are number of cases where proper addresses have not been mentioned in the issued summons. 21.17 A list of 57 persons where postal address mentioned in summons is wrong, therefore, no adverse inferences is called for. 21.18 As regards the balance, in most of the cases PIN code no. has not been mentioned in case of registered letters or speed post letters the post office does not accept letters without having PIN code. Postal authorities on finding that the PIN code is not traceable, may have returned back the letters thus they could not reach the depositors. 21.19 As regards 78 persons summoned (correct figure 71 persons) which have been returned on the ground person was not present there at the time of delivery of the letter, their identity and genuineness by itself stands proved. This is so because the person was existing and if at the given time, depositor is not present for the postman no adverse inference is called for. 21.20. Similar is the position with reference to 5 depositors (correct figure 6 persons) who have refused to accept the summon. Once a persons has refused to accept the summon, his identity and genuineness stands impliedly est ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The depositors may change their address or they might have left their places because of which the summons which were issued in respect of deposits which were started in the F.Y 2001-02 onwards may not have been received by them. 21.28 The maturity vouchers/documents also contain KYC document of the respective depositors to whom repayment has been made during the year wherein his identity/address etc. as on the date of taking of the maturity proceeds stand duly mentioned and the depositor should be traceable with reference thereto. 21.29 Due to some adverse publicity, Reserve bank of India put assessee under strict surveillance and by an order imposed directions, during the relevant previous year, to close the business of the assessee. Dispute went to Hon'ble Supreme Court and, thereafter, the business was again started and no new account has been opened after 30.06.2010 after the receipt of the RBI order to close the existing business by 2015. After 30.06.2011 no further installments/renewals are taken and assessee is only servicing maturity of the deposits. 21.30 Further the deposits in question were obtained by the assessee through the services of its main agent in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hus a party in delaying the process of verification. 21.34 There is no harm in helping the depositors who approached the assessee to give them in understanding the issue and comply with summons. In order to promote the process of verification they were supplied with the requisite information like Fax number, address and proforma for furnishing requisite information. It was beneficial for verification as depositors feel scared by income tax notices and approached assessee for guidance in compliance. There is no reason to misconceive assessees good efforts into adverse inferences. 21.35 Assessee claimed that there were no distinguishing features in the observations with reference to the facts of earlier years. Introduction of KYC norms, rather helped everybody in the system, as proof of identity of the depositors became stronger. Consequently by KYC norms, genuineness of deposit and its repayment got automatically strengthened. The introduction of KYC norms and the deposits being under RBI guidelines are akin to banks, this clear proposition of law strengthens the assessee case on these aspects. After introduction of KYC norms, there should not be any doubt left in relation to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs is similar in all material terms for all these years consequently the findings of earlier appellate orders accepting deposits u/s 68 are applicable and binding on assessed case. 21.39 Without prejudice to these arguments, assessee raised a legal plea that the deposits mobilized by it are not in the nature of unexplained credits to which the provisions of section 68 of the Income Tax Act are applicable, it section 68 reads as under: Where any sum is 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 Assessing Officer, satisfactory, the sum so credited may be charged to Income Tax as the income of the assessee of that previous year. 21.40 Section postulates two important factors for consideration: (a) That the addition in respect of unexplained credits can only be made qua each deposit and not on a generalized basis or pro rata basis on the whole amount of deposit. (b) AO is vested with a judicious discretion to hold any deposit as explained or otherwise which is evident by use of words ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appointed SA contending that there are complexities in accounts. Assessee provided the information not in the particular software format but furnished hard copies of information along with explanation in support of its legal contentions. AO in past also conducted a sample checks, and held a part ranging from 15% to 100% of the deposits as unexplained credits. Appellate authorities have consistently rejected this type of estimated, generalization and ad hoc disallowance by holding that it is not permissible u/s 68. (ii) The dispute is same as earlier years, as against earlier 15-100%, estimate disallowance, now 35% are held to be unexplained. In all earlier years this type of estimated additions by way of assessment, reassessment and revisions order u/s 263 for AY 1994-95, have been deleted and decided in assessee's favour by CIT(A) or the ITAT. The parity of facts, circumstances and issue amongst the current and earlier years is tabulated by ld. CIT(A) as under: Sl. Observations of AO Findings during appeal proceedings 1 Books of accounts as defined u/s 2(12A)/2(22A) of the Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (viii) cases had already matured and repaid by the appellant. 4. Unsatisfactory replies- (i) details as required not furnished; (i) queries were complex and in English, most depositors are people of small means and would not know the language; (ii) replies received by fax though no such no. furnished; (ii) depositors approached appellant's branches who facilitated responses to summons; (iii) same language, font, drafting used, even from different places; (iii) appellant's branches facilitated responses when approached by the depositors, one branch office may cover several places; (iv) replies received after 5-10 days from the date given in summons; (iv) has no significance since replies were in fact received; (v) request for adjournment; (v) it is a right of any person summoned, at least some response was received and cannot held against the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ignature; (g) photo not present - no requirement for photo, KYC document present. 21.45 Thus it has been repeatedly held that the deposits collected by assessee under various RBI regulated schemes, without there being any adverse observations of RBI, cannot be held as unexplained credits u/s 68. It is held that on principle of consistency, bringing finality of repetitive issues in income tax proceedings and principles of judicial discipline the assessee deserved to succeed. Reliance was placed on Hon'ble Supreme Court in UOI v. Kamlakshi Finance Corp. Ltd. [AIR 1992 SC 711]; Khalid Automobiles v. Union of India [4 SCC (Suppl.) 653] Pannalal Binjraj v. Union of India [1957] 31 ITR 565 (SC); 21.46 In CIT v. Simon Carves Ltd. (1976) 105 ITR 212 (SC), the Apex Court held that: The nixing authorities exercise quasi-judicial powers and in doing so they must act in a fair and not a partisan manner. Although it is part of their duty to ensure that no tax which is legitimately due front the assessee should remain unrecovered, they must also at the same time not act in a manner as might indicate that sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , no adverse inference can be drawn against tie appellant if the letters were served, or could not be served due to natural (death) or socioeconomic reasons. 21.48 Thus CIT(A) held that assessee's case was favourably covered by series of earlier decisions which are on same facts in assessees own case. Ingredients of sec. 68 about identity, genuineness and creditworthiness were to be applied on the basis of yard stick laid down by various judicial precedents in respect of banking industry. Assessee being registered RNBFC fell in the category of banking industry and the nature of primary onus lying on assessee was akin to banking industry. Compliance with RBI regulations and KYC norms was reasonable discharge of the assessees onus u/s 68. The allegation about non compliance of summons has been wrongly inferred by AO. There is no basis to hold that assessee was instigating depositor to be non cooperative. Compliance of summons cannot be enforced by assessee. It was also upheld that sec. 68 cannot be applied in estimated, ad hoc or generalized manner. In order to make legally sustainable addition u/s 68 each specific deposit i.e. cash credit was to be identified as unexplained. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ash books, account-books and other books, whether kept in the written form or as-print-outs of data stored in a floppy, disc, tape or any other form of electro-magnetic data storage device; (b ) Further, as per section 2(22AA) of the Act, the documents are defined as under:- document includes an electronic record as defined in clause (t) of sub-section (1) of section 2 of the Information Technology Act, 2000 (21 of 2000); (c ) As regards definition of electronic record under the Information Technology Act, 2000, as per section 2(1)(t) the electronic record has been defined as under:- electronic record means data, record or data generated, image or sound stored, received or sent in an electronic form or micro film or computer generated micro fiche; 22.4 A conjoint reading of above provisions and provisions of clause (iii) of sub-section (1) of section 142 of the IT Act 1961, the Assessing Officer held that it was within his Jurisdiction to call for: (ii) to produce, or cause to be produced, such accounts or documents as the Assessing Officer may require, or (iii) to furnish in writing and verified in the prescribed ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ddresses are incomplete, the special auditor had also pointed out in the report that many deposits have been accepted during the year which are appearing in the name of the same person. Provisions of sec. 68 are applicable to recurring deposit also. To verify the genuineness, identity and creditworthiness of the depositors on sample basis from available information total of 1126 summons were issued by speed post to various of audited 53 branches. 22.9 Out of 1126 summons only 197 depositors replied and out of which 154 has asked for adjournment, 346 summons returned back due to incomplete address, 78 summons returned as the person is not present there, 5 summons have been refused to be accepted, 2 summons have been issued to person who have died, 3 summons have not been accepted as there are many persons with the same name at the given address, 21 summons returned as the depositor has left the available address having shifted and the remaining 474 summons remained pending reply. 22.10 The assessee has not questioned the sample size but at many places tried to point out that there was no need of drawing out this sample as in its earlier year assessments before the Income Tax A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banking channels and the same has also been confirmed by the depositors who have responded, i.e. Out of 48 depositors who have responded and confirmed the deposits, 46 have stated that the deposits have been made in cash. (c) Creditworthiness of the depositors was held as not established since no documentary evidence was produced regarding proof of income or wealth of the depositors in most of the cases. 22.13 AO was of the view that onus lies on die assessee to explain the cash credits in terms of sec. 68 and the burden can only be discharged by furnishing the requisite details, documents, explanations, clarification etc. including the personal deposition of the lender before the assessing officer and the assessee has failed to discharge the said burden. Therefore in these facts and circumstances, the three required tests i.e. identity, genuinity and creditworthiness of the depositor are not satisfied in case of die assessee. 22.14 The method of test checking is well-recognized and is also accepted by the Institute of Chartered Accountants. 22.15 The entire explanation of the assessee revolves around the KYC norms. However on random test check, it was found to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tire universe of deposits considering the sheer volume of data/information and the peculiar facts of the case. 22.17 Ld DR contends that in view of the above facts, circumstances and arguments, it is clear that the assessee has failed to discharge the onus which squarely lied on it to prove Identity, Creditworthiness and Genuineness of the deposits in terms of sec. 68. Since AO worked under constraints mentioned by him and as the assessee failed to discharge its onus with respect to deposits, same pattern of addition as made in A.Y.s 1999-2000, 2000-20001, 2001-2002, 2002-2003, 2003-2004 A.Y. 2004-05 was adopted. Keeping into mind the business of the assessee, all related facts, the outcome of sample verification and the previous years pattern AO was justified in estimating the quantum of addition @ 35% of the net collection of deposits during the year. 22.18 CIT(A) held the assessee's case favourable, covered by earlier orders in appellant's own case, overlooking the distinguishing facts tabulated by Assessing Officer. Support is drawn by CIT(A) from Supreme Court decision in UOI v. Kamlakshi Finance Corp. Ltd. AIR 1992 SC 711 and Khalid Automobiles v. UOI [4 SCC ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tors about any non cooperation, not providing requisite records/information or deliberate delay on the part of foe assessee-company. (b) In assessment year 1996-97, the AO refused to accept the approach adopted by the auditors to examine the deposits on sample test check basis, whereas in this year no such situation exists. In fact, the AO himself has chosen to make verification of tile genuineness and correctness of the deposits on test check basis and accordingly notices were issued only to 1118 depositors. In the year under consideration, it is the assessee-company which is objecting to the sample size picked up by the special auditor. (c) In the assessment year 1996-97, the CIT(A) set aside the issue of deposits and directed the AO to conduct inquiries in respect of 100 branches and thereafter take a reasonable view of the matter. Whereas In this year learned CIT(A) has summarily disposed of the matter without affording any such opportunity to the AO to make further inquiries nor did he make any attempt on his own part. (d) In the assessment year 1996-97, the assessee-company itself was insisting that the special auditors were fully justified in making v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e CIT(A). 22.23 Ld. CIT(DR) contends that there is no merit in the observations of the learned CIT(A) and claim of the lessee that the issue of cash credits is covered in its favour by the order of the ITAT Lucknow in A.Y. 1996-97 is not correct. Rather some findings of the ITAT in A.Y. 1996-97 support the AO's approach, as: a. In Para 13 of the order it has been held that - Considering the circumstances under which the Special Audit was done and also the time-limit for completing the special audit and in view of the huge material in the shape of ledger and owner account books, the auditors could not have been excepted to do more than what has been done i.e. if the audit work was to be done by examination and scrutiny of all the books of account of 1100 branches of the sister concern and all the, books of the assessee. then such exercise could have consumed not only several months but several years. Hence, the only proper method was to make sample scrutiny by taking up some of the Branches and some of the documents. The method of test checking is well-recognized and is also accepted by the Institute of Chartered Accounts. Even the A.O. has adopted the same course. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umerated various difficulties faced due to non-furnishing of information in soft copies during the special audit as well assessment proceedings. Constrained by these difficulties AO was left with no alternative but to adopt the method of estimation. In view of the these facts also the cited judgments are not applicable to the instant case. 22.28 The decision of CIT v. Citizen Urban Co-op Bank Ltd. 336 ITR 62 (P H}, is based on the facts that assessee bank cooperated in discharging its primary onus qua die identity of the members of the society and their creditworthiness. Similarly in the case of CIT v. Pragati Co-operative Bank Ltd. 278 ITR 170 (Guj) also, facts are different as assessee bank was enjoying tax exemption u/s 80P and therefore, the Hon'ble Court held that there could exist no reason for the assessee bank to indulge in any activity which would yield undisclosed income. 22.29 In the cases of DCIT v. Dhanlakshmi Bank Ltd. 76 TTJ 439 facte are clearly distinguishable. The issue in question pertained to FDRs where the depositors do not remain in regular touch with the Bank besides branch manager extended necessary cooperation to AO regarding identity of the FDR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o argue that assessee is required to comply with conditions laid down u/s 68 on KYC and other parameters, otherwise its RNBC business may be finished. When the provisions of law are clear and unambiguous the courts have to give effect to such provisions irrespective of difficulties and hardships which may be caused to an assessee. Reliance is placed on Tarulata Shyam and others (108 ITR 345) (SC) Patil Vijay Kumar and others (151 ITR 48) (Kar.). It is pleaded that the order of CIT(A) may be reversed. Ld. DR has filed written submissions which are considered. 23. In reply assessee's counsel shri Ajay Vohra contends that during the year under consideration, an amount of ₹ 5300 crore was mobilized by, the assessee RNBC from several depositors under various sehemes floated with the approval of RBI. The assessing officer, however, on estimate basis made addition of 35% of the deposits during the year, holding it to be a legally permissible and reasonable estimate alleging that assessee has failed to discharge its primary onus in terms of section 68. Since AY 1994-95 the issue of discharging of primary onus in terms of sec. 68 has been raging between assessee and departmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.3 Against first round order of CIT(A) for AY 1996-97 in revenue appeal, ITAT by order dated 26.05.2003 from page 13 onwards the Tribunal made various observations gist thereof is as follows:- i. The A. O. has not considered the nature of the business of the assessee while making addition u/s 68, the assessee is a non-banking financial institution, which was recognized by the Reserve Bank of India which was in force. ii. It had engaged the services so M/s sahaha India as its agent. Assessee-company is akin to a banking and the deposits received by it are not in nature of taking of any loan or deposit as in a routine business. iii. If the total deposits mobilized during the year were found to be unexplained credits u/s 68, there was no justification to allow reimbursement of expenses at 3% of the deposits mobilized. Secondly, the deposits made were not the fresh deposits during this year, but the deposits were coming from the earlier years and in earlier years, a part of the deposits were treated as genuine. Thus, if the action of the A. O. is upheld, it shall lead to absurdity, inasmuch as- the deposits which have been treated to be genuine in earlier years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stinguishable on facts, vii. The primary burden of proof lies on the assessee to prove the identity of the depositors etc. but the nature and volume of the business of the assessee has to be duly considered. In the case of the assessee, even verification from some of the depositors was filed, which was not doubted by Department and if the verification is filed in respect of some depositors and particular transactions were found to be genuine, then general addition u/s 68 cannot be justified. ix. ITAT placed reliance on the cases of CIT v. Smt. P. K. Noorjehan 237 ITR 570 (SC) CIT v. Roohini Builders, 256 ITR 360 (Guj), in later case it has been held that unsatisfactoryness of the explanation of the assessee does not mean and need not automatically result in deeming the amount credited in the books as income of the assessee. The Special Leave Petition filed by the Revenue was also dismissed. Thus, the provisions of Section 68 cannot be applied without having regard to the nature of deposits etc. In the case of Dy. CIT v. Dhanlaxmi Bank Limited, 76 TTJ Cochin 439, the Cochin Bench of ITAT, while considering the scope of burden of proof in the case of cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecial auditor. Looking at the space constraint of the special auditor, as an initial instalment, deposit ledgers for 69 branches were furnished. It was further agreed that after the verification/test check of available 69 branches is completed, remaining record of branches, printouts etc. will be made available as desired by the auditor. The special auditor, however, out of 69 branches could complete verification of 53 branches only. No further requisition from die special auditor for producing further record of any other branch was received by assessee, in such eventuality it cannot be held that assessee was non-cooperative for branches. It is a travesty of justice that despite their being no further requisition from auditors for the reasons best known to them, it has been unjustifiably held that assessee is adamant and non-cooperative. The facts and arguments will unfold that assesses in reasonable terms discharged its primary onus. The allegations are generalized assumptions, presumptions, surmises and to paint a wrong and prejudiced image of the assessee. Re : Non-production of soft copies of books of account: 23.7 As per section 2(12A) of the Act, 'books of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itors were not able to verify- what was in their possession and on the other hand the assessee has been blamed for non-supply of information. II. Re: Non-adherence to KYC norms 23.9 The assessing officer on test check of the deposits held that the assessee failed to adhere to the KYC norms laid down by the RBI. This is in direct contradiction to the categorical observations of Special Auditor appointed by him. SA after carrying out verification of the deposit accounts, accepted that the assessee had fully complied with the KYC norms as mandated by RBI which is writ large on the Special Auditor's report observing as under: On test check basis, we have verified the KYC norms for the deposits taken during the year under consideration and apart from minor address corrections; we have found the same in order Thus the learned assessing officer may not draw any adverse inference on the same. 23.10 Thus. the finding of the assessing officer that the assessee had not complied with KYC norms is based on ignoring the audit report, record and is an attempt to blow minor deficiencies out of proportion., III. Summons issued by the assessing officer 23.11 Du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditworthiness of the said depositor needs to be proved by the assessee to establish that the creditor was having sufficient source wherefrom credit has been giver. However, the assessee is not required to prove source of source. (iv) The genuineness of the transaction shall, prima facie, stand established where the amount has been transmitted through banking or other indisputable channels. (v) Once identity of the creditor, genuineness of transaction and creditworthiness of the creditor is prima facie established, the burden shifts to the Revenue. (vi) The Revenue ,then, in order to invoke the provisions of section 68 of the Act has to bring on record further, evidence to controvert the evidence furnished by the assesses. 23.14 Thus it is settled law that once the primary onus is discharged and there is nothing to effectively for rebuttal with the AO, no addition can be made under section 68. In view of this legal position, it is imperative to analyze whether the assessee has, discharged its primary burden under section 68 of the Act or not. The peculiar business model of the assessee's RNBFC for acceptance of deposits, is as under: Procedure fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. 2. Advice for maturity payment is issued by Registered Office to Branch Office. 3. The informant! of advice received at branch is given by agent to depositor. 4. Depositor surrenders pass book, submits the documents required as per KYC norms and receives maturity. III. In case of daily scheme: At the stage of acceptance of deposits a. Agent approaches the depositors. b. Gets account opening form filled and collects amount of first instalment. c. Submits the account opening form and amount of first instalment at branch. d. Branch issues receipt of money so collected and pass book. e. Thereafter, account is allotted to collector of that area who collects instalments on daily collection sheet, deposits the same at the branch and branch issues a collector receipt to collector for total amount deposited by him. f. At the end of the fortnight, branch issues a consolidated depository receipt to depositor for total deposit received in that fortnight and also updates pass book of depositor. g. Mtial commission calculated after receiving 25 instalments and credited in Field worker ledger. h. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice issued by the registered office of the assessee-company for making final payment due to the depositor (refer pg 54 of PB filed on 01.10.2013). (h) Copy of the relevant extracts of the bank statement of assessee-company showing the payment made to the depositor (refer pg 56 of PB filed on 01.10.2013). (i) Copy of the TDS certificate issued to the depositor in respect of the tax deducted at source from the payment of interest, wherever applicable (refer pg 77-80 of PB filed on 01.10.2013). (j) Copy of the statement showing commission due to the agent on the above depositor's account (refer pg 57 of PB filed on 01.10.2013). (k) Copy of the TDS certificate issued by assessee-company to the above commission agent showing that tax was duly deducted on the amount paid to collector(s) as commission (refer pg 58-66 of PB filed on 01.10.2013). 23.16 It is contended that before accepting any particular deposit from the depositor, the assessee has to mandatorily follow several important steps. Assessee being a registered RNBFC, several checks and controls have been put in place in the system. They by necessary implication are inbuilt in the above pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tine and periodic inspection of the books of account and records maintained by the assessee-company and made no adverse comments and/or reported any discrepancy, vis-a-vis the genuineness of the activity of collection and repayment of deposits. 23.20 In several cases, depositors filed Form 15G/15H requiring the assessee for non-deduction of tax at source from the interest due. The assessee has duly submitted relevant returns as mandated in section 197 A of the Act read with Rule 29C of the Income-tax Rules, 1962, on monthly basis to the concerned CIT. There has never been any adverse remarks by the department about the correctness of such prescribed TDS related returns. 23.21 In many cases, the depositors had indicated their PAN in the application form and tax was deducted at source out of interest paid to some of the depositors wherever interest paid exceeded the minimum amount as prescribed in section 194A of the Act. In cases where repayment of deposit along with interest exceeded ₹ 20,000/-, the payment was made by accounts payee cheques except in certain unavoidable circumstances, which demonstrates that the identity of the depositors had been established. Evide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s are relied: ACIT v. Citizen Urban Co-op Bank Ltd.:120 ITD 513 (Amritsar Tribunal) 23.25 The relevant extracts of the Tribunal decision is as under: 26. We have heard the parties and have perused the material on record. The facts are not in dispute. The issue is as to whether the provision of section 68 of the Act are applicable and whether it has rightly been applied to the assessee-bank The learned CIT(A), while deleting the addition made, has observed that the assessee's case was subject to rules laid down under the Banking Regulation Act, as also the regulations of the RBI; that all the banking operations are under audit and report in this regard goes to the RBI; that, therefore, the case of the assessee-bank could not be put at par with the cases of other persons, since the bank does not have any control in respect of the amounts credited in its accounts; that the bank is to maintain accounts of its customers, which accounts can be operated only by those customers and the bank does not have any control over the. amounts in the accounts. While holding in favour the assessee, the learned CIT(A) has duly taken into consideration the provisions under section 68 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the bank from other ordinary assessees. Therefore, the provisions of section 68 of the Act are not applicable to the bank as they are in the cases of the other assessees. Still further, under section 35 of the Banking Regulation Act, 1949, a banking company is subject to periodical inspections and audit by the RBI and in case any default is found, the bank is liable for heavy monetary penalty, besides cancellation of its license. This is not the case with other assessees. A bank, under the RBI guidelines, in order to maintain confidentiality in respect of the information collected by a bank relating to its customers, such information is not to be divulged to outsiders. There is no such obligation with other assessees. 28. Despite the RBI guidelines providing maintenance of secrecy with regard to the information regarding the customers of the bank, the assessee furnished to the Assessing Officer whatever information it had in its possession. The addresses of the accountholders, as mentioned in the bank ledgers, as also the addresses of the introducers of the accounts were funished to the. Assessing Officer. Now if the addresses of the customers of the assessee-bank were fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld discharge the onus which lay on the assessee considering the fact that deposits were made by third parties, viz., customers of the bank. It is nobody's case that the deposits were made either by the directors of the assessee-bank or any of the relatives of the directors. As to what would be the scope of the inquiry and the degree of proof that would be required in such circumstances, is not required to be dealt with in the fact situation of the present case. The opinion expressed by the Patna High Court has been impliedly approved by the Apex Court in the case of CIT v. Orissa Corporation (P.) Ltd. '[1986] 159 ITR 782 (SC) when it is stated that, once the assessee had given the names and addresses of the alleged creditors and it was in the knowledge of the Revenue that the said creditors were income-tax assessees, if the Revenue did not make any effort to pursue the so-called alleged creditors, the assessee could not do anything further and the assessee had discharged the burden that lay on the assessee. It was for the Revenue to examine the source of 'income of the alleged creditors to find out their creditworthiness. 16. The finding by the Tribunal that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctly paid the deposits directly to the depositor. In the present case the assessee Society is subjected to rules laid down by multi-state Co-operative society Act and Rules. The society books of account are subjected to audit by the regulatory bodies even year. Therefore, the assessee cannot be equated with other normal business concerns. Since the assessee has no control over the deposits as it is the property- of the depositors and the Society required to pay on demand. 'The customers usually go the bank for making deposit to earn better interest. The customers will go the banks where they get more interest. There is no dispute in these assessment years the assessee has been carrying out the Banking business. Whether or not the business is carried out with or without permission, it is bound by the Banking Regulations Act, 1949. The deposits and loans are just buying and sailing activity for the assessee. The amounts maintained at the customers account is not in the control of the society as it is required to pay the deposits on demand. In the present case what is required to be done before accepting the deposit is to take proper proof of address, identity, photograph and intr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome under section 68 of the Act, the Revenue had to discharge further burden of proving that the amount found credited in the books of the assessee actually emanated from the coffers of the assessee. In the absence of the Department leading evidence to prove the aforesaid, the onus that shifted to Revenue could not be considered to have been discharged so as to justify the addition under section 68 of the Act. - It is further pleaded that ingredients of sec 68 i.e. identity, genuineness and creditworthiness have been applied by courts depending on the nature of business, regulatory norms and practical aspects. 23.29. Hon'ble Delhi High Court in the case of CIT v. Divine Leasing Finance Ltd. 299 ITR 268 laid down various parameters for discharge of primary onus: 16. In this analysis, a distillation of the precedents yields the following propositions of law in the context of section 68 of the Income-tax Act. The assessee has to prima facie prove (1) the identity of the creditor/subscriber; (2) the genuineness of the transaction, namely: whether it has been transmitted through banking or other indisputable channels; (3) the creditworthiness or financial stren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the eyes of law. This proposition is supported by the decision of the Hor'ble Delhi High Court in the case of CIT v. Kinetic Capital Finance Ltd, 354 ITR 296. (e) Reliance is also placed on the decision of Hon'ble ITAT in appellant own case of A.Y. 1996-97 dated 22.07.2005 wherein similar decision of CIT(A) deleting addition u/s 68 on account of unexplained deposit, has been upheld. 23.31 Case, laws cited by ld. DR are distinguished and it is contended that Nova promotions is a case of share capital of private company and not, RNBFC. Besides, Lovely Exports (SC) (supra) has been impliedly followed there. 24. We have heard the rival contentions and perused the material available on record, and proceed to decide the issues in following order: (i) Whether assessed filing of hard Copies or the printouts of the record asked to be produced in soft copy is sufficient compliance to the requirements of SA and AO's notices under the Income Tax Act ? - In view of the earlier judgment in the case of assessee for AYs 1999-2000 to 2002-03 ITAT while deleting the penalty u/s 271E and D, ITAT has held that the production of printouts of the computer rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lusions and adverse inference drawn by AO on this issue was not justified. (iv) Whether facts and circumstances or assesses case are similar to earlier years and ITAT judgments in assesses own case or to be followed? -Assessee has a long history of litigation with department on various issues including sec 68, the same is tabled above. AO has made a chart contending that there are distinguishing features in earlier years. CIT(A) has referred to all these issues and by objective findings in a tabulated chart held that facts and circumstances of the earlier and currents years are by and large the same. Assessee continues to RNBFC under the same regulatory regime of RBL business model and the pattern of collecting deposits remain practically same. Rather in this year the Board of Directors and auditors were appointed as suggested by the RBI Thus assessee's banking business affairs were under RBI watch with a revamped Board and auditors as recommended and approved by RBI. In the entirety of facts and circumstances we have no hesitation to hold that facts and circumstances of this year are on reasonable parity with earlier years. This being so we have to respectfully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iterate. It has not been disputed that possible deficiencies in KYC compliance has been noted by the Board and as suggested by RBI, lien has been put on such accounts and not to repay unless these KYC deficiencies are made good. Under these facts and circumstances expecting the substantial rural and agro based citizenry to possess PAN card and drawing adverse-inference therefrom is not justified in these facts and circumstances. We have already held that earlier ITAT orders in assesses own case are to be respectfully followed. In view thereof it is to be held that assessee's Business is akin to banking business and the discharge of primary onus by the assess has to be on the same lines that of banking industry. A catena of judgments has been already referred in this behalf. In consideration of overall facts and circumstances, history of earlier litigation and ITAT judgment in assessee's own case, we hold that assessee discharged its primary onus in terns of sec 68. 24.1 Apropos assessee's legal contention that fiction created by deeming provisions of sec 68 contemplate any addition at all refers to a specific deposit and there is no provision for making estimated ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing but change in calculation of an accounting estimate for which there was no requirement of making a disclosure in the notes to accounts. Schedule 15 clause (b) of the financial statements were significant policies are mentioned refers to allowable accounting estimates under accepted accounting policies. Deposit schemes up to 31st March 2008, were mainly of recurring nature and the provision of accrued interest liability thereon was estimated earlier at the minimum interest rate payable on maturity of a fully compliant deposit. Fully compliant of deposits were eligible for some rebates, However many of the deposits were not fully complied by the depositors and rate of interest payability was decided at the time of repayment. Additional interest, if any payable, for full maturity account was accounted in the year of maturity. ii. RBI's order on June 04, 2008, prohibiting assessee from accepting any deposit from public was challenged by it; thereafter RBI issued another order on 17th June, 2008 directing company to wind up its deposit receiving activity by 31st March, 2015. RBI further put conditions that the company will appoint auditors as well as independent director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting policy in the name of behavioural pattern of the deposits. Even if it is held as a change in the accounting estimate then also as per the CBDT notification mentioned above the assessee was required to disclose all material facts impacting financial statements, which it has not done. 25.5 Assessee's contention that the interest provision creates a revenue neutral position was rejected holding each assessment year to be a separate and independent from other years and correct income of each year was to be calculated on the similar lines, details of the same are tabulated by AO in his order. It was held that because of the change in accounting policy the assessee has excessively provided ₹ 467,96,79,775/- (being 3% of average of opening and closing deposits). Amount was disallowed as change in Mercantile System of accounting and not accounting estimates. It was farther held that it is not bona fide as it was adopted to evade tax. 25.6 In first appeal ld. CIT(A) referred to historical data with regard to deposits raised and repaid, interest provided and paid as under: TABLE OF DEPOSITS INTEREST PAID FINANCIAL Year 2004-05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AVG INTT 393.71 615.96 893.12 1085.34 1263.19 AVG INTT/DEP % 4.03 4.76 5.60 6.39 8.10 INTT DISALLOWED 467.97 LEGEND OB OPENING BALANCE COLL COLLECTIONS DURING THE YEAR PROV PROVISION MADE DURING THE YEAR PAID AMOUNT ACTUALLY PAID/REPAID DURING THE YEAR CB CLOSING BALANCE AVG AVERAGE CIT(A) after analysing this data observed that there is wide variation in the interest provided as a component of net deposits from year to year. It ranged from 4.81% to a high of 11.6% in FYs 2007-08 and 2008-09. In this variable scenario, a more accurate method to calculate the real income should be made to account for both interest income and exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 (SC)). It was held in Southern Technologies Ltd. v DCIT [2010] 320 ITR 577 (SC) that real income has to be charged to tax and method of accounting or RBI guidelines/directives will have no consequence on the chargeability of income under the Income Tax Act. 25.9 CBDT Notification No. SO 69(E), dated 25-1-1996 is clear in paragraph-11, that any change m the accounting estimate has also to be disclosed and quantified in the final accounts. ITAT, Delhi has upheld its view, that the interest expenditure provided then in its accounts was correct (ITAT order dated 12.10.2003 in ITA Nos.667/Luck/2002 for AY 1994-95 lO1/Luck/2000 for AY 1990-91). About the correctness of assessee earlier accounting estimate of interest provision or the one recommended by RBI auditors, CIT(A) observed that both estimates cannot be correct at the same tune. Assessee may have provided for lower interest to project better financial health and the RBI and its auditor may project higher interest expenditure estimates to arrive at a more conservative estimate of financial health to protect depositor interests. 25.10 CIT(A) though held that it was change of accounting estimate, nevertheless held that int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s that the taxpayer is free to adopt either cash system of accounting or mercantile system of accounting and the Department is bound to accept the assessee's choice of method regularly employed and AO is permitted to intervene in case it is found that the income, profits or gains cannot be arrived at by the change employed by the assessee. Entitlement to a particular deduction will depend on the provision of law relating thereto and not on assessees view. Existence or absence of entries in the books of accounts cannot be decisive; it is not only the right but the duty of the AO to decide whether or not the books disclose true state of accounts and correct income. 26.3 It emerges that the system being followed by the assessee up to financial year 2007-08 was more accurate and realistic as the same was followed after taking into consideration the behavioural pattern of the depositors during the entire period of deposits in question. It is a matter of common knowledge that the reconciliation of accounts is more realistic and correct when the same is effected at the time of final settlement of accounts. Thus, providing interest on quarterly basis will only add to the confusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company by preparing two sets of balance sheet, one as per established practice and other by making provisioning of interest as advised by the statutory auditors to facilitate an appropriate decision could be taken in the next Audit Committee meeting. However, there is no evidence to suggest that such a note was prepared or placed before the Audit Committee. It is equally important to note that the statutory auditors M/S Kalyaniwalla Mistry, were not present in the said meeting. 26.6 The document sought to be filed as additional evidence is extract of the minutes of the meeting of Audit Committee held on 3rd February, 2009 at the same venue. It is mentioned that after discussions it was decided that for the financial year 2008-09 and onwards, interest accrual on outstanding deposit accounts shall be made account wise depending upon the status of accounts as on the date of accrual of interest for the purpose of computation of ALD of the company at the each quarter commencing from the quarter ending on 31st March, 2009. It was further provided that the approval of the Board of Directors of the company with regard to change in method of computation of accrual of interest on d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edarnath Jute Mfg. Co. Ltd. v. CIT; - CIT v. British Paint's India Ltd. - CIT v. McMillan Co.; - Southern Technologies Ltd. v. Deputy CIT 26.11 Assessee has to close its business relating to obtaining of deposits latest by 31.03.2015 as mandated by the RBI and this has already started reflecting in decreasing balance of ALD. In a case where the winding up of operations is certain in near future , it will be impossible to ensure that the change -brought in by the assessee would be followed regularly. Therefore, viewed from any angle, the action of the AO is fully justified and deserves to be sustained. 27. Ld. Counsel for the assessee en the other rand contends that appellant accepts deposits from public under various schemes on which interest is payable. The rate of interest on such deposits is contingent upon its regularity. If the account is regular, the interest is paid at the agreed regular rate; in case of default, interest is payable at the agreed reduced rates. 27.1 Up to immediately preceding year assessment year 2208-09, the appellant was providing for interest on a conservative basis, i.e., at the lowest rate assuming that the accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest on deposits of ₹ 1207,57,86321/-. 27.4 The assessing officer not accepting the change in the basis of such provision disallowed the interest provided in the books of account on the ground that the interest provision was excessive. The AO held that interest provision @ 3% of the average of opening and closing deposits was excessive and thus, disallowed a sum of ₹ 467,96,79,775/- ( 3% of ₹ 15598,93,25,833/- being average deposit). 27.5 On appeal, the CIT(A), while accepting that there was no change in the accounting policy i.e. the same remained to be mercantile system, observed that the change in the rate of interest adopted for provisioning, was simply a change in accounting estimate only. Further, the CIT(A) held that IT Act entitles the appellant to change the method of accounting, provided the provision made earlier was not accurate, change was bona fide and it was further required to be consistently and regularly followed. Despite giving these categorical favourable findings ld. CIT(A), mistakenly held that the interest provision made during the relevant previous year was excessive, impliedly adopting unpermissible hybrid system of accounting. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... regular method the question of his bona fides have little relevance. Only in the year where a change in the method of accounting is introduced for the first time, it is to be examined by the Revenue authorities whether the change introduced is meant to be regularly followed or not. It appears to us that it is in this context only that the 'expression good faith and bona fide occur in the observations in the earlier judgment noted earlier. In our opinion, where it is found that an assessee has employed (changed) his regular method of accounting by another recognised method and has followed the latter method regularly, thereafter, it is not open to the revenue authorities to go into the question of bona fides of the introduction and continuance of the change. For the above reasons the assessee succeeds in this reference. The question referred to us are both answered in the negative and in favour of the assessee. In the facts and circumstances, there will be no order as to costs. 27.7 The method of provisioning for interest hitherto followed by the appellant was not found to be rational by renominated auditors and Board at the recommendations of RBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion as per the method of accounting followed by that assessee, in terms of sub-section (1) of section 145 of the Act. Consequently the changed method of estimate for interest is in accordance with (a) concept of prudence (b) reflects true and fair value of the accounts, (c) has been fadopted on the suggestion of the statutory auditors nominated by RBI, (d) is a more scientific change and a rational method of accounting, (e) the change is bona fide. 27.11 Considering that the changed method for providing for interest has been consistently followed in all subsequent years, it is contended by the assessee that the change in the rate of estimate deserves to be accepted. Consequently the provision of interest on the basis of this change is to be allowed deduction in its totality. 27.12 Adverting to arguments of ld. CIT DR that the change in the method of accounting should not be accepted in view of the following: (a) The facts on record do not support the bona fides of the appellant in effecting the change inasmuch as (i) there is no evidence to suggest that RBI or its nominated directors or the statutory auditors issued any directions to the appellant company for adopti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmended and necessary change in the estimate of accounting for interest on deposits, including the note prepared by Shri R. S. Dubey, as directed by the Board in the meeting held on 06.12.2008. 27.15 In any case, it is be independently evaluated, whether tine earlier method followed by the appellant which admittedly resulted in under provisioning of interest, was more scientific/rational vis-a-vis the changed method adopted by the assessee in this year. It takes into account the behavioural pattern up to the date of provisioning of interest. A dispassionate analysis will yield to the conclusion that the changed method is in line with the accrual method of accounting inasmuch as the same observes the principle of prudence; reflects true and fair value of the accounts of the appellant; is a more scientific and rational method of provisioning for interest. The gamut of background facts corroborate that the change is bona fide and the interest deserves to be allowed fully. 27.16. Even though, on RBI direction the appellant has to wind up accepting deposits by 31.03.2015, even then the changed method would be followed by the appellant for seven years - which is a long period of ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in this regard is also placed on the decision of the Hon'ble Delhi High Court in the case of CIT v. Whirlpool of India Ltd.: 242 CTR 245, wherein changed arrears caused by change rate of provision for warranty, relating to sales effected in earlier years was held allowable in the year in which the changed provision was created. It is contended that interest depreciation and warranty provision stand on exact parity, both are charged to P L a/c, therefore, Whirlpool judgment is fully applicable to asessee's case'. 27.22 Further reliance in this collection is placed on following decisions (though rendered in the context of section 115J of the Act): - Apollo Tyres Ltd. v. CIT : 255 ITR 273 (SC) - Bombay Tyres International Ltd. v. Deputy CIT : 51 ITD 339 (Mum.) - Deputy CIT v. Eicher Goodearth : 64 TO 208 (Delhi) 27.23 Besides change in the method of valuation of closing stock also stands on same analogy, courts have held that even though the change in valuation of stock may result in lesser income, it is not possible to change the opening stock of that year as well - CIT v. Carborandum Universal Ltd. 149 ITR 759 (Mad.) - C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the department is likely to collect from him whether in one year or the other. (p. 684) 18. In the reference that is before us there is no doubt that the assessee had incurred an expenditure. The only dispute is regarding the date on which the liability had crystallized. It appears that there was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BI and its appointees gave such recommendation. Plethora of correspondence in this behalf has been referred including RBI's prohibitive order and reconstitution of board and auditors they demonstrate that the changes were bona fidely made under these facts and circumstances. Therefore, there is no gainsaying that the process seems to be suspicious. Thus we are of the view that the exercise of change of interest provision is carried out in the backdrop of recommendations of board and auditors nominated under RBI directions. 28.2 Now the major issue which is to be decided is whether the change in rate of interest provision amounts to change in accounting estimates or change in method of accounting? In our considered view to create provision of interest is essential part of the income recognition process. Mercantile system permits debiting provision of interest on accrual basis, rate of accrual of interest are never prescribed. Similarly there is no accounting standard or principle that once assessee adopts a particular rate of interest it can never be changed. The creditors may change, interest payable to them is also subject to change in various exigencies. Thus in routine co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he cases of Apollo Tyre Ltd.; Bombay Tyres Int.; Eicher Goodearth Ltd.; Corborandum Universal and Moped India (all supra) 28.6 Assessee is in perineal litigation with department and earlier years are pending at one stage or other. The proposal not to allow the interest of earlier years even accepting the change is revenue neutral at macro level. Having accepted for this year it becomes admitted liability and assessee has a right to claim it in earlier years as a consequential relief in years under litigation. In this situation going by judgments of Nagri Mills which is approved by Hon'ble Delhi High court in Shriram Pistons (supra), the exercise becomes academic and revenue neutral exercise, which is of no avail. 'This view has been further upheld by Hon'ble Supreme Court in the recent case of Excel Industries 358 ITR 259. 28.7 In our view the claim of assessee qua provision of interest is fully justified. Having held it to be a change in accounting estimate, CIT(A) should not have retained part of provision by applying cash system of accounting for interest provision and indirectly converting it into hybrid system is not permissible u/s 145. Consequently revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.03.2009, special auditor summed up that out of cheques issued but not paid, a sum of ₹ 10,86,42,931/- is outstanding and no specific reply is given by assessee, sec. 41(1) was proposed. Besides assessee has submitted that a sum of ₹ 4,16,18,900/- is outstanding as unpaid commission up to 31.03.2009. On a similar footing the rent payable amounting to ₹ 1,50,838/- which remained unadjusted for more than 3 years was also proposed u/s 41. 29.6 In was submitted that provisions of section 41(1) cannot be applied qua 1. Cheques issued but not presented Rs.10,86,42,931/- 2. Commission payable Rs. 25,81,00,086/- 3. Rent payable ₹ 1,50,838/- 29.7 The first item represented cheques issued but not presented which has been credited on 31.03.2009. The basic purpose of creation of this head is that these cheques were issued but not presented for payment till 31.03.2009. They may not be reflected in the bank reconciliation statement and may appear separately in the accounts of the assessee. These reconciliation entries as a matter of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terms of section 43B of the Act while the provision made thereof was added back in the computation of income. (2) ₹ 11.51,878 was already added back in the return for assessment year 2008-09. (3) ₹ 12,272 was surrendered by the appellant in the year under appeal. It is pleaded that order of the CIT (A) does not warrant interference. 32. We have heard the rival contentions and perused the material available on record. It is a settled proposition of law that liabilities which are acknowledged in books by the assessee cannot be construed to have ceased u/s 41(1). Tlie time limit for enforcing a suit for debt is not applicable to them, as the right to legally enforce a suit does not extinguish the debt which can be adjusted by creditor against any other sum of the debtor and by acknowledging each year the limitation gets extended. On other issues also CIT(A) after due verification has given the relief on facts. We see no infirmity in the order on these issues, revenue ground is dismissed. 33. Ground no. 11: addition of ₹ 8,88,997/- outstanding creditors u/s 41(1) 33.1 Qua disallowance u/s 41(1) in respect of outstanding creditors detailed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Meakin Ltd. 205 Taxman 43 (Del.) - CIT v. Jaipur Jewellers (Exports) 187 Taxman 169 (Del.) - CIT v. G.P. International Limited 186 Taxman 229 (P H) - CIT v. Smt. Sita Devi Juneja 187 Taxman 96 (P H) - CIT v. Tamilnadu Warehousing Corporation 292 ITR 310 (Mad.) - CIT v. Eastern Medikit Limited 135 ITD 461 (Del.) (Trib.) 35.1 The order passed by the CIT(A) being in accordance with law, does not call for any interference. 36. We have heard the rival contentions and perused the material available on record. Since these amounts represent acknowledged liabilities. In view of catena of judicial precedents cited by ld CIT(A) and for the same reasons as taken while deciding ground no. 10 we find no infirmity in the order of CIT(A). Same is uphold, revenue ground is dismissed. 37. Ground no. 12 Addition of ₹ 15.04.12.669/- u/s 41(1) of the Act. 37.1 This addition comprises of: (a) ₹ 10,86,82,931 /- Representing cheques which were issued but not presented for payment on last date of the previous year i.e. 31.3.2009. (b) ₹ 4,16,18,900/- Out of Commission payable. (c) ₹ 1,50,838/- On account of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsequently reversed on 1.04.2009. An entry entered in books only for the purposes of management accounting cannot result in any cessation of liability so as to attract the mischief of section 41(1) of the Act; (b) Commission payable to field force is duly acknowledged liability in the books of account. There was no basis to hold that liability in this behalf has ceased. (c) Amount of ₹ 1,50,838 represents rent payable to sister concern, which is July acknowledged as liability. For the reasons adopted by ld. CIT(A), the does not warrant any interference. 40. We have heard both the parties, facts and issues in question in principle are similar to ground nos. 10 11, following our order on these grounds revenue ground is dismissed. 41. Ground 13 disallowance of ₹ 6,91,230/- in relation associate concerns: 41.1 AO found that many of the bills debited by assessee under the head Telephone/Travelling expenses were in the name of Sahara Parivaar or Sahara India. Assessee explained that these related to visits of various officers who are posted in its branch/region/zone offices. Assessee was using M/s. Sahara India's total infrastructure and bran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te allocation of advertisement expenses: 44.1 Special auditor pointed out that, for the BCCI sponsorship contract, 10% expenditure is allocated to the assessee, wherein other advertisement a/c i.e. as for other consultancy charges paid to Percept (debited in retainership fees account) assessee has allocated 25% of the expenditure amounting to ₹ 1,36,51,740/-. Out of same ₹ 1,01,12,400/- has been booked under the head retainer ship fees whereas ₹ 35,39,340 has been booked under the head advertisement. The assessee was required by AO to justify that if allocation in case of BCCI is 10%, then in the other case why the expenditure allocation can be allowed at 25%. Besides, why advertisement expenses in respect of payment to M/s B.C.C.I. has been booked only in two companies and not of the other group companies, consequently ₹ 81,91,044 were propose to be disallowed under section 37. 44.2 Assessee vide letter dated 30.07.2012 explained that B.C.C.I. had entered into an agreement with M/s Sahara Airlines Limited (SAL) on 19.02.2005 for sponsorship of the Indian Cricket Team to display logo Sahara on their uniform. Subsequently on 06.01.2006 SAL approached M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nditure is shared by assessee and the balance 3/4th expenses are shared by other 3 concerns viz. M/s Sahara India, SICCL and M/s Sahara India Mass Communication respectively. Under these circumstances the expenditure is directly, wholly and exclusively attributable to assessee's business. Since conditions of section 37 are fulfilled, there is no justification to restrict the same to 10% on assumptions and comparing BCCI fees with altogether deferent mode of advertisement i.e. neon sign boards and consultancy. 44.5 The reply of the assessee was not found to be satisfactory by AO. It was held that it was not following a consistent system of accounting and cost allocation resulting in disallowance of ₹ 81,91,044/-. 44.6 In first appeal, CIT(A) considered the turnover of group companies which were beneficiaries in advertisement of Indian cricket team. Reference was made to CIT(A)s order in the case of associate concern Sahara India Mass Communication (SIMC) for AY 2005-06 vide order dated 17.12.2012 as under: 9.4 I have considered the assessment order and the submissions filed by the appellant. The fact of expenditure is not disputed. The only dispute is regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expense was shared by Sahara India Mutual Benefit Co. Ltd.. also, which now stands merged with SICCL. As equal apportionment is being followed according to an earlier decision of the revenue, no disallowance should be made by the revenue at this stage. This ground of appeal is allowed. Appellant gets relief of ₹ 81,91,044/-. Aggrieved revenue is before us. 45. Ld. DR relied on the order of AO. 46. Ld. Counsel for the assessee contends that ld. CIT(A) deleted the above disallowance relying upon his own order dated 17.12.2012 in the case of Sahara India Mass Communication Ltd. in appeal No. 75/09-10 for assessment year 2005-06. Department had in the past accepted that expenditure on advertisement incurred on advertising the brand Sahara Pariwar and was allowed to be apportioned @ 25% to the group companies including the appellant: 46.1 Since the order passed by ld. CIT(A) is based on proper verification and appreciation of facts about agreement, role of group concerns and expenditure was incurred wholly and exclusively for assessees business, it deserves to be upheld. Besides the orders have been accepted by revenue relying on the past history of the case; on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndeavoured to a holistic view. In our view being appellate authority he has the power to modify the assessment including granting relief which is found to be due to the assessee though not specifically claimed. However the distribution will depend on the outcome of ITAT judgment, since consequential relief may be awarded. In the interest of substantial justice we set aside the issue back to the file of AO. This ground of the revenue is thus allowed for statistical purpose. 49. Ground 16: Pre-acquisition interest incurred at the time of purchases: 49.1 SA. found that the a sum of ₹ 11,86,24,108.95/- being pre-acquisition interest incurred at the time of purchase of securities is claimed as revenue expenditure in accordance with AS-13. As per Supreme Court ruling in the case of CIT v. Vijaya Bank Ltd 187 ITR 541, pre-acquisition interest is part of cost of securities and cannot be reduced from interest earned. AO asked assessee as to why expenditure of ₹ 11,86,24,108.95 in this behalf should not be disallowed. 49.2 Assessee replied that it is following Accounting Standard-13 in respect of investment as prescribed and laid down by the ICAI. The observations of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, the appellant rightly credited the face value along with accrued interest on the bonds to its balance-sheet. The effect on P L account would be a reduction of the interest component of the cost paid for the bonds. Thus, there was no infirmity in the method of accounting adopted by the appellant, and the income and the expenditure with regard to the interest accrued and paid on Govt, securities was properly accounted for in the P L account In this view of the matter also, the amount cannot be brought to taxation. 19.3 Following my own order in associate group case (M/s Sahara India Life Insurance Corporation Ltd.; Appeal No.340/11-12; AY 2004-05; order dated 15.03.2013) on. similar issue, and following the earlier orders in the appellant's own case as well as case laws relied upon, I hold that addition on account of interest on securities relating to pre-acquisition period is not sustainable and is deleted. Appellant gets relief of ₹ 11,86,24,109/. Aggrieved, revenue is in appeal before us. 50. Ld Dr relied on the order of AO. 51. Ld counsel in reply contends that in view of the relevant factors like RBI guidelines, CBDT circulars, ratio of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds that the claim is also backed by doctrine of consistency method followed by the appellant and CIT(A)s several orders deleting the additions in A.Ys. 1999-00, 2000-01, 2001-02, 2002-03, 2003-04 2004-05. The addition has been repeatedly deleted by the CIT(Appeals) year after year by verification of facts, consistent treatment followed by the appellant applying the judicial decisions on the issue in the cases of the appellant and other associated companies. The assessing officer has failed to appreciate the components of cost of securities and distinctly calculated unpaid interest thereon. It has been erroneously held both deferent components to be one. Addition has been repeated solely by following his own earlier orders only. The order of the CIT(Appeals) is relied on. 52. We have heard the rival contentions and perused the material available on the record. In our considered view, the amount paid for acquiring securities consists of two distinct elements, cost price of the security and future interest due thereon. Due to advance payment of interest some discount etc. is transacted depending on the market conditions qua the interest element. The amount paid thus contains th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear. The appellant has been recognizing expenses on accrual and crystallization basis. This policy has been consistently followed by the appellant over the years. The factum of expenses has not been disputed by the revenue. The appellant is a company having several branches spread across the country and accounts consolidation may be a genuine problem. Further, there is little chance of deriving any tax advantage by shifting expenses from one year to another in view of the same rate of tax. Therefore, on principle of consistency revenue neutrality and judicial precedents cited by assessee, claim was allowed. 54. Ld DR relied on AO's order. 55. Ld counsel contends that assessing officer disallowed an amount of ₹ 8,14,000/- as prior period expenditure as under: - Bill of M/s Voltas Ltd. - ₹ 20,365 - Travelling expenses - ₹ 51,135 - Bill of M/s Credence Analytics - ₹ 7,02,500 55.1 Apropos Voltas bill assessee received bill of ₹ 1,22,192 during the relevant previous year relating to the period 1.3.2008 to 31.8.2008, i.e., for a period of six months. The assessing officer on proport ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. On other issues also we see no infirmity in the orders of CIT(A). The liabilities crystallized in this year and disallowances being revenue neutral as the assessee and department are in perpetual litigation. No interference is called for. This revenue ground is dismissed. 57. Ground no. 18 : Disallowance of Expenditure in relation to Write off of Principal Amount of Ganesh Benzoplast NCD's: 57.1 Brief facts are: AO found that a sum of ₹ 70,13,750/- debited under the head sundry balances written off is on account of settlement of claim with M/s. Ganesh Benzoplast P. Limited (GBPL) NCD's as is of principal amount and not to any income, provisions of section 36(1)(vii) do not apply and cannot be allowable as a bad debt. 57.2 Assessee replied that it is a RNBC governed by RBI directions and undisputedly making of such investments is a part of its business activities. In pursuance of business it invested ₹ 5 crore on 10th May 1997 in 19%. Non-Convertible Debentures of GBPL due for redemption on 7th July 2002. The Debentures were secured by pari passu first charge on company's fixed assets. GBPL regularly serviced the interest upto 7th October 2000 but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. Counsel for assessee contends that the assessing officer disallowed the above write-off on the grounds that (a) the write-off should have been made in financial year 2006-07 when the first OTS was entered with M/s. Ganesh Benzoplast Ltd.; and (b) that the amount written off was in the nature of investment and not trade debt / trade advance. Ld. CIT(A) verified that interest accrued on these GBPL debentures was duly offered to tax in the earlier years and, therefore, the conditions in sections 36(1)(vii) read with 36(2) of the Act relating to allowability of bad debts write off were fully complied with. Relying on the decision of the Supreme Court in Vijaya Bank Ltd. v. CIT 323 ITR 166 and TRF Ltd. v. CIT 323 ITR 397, it was submitted that deduction allowable in the year of write off. 58.2 The CIT(Appeals) accepted that the investment in non-convertible debentures of GBP was made in course of business as a RNBC, the investments held by the appellant were in the nature of stock-in-trade. Besides, it is only in this year the amount finally became bad and is written off. The decision of the CIT(Appeals) being in accordance with law does not warrant any interference. 59. We ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the reduction/ diminution in value has been claimed following this proper method and calls for no adverse inference on this count. 60.5 AO however was of the view that assessee's stand was inconsistent if it is compared with the stand in write off effected in the case of GBPL, claim was disallowed. 60.6 In first appeal CIT(A), allowed the claim considering that assessees business was to raise deposits from the public and to deploy them in investments agreeable to RBI. The income from such investments is treated as assessees business income and they are in the nature of stock-in-trade. It is settled law that diminution in the value of stock-in-trade is an allowable business deduction. AO cannot deny it on the ground that entries were posted in different manner. Besides GBPL was case of write off of bad business advance and valuation of closing stock were two separate issues. The impact on book results was same as proposed by SA, AO and assessee. Thus market value and consequent entries made by the assessee were correct i.e. decrease in the value of business investments which is an allowable business expenditure u/s. 28 or u/s. 37(1). In any case, revenue was adequate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t diminution in the value of business investments is an allowable business expenditure u/s 28 or u/s 37(1) in the context of the appellant a RNBC. It is not in the nature of bad debt allowable u/s 36(1)(vii) and 36(2) only when it is written off in the accounts, as opined by the 'revenue, because a realizable debt written off and reduction in value of an investment are two completely different things. In any case, revenue is adequately protected by the write back of increase in value up to cost-level,'and booking of income at sale minus cost on disposal of the asset. In the circumstances, I am inclined to allow the claim of the appellant. This ground of appeal is allowed. Appellant gets relief of ₹ 46,26,500/-. 62.3 Ld. Counsel relied on following decisions, wherein it has been held that current investments are valued at lower of cost or market value: - CIT v. State Bank of Patiala 212 ITR 59 (Stat.) - American Express International Banking Corp. v. CIT 258 ITR 601 62.4 The order passed by the CIT (Appeals) being in accordance with the laws, mandatory prudential directions of the RBI and applicable accounting standard, in consonance with deserve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the auditors is incorrect. (5) There are number, of accounts in which there is an error in mention of the account numbers because of which we have not been able to verify the veracity of the auditor's statement in respect of TDS on such accounts. (6) There are number of cases where even clubbing of accounts of person of same name and address amount of interest is less then ₹ 5,000/-. 64.3 Proper TDS deduction has been made wherever it was applicable and stands deposited in the Government Treasury also. TDS returns have been duly filed and the assessment of TDS is complete by the department thus, there is no justification in drawing any adverse inferences. 64.4 Payment made to M/s. Bloomberg Services (India) Pvt. Ltd. is in the nature of subscription to Data Base and not for carrying out any work pursuant to any contract and is not covered u/s 194C. It was opined by legal advisors also that no contractual services were rendered by Bloomberg, therefore, there is no TDS liability, no disallowance u/s 40(a)(ia) was called for. 64.5 Apropos payments made to M/s. Sahara Hospitality Ltd.(HPL) for arranging meetings and conferences, a sum of to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... venue at 12.78% and subsequently reduced to 12.34%. Consequently of a sum of ₹ 150,38,35,341/- was disallowed out of the total interest of ₹ 1218,36,28,517/- provided by the appellant during the year. In CIT(A) opinion, for TDS default disallowance cannot be made on estimate basis as law does not provide for it. This contention of assessee was upheld. 64.11 However CIT(A) further observed that the department has a full-fledged TDS wing which ensures implementation of TDS provisions and its assessment. It would be appropriate to get the matter checked by the TDS wing, the addition of ₹ 150,38,35,341/- is, for the time being, upheld on protective basis. In case it is found through the TDS wing that TDS defaults have taken place, to the extent of such defaults the addition shall be upheld. If it is found that there is no substantiated default, the addition shall be deleted. The exercise shall be completed within a period of six months, i.e. by 30.09.2013. The balance disallowance of ₹ 11,11,192/- (Rs.9,03,855/- + ₹ 2,07337/-) was deleted. Aggrieved revenue is before us. 65. Ld. CIT(DR) contends that the assessee has not maintained systematic reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... S, Lucknow has already been requested for proper verification of TDS defaults in the above case on 19.09.2013 and a meeting was also held in the chamber of CIT (c) - 1, New Delhi with CIT TDS, Lucknow and CIT (Appeals)-XXVI on 20.9.2013 regarding verification of TDS in the case M/s Sahara India Financial Corporation Limited. In the meeting CIT (TDS), Lucknow stated that as the assessee is not co-operating and the data is voluminous, the process of verification of TDS cannot be completed in the given time. 65.5 In view thereof, it is requested by ld. CIT(DR) that the revenue may be granted further extension of six- months for logical verification, assessee may be directed to cooperate in a proper manner. 66. Ld. Counsel for the assessee contends that aforesaid ground relating to deletion of disallowance under section 40(a)(ia) of the Act has two parts: (a) disallowance of ₹ 1,50,38,35,341/-; (Qua interest to depositors) (b) disallowance of ₹ 11,11,192/- (Rs. 9,03,855 M/s Bloomberg -Rs.2,07,337AVL) 66.1 Ld. CIT(Appeals) after verification held that payment to M/s Bloomberg was for subscription to data base which was in the nature of purchase of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest of revenue. Revenue so far has not been able to comply with this direction and verification schedule. Ld. DR during the course of hearing has made an earnest request to extend the time of verification for a further period of 6 months from last date. Ld. counsel for the assessee vehemently argued that CIT(A) having held that estimated addition u/s 40a(ia) cannot be made on estimate basis, ground raised by assessee should have been allowed. There is no occasion for upholding protective addition and directing further verification by TDS wing. He thus objected to extension contending that assessee is being taken on a space of repetitive proceeding. It is being assumed that departmental authorities do not carry out proper TDS verification, for which assessee is at receiving end. However ld. Counsel agreed for a shorter extension. After hearing both the parties and in the interest of substantial justice, department was orally allowed a further extension of 6 months as prayed i.e. from 30-9-2013, protective addition cannot be upheld, the matter is therefore, restored back to AO, if department fails to carry out the exercise in this extended time i.e. up to 31-3-2014, order of ld. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8080207.00 68.4 As regards M/s. Pranik Shipping Services Ltd., assessee gave a loan of ₹ 5.50 crore to M/s. Pranik Shipping Services Ltd. against English mortgage of property situated at 15th floor of Maker Chambers IV Nariman Point Mumbai. The whole principal was due for repayment on 24th January 1999 and interest was payable on quarterly rests. The Company has paid ₹ 52.50 lakhs towards the principal and cleared the entire interest till 24th January 1999. This property was given on Leave License basis to M/s. Tamara Capital Advisors Pvt. Ltd. vide agreement dated 1st March 2005 for a period of 33 months The monthly rental of ₹ 4,87,300/- received from Tamara Capital Advisors Pvt. Ltd was adjusted in the amount outstanding. The total outstanding Principal as on 31st March 2009 was ₹ 3,60,10,288.86/- and a provision of ₹ 1,80,05,144.43/- was made as per prudential norms direction of RBI. 68.5 As regards M/s. Prakash Industries Ltd., a loan of ₹ 5.00 crore was given @ 28% for 180 days vide agreement dated 23.07.1996 against the security of 33,86,400 equity shares of the company. At the time of maturity the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.15/- towards interest account. Thus in this case assessee settled the loans on July, 2003 by sale of property mortgage by the borrower. Following the RBI directions the interest income was recognized in F.Y.2003-04 relevant to A.Y. 2004-05 and whole of it was offered to tax in this year. 68.10 Assessee filed further submission pleading before AO that ld. CIT (A) in appellant's own case in earlier years has deleted disallowances in AYs 1999-00, 2000-01, 2001-02, 2002-03 2004-05. 68.11 AO considered the reply and not found it to be satisfactory. Relying on C.K. Gangadharan anothers v. CIT [2008] 304 ITR 61 (SC). AO Held that though, the CIT(A) has allowed similar relief but the department has not accepted them and is in appeals. Further reliance was placed on State Bank of Travancore v. CIT (SC) ; CIT v. Mercantile Bank Ltd. In 237 ITR 676 (Bom). AO held that, as the interest has accrued to the assessee as per mercantile system of accounting, it was to be taxed by making an addition of ₹ 2,53,43,772/- to the income of the assessee. 68.12 In first appeal CIT(A) held that, it is well settled that RBI directives and income-tax law operate in separate and indepen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es had turned into Non-Performing Assets ('NPA'), as per the mandatory Prudential Norms guidelines of the RBI. Assessee cannot provide for any interest thereon on accrual basis. Subsequently realized interest was to be recognized on receipt basis, this is consistently followed by the appellant since the introduction of Prudential Norms issued by RBI. The settled legal position apropos accrual of interest on NPA is as under: 70.1 Income chargeable under the head profits and gains of business or profession is to be determined as per the method of accounting consistently followed by an assessee. Sub-section (1) of section 145 of the Act clearly prescribes the method of accounting to be followed by an assessee for computing income chargeable under the head profit and gains of business or profession . This provision mandates that income chargeable under the head profits and gains of business or profession shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. 70.2 Section 209(3) of the Companies Act, 1956, however, makes it mandatory for companies to keep accounts on accrual basis only. The accounts prep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d forgo the whole or part of a debt, which was irrecoverable, and the same could not be added to the income of the assessee. The Hon'ble Court, referring to the decision of the Hon'ble apex Court in the case of Shoorji Vallabhdas, 46 ITR 144, observed A reading of the aforesaid passage clearly shows that income-tax is levied on income, whether mercantile system of accountancy is maintained or on cash basis. If income does not result at all, there cannot be levy of tax. It was further held that even if an entry of hypothetical income is made in the books of account, but if the income does not result at all, when there is neither accrual nor receipt of income no tax can be levied. The Department's Special Leave Petition against the above case was dismissed by the Hon'ble Supreme Court vide SLP (Civil) No.8158 of 1981. [144 ITR (St.) 50]. 70.6 The aforesaid principle was reiterated in the later judgment of the Hon'ble Madras High Court in the case of CIT v. Motor Credit Co. (P) Ltd. 127 ITR 572; In this case, too, the Hon'ble Supreme Court dismissed the Revenue's Special Leave Petition vide SLP (Civil) No. 2806 of 1981 [149 ITR (St.) 93]. 70.7 In th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 70.12 Ld counsel contends that in view of these pleadings, settled judicial propositions that notional interest cannot be added, order of the CIT(Appeals), deserves to be upheld. 71. We have heard the rival contentions and perused the material available on record. The legal position about the real income theory has been elucidated by the ld counsel by way of catena of case laws mentioned above. The advances/loans in question had become NPA and sticky there is no dispute on these facts. AO has relied on the Supreme court judgment in the case of Southern Technologies apropos ld. CIT(A) has relied on Hon'ble, Delhi High Court judgment in the case of Vasisrh Chaya Vaapar Ltd. (supra) which after considering the southern technologies case has held that income not provided for under the RBI Prudential Norms is not to be brought to tax under the Income Tax Act, 1961. The distinction between Vasisth chhaya being NBFC and assessee being RNBC also has been considered by CIT(A) and a right conclusion has been arrived at that both classes of entitles are regulated by similar RBI Directions. In view of the fact of advances becoming NPAs on the concept of real income, prudential RBI nor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting in the branches and its consolidation while preparing the final accounts in HQ, hence the journal entry was passed. The stationery being a consumable and exercise of AO at the end of the day was effectively revenue neutral, the addition was deleted. Aggrieved revenue is in appeal. 74. Ld DR contends that the addition is restricted by the AO to the purchases of stationery made by the appellant company towards the end of the financial year and therefore, unutilzed stock of stationery should have been either shown in the closing stock or the same should have been reduced from the actual consumption. 75. Ld. Counsel contends that the purchases related to several bills for supply of stationery in January, February and beginning of March, 2009, which stationery stood consumed by the appellant. The closing stock method was avoided to avoid mammoth inventory, to save efforts, cast and hassels for accounting and management efficiency. Stationery in any case is a consumable item, allowable as revenue expenditure beside the exercise is revenue neutral. Order of ld. CIT(Appeals) is relied on. 76. We have considered the rival submissions and perused the material Ld. CIT (A) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lished by the assessee that share capital and reserves and surplus were used for acquisition of such income, generating assets. Consequently disallowance of ₹ 2,16,51,917/-was made as per calculation mentioned in the order. 78.5 In first appeal before CIT(A) it was pleaded that qua exempt income of ₹ 68,37,583/- earned by assessee on UTI 64 Bonds, which also have 'matured during the year. The appellant is maintaining a separate and independent Investment Division at Mumbai, maintaining its set of accounts, in accordance with R.B.I Guidelines. The total expenditure of Ms Division was taken into consideration vis-a-vis total income derived from the Investment Division and on a pro rata basis resultant disallowance of ₹ 26,646/- was offered u/s 14A for assessment. 78.6 Special auditors worked out disallowance by treating interest paid by the appellant as direct expenditure for the purposes of disallowance by treating the expenditure as indirect expenditure. Assessee pointed out that it has share capital of ₹ 913,04,87,300/- and Reserve Surplus of ₹ 757,42,50,160/-. Meaning thereby, the total interest free funds which were available with the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... giving assessee an opportunity may reject the claim after stating cogent reasons for doing so. 78.9 In the case of the appellant without rejecting its claim Ld. Assessing Officer has applied Rule 8D only based on the opinion of the special auditors without appreciating that it was his onus to prove the nexus which is erroneously held as assessee's onus to establish the nexus. Thus without citing any cogent reason for rejection of the claim and only on presumptions the disallowance has been made. 78.10 Section 14A of the Income Tax Act, 1961 reads as follows:- 14A(1)-For the purpose of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under this Act . 78.11 The total income has been defined under section 2(45) to mean the total amount of income referred to in section 5 computed in the manner laid down in this Act. Section 5 of the Income Tax Act let out the scope of total income and lays down as to which incomes are to be included in the total income for the purpose of the Act. Income has been defined under section 2(24) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowance of ₹ 26,646/- offered. There is no justification in making such exorbitant disallowance under section 14A, exceeding the tax free income earned by the assessee. Reliance for this proposition was placed on ACIT v. Punjab State Coop-Mkt Fed. Ltd (ITA No. 548/Chd/2011). In the decision of the Bombay High Court in the case of CIT v. Delite Enterprises (2009(2) TMI 498), it has been held if there is no income no disallowance under section 14A should be made. Applying the same principles there is no justification in such disallowance which for exceeds tax free income. 78.16 Delhi Tribunal in the case of DCIT v. Maharashtra Seamless Ltd. 52 DTR. (Trib.)(Del) 5 held as follows:- It remains undisputed that the funds are mixed and it is not possible to ascertain as to whether the investment in tax-free bonds was not of assessee's own funds. The source of investment in tax free bonds are nor identified. The A.O. did not establish any nexus between the borrowed funds and the investment in tax free bonds. The cash flow of the assessee was not seen, therefore, the Ld. CIT(A) is correct in opining that the. apportionment on a pro rata basis was improper in abse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of any finding whatsoever that expenses were incurred by the assessee directly or indirectly for the purpose of earning tax exempt income and in view of the admitted position that the assessee had sufficient non-interest bearing funds to make the investment on which tax exempt income has been earned, disallowance of ₹ 1,66,000/- offered by the assessee itself is to be accepted as fair and reasonable and, therefore, no further disallowance could be made under section 14A by applying Rule 8D . 78.20 CIT(A) decided the issue by following observations 7.2 I have considered the assessment order, the submissions made and the case laws cited. Firstly, Rule 8D is applicable with effect from A Y 2008-09 and is, therefore, applicable to the present AY. Secondly, the separate account maintained for the investment division of the appellant at Mumbai allocates only some administrative expenses amounting to ₹ 26,646/- directly attributable to that activity but does not include interest or other expenditure allocable. Thirdly public deposits raised by the appellant, an RNBC, are invested in accordance with the RBI directives, which include a component of investments in se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest expenditure on deposits 12,16,83,23,131 =A Assets yielding exempt income As on 01.04.2008 (i) 0 As on 31.03.2009(ii) 61,11,33,800 Average (i + ii) /2 30,55,66,900 = B Total assets As on 01.04.2008(i) 1,90,37,70,21,317 As on31.03.2009(ii) 1,73,80,00,68,014 Average (i + ii)/2 1,82,08,85,44,666 =C Rule 8(2)(i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng satisfaction that the claim of the assessee in respect of expenditure incurred in relation to exempt income is incorrect. Where the assessee claims that no expenditure is incurred or claims that certain expenditure is incurred in relation to exempt income, the assessing officer, before proceeding to apply the formula given in Rule 8D of the Rules must, in both situations record his prima facie satisfaction as to why the assessing officer does not agree with the claim of the assessee. (c) On being satisfied and after recording satisfaction required under sub-section (2), the assessing officer can proceed to make disallowance as per Rule 8D of the I.T. Rules. ii. Hon'ble Supreme Court in the case of CIT v. Walfort Share and Stock Brokers (P) Limited. 326 ITR 1 observed that for attracting section 14A of the I.T. Act, there has to be a proximate case for disallowance, which is its relationship with the tax exempt income. Following this decision, the Hon'ble High Court in the case of Godrej Boyce Manufacturing Company Limited v. DCIT :328 ITR 81 observed as under: .. In order to determine the quantum of the disallowance, there must be a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applied to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or 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 (3) 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 m Rule 8D of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relation to such income which does not form part of the total income in accordance with such method as may be prescribed. However, the Assessing Officer shall follow the prescribed method if, having regard to the accounts of the assesses he is not satisfied with the correctness of the claim of the assessee in respect of expenditure in relation to income which does not form part of the total income. Provisions of sub-section (2), will also be applicable in Nation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income. (emphasis supplied). 79.3 A simple analysis reveals that provision has been inserted to first record a satisfaction on cogency of reasons that assessing officer is not satisfied with the correctness of the claim of the assessee with reference to the accounts of the assessee. Thereafter it provides a mandatory method/procedure to determine the expenditure incurred in relation to exempt income. Mandatory recording of a discernable finding that AO is not satisfied with the correctness of the claim of the assessee regarding such expenditure is also clear from Circular No. 14/200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by regulatory intervention. 79.8 Apart from above, the appellant has investments in shares of companies as part of the portfolio of directed investments made in accordance with the policy direction of Reserve Bank of India ( RBI ) as applicable to Residuary Non-banking Company ( RNBC ). Such investment in shares has been brought forward from earlier years and there is no fresh investment made during the year under appeal wherefrom exempt income has been earned. Assessee claims that investment in securities yielding tax free income was out of interest free owned funds in the form of share capital and reserves surplus, in earlier years. For that reason, interest paid on deposits at ₹ 12,16,83,23,131 has not be allocated to securities / instruments yielding tax free income. Further, the instruments being in the nature of ' directed investments , which in the case of RNBC are in the nature of stock-in-trade , no disallowance under section 14A of the Act is called for. Reference in this regard may be made to the decision of the Karnataka High Court in the case of CCI Ltd. v. JCIT: 250 CTR 291 (Kar.) 79.9 Ld counsel raised further plea of ' Mixed Pool of Funds&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue of preference shares during the financial year under consideration. Thus, at the beginning of the financial year under consideration, share capital of ₹ 163.04 Crores only was available with the appellant. Similarly, out of total reserves of ₹ 757.42 Crores, reserves and surplus of ₹ 205.26 Crores were only available for disposal and balance amount represents share premium account, capital reserve, revaluation reserves and special reserves u/s 451C of the RBI Act. 80.1 There is no evidence that the appellant invested in tax free investments only out of equity share capital and paid up reserves. This fact has been clearly noted by the special auditors as per Page 133 of the Paper book Volume-1 filed by the appellant company. As on 31.03.2009, assessee had fixed assets valuing at ₹ 304.76 Crores and investments of ₹ 11011.32 Crores which aggregate to ₹ 11315 Crores and the same could not have been invested out of interest free funds of ₹ 368.30 Crores (share capital ₹ 163.04 Crores and disposable reserves and surplus ₹ 205.26 Crores). 80.2 In view of the aforesaid, there is no merit in the claim of the appellant company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment is capable of yielding exempt income, the provisions of section 14A of the IT Act 1961 would apply. Secondly, there is no evidence suggesting specific directions by the RBI to make investment in a particular security or bond. It was a commercial decision taken by the management of the appellant company to utilize interest bearing funds for investment in bonds and securities. 80.6 Adverting to the case laws relied upon by the appellant company, it may be seen that Judgements at serial nos. (a) to (e) are distinguishable on facts. In all the cases relied upon by the appellant company the assessees were having mixed/common pool of funds and the interest free funds were sufficient to take care of investment yielding exempt income. Therefore, it was held in the aforesaid cases that since the volume of interest free funds was sufficient enough to take care of tax free investments, no disallowance u/s 14A of the Act was called for. However, as submitted here in before, in the present case the appellant company did not have sufficient interest free funds to take care of the investment. 80.7 It may be relevant to mention here that the Hon'ble Calcutta High Court, has in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is quite arduous to precisely decide the issue. In given facts and circumstances without going into all the issues, in our view it is appropriate to take guidance from Chandigarh bench judgment in the case of Punjab state coopt mft. Fed. (supra) holding that the disallowance of expenditure in any case cannot exceed the income earned. In our view this judgment takes a holistic view that disallowance in terms of sec. 14A can be maximum to the extent of exempt income, there is no dispute that in tins case which is at ₹ 68,37,583/-. This judgment implies that reasonable expenditure less than the exempt income can be disallowed. In our considered opinion, in the interest of justice, it will be reasonable to estimate and disallow, 50% of exempt income (Rs.68,37,583/-) as reliable to exempt income u/s 14A r/w rule 8D. We do not go into various plea taken by both sides offering diverse views based on judicial citations. This ground of the assessee is partly allowed. 82. Ground no. 2 is not pressed by assessees hence already dismissed. 83. Ground nos. 3(a) to 3(d) of the assessee have been already allowed while deciding ground no. 9 of Revenue's appeal regarding provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87. We have heard the rival contentions and perused the material available on record. It emerges from record that there is no dispute on the fact that impugned FDR interest stands taxed in earlier years. Ld. CIT(A) held that there should be no double taxation. Taking a technical plea that right income should be taxed in right year, the addition has been confirmed on the reason that alternative remedy should be pursued by the assessee. In our view CIT(A) has plenary powers to decide the issue as it is one of the remedy. Mere existence of alternate remedy cannot be a ground to deny the due relief when the eligibility to relief is also expressed by CIT(A). In our view this type of relief based on consideration of avoiding unnecessary exercise in case of revenue neutral issues has been granted to assessee. Our view is further supported by recent Supreme Court Judgment in the case of CIT v. Excel Industries 358 ITR 295 holding in this behalf as under: 32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epetition of the same amount and relatable TDS thereon, we had approached M/s Mahindra Mahindra in this regard and they have informed us that it was an inadvertent mistake committed on their part in loading TDS returns and they will be revising their returns shortly. Copy of correspondence in this respect is enclosed herewith and, therefore, your honour will appreciate that the TDS of ₹ 7,93,368/- which has been shown in 26AS at two places actually relates to only one TDS certificate and the other amount was a duplicacy because of error committed by M/s Mahindra Mahindra and, therefore, no income with reference to duplicacy is chargeable to tax in the hands of the assessee and neither the assessee has claimed any TDS with reference thereto (Annexure-24). (2) As regards the item mentioned at Sl. No. 95 to 459 due to clerical mistake while filing the form no. 26Q at the Hyderabad Zone Office of the assessee company, PAN of the assessee was wrongly mentioned in place of PAN of the deductee as a result of which TDS which was deducted and deposited in the account of the respective deducted is appearing in 26AS reliable to the assessee company. The income which is relat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtificate was not available with assessee. Now, we have obtained the TDS Certificate and therefore it is requested that claim may kindly be allow to the assessee of ₹ 2,575/- (Enclosed T.D.S. Certificate as Annexure-29) (8) As regards Sl. No. 860, Indusind Bank limited the income of ₹ 1,10,937/- relatable to TDS Certificate stands offered to tax already. However claim of T.D.S. of ₹ 11,427/- was not made as the certificate was not available with assessee. Now, we have obtained the T.D.S. Certificate and therefore it is requested that claim may kindly be allow to the assessee of ₹ 11,427/-(Enclosed T.D.S. Certificate as Annexure-30). ' (9) As regards Sl. No. 824 to 826 and 833 to 858, the same relates and T.D.S. claim in respect of Star Health and Allied Insurance Company Limited against income from commission which stands duly accounted for in the books of CMSD Division. However T.D.S. claim of ₹ 17,594/- was not made as the certificate were not available with assessee. One persuasion, Star Health and Allied Insurance Company Limited has given a consolidated certificate for ₹ 21,445/- which is being enclosed herewith (Annexure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D.S. of ₹ 680/- either in F.Y. 2007-08 or F.Y. 2008-09. 83.3 On perusal of the submissions AO observed that a sum of ₹ 20,31,750 has been offered to tax which needs to be added to the income. Further for a sum of ₹ 5,69,571 and a sum ₹ 41,854 appearing on L-99 of volume I of the special audit report, the assessee has not offered any satisfactory explanation, which is to be added. Accordingly, a sum of ₹ 26,43,175 (Rs.20,31,750 + ₹ 5,69,571 + ₹ 41,854) was added to the income of the assessee. 88.4 On appeal, the CIT(A) sustained the addition on protective basis, observing as under: I have considered the assessment order, the submission made and the records produced before me. The correspondence between the appellant and the Bank clearly indicates that there was confusion in the matter. The undisputed amount of ₹ 20,31,750/- was already added back by the appellant. The other amounts of ₹ 5, 69,571/- and ₹ 41,854/- were unclear and disputable. The matter should have been verified from the bank by the revenue before taking an adverse view. The factual position shall be verified / clarified in the matter and corr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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