TMI Blog2017 (1) TMI 1107X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered to have been explained in view of the payment of interest, referred above. Accordingly we modify the order passed by Ld CIT(A) on this issue and direct the AO to sustain the addition in respect of this cash credit to the extent of ₹ 28,000/-. Cash credit received from Shri Saurin Patel the assessee has paid interest of ₹ 12,600/- in Feb & Aug, 1986. The fresh credit of ₹ 12,000/- was obtained on 3-12-1986. Hence, we are of the view that the interest payment of ₹ 12,600/- is sufficient to explain the sources for the fresh credit of ₹ 12,000/-. Accordingly we are of the view that this cash credit may be treated as explained Cash credit received from Shri Vikram U Patel assessee has received a sum of ₹ 60,000/- on 06.05.1986. We notice that the AO has given credit for principal portion of ₹ 50,000/- repaid by the assessee and accordingly made the addition of ₹ 10,000/-. However, he has not given credit for the interest amount of ₹ 7,057/- referred above. Considering the opening balance of ₹ 1,00,000/- available in this account and the interest payment made to this creditor, we do not find any reason to sustain t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come to such a conclusion without examining relevant contract notes issued by the third party brokers. Accordingly we are of the view that the tax authorities have not given proper justification in presuming that the loss shown by the assessee is bogus one and constitutes negative brokerage. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. Undisclosed investment in Stock - Held that:- Since the assessee has held fully convertible debentures of Reliance G series, he became entitled to apply for shares on a prescribed rate upon conversion. As per the market mechanism, the assessee is entitled to sell his rights in favour of another person, instead of applying for the shares. According to the assessee, he has sold the rights, which has accrued from the debentures, which are already held by him, i.e., he has not purchased such rights, but the right has accrued to him from the debentures held by him. Hence the “right to apply” for shares, in our view, cannot be taken as undisclosed item of asset. We notice that though the assessee has submitted these explanations and accordingly contended that the assessing officer was w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GH COURT ). Accordingly we are of the view that there is no justification in disallowing interest claim, when the assessee is possessing huge interest free funds. Disallowance of loss on securities transactions - Held that:- Before Ld CIT(A), the assessee has furnished relevant vouchers and also made a reference to the bank accounts, but the Ld CIT(A) has proceeded to uphold the disallowance by putting up the responsibility on the assessee. In our view, the assessee has been asked by the tax authorities to prove the loss, but according to the assessee the same can be examined from the details available in the books of account only, i.e., by examining the corresponding purchase and sale. Hence, in our view, the tax authorities have disallowed this claim by drawing inferences without actually carrying out examination, which is not justified. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance. - I.T.A. No. 1350/Mum/2011, I.T.A. No. 1351/Mum/2011, I.T.A. No. 1352/Mum/2011, I.T.A. No. 1625/Mum/2011, I.T.A. No. 1627/Mum/2011 - - - Dated:- 9-11-2016 - Shri B.R. Baskaran (AM) Shri Sandeep Gosain (JM) For The Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Consequently, the present assessment orders were passed by the assessing officer in the second round of proceedings. The assessee again challenged the assessment orders by filing appeals before Ld CIT(A) and both the parties have filed the appeals under consideration challenging the orders passed by Ld CIT(A) on the issues decided against each of them. 4. The assessee has filed returns of income for AY 1987-88 to 1991-92. However the assessee did not file returns of income for AY 1992-93 and 1993- 94. It was explained that he could not file the return of income for those years, since all the records were seized by the CBI/revenue and further he was constrained to undergo imprisonment and to face enquiries of various investigating agencies. 5. Before going into specific issues, we feel it pertinent to discuss in brief about the nature of activities carried on by the assessee, since the main contention of the assessee is that the AO has made most of the additions without properly appreciating the nature of activities carried on by the assessee. As noticed earlier, the assessee was acting as a broker and dealer in Securities market. The securities are Debt instruments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities through the secondary market to a prospective buyer. The role of broker in securities market is to establish a link between the seller and buyer. Only the brokers holding a membership card in a recognised stock exchange and permitted by the stock exchange are allowed to act as brokers in the securities market. Hence for the institutions planning to sell/buy securities, the secondary market has emerged as the safe platform and all of them including RBI and banks preferred to transact through the brokers empanelled by them. 7. Besides the above, the financial institutions, provident funds, the insurance companies also prefer to invest their long term funds in Government securities. Since demand for sale and purchase of securities increased in the secondary market, it has motivated some of the brokers to act as dealers in securities, i.e., they started buying Securities on their own account and then sell the same to the prospective buyers. 8. It is stated that the Government Securities are issued in three forms, viz., (a) By credit to the Subsidiary General Ledger Account (SGL Account) of the Banks and insurance companies. (b) In the form of Promissory notes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nctive number and the transfer takes place by making endorsement of transfer on the back side of the stock certificate. The registered holder will receive interest and the stock certificate has to be lodged for redemption. This is also not so popular method. 11. ROLE OF BROKERS:- Over the years, the Government, semi-Government, institutions, local bodies etc., have issued securities from time to time. Hence the number and variety of securities available in the market have also increased. The fluctuation in the rate of interest has increased the demand for securities. Due to statutory compulsion of parking funds in Government securities and availability of surplus funds also, the demand for securities increased. Since the investors are scattered all over the Country, the necessity of broker or middlemen has arisen, who would create a link between a buyer and a seller. As noticed earlier, only persons holding membership of recognised stock exchange are permitted to act as brokers in the securities market. Due to increase in the volume, the RBI, banks, institutions etc have also avoided direct dealing and instead preferred to purchase and sell securities through the brokers. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank of Maharashtra in favour of the Routing bank, who shall lodge the same with RBI for effecting the transfer of Securities to its name (to be held on behalf of dealer-broker). 13. PURCHASE AND SALE OF SECURITIES CUM INTEREST The interest on securities are generally paid on half yearly basis by the Public Debt Office of Reserve Bank of India at the rate of interest at which the securities were issued. The prescribed date of payment of interest is called as Coupon Date . The transactions of purchase and sale of securities are made on Cum interest basis, since the date of payment of interest as well as the rate of interest is very well known. This can be explained by way of an illustration. Let us assume that Coupon date of a Security having a face value of ₹ 1.00 lakh is 30th June and 31st December. It carries interest rate of 12% p.a. If an investor wishes to purchase a security on 30th September, he will have to pay the price of security (Rs.1.00 lakh) plus interest for the period from 1st July to 30th September (Rs.3,000/-) aggregating to ₹ 1,03,000/-. This is called cum interest price of the security. The buyer will receive interest of ₹ 6,000/- on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich credit of ₹ 91,000/- pertain to share trading transactions. He submitted that the assessee had filed confirmation letters obtained for the year ending 31.12.1984 and 31.12.1985. Accordingly he prayed that the addition of ₹ 32,100/- confirmed by Ld CIT(A) should be deleted. 15.3 The Ld D.R, on the contrary, stressed the point that the assessee has failed to furnish the confirmation letter for the current year, i.e., year ending 31.12.1986 and the assessee has failed to discharge the initial onus placed upon him u/s 68 of the Act. 15.4 We have heard the parties on this issue. We notice that the addition of ₹ 32,100/- was made on the reasoning that there was a difference between the amounts shown as received in the books of account of the assessee and the confirmation letter. The assessee has pointed out that the assessing officer has compared the receipts pertaining to the year ending 31.12.1986 with the receipts pertaining to the year ending 31.12.1987. There should not be any dispute that the assessing officer has made the addition by comparing two different years, which is not correct. Further, the assessee has pointed out that he has filed confirmatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firmation letter. However, on a perusal of the account copy of the creditor, which is placed at 215 of the paper book, we notice that the assessee has paid interest of ₹ 12,600/- in Feb Aug, 1986. The fresh credit of ₹ 12,000/- was obtained on 3-12-1986. Hence, we are of the view that the interest payment of ₹ 12,600/- is sufficient to explain the sources for the fresh credit of ₹ 12,000/-. Accordingly we are of the view that this cash credit may be treated as explained. Accordingly, we set aside the order of Ld CIT(A) and direct the AO to delete this addition. 18. The next addition relates to the cash credit of ₹ 10,000/- received from Shri Vikram U Patel. On a perusal of the account copy of the above said creditor, which is placed at page 219 of the paper book, we notice that the assessee has paid interest of ₹ 7,057/- on 01.12.1985 and principal of ₹ 50,000/- on 19.03.1986. Thereafter, the assessee has received a sum of ₹ 60,000/- on 06.05.1986. We notice that the AO has given credit for principal portion of ₹ 50,000/- repaid by the assessee and accordingly made the addition of ₹ 10,000/-. However, he has not given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f interest accounted through journal entries. Hence, in the second round of proceedings, the assessee furnished copies of few journal vouchers relating to interest paid on securities. 21. However, the AO took the view that the interest paid on securities is excessive and non-genuine and accordingly disallowed the claim. The relevant observations made by the AO in AY 1987-88 are extracted below, for the sake of convenience:- In the ongoing proceedings the assessee has produced few journal vouchers showing the interest as paid on securities. It is seen that the main issue in the case of assessee for the Assessment Years 1987-88 to AY 1992-93 was that the interest shown to be paid by the assessee on purchase and sale of securities was excessive and not genuine. In those years too, the entries of interest paid were made through Journal Vouchers, which was not accepted by the department. In the current assessment proceedings, the assessee has not justified the payment of the interest at a high rate. The assessee has not established the nexus between the interest paid and income received on the same. Hence as in the original assessment the Interest paid on purchase and sale of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar, the assessee would issue contract note for cum interest price and the interest pertaining to 1st January to 19th May shall be credited to Interest on Securities Account . It is pertinent to note that the assessee would issue the contract note, even if he is not in ready possession of the security with the hope that the same can be purchased from the market. Suppose, if the particular security is not readily available in the market in the form of requested lot , he is required to search for the same lot in the market and it may take some time to locate the same. Suppose if the assessee could finally purchase the security on 20th of June, he would purchase the same by paying cum-interest from 1st January to 20th June. At the time of purchase, the assessee had received interest from 1st January to 19th May. Thus, the assessee would be constrained to bear the interest burden for the period from 20th May to 20th June and the same would go to increase the expenditure debited under the head Interest on securities . If the assessee could purchase the security after the coupon date, i.e, say on 10th July, then the assessee would be paying six months interest from 1st January to 30t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts of cum-interest as well as the consolidated payments made at the time of purchase of securities are by way of Account Payee cheques and hence they have been duly reflected in the bank accounts of the assessee. Hence the question of any bogus payment or excessive payment of interest shall not arise. (i) The AO did not make any such kind of disallowance in AY 1992-93 and 1993-94. The Ld CIT(A) deleted identical disallowance made in AY 1988-89 in first round and in AY 1989-90 both in first and second round of proceedings. 24. Besides the contentions urged on merits of addition, the Ld A.R also submitted that the assessee was not provided with all the relevant materials available with the AO. He submitted that the copies of letter dated 28-09-2001 written by Ld CIT(A), letter dated 25-02-2003 written by AO to Ld CIT(A), assessee s letter dated 19-03-1998 and letter dated 23.08.2010 written by Ld CIT(A) were not provided to the assessee. He further submitted that the assessee, during the course of inspection of assessment records, noted down contents of the letter dated 23.08.2010 addressed by Ld CIT(A) to the assessing officer and the same reads as under:- The second is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the appeal proceedings folder for AY 1987-88 in the CIT(A) s proceedings, the confirmation of inspection having been provided is noted by the appellant and his Ld Counsel. The copy of the said order sheet noting is reproduced hereunder:- Mr. Bhupen Dalal and Mr. M.D. Pandya CA appear. Addl. CIT, Central Range-7 is also present. The appellant files letter dated 21.01.10 in response to Assessing Officer s letter dated 12.1.10. According to Minutes submitted before the Hon ble High Court, now with the final certification by the Assessing officer, the inspection is held as complete. The appellate has expressed some reservations. However, in terms of the Minutes of Hon ble High Court the hearing is to commence on completion of the inspection, which is fulfilled as the documents disputed in connection with the inspection are stated to be not available by the AO. So the hearing can now proceed in terms of the Minutes. The date of AO s letter dated 12.1.10 is being taken as the base for timeline for the 4 months period allowed by the Hon ble High Court for completion of the hearing. Case fixed for hearing on 2.2.10 at 3 p.m. The Ld D.R further submitted that the assessee himself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the reason that the assessee did not produce the journal vouchers. Hence, the assessee produced sample journal vouchers in the second round. However, the assessing officer was not satisfied with the same and hence he again disallowed the expenditure claimed under the head Interest on securities with the following observations:- The assessee was asked to produce all the journal entries for inspection. However, he had stated that the same were not available. The issue of interest was discussed in the assessment order for AY 1988-89 to 1991- 92. In none of the years the assessee had given any satisfactory response. In the AY 1991-92, it was seen that the assessee had debited an amount of ₹ 1.15 crores by means of four journal entries for which no explanation was given. In absence of any explanation and in the absence of journal books, the correctness of the amount remained unverifiable. Hence an amount of ₹ 47,45,108/- was disallowed and added back to the income in the original assessment order . In the ongoing proceedings the assessee has produced few journal vouchers showing the interest as paid on securities. It is seen that the main issue in the case of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can be explained by way of an illustration. Suppose a security bearing 12% interest rate is purchased for a sum of ₹ 1.00 lakh on 01-02-2007 and the coupon date is 30th June. The purchaser shall pay ₹ 1,01,000/- and debit the account of securities with ₹ 1.00 lakh and debit the account of Interest on securities with ₹ 1,000/-. Under both the method of accounting, the purchase of securities shall be accounted in identical manner, since the payment has been made. Let us assume that the accounting year ends on 31st March 2007. Under cash system of accounting, no further entry shall be passed. However, under mercantile system of accounting, the interest for the period from 1st January to 31st March amounting to ₹ 3,000/- shall be recognised as income. Hence the Interest on securities account shall show a credit balance of ₹ 2,000/- (Income of ₹ 3000/- less expenditure of ₹ 1000/-) under mercantile system of accounting, whereas the same account shall show a debit balance of ₹ 1000/- under Cash system of accounting. Under cash system of accounting, the income for the period from 1st January to 30th June amounting to ₹ 6000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. The assessee has explained that he would issue sales contract, when he receives order for purchase of security even if it is not available in his hands. The amount received from his client is deposited into his Overdraft Account. According to the assessee, he has to pay cum-interest at the rate of around 6% or may be upto 9%. However, the amount deposited into his Overdraft account will reduce interest burden by the rate applicable to overdraft facility, which is around 16%. Since there is net gain to the assessee on account of interest leverage, the assessee used to issue sales contract even if the security is not available with him and would purchase the same later from the market and deliver the same. According to the assessee additional interest borne by him towards cum-interest is more than compensated by the reduction of interest expenditure on the overdraft facility. In our view, this appears to be a reasonable explanation, since the businessmen will always exploit the interest leverage opportunities, since it would increase their profitability. The Ld A.R submitted that the assessee has accounted for Interest on Overdraft facility separately and hence any increase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e part and parcel of normal accounting procedure and it is necessitated in many situations. We may give certain illustrations:- (a) A person purchases goods for ₹ 5,00,000/- on credit. He would debit the Purchases account with ₹ 5,00,000/- and credit Supplier account with the same amount. Subsequently, he negotiates with the supplier and settle the payment at ₹ 4,90,000/-. After making payment, the Suppliers account will show a credit balance of ₹ 10,000/-, which is no longer payable. Hence a journal entry will be passed by debiting Suppliers account with ₹ 10,000/- and crediting Discount received Account with the same amount. (b) A person makes an advance payment of ₹ 10.00 lakhs to a supplier in connection with the supply of goods. He will debit Advance Payment Account with ₹ 10.00 lakhs. Let us assume that the supplier supplied the goods in three different lots at three different point of time. When the first lot of goods and bill is received, say ₹ 2,00,000/-, he will pass a journal entry by debiting purchases account with ₹ 2.00 lakh and crediting Advance Payment Account with that amount. Similar journal entries ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , bills, payment details, the party details etc., whether the expenditure is accounted through journal vouchers or through cash vouchers or bank vouchers. Thus, the methodology of examining the genuineness of expenditure is identical in all the three method of accounting the expenditure. We notice that the tax authorities have failed to understand this fundamental principle and instead proceeded to suspect the expenditure only for the reason that the same has been accounted through Journal vouchers and further the journal vouchers were not produced. In our view, the passing of entries through Journal Vouchers is part and parcel of accounting procedure in any type of business and hence any expenditure accounted through journal vouchers cannot be doubted with, only for the reason that they have been accounted through journal vouchers. 38. We have noticed that the assessee has submitted certain journal vouchers before the Assessing officer, but the assessing officer has failed to examine the same to appreciate the contentions of the assessee. Instead he has proceeded to make the addition again on the reasoning that the assessee has failed to furnish all the journal vouchers. In our ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure that the he makes payment towards cum-interest from the last coupon date to the date of purchase. Hence the question of nexus, in our view, may not arise in these type of transactions. 41. We notice that the Ld CIT(A) has also confirmed the addition without critically examining the issue. However, the foregoing discussions would show that the interest expenditure claimed under the head Interest on securities have been made only on surmises and conjectures. We further notice that the assessing officer has taken support of identical additions made in AY 1988-89 to AY 1991-92 to make this addition in the second round of proceedings. The Ld CIT(A) has also confirmed the same. The assessee has pointed out that the identical addition made in AY 1989-90 has been deleted by Ld CIT(A) in AY 1989-90 in both first and second round of proceedings. He also deleted identical addition made in AY 1988-89 in the first round of proceedings. The AO did not make any addition of identical nature in AY 1992-93 and 1993-94. 42. In view of the foregoing discussions, we are of the view that the AO has not given proper reasoning or any credible material to make this addition and the same is not wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng officer himself and he has not furnished the basis for arriving alleged negative stock. He submitted that the Tribunal, in the first round of proceeding, had given following directions:- We would like to reiterate that if the relevant material on the basis of which any addition is proposed, is not confronted to the assessee, the Assessing officer shall not make any such addition. The Ld A.R submitted that the assessing officer has made the addition again without providing the relevant materials in contravention of the specific direction given by the Tribunal. He submitted that on this count alone, this addition is liable to be deleted. He further submitted the addition made by the AO without confronting the relevant materials to the assessee is not legal as held by Hon ble Supreme Court in the case of Kishinchand Chellaram Vs, CIT (1980)(125 ITR 713)(SC). 47. The Ld A.R submitted that the assessing officer has furnished the stock statement prepared by him. However he did not furnish the materials on the basis of which the stock statement was prepared. He submitted that the addition of ₹ 3,22,72,000/- relate to only one scrip, viz., Units of UTI. The details of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he discussion given above and following our order for the assessment year 1992-93 referred to supra, we set aside the assessment orders passed by the Assessing Officer for the assessment years under appeal with the direction that the assessments should be reframed after allowing adequate opportunity to the assessee and after confronting the assessee with relevant material. We would like to reiterate that if the relevant material on the basis of which any addition is proposed, is not confronted to the assessee, the Assessing Officer shall not make any addition. There is no dispute with regard to the fact that the assessee was provided with only Stock Summary prepared by the AO and the basis for preparing the same was not given. Hence, on this point alone, this addition is liable to be dismissed. 50. On merits, we notice that the interpretation given by the assessee appears to be correct one. The Ld A.R has pointed out that there is no difference in the quantity, since the debit and credit of face value of units of UTI are same. Since there is no difference in the quantity of units alleged to have been purchased and sold, the question of negative stock does not arise at al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nised broker of BSE, yet it is stated that he was not operating his card. Hence, it is stated that the share transactions were carried out through other brokers. 55. The method of accounting followed by the assessee in respect of these transactions is stated to be as under:- (a) All share transactions shall be entered in Position Book , which contain details regarding the transaction, viz., name of party, number of shares, price, date of delivery etc. These transactions have been maintained scrip wise. (b) All the transactions are supported by Contract notes and Bills, which again contain all the relevant details stated above. B-1 voucher is prepared for sale of shares and B-2 voucher is prepared for purchase of shares. (c) The assessee shall prepare Patwat Sheet (B-7), which is a summary of all purchases and corresponding sales transacted in a month. This Patwat Sheet shall be prepared on the last date of every month on the basis payment received or amount paid during the month. (d) The accounting for share transactions were done at the end of each month based on payment made to and amount received from parties/brokers. This is in accordance with the cash method ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd sale of shares have taken place with the same party on the same date, where as in the examples given by the assessee, the purchase and sale of shares were on different dates with different persons. Accordingly he came to the conclusion that the losses shown in the patawat sheets have been engineered by the assessee for booking artificial losses. Accordingly, the AO again disallowed the amount of ₹ 19,61,363/- observing the same as negative brokerage. 58. The Ld CIT(A) observed that the assessee has not brought on record any third party confirmation at least in respect of transactions included in the illustrative list prepared by the AO. Before Ld CIT(A), the assessee contended that there are profit making transactions and the AO has omitted to consider the same. The said contentions did not find favour with the Ld CIT(A), since the assessee has failed to show the profit making transactions of purchase and sale on the very same date. Accordingly he confirmed the addition made by the AO. 59. We have heard the rival contentions on this issue and perused the record. The main submission of the Ld A.R was that the transactions of purchase and sale carried out by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 15.12.1986, i.e., the assessee has sold the shares initially without having stock of the same and then covered the same by purchasing the same later. This is called short sale, which is quite common in share trading circles. Similarly, the AO has stated that the assessee purchased and sold 900 shares of Hindustan Cocoa on 28.02.1987. The assessee has explained the above said shares were purchased on 24.12.1986 and sold on 17.2.1987. 61. In some of the illustrations, the AO has pointed out that the purchase and sale of shares have been carried out with the same person. For example, in the illustration No.10, the AO has pointed that the assessee has purchased and sold 11000 shares of Tata Tea from M.D. Shukla as per Patawar Sheet No.6004. The assessee has explained the same to be badla transactions. We have earlier noticed that a buyer/seller of shares is entitled to roll over his position to the next settlement period on payment of prescribed fees, in which case, the existing position shall be closed on the last day of the settlement period and a corresponding new position will be created on the first day of succeeding settlement period. This is called as badla transactions i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature in all of the years. 65. In view of the foregoing discussions, we are of the view that the assessing officer should not have come to such a conclusion without examining relevant contract notes issued by the third party brokers. Accordingly we are of the view that the tax authorities have not given proper justification in presuming that the loss shown by the assessee is bogus one and constitutes negative brokerage. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. 66. The next issue urged by the assessee relates to the addition of ₹ 29,61,353/- pertaining to Undisclosed investment in Stock, which was sustained to the extent of ₹ 20,59,607/- sustained by Ld CIT(A). The assessee has purchased and sold shares on his own account, which was accounted under the head BCD Share Account . The AO analysed the transactions accounted in that account by entering the details in a computer and arrived at the position of closing stock. This statement of closing stock was compared with the list of closing stock of shares furnished by the assessee. In many cases, there were mismatch and hence the AO made an addi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee without examining the same. 69. On the contrary, the Ld D.R invited our attention to paragraph 9.6 of the order passed by Ld CIT(A), wherein he has observed that the assessee has not furnished specific replies. 70. We have heard the parties on this issue and perused the record. We notice that the assessee has pointed out the mistakes that occurred in the computation made by the Assessing officer, which included the sale/renunciation of rights, i.e., the renunciation of rights have been considered as sale of shares by the assessing officer. The assessee has also pointed out other mistakes also. We notice that the AO has accepted the other mistakes, but did not give any reason for not accepting the mistakes pointed out by the assessee in respect of renunciation of right to apply for shares. Even though the Ld CIT(A) has observed that the assessee has failed to give specific replies, yet we notice that the tax authorities have also failed to address the specific mistake pointed out by the assessee. In order to arrive at the alleged undisclosed stock, the assessing officer has adopted an estimated rate of ₹ 111/- per share. 71. Since the assessee has held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estroyed in fire and hence no cross verification was possible. It was further noticed that the credit balance outstanding in the name of M/s Champaklal Devidas was increasing every year, i.e., as on 31.12.1987 the balance was shown at ₹ 1.26 crores and the same increased to ₹ 14.12 crores as on 31.3.1991. It was further noticed that the assessee has settled the balance by paying a sum of ₹ 15.40 crores by way of cheques to M/s Champaklal Devidas. However, the above said amount was returned back to the assessee and his group companies on 26.3.1992. Further M/s champaklal Devidas has not charged any interest from the assessee on the huge outstanding amount. Accordingly a view was taken in those years that the assessee has shifted his profits to M/s Champaklal Devidas. The AO took note of the observations made in AY 1990-91 and 1991-92. Accordingly, he came to the conclusion that the balance shown in the account of M/s Champaklal Devidas was not genuine one. Accordingly he added outstanding balance of ₹ 1,26,12,036/- in the first round of proceedings. 74. The Ld CIT(A), in the first round of proceedings, examined the ledger account of M/s Champaklal Devidas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e opening balance only on the reasoning that the assessee did not produce any evidence. However, the Ld CIT(A) has noticed that the accounts relating to AY 1987-88 were available with the AO and hence accepted the contentions of the assessee. Since the accounts relating to AY 1987-88 are available with the AO, we are also of the view that the AO could not have observed that the assessee did not prove the opening balance. The addition of opening balance, if required, may be made in the respective year of transactions and not during the year under consideration. Accordingly, we do not find any infirmity in the decision so taken by him. Accordingly we dismiss the appeal filed by the revenue for AY 1988-89. 78. The assessee is contesting the addition of ₹ 71,98,594/- confirmed by the Ld CIT(A). The main contention of the assessee is that the assessee was having trading transactions with M/s Champaklal Devidas and the AO has added the outstanding closing balance without making any independent enquiry with regard to the veracity of the transactions. The AO has mainly relied upon certain observations made in subsequent years, i.e., AY 1990-91 1991-92. The Ld A.R submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been made on the basis of generalities. Only the last balance in the account of Champaklal Devidas has been added without looking into entire volume of transaction and also arrival and disbursement of money have not gone into by the AO. I have a copy of account of Champaklal Devida in the books of the assessee filed by the Learned A.R. It is also found that on certain dates the credit balance was ₹ 1,40,00,000/-. This date is 3.1.1987. It is not denied that the assessee has transactions of securities and shares with Champaklal Devidas. The AO has tried to tax only the last credit balance. The question of taxability for the purposes of section 68, 69 etc., have to be decided with reference to the dates of arrival or funds. As no inquiry in this aspect of the matter has been made by the AO there would not be any justification for this addition. Nevertheless, it is required that each entry of debit and credit appearing in the account of Champaklal Devidas has to be verified as to whether they are recorded in the bank account of Champaklal Devidas. The reference to the bank account is made by me because it is the claim of Champaklal Devidas that his books of accounts have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yments from unaccounted sources. When the payments were made from the books of accounts and the recipient have transferred the funds through banking channels to other concerns, we are unable to understand as to how the same would make the transactions non-genuine. 82. The AO has observed that M/s Champaklal Devidas has not charged interest on the balance due from the assessee. It is a matter to be decided between the parties and it is well settled proposition that the tax authorities are not entitled to sit in the arm chair of the businessman to regulate the business affairs. In any case, non-charging of interest only benefits the assessee herein and the cause of action does not arise here. Another important point is that the Ld A.R has stated that the proprietor of M/s Champaklal Devidas, Shri J P Gandhi has confirmed the transactions and he is also assessed to income tax by the very same assessing officer. In these set of facts, we are of the view that the tax authorities are not justified in holding that the transactions entered with M/s Champaklal Devidas are not genuine. When the transactions entered with this concern has been accepted as genuine in the earlier year, then t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 15,000/- received from Smt. Kusumben V Patel. This account shows an opening balance of ₹ 2,57,555.88 and the amount of ₹ 15,000/- represents three credits by way of bills, meaning thereby, the amount of ₹ 15,000/- does not represent cash credit. The ledger account copy is placed at page 377 of the paper book. The assessee has also furnished ledger account copy of this assessee for year ending 31.12.1984 at page 365 of the paper book, which shows that this creditor is having account from past years also. The assessee is also regularly paying interest to this creditor. The assessee has also furnished confirmation letter obtained from this creditor for the year ending 31.12.1986 and 31.3.1991. In view of the above, we are of the view that there is no reason to suspect the sources of ₹ 15,000/-. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. 85.3 The third item of the addition relates to the amount of ₹ 3.00 lakhs received from M/s Mamta Enterprises. The assessee has furnished account copy of the creditor, copy of receipt issued to the creditor, confirmation letter obtained for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere has been regular payment of interest and the creditor has been fully repaid on 14.6.1991. The creditor was receiving interest of about ₹ 7000/- per annum from the assessee. The assessee has furnished confirmation letter obtained for 31.12.1985 and also the ledger account copy of the subsequent year. In view of these facts, we are of the view that there is no reason to suspect the credit or ₹ 10,000/- received during this year. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. 85.8 The next item of addition relates to the amount of ₹ 1,25,000/- received from Shri V.C.Patel. The assessee has furnished ledger account copy for the year 1992 to show that the creditor s account is being regularly serviced with interest and it has been repaid in that year by way of pay order. The assessee has submitted that he could not obtain confirmation letters due to passage of time. Considering the ledger account copy as well as the repayment details, we are of the view that there was genuine difficulty for the assessee to obtain confirmation letter from this creditor. Accordingly, we are of the view that the genui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was mainly used for purchase and sale of securities. Thus, the possibility of diverting funds from bank overdraft facility is minimal. We notice that the assessing officer has compared the figures available in Balance sheet and has taken adverse view of the matter. According to the assessee, he was having huge interest free sundry creditors balance with him and the AO has failed to recognize the same. In our view, there is merit in the said submissions of the assessee. When interest free funds and interest bearing funds are mixed together, they loose their respective identity and hence the presumption should be that the assessee has used interest free funds to give interest free advances. For this proposition, we get support from the decision rendered by Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd (313 ITR 340). Accordingly we are of the view that there is no justification in disallowing interest claim, when the assessee is possessing huge interest free funds. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance. 89. The next issue urged by the assessee relates to the disallowance of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on by entertaining certain presumptions. We have seen that the Ld CIT(A), in the first round of proceedings, has taken identical view, i.e., the addition has been made on the basis of observations made in AY 1990-91 and 1991-92. The Ld CIT(A) has rightly pointed out that the assessing officer should have examined specific entries found in Interest on securities account and should have reached the conclusion on the basis of such examination. We notice that the AO, in the second round of proceedings also, has been persuaded by general presumptions, i.e., the AO did not examine the explanations given by the assessee with the ledger account. We notice that the Ld CIT(A), in the second round of proceedings, has simply upheld the order of the AO passed on this issue. In the absence of such kind of examination and in the absence of pointing out any case of bogus booking, we have no other option but to delete the addition by following the decision rendered by us in AY 1987- 88. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. 91. The next issue contested by the assessee relates to the disallowance of loss on securities tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e explanations before the AO. Further the AO has noticed that the losses have been booked by the assessee by passing journal entries. Hence the AO was constrained to disallow the claim in the absence of proper explanations. He further submitted that the Ld CIT(A) has also pointed out that the transactions carried on by the assessee are in contravention of the rules framed by the Indian Banks Association and RBI. Further the assessee has failed to give instances, where he has made profits. 94. We notice that the assessing officer has disallowed this claim in the first round of proceedings mainly on the reasoning that the assessee has passed the journal entries to book the losses. In the second round, the AO changed his stand and disallowed the claim on the reasoning that the assessee has failed to furnish explanations. We notice that the assessee furnished vouchers relating to certain transactions before the Ld CIT(A), but the first appellate authority also confirmed the addition by following the decision rendered by him in a subsequent year. The assessee has explained that purchase and sale of securities were by way of account payee cheques only. It is submitted that after the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing out examination, which is not justified. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this disallowance. 96. The next issue contested by the assessee relates to the levying of interest u/s 139(8) and 217 of the Act. The levying of interest is consequential and hence this issue does not require adjudication. 98. The assessee has also raised certain legal grounds. As observed by us in AY 1987-88, we do not find it necessary to adjudicate them, since we have deleted most of the additions on merits. 99. The revenue is contesting the relief granted by Ld CIT(A) in respect of addition relating to M/s Champaklal Devidas. We have deleted the entire addition made by the AO while dealing with this issue in assessee s appeal. Hence all the grounds urged by the revenue on this issue are liable to be dismissed. We order accordingly. 100. We shall now take up the appeal filed by the assessee for AY 1989-90. The first issue relates to the disallowance of interest of ₹ 12,19,181/- paid to banks and others. As in AY 1988-89, the AO disallowed the above said claim on the reasoning that the assessee has diverted interest beari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he view taken in AY 1988-89, we are of the view that the tax authorities are not justified in disallowing interest expenditure claimed by the assessee. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. 102. The next issue relates to the addition made u/s 68 of the Act in respect of cash credits. In the first round of proceedings, the AO added a sum of ₹ 33,26,921/- u/s 68 of the Act. In the set aside proceedings, the AO reduced the addition to ₹ 20,20,367/-. The Ld CIT(A) also confirmed the same. 102.1 The first item of addition is the cash credit of ₹ 14,15,157/- taken from Shr Paresh Patel. During the year under consideration, the aggregate amount of credit available in this account was ₹ 15,53,929/-. However, in the confirmation letter, a sum of ₹ 1,38,772/- alone was confirmed. Hence the AO made addition of difference amount of ₹ 14,15,157/-. The Ld A.R submitted that the aggregate credit of ₹ 15,53,929/- relate to the trading transactions and the closing balance available at the end of the year was ₹ 1,38,772/-. Hence the creditor has confirmed the closing credi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition on the ground that the aggregate amount of credits available in the account was ₹ 1,76,250/-, but confirmation letter was given for a sum of ₹ 47,715/- only. Hence the difference was added by the AO. It is submitted that the credit transactions relate to the share trading transactions and major portion of the credit has been repaid during the instant year and the outstanding balance of ₹ 47,715/- was settled after 31.3.1991. Thus, we notice that the assessing officer has made the addition without properly examining the replies given by the assessee as well as ledger account copy of the creditor. When the debit entries of the trading transactions are accepted as genuine, there is no reason to suspect the corresponding credit entries. Further, the creditor has only confirmed the closing balance, which is in agreement with the books of account of the assessee. Accordingly, we are of the view that the AO has made this addition without proper reasoning and accordingly the deserves to be deleted. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition. 101.5 The next item of addition relates to the cash cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee has also raised certain legal grounds in this year also. Since most of the issues have been decided in favour of the assessee on merits, we do not find it necessary to adjudicate them. 105. We shall now take up the appeal filed by the revenue. The only issue urged in this appeal relates to the deletion of various additions aggregating to ₹ 10,89,30,545/-. Various types of additions aggregating to the above said amount were made by the AO in the original assessment proceedings. In the appeal filed by the assessee, the Ld CIT(A) deleted these additions. The revenue did not prefer appeal challenging the order of Ld CIT(A) on these issues and hence the same has attained finality. The assessee alone went in appeal before ITAT challenging the additions confirmed by Ld CIT(A). As stated earlier, the Tribunal restored those additions which were confirmed by the Ld CIT(A) to the file of the AO for fresh examination. In the set aside proceedings, the AO assessed various additions aggregating to ₹ 10,89,30,545/- again, even though they have already been deleted by Ld CIT(A) in the first round of proceedings and the concerned matters have attained finality. These f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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