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TMI Blog2017 (11) TMI 561X X X X Extracts X X X X X X X X Extracts X X X X ..... , relying on the provisions of section 68 of the Income-tax Act, 1961 ('the Act') without appreciating the efforts that your assessee had made to provide sufficient available details for each and every such credit in its account. 2. Without prejudice to the Ground No. 1, the CIT(A) has erred in law and on the facts in not granting credit for a sum of Rs. 51,68,195/- being added to the total income during the course of assessments of earlier years and identified subsequently. without appreciating the efforts that your assessee had made to pass on this credits along with credits received and unidentified in earlier years after having sufficient details like Identity of the creditors, PAN No. of depositors, their bank account and more importantly the creditworthiness by way of proving that these are the depositors in normal course of business to trade with clients with your assessee. 3. The CIT(A) has erred in law and on the facts in adding a sum of Rs. 3,28,767/-being proportionate interest on the borrowings reason being the borrowings were used as short term interest-free credit to the appellant's subsidiary company. 4. The CIT (A) has erred in law and on the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances were upheld. 4. The assessee being aggrieved with the order of the CIT(A) to the extent the latter had sustained the aforesaid additions/disallowances, had therein carried the matter in appeal before us. The contentions raised by the authorised representatives for both the parties, and our adjudication as regards the respective issues assailed before us, is as under:- ADDITION OF 'UNEXPLAINED DEPOSITS' U/S 68 : Rs. 29,91,792/- 5. The ld. Authorised Representative (for short 'A.R') for the assessee taking us to the genesis of the issue under consideration, submitted that the A.O had during the course of the assessment proceedings observed that the assessee had maintained an account under the head "Temp. a/c". The assessee submitted before the A.O that in order to facilitate early credit of money from the clients, it had advised them to deposit the money directly in its bank accounts and intimate the same by way of a letter or e-mail etc., with the proof of deposit, in order to enable the assessee to reconcile such deposit with the credit in the bank. The ld. A.R submitted that the assessee would credit the amount in the account of the respective client in its records only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he unclaimed amounts received from the clients were consistently offered by it for tax after a lapse of a period of three years, therein took us through Page 147 of his 'APB', which revealed that the assessee in the preceding years, viz. A.Y.2006-07 and A.Y. 2007-08 had on his own offered such unidentified amounts lying in the "Clients account" of Rs. 2,51,576/- and Rs. 3,50,554/-, respectively, for tax. The ld. A.R further averred that the amounts lying in the "Clients account" were held by the assessee only in a fiduciary capacity, and it could at no stage be held to be the owner of the said amount. Alternatively, the ld. A.R submitted that though the amounts aggregating to Rs. 29,91,972/- which with the efflux of time had been characterised as unclaimed amount of the clients, however, could not be assessed as an 'Unexplained credit' u/s 68 in the hands of the assessee. It was averred by the ld. A.R that the addition of the entire amount would lead to a 'double addition' in the hands of the assessee. It was submitted by the ld. A.R that the A.O while framing the assessment in the hands of the assessee for the preceding years, viz. A.Y. 2006-07 and A.Y. 2007-08 had made a further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that as the assessee had failed to identify the depositor, therefore, the genuineness of the transaction could not be established. The ld. D.R referring to S.No. 17 - Page 5 of the 'Synopsis', averred that the amount of Rs. 58,162/- mentioned therein stood reflected as a cash receipt. The ld. D.R thus taking support of the aforesaid fact, submitted that on various occasions such cash deposits were received by the assessee, therefore, the fact that the said amount was as a matter of fact the unexplained cash owned by the assessee, could not be ruled out. The ld. D.R relied on the orders of the lower authorities and submitted that the order of the CIT(A) sustaining the aforesaid addition of Rs. 29,91,792/-(supra) did not suffer from any infirmity, therefore, the same may be upheld and the appeal of the assessee on the issue under consideration may be dismissed. 7. We have heard the authorised representatives for both the parties, perused the orders of the lower authorities and the material available on record. We have deliberated upon the issue under consideration and after giving a thoughtful consideration to the facts of the case find substantial force in the contentions raised by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to be in strict compliance of the parameters laid down by SEBI. We thus in the backdrop of our aforesaid observations are thus of the considered view that it can safely be concluded that the assessee was holding the amounts lying in the "Clients account" only in a fiduciary capacity. We find that the issue that an amount held by a person in a fiduciary capacity cannot be brought to tax as an unexplained credit u/s 68, is no more res integra in light of the judgment of the Hon'ble High Court of Bombay in the case of CIT Vs. Tanubhai D. Desai (1972) 84 ITR 713 (Bom), wherein the Hon'ble High Court after referring to the rights and regulations of solicitors, in respect of the amounts of their clients held by them in a fiduciary capacity, had observed as under:- "The relevant principle laid down by the House of Lords in its judgment in that case is that if a person in a fiduciary position receives any financial benefit arising out of the use of the property of the beneficiary, he cannot keep it unless he is authorised to do so. Applying that principle the House of Lords held that on the facts of the case the solicitor was not authorised to keep the interest either by custom or by i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid practice of the assessee in offering the unidentified amounts received from the clients and forming part of the "Clients account" for tax, after a lapse of a period of three years, and on the said basis had assessed the amounts of Rs. 2,51,576/-(supra) and Rs. 3,50,554/-(supra) offered by the assessee for tax after a lapse of a period of three years in AY: 2006-07 and AY: 2007-08, respectively, therefore, a different yardstick and an inconsistent approach would not be permissible on its part for the year under consideration. 8. We are of the considered view that as we have set aside the entire addition of Rs. 29,91792/-(supra), therefore, the contention of the assessee that the taxing of the amount of Rs. 9,49,687.96 (supra) during the year under consideration would lead to 'double taxation' in its hands is rendered as academic. We thus refrain from adjudicating the said contention of the assessee, which thus is left open. 9. The Ground of appeal No. 1 & 2 are thus partly allowed in terms of our aforesaid observations. DISALLOWANCE OF INTEREST ON BORROWED CAPITAL : Rs. 3,28,767/- 10. We now advert to the disallowance by the A.O of the interest on borrowed capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o its 'Wholly owned subsidiary' company ('WOS'), then no disallowance of any part of the interest paid by the holding company on the borrowed funds advanced to the 'WOS' would be called for. It was thus submitted by the ld. A.R that the judgment of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. (supra) had not been appreciated by either of the lower authorities. Per contra, the ld. Departmental representative relied on the orders of the lower authorities and submitted that as the assessee had made available interest free funds out of its interest bearing funds, therefore, the A.O had rightly disallowed the proportionate interest relatable to such amount. 12. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record in context of the issue under consideration before us. We find that it remains as a matter of fact that the assessee had borrowed substantial interest bearing funds on which huge interest was being paid by it. We are of the considered view that the issue as regards the allowability of the interest paid by the assessee, to the extent interest free advances were made ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gments of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. (supra) and the judgment of the Hon'ble High Court of Bombay in the case of Reliance Utilities Ltd (supra). That in case if it emerges from the records that sufficient interest free funds were available with the assessee at the relevant point of time when the interest free amounts were advanced to the subsidiary company, or it is proved by the assessee that the amount advanced to the subsidiary company was prompted by commercial expediency, then under either of the aforesaid situation the disallowance of interest made by the A.O u/s. 36(1)(iii) shall stand vacated. Needless to say, the A.O shall during the course of the set aside proceedings afford sufficient opportunity of being heard to the assessee, who shall remain at a liberty to substantiate the factum of availability of sufficient interest free funds at the time of advancing the interest free amount to the subsidiary company, as well as demonstrate before the A.O that the amounts had been advanced to the subsidiary company on account of commercial expediency. We thus restore the aforesaid issue for fresh adjudication to the file of the A.O, who is directed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had some business of foreign clients, therefore, made an adhoc disallowance of 50% of the foreign travel expenditure and made an addition of Rs. 45,97,216/- on the said count in the hands of the assessee. 14. The assessee being aggrieved with the order of the A.O assailed the disallowance of the foreign travelling expenses before the CIT(A). The assessee submitted before the CIT(A) that the foreign travelling expenses were incurred for arranging meetings with clients and to provide them with update and support of trading ideas, arranging meetings with prospective clients, arranging meetings to introduce various leaders of corporate India with FII's and also to have discussion on business strategies to expand business and enhance efficiency of operations of the assessee. It was submitted by the assessee that it had during the year under consideration sent representatives/employees to Singapore, Hongkong, U.K., Germany, Dubai, Italy, France, Vienna, Vietnam, South East Asia, London, Japan, USA, Seoul, Austria and other countries. The assessee averred before the CIT(A) that considering the size of brokerage revenue earned, it was essential to organize clients meetings in order to mai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ling expenses are pitted against the total brokerage receipts of the assessee, the same hardly works out to 0.5% of the said brokerage income. It was submitted by the ld. A.R that the assessee is a Joint venture and its counterpart was a foreign company based in U.K. The ld. A.R submitted that the clientele of the assessee is present in almost 12 countries and it earns substantial brokerage income from catering to the said clients who are settled abroad. The ld. A.R in order to substantiate the genuineness and veracity of incurring of the foreign travelling expenses, which as per him were incurred wholly and exclusively in the course of the business of the assessee, therein submitted that the assessee is a professionally managed company and its clients consists of foreign institutional investors (FII's) and Nonresident Indians (NRI's) based in the foreign countries. It was thus submitted by the ld. A.R that the assessee in the very interest of its business had to hold regular meetings with its clients, in order to maintain and furtherance of its business relationships with them. The ld. A.R further submitted that as the assessee was a multi-national company, therefore, the director ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the absence of complete details in respect of the nature of the foreign travelling expenses incurred by the assessee, the lower authorities had fairly carried out a proportionate disallowance of the said expenditure. It was thus submitted by the ld. D.R that no infirmity did emerge from the order of the CIT(A) and the appeal of the assessee in respect of the issue under consideration lacked any merit and thus was liable to be dismissed. 16. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record in context of the issue under consideration. We have given a thoughtful consideration to the issue before us and find substantial force in the contentions raised by the ld. A.R before us. We have deliberated on the material available on record and find that the assessee is a multinational company which primarily caters to its clients, which consists of Foreign Institutional Investors (FII) and Non Resident Indians (NRI's) based in foreign countries. We are of the considered view that in the backdrop of the very nature of the business of the assessee, it was indispensably required on its part to ho ..... X X X X Extracts X X X X X X X X Extracts X X X X
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