TMI Blog2019 (9) TMI 615X X X X Extracts X X X X X X X X Extracts X X X X ..... t remains that the bank had advanced monies to the notified party and that money had not been repaid. These monies were therefore outstanding and repayable by the notified party. Even assuming that the assessment is not on the basis of best judgment, there is no explanation why the department has chosen to reject the conclusions drawn by the auditors classifying the amounts as a liability. Indeed nothing prevented Assessing Officer or the Appellate authority from taking its analysis of the auditors report to its logical conclusion. Thus to my mind there can be no doubt that what we are faced with is an assessment on best judgment basis. The first of these criteria are therefore clearly satisfied. Facts of the case justifies intervention to scale down the demand since the decision of the tax authorities is clearly on a discretionary assessment. In the case at hand we are concerned with arriving at a suitable formula for scaling down the demand of the income tax department based on best judgment assessment and as against decrees passed by this Court and in my view it would not be appropriate that the extent of scaling down should take into consideration the demand of the revenue a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e amount specified in (i) above. (iii) Mr. Daruwalla on behalf of the Custodian states that in view of this order he is not pressing Custodian Report no. 18 of 2016. Accordingly, Custodian Report no. 18 of 2016 is disposed. Liberty to apply. - Miscellaneous Application No.77 Of 2007 In Custodian Report No.3 Of 2007 Along With Custodian Report No.18 Of 2016 In Custodian Report No.3 Of 2007 - - - Dated:- 6-9-2019 - A.K. MENON, J. Mr. Pradeep Sancheti, Senior Counsel, a/w Ms. Smriti Jha i/b. Mulla Mulla Craigie Blunt and Caroe for the applicant. Mr. D. P. Kamath for respondent no.1. Mr. Hormaz Daruwalla a/w Ms. Shilpa Bhate i/b. Leena Adhvaryu Associates for respondent no.2/Custodian. Mr. B.M. Chatterji, Senior Counsel, a/w Maya Majumdar i/b. Ranit Basu for respondent no.3. JUDGMENT : 1. By this Miscellaneous Application, the applicants seek scaling down the demands of the Income Tax Department-respondent no.3 prior to payment of taxes from the attached assets of the respondent no.1 notified party Abhay D. Narottam. Respondent no.1 was notified on 8th June, 1992. However, he expired on or about 16th July, 2012. The widow of the original respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e that the proceeds of the said cheques were credited to the account of respondent no.1 maintained with BOK (now under liquidation) without any instructions or authorization of the applicants. According to original respondent no.1 these were not his transactions and he had issued instructions to BOK under the instructions of other notified parties such as Hiten Dalal. The transfer of funds into the account of original respondent no.1- Narottam was alleged to be a result of fraud and collusion between the officers of BOK and some brokers like Hiten P. Dalal. In the said Suits, Narottam who was defendant no.4 had filed his written statement in which he admitted that proceeds of the three aforesaid cheques had been received by him and credited to his overdraft account no.201 with BOK. He did not claim any entitlement to the amount. On 11th March, 2004, Narottam consented to decrees being passed against him in the three Suits. 4. On 27th June, 2008 further affidavit of one Mr.K. Vijendra Rao of the applicants came to be filed once again complaining that the Commissioner of Income Tax - Respondent no.3 had not produced material documents relied upon while passing the order of assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-. The Auditor's report had clearly disclosed oversold securities on the liability side coupled with explanation that it related to those transactions where sales were made to other parties and consideration was received but no securities were delivered at least upto 31st March, 1992. The explanation given by Narottam is that his account had been misused by DMPL, Bhupen Dalal, J.P. Gandhi, T.B.Ruia and Hiten Dalal. The funds borrowed by DMPL, from LIC and Allahabad Bank were repaid by misusing funds from his account apparently by the sale of securities which were not delivered. Reference was made to the observations in the Assessment Order dated 28th March, 1994 inter alia recording statement of the said Narottam and concluding that the banking system had lost money (through Bank of Karad, which was in liquidation) to the said Narottam who does not appear to be the real beneficiary. That the said, Narottam had not accepted the liability as his own. Observations are to the effect that the complex transactions are series of structured deals carried out by a coterie of brokers resulting into someone losing money but the gainers and losers cannot be directly corelated. 6. There ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Assessment Order and a demand in a sum of ₹ 30,26,14,091/- which is based on assumption of total wealth of the assessee at more than ₹ 1543 crores. The reasons for scaling down referred to above clearly apply to Wealth Tax assessments as well. Surprisingly the amount of oversold securities which auditors considered to be liability and which are presumed to have been delivered in the Assessment Orders are treated as wealth. Clearly this was unacceptable. That the Assessment Order includes a sum of ₹ 1298 crores as wealth for A.Y. 1991-92 but the relevant assessment year has not been provided. It is also the grievance of the applicant that despite repeated demands, copies of documents and materials relied upon while passing Assessment Order in respect of the respondent no.1 running into 14 items have not been furnished. Thereafter two documents were received. Further disclosure was then made, yet again, the security ledger for 1991-92 was not forthcoming. The applicant has annexed statement of summary of scaling down in respect of A.Y. 1992-93. 9. That the Janakiraman Committee Report records, after scrutinizing records of banks and of the said Narottam had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Income Tax department had completed the assessment within the frame work of law and a parallel enquiry could not be conducted. In a further affidavit of the same officer also dated 12th June, 2008 is seen to have been filed in which the respondent no.3 sought to highlight the principles laid down by the Supreme Court in Harshad S. Mehta and Custodian and Others 1998 (5) SCC 1. The deponent contended that demands against the respondent no.1 as on that date was ₹ 5,84,614.42 and that there has been no miscarriage of justice, fraud or collusion. The decision of the Income Tax department, it was contended was based on proper materials and once assessment was based on a proper materials and it relates to the statutory period, there was no question of reducing tax assessment made by the Revenue. It was reiterated that there was no miscarriage of justice, fraud or collusion in the instant case. 12. Paragraph 10 the affidavit sets out that respondent no.1 had failed to file his return of income despite repeated reminders and hence the assessment was completed under section 144 of the Income Tax Act on the basis of best judgment . The Assessing Officer had taken into account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 6 Interest receivable from Dhanraj Mills Pvt. Ltd. 13,63,40,398/- 7 Unaccounted investment in the oversold securities 333,23,30,172/- The deponent has sought to justify these amounts by contending that even though the assessment is based on best judgment, it is framed on the basis of all relevant material and after giving an opportunity to the assessee of being heard. No specific addition is made on account of three cheques referred to by the applicant. For the year 1993-94 also the very same reasons are reiterated and the additions made are as follows : Sr.No. Particulars Amount 1 Interest from Uday Palani group 3,83,09,437/- 2 Income from share market activity 18,00,000/- 3 Commission on security transactions 12,98,550/- 4 Unexplained investment in seized assets ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under section 234A, 234B and 234C. 14. An additional affidavit of Mr.Amol Kirtane dated 11th September, 2008 has been filed in which it is contended that merits of assessment cannot be gone into under section 69 of the Income Tax Act and the value of investment made by assessee in financial year immediately preceding the assessment year is deemed to be income for such financial year. If the investments are not recorded in the books and the assessee offers no explanation, the deeming provisions of sections 69, 69A, 69B and 69C and judicial decisions establish that these sections are only clarificatory and, therefore, addition can be made towards income from undisclosed sources. Submissions of Counsel 15. Mr. Sancheti, the learned Senior Counsel appearing on behalf of the applicants submitted that assets of the notified party as per the report submitted by the Custodian is approximately ₹ 77.78 crores whereas the claim of the Income Tax Department for the statutory period is said to be about ₹ 211.08 crores. This computation is based on income assessed for the year 1992-93 and assessment for the year 1993-94 at ₹ 26.10 crores. Wealth tax dues are also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad arisen on account of additions which required scaling down. 18. In this respect, interest receivable from DMPL was ₹ 13.63 crores and interest receivable from Uday Palani was ₹ 3.83 crores. Mr. Sancheti submitted that the additions made were only on account of oversold securities where under the Income Tax Department claimed a sum of ₹ 211 crores as tax and also claimed on interest receivable which the Custodian had not yet received. Mr. Sancheti submitted that the additions made to the income on account of oversold securities can also be subject matter of scaling down. In this respect, he referred to the orders of the Special Court dated 29th September, 2007 passed in the Custodian Report no.15 of 2006 along with Miscellaneous Application no. 210 of 2003 seeking distribution of assets. The State Bank of India and Standard Chartered Bank held decrees passed by the Special Court against late Harshad S. Mehta who had filed Miscellaneous Applications pursuant to orders of the Supreme Court in Harshad S. Mehta v/ s. Custodian and others [1998 (5) SCC 1] and in which the Supreme Court noted that under Section 11(2)(a) only the tax liability of the notified pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n nor was any such investment noticed by the auditor. For the A.Y. 1991-92 it was pleaded that oversold securities amounted to ₹ 1042/crores was treated as income on account of unaccounted investment and that if such investments are available in the earlier assessment year, Mr. Narottam could have delivered the securities by using these investments and hence it should not have been a case of unaccounted investment in the relevant A.Y. 1992-93. Mr. Sancheti submitted that funds of the applicants amounting to ₹ 374 crores were received by Mr. Narottam during July-September 1991 and this aspect has not been disputed. Thus the basic transaction leading to the filing of the suits is not in dispute inasmuch as the encashment of the bankers cheques in the account of the said Narottam with the BOK is not in dispute. It is also not in dispute that the funds received from the applicants by Narottam had not been returned or repaid and these funds were available with Narottam to acquire and deliver securities in relation to the so called oversold securities and that these funds collected by Narottam could not be said to be unexplained since these were received by him in his bank ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... price was liable to be taxed. The entire amount could not have been taxed in any year. He further submitted that this is borne out by the order of the Special Court in the order under Custodian Report No.15 of 2006 and in case of SBI(supra). Furthermore, since no delivery had been effected, there could have been no profit and, therefore, it would continue to be a liability. In this respect reliance was placed on the report of the auditor filed in the matter, the contention being that since amount is unaccounted investment and is basis of the Income Tax Assessment Orders, no such investment is found in the books of account nor its investment available with the Custodian. Even the Chartered Accountant has not found that such amount is invested. 24. Mr.Sancheti contended that in the appellate order dated 5th December, 2006 referred to above the amount of ₹ 1042 crores was found in the assessment year immediately preceding the statutory period and that was treated as income on account of investment. If that be so, Mr.Sancheti submitted that said Narottam could deliver the securities using these investments and it would be assessed as unaccounted investment for the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of two entries the conclusions that there was over selling were incorrect. In three cases the figures did not match. Thus, to the extent of ₹ 11,94,12,113/- there was either no over selling or the figures were not matching. Moreover, the securities ledger did not reveal entries in support of a value of ₹ 176,96,74,652/-. He therefore submitted that the increase in the oversold position as projected by the Income Tax department cannot be sustained. In effect, it is submitted that in respect of interest addition on account of the Uday Palani group, no amount can be payable. Likewise in the case of unexplained credits in the books of account, and interest accrued on account of DMPL no amount is payable to the Income Tax department. The scaling down on these three counts was canvassed. 27. It was also contended that as against ₹ 12,98,550/- claimed by the Income Tax department as commission on securities, only ₹ 12,985/- will be found due upon scaling down. The bulk of amounts namely, ₹ 383,09,437/- being interest from Uday Palani group, ₹ 7,78,14,935/on account of unexplained credits and ₹ 13,63,40,398/- being interest from DMPL were requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e audit report of the Auditors appointed by the Special Court. In the reassessment proceeding the Assessing Officer retained the addition of ₹ 219 crores and in appeal the assessee had not challenged this addition and that which has led to a presumption that the appellant accepts that in respect of oversold securities delivery had been made by buying these securities. It was also found that in the immediately preceding assessment year an addition of ₹ 1042 crores had been upheld. The appellate order went on to hold that in the facts and circumstances of the case oversold position does not represent any liability as delivery had been made through unaccounted sources. There is absolutely no justification in having such a finding if there is no delivery at all. 31. Elsewhere in the Appellate order in the concluding portion reference was made by the CIT(A) to the Remand Report dated 29th November, 2006 it recorded that there was an increase in liability on account of oversold security from 31st March, 1991 to 31st March, 1992. He further submitted that the list annexed to the Remand Report is a selective list. That list does not reflect correct position. A reference to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above legal provisions and judicial pronouncement on the subject as the guiding factor. 33. In the concluding portion, after dealing with the gist of the additions bulk of it being a sum of ₹ 333 crores deponent states as follows ; The copy of the Assessment Orders dt. 30/3/1995, 19/3/2002, the order of CIT(A) dt. 5/12/2006 and the order giving effect to the order of CIT(A) dt 13/2/2007 is enclosed as Exhibits 'A', 'B', 'C' and 'D' respectively. It can be seen from these orders that the additions are made on the basis of facts on record and have stood the test of first appeal. It can be further seen that Audit report as ordered by the Honorable Special Court has also been considered during the remand proceedings. Thus even though the assessment is on best judgment basis, it has been framed after considering all the relevant material on record and after giving due opportunity to the assessee. It is also clearly seen that no specific addition has been made on account of three cheques mentioned by the applicant. The amount of the said cheques also does not match with any of the additions made. 34. Mr. Sancheti submitted that und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that when the Assessment Order wascarried in appeal, the Assessee had personally appeared before the CIT (A) and the assessment was completed on best judgment basis as contemplated in the decision of the Supreme Court in CIT vs. Amritlal Bhogilal Co [AIR 1958 SC 868] and J.K. Synthetics Ltd. vs. Additional CIT [105 ITR 344 Allahabad.] Mr.Chatterji further submitted that unaccounted investment in oversold securities of ₹ 219 crores on which tax would be around ₹ 109.50 crores at the rate of 50% was accepted by the assessee in the appeal. In this behalf he invited my attention to the observations in the appellate order which reads as follows : The assessee must have acquired the said securities, which have admittedly sold, from unaccounted sources. It may be noted here that in the original assessment order the assessing officer made an addition of ₹ 219 crores in respect of unaccounted investment in securities, which has been included in the assessed income in the reassessment order appealed against. However, in his grounds of appeal, the assessee has not disputed the said addition. In other words, the assessee has accepted that there was unac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the securities. It is contended that the applicant has not been able to prove these sources or legitimate purchase of these oversold securities. 39. Mr.Chatterji further submitted that the applicant could not show that transactions in unsold securities were complete. Unaccounted investment in securities were sought to be focused upon. My attention was invited to the observations in the appellate order of the CIT (A) dated 5th December, 2006 under the caption of enhancement of income wherein Mr.Chatterji invited my attention to the observations that enhancement of the income has been proposed on account of liability shown in the balance sheet on account of oversold securities that for the A.Y. 1992-93, the final report of the Assessing Officer dated 29th November, 2006 had made following observations : The Auditor was asked as to how such transactions have been taken in the Balance Sheet as liabilities. The Auditor has orally stated that such securities were not acquired or delivered by the assessee and only entries for bankbook and liability have been passed. It may be noted that the assessee has not established by producing any evidence that securities were not held/acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod of accounting. He further concluded that papers seized from the premises showed that he is calculating interest on accrual basis. 41. Mr. Chatterji then submitted that in respect of interest receivable from DMPL, the additions made was on the basis that Narottam has advanced a sum of ₹ 71,85,81,040/- to DMPL and filed a petition before the Special Court for recovering of that amount for recovery at 18% per annum. The Special Court allowed the petition and decreed payment of interest at 19% per annum. In view of this order, accrual of interest cannot be doubted and the Assessing Officer has taxed accrued interest at 18% though the Court had awarded interest at 19%. In this behalf Mr.Chatterji relied upon decision of the Supreme Court in CIT vs. Shivaprakash Janakraj Co. Pvt. Ltd. [222 ITR 583] which dealt with aspect of real income . Mr.Chatterji further submitted that the Assessing Officer has correctly added brokerage of ₹ 3.50 crores at 0.5 paise to ₹ 100/- as has been discussed by the Assessing Officer and CIT (A) in first two paragraphs. 42. Mr. Chatterji relied upon a statement which sets out only the increase and submitted that it was only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh the source of funds. It was contended that introduction of the deeming provisions was to be considered in case of such eventuality and therefore this aspect must be borne in mind while determining whether or not scaling down was justified. 44. Mr Chatterji had also stressed upon the fact that there was no nexus between the three suits in which the applicant had obtained decrees and the amount ought to be treated as income. These suits were in relation to securities of the UTI and 11 Government of India bonds and were not included in the table contemplated in paragraph 4.5 of the appellate order and that included in the annexure to the Remand Report. It was therefore sought to be contended that the securities on the basis of which addition of income has been made were different from the income on the securities when the suit was filed and therefore there was no nexus. Interesting though this argument may be, it must be borne in mind that the suits for recovery of money and decrees on admission have been passed in the suits against the assessee Abhay Narottam. It is money that is subject matter of the suits and of scaling down. It is not the securities by themselves. 45. Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He reiterated that the assessee had accepted that there was unaccounted investment in oversold securities. 47. Mr. Chatterji denied that the contentions of the revenue were an after thought as sought to be contended by Mr. Sancheti. Adverting to the contention of Mr.Sancheti that the oversold securities should be restricted to ₹ 51 crores, Mr. Chatterji submitted that securities forming part of the addition of ₹ 333 crores was differential amount between A.Y. 1991-92 and 1992-93 as reflected in the chart annexed to the Remand Report. Mr. Chatterji in the course of arguments clarified that the term nexus referred to in paragraph 44 of the judgment of the Supreme Court in SBI (supra) is in the context of paragraph 15 of that judgment which is quoted below for ease of reference : 15......... unless it was demonstrated and established by the banks that there is a nexus between the amounts which have been decreed in their favour and the amount which has been included in the income of the assessee / notified person for the statutory period, the said amount cannot be scaled down. 48. Mr. Chatterji further submitted that the decretal amounts did not find plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raj Co. Pvt. Ltd. [222 ITR 583] 50. Mr. Sancheti in rejoinder submitted that the revenue's contentions were based on the conclusion of the Supreme Court recorded in paragraph 44 of DCIT vs. SBI (supra). The revenue had dealt with only submissions made by the applicant in paragraph A(4) of the applicants written submission. The order of CIT being the final order in relation to additions for oversold securities inter alia records at page 124 as follows : The Appellate order passed by the CIT(A) at Pg. 103 (which is final order) in relation to the additions for the oversold securities in the previous 1991-92 assessment year, inter alia records at Pg. no. 124 that it is also found that in the immediately preceding assessment year (F.Y. 1990-91 ; A.Y . 1991-92) addition to the tune of 1042 crores in this account has been upheld in the first Appeal Mr. Sancheti had submitted that the reference in this paragraph to the assessment years would be A.Y. 1991-92 and F.Y. 1990-91. The order also recorded that for A.Y. 1992-93 the position of oversold securities was ₹ 719 crores based on the balance sheet of the notified party. Reference was also made to the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson are, along with revenues, cesses and rates, entitled to be paid first in the order of priority and in full as far as may be. 34. While we respectfully agree with the finding that the Special Court cannot sit in appeal over the assessment of taxes by the tax authorities, we would like to qualify the Court subsequent observations relating to payment in full of all assessed taxes under section 11(2)(a). There is undoubtedly no question of any reopening of tax assessments before the Special Court. There is also no provision under the Special Court Act for proof of debts as in insolvency. The provisions in the Special court Act for examination of claims are under Section 9-A. A claim in respect of tax assessed, therefore, cannot be reopened by the Special Court. The liability of the notified person to pay the tax will have to be determined under the machinery provided by the relevant tax law. The extent of liability, therefore, cannot be examined by the Special Court. 35. But the Special Court can decide how much of that liability will be discharged out of the funds in the hands of the Custodian. This is because the tax liability of a notified person having priority under se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r collusion, that leaves only miscarriage of justice in the assessment proceeding, if any, to be identified. In paragraph 26 of the judgment the Supreme Court holds that scaling down should only be done in serious case of miscarriage of justice or where tax assessed is so disproportionately high in relation to the funds in the hands of the Custodian so as to require scaling down in the interest of claims of banks. 55. The contention of the applicants in Miscellaneous Application is that Janakiraman Committee in its report covering the statutory period has observed that the account of the respondent no.1 was commonly used for siphoning funds, one of the methods being to enter into sale transactions in the name of Bank of Karad whereas the counter party purchasers would issue banker's cheque favouring Bank of Karad. The proceeds, however, would be credited to the account of respondent no.1 and utilised by the parties such as Hiten Dalal, T.B.Ruia and M/s.Dhanraj Mills Pvt. Ltd. for their own purpose. In this behalf, the applicants sought to rely upon the reports of the Janakiraman Committee appointed by the Reserve Bank of India. In particular Chapter XVI of the 5th Report, 6t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty cannot be examined by the Special Court. It reiterated that tax due means tax as finally assessed and the tax liability can be properly construed as one arising out of transaction in securities during the statutory period i.e. form 1st April, 1991 to 6th June, 1992. Priority is given under section 11(2)(a) to such tax liability for the aforesaid statutory period but the Special Court can decide how much of the tax liability will be discharged from the monies in the hands of the Custodian. There is no material change in the legal position. SBI (supra) reiterates that if the assessment is based on proper material the Special Court may not reduce the tax claim and pay it out in full. 58. The Special Court may examine whether the taxes so assessed are grossly disproportionate to the properties of the assessee in the hands of the Custodian while applying of Wednesbury Principles of Proportionality and accordingly the Special Court may scale down the tax liability. Further it reiterates that the Special Court must have strong reasons for doing so. This is evident from paragraph 24 of the judgment. In paragraph 38 of HSM (supra) the Supreme Court held that if any amount was fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he decretal amount and the income included in the assessment of the notified person for the statutory period ? 2. Whether the decrees are with regard to the oversold securities, and if so, whether there is any duplication of amount while scaling down the tax liability ? The principles having been thus laid down in HSM (supra) and as specified in SBI (supra) when these instances are applied to the facts in the instant case, one has to consider whether the application for scaling down meets that requisite criteria. ➢ Firstly whether the assessment in question was a best judgment assessment. ➢ Secondly whether there has been fraud, collusion or miscarriage of justice in the assessment and generally. ➢ Thirdly whether the amount assessed is so highly disproportionate when compared to the amounts of the assessee in the hands of the Custodian ➢ Fourthly whether there is a nexus between the amounts advanced by the banks and the amounts assessed as income of the notified party and ➢ Lastly whether on account of oversold securities the transaction is complete and only difference could be difference between payable and rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The conclusions arrived at in the present case by the appellate authority are based on the Remand Report and on the previous record pertaining to the prior assessment year. In particular, the approach of the tax authorities in having made reference to the sum of ₹ 1042 crores. Assessed during the year 1991-92 and the conclusion that the entire amount of ₹ 719,29,91,843/- being treated as income is obviously on the basis of best judgment but inherent in the process leading to the aforesaid conclusion, I am of the view that erroneous and questionable standards were adopted. On one hand the Special Court appointed Auditors report has been relied upon for some facts yet the conclusion of the auditor that the amounts reflected in the accounts pertain to liability has not been accepted /dealt with. The tax department was unable to accept the conclusion of the auditors, that the amount in the account of Abhay Narottam were only liabilities. There is no explanation forthcoming from the department nor has it has been urged by the revenue as to why the conclusion of the auditor is incorrect. The fact remains that the bank had advanced monies to the notified party and that money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me banks, same party on the same date in the same securities resulting in abnormal profit and losses. It also reports unusual transactions. In some cases there were very high fluctuation in the rates and securities which were sold without adequate purchases resulting in oversold position of stock. There were mismatches in dates between the financial transaction and entry appearing in the securities ledger maintained by the Bank of Karad for the assessee. According to the auditors the reason for mismatch of the date was because the bank wanted to avoid showing a negative stock position. With particular reference to the oversold position of stock, the auditor found that ₹ 7,193,853,583/-was shown as current liability. This was an unusual item in the balance sheet, that the assessee had sold security without adequate opening stock and adequate purchases to effect the sale and security oversold appeared in the balance sheet may be arising due to not giving effect to free delivery of securities in the books of accounts. The auditors concluded that the result declared on the basis of oversold stock position does not indicate a fair business picture of the assessee and therefore the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 1992-93. 68. This matter was discussed with the Auditor who had explained to the Assessing Officer that the assessee was engaged in trading of Government securities, sometimes they were short sold i.e. sold in excess of what was physically held and later on the assessee acquired securities to square off the transaction but such oversold securities related to transactions where sales were made to parties and consideration received but no securities were delivered till 31st March, 1992 or even thereafter. The Auditor was apparently queried as to how such transactions had been accounted for in the final accounts and it was revealed that over sold securities were taken as liability in the balance sheet. The Auditor had stated that such acquired securities were not acquired nor delivered and only entries in the bank book were made. In the meanwhile the assessee did not produce any evidence that securities were held or acquired and delivered. The auditor had not made any categorical remark in this behalf and normally full consideration of any goods and services is received only against immediate delivery or delivery in the near future. The Remand Report concluded that the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r there were no transactions as contemplated in the previous assessment year. Perusal of the tabulated annexure shows 34 securities, their oversold position as on 31st March, 1992 in terms of values, oversold security as of 31st February, 1991 and increase in oversold position. The increase was noted only in four cases that of Sec 11.5% IDBI 2011, Sec 6.75 any, Sec 7.5% IDBI 1997, Sec 6.75% ICICI 2000. 71. The Remand Report relies upon opening and closing balances of all oversold securities and finds that in a number of securities the oversold position has gone up during the financial year 1991-92 i.e. A.Y. 1992-93 and concludes that during the previous year under consideration, transactions of the aforesaid nature took place in these securities and therefore concludes that increase in liability on account of oversold position in these securities is indicative of The Remand Report relies substantially on the accounts of the auditor. This in my view cannot be overlooked. In the decision of Special Court dated 29th September, 2007 in Custodian Report no. 15 of 2006 the Special Court held that in support of the plea of miscarriage of justice five items were pointed out namely viz : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew, the second test of miscarriage of justice is satisfied, more so because if there is no delivery pursuant to sale transaction there could be no profit and it would be a liability. Although this aspect is emphasized by the auditors, this has not been accepted by the Income Tax department. Analysis of the auditors report and as interpreted by the Assessing Officer makes it evident that there is nothing to show that delivery had been effected or that securities had been purchased, as otherwise this would be attached assets in the hands of the Custodian. In this light of the matter since no investment have been found in the books of account or documents no such investment are presently with the Custodian nor were any found by the special auditor read with the fact that in the prior year ₹ 1042 crores was stated as income on account of unaccounted investment, the Assessment Orders clearly are questionable and in any event does not pass the test of an assessment based on proper materials. Miscarriage of justice in my view is clearly evident. 73. As far as the third question whether the amount assessed is disproportionate to the amounts of the assessee in the hands of the Cus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is in this context that the Supreme Court observed that the assessee is under legal obligation to prove receipt of share capital premium to the satisfaction of the Assessing Officer and it would justify addition of the amounts to the Income of the assessee. In my view the ratio of this judgment bears no relevance to the facts at hands. We are concerned with treatment of monies in the hands of the notified parties who is a broker dealing with shares and securities. There was no question of any share capital or premium on share capital being involved. 76. Mr. Chatterji has submitted that in paragraph 39 of DCIT vs. SBI (supra) the Supreme Court had observed that banks have a right to attach property as on date of notification and for which decrees have been obtained and if the banks claim that the amount claimed is wrongly included in income, the banks are required to shows nexus between decreed amount and amount which is included in the income of the notified parties. In the present case it was submitted by Mr. Chatterji that there was no nexus. I am of the view that submission on behalf of the department has proceeded on the incorrect presumption that nexus should be es ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that DCIT has come to the conclusion only on the basis of probability since the above quoted paragraph reveals that assessee or Auditor had not given any detailed trading account for the securities and therefore it was not possible to workout the exact figure of investment. The conclusion however is that the difference between opening and closing balance would mean that during the previous year under consideration transactions took place in those securities and in the opinion of the DCIT the increase in liability is indicative of unaccounted investment in the respective securities . A summary is then provided. The basis of taxation is premised on the securities said to have been oversold which itself has been arrived at without reference to a trading account. No assistance has been derived from the Auditor's report for the revenue to work out these details. In the light of the aforesaid I am inclined to accept the submission on behalf of the applicant that the disclosure made is selective and the annexure to the Remand Report cannot be said to be final one on the subject besides the application of the amount under Suit no. 8 being 25.81 crores related to 11.5% GOI 2008. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f maintaining that such investment were not available in the next year for dealing with securities. Mr. Chatterji's submission proceeded on the basis of comparison of each individual security but that overlooks the obvious. It is well known that securities can be sold on day today basis and what is relevant is the source availability of funds and not the name of the securities. 79. The entire case of the applicant in the case was that securities were not delivered. This aspect has already been dealt with in the judgment of this Court in Suit nos. 7, 8 and 10 of 1994 and it is evident that there was no occasion for the applicant to identify the securities in respect of which such nexus is to be established. The Revenue's submission that the nexus contemplated should be directly between the funds advanced and specific securities inter alia relying upon the Remand Report suffers from an inherent fallacy inasmuch as this submission proceeds on the basis that funds in question were utilised for purchase of securities. The entire case of the applicant and in the suits on the basis of which decrees were obtained on admission is that amounts were advanced but securities were not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee may have accepted unaccounted investment in oversold securities, the basic premise that the asssessee must have acquired securities is in the realm of probability. Having considered all the aspects canvassed before me, I have no doubt that the demand of the Income Tax department is required to be scaled down on account of the fact that there has been miscarriage of justice in the assessment proceeding and the tax assessed is disproportionately high in relation to the funds available and to that extent it is necessary to scale down liability to be paid in priority following the principles laid down in HSM (supra) and SBI (supra). The applicable tests laid down in the judgment of HSM (supra) and SBI (supra) in my view have been satisfied. It is obvious that this Court cannot examine the extent of liability to tax but considering that the decrees have been based on admission and an admission in law is best evidence of the debt I am of the view that the banks must receive funds towards the decree from the notified party. 83. I now proceed on the basis of the ruling in HSM (Supra) that while scaling down, the principle of proportionality be employed. de Smith, Woolf Jowel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such action by exercising power of judicial review. One of such modes of exercising power, known to law is the doctrine of proportionality.― 18. Proportionality is a principle where the court is concerned with ― the process, method or manner in which the decision-maker has ordered his priorities, reached a conclusion or arrived at a decision. The very essence of decision-making consists in the attribution of relative importance to the factors and considerations in the case. The doctrine of proportionality thus steps in focus true nature of exercise the elaboration of a rule of permissible priorities. 19. De Smith states that proportionality involves balancing test ― ― and necessity test. Whereas the former (balancing test) permits ― scrutiny of excessive onerous penalties or infringement of rights or Interests and a manifest imbalance of relevant considerations, the latter (necessity test) requires infringement of human rights to the least restrictive alternative. 86. Although the decisions have their genesis in the field of administrative law, proportionality principle can be applied in the instant case as recognised by the Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 73,889/- Total additions 26,10,43,650/- 72,69,421.00 Total Income 26,10,43,650/- 72,69,421.00 Income tax @ 40% 10,43,96,860/- 29,07,768.40 Surcharge @ 12% 1,25,27,623/- 3,48,932.20 Assessment Year 1992-93 Income Tax 60,39,068.00 Surcharge 7,24,688.16 Total 67,63,756.16 Assessment Year 1993-94 Income Tax 29,07,768.40 Surcharge 3,48,932.20 Total 32,56,700.60 87. The computation relied upon by the applicant and reproduced above would require this court to enter upon merits of the assessment. This in my view would be inappropria ..... X X X X Extracts X X X X X X X X Extracts X X X X
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