DCIT, CIRCLE-3(2), HYDERABAD, HYDERABAD vs. SPANDANA SPHOORTHY FINANCIAL LTD., HYD, HYDERABAD

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAO BENCHES “B”: HYDERABAO (THROUGH VIRTUAL CONFERENCE) BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI LAXMI PRASAO SAHU, ACCOUNTANT MEMBER

ITA No. 990/H/2016 Assessment Year: 2011-12 Spandana Sphoorty Vs Dy. Commissioner of Financials Ltd., Income Tax, Circle-3(2), HyderabAO. HyderabAO. PAN – AAICS 6213N (Appellant) (Respondent)

ITA No. 1474/H/2016 Assessment Year: 2011-12 Dy. Commissioner of Vs Spandana Sphoorty Income Tax, Circle-3(2), Financials Ltd., Hyderabad. Hyderabad. PAN – AAICS 6213N (Appellant) (Respondent) Assessee by: Shri G.V.N. Hari Revenue by: Shri Y.V.S.T. Sai Date of hearing: 10/08/2021 Date of pronouncement: 04/10/2021 O R D E R PER L.P. SAHU, A.M.: ITA No. 990/Hyd/2016 – appeal by assessee This appeal filed by the Assessee is directed against Pr. CIT - 3, Hyderabad’s order dated 12/01/2016 for AY 2011-12 involving

2 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. proceedings u/s 263 of the Income- Tax Act, 1961; in short “the Act” on the following grounds of appeal: “1. The order of the learned Pro Commissioner of Income Tax is contrary to the facts and also the law applicable to the facts. 2. The learned Pro Commissioner of Income Tax is not justified in assuming jurisdiction u/s 263 of the Act in as much as the assessment order dt. 26-032014 u/s 143(3) of the Act is neither erroneous nor prejudicial to the interests of revenue. 3. The learned Pro Commissioner of Income Tax is not justified in directing the assessing officer to reexamine the claim of the appellant towards loss of Rs.2,27,39,54,719 on assigned portfolio in general and in particular the loss of Rs.56,03,43,323 towards excess cash collateral over unpaid value of assigned portfolio. 4. The learned Pro Commissioner of Income Tax ought to have appreciated that the issue of loss on assigned portfolio was duly considered and allowed by the assessing officer and merely because the learned Pro Commissioner of Income Tax entertains a different view the assessment cannot be termed as erroneous. 5. Any other ground that may be urged at the time of appeal hearing.” 2. We notice at the outset that assessee’s instant appeals suffer from 111days delay in filing before the ITAT. To this effect, the assessee filed an a petition for condonation of delay along with an affidavit wherein it was inter-alia, affirmed that due to the resignation of his employee who is looking after income tax matters, caused the impugned delay in filing of the instant appeals. Case law Collector Land Acquisition Vs. Mst. Katiji & Ors, 1987 AIR 1353 (SC) and University of Delhi Vs. Union of India, Civil Appeal No. 9488 & 9489/2019 dated 17 December, 2019, hold

3 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. that such a delay; supported by cogent reasons, deserves to be condoned so as to make way for the cause of substantial justice. We accordingly hold that assessee’s impugned delay is neither intentional nor deliberate but due to the circumstances beyond its control. The same stands condoned. Case is now taken up for adjudication on merits.

3.1 In the course of assessment proceedings, the Assessing Officer had called for the details and also verified the, books of account. In the assessment, the Assessing Officer made additions/disallowances and reduced the loss returned by the assessee as under:

4 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. on website 1,152 Disallowance u/s 14A 6,77,46,792 Loss assessed 27,23,29,304 ========== 4. By virtue of powers vested under section 263 of the Income Tax Act, 1961, the Pr. CIT – 3, Hyderabad called for the assessment records of the assessee company for the Assessment Year (AY) 2011-12 and after examining the same, the Pr. CIT set side the assessment order and directed the AO to revise the income of the assessee keeping in view the directions mentioned in his order passed u/s 263 of the Act, by observing as under: “7.1 I have gone through the assessment order, record, grounds of revision and submissions made by the assessee company from time to time. 7.2 The assessee company grants loans to members of Self Help Group's individuals who need financial assistance to improve their weak financial condition but do not have access to traditional banking facilities. The assessee company then gradually builds up a basket, (portfolio) of such borrowers with varying, loan amounts and repayment periods. Such portfolios, built over different time periods, is then offered to Banks/Fls for sale. The assessee company becomes the assignor and the portfolio purchasing Banks become/s the assignee/s. The assignee purchases this portfolio after, discounting the principal cum future interest value of this portfolio. 7.'3. The assessee company made provisions towards portfolio loans. The relevant para as per Page-31 of the Annual Report is as under:- "In earlier years, the company had voluntarily adopted a provisioning. methodology which was higher than the minimum prescribed norms by the Reserve Bank of ;India, in earlier years. Refer note(f) of schedule 19 for provisioning methodology followed in the earlier years.

5 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd.

The Government of Andhra', Pradesh enacted "The Andhra Pradesh Micro Finance Institution (Regulation of Money Lending) Act, 2011 (Act 1 of 2011)" on December 31, 2010 by way of notification in the official gazette on 'January. 1, 2011 in lieu of "The Andhra Pradesh Micro Finance Institution (Regulation of Money Lending) Ordinance 2010 promulgated on October 15, 2010. Post enactment of the above Act, the environment in which the company is operating has changed significantly. Further, the state regulatory bodies and the Reserve Bank of {India (RBI) have increased their regulatory oversight on MFIs. Given the increased regulatory focus on MFIs, the company changed its earlier provisioning methodology and adopted across all geographies the RBI guidelines as prescribed in the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Direction, 2007."

7.4 . 'It was stated that the assessee company. keeps certain deposits/assets of the assessee company with the assignee Bank as security. In case the assessee company does not pay back the amount to the assignee bank on account of short recoveries from the borrowers of the assessee company, the assignee bank can encash the securities furnished. It was also stated that the securities provided to the assignee Bank varies between 10% to 15% of the assigned portfolio. It was also argued in these proceedings that the assignee Bank is entitled to revoke/encash these securities in case the assessee company defaults in remitting the i~st9lments as per the repayment schedule agreed upon between the assessee company and the assignee Bank/s. The assessee company recognizes the extent of encashed securities as loss and debited to the Profit & Loss a/c under the head 'Loss on assigned portfolio' which for the Assessment Year in question is Rs.227,39,54,719/- as mentioned in the earlier paras of this order. The recognition of loss on account of encashment of securities/bank guarantees by the assignee bank is a complex and laborious exercise in the changed context of new enactment viz. The Andhra Pradesh Micro Finance Institution (Regulation of Money Lending) .Act, 2011 (Act 1 of 2011). The assessee company in the course of the

6 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. proceedings before the Assessing Officer, though explained, did not furnish the data to verify the working out the loss and also the repayment schedule furnished to the assignee Bank/s. It is quite evident that the Assessing Officer has not addressed the issue to the extent it deserves and also there was no relevant enquiries conducted to allow the claim 'of the assessee company under the head 'Loss on assigned portfolio.' Moreover it was mentioned that excess cash collateral for Rs.56,03,43,323/- was invoked by bank over' unpaid value of assigned portfolio. After careful consideration of the facts of the' case, relevant enquiries into the claim in general and amount of Rs.56,03,43,323/- in particular which was claimed as excess cash collateral over unpaid value of assigned portfolio were not conducted. Hence it can be safely concluded that the order is erroneous and prejudicial to the interest of. revenue warranting invoking of provisions of section 263. 7.5 The assessment so made by the Assessing Officer is in a very casual and mechanical manner deserves to be set aside on the issues mentioned above. Assessment made without proper enquiry is held as erroneous and prejudicial to the interest of the revenue and the Commissioner of Income Tax is empowered to revise such assessment by invoking the provisions of section 263 there are various judicial decisions in support of such proposition which are as under: i. Rampyari Devi Sarogi Vs. CIT (SC) 67 ITR 114 ii. Malabar Industrial Go. Ltd. Vs. CIT(SC) 243 ITR 83 iii. Swarup Vegetable Products Industries Ltd. Vs. CIT (ALL) 187 ITR 412 iv. Gee Vee Enterprises Vs: Addl. CIT&Ors (Del.) 991TR 375 v. Rajalakshmi Mills Ltd. Vs. ITO,(ITAT, S6-Chennai) 121 ITO 343, 313 ITR(AT} 182 vi. SRM Systems & Software Pvt. Ltd. Vs. ACIT 2010-TIOL-646-HC-MAO-IT. 8.1 There was incorrect application of law which constitutes an error and as such the. assessment is erroneous and prejudicial to the interests of the Revenue since there is loss of revenue. In this regard, support is drawn from the following decisions: "

7 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. i) CIT Vs. Jawahar Bhattacharjee, 341 lTR 434 (Gau.) ii) Jai Bharath Tanners Vs. GIT, 264 ITR 673 (MAO.) iii) Vashti Management Services Pvt. Ltd. Vs. ITO (ITAT, Del. )(2010-TIOL-642-ITA ,DEL) 8.2. In the case of CIT Vs. Jawahar Bhattacharjee (supra), the following ratio was laid down:- "Jurisdiction under section 263 can be exercised whenever it is found that the order of assessment was erroneous and prejudicial to the interest of the Revenue. Cases of assessment order passed on wrong assumption of facts or incorrect application of law, without due application of mind or without following the principles of natural justice are not beyond the scope of section 263 of the Act. 8.3 In the case of Jai Bharath Tanners Vs. CIT(supra), it was held as under: "We, therefore, hold that the Appellate Tribunal was correct in holding that the Commissioner has exercised his jurisdiction on proper and valid grounds and he has exercised his jurisdiction properly when he found that the assessing officer had granted deduction under sections 80HDD and 80HHC of the Act without verifying the same. We do not find any infirmity in the order of the Appellate Tribunal and accordingly we answer the question of law referred to us in the affirmative, against the assessee and in favour of the revenue. No Costs. 8.4 In the case of Vashti Management Services Pvt. Ltd. Vs. ITO (supra), one of the issues was wrong application of provisions of section 41(2) in respect of profits earned on sale of assets in place of section 50 and the Assessing Officer allowed brought forward losses against such profits claimed u/s 41 (2) by the assessee, The Assessing Officer did not examine the nature of income and submissions of the assessee were not gone into detail to come to a conclusion whether the submissions are correct or not. The Hon'ble ITAI observed as under: “Coming to the applicability of section 263, there is no possibility of taking different views in this matter. The finding

8 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. of the Ld. CIT is that the assessing officer simply ignored the issue involved despite there being a specific query raised by his predecessor. We find that the assessing officer has not examined the nature of the income. He was not sure whether the submissions of the assessee were correct as such submissions only appeared to be correct to him. In view thereof, the order is erroneous as it, is not based upon appreciation of facts and law in the matter and, in fact, is contrary to the decision discussed above. It has also caused prejudice to the interest of the revenue as there has been loss of revenue. The ld.CIT has merely restored the matter to the assessing officer to decide the matter afresh after hearing the assessee. We do not find any fault with his finding. Therefore, it is held that the Id. CIT was right in holding the order to be erroneous and prejudicial to the interest of revenue on this ground. 9. It is the bounden duty of the Assessing Officer to. collect and it appreciate the facts collected and proper application of law is to be made while making the assessment. There is understatement. of income as mentioned in paras 7.2, 7.3 & 7.4 above. In the interest of justice and since the twin conditions, namely, (i) the order of the Assessing Officer sought to be revised. is erroneous: and (ii) it is prejudicial to the interests of the Revenue are satisfied; the assessment order passed u/s 143(3) on 26.03.2014 needs to be set aside for the discussion made. 10. In view of the above discussion, assessment order dated 26/03/2014 for the AY 2011-12 in the. case of the assessee company is set aside to revise the income keeping in view the directions as mentioned in paras 7.2, 7.3 & 7.4 above! after allowing an opportunity of· being heard to the assessee company.”

9 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. 6. Before us, the ld. AR of the assessee filed written submissions, which are as under: “7. The observations of the Pr.CIT are very general, vague and contrary to the facts on record. The assessing officer did examine the issue of 'loss an assigned portfolio' before allowing the said claim. This fact is evident from the following: a) In the very first page of the assessment order, the assessing officer clearly mentioned that 'In response to the notice issued, Shri Prashant Agarwal, FCA appeared from time to time and furnished information as called for. After considering the information, the assessment is completed as under:' From this statement of the assessing officer it is evident that the appellant furnished all the required information and that the assessing officer considered the information submitted by the appellant before passing the assessment order uls 143(3). b) Even the Pr.CIT-3 accepted the fact that the appellant explained the issue of 'loss on assigned portfolio' in the course of proceedings before the Assessing Officer. c) The claim of the appellant in respect of loss on assigned portfolio was separately mentioned in Schedule 18 of the profit and loss account. Moreover, the appellant filed a detailed note during the course of the assessment proceedings (copy at page no.39 of the paper book filed by the appellant) wherein all the relevant facts relating to loss on assigned portfolio' were submitted to the assessing officer. Even the entries in the order sheet (copy placed on record at page no. 39 of the compilation filed by the learned CIT-DR) reveal that the assessing officer enquired into the matter. As per these entries, a notice u/s 142(1) was issued on 4.2.2014 (copy of the notice at page no.12 of the above compilation). The very first point in this notice is 'An amount of Rs.254,19,10,185 is debited to P&L account under the head "Provision and write off'· Please state how this expenditure is allowable as per the provisions of Income Tax Act, 1961. On 13.2.2014 there is an entry in the order sheet confirming that Shri Gayas Moosavi, Manager (Taxation),

10 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. Prashant Agarwal, CA, AR of the company appeared & filed the details called for by this letter dated 04/02/14'. Further, the assessing officer examined the information furnished and sought further details in respect of 'loss on assigned portfolio. The entry reads as detailed note on assigned portfolio- the valuation, board resolution, if any - & also accounting treatment of the same in your books as well as for income tax purpose'. The next entry on 24.02.2014 confirms the fact that the above information was filed. Therefore, it is incorrect to presume that this issue was not addressed to the extent it deserves. 8. The Pr.CIT did not mention any specific reason as to why the order of the assessing officer 'inadequate enquiry' on the part of the assessing officer cannot be a ground to say that the order of the assessing officer is erroneous. The case of the appellant is not that of 'lack of enquiry' and the only point raised by the Pr. CIT is that that the issue was not addressed to the extent it deserves. The appellant submits that the assessing officer is a quasi-judicial authority and the extent of enquiry to be conducted in a case shall be his prerogative and the learned Pr. CIT cannot step into the shoes of the assessing officer and review the adequacy of enquiry mAOe by the assessing officer. The appellant places reliance in this regard in the following cases: a) CIT&Anr.Vs.Chemsworth Private Limited 275 Taxmann 408 (Kar) b) Pr. CIT Vs. Rudrapriya Holiday Resort (P) Limited 184 DTR 378 (Raj) c) Pr.CIT Vs. Brahma Centre Development (P) Limited III CCH 87 (Del) d) Rungta Mines Ltd. Vs. Pr. CIT 61 CCH 27 (Kol)(trib) 9. The Pr.CIT-3 deviated from the issue raised in the show cause notice while passing the final order u/s 263 of the Act. In this regard, it is relevant to refer to parano.2(b) of the showcause notice dt.6.10.2015 which reads as under:

11 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd.

"It is evident from the above statement that the Bank has invoked an amounting to Rs.56,03,43,323 towards excess cash collateral over unpaid value of assigned portfolio. As per the assessee company, the actual liability to pay to bank towards FLDG on assigned loans is Rs.148,61,96,347 only and it was not liable to pay Rs. 56, 03,43,323. However, bank has collected that amount in excess. As the liability to pay Rs.56,03,43,323 has not accrued to the assessee and the same was classified as 'excess cash collateral invoked' and the same is liable to be treated as unascertained liability, and as such required to be disallowed. " Thus, the only issue raised by the Pr.CIT-3 in his show cause notice is that the amount requires to be disallowed. The appellant explained in detail in its replies dt.5.11.2015 and 26.11.2015 that the aforesaid amount of Rs.56,03,43,223 represented the actual amount recovered by the banks from the Fixed deposits and bank balances on account of default on the part of the customers in repaying the loan installments and further on account of the fact that the appellant company also failed to fulfill its obligation to arrange payment of this amount. The appellant filed a copy of the ledger account to substantiate the contention that the amounts were actually debited to the bank account. Thus, the appellant submitted that the amount claimed is neither contingent nor provisional. However, the Pr.CIT-3 in his final order u/s 263 completely deviated from the show-cause notice and held that the assessing officer did not conduct relevant enquiries into the claim in general and amount of Rs.56,03,43,323 in particular which was claimed as excess cash collateral over unpaid value of assigned portfolio. The appellant submits that the Pr. CIT erred in deviating from the show cause notice and raising the issue of 'inadequate enquiry' in the final order uls 263 of the Act. The appellant places reliance in this regard in the case of Pr.CIT Vs. Kesoram Industries Ltd. 181 DTR 236 (Cal) rendered on identical facts. 10. The learned CIT(DR) filed written submissions dt.3.5.2021 and sought to justify the action of the· Pr.CIT in revising the assessment order. The appellant would like to submit the following with regard to each one of the arguments contained in these written submissions:

12 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd.

a) The first contention of the learned CIT(DR) is that the explanation of the appellant filed before the assessing officer and placed at page no.39 of the paper book is not traceable in the assessment record. The appellant contends that the submission of the learned CIT(DR) is contrary to the facts on record. At page no.14 of the compilation filed by the learned CIT(DR), copy of the reply dt.11.02.2014 filed by the appellant before the assessing Officer can be found. In this reply, the appellant furnished the break-up details ofRs254,19,1O,185 debited to the profit and loss account under the head 'Provisions and Write Offs'. As per this break-up at page no.16 of the compilation, the amount of loss on assigned portfolio is RS.227,39,54,719. In the show-cause notice dt.6.l0.2015 issued by the Pr.CIT-3, Hyderabad uls 263 of the Act (copy at page no 40 to 41 of the paper book), the learned Pr. CIT-3 referred to the further break-up of this amount and proposed to revise the assessment in respect of 'Excess cash collateral invoked by bank over unpaid value of assigned portfolio' amounting to Rs.56,03,43,323. Had the appellant not furnished this break-up, the Pr.CIT could not have referred to this break-up. Therefore, the assessment record referred to by the learned CIT(DR) is certainly incomplete. It is common knowledge that the assessing officer keeps some papers in the main folder and some papers are kept separately in 'information folder'. Probably, the learned CIT(DR) did not get the complete record and consequently the above submission was made which is contrary to the facts on record. b) The learned CIT(DR) submitted that the assessing officer collected information only in respect of First loss deficiency guarantee (FLDG) and did not either notice or call for any evidence in respect of excess cash collateral. In this regard, the appellant submits that the obligation of the appellant to the assignee bank/financial institution to ensure collection of the entire receivable emanates only from one agreement. The amount of loss claimed under all the three heads emanated only from 'First loss deficiency guarantee'. This was clearly explained to the assessing officer in the last para of the explanation at page no.39 of the paper book. The last two lines of this para read as it is these FLDGs that have been written off

13 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. as 'Loss on Assigned Portfolio for Rs. 227.39,54,719 in the financials'. Therefore, it is incorrect to say that the assessing officer collected the relevant information in respect of FLDG but not the excess cash collateral. c) The learned CIT(DR) sought to support the order u/s 263 by taking reference to clause (a) and (b) of Explanation 2 to 5.263 of the Act. The appellant submits that this Explanation has no application to the case of the appellant. In some of the cases cited by the appellant hereinabove, the scope of Explanation 2 to 5.263 was clearly explained. d) Lastly, the learned CIT(DR) submitted that the appellant did not file any evidence before the assessing officer regarding claim of Rs.56.03 crores towards 'Excess cash collaterals'. The appellant has already explained above that the assessing officer clearly stated in the order sheet as well as the assessment order that the appellant furnished all the requisite information. Part of the information might not have been kept in the assessment folder. That cannot be a reason to say that the assessing officer did not call for the relevant evidence.”

6.1 In addition to the above written submissions, the ld. AR of the assessee filed paper book containing pages 1 to 48, which is placed on record and perused. He reiterated the submissions made before the CIT(A) and submitted that the AO had issued notice u/s 142(1) dated 04.02.2014 at Sr. 01 for examining the issue and the reply was duly filed before the AO. The explanatory note on portfolio assignment and the pricing methodology, which is as under: “Spandana Sphoorty Financial limited provides financial assistance in form of unsecured loans to underprivileged and unprivileged sections of rural and semi urban population. These loans become book debts, receivables or loan portfolios in financial books of 55FL. 55FL (assigner) then approaches banks/financial institutions (assignee) for selling or assigning portions of these portfolios. The value of any such portfolio will include the principal book value 'plus the interest receivable over the tenure of the portfolio. The assignee then applies it's

14 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. own model to discount this value over various factors, including but not limited to, future inflation, present value of future receivables, primary sector lending targets, the portfolio size, the outstanding period. Once the portfolio is assigned, the principal debt moves out of assignor's Balance sheet as it is no longer a receivable for the assignor. However the assignor continues to remit the loan instalments collected from the borrower, according to the loan repayment cycle, to the assignee. Although these loans are sanctioned without any collaterals by SSFL to it's borrowers, the assignee attaches a partial guarantee, ranging from 10% to 15%, on these portfolios. This guarantee has to be provided by the assignor in form of Fixed Deposit, cash collaterals kept with the assignee as is known as First Loss Deficiency Guarantee (FLDG). In case any portion of the assigned portfolio goes bad or turns unrecoverable, the assignee is contractually and legally entitled to invoke the FLDG. Method of accounting: The difference between the discounted value and the book value of portfolio is credited to Profit and Loss account as a business income and same is offered for taxation. Please refer to example: Principle/Book value of portfolio (A) : Rs. 100 Interest income thereon (B) : Rs. 15 Total receivable over period of loan (A+B) : Rs. 115 Portfolio assigned for (D) : Rs. 107 Profit recorded in books-and offered for taxation (D-A) : Rs. 7 Since the amount received on portfolio assignment is always higher than the book value, the Company always records a profit on such assignment and has been offering the same for taxation. Loss on assigned portfolio during FY 2010-11 The Andhra Pradesh Microfinance institutions (Regulation of Moneylending) Act, 2010 severely and adversely impacted the entire microfinance industry in Andhra Pradesh. SSFL was

15 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. more affected than others as nearly 70% of its total loan portfolio was within A.P. Large parts of loan portfolio and assigned portfolio started turning bad or unrecoverable. 55Fl continued to be liable to the assignees for bad debts on assigned portfolios to the extent of First Loss Deficiency Guarantee. As soon as parts of assigned portfolio started turning bad or unrecoverable, the assignees became legally entitled to invoke the respective FLDGs. It is these FLOGs that have been written off as 'Loss on Assigned Portfolio' for Rs. 2,27,39,54,719 in the financials.”

6.2 After examining the above explanation, AO was satisfied and accepted the loss claimed by the assessee and, therefore, it cannot be said that the AO has not enquired and passed the assessment order. He submitted that the expenditure claimed by the assessee is a revenue expenditure, which is allowable u/s 37(1) of the Act and the assessee is legally entitled to claim as the assessee got negative income during the course of normal business activity of the assessee, which was offered in the return of income. He also referred financial statements in this regard.

16 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. submissions are made. It is humbly submitted that during the original assessment proceedings, the AO did not examine the issue. It is submitted that the AO issued notices u/s 142(1) 14/05/2013 and 04/02/2014 wherein certain information was called for. Information was also called for through order sheet noting during the hearing dated 13/02/2014. In response to notice u/s 143(2) also, certain information was filed by the assessee. Copies of the notices u/s 142{1), order sheet noting and letter filed in response to notice u/s 143(2) are attached with these submissions. It is humbly submitted that no information related to the loss on assigned portfolio was filed in response to notice u/s 143(2). In the questionnaire dated 14/05/2013 also, the issue was not raised by the AO 2. . In the notice u/s 142(1) dated 04/02/2014 also, no mention was made about the issue. However, a query was raised on the amount of Rs 254,19,10,185/- debited to the P&L account under the head "Provision and write off". In response, the assessee filed a statement, in which Rs 227.39 Cr was shown as loss on assigned portfolio. Further details were not given and it was stated that it was business loss incurred on assigned portfolio and the income has always been offered to tax. During the hearing dated 13/02/2014, a detailed note was sought on assigned portfolio regarding valuation of the portfolio and its accounting treatment in the books as well as in the income tax returns. There was no query on the loss on assigned portfolio or nature of assigned portfolio. 2. In the paper book filed by the assessee, it is stated that page 39 of the paper book was filed before AO in the original proceedings. The undersigned in unable to trace the same from the assessment record and there is no proof of filing the same. (During the course of arguments the ld. Dr. submitted that it was on record of the assessing officer ) Even if it were to be presumed that the paper was filed, it may kindly be noticed that the explanation does not indicate any obligation on the part of the assessee to incur expenditure on account of ' revocation of excess cash collaterals. The only liability was in the form of First Loss Deficiency Guarantee (FLDG), expenditure on which account is separately claimed and

17 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. allowed. With regard to the excess recovery, neither the AO noticed the point nor did he call for any evidence in the form of agreements with the assignees or any other relevant information. The assessment was completed on 26/03/2014. Therefore, the argument that the AO examined the item in detail and formed an opinion is incorrect and devoid of merit. In light of the above, it is humbly submitted that the Pr CIT rightfully assumed jurisdiction u/s 263 after examination of the record and there was no change of opinion because in the first place the issue was not examined by the AO, let alone forming an opinion. Therefore, there is a blatant error in the order of the AO in granting deduction to claim of expenditure which is not allowable and prejudice is cause to Revenue in the form of loss of tax. 3. It is also humbly submitted that the case falls under clauses (a) and (b) of Explanation 2 to Section 263(1) which was inserted with effect from 01/06/2015 and the order of the AO is deemed to be erroneous and prejudicial to the interests of Revenue. Therefore, a show cause notice was issued by the Pr.CIT on 06/10/2015, wherein the issue was clearly mentioned. Kind attention of the Hon'ble Bench is invited to the show cause notice which is available at pages 40 & 41 of the paper book filed by the assessee. At para 2(b), the Pr.CIT clearly mentioned that the assessee was not liable to pay Rs 56.03 Cr on account of excess cash collaterals invoked and it was liable to pay amounts only towards FLDG. Therefore, the issue was clearly put forward to the assessee through show cause notice. 4. The following submissions are made with reference to Ground no: 3 i.e on merits of the order u/s 263. It is humbly submitted that during the revision proceedings, the assessee could not file any evidence to show that the amount of Rs 56.03 Cr was incurred as per any agreement or obligation. In the reply dated 05/11/2015 (available at pages 42 to 45 of the paper book filed by the assessee), it was stated that the liability is ascertained. it was first year of portfolio assignment and therefore, there was no clarity on the treatment. As reconciliation was going on the amounts on upfront forfeiture

18 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. of FDS and adjustment of balances by few assignees was termed as "excess" but it was actually ascertained liability. The assessee did not claim any loss higher than the total FLDG exposure. In support, copy of a ledger account on "loss from assignment of loans" was filed which is available at pages 44 and 45 of the paper book filed by the assessee. This account contained debits on account of payments to HDFC, IClCI, PNB, Axis Bank, Fullerton, Induslnd Bank, ING Vysya and Kotak Mahindra Bank. However, no proof in the form of confirmation from the said banks or copies of agreements empowering the banks to liquidate the FDs was furnished. 5. In the reply dated 26/11/2015, which is available at pages 46 to 48 only general submissions on the methodology were made. In these submissions also, no proof was filed regarding contractual obligation of the assessee on the said item. It was only stated that on account of default in repayment schedule, the FDs were liquidated. In essence it was stated that loss from assignment of loans of Rs 56.03 Cr and FLDGs on assigned loans of Rs 148.61 Cr are stated to be identical. Therefore, after considering the facts, the Pr CIT recorded a finding that in the assessment proceedings the assessee did not furnish the data to verify the working out the loss and also repayment schedule furnished to the assignee Bank(s). The Pr CIT also stated that it is quite evident that the Assessing Officer has not addressed the issue to the extent it deserves and also there was no relevant enquiries conducted to allow the claim of the assessee company under the head "loss on assigned portfolio". The Pr CIT also stated that moreover it was mentioned that excess cash collateral for Rs 56,03,43,323/- was invoked by the bank over unpaid value of assigned portfolio. Therefore, the Pr CIT held that after careful consideration of facts of the case, relevant enquiries into the claim in general and amount of Rs 56,03,43,323- in particular which was claimed as excess cash collateral over unpaid value of assigned portfolio were not conducted. The Pr CIT, therefore concluded that the order was erroneous and prejudicial to the interests of Revenue. 6. It is humbly submitted that as evident from the above, there was no enquiry in the assessment proceedings, the Pr. CIT rightfully assumed jurisdiction u/s 263 and after critical

19 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. examination of the facts passed the order u/s 263 setting aside the matter to revise the income keeping in view the directions at paragraphs 7.2 to 7.4 of the order. In light of the above, the Hon'ble ITAT may kindly dismiss the appeal of the assessee.”

7.1 In addition to the above, the ld. DR relied on the order of Pr. CIT passed u/s 263 and submitted that the AO failed to enquire properly the case of the assessee. He submitted that against the notice u/s 142(1) of the Act, the assessee gave a cryptic reply without explaining the details and the AO without enquiring and recording proper observations, accepted the claim of the assessee, which is erroneous and prejudicial to the interests of revenue. He, therefore, submitted that the Pr. CIT has rightly exercised the powers vested u/s 263 of the Act and set aside the assessment order.

20 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. 8.1 As against the above question, the reply filed by the assessee vide its letter dated 11th February, 2014 is as under: “Rs. 254,19,10,185/- debited to P&L Account as “provision and write off” has not been totally claimed as expenses in tax computation. The break up is as per Annexure 1. Also attached is computation and ITR extract for FY 2010-11 and FY 2009-10 for comparative analysis.”

8.2 It is clear that the above reply of the assessee is not complete as the AO has asked the assessee how the expenditure is allowable as per the provisions of the IT Act, but, there was no proper explanation from the assessee in this regard. Even after perusal of the Explanatory Notes, there is no proper explanation from the assessee in the said explanatory notes, viz., under which section he has claimed the above expenditure, agreements, details of working notes with the relevant data with supporting documents and also the repayment schedule furnished to the assignee banks, guarantee invoked, etc. In view of the above observations, we approve the categorical finding of the Pr. CIT(A) that the AO has not addressed the issue to the extent it deserves and also there was no relevant enquiries conducted to allow the claim of the assessee company under the head “loss on assigned portfolio.” Therefore, we are of the view that the AO without applying his mind, failed to make requisite enquiries and without going into the details and without investigating the issue in detail, allowed the claim of the assessee. Therefore, it tantamount to non-application of mind on the part of the AO. We find that the assessee did not furnish the data to verify the working of the loss and also repayment schedule furnished to the assignee bank(s),

21 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. agreements and also there was no relevant requisite enquiries conducted by the revenue, but allowed the claim of the assessee. The questionnaire issued by the AO and the reply filed by the assessee, which is not in consonance with the questionnaire is erroneous as per law and claim made by the assessee has been allowed by the AO is without justification as per the provisions of the IT Act is prejudicial to the interests of revenue. Before invoking the provisions us/ 263, the twin conditions must be satisfied, namely, the order is erroneous and prejudicial to the interests of the revenue, which are exist in the instant case and, therefore, the Pr. CIT has rightly invoked section 263 and set aside the order of the AO. Therefore, the order passed by the AO is erroneous and prejudicial to the interests of revenue. The assessing officer is first an investigating officer thereafter he is an adjudicator but here in this case, the AO remained silent, but, he ought to have exercised his duty properly. We find substance in the submissions made by the ld. DR. The arguments of the AR is rejected in regard to show cause notice and finding of the Pr. CIT is different because the issues are the loss on assigned portfolio. and the Pr. CIT has rightly exercised his jurisdiction vested u/s 263 and set aside the order of AO. In support of our decision, we rely on the following judgments: 1. Rajmandir Estates Pvt. Ltd. Vs. Pr. CIT, (2016) 70 Taxmann.com 124 (Calcutta) 2. Rajmandir Estates Pvt. Ltd. Vs. Pr. CIT, [2017] 77 Taxmann.com 285 (SC) 3. Pr. CIT Vs. Indian Farmers Fertilizers Cooperative Ltd., [2020] 113 Taxmann.com 599 (SC) 4. Sesa Starlite Ltd. Vs. CIT, [2021] 123 Taxmann.com 210 (Bombay)

22 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. 5. Param Transport (P) Ltd. Vs. Pr. CIT, [2019] 102 Taxmann.com 328 (SC)

8.3 In the case of Rajmandir Estates Pvt. Ltd. Vs. Pr. CIT (supra), the Hon’ble High Court of Calcutta has held as under: ■ The following pieces of evidence are noticeable:- (a) 39 corporate subscribers purchased 7,92,737 shares of Rs.10 each at a premium of Rs.390 per share. In the process the assessee company raised a paid up share capital of Rs.79.27 lakhs with a premium of Rs.31.7 crores. (b) From the information made available by the assessee, it appears that 19 out of 39 applicants secured funds, for the purpose of contributing to the share capital of the assessee, on account of share application money. In otherwords, those 19 applicants collected funds on account of share application money in their respective companies and that money was contributed to the share capital of the assessee. 15 out of the 39 applicants procured the requisite fund by selling shares. The rest of the applicants of shares, in the share capital of the assessee company, did not disclose the nature of receipt at their end though the source of fund was identified. What has not been specified is, as to on what account was the money received. (c) The forms of share application purporting to have been signed by the applicant companies have also been disclosed from which it appears that the date of allotment, number of allotment, number of shares allotted, share ledger folio, allotment register folio, application number, have all been kept blank. These particulars should have been filled up by the assessee, but that has not been done. (d) Another significant fact admitted by the assessee in reply to the notice to show cause under section 263 is that the shares were offered to, and subscribed by the closely held companies owned by the Promoters/Directors or their close relatives and friends. (e) From the bank statements disclosed it appears that to have the cheques issued in favour of the assessee honoured, matching amounts were credited to the accounts of the subscribers shortly before the cheques issued in favour of the assessee were presented for collection. (f) 19 applicants of shares within a period of less than six months had money contributed to their share capital which in their turn they contributed to the share capital of the assessee. So that, the 19 companies which contributed to the share capital of the assessee in the name of assets were left merely with the share-scripts of the assessee. The other lot of 15 subscribers in substance had the share-scripts held by them substituted by the share-scripts of the assessee. (g) Though, assessee made extensive submissions scanning the order under section 263 in between the lines, he did not criticize the finding of the Commissioner that the Assessing Officer did not examine a single Director of the assessee company or of the subscribing company which goes to show that correctness of this assertion is not in dispute.[Para 23]

23 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. ■ From the aforesaid evidence the following, prima facie, inferences can safely be drawn:- (a) The promoter/directors of the assessee and their close relatives and friends had united with the common object of creating at least 20 (19+1) companies apparently having a large capital base, but, in fact these are mere paper companies having no real worth. The transaction of sale and purchase of shares was nominal rather than real. (b) The allegation, in response to the notice to show-cause under section 263 that it bears importance to state here that the investor companies of shares were interested to subscribe shares of the assessee company as, according to them, the assessee company had prospect in future is a plain lie. (c) The blank share application forms etc. tabulated above go to show that the alleged application for shares and the alleged allotment were not in the usual course of the business. (d) In the light of the aforesaid pieces of evidence and the prima facie finding, it can be said that the three requirements: (A) identity of the share-holders; (B) genuineness of the transaction and (C) the creditworthiness of the share-holders repeatedly impressed, by assessee have not been satisfied. Identity of the alleged shareholders is known but the transaction was not a genuine transaction. The transaction was nominal rather than real. The creditworthiness of the alleged shareholders is also not established because they did not have any money of their own. Each one of them received from somebody and that somebody received from a third person. Therefore, prima facie, the share-holders are mere name lenders. [Para 24] ■ The attempt of the assessee, it was apprehended in the case of Tara Devi Aggarwal v. CIT [1973] 88 ITR 323 (SC) was to assist someone else. An identical attempt is involved in this case. Who is the person sought to be assisted by the assessee? This question can only be answered after a thorough enquiry, directed by the Commissioner, is held. The assessee is interested installing that investigation on the plea that the order of the Assessing Officer is neither erroneous nor prejudicial to the interest of the revenue. [Para 27] ■ As indicated above the pieces of evidence which go to show that the Commissioner had reasons to entertain the belief that this was or could be a case of money laundering which went unnoticed because the Assessing Officer did not hold requisite investigation except for calling for the records. The evidence as tabulated above and the prima facie inference drawn is deducible from the documents also submitted before the Assessing Officer. The fact that the Assessing Officer did not apply his mind to those pieces of evidence would be evident from the assessment order itself as per which during the financial year the assessee company has issued 7,92,737 no. of equity share with a face value of Rs.10 along with a premium of Rs.390. Thereafter, notices under section 133(6) were also issued to verify the transactions of the assessee on test check basis and it was held that the case is discussed and heard and issue relevant for determination of total income of the assessee is discussed. The issues relevant according to the Assessing Officer were a receipt of a sum of Rs.61,000 on account of consultancy charges and the preliminary expenses written off amounting to a sum of Rs.60,000. He, therefore, completed the assessment after making addition of a sum of Rs.1,21,000.The persons behind the assessee company and the persons behind the subscribing companies were not interrogated which was essential to unearth the truth. Thus, in the facts and circumstances of the case, the question for consideration whether in the presence of

24 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. materials discussed above the Commissioner was justified in treating the assessment order erroneous and prejudicial to the interest of the revenue is to be answered in the affirmative. Further, there is no substance in the submission that the order of the Tribunal is perverse, after examining all the submissions advanced by the assessee. [Para 28] ■ The assessee with an authorised share capital of Rs.1.36 crores raised nearly a sum of Rs.32 crores on account of premium and chose not to go in for increase of authorised share capital merely to avoid payment of statutory fees is an important pointer necessitating investigation. Money allegedly received on account of share application can be roped in under section 68 if the source of the receipt is not satisfactorily established by the assessee. The submission that any further investigation is futile because the money was received on capital account is unacceptable. The Special Bench in the case of CIT v. Sophia Finance Ltd. [1994] 205 ITR 98/70 Taxman 69 (Delhi) opined that section 68 is very widely worded and an Income-tax Officer is not precluded from making an enquiry as to the true nature and source thereof even if the same is credited as receipt of share application money. Mere fact that the payment was received by cheque or that the applicants were companies, borne on the file of Registrar of Companies were held to be neutral facts and did not prove that the transaction was genuine. It need not be decided in this case as to whether the proviso to section 68 is retrospective in nature. To that extent the question is kept open. Further, the submission that the source of source is not a relevant enquiry does not appear to be correct. There is no substance in the submission that the exercise of power under section 263 by the Commissioner was an act of reactivating stale issues. In the instant case the evidence which was before the Assessing Officer which should have provoked him to make further investigation has been tabulated. The Assessing Officer did not attach any importance to that aspect of the matter as discussed above. The order passed by the Commissioner is by no means an act of substituting his own views to that of the Assessing Officer. It is true that the Assessing Officer had requisitioned the necessary details by his notice under section 142(1) but he thereafter did not apply his mind thereto. Thus in this case it has been demonstrated in some detail as to why is the order of the Assessing Officer erroneous and prejudicial to the revenue. [Para 29] In the result the appeal fails and is dismissed. [Para 30]” 8.4 In the case of Param Transport (P) Ltd. Vs. Pr. CIT (supra), the Hon’ble Supreme Court has held as under:

“Deepak Gupta, CJ. - This batch of tax appeals is being disposed of by this common judgment. It would be pertinent to mention that another batch of tax appeals arising out of the same order of the Tribunal were dismissed on 25.10.2016. The order passed in these tax appeals reads as follows:— '1. All these tax appeals are being dismissed at the admission stage itself because according to us no question of law much less a substantial question of law arises in these appeals. 2. Briefly stated facts of the case are that the Income Tax authorities conducted search and seizure operations under Section 132 of the Income Tax Act, 1961 (hereinafter called 'the Act') against Agrawal Group of Companies of

25 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. Shri B.L. Agrawal and others. During search and seizure operations, it was discovered that one company M/s. Prime Ispat Limited was a closely held limited company of Shri B.L. Agrawal and Chartered Account Shri Sunil Kumar Agrawal. Thereafter, search and seizure operations were conducted in the office of Shri Sunil Kumar Agrawal, Chartered Accountant and during these search and seizure operations, it was discovered that there was an investment of Rs. 39.08 crores by some shell companies in M/s. Prime Ispat Limited. The Appellants before us are the Shell Companies. Notice was issued to the Shell Companies to show cause from where they have got the funds to the extent of Rs. 39.08 crores. It would also be pertinent to mention that during search and seizure operations conducted in the office premises of Shri Sunil Kumar Agrawal, Chartered Accountant, pass books of all 232 share holders of these 13 Shell Companies were found in his office. The Bank Accounts were held in two banks only. The addresses of Shell Companies were almost identical. The Assessing Officer issued notices to these Shell Companies under Section 153C of the Act, and also issued a questionnaire. It would also be relevant to refer to question (vi) of the questionnaire which reads as follows: "(vi) Details of the share capital, share premium account and share application money, if any, which appears as liability in the balance sheet. Please furnish the complete name, address, occupation of the investor and the date and mode of receipt of the funds. Also furnish the compliance made in this regard to the Registrar of Companies." 3. The Companies were also asked to submit explanation in the following terms: "3. You are also hereby asked to furnish explanation/submission with reference to the following points: (I) Details of liability appearing in the balance sheet in form of subscribed share capital, share premium and share application money. In this regard please furnish the complete list giving full name, postal address and PAN and assessment details. Also furnish copies of relevant ledger statements. (ii) In satisfaction to the requirements of Section 68 of the Income Tax Act, 1961, please furnish the supporting documents for the transaction of share capital subscribed and other amounts received by way share premium and share application money. You are also asked to produce the creditors in support of the claim of these liabilities appearing in the balance sheet. (iii) In enquires conducted by Income Tax Department regarding funds applied towards share subscription in assessee-company from bank accounts, some of the persons in whose names the bank accounts were operated have denied of having made any share subscription and they also deny of having any knowledge about the assessee-company. In view of their statements, the share capital appearing in their name is proved to be not genuine and the share capital subscribed in this year becomes liable to be taxed in the hands of assessee-company and any such share capital appearing in the balance sheet is also liable to be added by holding the same as cash credit. Please furnish your explanation in this regard. The list of such persons for this year is as under: (1) for investment made in financial year 2006-07: 1. Dewcharan Sahu 2. Pawan kumar Shukla 3. Mubarak Khan

26 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. 4. Surendra Verma 5. Shivshankar Verma (2) 1. Dewcharan Sahu 2. Ranjit Dewangan 3. Narottam Yadav 4. Netram Sagarwanshi 5. Kuleshwar Varma 6. Dinesh Kumar Verma 7. Lochandas Manikpuri 8. Rupendra Kumar Verma 9. Radhelal Chhatri 10. Lalaram Sinha" 4. A detailed reply was submitted by the Appellants herein and thereafter the Assessing Officer passed an order on 30.12.2011 which is identical in all the cases and reads as follows: "2. On being so satisfied on the basis of the documents seized as mentioned above and pertaining to the assessee company, notice U/s. 153C was issued to the assessee on 29/09/2011 and served on 29/09/2011 requiring to file the return of its income within 30 days of receipt of the notice. In response to which the return of income is filed by the assessee in this office on 21/11/2011. In its return the assessee has declared total income of Rs. NIL. The case was selected for scrutiny by issue of notice U/s. 143(2) dt. 05/12/2011 and questionnaire alongwith notice U/s. 142(1) were issued upon the assessee on 21/10/2011 and duly served. During the course of assessment proceedings, Shri Sunil Kumar Agrawal, CA and AR of the assessee, attended and filed a written submission giving parawise reply to the questionnaire. The assessee company is incorporated on 13/08/2004 which is evident from the copy of the Certificate of Incorporation filed. The assessee company was required to explain the basis of determining his income and furnish information relating to affairs of his business which was done through compliances made during assessment proceedings. Subject to the above the income of the assessee as shown in the return is accepted. Income Assessed : Rs. NIL" 5. It would also be pertinent to mention that notices under the Income Tax Act, 1961 were also issued to M/s. Prime Ispat Limited which moved the Settlement Commission of the Income Tax authorities at Calcutta and the Settlement Commission, vide its order dated 07.11.2012 with regard to Shell Companies held as follows: "5.... Thus, in view of the plethora of evidence produced before us, we are of the opinion that the whole of investment other than that made through the medium of 13 shell companies etc. cannot be held as bogus. We have carefully gone through the statement of facts and the disclosure made by the applicant Prime Ispat Limited, which is a company. Normally, the share subscription is a capital receipt and may not be counted towards income of the company. However, when the facts of the case so require, and the genuineness of shareholders itself is questionable, the AO is not stopped from making enquiries to know the exact nature of receipts. The CIT has already pointed out that the investment in the company Prime Ispat Ltd. has

27 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. been made by petty account holders, whose bank pass books were knowingly / unknowingly found with the CA and the investment from them (savings bank accounts) were found into the shell companies from whom the investment further flowed to the applicant No. 1 company M/s. Prime Ispat Limited. Thus, as far as investment from shell companies etc. of Rs. 39.08 crores + Rs. 1.40 crores = Rs. 40.48 crores is concerned, the same cannot be treated as fully explained...." 6. Though, the Settlement Commission did not decide the issue and it could not have decided the issue, but it is apparent that questions were raised with regard to the manner of investments made in these 13 shell companies. After the order was passed by the Settlement Commission, notice under Section 263 of the Act was issued on 20.02.2014 to these shell companies. Thereafter, the Commissioner of Income Tax passed a detailed order in which he held that the order of the Assessing Officer is erroneous and prejudicial to the interest of the Revenue since it shows total non-application of mind. 7. The Appellants before us challenged the order of the Commissioner of Income Tax before the Income Tax Appellate Tribunal (hereinafter called 'the Tribunal') which, vide impugned order dated 22.04.2016 has rejected the appeals. The main issue raised before us is that the order of the Assessing Officer cannot be said to be erroneous or prejudicial to the interest of the Revenue. It is also urged that the finding of the Settlement Commission cannot be a foundation for issuing notice under Section 263 of the Act. Lastly, it is urged that this amount of Rs. 39.08 Crores had been added to the income of Shri B.L. Agrawal and therefore, action could not be taken under Section 263 of the Act, especially when the Assessing Officer after sending a detailed questionnaire has accepted the case of the assessees. We are not at all in agreement with these submissions. 8. To appreciate the rival contention of the parties, it would be apposite to refer to Section 263 of the Act, relevant portion of which reads as follows: "263. (1) The CIT may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the AO is erroneous insofar as it is prejudicial to the interests of the Revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment." 9. The Bombay High Court in Commissioner of Income Tax v. Gabriel India Ltd., ((1993) 203 ITR 108 Bom) held as follows:— "The power of suo motu revision under sub-section (1) is in the nature of supervisory jurisdiction and the same can be exercised only if the circumstances specified therein exist. Two circumstances must exist to enable the Commissioner to exercise power of revision under this sub-section, viz. (i) the order is erroneous; (ii) by virtue of the order being erroneous prejudice has been caused to the interests of the Revenue. It has, therefore, to be considered firstly as to when an order can be said to be erroneous. We find that the expression "erroneous", "erroneous assessment" and erroneous judgment" have been defined in Black's Law Dictionary. According to the definition, "erroneous" means "involving error; deviating from

28 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. the law". "Erroneous assessment" refers to an assessment that deviates from the law and is, therefore, invalid and is a defect that is jurisdictional in its nature, and does not refer to the judgment of the Assessing Officer in fixing the amount of valuation of the property. Similarly, "erroneous judgement" means "one rendered according to course and practice of court, but contrary to law, upon mistaken view of law, or upon erroneous application of legal principles." 10. The Apex Court in Commissioner of Income Tax v. Shree Manjunathesware Packing Products and Camphor Works, ((1998) 231 ITR 53 (SC)), held as follows:— "Section 263 of the Income-tax Act, 1961 enables the Commissioner to call for and examine the record of any proceeding under the Act and pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment or canceling the assessment and directing a fresh assessment, if he considers that any order passed by the Assessing Officer is erroneous insofar as it is prejudicial to the interests of the Revenue. The section did not at first contain any Explanation. An Explanation was added to section 263(1) by the Taxation Laws (Amendment) Act, 1984. By the Finance Act, 1988, the said Explanation was substituted with effect from June 1, 1988. The Explanation was again amended by the Finance Act, 1989. By the amendments made by the Finance Acts of 1988 and 1989 a definition of the term "record" was provided. It has been provided that "record" shall include and shall be deemed always to have included all records relating to any proceeding under the Act available at the time of examination by the Commissioner." 11. A Division Bench of the Madras High Court in Mofussil Warehouse and Trading Co. Ltd. v. Commissioner of Income-tax, ((1999) 238 ITR 867 (Mad)) was dealing with a case where the assessee company paid amounts to the holding company by way of reimbursement in relation to the utilization of the service of the employees of the holding company. The Assessing Officer had not taken into consideration the exact nature of the claim or the unreasonableness thereof. The Madras High Court held that non performance of such a duty cast upon the Income-tax Officer entitled the Commissioner to invoke his power under Section 263. Relevant observation of the Madras High Court reads as follows:— "The non-performance of such a duty on the part of the Income-tax Officer culminated in distortions and prejudices to the Revenue. Such distortions and prejudices to the Revenue for being set right, the Commissioner of Income-tax invoked his power under Section 263 and in exercise of such power he cancelled the assessment passed by the Income-tax Officer with a direction to him to make a fresh assessment, according to law." 12. The Apex Court in Malabar Industrial Co. Ltd. v. Commissioner of Income-tax, ((2000) 243 ITR 83 (SC)), has dealt with the revisional powers under Section 263 in detail. The Apex Court held as follows:— "A bare reading of this provision makes it clear that the pre-requisite to exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i) the order of the Assessing Officer sought to be revised

29 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent - if the order of the Income-tax Officer is erroneous but is not prejudicial to the Revenue or if it is not erroneous but is prejudicial to the Revenue - recourse cannot be had to Section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase 'prejudicial to the interests of the Revenue' is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not conferred (confined) to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy and Co. v. S. P. Jain, (31 ITR 872 (Cal)) : (AIR 1957 Cal 244), the High Court of Karnataka in Commissioner of Income-tax, Mysore v. T. Narayana Pai, ((1975) 98 ITR 422 (Kar)), the High Court of Bombay in Commissioner of Income-tax v. Gabriel India Ltd., ((1994 Tax LR 116 (Bom)) and the High Court of Gujarat in Commissioner of Income-tax v. Smt. Minalben S. Parikh, ((1995) 215 ITR 81 (Guj)) treated loss of tax as prejudicial to the interests of the revenue. Mr. Abaraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Company v. Commissioner of Income-tax, ((1987) 163 ITR 129 (Mad)) interpreting "prejudicial to the interests of the revenue". The High Court held, "In this context, it must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the order passed by the Income-tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration". In our view this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income Tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income-tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue. Rampyari Devi Saraogi v. Commissioner of Income-tax, ((1968) 67 ITR 84 (SC)) and in Smt. Tara Devi Aggarwal v. Commissioner of Income-tax, ((1973) 88 ITR 323

30 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. (SC))." 13. The Apex Court again dealt with the scope of Section 263 in Commissioner of Income-tax v. Max India Ltd. ((2007) 295 ITR 282 (SC)) and held as follows:— "At this stage we may clarify that under paragraph 10 of the judgement in the case of Malabar Industrial Co. Ltd. v. CIT (supra) this court has taken the view that the phrase "prejudicial to the interests of the Revenue" under section 263 has to be read in conjunction with the expression "erroneous" order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interest of the Revenue. For example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interest of the Revenue, unless the view taken by the Income-tax Officer is unsustainable in law." 14. The Apex Court in Commissioner of Income Tax v. Greenworld Corporation, ((2009) 314 ITR 81 SC), while dealing with Section 263 held as follows:— "Jurisdiction under Section 263: The scope of the provisions of section 263 of the Act is no longer res integra. The power to exercise suo motu power of revision in terms of section 263(1) is in the nature of supervisory jurisdiction and same can be exercised only if the circumstances specified therein, viz., (1) the order is erroneous; (2) by virtue of the order being erroneous prejudice has been caused to the interest of the Revenue, exist." 15. From a reading of the aforesaid judgments, it is apparent that the powers conferred on the Commissioner under Section 263 are very wide. However, two conditions have to be met before the Commissioner can exercise his powers under this section. The order sought to be reviewed should be erroneous and should also be prejudicial to the interest of the revenue. In Malabar Industrial Co. Ltd. V. Commissioner of Income-tax (supra), the Apex Court held that both the conditions must be satisfied and if only one of the conditions is satisfied recourse cannot be had to Section 263. It is also apparent that recourse to Section 263 cannot be taken to correct every small error or mistake committed by the Assessing Officer. However, if the order itself is erroneous the provisions of the section would be attracted. The Apex Court has made it clear that even incorrect assumption of facts would satisfy the requirement of order being erroneous. In case the orders are passed without applying the principle of natural justice or without application of mind then also the Commissioner can exercise his revisional powers. It is important to note that the Apex Court in Malabar Industrial Co. Ltd. v. Commissioner of Income-tax (supra) further held that the expression prejudicial to the interest of the revenue has very vide connotation and was not confined to loss of tax. If the Assessing Officer adopts one or two courses available under law and it results in loss of revenue then the order cannot be said to be erroneous or prejudicial to the interest of revenue within the meaning of Section 263 but where the view taken by the Income-tax Officer is unsustainable then the order passed by the Assessing Officer is not only erroneous but also prejudicial to the interest of Revenue.

31 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. 16. As far as the present cases are concerned, the whole issue is, where did this huge amount of Rs. 39.08 crores came from? The Income Tax Officer issued a detailed notice and a questionnaire but in his order has not decided any of the questions raised by him. His order is totally a non-speaking order and he has not even decided the issue as to from where money came into the hands of the so-called share holders of these shell companies. 17. We are of the considered view that the Commissioner of Income Tax was fully justified in issuing notice under Section 263 of the Act and further directing the Assessing Officer to pass a fresh order after considering the entire material. It is not as if the Appellants before us will not have an opportunity to present their case before the Assessing Officer. The Settlement Commission has clearly held that the manner in which these investments were made in these shell companies leaves many questions unanswered. Truth must be found out. There are certain startling facts which emerge from these cases. During search and seizure operations conducted in the office of Shri Sunil Kumar Agrawal, Chartered Accountant, 232 bank pass books of different individuals were found. All the pass books pertain to only two banks i.e. Union of India, Main Branch, Raipur and Union of India, Pandri Branch, Raipur. There has to be some explanation why all the villagers of Kharora would open bank accounts in Raipur. A number of these companies are having their registered office in the office of Shri Sunil Kumar Agrawal, Chartered Accountant. Therefore, the Commissioner of Income Tax was justified in coming to the conclusion that there was ample material to point out that there may have been benami transactions in the name of individuals of village Kharora to induct share application money/share capital in the 13 shell companies. An enquiry is required to be conducted in this matter and therefore, we are clearly of the view that no question of law arises in these appeals. 18. In view of the above discussions, the appeals are dismissed in limine.'

8.5 The case law cited supra are squarely applicable to the case of the assessee in hand. In the above cases the notices were issued by the assessing officer and reply were also filed by the assessee in response to the notice u/s 142(1) of the Income Tax Act but the assessing Officer did not hold requisite investigation/enquiries as per the opinion of CIT. Similar situations are existed in the present case on hand. The case law relied on by the ld. AR is distinguishable on the basis of above cited judgements by us, of Hon'ble Apex Court as quoted supra. In view of the above observations and respectfully following the ratios laid down in the aforesaid judgments, we

32 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. uphold the order of the Pr. CIT and dismiss the grounds raised by the assessee on this issue.

ITA No. 1474/Hyd/2016 – appeal by the revenue

33 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. 11. Briefly the facts of the case are that the appellant is in the business of micro finance. It filed return of loss of Rs.34,38,56,806/-. During the course of scrutiny assessment, the Assessing Officer noticed that assessee invested an amount of Rs.3658,35,17,416/- on different dates on which dividend income of Rs.11,22,16,138/- was received and was claimed as exempt from tax. The entire investment in mutual fund was sold before 31. 3 .2011. The Assessing Officer also observed that interest expenditure of Rs.307,90,23,078/- was debited to P&L account. Thereafter the Assessing Officer disallowed the proportionate interest attributable to investment made in mutual funds of Rs.6,76,30,358/-. The total disallowance made by Assessing Officer U/s 14A r.w.r. 8D was Rs. 6,77,46,792/-.

34 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. connection, we reproduce the observations of the AO from his order, which are as under: “I have carefully considered the above submission of the assessee. In this regard, reference to balance sheet for the year ending 31/03/2011 is made. On perusal of balance sheet for the year ending 31/03/2011, it is seen that the assessee has got its own funds in the form of share capital and reserves & surplus at Rs. 2846.67 crores. As against this, the gross block of fixed assets (including WIP) is stood at Rs.29.47 crores and current assets in the form of loans & advances and bank balances at Rs.3099.93 crores. Hence, from the above, it is clear that the assessee's own funds in the form of share capital and reserves & surplus have gone in fixed assets and loans & advances. Therefore, it is clear that in order to make investments in Mutual funds, the assessee has partly resorted to borrowings. On these borrowed funds, the assessee has debited interest expenditure of Rs.307,90,23,078/_. Hence, the contention of the assessee, that it has sufficient own funds is devoid of any merit. Further, the assessee has not given any specific details as to whether the investments on which the tax free income has been received during the year have been financed from its Own Funds or Borrowed Funds. The mere presence of Borrowed Funds in its Funds Flow Statement does not support the proposition of the Assessee Company that it has sufficient Own Funds to finance its investment Portfolio. If Own Funds are sufficient, then, there would have been no reason to resort to Borrowed Funds and the consequent interest cost would not have arisen if the investment has not been made. In other, words, had the investment of the company not been made, the interest cost would have been definitely lower. Further, the entire money in a business entity comes in a common kitty. Monies are received as share capital or as term loan or working capital loan or as internal accruals do not have a different colour. Whatever the receipts in the business have the colour of business receipts and has no separate identification. In view of the above, the objections of the assessee company are not acceptable. As per the provisions of sec.14A of the Act, for the purpose of computing the total income, no deduction

35 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. shall be allowed in respect of expenditure incurred by the assessee in relation to the income which does not form part of the total income of that year. Since, the assessee is claiming the dividend income as exempt, the expenditure incurred for earning the above exempt incomes cannot be allowed. As the period of holding of units is available and the assessee has sold all the mutual funds by the end of the year, the expenditure relating to dividend income can be ascertained by calculating interest on the amount of investment for the holding period at the prevailing rate of interest. As the average rate of interest for which the assessee borrowed capital during the year is 11 %, the same percentage is applied to work out the proportionate interest and the same works out to Rs. 6,76,30,358/- (Annexure-A). This amount of Rs.6, 76,30,358/- represents the expenditure directly relatable to income which do not form part of total income. The other expenditure relating to exempted income is determined by invoking the provisions of Rule 8D as under: 1. Amount of expenditure directly attributable to Exempted income Rs. 6,76,30,358 (I) 2.Amount of Expenditure on interest which cannot be attributable to the exempt income A x B / C A - Amount of expenditure of interest = 307,90,23,078 B - Average of Investments = 10,00,000+10,00,000/2 =10,00,000/-“

14.1 From the above order, it is clear that the assessee did not comply as per the observations of the AO in his order with regard to substantiate for using of its own funds for making investment as per Schedule 19. As per Balance Sheet as on 31/03/2010 & 2011 placed at paper book at page No. 9, the entire own funds have been utilized for the purpose of investment in fixed Assets and current assets. In the balance sheet, there is capital reserve of Rs. 70 lakhs, which cannot be utilized by the assessee. There are only

36 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. Rs. 10 lakhs of investments appearing in the balance sheet as closing balance as on 31/03/2010. From the cash flow statement paced at page No. 11 of paper book, the net cash flow for the year ending 31.03.2011 is as under: A. Net cash provided by operating activities – (7,767,860,173) B. Net cash provided by/used in) investing activities – 188,497,139 C. Net cash provided by/(used in) investing activities – 1,764,294,246 14.2 From the above, it is clear that the entire cash during the year is negative, which shows that the entire own funds are dried up during the year. The own funds are only Rs. 4,743,809,875, which is less than the negative cash flow. In the impugned year, there is only opening of balance of investments is Rs. 10 lakhs and the assessee has invested Rs.59,635,390,755/- as per schedule No. 19 – Notes to the Accounts at “O”. Further, for the sake of clarity, we extract the “q. – Movement of loan portfolio” of schedule 19 – Notes to the accounts, has been increased as on 31 st March, 2010 Rs. 21,300,827,762/-. We also observe from the order of AO that the AO had given opportunity to the assessee to justify the assessee’s pleas that own funds have been utilized for the earning exempt income, but, it failed to do so. We do not understand that during the year as per cash flow, once the assessee has exhausted its own funds entirely, then, how the assessee can say that the investments were made from its own funds We also observe from the table quoted by the AO in his order that the assessee has shown share capital, reserve & surplus and additional loan recovery, but, not shown loan disbursement which is cash

37 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. outgoing and likewise sale of investments which is cash inflow. It appears that it is incomplete information submitted by the assessee. The observations of the AO have not been controverted by the assessee before him, before the CIT(A) and even before us also. The ld. CIT(A) has relied on the decision of the ITAT in assessee’s own case for AY 2009-10 in ITA No. 1653/Hyd/2012 vide order dated 10/10/2014. We find that the facts of the said year i.e. 2009-10 are different from the facts of the impugned AY, therefore, binding precedent of the decision of the ITAT, does not apply to this impugned AY. Considering the totality of the facts and circumstances of the case of the assessee, we observe that the assessee has not utilized its own funds for making investments. The case law relied on by the ld. AR are distinguishable on facts to the case under consideration and, therefore, the same are not of any help to the assessee’s case. The law is settled in this regard from the decisions of various Hon’ble High Courts that the disallowance u/s 14A read with rule 8D cannot exceed from the exempt income. In the instant case, the assessee has earned exempt income of Rs. 11,22,16,130/- and disallowance made by the AO is of Rs. 6,76,30,358/- which is below the exempt income received by the assessee. On perusal of the assessment order, we find that the AO has disallowed under rule 8D(i), (ii) and (iii), once the AO has calculated disallowance under rule 8D(i) out of total interest debited into P&L Account of Rs. 307.90 crores, which comes to Rs. 6,76,30,358/- as interest directly attributable to earn exempt income. During the course of assessment, the AO asked to substantiate the utilization of own funds for making investment

38 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. which income is exempt, but, assessee could not substantiate the live-links between using of own funds and investments. The entire investments were made during the impugned AY. We also find that there is an increase of loan funds of Rs. 177,91,92,156/- and increase on interest payments of Rs. 85,54,79,518/-. It is the duty of the assessee to rebut the findings recorded by the AO, but, he failed to do so. The contentions raised by the ld. AR of the assessee in the written submissions with regard to disallowance of Rs. 6,76,30,358/- u/s 8D(i) is not warranted as the disallowance of under rule 8D(ii) has already been made by the AO, on the ground that the said amount of Rs. 6,76,30,358/- was already included in the total interest expenditure of Rs. 307.90 crores, are not acceptable because the disallowance calculated under rule 8D(i) was directly attributable for earning exempt income and during the course of arguments, the AR of the submitted that during the impugned AY no fresh loans have been taken, is also not acceptable. On examination of the cash flow statements, there is a huge negative cash flow from operations during the year, which clearly shows that the own funds have been exhausted and there is increase in loan funds to the extent of Rs. 177,91,92,156/-. It shows that the assessee has used loan funds for making investments during the year of which income is exempt. Therefore, considering all the facts of the case and the observations made by us, the disallowance made by the AO under rule 8D(i) of Rs. 6,76,30,358/- is correct and the CIT(A) was not justified in allowing the appeal of the assessee. Therefore,

39 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. the disallowance made by the AO under rule 8D2(ii) of Rs. 1,11,434/- is hereby deleted.

14.3 In view of the above, discussion, the grounds raised by the revenue are partly allowed.

Pronounced in the open court on 4th October, 2021.

Sd/- Sd/- (P. MADHAVI DEVI) (L. P. SAHU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated: 4th October, 2021.

kv

40 ITA Nos. 990 & 1474/Hyd/2016 Spandana Spoorty Financial Ltd., Hyd. Copy to : 1 Spandana Sphoorty Financial Ltd., Plot No. 79, Care Crystal, Vinayak Nagar, Gachibowli, Hyderabad. 2 Pr. CIT – 3, Hyderabad 3 DCIT, Circle – 3(2), 7th Floor, Signature Towers, Hyderabad. 4 CIT(A) – 3, Hyderabad. Pr. CIT – 3. Hyderabad. 5 ITAT, DR, Hyderabad. 6 7 Guard File.