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Income Tax Appellate Tribunal, ‘C‘ BENCH
Before: SHRI M.BALAGANESH & SHRI SANDEEP SINGH KARHAILDr. A.B. Road, Worli
आदेश / O R D E R PER M. BALAGANESH (A.M):
This appeal in A.Y.1993-94 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-52, Mumbai in appeal No.CIT(A), Mumbai – 52/11081/2016-17 dated 08/09/2022 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) r.w.s. 254 of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 26/12/2016 by the ld. Dy. Commissioner of Income Tax, Central Circle-4(1), Mumbai (hereinafter referred to as ld. AO).
2. The assessee has raised the following grounds of appeal:-
The Ld. CIT(A) erred in law and in facts in confirming the rejection of the books of accounts and not determining the income of the appellant in accordance with the same.
2. The Ld. CIT(A) has erred in law and in facts in confirming the disallowance of interest expenses of Rs. 1,52,82,904/- 3 The Ld. CIT(A) has erred in law and in facts in confirming the addition of Rs. 31,902/-on account of difference in ledger balance as compared with the books of Late Harshad S. Mehta and dismissing the ground as not maintainable. 4. The Ld. CIT(A) has erred in law and in facts that in confirming the levy of interest u/s 220 of the Act and dismissing the ground as non maintainable. 5 The Ld. CIT(A) has erred in law and in facts in not appreciating that the TDS made on income for subsequent years ought to have been adjusted against the demand for the year under consideration in accordance with the order of the Hon'ble Supreme Court. 6. The Ld. CIT(A) has erred in law and in facts in not appreciating that the income assessed in the hands of the appellant were subjected to the provisions of TDS and hence on the said amount of tax, no interest can be computed u/s 2348 of the Act. 7. The appellant craves leave to add to, alter, amend and/or delete all or any of the foregoing grounds of appeal.
We have heard rival submissions and perused the materials available on record. The assessee is a member of Harshad Mehta group (hereinafter referred to as „HM group‟) categorized as a notified entity under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (hereinafter referred as “Special Court Act”). Search and seizure actions of the Income Tax Department were carried out in the HM Group on 27/09/1990 and on 28/02/1992 during which large number of documents and valuables were found Pratima Hitesh Mehta and seized. For the year under consideration, it is evident from the original assessment order dated 29/03/1996 that the assessee had neither filed the return of income nor were the books of account ready. Consequently, the then Assessing Officer completed the assessment u/s 144 of the Act determining the total income at Rs. 13,99,10,820/- vide order dated 29/03/1996 (hereinafter referred to as "original assessment order") as per the following details:-
1 Capital gain as per the letter 9,81,15,941 dated 28.03.1996
Unexplained income from sale 3,31,20,180 of shares 3. Dividend/Interest income 86,74,475
4. Unexplained credit in bank 224 3.1. Against this original assessment order, the assessee filed first appeal and the Ld. CIT(A) vide order dated 26/05/2003 partly allowed this appeal by dismissing a few grounds and directing the Ld. AO to re- determine the respective additions in respect of other grounds. On further appeal, this Tribunal vide order dated 17/03/2006 set-aside the matter back to the Ld. CIT(A) for re-adjudication. This resulted in passing of order dated 30/03/2012 by the Ld. CIT(A) wherein, the ground related to Unexplained income from sale of shares was allowed, those relating to Dividend and Interest Income were partly Pratima Hitesh Mehta allowed and the balance grounds were dismissed, and the assessment was enhanced.
3.2 Cross appeals were filed in (Assessee- appeal) and 4288/Mum/2012(Revenue-appeal) against this order of the Ld. CIT(A) before this Tribunal. The Tribunal vide order dated 05/09/2014 restored most of the matters to the ld. AO to examine the correctness of the books of account with supporting evidences. It is in pursuance and compliance to this order dated 05.09 2014, the ld. AO passed the impugned assessment order dated 29/12/2016 u/s.143(3) r.w.s. 254 of the Act which is the subject matter of the present appeal. In the said assessment order, the ld. AO chose to disallow the interest expenditure of Rs.1,52,82,904/- claimed by the assessee as deduction on the ground that the said interest is payable to broker firms belonging to Harshad Mehta group for investments in shares made through them. In other words, the assessee had made investment in shares through the broker firms belonging to HM group and no payments were made by the assessee for those acquisition of shares. Instead it was acquired on credit by the assessee. The assessee however, had agreed to pay interest @12% on the said credit. Hence, this interest expenditure of Rs.1,52,82,904/- becomes payable to broker firms belonging to HM group. It is not in dispute that the interest of Rs.1,52,82,904/- is payable by the assessee to the broker firms belonging to HM group for acquisition of shares on credit. It is not in dispute that assessee had claimed this interest expenditure on mercantile basis which is in accordance with the method of accounting regularly employed by the assessee in terms of Section 145 of the Act. Since, the recipient broker firms were following cash system of accounting as informed by the ld. DR before us, the Revenue has chosen to disallow this interest payable by the assessee in the hands Pratima Hitesh Mehta of the assessee. This disallowance was primarily made on the ground that this interest liability that had accrued in A.Y.1993-94 had never been paid by the assessee to the broker firms of HM group. Hence, it was concluded by the Revenue that this interest expenditure would not be eligible for deduction in the hands of the assessee. In fact before the ld. AO the assessee had also placed on record the Tribunal order in its own case for A.Y.1991-92 which had decided the issue in favour of the assessee. The ld.AO had rejected the plea of the assessee on the ground that the appeal has been preferred by the department before the Hon‟ble Bombay High Court against the order of the Tribunal. This action of the ld. AO was upheld by the ld.CIT(A).
3.3. We find that this issue in dispute is squarely covered by the order of this Tribunal in assessee‟s own case for A.Y.2014-15 in dated 27/11/2019. The relevant observations are made in para 7 – 7.2 of the said order which are not reproduced for the sake of brevity. Further, we find that in assessee‟s family members case i.e. in the case of Smt. Rina S Mehta, this Tribunal in ITA No.1367 and 1455/Mum/2016 for A.Y.1992-93 dated 05/04/2021 had also directed the ld. AO to allow the interest payable to the broker firms of HM group in respect of borrowings made for acquisition of shares which were made in earlier years way back in 1990.
3.4. Moreover, the argument advanced by the ld. DR was that the recipient entities are following cash system of accounting wherein they would offer the interest income to tax in their hands only on receipt basis and that the assessee herein is claiming the deduction on accrual basis. In this regard, the ld. AR submitted that the assessee has been classified as a notified entity under the Special Court Act referred to supra and all the assets of the assessee and family members are Pratima Hitesh Mehta attached by the Special Court. Unless the permission is granted by the Special Court by way of releasing the attached assets, the assessee would not be able to make the payment to anybody much less to the family run entities. In any case, we find that this very same aspect of the argument has already been addressed by this Tribunal in the case of - M/s. Growmore Leasing & Investment Ltd. vs. DCIT in Ms. Deepika A. Mehta vs ACIT, Central Circle – 23 in ITA No.418/Mum/2016 & ITA No.2736/Mum/2017 Ms. Jyoti H. Mehta vs. DCIT, Central Circle – 23 in ITA Nos. 419 & 420/Mum/2016 Shri Ashwin S. Mehta vs. DCIT, Central Circle – 23 in ITA Nos. 1728, 1729 & 1730/Mum/2015 Shri Sudhir S. Mehta vs. DCIT, Central Circle - 23 ITA Nos.5799, 5800 & 5801/Mum/2015 Smt. Rina S. Mehta vs. DCIT, Central Circle - 23 ITA Nos. 5804 & 5805/Mum/2015, 2600, 2601, 4570 & 4571/Mum/2017 Smt. Rasila S. Mehta vs. ACIT, Central Circle – 23 ITA No.5806/Mum/2015 & ITA Nos.2738 & 2739/Mum/2017 Shri Hitesh S. Mehta vs. ACIT, Central Circle - 4(1) in ITA No.4430/Mum/2017 3.5. The operative portion of the judgment in the case of M/s. Growmore Leasing & Investment Ltd vs.DCIT in ITA No.1219/Mum/2017 is reproduced as under:-
Coming to the objection of the Revenue that interest cannot be allowed as deduction has not been shown by recipients in their income. As has been discussed by us in the preceding paragraphs the interest has been shown as income by Mr. Ashwin S. Mehta in assessment years 2010- 11 and 2011-12. We also noted that Late Shri Harshad Mehta has been offering his income on cash basis and the method of accounting has been duly upheld by the Tribunal in his case for A.Y. 1989-90. Even otherwise disallowance of interest claimed by the assessee cannot be made merely because in the opinion of the AO the corresponding interest income has not been offered by the recipients. The interest can be allowed on the basis of method of accounting followed by the assessee. We noted that similar issue when arose in the case of M/s. Growmore Leasing & Investment Ltd. vs. CIT in & 5136/Mum/2012 Pratima Hitesh Mehta wherein the Coordinate Bench of this Tribunal while setting aside the issue to the file of the CIT(A) directed him to tax the income in the hands of recipient family members in accordance with the method of accounting followed by them. We find force in the submission of the learned A.R. that since the assessee as well as the recipients are notified entities under the Special Court Act unless the Court directs for distribution of the assets towards existing liabilities under Section 11(2) of the Special Court Act, the assessee cannot make the payment to these creditors. Even otherwise since the existence of liability towards interest has accrued especially when the assessee is following the mercantile system of accounting the interest is to be allowed. During the course of hearing we raised a query about the nexus of interest expenses with the interest income. The learned A.R. pointed out that the liability in the present case was accrued on account of purchases of shares and Growmore Leasing&Investment Ltd. & Others securities by the assessee which were sold in terms of the directions of the Hon'ble Special Court in subsequent years and the sale proceeds so received were invested in term deposits with the banks and accordingly the assessee has claimed interest expenditure against the interest earned on term deposits. No contrary evidences or material were brought to our knowledge to contradict this fact. In view of this fact we find that there is a nexus between borrowed funds and investments in term deposits. Therefore, the interest paid on the borrowed funds has to be allowed out of the interest earned by the assessee on term deposits. We noted that identical issue was raised in the case of M/s. Growmore Leasing & Investment Ltd. in A.Y. 2007-08. The CIT(A) in his order dated 26.02.2012 considered the issue of nexus of interest expenditure with interest income, following his own finding in the case of another notified entity, i.e. Eminent Holding Pvt. Ltd. for A.Y. 2007-08 which are reproduced as under: - "As regards the nexus of the interest expenditure with the interest income, I find that the Balance Sheet of the appellant and the affidavit filed by the custodian before the Hon'ble Special Court supports the fact that the funds borrowed from Shri Harshad S. Mehta were deployed by the appellant in various assets like shares and securities, properties, etc. These funds generated income in the form of dividend and interest income. After being notified, such shares and securities got converted into Fixed Deposits with various banks. These fixed deposits generated interest income which is offered to tax. Hence, a reasonable nexus can be said to exist between the interest liability incurred by the appellant, and the interest income earned from these assets. However, this matter being sub-judice before the Hon'ble Special Court, no finding can be given on these matters."
Similar issue has arisen in the case of Shri Hitesh S. Mehta for A.Y. 2005- 06 wherein the CIT(A) vide his order dated 31.08.2010 approved the nexus between borrowed funds and the investment in term deposit which has been followed by the CIT(A) even in the case of the assessee for A.Y. 2006-07 dated 27.09.2013. We do not agree with the submission of the learned D.R. that interest expenses cannot be allowed till the Hon'ble Special Court decide the issue. The allowance or disallowance of the expenditure depends on the accrual of expenditure. Even no dispute has been raised in respect of interest Pratima Hitesh Mehta on such credit balances before the Growmore Leasing&Investment Ltd. & Others Special Court. Even on this basis, following the principle of consistency, as the interest has been allowed as deduction in the A.Y. 2006-07 and there is no change in the facts, the deduction in respect of the interest expenditure has to be allowed. Our aforesaid view is supported by the following decisions: The Supreme Court in the case of Radhasoami Satsang Saomi Bagh vs. CIT 193 ITR 321 referred to the following passage from Hoystead v Commissioner of Taxation 1926 AC 155 (PC), wherein it was observed (page 328): "Parties are not permitted to begin fresh litigation because of new view they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle, namely, that of setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the Plaintiff and traversable by the Defendant, has not been traversed. In that case also a Defendant is bound by the judgement, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken." At pg 329 of the judgement, Their Lordships observed as under: "We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating though the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging Growmore Leasing&Investment Ltd. & Others the order, it would not be at all appropriate to allow the position to be changed in a subsequent year.
On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter and if there was not change it was in support of the assesses - we do not think the question should have been reopened and contrary to what had been decided by the Commission of Income-Tax in the earlier proceedings, a different and contradictory stand should have been taken. We are, therefore, of the view that these appeals should be allowed and the question should be answered in the affirmative namely, that the Tribunal was justified in holding that the income derived by the Radhasoami Satsang was entitled to exemption under Sections 11 and 12 of the Income Tax Act of 1961." The aforesaid dictum of law was reiterated recently by the Supreme Court in CIT vs. Excel Industries Ltd. : 358 ITR 295. "It appears from the record that in several assessment years, the Revenue accepted the order of the Tribunal in favour of the Assessee and did not pursue Pratima Hitesh Mehta the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather spend the tax payers money in pursuing litigation for the sake of it."
In view of our aforesaid discussion we set aside the order of the CIT(A) and direct the AO to allow deduction in respect of said interest accrued and calculated at 12% per annum amounting to ₹2,64,72,208/- after disallowing proportionate interest in respect of the investment in Growmore Leasing&Investment Ltd. & Others shares amounting to ₹3,51,176/- after verifying the calculation of the interest quantification.
3.6. In view of the aforesaid observations and respectfully following the various judicial precedents relied upon hereinabove, we direct the ld. AO to allow deduction in respect of interest expenditure of Rs.1,52,82,904/- in the hands of the assessee for the year under consideration. Accordingly, the ground No.2 raised by the assessee is allowed.
The ground No.3 was stated to be not pressed by the ld. AR at the time of hearing due to smallness of the amount. Hence, the same is reckoned as a statement made from the Bar and hence, dismissed as not pressed.
The ground No.1 was stated to be not pressed by the ld. AR at the time of hearing due to smallness of the amount. Hence, the same is reckoned as a statement made from the Bar and hence, dismissed as not pressed.
The ground No.4 raised by the assessee is challenging the levy of interest u/s.220 (2) of the Act. This would be consequential in nature and does not require any specific adjudication.
Pratima Hitesh Mehta 7. The ground Nos. 5 & 6 raised by the assessee are with regard to TDS credit not fully granted to the assessee and charging of interest u/s.234B of the Act.
7.1. We have heard rival submissions and perused the materials available on record. We direct the ld. AO to grant TDS in accordance with law to the assessee. With regard to interest u/s.234B of the Act, the same would be consequential in nature and does not require any specific adjudication.
In the result, the appeal of the assessee is partly allowed.
Order pronounced on 27/02/2023 by way of proper mentioning in the notice board.