SUDHIR S. MEHTA,MUMBAI vs. DCIT,CC-4(1) (ERSTWHILE DCIT, CC -31), MUMBAI

The Ld. CIT(A) has erred in law and in facts in confirming the addition to the extent of Rs. 48,95,729/- out of the aggregate addition of Rs. 78,35,878/- on account of dividend and interest income.

The Ld. CIT(A) has erred in law and in facts in confirming the addition to the tune of Rs. 16,36,407/- on account of unexplained credits in the bank account.

The Ld. CIT(A) has erred in law and in facts in not granting deduction on account of interest expense payable by the appellant.

The Ld. CIT(A) has erred in law and in facts in not appreciating that the interest u/s. 234A and 234B of the Act was not computed in accordance with law.

The Ld. CIT(A) has erred in law and in facts in enhancing the income by Rs. 48,69,375/- on account of short term capital gains.

The Ld. CIT(A) has erred in law and in facts in enhancing the income by Rs. 2,58,263/- on account of miscellaneous income allegedly based on the books of account which have not been considered by the ld. A.O. while determining the assessed income.

The appellant craves leave to add to, amend, alter or delete all or any of the foregoing grounds of appeal.”

At the very outset, the ld. Counsel for the assessee stated the he is not pressing Ground Nos. 3, 5, 6 & 7. Therefore, all these grounds are dismissed as not pressed. 4. Ground No. 1 relates to the addition of Rs. 8,10,87,777/- on account of alleged unexplained income from sale of shares. 5. Briefly stated, the underlying facts in the issue are that the assessee is a member of Harshad Mehta Group, notified by Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. While scrutinising the return of income, taking the closing stock position on 31/03/1992, the AO determined the holding of the assessee for 1993 basis the assessment order for AY 1992-93. On comparison of the opening stock figures and closing stock figures, the AO observed that there is a variation in the figures. The AO observed that in cases where the opening stock is more than closing stock, there are sales in the relevant previous years. Similarly, where the closing stock is more than the opening stock there were purchases during the year. The assessee was asked to explain the treatment to be given in case of such variations. On receiving no plausible reply, the unexplained purchases

1. Similar view was taken by the Co-ordinate Bench in ITA No. 6026/Mum/2017 and ITA No. 5190/Mum/2017. The relevant findings read as under:- “So far as, the second amount of 7,28,925/- representing the addition made on the basis of letters filed by four companies as mentioned at serial no. 9 to 12 in para no. 9 above, we find that in the said letters details provided were incomplete as it is not clear whether the same pertain to the year under consideration. For example, the details and information provided by these companies do not explain to which year these transaction relate to and there were I.T.A. No. 451/Mum/2023

2. Similarly, the Co-ordinate Bench in the case of Pratima H. Mehta in ITA NO. 416/Mum/2023 and 1180/Mum/2023, had the occasion to consider an identical situation and the Co-ordinate Bench held as under:- “18. As regards the addition made on the basis of company letters, the learned AR submitted that the enquiries were made by the AO during the course of original assessment proceedings with various companies seeking information in respect of the shareholding of the assessee. It was further submitted that although the said information so received was used to determine the shareholding in the various scrips and treated the same as unexplained, however, copies of these evidences were never provided to the assessee. In this regard, the learned AR referred to details of various letters requesting the AO/learned CIT(A) to provide the information received from the company on the basis of which addition was made. The learned AR further submitted that to the extent company letters were provided by the AO, in the third round of proceedings, assessee's explanation was accepted by the AO and the addition to an extent of Rs.1,32,13,835, was deleted. It was further submitted that during the course of proceedings before the learned CIT(A), even though several letters were provided to the assessee, the copies of letters based on which the addition of Rs.3,13,213, was sustained, were not provided to the assessee. 19. We find that the coordinate bench of the Tribunal vide its order, in the second round of proceedings, in ITA No.2694/Mum./2012, vide order dated 30/06/2014, specifically directed the AO to provide copies of all information on the basis of which additions were made in the hands of the assessee. The coordinate bench further held that if the AO does not provide the material then the addition cannot be made. The relevant findings of the coordinate bench in the aforesaid decision, are reproduced as under:- "5. After considering the impugned order, various Tribunal orders in the group cases of the assessee and also the grounds raised before us, we find that in the case of Smt. Rasila S. Mehta (supra) and in other cases also, similar grounds were raised. In these cases, the Tribunal has set aside the entire matter to the file of the Assessing Officer for making fresh assessment denovo. Since the facts of the assessee's case are similar to other cases viz. Hitesh S. Mehta, Rasila S. Mehta, Jyoti H. Mehta and Pratima H. Mehta, cited above, therefore, for the sake of ready reference, the relevant findings, as given in the decision of Rasila S. Mehta, is reproduced herein below:- "3.2 Having considered the rival submissions and careful perusal of the relevant material on record, we note that the CIT(A) while deciding the matter has relied upon the order in the case of Shri Hitesh 5 Mehta, as it is evident from para 9.20 as well as para 10.1 of the impugned order. We further note that the facts in the case of the assessee as well as in the case of Shri Hitesh S. Mehta, are identical and the matter arising from the same search and seizure action u/s 132 of the Act. The co-ordinate bench of the Tribunal, while deciding

After considering all the relevant material, we found that the matter should go back to the file of the Assessing Officer to pass a fresh order, It is seen that for rejecting the books of account, the AO has not given any valid reasons as no specific defect has been pointed out in. the books of account, therefore in our view the Assessing Officer should go through the books for determining the income on the basis of books accounts"

Thus, consistent with the view taken by the Tribunal in all these cases, wherein identical facts and issues are involved, therefore, we also set aside the impugned order passed by the learned Commissioner (Appeals) and restore back the entire issue to the file of the Assessing Officer for denovo assessment

We further find that the Revenue's appeal against the aforesaid decision was dismissed by the Hon'ble juri ictional High Court in CIT v/s Smt. Pratima H. Mehta, ITA No.258 of 2015, vide order dated 26/09/2017. Therefore, from the above, it is evident that the addition of Rs.3,13,213, is based on the evidence which was not furnished to the assessee. In view of the specific directions of the coordinate bench of the Tribunal in assessee's own case, in the second round of proceedings, we find no basis in sustaining such an addition. Accordingly, the addition of Rs.3,13,213, made on the basis of company letters, which were not provided to the assessee is deleted. Further, the learned DR could not bring any material on record to controvert the partial relief granted by the learned CIT(A), accordingly, the relief so granted is upheld. Therefore, the appeal by the assessee in respect of the aforesaid addition is allowed, while the appeal by the Revenue is dismissed.”

In light of the above decisions of the Co-ordinate Bench, to sum-up even in the first round of litigation, the AO could not provide the details which were the basis for making the impugned additions. Therefore, in our considered view, such additions cannot be sustained, keeping in mind the number of decades passed since the original assessment order was framed. Moreover, the additions have been made in violation of audi alteram partem. We, therefore, direct the AO to delete the impugned addition. 18. (II) – The second addition is based upon the letter received from the Custodian – Rs.3,89,77,270/-.

A bare perusal of the aforementioned letter shows that there is not even a whisper of the impugned financial year or assessment year. It has also been clearly mentioned that the figures cannot be treated as firm and final figures. Moreover, when the office of the Custodian realised some glaring errors, it clarified the information already sent, as under:-

In fact, on 28/10/1993, the company, Fuller K.C.P. Ltd., certified that the dividend declared @24% was dispatched to the registered shareholders. Mr. Rasilal Shantilal Mehta, holding 11900 shares which had been added by the AO in the hands of the assessee. Thus, an example of wrong information and in some cases, the request for allotment of shares have been returned. One such company is TISCO, whose letter is place at page 403 in Paper Book volume-II. 21. On identical situation and facts, the Co-ordinate Bench in the case of CIT vs. Hitesh S. Mehta ITA No. 6026/Mum/2017 and ITA No. 5190/Mum/2017, had the occasion to consider a similar issue and held as under:- “13. The second amount of addition of Rs.24,24,385/- as stated in para 8 above represented the addition made on the basis of Custodian letter. We observed that Rs.24,24,385/- was made on the basis of Custodian letter dated 29.10.1993. The information provided in the said letter were incomplete. For example the date of determination of the share holdings was not mentioned, constant change of the figure of holding due to reasons like non-consideration of sale of shares by notified parties, and the holding provided by the Custodian not matching with the companies letters. Therefore, the addition made by relying on the Custodian letter can not be confirmed. The case of the assessee is supported by the decision of the coordinate bench in Growmore Leasing & Investments Ltd. Vs. DCIT in ITA. No.2192/M/2015 A.Y.1992-93 wherein it was held that where there was no evidence of the holdings of shares and securities as alleged by the revenue, the addition has to be deleted. Considering these facts and circumstances and the coordinate bench decision, we set aside the addition of Rs.24,24,385/ sustained by CIT(A) and direct the AO to delete the same. 22. Considering the facts of the case in totality in light of the letter of the custodian mentioned elsewhere and finding that no specific details of holding of shares for the impugned assessment year has been mentioned or provided to the assessee, the additions cannot be sustained. The AO is directed to delete the same.

(III) – Additions made on account of dividend details/warrants – Rs.51,67,438/-

The details of shareholding of the assessee are exhibited from pages 414 to 418 of the Paper Book volume – II. The investment in shares DCM Ltd. of 2500 shares are coming from earlier years as the same is opening balance. Similarly, 3900 shares of Eicher Motors which were opening balance of the assessee were only 200 shares with bonus of 400 shares at the end of the impugned financial year. The holding of Golden Proteins at 15,300 shares have been wrongly taken from the opening balance of Gujarat Ambuja Proteins. The complete details of short-term capital gains and long-term capital gains on sale of shares during the impugned financial year have been given at pages 247 to 249 of the paper book with complete details of dividends received from shares during the financial year at pages 258 to 263 the paper book. It would be pertinent to mention here that the entire additions have been based on dividends declared by the companies of which the assessee may or may not have held the shares during the year under consideration as the same is not based on physical holding of shares and merely on the basis of information collected behind the back of the assessee for which we have already expressed our view elsewhere. Therefore, this addition also cannot be sustained. Accordingly, Ground No. 2 with all its sub- grounds is allowed.”

On finding parity of facts, respectfully following the decision of the Co-ordinate Bench, we direct the AO to delete the impugned addition. Ground No. 1 is accordingly allowed.

Ground No. 2 relates to the addition of Rs. 48,95,729/- out of the total addition of Rs. 78,35,878/- on account of dividend and interest income. 9. During the course of scrutiny assessment proceedings, taking a leaf out of the figures arrived at by the AO in AY 1992-93, the AO was of the opinion that the closing stock figures included both registered and unregistered shares and debentures. On such observations, the AO asked the assessee as to why the dividend/interest should not be calculated based on the holding of the debentures/shares as per the departmental records and the published details of dividend issued coupon rate by the respective companies. The assessee strongly objected for this proposition stating that the assessee has not accepted the figures in AY 1992-93 as they are not reliable. However, this objection of the assessee was dismissed by the AO by stating that the assessment order stands good till the same is superseded by an appellate order of a higher authority. The AO further observed that the assessee is still receiving interest/dividend on shares and debentures even though they must have been sold by the assessee. The AO further rubbished the contention of the assessee that the unregistered shares/debentures are pending registration before the Special Court and, therefore, the dividend/interest should be taxed only when the same is received by the assessee. The AO proceeded by determining the dividend/interest as per the holding of the assessee and arrived at figure of Rs. 78,35,878/- . 9.1. The assessee strongly objected before the ld. CIT(A). It was brought to the notice of the ld. CIT(A) that the assessee has received the I.T.A. No. 451/Mum/2023

Before us, the assessee only contested the debenture interest income of Rs. 13,16,937/-. The assessee furnished detailed chart in respect of its submissions and the same reads as under:-

We have given a thoughtful consideration to the aforementioned chart. It appears that the debentures mentioned that Sr. No.1 to 4 were partly paid and the call money were paid in subsequent accounting year Sr. No. Name of the Company Amount Invested Interest Income as per Books Remark 1 Baroda Rayon Corporation Ltd. 7,13,500 Nil As per Company Letter dt.23.02.1993 (PBP-381), since Debentures were partly paid-up, no Interest was paid by the company on said debentures. 2 Mazda Industries & Leasing Ltd. 25,07,219 172 As per Company Letter dt.20.04.1998 (PBP-383), since all the Debentures were converted into Shares except 12 Deb. as on Notification Date, i.e.08.06.1992, Interest was paid by the company only on 12 debentures. 3 Reliance Industries Ltd. "H' Series 24,55,725 Nil Since all the Debentures were Partly Paid-up and the Call Money/Balance Payment was made in July - 1995 vide Special Court order dt.03.07.1995 in M.A.No.255 of 1995 (PBP-386,396) Company has made payment of Interest on the said Debentures in August - 1995 and the same was assessed in A.Y.1996-97 by Assessing Officer vide order dt.22.03.2002 (PBP-399). 4 Reliance Industries Ltd. "J' Series 7,97.100 Nil Since all the Debentures were Partly Paid-up and the Call Money/Balance Payment was made in May - 1995 vide Special Court order dt.30.04.1994 in M.A.No.173 of 1994 (PBP-408,415) Company has made payment of Interest on the said Debentures in August - 1995 and the same was assessed in A.Y.1996-97 by Assessing Officer vide order dt.22.03.2002 (PBP-399). 5 Other Companies 29,33,147 2,94,127 This interest of Rs.2,94,127/- on remaining Debentures received by the assessee during previous year is already offered by the assessee and assessed by the Assessing Officer vide its order dt. 29.03.1996

We have considered the submissions of both sides and perused the material available on record. From the perusal of the computation of total income, forming part of the paper book on pages 464-466, we find that the assessee claimed interest on bank loans of Rs. 2,46,33,261 against the income under the head "income from other sources". It is evident from the record that the learned CIT(A) placed reliance upon the decision of the Hon'ble juri ictional High Court in CIT v/s Jagmohandas J. Kapadia, [1966] 61 ITR 663 (Bom.), in order to support the conclusion that unless the interest expenditure was incurred solely for the purposes of making or earning dividend income, no deduction as possible under section 57 of the Act. The relevant findings of the Hon'ble juri ictional High Court in the aforesaid decision, as relied upon in the impugned order, are as under:-

We find that the Hon'ble Supreme Court in Seth R. Dalmia v/s CIT, [1977] 110 ITR 644 (SC) agreed with the view taken by the Hon'ble juri ictional High Court in CIT v/s H.H. Maharani Vijaykuverba Saheb of Morvi [1975] 100 ITR 67 (Bom), wherein it was held that the connection between the expenditure and the earning of income need not be direct, and even an indirect connection could prove the nexus between the expenditure incurred and the income. We further find that in CIT v/s Smt. Sushila Devi Khadaria, [2009] 319 ITR 413 (Bom.), in a similar factual matrix, i.e. wherein the AO denied the deduction claimed under section 57(iii) of the Act on the basis that the expenditure was not incurred wholly for the purpose of earning income as the taxpayer was engaged in selling shares in the stock market and the dividend income had accrued as a by-product, the Hon'ble juri ictional High Court by placing reliance upon the aforesaid decision of the Hon'ble Supreme Court in Seth R. Dalmia (supra), upheld the allowance of finance expenditure as deduction under section 57(iii) of the Act against the income by way of dividends, finance charges and interest which were shown as income from other sources by the taxpayer. Therefore, respectfully following

2. Similarly in the case of Jyoti H. Mehta vs. ACIT in ITA No. 436/Mum/2023 and ITA No. 1186/Mum/2023, the Tribunal has considered similar grievance, which reads as under:- “41. Ground no 6 pertains to sustaining the addition on account of interest disallowed. The Ld. CIT (A) has granted partial relief, by allowing on proportionate basis, the interest expenditure only to the extent of Rs. 11, 49,540/- as against the total claim of Rs. 1, 02, 00,000/- made by the assessee.”

2.1. And the Co-ordinate Bench following the order of the case of Pratima H. Mehta (supra), held as under:- “44. It is apparent that the reasons given for not allowing the interest expenditure claimed by the assessee u/s 57 of the Act are not tenable in view of the decision of the Apex Court in the case of Seth R. Dalmia (supra) which is duly followed by the co-ordinate bench of the Tribunal in the case of Smt. Pratima Mehta (supra). Respectfully following these judicial precedents, we allow this ground of appeal in favour of the assessee and direct the A.O. to allow interest expenditure claimed by the assessee while computing the taxable income. In the result, ground no. 6 raised by the assessee is allowed.”

In assessee’s own case for AY 1991-92, the Coordinate Bench in ITA No. 5966/Mum/2017 and 635/Mum/2018, has allowed the claim of interest. On finding parity of facts, respectfully following the decision of the Coordinate Bench (supra), we direct the AO to allow the entire claim of interest. Accordingly, Ground No. 4 is allowed.”

On finding parity of facts, respectfully following the decision of the Coordinate Bench (supra), we direct the AO to allow the entire claim of interest. Accordingly, Ground No. 4 is allowed.” 15. In the result, appeal of the assessee is partly allowed. Order pronounced in the Court on 12th March, 2025 at Mumbai. (SAKTIJIT DEY)

अपीलाथ / The Appellant 2.  थ / The Respondent 3. संबंिधतआयकरआयु" / Concerned Pr. CIT 4. आयकरआयु" ) अपील ( / The CIT(A)- 5. िवभागीय ितिनिध ,आयकर अपीलीय अिधकरण, मुंबई /DR,ITAT, Mumbai, 6. गाड& फाई/ Guard file.