ASST CIT 10 (1)(1), MUMBAI vs. M/S HYBRID FINANCIAL SERVICES LTD., MUMBAI

O R D E R PER S. RIFAUR RAHMAN (AM)

2. Revenue has raised following grounds in its appeal: - 2 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., 1. “On the facts and circumstances of the case and in law, Ld. CIT(A) erred in deleting the disallowance of Rs.1,70,77,889/- without appreciating the fact that assessee has not determined the W.D.V of the leased assets on 1.04.2007.” 2. “On the fact and circumstances of the case and in law, Ld. CIT(A) erred in allowing the prior period items of Rs. 11,60,00,000/- as allowable expenses without appreciating the fact that the assessee has not added back the same amount in the computation of Income though the same was debited to P&L account.” 3. “On facts and circumstances of the case and in law, Ld. CIT(A) erred in deleting the interest disallowance of Rs. 1,86,637/- and Demat charges Rs. 15,721/- without appreciating the fact that assessee has earned interest income and must have incurred amount to earn such income”

4. The appellant prays that the order of the Ld. CIT(A) on the above ground be set aside and that of the AO be restored.

5. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.”

3. We shall deal with the issue ground wise. With regard to Ground No. 1, brief facts of the case are, during the assessment proceedings Assessing Officer observed that Depreciation on Leased Assets for A.Y 1993 to A.Y 1998- 99 was disallowed by the Assessing Officer which was confirmed by Learned Commissioner of Income Tax (Appeals) and pending before ITAT. Since the WDV of leased assets was not determined as on 1.04.2007 no depreciation on such assets was allowed. Hence an amount of ₹.1,70,77,889/- was disallowed.

4. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and filed detailed submissions in this regard: -

3 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., “2. Disallowance of Income-tax Depreciation on opening WDV of leased Assets Rs.1,70,77,889/-: Ground No. 3 &4 The appellant submits that the depreciation claimed in the computation of total - income on WDV of leased assets was Rs.1,70,77,889/- and owned assets — Rs. 1,87,497/- for the A. Y 2008-09 which has been verified by the Tax Auditors vide Tax Audit Report dt.27 10.07. The learned AO has allowed the income tax depreciation on the owned assets Out however, disallowed the income tax depreciation on leased assets. The AO ought to have allowed the depreciation on leased assets. Revised submissions in respect to ground no.3 regarding disallowance of income tax depreciation of Rs.1,70.77,889/- on opening WDV of leased assets. The appellant vide its letter dt.3/7/2014 has submitted the written submissions in respect to income tax depreciation on opening WDV of leased assets which is required to be revised in view of recent decision on 21/11/2014 by Income Tax Appellate Tribunal, D Bench, Mumbai for the base assessment year i.e A. Y. 1994-7995 to A. Y. 1998-1999 in our own case in which it was held that income tax depreciation is allowed on leased assets on the ground that the appellant is the "owner" of the assets. Further it was also held that the factum of repossession of equipment has not been disputed by the revenue and therefore this clearly indicates that lessee is not the owner and not lessee has not claimed the depreciation. The facts of the appellant case as given in the Remand Report dt.27/04/2007 are similar on the basis of the principles involved as per Honourable Supreme Court decision in case of 1CDS Ltd v/s CIT which has also been supported and relied upon by the appellant in case of Development Credit Bank v/s DC/T, S/COM in L& T in ITA NO.2200/MUM/2001. Accordingly it was held that issue is fully covered and income tax depreciation is allowed for A. Y. 1994-1995 to A. Y. 1998-1999 as per Remand Report dt.27/04/2007. Further it was also held that the order of the C1T(A) dt.15/6/2009 did not consider/did not go into the fact brought by the AO in Remand Report no question of shame transactions as it was dealt with Corporate as well as Slate Government agencies and have to be taken to be genuine transactions. In view of the above the depreciation claim of Rs.1,70,77.889/- on opening WDV of the leased assets should be allowed for the subject assessment year. Further the appellant state that there are no additions to the leased assets after 1st April, 2001. The opening VI/DV of the leased assets/quantum of depreciation has not been 4 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., disputed by the Department and therefore depreciation as claimed should be allowed. Copy of the order of Income Tax Appellate Tribunal, "D" Bench, Mumbai dt.21/11/2014 is enclosed 1. Further to written submissions filed on 3/6/2015 & 11/6/2015, we have to submit that in our own case vide consolidated order of the Honourable 1TAT , "H' Bench. Mumbai dt.26/08/2016 for the assessment years 2000-2001, 2001-2002, 2003-2004, 2006- 2007 & 2007-2008 allowed income tax depreciation on leased assets. Copy of the said ITAT Order dt.26/08/2016 is attached with Index page No.148-181 Previous to this the order of ITAT "IX Bench, Mumbai dt.21/11/2014 in our own case was submitted to your honour vide our letter dt.11/06/2015 allowing income tax depreciation on leased assets for assessment year 1994-1995 to 1998-1999. Copy of the said order is also attached on Index page no 138-147 Also refer our letter dt.3/6/2015 submitted to Commissioner (Appeals) during the proceedings.

5. After considering the submissions of the assessee, Ld.CIT(A) allowed the ground raised

by the assessee with the following observations: - “4.2 This ground relates to disallowance of depreciation on opening WDV of leased assets. I have carefully gone through the facts of the case and explanation given by the assessee company. I have also gone through the order of the Hon'ble ITAT in assessee's own case for A.Y 1994-95 to 1998-99, 2000-01 to 2003-04 ,2006-07 to 2007

08. The issue under appeal has been decided by the Hon'ble ITAT in favour of the appellant in all these years and the present block of WDV is the continuation of earlier years decided by the Tribunal in favour of the appellant. Thus, respectfully following the decision of the Hon'ble ITAT in appellant's own case for earlier years, the disallowance of depreciation on leased assets is deleted and appeal filed by the appellant company on this ground is allowed.”

6 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., 6. Before us, Ld. DR fairly agreed that this ground is covered in favour of the assessee and ITAT has decided this issue in favour of the assessee.

7 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., 9. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and before the Ld.CIT(A) assessee filed detailed submissions which are reproduced below: - “1. Prior period expenses / Interest on Fixed Deposit Rs.11,60,00,000/- Ground No. 1&2 The appellant submit that in the computation filed with the return of income for the assessment year 2008-2009, the appellant has claimed deduction of Rs 11,60,00.000/- towards reversal of contingency proves ion which ccii be seen from the computation enclosed (refer compilation page no from 4 to 5) under deduction allowable item no. (0 for the subject assessment year. The appellant state that this deduction was claimed as the said amount being 'provision for contingencies" was disallowed in the computation for earlier assessment years i.e. for A Y 2005-06 & 2006-07 The details of which are as under [i] A. Y. 2005-2006 Disallowed Rs. 12, 50.00.000/- comprises of Rs. 2,29,00,000/- HDFC Bank Rs. 9,01,00,000/- Fedral Bank Rs. 11 30,00,000/- [ii] A.Y. 2006-2007 Disallowed Rs. 30,00,000/- Other Bank Total [i+ii] Rs. 11, 60,00 ,000/-. In connection with the above the appellant invite the kind attention of your honour (refer compilation page no from 6 to 8) wherein the computation for A. Y. 2005-2006 is enclosed indicating item no. (0 as provision for contingencies which will prove that an of Rs.12,50,00,000/- was disallowed includes Rs.11,30,00,000/- as mentioned above. Further the appellant also enclosed computation for A. Y. 2006-2007 together with assessment order dt. 2911212008 (refer compilation page no.from 9 to 14) wherein it can be seen that provision for contingencies of 30,00.000/- is also disallowed. in view of this ire appellant submits that the deduction for the assessment

8 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., in question is claimed as the same amount was disallowed in earlier years. The appellant submits that during the assessment proceedings AC issued a notice u/s 142(1) of the Income Tax Act, 1961 in which the AC required the appellant to explain as to why deduction in the computation should be allowed in respect to interest on term bar and bank cash credit and also deduction on account of reversal of contingency. The appellant vide its letter dated 811112010 submitted /he required explanation to AC and stated that the deduction claimed in respect to reversal of contingency was rightly claimed as the same was disalic wed iii the A. V 2005-06 & 2006-07. Copy of the letter dt. 18/11/2010 is enclosed (refer compilation page no. from 15 to 19). The AC did not ask any further clarification or explain in this regard and the same was arbitrarily disallowed. The appellant further submit here that the learned AC perhaps not understood the implication of the entries passed in the books of accounts compared with earlier years computation of Income Tax in which the said amount was disallowed. In this connection the appellant had also made an application Li/S 154 of the Income Tax Act. 1961 which has not been taken cognizance of the same by AC so far. The appellant submits in details &s under . - In the assessment order Page No 4. Item ('10.6, the AC has observed the following (refer assessment order on compilation page no from. 23 to 24 for ready reference) :- a) It is seen from the P&L A/c that assessee has debited an amount of Rs.11,56.00,000/- under the head prior period items b) The said amount was nullified by a reversal against an amount of Rs.11,56,00,000/- drawn from contingency reserve of the assessee. C) The assessee in the computation of Val income has reduced Rs. 11,60,00,000/- has being reversal of contingency provisions. d) However, the assessee has riot added the said amount debited as 'prior period items' in the computation of total income e) The said expenditure is not eligible to be carried as expenditure, since if pertains to prior period, whereas the assessee has not added back in the computation of income though the same was debited to P&L A/c. Accordingly. the prior period expenditure of Ps. 11,56,00,000/- is disallowed and! added to the income returned.

9 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., f) Further, on Page No.5 under Sr.No.6.2 of the assessment order, your, good self has mentioned the following.- The claim of deductions in the statement of income in respect of reversal of contingency provision made at Ps. 11,60,00,000/- is also erroneous as the amount credited to the P&L A/c)(reduced from prior period exp.) is only Rs. 11,56,00,000/-, The said claim is therefore restricted to Rs. 11,56,00,000/-. The above findings was given by the AC which to the extent of (para f) i.e. The said claim I s restricted to Ps. 11,56,00,000/- is found to be correct. Explanation to Sr No. (a) & (b) The appellant has not debited an amount of Ps. 11,56,00,000/- to the P&L A/c as it can be seen from Page No. 17 of the printed accounts (refer compilation page no.43), which reads as under:. Prior period items Rs. 11,56,00,000 Less: reversal of contingency reserve Rs. 11,56,00,000 Amount debited to P&L A/cPs. Nil The fact that it is nullified by reversal there is no debit appearing to P&L A/c. Explanation to SrNo (c) The appellant in its computation has claimed the deduction of Rs. 11,60,00,000/- as the same was disallowed in the A. V 2005-06 and 2006-07 aggregating to Rs. 11,60,00,000/-, which has been clarified herein above Since the provision for contingencies was disallowed in the computation for earlier year's i.e A, V 2005-06 & A. Y. 2006- 2007, the deduction was rightly claimed for an amount of Ps. 1 1,60,00,000/-. The appellant therefore submits that no additions can be made on this account in the computation of income as is done by AO. Explanation to St. No.(d) The appellant submit that the deduction in the computation of Rs.11,60,00.000/- was claimed rightly because the same was disallowed in earlier year. However, in respect of claim of Rs. 11.60,00,000/- consisting Rs.9,31,00,000/- of Federal Bank, Rs. 2,29,00,000/-of HDFC Bank and other bank of Rs. 30,00,000/- towards interest paid by the 10 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., company on fixed deposit, the same was crystallized during the year and therefore it was claimed as '”allowable deduction' and therefore not added in the computation of total income. in this connection, the Auditors have mentioned in Note No. 8 Schedule- i 7 Page No. 26 of the Rooted Accounts (refer compilation page no. 52) that on account of pending reconciliation the company made the provision in the F. V 2004-05 & 2005-06 aggregating to Ps. 11, 50.00.000/- towards interest on fixed deposit. Since the same was crystallized during the year was adjusted against the reversal of contingency provision. The appellant produce herewith Note No.8 of Schedule- 17 of Audited Printed Accounts as under.'- In respect of Current Accounts with banks amounting to Rs.5.02,97,672/ (net) (previous year Rs.17,36,04,717/-) which includes book debit balance of Rs.5,12,29.433/- and book credit balance of Rs.9,31,761/- statements of account were not being received: including from 2000-2001 in some cases In the year 2004- 05 the company followed up and succeeded in obtaining the statements of account barring a few cases including where request for confirmation/statement of account could not be sent as address were not available. Pending the reconciliation, the company has made provision for contingency in the years 2004-2005 and 2005- 2006 aggregating to Rs.11,60,00,000/- for two banks to cover the loss if any. During the Current year, in case of one bank the company has identified the difference of Rs.9,30.78.412/- towards Fixed Deposit Interest Warrants short accounted and interest on Over Draft not accounted in the earlier years The Company has accounted the same as Prior Period Items and adjusted the same against contingency provision of Rs.9.37,00,000/- In case of other Bank it was very difficult to identify the difference due to non availability of complete statement from the Bank, the company has accounted Rs.2,29,21,179/- as Prior Period Item and adjusted the same against contingency provision of Rs.2,29.00.000/-. In case of remaining current accounts adjustment if any would be made on receipt of statements of account, confirmations and completion of the reconciliation. Under the circumstances, the appellant submit that the statement of computation made and submitted along with the return of income was correct in which no additions were made by the appellant for Rs. 11.60.00,000/- as the expenditure related to the interest on fixed deposit was crystallized during the year which was pertaining to the provision made and disallowed in earlier years. Therefore, the additions made by the AO is not justifiable.

11 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., Referring to the written submissions filed by us dt.03/07/2014, the appellant would like to make further submissions in respect to ground of appeal no.1 & 2 as under. The appellant has claimed deduction of Ps 11,60,00,000/- in the computation of income as the same was crystallized during the year and the appellant could identify the quantum after completing pending reconciliation on receipt of the bank statements. In this connection, the appellant submits the background of the facts as under:-

1. On account of differences in the interest amount of fixed deposits and pending reconciliation, the appellant had made contingency provision in the earlier assessment i.e. A. Y 2005-2006 and A. Y. 2006-2007 aggregating to Ps. 11,60,00000/- which was revered during the year by appropriating income against expenses on interest on fixed deposits.

2. The interest on fixed deposits amounting to Rs. 11,00,00,000/- which was debited during the year and remains as debit after nullifying the contingency provision disallowed in the earlier years, the expenses which the appellant has booked is only after crystallizing interest on fixed deposits.

3. The statutory auditors had made a note in Sch-17 -Note 8 corresponding to the debit appearing in P&L A/c (Refer compilation page no.52) that during the current year in case of one of the bank i.e. Federal Bank, the appellant has identified the difference of Rs.9,30,78,412/- towards interest on fixed deposits. In case of other bank i.e. HDFC Ltd, Mumbai it was very difficult to identify the differences due to non- availability of complete statements from bank, the company has accounted Rs.2,29,21,179/- as poor period items towards Interest on fixed deposits

4. The appellant submits that the company was exclusively maintaining Federal Bank. Chennai branch and HDFC Bank; Mumbai for payments of interest warrants of fixed deposits. The bankers used to debit an aggregate amount of various interest warrants paid to fixed depositors on particular day but failed to give the details of various fixed depositors with warrant numbers. In view of this the matter was pending for reconciliation. The appellant submits that on receipt of requisites details/statements from the bank, the reconciliation was carried out and the amount of interest on fixed deposits was crystallized in respect to Federal Bank. Chennai. However the appellant states that in respect to HDFC Bank, Mumbai though one or two statements from the bank could not be received, the appellant submit that based upon the available records and details and the fact that since the HDFC Bank was exclusively

12 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., maintained for payment of FD interest warrants, the differential amount was accounted as "Interest on fixed deposits". Further majority of the payments were identified through the bank statements and records as an interest warrants payments to fixed depositors. Under the circumstances the appellant submits that the poor period expenses claimed in the computation should be allowed as deductible expenses for the above mentioned assessment year.”

by the assessee with the following observations: - “4.1 Ground No.1 &

2. This ground relates to prior period expenses. The appellant submits that on account of differences in the interest amount of fixed deposits and pending reconciliation, the appellant had made contingency provision in the earlier A.Y’s i.e 2005-06 & 2006-07 aggregating to Rs.11,60,00,000/- which was reversed during the year by appropriating income against expenses on interest on fixed deposits. The appellant submits that provision for contingencies were made in earlier years amounting to Rs.11,60,00,000/-, the break-up of which is Rs.11,30,00,000 for A.Y. 2005-06 and Rs.30,00,000/- for A.Y. 2006-07. In the year under consideration, the appellant company has reversed the contingency provision in its Profit and Loss account as the expenditure related to interest on fixed deposit was crystallized during the year and accordingly claimed the deduction there of Rs.11,60,00,000/- as the same amount was earlier disallowed in A.Y. 2005-06 and 2006-07. The AO, however, took the view that this is a prior period item and cannot be allowed as a deduction. I find merit in the Submission of the appellant company and found that it is just a notional expense which was earlier rightly disallowed in respective years and hence, reversal of such notional expense can also not be taxed if credited to the Profit & loss account. Thus, by claiming a deduction in the computation of total income, the appellant company has rightly removed the amount of Rs.11,60,00,000/- which ought not to have been taxed in the year under consideration. Hence, this ground of appeal is allowed.”

13 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., 11. Aggrieved revenue is in appeal before us and at the time of hearing Ld. DR brought to our notice findings of the Assessing Officer and Ld.CIT(A). Ld. DR submitted that the findings of the Ld.CIT(A) is very cryptic and he has not discussed the issue in detail.

14 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., also not be taxed if credited to the Profit & loss account and we also find that the assessee has adjusted the crystalized interest expenditure during this year and the corresponding expenditure of earlier years were disallowed by the assessee in the earlier assessment years and the same was credited to contingence reserve account. It is only a notional expense which is not relating to the current assessment year which was rightly adjusted against the contingence reserve account. Therefore, we do not find any reason to interfere with the findings of the Ld.CIT(A). Accordingly, this ground raised by the revenue is dismissed.

16 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., interest of Rs. 61,000/- the same is paid by the appellant on delayed payment of indirect taxes to the Government Treasury. The appellant states that none of the above explanations were taken On the record by the AO. Further, the appellant has not invested any amount during the year in the securities and shares. The appellant submits that as per clause (ii) of Rule 30 (1) interest expenditure which is not directly attributable to any particular income of any receipt is to be disallowed as per the formula provided therein. However, exception to this in appellant's own case is that the interest debited to P&L A/c is based upon Scheme of Compromise approved by the Honble Bombay High Court for secured as well as unsecured creditors therefore the same is not to be included for the purpose of disallowance u/s 14A of the Income Tax Act, 1961(refer compilation page from 120 to 137). In view of (his, the appellant submits that additional disallowance of Rs 1.86.637/- is not warranted. With regard to the expenditure of Demat charges of Rs 15,721/-, which is included in the computation of disallowance u/s 44A, the expenditure is incurred for maintaining account of the investment irrespective of the fact whether dividend income is earned or not. In view of this, the said expenditure should be deleted from the computation made by the learned AO u/s 14A. The appellant had worked out the disallowance u/s 14A at Rs.6,20,071/- Refer compilation page no.4 for Statement of Computation of Income Tax) without considering the interest amounting to Rs.3,40,07.000/- debited to P&L A/c on which interest u/s 14A disallowed at Rs. 1,86,637/-. (Refer compilation page no.49) In connection with this grounds of appeal, in our own case in a consolidated order of ITAT dt.29/12/016 for A. yr. 2009-2010 the issue regarding interest disallowance was set-aside to the file of the AO and order giving effect to the said order of ITAT was passed by the AO dt.4/12/2017 in which disallowance of interest of Rs.4,75,554/- worked out in computation u/s 14A was - deleted. (Refer Index page no.210). The appellant state that during the year there are no investments made which can be observed from Index page no. .46. The appellant state that in the assessment order dt 2/12/2010 for the above

17 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., mentioned assessment year (refer relevant index page no.22) the disallowance worked out is as under:- Disallowance u/s 14A a. Demat Charges Rs. 15.721/- b. Disallowance of Interest (as computed) Rs.1,86,637/- c. Disallowance of expenses on average investment basis Rs.6.20.017/- Total disallowance u/s 14A Rs. 8,22,428/- The appellant submits that the disallowance should be restricted to only Rs.6,35,738/- by deleting interest disallowance computed u/s.14A at Rs. 1,86,637/-.

by the assessee with the following observations: - 4.3 Ground No.5 &

6. This ground relates to disallowance u/s. 14A. The assessee company has claimed dividend income of Rs.1,10,622/- as exempt income during the year under consideration. The AO held that administrative and other expenses incurred by the assessee company facilitate earning of all incomes including the exempt income. The AO held that it is not possible for the assessee company to identify the actual funds used for the purpose of making investments and hence a part of the interest expenditure is attributable to the investments and earning of exempt income. The AO computed the disallowance u/s 14A and disallowed an amount of Rs.8,22,428/-. During appellate proceedings the appellant has submitted statement of disallowance offered to tax in the computation u/s 14A(2). The appellant has worked out the disallowance u/s 14A at Rs 6.20,071/- without considering interest amounting to Rs,3,40,07,000/- debited to the P & L A/c on which interest u/s14A was disallowed at Rs.1,86,637/- by the AO. The appellant has submitted that the expenditure by way of interest amounting to Rs.3.40,07,000/- is not directly attributable to any income or receipt which is exempt from the tax and that this interest debited to P & L

18 ITA.NO. 8048/MUM/2019 (A.Y: 2008-09) M/s. Hybrid Financial Services Ltd., A/c is based upon Scheme of Compromise approved by the Hon'ble Bombay High Court for secured as well as unsecured creditors and therefore the same is not to be included for the purpose of disallowance u/s14A of the IT Act. The appellant has also submitted that there are no fresh investments during the year in securities and shares. In view of the above, the interest disallowance of Rs.1,86,637/- be deleted. Regarding the demat charges of Rs.15,721/- incurred by the appellant, the same is disallowed since the assesse is not in the business of share trading. Thus the amount of Rs.1,86,637/- be deleted out of the disallowance made u/s14A. Thus this ground is partly allowed.”

Order pronounced in the open court on 06.04.2022