DHANRAJ MILLS P.LTD,MUMBAI vs. ACIT (OSD-II) CR-7, MUMBAI

Date of hearing 01-11 -2017 Date of pronouncement 19-01-2018 O R D E R Per Bench : These eight appeals filed by the assessee, two each for assessment years 1993-94 to 1996-97 against separate, but identical orders of the CIT(A)-52, Mumbai against consolidated order passed for each assessment year separately in respect of two appeals filed by the assessee against the orders of AO passed u/s 143(3) & 143(3) r.w.s. 147 of the Income-tax Act, 1961. Since the facts and issues involved in 2 Dhanraj Mills Pvt Ltd these appeals are identical, for the sake of convenience, these appeals were heard together and are disposed of by this common order. 2. The assessee has raised more or less common grounds of appeal for all the assessment years. Therefore, for the sake of convenience, grounds of appeal raised for AY 1993-94 are reproduced below:- “1. The Learned CIT (A) has erred in not following Hon'ble ITAT, Mumbai direction for competing the assessment. The Learned CIT (A) has erred in confirming Rs 1,59,73,852/- on account of unexplained investment in Jewellery

3. The Learned CIT (A) has erred in directing to adopt the interest income at Rs 11,31,28,230/-

4. The Learned CIT (A) has erred in confirming Rs 7,11,531/- as a dividend income.

5. The Learned CIT(A) has erred in not reducing the interest income already shown in Profit and Loss account. The Learned CIT (A) has erred in law and in facts in rejecting the "-" contentions of the appellant company that no real income has become due to it from Cifco Group of Companies of Rs 2,57,60000/-. (The Learned CIT (A) has erred in law and in facts in rejecting the contentions of the appellant company about the taxability of interest come from M/s Excel & Co at Rs 2,31,00,000/-. The Learned CIT (A) has erred in law and in facts in not considering that no real income has become due to it from VKSA, and Swadeshi Enterprises

9. The Learned CIT (A) has erred in law and in facts in not considering the additional grounds that appellant prays that if non-accruability of interest allegedly due from VKSA, Swadeshi Enterprises and Cifco Group of Companies., is rejected , then the amount so assessable ought to be correspondly allowed as a deduction on the premises that the interest has not been actually and really received by the Appellant from VKSA, Swadeshi Enterprises and Cifco Group of Companies.

10. The Learned CIT (A) has erred in confirming the 3 Dhanraj Mills Pvt Ltd interest u/s 234A, 234B and 234C of the Income Tax Act 1961. 11. The Learned CIT(A) has erred in confirming the initiation of penalty proceedings u/s 271 (1)(c) of the Income Tax Act 1961.

3. There is delay in filing appeals in to 1258/Mum/2017. The assessee filed a condonation petition dated 22- 02-2017 praying for condonation of delay, which reads as under:- Date: 22nd February, 2017 To, Hon'ble"D" Bench ITAT, Mumbai Respected Sir, Sub: Request for condonation of delay in filing Income Tax Appeals for Ay 1993-94-PAN: AAACD5580D I, Rajendra Prasad Mehrotra, Director of the Dhanraj Mills Private Limited, hereby request to kindly condone the delay in filing Tax Appeal. We submit that Learned CIT(A) has passed the consolidate order dated 12-01-2015 for AY 1993-94 for order u/s 143(3) and Order u/s 143(3) r.w.s. 147 received on 09-02-2015, due to single order we inadvertently file single appeal bearing no. 1679/M/15. Recently it has been advised to file separate appeal for the both the order. Therefore, accordingly we are filing separate appeal for order u/s 143(3) r.w.s. 147. Kindly treat the appeal no. 1679/M/15 files for order u/s 143(3). * to inadvertent there is delay in filing appeal by 685 days. Kindly condone the delay. Sd/- For Dhanraj Mills Private Limited”

The above application of the assessee is duly supported by an affidavit sworn in by the director of the company, which reads as follows:-

“AFFIDAVIT I, Rajendra Prasad Mehrotra, Director of the Dhanraj Mills Private Limited, do hereby solemnly state as under:

4 Dhanraj Mills Pvt Ltd That the Learned CIT(A) has passed the consolidate order dated 12-01-2015 for AY 1993-94 for order u/s 143(3) and Order u/s 143(3) r. w. s. 147 received on 09-02-2015, due to single order we inadvertently file single appeal bearing no. 1679/M/15. That the recently it has been advised to file separate appeal for the both the order. Therefore, accordingly we are filing separate appeal for order u/s 143(3) r. w. s.

The reasons for delay in filing the appels are convincing. Therefore, we admit the appeals for adjudication. 4. The assessee also filed a petition for admission of additional grounds vide application dated 21-10-2015 raising more or less common grounds of appeal for all the years under appeals. Therefore, for the sake of convenience, grounds of appeal raised for AY 1993-94 are reproduced below:-

1) The Learned CITA) has erred in computing the interest income of Rs 2,31,00,000/- from Excel & Co. 2) The Learned CITA) has erred in enhancing the interest income by Rs 2,12,03,280/- as receivable from Excel & Co. without issuing enhancement notice.

5 Dhanraj Mills Pvt Ltd 3) The Learned CIT (A) has no jurisdiction for enhancement in the appellate proceeding, which has to be completed as per direction given by Hon'ble ITAT.

4 The Appellant craves leave to add to and/or amend and/or modify and/or alter and/or delete the aforesaid additional ground of appeal.

5. From these grounds of appeal, the assessee has challenged additions made by the AO towards unexplained jewellery and accrued interest on loans and advances receivable from CIFCO group of companies, Excel & Co, VKSA & Swadeshi Enterprises. The assessee also challenged additions made by the AO towards dividend income, computation of interest income adopted from total loans and advances and also levy of interest u/s 234A, 234B and 234C of the Income-tax Act, 1961. Though the assessee has raised various grounds of appeal, filed a chart and explained that the issue for consideration from these grounds of appeal is for AY 1993-94 addition made by the AO towards unexplained jewellery and interest income receivable from loans and advances given to group companies. For rest of the assessment years, the only issue to be decided is addition made by the AO towards interest income receivable from CIFCO group of companies, Excel & Co, VKSA & Swadeshi Enterprises. The remaining grounds are either consequential in nature and / or not pressed. Therefore, the effective grounds remain for adjudication from assessee’s ground of appeal in all

6 Dhanraj Mills Pvt Ltd these appeals is addition made by the AO towards unexplained jewellery and interest income from group companies. 6. The brief facts of the case extracted from for AY 1993-94 are that the assessee company was engaged in financing business and is a notified entity under Special Court (TORTS) Act, 1992. The company filed its return of income for the year under 30th consideration on December, 1993 declaring a loss of Rs.2,99,23,297. The return was processed u/s 143(1)(a) of the Act and while doing so, the AO disallowed assessee’s claim of estimated liability of Rs.10,45,17,615/- on account of finance charges payable to A.D.

Narottam. Consequently, the total income was determined at Rs.7,45,44,318. Subsequently, the case has been selected for scrutiny and the assessment was completed u/s 143(3) on 27-03-1996 determining total income at Rs.12,56,69,558. The assessee has filed appeal against the order of the AO before the first appellate authority. The CIT(A), vide order dated 24th March, 2000, partly allowed appeal filed by the assessee. In the meanwhile, the assessment was reopened u/s 147 of the Act on the ground that certain income was escaped assessment within the meaning of section 147 of the Income-tax Act, 1961 and the AO has completed assessment u/s 143(3) r.w.s. 147 of the Act on 27-03-2003 in which further addition of Rs.4,18,61,409 was made on account of interest from certain parties which was not considered in 7 Dhanraj Mills Pvt Ltd the original assessment. The appeal filed by the assessee against order passed u/s 143(3) r.w.s. 147 has been dismissed by the first appellate authority vide his order dated 28-09-2006 wherein he upheld the addition made by the AO towards interest income of Rs.4,18,61,409. The assessee has filed further appeal against order of CIT(A) before the ITAT. The ITAT, vide order dated 25th February, 2011 restored the appeals filed by the assessee to the file of the CIT(A) with a direction to decide it afresh. The CIT(A) in second round of litigation, after considering the arguments of the assessee, partly allowed appeal filed by the assessee against order of the AO passed u/s 143(3) of the Act and dismissed appeal filed by the assessee against order of the AO passed u/s 143(3) r.w.s. 147 of the Income-tax Act, 1961. Aggrieved by the order of CIT(A), assessee is in appeal before us.

10 Dhanraj Mills Pvt Ltd found in the valuation report except in a few cases where there is a minor difference of less than one milligram which is on account of error committed by the two valuers. The Ld.AR further submitted that the valuer has his own style of describing an item of jewellery and also in respect of weight where there is a milligram has been rounded off to the nearest gram. The Ld.AR of the assessee referring to the reconciliation statement of jewellery filed before the AO explained that except in two cases there is absolutely a narrow difference in weight as well as in value and the difference in two cases has been explained before the AO.

Therefore, the CIT(A) was totally incorrect in confirming addition made by the AO by holding that the assessee could not able to explain certain items of jewellery with bills and vouchers. He further submitted that the AO had adopted a very rigid method while making the addition which is evident from the fact that even where the description, weight, value, etc of the items, as per rough valuation report where tallying, the AO treated such items as unexplained on the ground that the description of items did not tally with bills for purchasing / making charges.

The AO has treated certain jewellery as unexplained wherever the assessee could not able to match description, weight and value. The AO has brought out number of instances where the assessee could not 12 Dhanraj Mills Pvt Ltd match the jewellery with that of valuation report and such list has been furnished in Annexures A-1 & A-2 to the assessment order. It is the contention of the assessee that jewellery found and seized during the course of search is completely explained with known source of income which is evident from the fact that the value of jewellery seized during the course of search is less than value disclosed by the assessee in its books of account in the relevant financial year. The assessee further contended that no addition can be made based on the difference in two valuation reports because each valuer has his own style of valuing jewellery and also taking the weight in terms of milligrams may be because of rounding off of the milligrams to the nearest grams.

Therefore, unless there is substantial difference in weight, description and value, addition cannot be made, despite assessee has explained the jewellery found and seized during the course of search. 11. Having heard both the sides, we find merits in the arguments of the assessee for the reason that the total value of jewellery seized during the course of search valued by the departmental valuers at Rs.2,00,72,477, whereas the assessee has disclosed value 225,13,114.

The value of jewellery seized during the course of search is less than the value declared by the assessee in its books of account. This fact has not been disputed the fact that the assessee has disclosed jewellery in the wealth-tax returns filed for the relevant assessment years on its own

13 Dhanraj Mills Pvt Ltd and in the case of its family members was not disputed by the revenue.

The AO made addition only on the ground that the assessee could not match item-wise jewellery seized with reference to two valuation reports in terms of description, weight and value. On the other hand, the assessee has filed a reconciliation statement explaining the reasons for such difference. On perusal of the reconciliation statement filed by the assessee, we find that the AO has adopted a very rigid method while making the addition which is evident from the fact that he did not even consider minor variation in weight and description of the jewellery. The assessee has explained the reasons for difference in description and weight. According to the assessee, each valuer has his own method of describing jewellery and also taking the weight and value. The assessee has filed copies of valuation reports, list of inventory of jewellery seized during the course of search and corresponding purchase and / or making charges bill. Such details has been furnished in paper book pages 27 to 72. The assessee has explained item-wise jewellery seized with reference to two valuation reports and also explained the difference. According to the assessee, there is a minor difference in weight of the jewellery, that too, in milligrams which is very minimal and also because of different method of valuation followed by two different valuers. Insofar as difference in value quantified by two valuers, the assessee has explained in the remarks column and stated

14 Dhanraj Mills Pvt Ltd that there is a timing gap between two valuation reports because of which obviously, there will be an increase in / or decrease in value of jewellery. Therefore, it cannot be the reasons for making addition when the assessee was able to match item-wise jewellery of description and weight. We find merit in the argument of the assessee on the ground that first and foremost, the jewellery declared by the assessee in its books of account is more than the value of jewellery determined by the departmental valuer. However, we are not sure whether the assessee has furnished these documents before the AO to explain the difference quantified in terms of two valuation reports. Therefore, we are of the view that the issue needs to be re-examined by the AO in the light of re- conciliation statement filed by the assessee with reference to bills and other details and hence, we set aside the issue to the file of the AO and direct him to consider the evidence filed by the assessee and decide the issue in the light of our observations in accordance with law.

The assessee had given advances to CIFCO group of companies,through Kenilworth Investment Co. Pvt Ltd, Excel & Co, VKSA & Swadeshi Enterprises out of its interest bearing funds and no 15 Dhanraj Mills Pvt Ltd interest was charged on such loans. The petition filed by the custodian for seeking direction from the Hon’ble Special Court in respect of such loan / advances made by the assessee directing the concerned debtors to make payments of the outstanding amounts along with the interest thereon has been accepted by the Special Courts and has passed orders on the petitions filed by the Custodian requiring the debtors to make payment of the outstanding amount along with interest thereon.

The Special Court has passed separate orders making the debtors to make payment of principal amount alongwith interest thereon at varying rates. However, the assessee has not accounted for interest amount receivable from these parties in respect of relevant previous years in its books of account. The order passed by the Hon’ble Special Court quantified the interest liability of the debtor alongwith principal amount.

Since the Special Court has passed orders directing these parties to make payment of principal amount alongwith interest thereon at the rate specified therein, the AO observed that interest on such loans accrued to the assessee for the period from AY 1993-94 onwards. The AO has quantified the interest on the basis of order passed by the Special Courts and made additions in the assessment order passed u/s 143(3) and also in the re-assessment order passed u/s 143(3) r.w.s. 147 of the Act. The Special Court has passed order making the debtors to pay interest ranging from 12% to 20%. The AO has quantified interest for 16 Dhanraj Mills Pvt Ltd the relevant period at the rates directed by the Special Courts and made additions for the assessment years 1993-94 to to 1996-97.

No.6166/Del/2012 14. The Ld.Standing Counsel appearing for revenue submitted that the assessee has been given enough time to substantiate his case with necessary evidences, but the assessee has failed to file any evidences.

Therefore, at this juncture the assessee’s argument that interest is not accrued for the relevant financial year cannot be considered. The Ld. Standing Counsel further submitted that the order passed by the Hon’ble Special Court directing the debtor to pay the dues alongwith interest is enough evidence to justify accounting interest on accrual basis. The assessee failed to account interest receivable from parties even though

19 Dhanraj Mills Pvt Ltd such interest is accrued in the relevant financial year in terms of order of Special Court. The Ld.Standing Counsel further submitted that insofar as CIFCO group of companies, the argument of the assessee cannot be accepted for the simple reason that the assessee could able to recover interest amounting to Rs.11,37,51,284 from the assessment year 1996- 97 onwards which is evident from the fact that the assessee itself has admitted interest income in those assessment years on receipt basis.

Similar is the case in the case of Swadesh Enterprises where the assesse could recover interest of Rs.1640 lakhs which has been offered to tax on receipt basis. Since the assessee could not controvert the fact that these debtors could pay the dues and, therefore, the assessee should have considered interest accrued for the relevant financial years by following regular method of accounting followed in its business. The assessee admittedly followed mercantile system of accounting and hence, it is necessary to account interest receivable from those companies on accrual basis which is certainly accrued on the basis of order of the Special Court. In respect of other two debtors, though the assessee claims that the chance of recovery of dues is very less, by the order of the Special Court, the debtors are bound to pay the dues to the company and hence, the interest receivable from those debtors is accrued to the assessee. The AO as well as the CIT(A) has rightly dealt with the issue in the light of the order of the Special Court which 20 Dhanraj Mills Pvt Ltd mandates the debtors to pay interest and hence, the interest is certainly accrued to the assessee for the relevant financial year and hence, rightly taxed on accrual basis. The Ld.Standing Counsel referring to the decision relied upon by the Ld.AR of the assessee in the case of Godhara Electricity Co Ltd vs CIT (supra) submitted that the case law referred by the assessee are rendered in different set of facts and also in many of the case are in the light of Non banking financial companies and treatment of NPAs and interest accrued thereon which is not applicable to the facts of the case of the assessee, as in the assessee’s case, interest is certainly accrued to the assessee on the basis of order of the Special Court.

21 Dhanraj Mills Pvt Ltd Excel & Co, VKSA & Swadeshi Enterprises on the basis of order passed by the Special Court wherein it has quantified interest payable to the assessee. The AO has estimated interest at the rate prescribed by the Special Court and made addition for each of the assessment years starting from AYs 1993-94 to 1996-97. According to the AO, the assessee is following mercantile system of accounting and hence, necessarily to account all receipts on accrual basis, whether or not received during the relevant period. The AO further observed that in terms of order passed by Special Court, interest due from those debtors is accrued to the assessee.

22 Dhanraj Mills Pvt Ltd from the fact that in the case of CIFCO group, it has received interest of Rs.11,37,51,284 in 3 years, which has been offered to tax. Similarly, in the case of Swadeshi Enterprises, it has received interest amount of Rs.1640 lakhs and the same has been offered to tax in those assessment years on receipt basis. The assessee further contended that in respect of VKSA, as per the report of the Custodian appointed by the Special Court(TORTS) Act, 1992,chance of recovery is very less.

As regards Excel & Co, the Custodian has categorically stated that the proprietor of the company is a notified party and whose dues to income- tax is huge and hence, there is no chance of recovery due to non availability of assets with the Custodian on his behalf. Therefore, it is highly incorrect on the part of the AO to tax interest income on accrual basis, which is not really accrued to the assessee. The assessee further contended that merely by following mercantile system of accounting, the income cannot be taxed on accrual basis and the question whether such income is accrued to the assessee or not has to be seen by taking the probability or improbability of realization in realistic manner. If one look into the matter in this light, it is incorrect to hold that the interest is accrued to the assessee for the relevant assessment years.

23 Dhanraj Mills Pvt Ltd Enterprises on the basis of order passed by the Hon’ble Special Court (TORTS) Act, 1992 which has passed order decreeing amount due to the assessee by the above parties alongwith interest. The AO has estimated interest at the rate quantified by the Special Court and made additions in each of the assessment years under consideration.

Admittedly, the issue of recovery of dues from those debtors is not in the control of the assessee as the matter is seized by the Custodian appointed by the Government under the Special Courts (TORTS) Act, 1992. Therefore, under these facts and circumstances, one has to see whether interest receivable from those debtors is accrued to the assessee in the light of the order passed by the Special Court. No doubt, the Special Court has passed order decreeing the amount due from the above parties. As per the order of the Special Court, the Custodian appointed by the government has to recover the amount due from the parties. We further notice that in the case of CIFCO group of companies, the assessee could able to recover amount from the party in the financial year relevant to AY 1996-97, 1997-98 and 2007-08 totalling Rs. 11,37,51,284. Similarly, in the case of Swadeshi Enterprises, the assessee recovered an amount of Rs.1640 lakhs in 5 years which has been accounted for on receipt basis and offered to tax. As far as other two debtors, viz. VKSA Investment Pvt Ltd and Excel & Co, except to the extent of Rs.15,35,400 the assessee could not able to recover any 24 Dhanraj Mills Pvt Ltd amount and this fact has been confirmed by the report of the Custodian as per which, the chance of recvovery of amount due from those debtors is very less as the proprietor of Excel & Co did not have any asset.

Similarly, in the case of VKSA Investments Pvt Ltd, the Custodian has recovered certain assets to the extent of Rs.15,35,400 and further stated that the chances of recovery of remaining amount is very less. Under these circumstances, the issue has to be considered by taking the probability or improbability of realization of amount due from those debtors in a realistic manner.

25 Dhanraj Mills Pvt Ltd to the assessee or not has to be seen in view of the fact whether the assessee is able to recover such income or the probability of recovering such income is realistic or not. In the light of the above legal proposition, if we examine the present case, whether interest due to the assessee from those debtors is really accrued to the assessee or not has to be seen. No doubt, the assessee is following mercantile system of accounting. If any receipt is accrued or deemed to accrue for the relevant financial year, the assessee has to consider those receipts for the relevant financial year for the purpose of taxation. If the income or receipt is merely accrued on account of method of accounting followed by the assessee, but not really accrued, if you follow the real income theory, then the question of taxing such receipts for the relevant financial year is not correct. In this case, the Court has passed order decreeing the amount due to the assessee on the petition filed by the Custodian.

In the case of CIFCO group of companies, the arguments of the assessee cannot be accepted for the reason that interest is accrued for the relevant assessment year, because in the subsequent financial year the assessee has received interest which is evident from the fact that the assessee has offered to tax interest on receipt basis. Similarly in the case of Swadeshi Enterprises, the assessee has recovered interest which has been offered to tax for the relevant assessment years on receipt basis. Therefore, we are of the considered view that in respect

26 Dhanraj Mills Pvt Ltd of CIFCO group and Swadeshi Enterprises, interest receivable from the debtors is accrued to the assessee by virtue of mercantile system of accounting followed by the assessee and hence, the AO was right in taxing receipt on mercantile basis. However, this finding cannot be applied to the other two cases, viz. VKSA Investment Pvt Ltd and Excel & Co. Though the debtors are liable to pay interest by virtue of order of the Special Court, the Custodian of the Special Court in his report categorically stated that the chances of recovery of amount due from those two companies is very less because the proprietor of the company is a notified party and his income-tax dues are huge and hence, there is no chance of recovery due to non availability of assets. Since the assessee did not have any control over the affairs of collection due from those debtors and which has been under the control of custodian. The report of the Custodian specifically states that the chance of recovery of amount due from those parties is very less. Therefore, whether there was real income accrued to the assessee in respect of interest has to be considered by taking into account the probability or improbability of realization in a realistic manner. If the matter is considered in this light, it is not possible to hold that there was real accrual of income to the assessee in respect of interest receivable from VKSA Investment Pvt Ltd and Excel & Co. Therefore, we are of the considered view that the AO was erred in making addition towards interest receivable from VKSA

27 Dhanraj Mills Pvt Ltd Investment Pvt Ltd and Excel & Co. However, the facts are not clear whether the assessee has furnished this or not. Therefore, we are of the view that the issue needs to be re-examined by the AO in the light of our observations and also in the light of paper book filed by the assessee containing report of the Custodian. Therefore, we set aside the issue to the file of the AO and direct him to consider the issue in the light of our findings as well as report of the Custodian in respect of interest receivable from those two companies. Needless to say, the assesse is directed to file all the evidences and also if necessary, obtain latest report from the Custodian about the possibility of recovery of dues, from those companies.

We have gone through the case laws relied upon by the assessee in the light of the facts of the present case and find that the case law relied upon by the assessee on different facts and also most of the cases are in respect of treatment of non performing assets and also interest accrued on NPAs except in the case of Godhara Electricity Co Ltd vs CIT (supra). Therefore, we are of the considered view that the case law relied upon by the assessee are not applicable to the facts of the present case and hence, are not considered. In the case of Godhara Electricity

28 Dhanraj Mills Pvt Ltd Co Ltd vs CIT (supra), the issue was whether the enhanced electricity charges accrued to the assessee in the light of either by Court orders or by government orders and having been able to realize the enhanced rates, still it was taken over by the electricity board. Under these facts and circumstances, the Hon’ble Supreme Court came to the conclusion that no real income accrued to the assessee and nothing on that could be added even though the assessee is following mercantile system of accounting. In this case, facts are entire different and hence, the ratios of the above case laws are not applied to the facts of the assessee’s case. 20. In the result, the ground raised by the assessee in all the assessment years challenging additions made by the AO towards interest receivable from CIFCO group of companies, Excel & Co, VKSA Investments P Ltd and Swadeshi Enterprises is restored back to the file of the AO.

21. The Ld.AR for the assessee, at the time of hearing, submitted that the other grounds in all the assessment years are either consequential with reference to the addition made towards income from CIFCO group of companies, Excel & Co, VKSA Investments P Ltd and Swadeshi Enterprises and are not pressed. Therefore, the other grounds raised by the assessee except grounds relating to unexplained jewellery and accrued interest from loans and advances are dismissed, as not 29 Dhanraj Mills Pvt Ltd pressed. 22. In the result, all the eight appeals filed by the assessee are treated as partly allowed, for statistical purpose. Order pronounced in the open court on 19th January, 2018.