ACIT, NEW DELHI vs. M/S. A.K. CAPITAL SERVICES LTD., NEW DELHI

Since the issues involved are common and the appeals were heard together so these are being disposed off by this consolidated order for the sake of convenience and brevity.

The facts related to this issue in brief are that a search and seizure operation was conducted u/s 132 of the Income-tax Act, 1961 (hereinafter referred to as the Act) and survey u/s 133A of the Act in the case of M/s A. K. Capital Services Ltd., its group companies, directors of such companies and their relatives on 26.04.2007. Certain incriminating material and documents were found which were seized and impounded. The assessee filed the return of income on 30.10.2002 showing income at Rs.1,38,36,004/-.

The assessee was dealing in the business of providing financial services related to IPO management debt syndication. The AO framed the assessment at an income of Rs.2,90,42,487/- by making the various additions. The AO made the addition of Rs.28,04,900/- on the basis of page 18 of Annexure A-II found from the premises of the assessee company at V-87, Rajouri Garden Extension, New Delhi. The assessee explained to the AO that the aforesaid page was a hand written page which contained estimated/provisional arranger fees receivable from the various PSU/SLU/Bank clients and most of the arranger fees mentioned therein had been actually realized by the assessee and accounted for as its income for the assessment year 2002-03 itself. It was also explained that there were one or two cases where the amount was received in the succeeding years. The assessee also furnished copies of its arranger fees account for the year under 5 to 5596/Del/2013 A. K. Capital Services. Ltd. consideration as well as the succeeding years. However, the AO held that the following fees were still recoverable as on 31.03.2002: “i) PGCIL Rs.2,00,000 ii) KIDS Rs.7,72,660 iii) MKVDC Rs.18,32,240 Total Rs.28,04,900” The AO added the aforesaid amount in the income of the assessee.

Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted as under: “It is respectfully submitted that the learned assessing Officer has erred both in laws as well as in fact of the case in making the impugned addition. The inference has been drawn by the learned AO without giving any opportunity to explain the same. The fact of the matter is that PGCIL had actually not paid any fees to the assessee as it had given a mandate for collection of Rs.200 crores, whereas the assessee could arrange only Rs. 20 crore and accordingly PGCIL did not pay any fees. The fees from KIDC amounting to Rs.7,72,660/- has been actually received by the assessee during the instant year itself when an amount of Rs.9,57,800/- was received from them in two installments - one on 10.08.01 when Rs.3,36,200/- was received and again on 6.11.2001 when an amount of Rs.6,21,600/- was received. The copy of arranger fees accounts for the instant year is enclosed and it would be seen that both these amounts are 6 to 5596/Del/2013 A. K. Capital Services. Ltd. already included in the arranger fee income of the assessee for the instant year. The amount of Rs.7,72,660/- was only an estimated amount against which the actual of received and accounted for by it at Rs.9,57,800/- As regards the fees from MKVDC is concerned, the same has been received in the succeeding years when an amount of Rs.14,84,700/- has been received in total from them and the balance amount was not admitted by them at all. The copies of account of arranger fees for the period ending 31st March 2003, 31sl March 2005 & 31st march 2007 are enclosed to show that the amounts of Rs.9,18,800/- Rs.2,13,000/- and Rs,3,52,900/- respectively have been received in these years. The assessee did not receive any further amount of MKVDC did not admit the assessee's claim regarding the balance amount. It is respectfully submitted that the learned Assessing Officer while making the impugned addition has failed to appreciate that income tax is only on real income. The business of the assessee is such that merely by raising bills or by making estimates of receivables the income does not accrue. The income accrues to the assessee only when the bills are admitted by the clients and when the payments become due to assessee. In the instant case all the clients are Govt. of India undertakings and there cannot be any suppression of arranger fee from these parties. The seized document found was only a rough document showing the estimated/ provisional fees for which the assessee had done work but these amount could not be said to have accrued to the assessee until and unless the clients admits these bills. This fact can be proved 7 to 5596/Del/2013 A. K. Capital Services. Ltd. as PGCIL did not pay any arranger fees to the assessee even though the assessee had estimated an amount of Rs.2.00 lacs for having mobilised Rs.20.00 crores as against the mandate figure of Rs.200 crores. Since the claim was not admitted by the clients. The income cannot be said to have accrued to the assessee. Similarly in respect of MKDVC the income can be said to be accrued only when MKDVC admitted the bills of the assessee and the amounts received by the assessee from them have all been duly shown in respective years for which assessments have been framed u/s 153A of the Act. It is respectfully submitted that while making assessments for the subsequent years the learned Assessing Officer has not reduced any amount so shown as income in those years and therefore also this has led to taxing of same income twice which is not allowable in the Act and is also unjustified. The learned Assessing Officer has made the addition on the assumption that the same has actually been realized and not shown in books of accounts. It is submitted that such presumption is based only on suspicion without giving any opportunity to the assessee to explain the same. It is respectfully submitted that the impugned addition made is also against the principles of natural justice as no opportunity was allowed to the assessee during the course of assessment proceedings to explain this fact. The learned Assessing Officer has also failed to appreciate that all these parties are government undertakings and made payments only by account payee cheques, which have to be deposited only in bank account of the assessee company. The copies of arranger fees account for the relevant years 8 to 5596/Del/2013 A. K. Capital Services. Ltd. along with copies of documentation with these three parties is enclosed to show that there is no suppression of arranger fee and therefore no addition on account of alleged undisclosed income could be made during the instant year. It is accordingly prayed that the addition as made may kindly be deleted.”

The AO was also present before the ld. CIT(A) and submitted that the claim of the assessee is not acceptable due to the following reasons: “In respect of arranger fee not recorded in books Rs.28,04,900, the decision of learned CIT(A) is in total disregard of seized documents. Learned CIT(A) failed to appreciate that the assessee could not furnish any evidence to rebut information recorded in seized documents.”

The ld. CIT(A) after considering the submissions of both the parties deleted the addition by observing that the AO had not brought out any fresh material on record which are at variance with evidence here already reconsidered by the ld. CIT(A). He further observed that the addition/disallowance in the search and seizure assessment made u/s 153A of the Act emanate from the seized documents and that the AO disbelieved certain facts which amounts to his subjective opinion and does not reflect the factual matrix on the record. The ld. CIT(A) deleted the addition made by the AO.

In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the loose papers found during the course of search were duly recorded by the assessee in its books of accounts and therefore, could not be considered as incriminating material. It was further submitted that the completed assessments can be interfered u/s 153A of the Act only on the basis of some incriminating material and no addition can be made in a proceeding u/s 153A of the Act in the absence of any incriminating material being found during the course of search. The reliance was placed on the judgment of the Hon’ble Delhi High Court in the case of CIT(Central)-III Vs Kabul Chawla In 709 & 713/2014 order dated 28.08.2015.

The reliance was also placed on the following decisions of the ITAT New Delhi: � CIT-7 Vs RRJ Securities Ltd. in 177/Del/2015 order dated 30.10.2015 � Jakson Enterprises Vs ACIT in ITA No. 383/Del/2013 order dated 27.05.2015 � Jakson Engineering Ltd. Vs ACIT in ITA Nos. 349 & 350/Del/2013 order dated 11.04.2014 10 ITA Nos. 5590 to 5596/Del/2013 A. K. Capital Services. Ltd.

We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that the ld. CIT(A) followed the earlier order dated 24.03.2010 wherein the impugned addition was deleted by observing in para 9 of the said order as under: “I have examined the submissions made by the assessee with reference to the documentary evidences filed on record. In my considered opinion tax can be charged only on real income and in this case the business of the assessee is such that merely by raising bills or making estimates of receivables the income does not accrue. The income can be said to be accrued to the assessee only when the bills are admitted by the clients and when the payments become due to the assessee. It is also seen that all the three parties identified by the A.O. are Govt. of India Undertakings and indisputably there cannot be any suppression of arranger fees from these parties. Even during the course of search, no undisclosed bank account of the assessee has been found and no unaccounted expenses have been found. The assessee has duly accounted for the amount of fees received from these parties after the same were admitted by them and are duly included in the arranger fee account of the assessee for the instant year or for the subsequent year when the bills were admitted. The contention of the A.R. that there is no suppression of receipts is found to be correct on perusal of the arranger fee account and the details furnished by the assessee. It is further seen that the amount which has been received in subsequent years has been offered to tax in those years as the amount cannot be said to have accrued during the instant year only on raising of bills which were not admitted by the client. It is further seen that these amounts so offered to tax in subsequent years, 11 to 5596/Del/2013 A. K. Capital Services. Ltd. have been already assessed to tax in those years and no reduction in income has been made for those years and therefore the same income cannot be taxed twice and accordingly the addition as made by the learned Assessing Officer cannot be sustained and is deleted.”

In the present case, it appears that the arranger fees mentioned in the documents found during the course of search had been actually realized by the assessee and accounted for as its income in the assessment year under consideration itself. Therefore, the addition made by the AO in the absence of any incriminating material was not justified. In the present case, the ld. CIT(A) appreciated the facts in right perspective and considered this fact that while making the assessment for the subsequent years, the AO had not reduced any amount, so shown as income in those years. The AO made the addition on the presumption that the amount in question had been received and the amount in subsequent years which had been offered to tax in those years had actually been realized and not shown in the books of accounts. On the contrary, the claim of the assessee is that the income accrued to the assessee only when the bills were admitted by the clients and the payments became due to the assessee. In the present case, nothing is brought on record to substantiate that the amount mentioned in rough estimate made by the assessee had actually accrued to the assessee and that the amount which was shown as income in the year under consideration or in succeeding year was not correct or it was suppressed. We, therefore, considering

For the assessment year 2003-04 in a similar issue is involved in Ground No. 1, therefore, our findings given in the former part of this order for the assessment year 2002-03 shall apply mutatis mutandis for the assessment year 2003-04.

Next issue vide Ground Nos. 2 to 5 relates to the deletion of disallowance made by the AO on account of unexplained expenditure on sub-brokerage.

The facts related to this issue in brief are that the AO observed during the course of assessment proceedings that the particulars of services rendered by the sub arrangers for which fee was paid to them were not furnished before him and that the assessee had no filed the details called for and had also not produced any evidence to support such claim. Accordingly, the AO issued notices u/s 133(6) of the Act to the sub arrangers. He observed that in the case of M/s Avadh Alloys Pvt. Ltd. there was a variation in the amount claimed to have been paid by the assessee and the amount as confirmed by the sub arranger. He further observed that this party as well as other sub arrangers namely ‘Shamli Steels Pvt. Ltd., Kamla Electrodes Pvt. Ltd. and Sand Chem India Ltd. were companies which were not in the primary business of debt syndication. It was also observed that all 13 to 5596/Del/2013 A. K. Capital Services. Ltd. these companies were located in small towns and therefore could not be in a position to generate funds from various parties like LIC in India, SAIL, Bharat Electronics Ltd. etc. which had their offices in places which were located far away from the place of operation of these parties. The AO pointed out that the sub arranger fee had been paid without deduction of tax at source and all these factors cast doubt on the genuineness of the sub brokerage and genuineness and commercial expediency of the expenditure and that the seized material in the case of the company was silent about such sub arrangers. On the basis of above facts, the Assessing Officer concluded that the assessee has only taken sub brokerage costs into accounts to reduce its profits and therefore such expenditure was not genuine and the same was disallowed by him.

Being aggrieved the assessee carried the matter to the ld. CIT(A) who partly allowed relief to the assessee vide order dated 23.04.2010. Against the said order of the ld. CIT(A), the department filed second appeal before the ITAT Delhi Bench ‘A’, New Delhi wherein vide order dated 14.10.2011, the case was remanded back to the ld. CIT(A). In compliance to the said direction, the ld. CIT(A) passed the impugned order after giving the opportunity of being heard to both the parties. The ld. Counsel for the assessee submitted before the ld. CIT(A) that the assessee had paid sub-arranger fees of Rs.1,09,98,200/- to sub arrangers who had mobilized investments 14 to 5596/Del/2013 A. K. Capital Services. Ltd. bonds issued by the clients of the assessee for which the assessee had earned arranger fees of Rs.5,08,93,385/-. It was further stated that the entire expenditure had been incurred wholly and exclusively for the purpose of business and the disallowance had been made by the AO only on the basis of suspicion and for the sake of making the disallowance. It was also stated that the sub arranger fees had been paid to the persons who had rendered services in the interest of assessee’s business and the copies of invoice raised by the sub arrangers clearly showed the details of services rendered by them, the amount of investment raised, the name of the investor from whom the investment is raised and the same were furnished before the AO during the course of assessment proceedings. The AO was also present before the ld. CIT(A) and submitted as under: “In respect of unexplained expenditure on sub brokerage Rs. 1,09,98,200/-, the then Learned CIT (A) has recorded many findings which are not relevant in the case. He failed to appreciate that the assessee could not file any evidence of any services having been rendered by sub arrangers located in small towns, without any exposure, resources, credibility or cognizance in debt market. The information which was relevant to substantiate commercial expediency and genuineness of expenses, as required during Assessment was neither filed before AO but nor before Learned CIT (A). The assessee did not discharge its onus while failing to furnish evidence of genuineness of servicers rendered by such sub arrangers. The addition of Rs. 1,09,98,200/- towards unexplained : expenditure on sub brokerage was on a/c of the failure of the assessee to furnish information regarding actual services rendered by 15 to 5596/Del/2013 A. K. Capital Services. Ltd. sub brokers and funds mobilized by them for the assessee as required during Assessment and the assessee failed to substantiate genuineness of services having been rendered by such sub brokers. Further, the assessee has not discharged the onus and failed to furnish information regarding actual services rendered by sub brokers and funds mobilized by them for the assessee as required both before AO and also failed to substantiate genuineness of services having been rendered by such sub brokers. It is further submitted that even third party enquiries proved that no actual services were rendered and no details were filed to substantiate any funds mobilized by them for the assessee in debt mobilization.”

The ld. CIT(A) after considering the submissions of both the parties observed that the AO had not brought out any fresh material on record which were at variance with the evidences already considered by the then ld. CIT(A). He, further observed that the additions/disallowance in the search and seizure assessment made u/s 153A of the Act should emanate from seized documents but the AO disbelieve certain facts which amounts to his subjective opinion and does not reflect the factual matrix on record. The ld. CIT(A) deleted the addition made by the AO.

Now the department is in appeal. The ld. CIT DR strongly supported the order of the AO and further submitted that the ld. CIT(A) without appreciating the facts in right perspective, was not justified in deleting the addition made by the AO.

In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the loose papers found during the course of search were duly recorded by the assessee in its books of accounts and therefore, cannot be regarded as incriminating material. As such the very basis for making the disallowance was untenable in the absence of any incriminating material being found in the search carried out on the assessee on 26.04.2007. The reliance was placed on the following case laws: � CIT, Central-III Vs Kabul Chawla in ITA Nos. 707, 709 and 713/2014 order dated 28.08.2015 (ITAT Del.) � CIT-7 Vs RRJ Securities Ltd. in ITA No. 175- 177/Del/2015 order dated 30.10.2015 (Del. HC) � Jakson Enterprises Vs ACIT in ITA No. 383/Del/2013 order dated 27.05.2015 (ITAT Del.) � Jakson Engineering Ltd. Vs ACIT in ITA Nos. 348 & 350/Del/2013 order dated 11.04.2014 (ITAT Del.) 22. It was further submitted that the ld. CIT(A) discussed this issue at length in the earlier order dated 23.04.2010 in paras 6 to 7.2 and held that since no fresh fact had brought by the AO, the addition made by him was not sustainable. It was further stated that the ld. CIT(A) followed the said order dated 23.04.2010 and nothing contrary is brought on record by the department.

We have considered the submissions of both the parties and carefully gone through the material available on the record. In the 17 to 5596/Del/2013 A. K. Capital Services. Ltd. present case, it is noticed that the ld. CIT(A) has given a detailed finding while deleting the additions in paras 6 to 7.2 of the order dated 23.04.2010 which read as under: “6. The submissions made on behalf of the assessee supported by documentary evidences have been carefully perused with reference to the findings of the A.O. as well as the discussion with the A.R. during the course of hearing. An year wise comparative chart of sub arranger fees paid by the assessee from assessment year 1999-2000 to assessment year 2008-09 filed by the assessee has been examined and it is seen that in each of these years the assessee has paid sub arranger fees to its sub brokers / sub arrangers and the same has been duly allowed to the assessee In regular proceedings. It is further seen that sub arranger fees was also allowed to the assessee u/s 143(3) of the Act in original proceedings in A.Y. 2003-04 and A.Y. 2004-05. The learned Assessing Officer who has passed the impugned order has also allowed sub arranger fees paid by the assessee at Rs. 18.55 crores in A.Y. 2008- 09 against arranger fee of Rs.68.14 crores received by the assessee during that year. It is thus evident that the payment of sub arranger fees / sub brokerage by the assessee is an inherent feature of its business and the assessee has been consistently making such expenditure and the same has also been consistently allowed by the department. During the instant year the income from arranger fee has come down to Rs.5.09 crores vis-a-vis Rs.5.94 crores in the immediately preceding year as against which the assessee has paid only Rs. 1.09 crores in the instant year vis-a-v.is Rs.2.47 crores in the last year as sub arranger fee. in the succeeding years the assessee has been able to increase its income from arranger fees and has also paid sub arranger fee in the succeeding sears. The contention of the A.R. that sub arranger fee has 18 to 5596/Del/2013 A. K. Capital Services. Ltd. to be necessarily paid by the assessee to generate more business by mobilizing more funds is evident from the facts of the case and it is therefore found that payment of sub arranger fee is an expenditure which is incurred by the assessee in the regular course of its business. 7.1) It is further seen that during the course of assessment proceedings the assessee in support of its claim of having incurred the expenses has furnished an explanation dated 11.11.09 which has been reproduced by the Assessing Officer in the impugned order wherein he has explained the necessity and commercial expediency of incurring the expenditure on sub arranger fees and has supported the same by filing before the A.O. the copies of its ledger account in its books of accounts in respect of the sub arranger fee paid as also by producing the bills of the sub brokers and furnishing their complete details including names, addresses. It is further seen that the entire payment has been made only through account payee cheques and no material has been brought on record by the A.O. to show that any such amount has flown back to the assessee or its directors. The perusal of the impugned assessment order shows that the learned Assessing Officer has made the disallowance only on the basis of doubts when he has observed in para 5.7 of the impugned order that "all these factors cast doubt on the genuineness of the sub brokers and genuineness and commercial expediency of the expenditure. Even the seized material is silent about sub arrangers." In my considered opinion no disallowance can be justifiably made only on the basis of doubts and suspicion without bringing on record any material on record to show that the apparent is not real. It is seen that the learned Assessing Officer has not brought on record any material to show that the expenditure incurred by the assessee has not been genuinely incurred 19 to 5596/Del/2013 A. K. Capital Services. Ltd. or that the amount paid by it as sub arranger fee has flown back to it in any form. The assessee has duly discharged the onus that lay upon it to prove the expenditure incurred and the learned Assessing Officer in my considered opinion has not done anything to rebut such an explanation. It is an undisputed fact that even during the course of search no material has been found on the basis of which it could be said that the expenditure on sub-arranger fee has not been genuinely incurred by the assessee. The learned Assessing Officer has also not brought on record any material to show that the expenditure has not been genuinely incurred by the assessee in the regular course of its business. The expenditure incurred on sub arranger fee is found to be directly connected with the business of the assessee as the income earned by the assessee on account of arranger fee is derived only when the assessee is able to mobilise funds and tor such mobilisation the services of sub arranger are required and therefore it cannot be said that the expenditure has been incurred only to reduce its profits. It is further seen that in this case the assessee has furnished lull details giving the names of the parties from whom mobilisation of funds has been made by its sub arrangers and has also given the details of parties for whom such mobilisation was done. The payments made to all the sub arrangers is fully verifiable as the same has been made by account payee cheques against bills of all the sub- arrangers and have also been confirmed by the parties to whom notice u/s 133(6) were issued. It is also an undisputed fact that none of the sub arrangers is related directly or indirectly to the assessee company or its directors and there is no evidence to show that the payment of sub arranger fees represented only accommodation entry or was only a paper transaction or that the amount of sub arranger fee came back to the 20 to 5596/Del/2013 A. K. Capital Services. Ltd. assessee in any form. The sub arrangers have been found by the learned Assessing Officer to be income tax payees and merely because mobilisation of funds for which sub arranger fees has been paid to these parties, is not the core activity of these sub arrangers, it cannot mean that they have not carried out this activity when they themselves have confirmed the fact of having rendered the services of fund mobilisation to the assessee and have declared the income received from the assessee as their income in the returns tiled by them. The Assessing Officer has made the impugned disallowance only on the basis of suspicion without bringing on record any material to support such a disallowance. The details furnished by the assessee and the replies filed by the sub arrangers show that the payment of sub arranger fee as well as the aspect of rendering services by them are fully verifiable. It is also not a case where no income was received and expenditure was incurred. The assessee has been incurring similar expenses consistently and such expenses have always been accepted in the case of the assessee. Merely because some of the sub-arrangers are carrying out their business from small towns can also not be held against the assessee as these sub-arrangers have confirmed the fact of rendering services and have also confirmed to have incurred expenses on travelling and telephone. Therefore in my considered opinion no adverse inference can be justifiably drawn in the case of the assessee in respect of such expenses. 7.2) As regards the inquiries made by the Assessing Officer u/s 133(6) of the Act, I have perused the copies of replies tiled u/s 133(6) of the Act by two parties namely Avadh Alloys Private Ltd. and Shamli Steels Private Ltd. The finding of the learned Assessing Officer that Avadh Alloys Private Ltd. has only confirmed an amount of 21 to 5596/Del/2013 A. K. Capital Services. Ltd. Rs.13,52,810/- as against the claim of the assessee at Rs.32.50 lacs, has been examined with reference to the reply of that party filed before the Assessing Officer. It is seen that in paragraph 2 of its letter dated 1.10.09 signed by its director Shri Purshotam Kumar, the aforesaid company has clearly confirmed that it has received an amount of Rs.32.50 lacs in assessment year 2002-03 from the assessee company. This sub arranger has confirmed to have received sub brokerage income and has confirmed that it was engaged in business of sub brokerage. It has also given its income tax particulars and it has also confirmed that it had incurred the travelling and telephone expenses which were included in its respective expenses accounts. This sub broker has also confirmed that it has not made any payment in any shape to the assessee company and it has furnished copies of its acknowledgments of its returns of income as also copies of its bills to the assessee showing the names of parties who have invested in the bonds issued by the assessee's clients as also copies of correspondence with the assessee. The amount of Rs.13,52,810/- infact pertains to assessment year 2001-02 and it is a case of misreading of facts where adverse inference has been drawn by the A.O only my misreading of facts when this agent has duly confirmed the amount of Rs.32.50 lacs having been received by him as sub brokerage for assessment year 2002-03. Similarly in respect of Shamli Steels Private Ltd. the reply of the party dated 16.11.09 filed in response to notice u/s 133(6) along with supporting documents has been perused and it is seen that this agent has also confirmed the receipt of sub brokerage fees from the assessee. It has also submitted the copies of correspondence with the assessee, the copies of its bank accounts where the amounts were received, the nature of services rendered by it and has also submitted its 22 to 5596/Del/2013 A. K. Capital Services. Ltd. complete particulars including income tax particulars etc. It is also seen from the perusal of these documents that no adverse inference against the assessee can be justifiably drawn on the basis of such replies furnished by them when they have confirmed the fact of rendering services to the assessee and have also confirmed the fact of having received sub brokerage from the assessee. On these facts and circumstances the disallowance as made cannot be sustained and is deleted.”

In the present case, it is not in dispute that the AO conducted the inquiry from the parties to whom sub arranger fees had been paid by the assessee and all the transactions were dully confirmed by the parties. The assessee earned the arranger fees of Rs.5.09 crores while the sub arranger fees paid was of Rs.1.09 crore. The said expenditure in the form of sub arranger fees was directly related to the business of the assessee and since the assessee could mobilized the arranger fees with the help of sub arrangers who have confirmed to the AO. In the present case, the ld. CIT(A) while deleting the impugned addition, categorically stated that he has perused the documentary evidences. We, therefore, do not see any valid ground to interfere with the findings of the ld. CIT(A) on this issue and accordingly do not see any merit in these grounds of the departmental appeal.

Similar issue is involved in Ground Nos. 2 to 5 in assessment year 2003-04 and in Ground Nos. 1 to 4 in each of the assessment years from 2004-05 to 2007-08. Therefore, our findings given in the

Vide Ground No. 6, the grievance of the department relates to the deletion of addition of Rs.11,02,600/- made by the AO on account of interest on FDRs.

The facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the seized document contained details of investments of shares and FDRs amounting to Rs.1.04 crore relating to the assessee as on 08.07.2000 pertaining to the immediately preceding year and that the said investment included FDRs of Rs.70 lacs, Rs.5 lacs and Rs.23.26 lacs and the investments in UTI at Rs.12 lacs, there were other investments also. The AO asked the assessee to explain as to whether those investments were realized in assessment year 2001-02 or were carried forward to the year under consideration i.e. the assessment year 2002-03. The assessee submitted that no FDRs or receivables were outstanding as on 31.03.2001 and that the documents pertained to the assessment year 2001-02 which was not covered within the period u/s 153A of the Act. The AO, however, observed that the investment in FDRs at Rs.110.26 lakhs was not reflected in the balance sheet of the year under consideration in corresponding figures of assessment year 2001-02 and similarly interest on FDRs in the assessment year 2001- 24 to 5596/Del/2013 A. K. Capital Services. Ltd. 02 was not reflected in corresponding figures of assessment year 2001-02 in the profit and loss account for the assessment year under consideration and that the encashment of those investments was also not reflected. He was of the view that those investments were unexplained investments which were not shown in the regular books of accounts even though when it was clear that such investment were made prior to the block period. The AO estimated the interest @ 10% on the FDRs of Rs.110.26 lakhs and made the addition of Rs.11,02,600/-.

Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that no such income had arisen to the assessee as those FDRs were encashed before 31.03.2001 itself and no interest income had arisen to the assessee after that date. It was further submitted that the assessee was required to explain as to whether the investments in FDRs were realized in the assessment year 2001-02 or were carried forward to the year under consideration i.e. the assessment year 2002-03 and the assessee vide its reply dated 11.11.2009 explained that the FDRs were not outstanding as on 31.03.2001 and that the interest was shown in the assessment year 2001-02 but the AO ignored these facts and made the addition. It was also pointed out that the interest income on such investments in the assessment year 2001-02 was found duly included under the head “other income” in Schedule-J of the audited balance sheet dated 25 to 5596/Del/2013 A. K. Capital Services. Ltd. 31.03.2001 wherein the assessee had shown interest income of Rs.10,72,808 for the relevant year and that in the balance sheet for the assessment year under consideration, the interest income on investments for the previous year had been shown at Rs.17,82,093/- in Schedule-J.

The ld. CIT(A) after considering the submissions of the assessee deleted the addition made by the AO.

Now the department is in appeal. The ld. CIT DR strongly supported the assessment order and reiterated the observations made by the AO.

In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the AO had not appreciated the facts in right perspective and made the addition only on the basis of presumption that the FDR’s mentioned in the seized material in respect of assessment year 2001-02 continued to be owned by the assessee company and since the assessee had not declared interest income in respect of those FDR and even he had presumed the interest rate of 10%. It was stated that the FDRs matured prior to 31.03.2001 and therefore, the same were not shown as outstanding in the balance sheet as on 31.03.2001 or as on 31.03.2002 and as such no interest income had arisen to the assessee on this account, in the year under 26 to 5596/Del/2013 A. K. Capital Services. Ltd. consideration. It was further submitted that no material had been brought on record by the AO to substantiate that those FDRs were still continued to be owned by the assessee and therefore, there was no question of having earned the interest or even the interest being accrued to the assessee.

We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the AO himself admitted that no FDRs were outstanding in the balance sheet as on 31.03.2001. However, he presumed that those FDRs found recorded in the seized documents were continued to be owned by the assessee but nothing was brought on record to substantiate that the FDRs were not matured prior to 31.03.2001. The assessee claimed that the FDRs found noted on the seized documents were realized and matured prior to 31.03.2001 and the assessee had shown the interest income of Rs.10,72,808/- in the said year itself. The said submission of the assessee was not rebutted. In the present case, when the assessee during the year under consideration was not having the investment in the FDRs, there was no question of presuming that the interest had been earned by the assessee. We, therefore, considering the totality of the facts are of the view that the ld. CIT(A) rightly deleted the addition, made by the AO on the basis of presumption. We do not see any valid ground to interfere with the view taken by the ld. CIT(A).

The next issue vide Ground No. 7 relates to the disallowance u/s 14A of the Act.

The facts related to this issue in brief are that the AO during the course of assessment proceedings noticed that the assessee had shown dividend income of Rs.35,80,526/- which was claimed exempted from tax. The AO asked the assessee to explain as to why expenses may not be disallowed proportionately u/s 14A of the Act. The AO pointed out that no explanation was furnished by the assessee. He, therefore, disallowed a sum of Rs.2,96,883/- by observing in para 7 of the assessment order as under: “7. ………….It is seen from return of income of assessment year 2002-03 and subsequent assessment years that main sources of income of the assessee are merchant banking (fund arrangement etc.) and income on investments. The assessee has diversified portfolio of investment- in shares and is top merchant banker and monitors the market very keenly so as to earn maximum dividend. He is different from ordinary investors who earn dividend at market's and Companies' mercy. It cannot, therefore, be presumed that no manpower and resources of the assessee company are deployed in the process of portfolio management. The disallowance under section 14A of Income Tax Act 1961 is called for and is accordingly, worked out as under:-

The ld. CIT(A) after considering the submissions of the assessee restricted the disallowance to Rs.37,730/-. The relevant findings were given by the ld. CIT(A) in para 8.2 of his earlier order dated 23.04.2010 which read as under: “8.2 I have examined the audited balance sheet of the assessee. It is seen from Schedule E which gives the details of investments as on 31st March 2002 that the total value of investments held by the assessee is Rs.5,71,06,884/-, out of which the only tax free investment is in respect of equity shares owned by the assessee company at Rs. 10,01,000/-. The total value of investment as on 1.04.01 is Rs.4,26,22,975/-, out of which Rs. 10,01,000/- and Rs. 1,30,90,000/- are found to be invested in tax free investments in the form of equity/ preference shares. Thus the average investment in respect of tax free investments works out as under:- Tax free investments as on 1.04.01 Rs.1,40,91,000 Tax free investments as on 31.03.02 Rs.10,01,000 Rs.1,50,92,000 Average investment to =Rs.1,50,92,000} 2 = Rs.75,46,000} 0.5% of Rs.75.46 lacs work out to Rs.37,730 It is further seen that the interest paid by the assessee is not related to tax free investment and therefore cannot be included for computing disallowance under Rule 8D. On these facts the addition of Rs.37,730/- is sustained out of total addition of Rs.2,96,883/- made by the Assessing Officer under Rule 8D. As a result the appeal of the assessee on this ground is partly allowed allowing it relief of Rs.2.59.153/-.”

Now the department is in appeal. The ld. CIT DR supported the order of the AO and reiterated the observations made in the assessment order.

In his rival submissions the ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the AO made the addition by applying the provision contained in Rule 8D of the Income Tax Rules, 1962 which were applicable w.e.f. 24.03.2008 and as such were not applicable for the year under consideration. It was further submitted that the ld. CIT(A) after appreciating the facts and considering the correct figures, worked out the disallowance at Rs.37,730/-. Therefore, there is no merit in this ground of the departmental appeal.

We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that the ld. CIT(A) after appreciating the facts and the material on record, came to the conclusion that the tax free investment in respect of equity shares owned by the assessee on 31.03.2001 were at Rs.10,01,000/- and that total investment as on 31.03.2002 were at Rs.5,71,06,884/- and the tax free investments were at Rs.1,40,91,000/-. Therefore, the average of the tax free investments came to Rs.75,46,000/- and 0.5% of the average investments worked out to Rs.37,730/-. In the working of the ld. CIT(A) for the disallowance u/s 14A of the Act, no defect was pointed out. We, therefore, by considering the totality of the facts, are of the view that the ld. CIT(A) was justified in restricting the disallowance to Rs.37,730/- in place of Rs.2,96,883/- made by the

For the assessment years 2004-05, 2005-06 and 2006-07, the similar issue has been raised vide Ground No. 6, the only difference is in the figures of the disallowance made by the AO and sustained by the ld. CIT(A). Therefore, our findings given in the former part of this order shall apply mutatis mutandis to those assessment years also.

The another issue agitated by the department for the assessment years 2004-05 to 2008-09 relates to the deletion of disallowance made by the AO out of business promotion expenses. The facts related in all these years are similar, the only difference is in the figures involved, for the sake of convenience and brevity at the first instance, we will deal with the issue raised for the assessment year 2004-05 in ITA No. 5592/Del/2013.

The facts related to this issue in brief are that the AO during the course of assessment proceedings asked the assessee to substantiate a reasonableness and genuineness of claim of business promotion expenses towards purchase of gold ornaments amounting to Rs.4,21,650/- as per following details:

The AO however, did not find merit in the submissions of the assessee by observing in paras 7.3 & 7.4 of the assessment order dated 29.12.2009 which read as under: “7.3 Incurring business promotion expenditure by way of gifts of gold ornaments to CEOs/Managing 33 to 5596/Del/2013 A. K. Capital Services. Ltd. Directors/Other functionaries of investors or debit seekers to solicit favours either to get arranger Fee or mobilize Funds through Non Convertible Debentures (NCD) appear unethical and against public policy. The assessee company has made substantial expenditure on Sub arranger fee to sub arrangers during this assessment year and all previous and subsequent assessment years. If efforts have been made by such sub arrangers to arrange funds, incurring of business promotion expenditure by the assessee, that too by lavish gold gifts appears excessive, non-genuine, unreasonable and commercially inexpedient. So far as business meetings, dinners, gifts of silver or other precious items or other favours, these are not being questioned. 7.4 In this context, it is pertinent to note that the assessee is a merchant banker who arranges debts serving for many clients, the largest and most numerous among which are Public sector Banks/ PSUs/ State Level Undertakings. All the employees of such organizations are bound by Conduct Rules that prohibit the taking of gifts from anyone with which they have official dealings. If the assessee is distributing gold ornaments and bullion to such persons, which the assessee must as per its claims because these are his largest business providers, such payments are unethical, in the nature of inducements and against public policy. Such expenditure would, therefore, clearly be disallowable under Explanation to section 37(1) of Income tax Act 1961.” Accordingly, disallowance of Rs.4,21,650/- was made.

Being aggrieved the assessee carried the matter to the ld. CIT(A) and submitted that the assessee had not violated any 34 to 5596/Del/2013 A. K. Capital Services. Ltd. provisions of proviso to Section 37(1) of the Act and the allegation of the AO was wholly arbitrary and not borne out of any material on record. It was stated that the assessee did not give any gifts to the Government employees or employees of the public sector undertakings but it was required to give those gifts to its clients in private sector as well as to other people who helped it in generating business and the entire expenses had been incurred wholly and exclusively for the purpose of business, therefore, no valid basis for the AO to allege that the expenses so incurred were against the public policy. It was stated that the expenses on the gifts had been incurred in the regular course of business and these expenses are required to be necessarily incurred for running the business in regular course. Therefore, the disallowance made by the AO may kindly be deleted. The AO was also present before the ld. CIT(A) and reiterated the observations made in the assessment order.

The ld. CIT(A) after considering the submissions of the assessee as well as the AO, deleted the addition by observing that the AO disbelieved certain facts which amounts to his subjective opinion and did not reflect the factual matrix on the record.

Now the department is in appeal. The ld. CIT DR supported the order of the AO and reiterated the observations made in the assessment order.

We have considered the submissions of both the parties and carefully gone through the material available on the record. It is noticed that an identical issue having similar facts has already been adjudicated by the ITAT in assessee’s own case for the assessment years 2010-11 and 2011-12 in & 1194/Del/2014 vide order dated 10.02.2016 wherein the relevant findings have been given as under: “9. We have heard both the parties and perused the paper book, case laws cited by the Ld. Counsel of the assessee in his written synopsis, assessment order and the order of the Ld. CIT(A). We find that the Ld. CIT(A) has elaborately discussed the issue and gave his finding vide para no. 7 to 7.4 at page no. 8 & 9 of his impugned order. For the sake of convenience, the relevant finding of the Ld. CIT(A) is reproduced below:- “7. I have considered the facts and evidences available on records and the observations of the AO and the judicial pronouncements on the issue as brought forward by the appellant. I have examined the nature of 36 ITA Nos. 5590 to 5596/Del/2013 A. K. Capital Services. Ltd. expenses incurred and the description of items purchased shows that these items cannot be said to be jewellery purchased for personal use by the directors or their family members. The assessing officer has not brought any material on the basis of which it can be said that the items purchased by incurring the impugned expenditure on business promotion were retained by the directors for their personal use and were not distributed in the regular course of business. The commercial expediency on incurring these type of expenditure has infact been accepted by the Assessing Officer himself as he has accepted that the other gifts which have not been questioned. 7.1. Further It is seen that the appellant has earned a substantial arranger fee of Rs.158.73 cores during the instant year and the total expenses on account of gifts etc. are to the tune of Rs.2.27 crore i.e. 1.43% on total revenue. It is not the case of the AO that in the year under consideration there has been huge increase in such expenditure and the same is not incurred for the purpose of its business. It is also a matter of fact that the nature of services rendered by the appellant is for acting only as an intermediary or a broker and in this nature of business, maintaining cordial relations, contacts and liaison with business constituents is a business necessity. The expenditure incurred by the appellant is found to be fully vouched, verifiable and has been incurred through account payee cheques. 7.2. Also the AO has not brought forward any evidence to prove that these gifts have actually been given to public sector employees. He has just drawn a presumption looking to the nature of the business of the appellant. Disallowances/ additions merely on 37 to 5596/Del/2013 A. K. Capital Services. Ltd. presumptions, conjectures and surmises cannot be cemented without support of any corroborative evidence. 7.3. It is also pertinent to note that a similar expenditure incurred by the appellant in earlier years is found to be fully allowed by the Assessing Officer and no disallowance has been made in the earlier years. Further similar disallowances have been deleted by Commissioner Of Income Tax (Appeals)-I and Commissioner of Income Tax (Appeals)-XXXI in the cases of the appellant for earlier years. 7.4. Hence, from the above discussion, since the facts of the present case are same as in earlier years, therefore on the. basis of evidences on record, the addition of Rs, 74,53,938 cannot be sustained and the same is directed to be deleted.”

In the background of the aforesaid discussions and precedents, we are of the view that Ld. CIT(A) has passed a well reasoned order which does not need any interference on our part, hence, we uphold the same. Accordingly, the appeal of the Revenue is also dismissed.”

In the assessment years 2005-06 to 2008-09, similar issue has been raised by the department, the only difference is in the amount of 38 to 5596/Del/2013 A. K. Capital Services. Ltd. disallowance made by the AO. Therefore, our findings given in respect of assessment year 2004-05 on this issue shall apply with the same force for another assessment years under consideration.

In the result, the appeals of the department are dismissed. (Order Pronounced in the Court on 09/05/2017)