DCIT CC 4(3) CEN RG 4, MUMBAI vs. GROWMORE LEASING & INVESTMENT LTD, MUMBAI

M/s Growmore Leasing & Investment Dy. Commissioner of Income Ltd. Tax CC 4(3) Cen Rg-4 32, Madhuli, Third Floor Vs. Dr. Annie Besant Road, Worli Mumbai-400 018 PAN No. AAACG4397D Appellant .. Respondent Revenue by .. Dr. P. Daniel, DR Assessee by .. Shri Vijay Mehta & Dharmesh Shah, ARs’ .. Date of hearing 01-09-2017 Date of pronouncement .. 17-11-2017 O R D E R PER MAHAVIR SINGH, JM:

These two cross appeals by the Revenue and assessee are arising out of the orders of CIT(A)-52, Mumbai, in appeal No. CIT(A)-52/IT/AC- CC-31/171/2009-10 dated 21-01-2015. The Assessment was framed by DCIT CC-31, Mumbai for the A.Y. 1992-93 vide order dated 28-12-2006 under section 143(3) read with section 147 of the Income Tax Act, 1961 (hereinafter ‘the Act’).

& 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93)

First we will deal with Assessee’s appeal in for the AY 1992-93.

“The Ld. Commissioner of Income-Tax (Appeals) ought to have appreciated that as per the decision of Hon'ble Special Court dated 30.04.2010 in MP No. 41 of 1999, the assets under consideration and the consequential income belongs to Late Shri Harshad S. Mehta and hence the Income confirmed by the learned Commissioner of Income-Tax (Appeals) ought to have been taxed in the hands of Late Shri. Harshad S. Mehta and not in the hands of the appellant.”

4. The second issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of short term capital loss. For this assessee has raised following ground No.2: -

“The Ld. Commissioner of Income-tax (Appeals) has erred in Law and in facts in confirming the disallowance of short term capital Loss amounting to Rs.2,44,62,328/- .”

& 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93)

5. Briefly stated facts are that the assessee purchased 9% tax free IRFC bonds for the value of Rs. 50 crores from Harshad S Mehta for a total consideration of Rs.50,31,95,205/- on 26-09-1991. The assessee sold these bonds within a short period of 15 days on 11-10-1991 for a total consideration of Rs. 47,87,32,877/-. In this process the assessee claimed loss of Rs. 2,44,62,328/-. The assessee also received tax free interest from these IRFC bonds at Rs. 1,84,50,000/-. The AO noted that the assessee held these bonds for less than a month and obviously, the transaction entered into with an intention of earning tax free interest and claiming short term loss. According to AO, this is a business transaction in the nature of trade and hence, the provisions of section 94(4) of the Act applies, which provides that even if the assessee is partly carrying on the business of dealing in securities, the same will be hit by the provisions of section 94(4) of the Act. Accordingly, he held that the assessee is carrying on the business of dealing in securities, the same securities and the transactions of purchase and sale of 9% IRFC bonds worth Rs.50 crores is squarely covered in the provisions of section 94(4) of the Act and disallowed these claim of short term capital loss of Rs. 2,44,62,328/-. Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the AO by observing in Para 8 and 9 of his appellate order as under:-

“8. I have considered the facts of the case, submissions and contentions of the appellant, as also the order of the AG. The loss of Rs.2,44,62,328/- had arisen on sale of 9% IRFC Bonds. While the assessee claims that it is a short term capital loss, the AO has held if to be business loss, and he, accordingly, applied the provisions of Sec.94(4) of the Act. For clarity, the provisions of & 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93)

Sec.94(4) of the Act are reproduced as under: -

" (4) Where any person carrying on a business which consists wholly or partly in dealing in securities, buys or acquires any securities and sells back or retransfers the securities, then, if the result of the transaction is that interest becoming payable in respect of the securities is receivable by him but is not deemed to be his income by reason of the provisions contained in sub- section (1), no account shall be taken of the transaction in computing for any of this Act the profits arising from or loss sustained in the business."

It would be seen from the above provisions that as per Sec.94(4) of the Act, if any loss is arising to any person engaged in the business of dealing in securities, etc., then such loss shall not be considered in computing his net taxable income. Further, the provisions of sub-section (1) of Sec.94 say that where the owner of any securities sells or transfers those securities and buys back or reacquires the securities, then, if the result of the transaction is that any interest becoming payable in respect of the securities is receivable otherwise Page 4 of 24 & 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93) than by the owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income-tax apart from the provisions of the said sub-section, be deemed, for all the purposes of the Act, to be the income of the owner and not to be the income of any other person.

Though the assessee claims that purchase and sale of bonds is not part of its business activity. However, I am unable to buy such an explanation of the assessee. In my opinion, the entire assessee group is engaged in the business of purchase and sale of shares and securities, etc., and, therefore, mere technicalities will not come in the way to see as to what is the net impact of a particular transaction and whether it had happened in normal course of business or it is a deliberate attempt in the direction of tax avoidance. Therefore, I am unable to agree with the learned AR that the provisions of Sec.94(4) of the Act are not applicable to the facts of the present case. In the circumstances, I hold that the claim of the assessee towards loss of Rs.2,44,62,328/- is disallowable. Accordingly, the order of the AO in this regard is upheld and this ground of appeal is rejected.”

Aggrieved, now assessee is in second appeal before Tribunal.

of the provisions of section of 94(1) & (4) of the Act, the loss claimed by the assessee is to be disallowed. We have gone through the provision of section and the same reads as under:-

(1) Where the owner of any securities (in this sub- section and in subsection (2) referred to as" the owner") sells or transfers those securities, and buys back or reacquires the securities, then, if the result of the transaction is that any interest becoming payable in respect of the securities is receivable otherwise than by the owner, the interest payable as aforesaid shall, whether it would or would not have been chargeable to income- tax apart from the provisions of this sub- section, be deemed, for all the purposes of this Act, to be the income of the owner and not to be the income of any other person.

Explanation.- The references in this sub- section to buying back or reacquiring the securities shall be deemed to include references to buying or acquiring similar securities, so however, that where similar securities are bought or acquired, the owner shall be under no greater liability to income- tax than he would have been under if the original securities had been bought back or reacquired. Page 7 of 24 & 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93)

(2) -----------------------------------

(3) -----------------------------------

(4) Where any person carrying on a business which consists wholly or partly in dealing in securities, buys or acquires any securities and sells back or retransfers the securities, then, if the result of the transaction is that interest becoming payable in respect of the securities is receivable by him but is not deemed to be his income by reason of the provisions contained in sub- section (1), no account shall be taken of the transaction in computing for any of the purposes of this Act the profits arising from or loss sustained in the business.

(5)-------------------------------------------

section (1) of section 94 of the Act, this interest will be income of Harshad S Mehta and not of the assessee. Similarly, in respect to loss sustained on account of this transaction has been clarified by sub section of section 94 of the Act, which states that any person carrying on a business consists wholly or partly in dealing in securities, buys or acquires any securities and sell back or re-transfer the securities then, if the result of the transaction is that, interest become payable in respect of securities is receivable by him but is not deemed to be his income in view of the provisions of sub section (1). Further, no account shall be taken of the transaction in computing for any of the purposes of this act, the profit arises from or loss sustained in the business.

7. We are of the view that the provisions of section 94(4) can be invoked only in case the provision of section 94(1) was applicable to the counter party. The loss on sale of securities can be disallowed only if the assessee in the course of business, bought and sold any securities and as a result of the transaction, interest was receivable by him which was not deemed to be his income by reason of Sec. 94(1) of the Act. The provisions of Sec. 94(4) would come into operation only if:-

(i) Where any person is carrying on a business which consists wholly or partly in dealing in securities; (ii) Buys or acquires any securities and sells back or retransfers the securities; (iii) The result of the transaction is that interest becoming payable in respect of the securities is receivable by him; and (iv) Such interest is not deemed to be his income by reason of the provisions contained in sub-section (1) According to us, it is a pre-requisite that the provisions of Sec.94(1) of the Act ought to be applied in the case of the actual owner of the securities from whom the same were bought by the assessee. However, the AO had failed to examine as to whether the provisions of Sec.94(1) of the Act Page 9 of 24 & 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93) had been applied in the case of the party from whom the shares in question were purchased and to whom the same were sold by the assessee. The bonds in question were purchased and re-sold to Harshad S. Mehta, but the provisions of Sec.94(1) of the Act had not been invoked in the said case, and, therefore, the provisions of Sec.94(4) of the Act could not be invoked in the case of the assessee. Going by the intent, we are of the view that the provisions of Sec.94(4) of the Act had been introduced with a view to levy tax on the interest income, which was being sought to be avoided by certain persons by carrying on transactions in shares and securities. The intention of the Legislature was to tax the interest income in the right hands, which had been avoided by transferring the shares and then repurchasing the some after the interest was received by the other persons. Therefore, it was necessary for the AO to prove that the assessee had attempted to avoid payment of tax. Since the interest income on 9% IREC Bonds was exempt from tax, there was no question of the assessee or Harshad S. Mehta adopting any such methods to avoid tax on the income. Further, we are of the view that the provisions of Sec.94(4) of the Act would apply only in cases where the assessee had carried on the transactions of purchase and sale of securities during the course of business and since the purchase and sale of the bonds in question was not a business activity, the provisions of Sec.94(4) of the Act was not applicable to the transaction. Accordingly, We direct the AO to allow the claim of set off of loss of Rs.2,44,62,328/- suffered from 9% IRFC Bonds, against profit from sale of shares.

“3. The Ld. Commissioner of Income- Tax (Appeals) erred in Law and in facts in confirming the alleged unexplained investment in 9% tax free NTPC bonds Page 10 of 24 & 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93) amounting to Rs. 1 0,00,000/- out of the total addition of Rs.4,50,00,000/- made by the Assessing Officer.”

9. Briefly stated facts are that the AO during the course of assessment proceedings received information from National Thermal Power Corporation Vide letter dated 10-08-2000 that the assessee company is holding 9% tax free bonds 3rd series worth Rs. 4.5 crore as on 11-06-1991 under the register value No. 3631200. NTPC also enclosed copies of bonds endorsed in the name of the assessee. As per AO the investment in bonds is of face value of Rs. 4.50 crores. As per the delivery memo issued by M/s Harshad S Mehta dated 19-06-1991, the face value of NTPC bonds issued to the assessee was Rs. 4.40 crores as there was a discrepancy of Rs. 10 lakhs. The AO noted that the assessee has made unexplained investment of Rs. 10 lakhs in 9% tax free NTPC bonds and accordingly, he added the same to the return income of the assessee. Aggrieved, assessee preferred the appeal before CIT(A). The CIT(A) partly deleted the addition and sustained the addition of Rs. 10 lakhs by observing in Para 19 as under: -

“19. From the above, it is clear that the assessee is showing investment in NTPC Bonds at Rs.4.4 crores, while as per information provided by NTPC, such investment is Rs.4.5 crores. There is nothing on record to show that the investment made by the assessee in NTPC Bonds is actually Rs.4.4 crores + Rs.4.5 crores. Apparently, even the NTPC letter does not indicate that the appellant's investment in the NTPC Bonds amounted to Rs.8.9 crores. If that be the case, there is only a discrepancy of Rs.10,00,000/- between the Page 11 of 24 & 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93) investment as disclosed by the assessee and as reported by NTPC. It is also relevant to mention over here that the AC has added only the differential interest of Rs. 45,000/- in respect of unexplained investment in NTPC Bonds (apparently, for a period of six months), and not the entire interest attributable to investment of Rs.4.5 crores. Since the AC has considered the unexplained investment in NTPC Bonds only at Rs. 10,00,000/- for The purpose of making addition towards interest on such Bonds, he should not have made an addition of Rs.4.50 crores as unexplained investment in NTPC Bonds Therefore, considering the overall fats of the case, it will be fair and reasonable to sustain an addition of Rs.10,00,000/- out of total addition of Rs.4,50,00,000/- made by the AO. The assessee, thus, gets a relief of Rs.4,40,00,000/-, on account, and this ground of appeal (ground No.8) is, accordingly, partly allowed.”

Aggrieved, assessee is in second appeal before Tribunal.

bonds by the assessee is of face value of Rs. 4.50 crores. As per the delivery memo issued by M/s Harshad S Mehta dated 19-06-1991, the face value of NTPC bonds issued to the assessee was Rs. 4.40 crores as there was a discrepancy of Rs. 10 lakhs. The AO noted that the assessee has made unexplained investment of Rs. 10 lakhs in 9% tax free NTPC bonds and accordingly, he added the same to the return income of the assessee and CIT(A) also confirmed this addition. We find from the facts of the case that the assessee has purchased 9% tax free bonds of NTPC of face value of Rs. 4.40 crores on 19.06.1991 through the broker Harshad S Mehta and these bonds have been sold on 17-12- 1991. The same are reflected by the assessee in its books of accounts under account No. 2008 titled as, ‘investment in PSU bonds’. We find that the assessee has not paid any consideration on account of purchase of these bonds and these are standing as credit in the firm Harshad S Mehta. It means that holding of the assessee in NTPC bond is to the tune of Rs. 4.40 crores only and not more than that. Even now before us, the learned Counsel claimed that Revenue could not show to the assessee that it is holding NTPC bond of Rs. 4.50 crores as alleged by the Revenue and this information was never made available to the assessee and unless the said evidence is placed at the disposal of the assessee, the same cannot be explained. In view of the above facts, we delete the addition and allow this issue of assessee’s appeal.

11. The next issue in this appeal of assessee is against the order of CIT(A) confirming the addition made by AO on account of unexplained investments in shares amounting to Rs. 5,40,700/-.

1400 shares. Accordingly, AO made addition of Rs. 5,40,700/- by observing as under: -

“1. Coventry Coil: In the original assessment an addition of Rs. 57,80,000/- was made as unexplained investment in 57800 shares of Coventry Coil. In the set aside proceeding assessee produced contract notes in respect of 56600 shares. Hence the investment in respect of 1200 shares is treated as unexplained. For the purpose of valuation, the purchase rate quoted by the assessee in the last transaction of the F.Yr. is taken at Rs. 66.75. The total addition on this account is Rs. 80,100/- (1200 x 66.75). b. ITW Signode: An addition of Rs. 7,25,000/- in respect of 2900 shares was made in the original assessment order. Assessee has now produced contract notes for 1500 shares only. In view of this investment in 1400 shares is treated as unexplained. The value is taken @ Rs, 329/. being the purchase rate quoted by the assessee. The addition on this account is Rs. 4,60,600/-”

Aggrieved assessee preferred the appeal before CIT(A). The CIT(A) without verifying the facts confirmed the addition vide Para 27 of his appellate order as under: - & 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93)

“27. 1 have considered the facts of the case and find that the arguments of the learned AR are misplaced. Whatever contract notes the assessee was able to produce, the AO has allowed necessary benefit to the assessee, and wherever relevant contract notes were not produced, such investments have been treated as unexplained by the AO. Such decision of the AO appears to be fair and reasonable and should not be questioned by the assessee. Therefore, the addition made by the AG in this regard is upheld.”

“5. The Ld. Commissioner of Income- Tax (Appeals) erred in Law and in facts in confirming the disallowance on account of car rental expenses to the extent of 50% of the aggregate amount of Rs.3,98,091/- claimed by the appellant.”

“6. The Ld. Commissioner of Income- Tax (Appeals) erred in law and in facts in confirming the disallowance u/s. 14A of the Act to the extent of 50% of Rs. 11,65,140/- disallowed by the Assessing Officer in the assessment order.”

finding of relation of expenses there in the orders of the lower authorities and hence, we restrict the disallowance at 1% of the exempt income. We direct the AO accordingly.

“3. The next common issue relates to the disallowance of Auditors fees payable by the assessee. The claim of the assessee was disallowed on the ground that it had not been crystilised during the year as there was change in the Auditors. However, the Learned CIT (A) has deleted such disallowance by following the order of the Tribunal in the case of Pallavi Holdings Pvt. Ltd. and M/s Devine Holdings Pvt. Ltd. for Assessment Year 1993-94. Aggrieved by the same, the Department is in appeal before the Tribunal,

4. After hearing both the parties, we find that this issue is covered in favour of the assessee by the decisions of the Tribunal mentioned above well as in various other cases. However, the & 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93)

Special Counsel for the Revenue Dr. Daniel has tried to distinguish on the ground that there as no contractual liability during the year under consideration as the previous Auditor was changed and the audit report was obtained through a new Auditor. In reply, the Learned Counsel for the Assessee has submitted that Auditors are appointed from one Annual General Meeting to another Annual General Meeting and, therefore, the contractual liability existed during the year under consideration despite the fact that subsequently a new Auditor was appointed by the order of the Special Court. We find force in the submission of the Learned Counsel for the Asses-see. The appointment is made in the Annual General Meeting and the liability to pay fees is incurred the moment the appointment is made. No adverse inference can be drawn merely from the fact that audit could not be done due to seizure or the books of accounts as well as from the fact that subsequently the Court directed that audit be done through new Auditor. In view of the same and following the decision of the Tribunal mentioned above, we do not find any merit in the ground raised by the Revenue. Accordingly, the orders of the Learned CIT (A) are upheld on this issue. Page 18 of 24 & 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93)

“8. The Ld. Commissioner of Income- Tax (Appeals) erred in law and in facts in confirming the disallowance of depreciation of Rs.61,640/- out of the total depreciation of Rs.3,38,636/- disallowed by the Assessing Officer.”

“9. The Ld. Commissioner of Income- Tax (appeals) has erred in law and in facts in confirming the levy of interest under section 23A, 234B and 234C of the Act.

10. The learned Commission of Income Tax (Appeals) has erred in law and in facts in not appreciating that the income assessed in the hands of the appellant were subjected to the provisions of TDS and hence, on the said amount of tax, no & 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93)

interest can be computed under section 234B and 234C of the Act.

“6. The only other issue in this appeal is with regard to the chargeability of interest under section 234A, 234B & 234C of the Act. On this aspect, pleas of the assessee are two fold. First, the plea is to the effect that the & 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93) provisions of section 234A, 234B and 234C are not applicable to notified entity. This aspect of the matter is required to be held against the assessee following the judgment of the Hon’ble Bombay High Court in the case of Divine Holdings Pvt. Ltd( of 2010 dated 7/3/2012), as decided by our Co-ordinate Bench in the case Eminent Holdings Pvt. Ltd. in ITA NO.2139/Mum/2013 dated 18/6/2014, which also was a case of notified entity under the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992. At the time of hearing this aspect of the matter was fairly conceded by the Ld. Representative of the assessee. 6.1 The second plea of the assessee is with regard to the quantum of interest chargeable under section 234A, 234B & 234C of the Act which is to the effect that the interest should be charged after considering the amount of tax deductible at source on the income assessed. Similar plea of the assessee was upheld by our Co-ordinate Bench in the case of Eminent Holdings Pvt. Ltd. (supra). Following the same, we deem it fit and proper to restore the Page 21 of 24 & 2192/Mum/2015 M/s Growmore Leasing & Investment Ltd. (A.Y:1992-93) matter back to the file of AO who shall recompute the interest chargeable under section 234A, 234B & 234C of the Act after considering the amount of tax deductible at source on the income assessed. Needless to mention, the AO shall allow the assessee a reasonable opportunity of being heard and thereafter, recompute the interest chargeable under section 234A, 234B & 234C of the Act, as per law. Thus, on this aspect, the assessee partly succeeds.”

deleting the addition of interest of bonds amounting to Rs. 40,50,000/-. For this Revenue has raised following ground No.1: -

"1. Whether on the facts & in the circumstances of the case & in law, the Ld. CIT(A) is justified in deleting the addition on account of interest on bonds amounting to 40,50,000/- when the actual investment of the assessee in the bonds was Rs.50 crores (face value) and interest thereon at the rate of 9% works out to 2,25,00,000/- (apparently for a period of six months), as against that, the asses-see had shown interest of only Rs. 1,84,50,000/-, resulting into a difference of 40,50,000/-. It is also mentioned here that the assessee had accounted bonds to the extent of Rs. 41 crores only and not Rs. 50 crores, and this was the reason as to why there was a shortfall in the interest by an amount of Rs. 40,50,000/- and investment to the tune of Rs. 9 crores.”

brought to tax. According to us also this IFRC bonds interest is tax free and even differential amount cannot be brought to tax. Accordingly, this issue of Revenue’s appeal is dismissed.

Order pronounced in the open court on 17-11-2017.