SBI CAPITALMARKETS LTD vs. DCIT SP. RG 27,

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार /PER RAJENDRA, AM- अनुसार Challenging the orders of the CIT(A).s Mumbai the assessee and the Assessing Officers (AO.s)have filed the appeals for the above mentioned assessment years (AY.s).Assessee- company,is engaged in the business of merchant banking leasing, investment management. The details of dates of filing of returns, returned income, assessment dates, assessed incomes, dates of CIT(A) order etc. can be summarized as under :- A.Y. ROI filed on Returned Income Assessment dt. Assessed Income CIT(A)order dt. 1992-93 31/12/1992 Rs.1.63 crores Nil Rs.82.73 crores 13/12/1995 (revised return (Revised return – dt.30/3/1995 Rs.16.16 lakhs) 1993-94 31/12/1993 Nil Nil Rs.11.19 crores 19/05/1997 1994-95 30/11/1994 Rs.13.29 crores 14/03/1997 Rs.19.29 crores 16/10/1998 Revised (revised)Rs.13.45 dt.17/8/1995 crores 1995-96 31/03/1997 Rs.57.23 crores 12/03/1998 Rs.60.67 crores 11/12/1998 ITA/1127/Mum/1996-AY.1992-93: 2.During the course of hearing before us the Authorised Representative(AR) fairly conceded that Grounds No.2 and 3 stand decided against the assessee by the order of the Tribunal for 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd.

the AY.1991-92 and the judgment of Hon'ble Supreme Court in the case of Britannia Industries Ltd. (278 ITR 546). Therefore,we decide both the grounds against the assessee. 3.First Effective Ground of appeal

(GOA-1) is about disallowance of depreciation of Rs.13. 68 lakhs and Rs.11.19 lakhs in respect of plant and machinery leased out to M/s. Indodan Industries Ltd.(IIL)and M/s. Foremost Industries India Ltd. (FIIL),respectively. It was brought to our notice that identical issue was deliberated upon by the Tribunal while adjudicating the appeal for AY 1989

90. (ITA No.9044/Mum/1992 dated 01.02.2017).We find that the Tribunal had narrated the facts in detail about the controversy.We are reproducing the relevant portion of the order and it reads as under:- “2.Vide its letter dated 21.11.2012,the assessee had filed additional evidence in form of a paper book containing 29 pages.It was stated that at the time of filing of appeal before the Tribunal it was advised by the Counsel to file the documents.During the course of hearing before us, it was argued by the Authorised Representative that documents produced were vital to decide the issues raised by the assessee and were not considered by lower authorities. i.The Departmental Representative(DR)opposed the admission of new evidences.We have gone through the documents and find that same would be very helpful in adjudicating the appeal before us,that as per the order of the CIT(A),he had not admitted certain documents produced during appellate proceedings.Considering the peculiar facts and circumstances of the case,we are of the opinion that additional evidences should be admitted,as same would be useful to decide the issues raised in appeal. ii.During the course of hearing before us,the AR stated that the assessee was not interested in pressing Ground no.13 in absence of details.Hence,we dismiss Ground 13,as not pressed. 2.1.First effective Ground of appeal(GOA.1-7)is about disallowance of depreciation and invest -ment allowance on assets leased out by the assessee to Indodem Industries Ltd.(IIL) and Foremost Industries (I)Ltd.(FIIL).During the assessment proceedings,the AO found that the assessee had purchased assets worth Rs.1.64 crores and had leased out same to FIIL, Saharan -pur,that assets worth Rs.1.34 crores were leased out to IIL,Muzaffarnager, that the lease agreements between the assessee and FIIL and IIL were entered into on 28.06.1988, that various suppliers gave quotation to the lessees for purchase of certain equipments/machinery, that the assessee advanced loans to FIIL and IIL,that the letters of orders to supply the machinery to both the lessees were issued from the Bombay Office of the assessee. The AO asked the DDIT,Delhi and ADIT-Meerut to conduct enquiries and make verifica -tions about the assets supplied by the manufactuers to FIIL and IIL.As per the AO the enquiries made by the DDIT Delhi revealed that most of the suppliers did not exist at the given addresses or the addresses were not correct .Vide his letter,dt.20.2.92,the AO informed the assessee that summons issued by the AO of IIL and FIIL to 13 parties were received back un-served by the postal authorities with the noting that ‘the concerns did not exist at the given addresses’.Similarly vide his letter,dtd.02.03.92,he infirmed the assessee about the enquiries carried out by ADIT.He directed it to prove genuineness of transaction in respect of supplies made by the 13 concerns and which were shown to have been leased out to both the lessees along with the proof of the genuineness of the price of the assets.After considering the letters of the assessee,dtd.24.01.92 and 04.02.1992,the AO observed that the assessee had furnished copies of certificates issued by Aggarwal and Associates, CA.s New Delhi, certifying that IIL and FIIL had placed order to the supplier for fabrication and supply of the equipments, that the cost estimates were discussed with the technical staff of the companies, that the value of the equipments, as per the given specifications when completed would not be less than the figures quoted. The AO held that the assets were not verified and inspected by the assessee at the time of purchase, that it merely relied on the certificate of the CA,that the CA had stated before the departmental authorities that certificates were issued on the basis of cost estimati-on produced by IIL and FIIL,that assessee had released payment without any basis, that it had not taken help of any qualified valuer to value the assets,that it had not verified about the existence of equipments before releasing the funds,that all the invoices were raised on 29.6.88, that the sequence of events proved that it was a pre-planned affair,that the final invoices were never received by the assessee, that the suppliers of the goods did not send delivery challan of excise gate passes to the assessee, that both the lease agreements were signed by K.C Jain,G.M Finance,that indeminity bonds were signed by H.S. Jalan, Chairman, that suppliers had sent 2 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd. equipments directly to the business premises of the lessees, that the payment had been made after the supplies had been affected.He further observed that that out of total 15 suppliers 14 were not traceable at the given addresses,that the summons by Registered Post had returned unserved that on the spot enquiry made at certain places revealed that the supplier did not live at the addresses given,that one supplier traced by department denied to have received any amount from the assessee,that most of the bank accounts were introduced by authorised signatories of the lessees,that money deposited through drafts/cheques had been withdrawn by the employee of the lessees,that both the lessess had common addresses and chairman ,that there was no evidence of fabrication of machines at the sites of the lessees,that assessee had not stamped receipts for payments made by it, that it had not inspected the assets at the time of purchase, that the value had also not been verified by any valuer,that money had been given back to the lessee,that inspection report of the assessee for the month of March and May,1989 were incomplete,that the report for that period did not show purchase of machinery,that merely issue of cheque /drafts in favour of some parties would not prove the genuineness of the transaction, that the alleged purchase of machinery by an assessee from various suppliers and giving them on lease to IIL and FIIL was merely an eyewash, that the transaction in question was not genuine, that the ownership of the assessee on the assets was not tenable,that the assessee could have legal title on the assets only if there was a seller having a legal title,that in the case under consideration the sellers were not existing,that ownership of the assets was not established, that the assessee was not entitled to depreciation and investment allowance.He further held that money advanced by the assessee to various suppliers which was received by the lessees had to be considered as a loan by it to IIL and FIIL,that the receipts by the assessee from the lessee had to be taken as interest received. 2.2.Aggrieved by the order of AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,the assessee filed additional evidences including an inspection report of the assets.The FAA observed that those papers were not filed before the AO and no specific prayer had been made for their admission under Rule 46A of the Income-Tax Rules,1962(Rules).The FAA was of the view that papers could not be admitted as additional evidences as the assessee could not specify the particular clause of Rule 46A of the Rules under which those documents could be admitted.Finally, he did not admit the additional evidences. 2.3. The assessee made elaborate submissions before him.After considering the assessment order and submissions of the assessee,the FAA held that AO had confronted the assessee with all the material which was in his possession,that the local enquiries indicated that suppliers did not exist at the addresses given, that it was for the assessee to produce complete evidence in support of purchase bills, that assessee had to establish that certain machineries were purchased and were leased out,that it did not make any serious effort to meet the adverse inferences confronted by the AO from time to time,it wanted to rely on purchase bills,that assessee had not produced any of the suppliers of the machinery,that it could not get away by merely saying that it should get an opportunity to cross examine all the persons who might have been contacted by the department, in the course if local enquiries,that AO had not violated any principle of natural justice,that the assessee did not contest any of the observa -tions of the AO about withdrawal of money by the employees of the lessees or evidence of fabrication of the machines at the sites of the lessees, that mere existence of a bank account in the name of a party did not establish its existence, it had not produced proper receipts from the manufacturers regarding receipt of the cheques,that the totality of the circumstances was that parties in question were not genuine,that the only traceable party had denied the transact -tion,that the assessee had not come forward with any positive evidence to rebut the material gathered by the AO,that the employees of the lessees had withdrawn the money from the bank accounts,that the assessee had failed to rebut the circumstantial evidence brought on record by AO to prove the real character by the purchases.Existence of bank account and purchase bills could not establish the genuineness of the transaction,that assessee had claimed depreciation on the assets that it cannot say that it merely signed the documents, that it was difficult to believe that the lesser of costly plant and machinery would merely rely on the word of lessees regarding installation/fabrication,that the mere existence of plant and machinery at later date could not establish the claim of the assessee that the assets in question were purchased from sources claimed or were installed/fabricated at the time in a manner claimed by the assessee,that the assessee had filed a vague explanation regarding absence of delivery challans,that receipt by lessees could not be treated as receipt by the suppliers of the assets,that there was no evidence that the suppliers had authorised the lessees to receive the cheques, that mere operation of a bank account could not establish either the genuineness of account holder or the genuineness of the transaction,that no assessee would disburse such huge amounts without actually inspecting the assets, that the earliest inspection reports were of May,1989 and March 1989,that the reports could not substantiate the claim of the assessee that plant and machinery in question were installed by June 1998, that the assessee had produced insurance policies about the 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd. assets, that the policies at a later date could not prove the installation of machinery by June,1988,that entry in the balance -sheet about the assets could not prove that purchases in question were genuine, that the assessee could not prove its claim regarding depreciation and investment deposit allowance in respect of certain assets, that the AO had rightly rejected the claim made by the assessee, that there was nothing on record to indicate that lease rent shown in the books was not a revenue receipt. 2.4.During the course of hearing before us,the Authorised Representative(AR) argued that existence of the leased assets and their ownership was proved beyond doubt before the departmental authorities,that on default of by the lessees the assessee had filed winding up petition before the Hon’ble Bombay High Court,that as per the request made by it the Hon’ble court had appointed a Court Receiver(CR)to take possession of the machinery,that the CR took symbolic possession of the assets also,that the assets in question were in existence and the assessee held ownership rights in the same,that the action of the AO and the FAA-in denying depreciation on the said leased assets on the ground that the assets did not exist- was not justified,that both had observed that the CR had not certified that the assets found at the time of inspection were in fact supplied by the assessee,that there was no proof that the lessees had acquired the assets from some undisclosed sources.He further contended that the assessee did not issue any bearer cheque and in fact had issued bank Drafts to the suppliers from whom the assets in question were purchased,that it had no control over the manner of utilisation of the funds after the draft was deposited into the bank accounts of the suppliers,that the assessee had already furnished copies of all the insurance policies obtained for the leased assets during the course of the assessment proceedings,that there were typogra -phical error in the copies of the insurance policies,that the assessee had also requested the AO to give an opportunity to cross examine the persons whose statements have been relied upon by the AO,that the assessee had requested the AO to obtain the current addresses of the suppliers from the bank account details available with him,that during the course of the assessment proceedings it had requested the AO to visit the premises of the lessees to verify the physical existence of the leased assets,that in response to the show cause Notices of 02.03.1992 and 18.03.1992 issued by the AO,the assessee vide its letters dated 13.03.1992 and 21.03.1992 filed detailed submissions/explanations vis-a-vis all the suppliers as mentioned by the AO in his show cause notice.He referred to page Nos. 312 to 361,369 to 385 of the PB in support of his said submission.He further stated that all the details were also filed before the AO/FAA in the subsequent years.He referred to the appellate order 28/09/ 1994 of the FAA for the AY.1990-91 and assessment Order of the AO for the AY.1991-92 in that regard,that the departmental authorities had neither approached the suppliers of the assets nor had to gone to the lessees premises for verification of existence of the asset,that the High Court proceedings,including the report of the CR,were primary evidence to show existence of the assets. The AR relied upon the decision of I.C.D.S. Ltd.(350 ITR 527) of the Hon’ble Apex Court and contended that the Hon’ble Court had held that the assessee was entitled to claim depreciation since it was the owner of the assets so leased. 2.4.1.The Departmental Representative(DR)argued that the assessee had issued bearer cheques to the employees of the lessees,that one of the insurance policy document stated the period of insurance as 19.07.1988 to 18.07.1988,that in the inspection reports,there were few instances where the insurance details were not mentioned/were incomplete,that as per the inspection report of the inspector some of the assets were not available on the spot,that the officers making inspection had stated that inspection of some assets was not possible since they formed an integral part of another asset/ were fitted inside a big plant.Further,it was also argued that the inspections were not carried out by a technical expert, that the suppliers were non-existing,that there was no evidence for manufacturing or erection,that evidence about vat or sales tax number of the manufacturers were not made available ,that the bank accounts of the alleged manufacturers by the lessees or their employees,that funds flowed from suppliers’ accounts either to accounts of the lessees or the accounts of the milk vendors,that all those discrepancies were found during the investigation done about the suppliers of the machinery at the time of assessment,that the assessee was relying upon the Court proceedings,that the Inspection Report and symbolic position by the CR did not prove beyond doubt the existence of the very assets leased out by the assessee as claimed,that the Hon'ble High Court had not held that the assets belonged to assessee,that the AO even on his visit at the site could not have been found the assets as reported in Inspection report, that most of the assets could not be seen by the Inspecting Team,that lessee companies had taken a part of plant/machinery instead of the entire plant & machinery,that the Inspection report and note enclosed clearly proved that the report was prepared without ascertaining physical existence of the assets,that funds arranged by the assessee had gone into the hands of the lessees.He further argued that in the case of I.C.D.S.Ltd.,the issue under consideration was regarding the higher rate of depreciation claimed by the assessee,that the AO had rightly held the transaction as a finance lease.

1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd.

In his rejoinder,the AR argued that the AO nowhere in the assessment order had given any finding that the said transaction was a finance lease,that his case was only that the asset did not exist and that the assessee was not entitled to depreciation. 2.5.We have heard the rival submissions and perused the material on record.In the case under consideration,certain basic facts are not denied by the both the parties and those facts are that lessees existed,that lease agreements were executed by the assessee and the lessees for hiring machineries,that lease rent was received by the assessee in the initial period of the agreement,that it had approached the Hon’ble Bombay High Court when the lessees failed in paying regular rent,that the AO rejected the claim made by the assessee under the heads depreciation and investment allowance for the assets leased out to IIL and IFLL,that the FAA confirmed the order of the AO,that the departmental authorities held that the assets in question did not exist,that the assessee was not the owner of the machinery,that when the lessee companies had defaulted in payment of lease rentals the assessee had filed petitions u/s.434 of the Companies Act,before the Bombay High Court for winding up of IIL and FIIL, that as an interim relief it also prayed for appointment of CR to take charge of the leased assets and to hand them over to it,that the Hon’ble Bombay High Court by its Orders dated 15.12.1993 appointed a CR and directed him to take physical possession of the leased assets, that later on,the Bombay High Court, on an appeal filed by IIL and FIIL in respect of the above orders,vide its Orders dated 31.12.93 it directed the CR to take symbolic possession instead of physical possession of the leased assets,that the receiver was also accompanied by a technical expert/valuer M/s. Nadkarni & Associates,that the valuer had verified and taken inventory of the leased assets referred to in the report as suit machinery,that the Hon’ble Court vide its order dated 14.11.1995 upheld suspension of the above proceedings as IIL and FIIL had become sick companies in view of the provisions of section 22 of The Sick Industrial Companies (Special Provisions) Act,1985,that it further directed the receiver to take physical possession of the leased assets as per the declaration given by the IIL to BIFR. 2.5.1.We find that pages 1-17 of the paper book produced as additional evidences have relevance to decide the issue.As these were produced before us,for the first time.So,in the interest of justice we want to remit them to the file of the FAA,as he had no occasion to consider the same.He is directed to consider these papers while adjudicating the issue afresh and afford a reasonable opportunity of hearing to the assessee. First effective ground of appeal (GAO.1-7), are decided in favour of the assessee, in part.” 3.1.During the course of hearing before us, the AR stated that in the earlier year matter was restored back to the file of the FAA by the Tribunal to consider the additional evidence, that during the year under consideration no additional evidences were produced, that the matter should be decided on merits.The DR supported the order of the FAA . 3.2.We find that issue of allowing depreciation arose for the first time in the AY.1989-90, that the decision of the AO,after considering the additional evidences produced by the assessee, in that year will have a bearing on the assessment subsequent AY.s Therefore, we direct the AO to follow the decision for the AY. 1989-90 passed u/s.143(3) r.w.s.254 of the Act,about allowing/disallowing the claim of depreciation with regard to machinery leased out to IIL & FIIL.Ground No.1 decided accordingly.

4.Ground No.4 is about not allowing deduction u/s.80-O of the Act.During the assessment proceedings,the AO found that the assessee had claimed deduction of Rs.1.06 crores u/s. 80- O in the revised return. He held that the revised return was filed beyond the time admissible for filing revised returns,that the return had to be ignored. As the assessee had made claim during the assessment proceeding also, so,the AO deliberated upon the issue. He found that the assessee had claimed the deduction in respect of fee received from the Indian Magnum Fund (IMF) and Asian Convertibles and Income Fund (ACIF) established under the law of 5 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd.

Netherlands and Cayman Islands respectively, that in respect of income received from IMF it furnished necessary details to claim that it had rendered services abroad..With regard to ACIF,he observed that the assessee had not furnished any details indicating that the services were rendered abroad,that other conditions for claiming deduction were not satisfied, that till completion of assessment orders, assessee had not furnished necessary particulars. Accordingly,he disallowed the deduction u/s. 80-O of the Act with regard to income received from ACIF. 4.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the FAA and made detailed submissions.Referring to the provisions of section 80-O of the Act and history of the scheme,he held that the basic issue to be examined was as to whether the assessee had received the total amount of fee in convertible foreign exchange for the services rendered in India as investment manager with regard to the total assets of ACIF. He further observed that a copy of agreement,dt.3/5/1990,was not furnished before the AO, that in absence of the same he was not in a position to examine the issue properly, that para-8 of agreement proved that the assessee was receiving fees for the services as investment manager, that the quantum of such fee was to be calculated in a particular manner, that it appeared that the assessee was getting fee from the administrator and custodian of ACIF at a certain percentage, that it might also be getting certain amount of fee for rendering other services,that in absence of agreement dtd. 3/5/1990 the AO was not in a position to bifurcate fee receivable by the assessee. He directed the assessee to quantify the income as per para-8 of the agreement dtd.3/5/90. He further directed the AO to calculate deduction u/s. 80-O. He restored back issue to the file of the AO for passing a fresh order in that regard. He observed that the AO was free to call any information from assessee as he would consider necessary for purpose of determining the amount of fee received for services rendered outside India/in India. 4.2.During the course of hearing before us,the AR stated that the assessee was acting as an agent,that it was rendering services from India, that services were utilised outside India.He referred to Circular No.700 of 23-3-1995 and relied upon the cases of Eicher Consultancy Services Ltd.(214 CTR126),John Brown Technologies India(P.)Ltd.(257CTR370);LI & Fung India (P.)Ltd.(305/105).The DR supported the order of the FAA. 4.3.We have heard the rival submissions and perused the material before us.We find that the assessee had not furnished the agreement,dtd.03/05/1990,before the AO,that the FAA had directed the AO to consider the agreement and to decide the issue afresh. In our opinion, the FAA had rightly sent back the matter to the file of the AO so that he could have the benefit of 6 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd. going through the agreement. Therefore,we hold that the order of the FAA does not suffer from any legal infirmity.We have taken note of the fact that the agreement was produced for the first time before the FAA.So,confirming his order,we decide fourth ground of appeal against the assessee. 5.Next ground of appeal is about disallowance of business loss of Rs. 4.25 crores.During the assessment proceedings,the AO found that the assessee was operating a scheme namely Investment Management Scheme(IMS).He held that it was another name for Portfolio Management Services (PMS).He referred to the audit report received as per the provisions of section 142 (2A) of the Act and stated that as per the auditors the assessee had violated various provisions governing the guidelines regarding the PMS, that under the PMS the fund were to be invested at the risk of the clients,that it would just operate the scheme,that the investment belonged to the clients,that it would get certain income from various clients,that it had deployed certain money on ready forward deals not backed by proper securities/bank receipts from counterparties, that to the extent of Rs.16.25 crores recovery became doubtful, that it had claimed the loss of Rs. 4.25 crores in that regard for the year under consideration. He observed that ready forward transactions were held illegal by Special Court,that by investing on ready forward basis it had violated the specific guidelines issued with respect of PMS,that under PMS profits/losses belonged to the clients,that the assessee had no liability in that regard,that bad/doubtful of recovery of refunds happened after the year was over,that the loss could not be allowed for the year under appeal,that it had claimed loss u/s. 36. (2) of the Act as bad debt,that conditions necessary for allowing deduction under that section were not satisfied,that the assessee had claimed that securities-on account of which losses had been incurred-were stock in trade,that claim made by it was liable to be rejected, that the investments made under the IMS belonged to the clients, that its interests in the investments were only restricted to receive Management Service Fee,that it was not in the business of money-lending, that loss claimed by it on account of money given to Harshad S Mehta (HSM)for purchase of securities before 31/03/1992, had to be disallowed. 5.1.Before the FAA,the assessee made elaborate submissions.After considering the available material, he held that the assessee had handed over a sum of Rs. 4.25 crores to HSM on 30/03/1992 for the purpose of purchasing units of UTI Scheme,1964,that HSM did not purchase the units,that the amount of Rs. 4.25 crores were returnable to the assessee along with such other amount to be fixed by special court as compensation payable by HSM,that the transaction between the assessee and HSM were not complete up to 31/03/ 1992,that it 7 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd. was pursuing the matter with HSM,that on 4/06/1992 it approached HSM through its lawyer to repay the amount of Rs. 4.25 crores,that till June,1992 it was reminding HSM for repaying the amount,that it was factually incorrect to state that transaction of purchase of units was complete on 31/03/1992,that it had filed the suit in the Special Court(Trial of Offences relating to securities)Act, 1992, that the assessee had not suffered any loss relating to the disputed transaction during the year under consideration,that it had given Rs. 4.25 crores on 30/03/92 to HSM,that same was returnable to the assessee,that HSM had not denied the claim,that amount of Rs.4.25 crores was recoverable,that transaction of loss was not complete,that the amount could not be considered to have become bad on 31/03/1992,that claim was not allowable u/s.36(1)(vii) read with section 36 (2) of the Act.With reference to the case of Sutlej Cotton Mills Ltd.(116 ITR 1),relied upon by the assessee,the FAA held that facts of both the cases were different and let it was of no help to decide the issue. 5.2.Before us,the AR argued that the AO had wrongly treaded IMS as PMS,that the regional office of the assessee at Madras had entered into 4 ready forward transactions with Growmore Assets Management Company Ltd., a group company of HSM, on 30/03/1992 for a sum aggregate two Rs. 16.25 crores,that during the year under consideration it gave a sum of Rs.4.25 crores to HSM for the purpose of purchasing units of UTI, 1964 scheme, that HSM had agreed to sell the units and also repurchase the same on 29/04/1992 at an agreed price, that HSM neither deliver the securities nor returned the money advanced to him for purchase of units, that having regard to clause claim of areas of income tax and other revenues newsroom HSM the assessee wrote of the amount of Rs. 4.25 crores as bad debts, that the assessee pass a board resolution to write-off the disputed amounts and claimed the same as deduction while computing its business income, that in case of any recovery from the Estate of HSM would be offered for taxes under section 41 (1)/41 (4) of the Act,that alternatively the amount in question should be allowed as business loss.The DR relied upon the order of the FAA. 5.3.We have heard the rival submissions and perused the material before us.We find that the assessee had asked HSM to invest in units of UTI on 30/03/1992, that he did not return the money to the assessee,that it tried to recover the money but was not successful,that the FAA disallowed the claim holding that transaction had not become bad on 31/03/1992.On a query by the Bench,it was brought to our notice that the asssessee could not recover the disputed amount.The objection of the FAA was that transaction had not become bad in the year under appeal.Thus,he was of the opinion that claim should be allowed in some year.The transaction 8 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd. is of March,1992 and till 2017 money is not received back.Even if same is received in future the assessee would have to account for the same in the books of accounts.It is a fact that the assessee had advanced the money to HSM for purchasing Units and thus the transaction was directly related to its regular business.So,the non-recovery of the disputed amount can be allowed as business loss. It is also a fact that the board of directors had written of the sum of Rs.4.25 crores as bad debts.Considering the peculiar facts and circumstances of the case, we decide the effective ground of appeal in favour of the assessee. 6.Next ground of appeal is about an addition of Rs.7.43 crores under the head notional interest@18% calculated on a sum of Rs. 105.11 crores During the assessment proceedings, the AO found that a large number of transactions of units, valuing at Rs. 105.11 crores, had taken place,that the purchaser i.e State Bank of India had made debit notes forces transactions in the name of assessee,that no units were actually purchased by the assessee, that the sale proceeds were diverted to HSM and his group companies,that the amount of Rs. 105.11 crores was later on reimbursed by state bank of India to the assessee, that it did not receive any interest on the disputed amount,that if the amount were not diverted to HSM group the assessee could have utilised the funds for reducing its interest liabilities.Accordingly,he disallowed the interests relatable to the amounts diverted to HSM group in the year under appeal.He observed that total interests expenditure debited in the books of accounts was about 85 crores,that the debits had been made for the period 29/07/1991 to 31/03/1992. Applying the average rate of 18% of interest he calculated this allowable amount at Rs. 7.43 crores and added it to the total income of the assessee. 6.1.Before the FAA,the assessee made elaborate submissions. After considering the available material,he held that the AO had disallowed the interests on the amount which was found to be diverted to HSM group, that he had not made addition of accrued interest on account of Rs.105.11 crores which were debited to the account of the assessee maintained by SBI, that there could not be any doubt that no notional interest on the amount advanced by the assessee could be added back to the total income, that if the assessee had advanced money out of the borrowed funds interest expenditure could be disallowed, that the assessee was a subsidiary of SBI,that the SBI was maintaining the bank account for it, that the SBI had diverted disputed amount to HSM group, that it did not raise any objection about the transfer, that the share capital and reserve and surplus of the assessee were invested in fixed assets, that the assessee had shown liability for secured loans of Rs. 20 crores and liabilities for unsecured loan of Rs. 562.82 crores as on 31/03/1992, that it had more liabilities than its own funds 9 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd. which were invested in fixed assets,that the assessee had not diverted the disputed amount out of its own fund, that the AO was justified in disallowing the interest of Rs.7.43 crores on the amount diverted to HSM group without charging interest. 6.2.Before us,the AR contended that the assessee had sufficient own funds, that the amount advanced to the SBI was out of its own funds and not out of the borrowed funds, that no disallowance in relation to interest expense could be made as the own fund/non-interest- bearing funds exceeded the investments made.He relied upon the cases of HDFC Bank Ltd (383 ITR 529),Reliance Utilities and Power Ltd. (313 ITR 340) and referred to page 4 of the paper book. The DR argued that the FAA had categorically recorded the findings in the AY.1992 -93,that having regard to Share Capital, Reserves, Investment in Fixed Assets and Liabilities the assessee company had no money of its own,that the amounts were diverted to HSM Group from borrowings,that the above facts were not controverted by the assessee,that the money belonging to the assessee company was diverted to HSM group who had defrauded subsequently,that the legitimate money belonging to the assessee had been diverted, not for the business purpose,that HSM group, had not utilised it for the business purpose.He relied upon the case S.A. Builders Ltd. of the Hon’ble Supreme Court (158 Taxman74)and stated that the funds were diverted and not used for the business, that interest addition was warranted.Referring to the judgments of the the Hon’ble Bombay High Court,relied upon by the AR,he stated that in the above cases issue of mixed funds was deliberated upon,that the presumption drawn by the Hon'ble Bombay HC was a rebuttable presumption,that presumption arrived at by the Hon'ble court,could not be applied in all cases where the facts would speaks on its own to the effect that money was flown out of borrowed funds,not from own funds. 6.3.We have heard the rival submissions.We find that the FAA had upheld the disallowance on the ground that the funds available with the assessee were less than the advances made by it,that it had invested the borrowed funds for making investment.A perusal of the balance sheet of the assessee as on 31.03.1992 show that capital,reserves and surplus owned by it amounted to Rs.105,79,75,410/-,whereas the investment made by it as indicated by the FAA was of Rs.105.11 crores.Thus,the assessee had sufficient funds for making investment.In our opinion,the judgment of the Hon’ble Bombay High Court in the case of HDFC Bank(supra) has decided the issue once and for all.Following the same,we decided ground no.6 in favour of the assessee. 10 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd. ITA/4959/Mum/1997-AY.1993-94:

7.Grounds of appeal no.1.1,1.2,3.1.3.2,4.1,4.2,5.1and 5.2 deal with disallowance of deprecia - tion and investment allowance on the assets leased to IIL and FIIL,deduction u/s. 80-O of the Act,disallowance on account of payment made to Growmore Assets Management Company Ltd. and interest disallowance of Rs.75.45 lakhs on account of advancing of borrowed funds for making investments respectively.While deciding the appeal for the earlier AY.we have already decided the issues.We hold accordingly. 7.1. During the course of hearing the AR stated that considering the smallness of tax effect the assessee was not interest in pressing ground no.6 for the year under appeal.Hence,same stands dismissed as not pressed. He fairly conceded that second ground stands decided against the assessee.So,we dismiss GOA-2. ITA/294/Mum/1999-AY.1994-95: 8.Grounds no.1,3 and 4,raised by the assessee for the year under appeal,are about,expenditure incurred on account of guest house rent,maintenance,disallowance of depreciation and investment allowance for the assets leased out to FILL and IIL and disallowance made u/s.80-O of the Act.In the earlier AY.s.we have adjudicated all the three the issues.We hold accordingly. 9.Second ground deals with disallowance of Rs.15.37 lakhs,under the head bad debts written off.During the assessment proceedings the AO found that assessee had made a claim of bad debts of Rs.2.99 crores,he called for explanation of the assessee in that regard and held that all the alleged bad debts had not become bad. Finally,he held that claim made by assessee about bad debts for 1.27 crores was premature and that same was not allowable. 9.1.Aggrieved by the order of the AO the assessee preferred an appeal before the FAA and made detailed submissions. It also relied upon certain case laws.After considering available material,the FAA held that it was not necessary for the assessee to show that debt had actually become bad. After considering available material he held that bad debts written off in case of five parties namely Chetak Construction (Rs.9.91 lakhs); Paramount Furnace Co. Ltd.(Rs.93,742/-); Microwin Electronics Ltd. (Rs.24,900/-); Uptron India Ltd. (Rs.3.87 lakhs) and Pratap Steels (Rs.39,373/-) had to be disallowed . 9.2.During the course of hearing before us, the AR stated that the assessee had actually written off the bad debts in all the above mentioned five cases,that till date money had not been received. He relied upon the case of TRF Ltd. DR relied upon the order of the FAA. 11 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd.

9.3.We have heard the rival submissions. We find that the revenue authorities have not held that assessee had failed to write off the disputed amount. Once the disputed amounts have been written off in the books of account there was no justification for any disallowance. Respectfully following the judgment of TRF Ltd.(supra),we decide second ground in favour of the assessee. ITA/1055/Mum/1999-AY.1995-96: 10.First ground of appeal,filed by the AO,is against deletion of the addition of Rs.3.29 crores on account of the change in the method of accounting of stock in trade.During the assessment proceedings,the AO found that in the year-under consideration,the assessee adopted on average cost in place of the earlier method of identifying cost of acquisition for each asset sold.He considered the justification filed by the assessee in that regard but was not convinced with the arguments advanced by it.He held that there was no difficulty in following the earlier method of accounting,that the change in the method of accounting was not bonafide,that the main aim of the change was the postponement of profits to the subsequent years in which the rates were lower,that the accounts of the assessee were maintained on computers,that there was no difficulty in following the earlier method of accounting.Finally,he held that change in method was not to be allowed and made an addition of Rs.3 .29 crores to the total income of the assessee. 10.1.During the course of appeal before the FAA,the assessee made elaborate submissions and placed reliance on the ratio laid down in 4 cases,namely National & Grindlays Ltd.(202 ITR 559) Doom Dooma India Ltd.(200ITR496) West Coast Paper Mills Ltd.(193 ITR 349) and Memould Corporation(202 ITR 789). After considering the available material,the FAA held that the method followed by the assessee was a recognised method of accounting,that there was no material to hold that the method followed was not bonafide,that it was incorrect to hold that it could visualise that the tax rates would fall in the subsequent years,that the change in the method of accounting was bonafide,that there was no material to hold that the change was malafide,that the method for accounting followed in the year under appeal was consistently followed in the subsequent years,that the changed system was an accepted accounting method.Finally,he deleted the addition made by the AO. 10.2.Before us,the DR stated that the FAA had accepted the change in method to be bonafide mainly because it was a recognized method of accounting,that if the said argument was accepted then assessees would be free to jump over from one recognized method to other 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd. recognized method without any cogent reasons,that there was no discussion in the appellate order as to what difficulty was there to the assessee in following the regular method and that how the new method was more consistent with the accepted accounting principles,that the AO had pointed out that the average cost method did not tend to depress the profits as with each successive year,that the cost of securities purchased would be higher in terms of cost, that in a computerised environment it could not be accepted that the one-to-one co-relation of goods sold could be difficult for a trader,that the more acceptable method would have been the FIFO method which would not leave room for any artificial appreciation of costs,that the profits of assessee had depressed by Rs. 3.29 crores in the year under consideration by change of accounting method,that the burden was heavy on the assessee to prove as to how it was a bona fide change,that it had failed to demonstrate with cogent reasons the justifica - tion of change,that merely citing of some difficulty in calculations could not be accepted to be a bona fide change of accounting unless it was necessitated by some change in accounting standards,that the partial set-off of taxes in subsequent years was not relevant for deciding the taxability of income of the current year.He referred to the provisions of section 145A of the Act and argued that the valuation of purchase and sale of goods and inventory for the purpose of determining the income chargeable under the head 'Profits and gains of business or profession' had to be in accordance with the method of accounting regularly employed by the assessee,that the statute did not permit the change of method of accounting,that various courts had permitted the change for bona fide reasons,that the bona fides of the assessee remained unproved and the various case laws relied upon by it were not applicable. The AR supported the order of the FAA and contended that that in the earlier years,the majority of the transactions were ready forward deals involving back to back trading in Securities,that it was found convenient to arrive gain/loss on Securities held under short term investment by relating the sale to the cost of the specific security,that it was decided that it would not enter in ready forward deals,that as a matter of convenience it changed the method of accounting for the valuation of stock in trade,that the method of accounting followed was a recognised method of accounting,that the change in method of accounting was bonafide and followed consistently in the subsequent years,that the lesser profit in the year under consideration would be made up by larger profits in the subsequent years,that the average cost method adopted by it was one of the accepted methods of accounting,that the claim of the assessee should be allowed.He relied on the ratio laid down in the cases of Corborundum Universal Ltd. (149 ITR 784) and ANZ Grindlays Bank(145 ITR 457).

1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd.

10.3.We have heard the rival submissions and perused the material before us.We find that the AO had rejected the change in method of accounting as it resulted in payment of lower taxes in the year under consideration,that the FAA allowed the appeal of the assessee. Method of accounting,including the change in system,are governed by the provisions of section 145A of the Act.It is true that in section does not in explicit terms talks about change of method of accounting.But,at the same time it is also a fact that principle of change of accounting method has been recognised by the Hon’ble Courts and that the Act does not prohibit the change.In the matter of Sarupchand(4 ITR420),the Hon’ble Bombay High Court had dealt with the issue of change in method of accounting.The only condition is that the change should be bonafide and should be followed in subsequent AY.s.The Hon’ble Apex Court in the case of Sanjeev Woolen Mills (279 ITR 434) has held as under: “Choice of the method of accounting lies with the assessee but the assessee would be required to show that he has followed the chosen method regularly. The Department is bound by the assessee’s choice of the method regularly employed unless by this method the true income or profits cannot be arrived at. The assessee’s regular method would not be rejected as improper merely because it gives him the benefit in certain years or because as per the Assessing Officer the other method would have been more preferable. The method of accounting cannot be substituted by the Assessing Officer merely because it is unsatisfactory. What is material for the purpose of section 145 of the Income-tax Act, 1961, is, the method should be such that the real income, profits and gains can be properly deduced therefrom. If the method adopted does not afford a true picture of the profits, it would be rejected, but such rejection should be based on cogent evidence and would be done with caution. The power can be exercised by the Assessing Officer to choose the basis and manner of computation of income but he must exercise his discretion and judgment judicially and reasonably.” We would also like to refer to the case of Bajaj Auto Limited of Hon’ble Bombay High Court (389 ITR259).In that matter the assessee,a manufacturer of scooters, three wheelers and their parts, had been valuing its closing stock of stores, spares, tools and materials and work-in- progress on the basis of cost or market value whichever was lower. For determining the cost for the purposes of such valuation, the assessee had adopted the basis of "lowest purchase price during the year". While determining the closing stock in the later year though the stock was valued on the basis of "cost or market value whichever is lower", the cost itself was considered on "weighted average cost" basis. This change in the method of determining the cost took into account both opening quantities (their value being already declared in the earlier assessment year as value of the closing stock) as well as quantities purchased at different rates during the year and the cost of stock was arrived at by dividing the value of opening stock plus the value of purchases by the quantity of opening stock plus purchases during the year. This method of determining the cost, known as weighted average cost, 14 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd. according to the assessee, was one of the normally accepted methods of determining the cost for the purpose of stock valuation. This change resulted in the inventory and profits being shown in the accounting year relevant for the that assessment year less by Rs. 12,03,509. The AO Officer did not accept the change and made an addition of Rs. 12,03,509/-.The Hon’ble High Court,deciding the matter held that what the assessee had changed was the method of ascertaining the cost for the purpose of stock valuation and not the method of accounting employed by it for the purpose of stock valuation as such. The method, as before, continued to be “cost or market value whichever was lower”. It was only for determining the cost instead of “lower purchase price”, that the “weighted average cost” was adopted on the footing that the latter was a more scientific basis for accounting the closing stock. So long as the assessee adopted such change bona fide and employed the new method regularly, it could not be faulted. Bona fide of a change would depend upon facts of each case.Business activities are and have been always dynamic,so,change is a natural corollary to the dynamism.Static things or principles have to give place to new ideas/principles/ systems.Business world is not an exception to this basic principle of life.We find that in the year consideration,as per the assessee,it was decided not to enter in ready forward deals like earlier years.The AO had not questioned or proved the said fact.In the changed circumstances,it decided to follow the average cost in place of the earlier method of identifying cost of acquisition for each asset sold.So,there was a reasonable justification for changing the method of accounting.It is not the case of the AO that method adopted by it is not one of the recognised method or that true profit of the business could not be deduced from the method employed by it.Payment of lower taxes in the year under appeal cannot be a valid base for rejecting the change,until and unless it is proved that same was introduced with malafide intentions.We do not find absence of bona fide in the change of method of accounting.Comuterisation of books of accounts cannot be deciding factor for change of method of accounting.What has to be seen is the necessity genuineness of change.It is the prerogative of an assessee to decide as to which method of accounting it adopts for running his business more efficiently. The definitely can reject the change in method if is found that same is with some ulterior motive.In the case before us,the FAA has given a finding of fact that change was not driven by malafides. There is nothing on record that could prove that the stand taken by the FAA was suffering from any legal or factual infirmity.So,confirming his order,we decide first ground of appeal against the AO.

1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd. 11.Next ground of appeal is against the deletion of disallowance of Rs.1,14,583/- ,being the amount of broken period interest paid on the purchade of securities. During the assessment proceedings,the AO,folllowing the ratio laid down in the case of Vijaya Bank(187 ITR 587)held that the broken period interest paid at the time of purchase was a part of the purchase price,that the Securities were capital assets,that the payment of broken period interest was a capital expenditure.He,therefore,disallowed the broken period of interest of Rs.l.14 lakhs. 11.1.Before the FAA,the assessee made submissions.After considering the same and the assessment order he referred to the case of Vijaya Bank (supra) and held that the broken period interest paid was part of the purchade price,that the broken period interest would be allowed as a deduction when the trading accounts in respect of stock in trade was drawn up,that there was no material to hold that the Securities purchaded were capital assets.Following the Board's Circular and the order of his predecessor for the earlier year,he deleted the disallowance made by the AO. 11.2.Before us,the DR argued that the FAA had noted that the Supreme Court in the case of Vijaya Bank had held that the broken period interest paid was a part of the purchase price,that immediately thereafter he held that such broken period interest was allowable on stock in trade,that the Hon'ble Supreme Court had nowhere made any distinction between securities held as stock in trade or held as investment in the said judgment,that the broken period interest was invariably to be added to cost of securities purchased. The AR argued that the securities were held by the assessee as stock in trade and therefore the interest paid on the broken period was claimed as revenue expenses,that the assessee purchased securities worth Rs.276.93 lacs on 23.12.1994,that for that purchase broken period interest of Rs.l,14,583/ was paid,that the securities were held as stock in trade and therefore the broken period interest had to be allowed as a deduction,that the broken period interest received by the assessee was offered for taxation,that it was following the same method for broken period interest,that in the earlier year the then FAA had allowed the appeal of the assessee in that regard. 11.3 We have heard the rival submissions.We find that the assessee had debited broken period interest paid on purchase of securities amounting to Rs.1,14,583/-to profit and loss account,that it was claimed that all the securities were held as stock in trade and that the interest paid on broken period was revenue expenditure,that the AO held that in pursuance of 1380/M/99;1055/M/99,1127/M/96;4959/M/97;294/Mum/19-SBI Capital Markets Ltd.