NATIONAL HOUSING BANK,NEW DELHI vs. ADDL. CIT, NEW DELHI

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH “E”: NEW DELHI BEFORE SHRI KULDIP SINGH, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA No. 3704/Del/2010 (Assessment Year: 2007-08)

National Housing Bank, Addl CIT, Core-5A, India Habitat Centre, Range-31(1), Vs. Lodhi Road, New Delhi New Delhi (Appellant) (Respondent)

ITA No. 1512/Del/2013 (Assessment Year: 2003-04)

National Housing Bank, Addl CIT, Core-5A, India Habitat Centre, Range-31(1), Lodhi Road, New Delhi Vs. New Delhi (Appellant) (Respondent)

ITA No.1513/Del/2013 (Assessment Year: 2004-05)

National Housing Bank, Addl CIT, Core-5A, India Habitat Centre, Range-31(1), Vs. Lodhi Road, New Delhi New Delhi (Appellant) (Respondent)

ITA No. 1514/Del/2013 (Assessment Year: 2005-06)

National Housing Bank, Addl CIT, Core-5A, India Habitat Centre, Range-31(1), Vs. Lodhi Road, New Delhi New Delhi (Appellant) (Respondent)

ITA No. 1516/Del/2013 (Assessment Year: 2008-09)

Page 2 of 50 National Housing Bank, Addl CIT, Core-5A, India Habitat Centre, Range-31(1), Vs. Lodhi Road, New Delhi New Delhi (Appellant) (Respondent)

ITA No. 1517/Del/2013 (Assessment Year: 2009-10)

National Housing Bank, Addl CIT, Core-5A, India Habitat Centre, Range-31(1), Vs. Lodhi Road, New Delhi New Delhi (Appellant) (Respondent)

Assessee by : Sh. Ashok Chopra, CA Revenue by: Sh. Ravi Jain, CIT DR Date of Hearing 01/02/2017 Date of pronouncement 14/02/2017

O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are the appeals filed by the assessee against the order of the ld CIT(A) confirming the disallowance of claim u/s 36(1)(vii) of the Income Tax Act to the assessee for respective years as well as in AY 2003-04 & 2004-05 of allowability of loss on securities. . 2. The assessee has raised the following grounds of appeal in ITA No. 3704/Del/2010:- “1. The learned CIT (A) has erred in confirming the disallowance of claim amounting to Rs. 35,04,28,356/- under section 36(l)(viii) of the Income-tax Act on the alleged contention that (a) The role of the appellant as per the National Housing Bank Act, 1987 was merely to operate as a principal agency in order to promote housing finance institutions and accordingly the business carried on by the appellant is not covered in the definition of 'eligible business' as per the said section; and (b) That the deduction is only available to an assessee who is into the business of providing long-term finance for construction and purchase of houses for residential purposes and not to an assessee who is engaged in the business of providing finance to the Housing Finance Institutions for the construction and purchase of houses. 2. The learned CIT (A) was not justified in sustaining the disallowance of Rs. 35,04,28,356/- under section 36(l)(viii) of the Act on the alleged

Page 3 of 50 contention that the amendment made to the said section vide Finance Act 2009, wherein the appellant's sphere of activity has been specifically covered, is prospective in nature and not clarificatory in nature. 3. On the facts and in the circumstances of the case, the impugned addition and the consequent demand of tax along with interest under different provisions and penalty proposed u/s 271(l)(c) are wholly illegal and unsustainable and liable to be vacated. 4. The impugned orders having been passed by the lower authorities illegally and without any basis or justification valid in law, the same should not be taken as the basis to impose penalty u/s 271(l)(c) and the appellant, therefore, prays for stay of operation of the impugned orders till the disposal of the appeal and also for stay of penalty proceedings as well as collection and recovery of the disputed illegal demands for which appropriate orders may kindly be passed by invoking the inherent jurisdiction of this Hon'ble Tribunal, after hearing both sides at the earliest.”

Page 4 of 50 Finance Act, 2009 being only prospective for granting deduction with effect from AY 2010-11 ignoring the fact that it is nothing but a clarificatory amendment which is clearly applicable retrospectively for all passed and pending cases as the objective is to remove unintended hardship and consequences arising from the incorrect and negative view of the Revenue which was sought to be redressed by the legislative clarificatory amendment retrospective in nature. 7. The authorities below also erred in ignoring the fact that the legislative amendment by the Finance Act, 2009 is nothing but clarificatory in nature and intended to remove unintended consequences and hence, required to be applied retrospectively as if that had been the law all times and failure to do so has vitiated the impugned orders. 8. The authorities below also erred in disallowing the loss of 150,45,32,696/- on the erroneous view of the loss being of capital nature ignoring the fact that the records, documents, submissions and explanations provided by the appellant show clearly that the appellant had held securities both as investments and also as stock in trade and that the securities under consideration to which the loss relates had been clearly held as part of the appellant's trading a activities and stock-in- trade and hence the revenue loss in the normal course of business of the appellant cannot be held to be capital in nature for being disallowed and the impugned orders, being perverse and baseless, are liable to be vacated as unsustainable in law. 9. The authorities below had erred in making /sustaining illegal additions and disallowances to enhance the income returned of 25,56,62,610/- to the assessed income of 186,10,15,9607- along with illegal levies of interest and adverse action and notice for penalty all of which are wholly unwarranted and unsustainable. 10. The appellant prays for further/ additional submissions and grounds to be allowed to be filed before final hearing and further prays for early out of turn hearing to allow the appeal with consequential relief, after hearing both sides.” 4. The assessee has raised the following grounds of appeal in ITA No. 1513/Del/2013:- “1. On the facts and in the circumstances of the case, the CIT(A) had erred, both on facts and in law, in upholding the illegal order of assessment passed by the Respondent and dismissing the appeal of the appellant without fair and objective consideration of all the factual and legal submissions, records and documents and case law, placed by the appellant and the impugned order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of f 70,00,00,0007- u/s 36(l)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in holding that refinance of housing loans for construction or purchase of residential housing in India is not covered by Section 36(l)(viii) of the Act without giving considering the binding Circular No.72 dated 6.1.1972 CBDT, binding on the Revenue which clarifies that the 'refinance' has to be considered as part of providing long term finance.

Page 5 of 50 4. The authorities below have erred in holding that had claimed deduction u/s 36(l)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the appellant that the assessee has not considered the profits from short--term housing finance for computing the deduction ; -36(l)(viii) of the Act. 5. The authorities below have also erred in holding that the claim for deduction lawfully due to the appellant would result in double deduction on the same loans/advances without even considering the explanation given by the appellant pointing out that no double deduction would be allowed by virtue of the assessee’s claim for deduction being allowed as no deduction has been allowed of the same amount. 6. The authorities below also erred in disallowing the appellant's claim rightly made u/s 36(l)(viii) of the Act on the erroneous view that in view of the amendment to the Section made by the Finance Act/ 2009 being only prospective for granting deduction with effect from A Y 2010-11 ignoring the fact that it is nothing but a clarificatory amendment which is clearly applicable retrospectively for all passed and pending cases as the objective is to remove unintended hardship and consequences arising from the incorrect and negative view of the Revenue which was sought to be redressed by the legislative clarificatory amendment retrospective in nature. 7. The authorities below also erred in ignoring the fact that the legislative amendment by the Finance Act, 2009 is nothing but clarificatory in nature and intended to remove unintended consequences and hence, required to be applied retrospectively as if that had been the law all times and failure to do so has vitiated the impugned orders. 8. The authorities below have also erred in rejecting the appellant's claim for long-term capital loss of Rs. 33,52,98,304/- to be carried forward as rightly claimed by the appellant and further erred in making addition of this sum as income of the appellant, without any basis or justification valid in law. 9. The authorities below had erred in making /sustaining illegal additions and disallowances to enhance the income returned of 107,63,81,993/- to the assessed income of Rs.211,16,80,300/-along with illegal levies of interest and adverse action and notice for penalty all of which are wholly unwarranted and unsustainable. 10. The appellant prays for further/ additional submission and grounds to be allowed to be filed before final hearing and further consequential relief, after hearing both sides.” 5. The assessee has raised the following grounds of appeal in ITA No. 1513/Del/2013:- “1. On the facts and in the circumstances of the case, the CIT(A) had erred, both on facts and in law, in upholding the illegal order of assessment passed by the Respondent and dismissing the appeal of the appellant without fair and objective consideration of all the factual and legal submissions, records and documents and case law, placed by the appellant and the impugned order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of Rs.70,00,00,000/- u/s 36(l)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in holding that refinance of housing loans for construction or purchase of residential housing in India is not covered by Section

Page 6 of 50 36(l)(viii) of the Act without giving reasons for not considering the binding Circular No.72 dated 6.1.1972 issued by CBDT, binding on the Revenue which clarifies that the expression “refinance” has to be considered as part of providing long-term finance. 4. The authorities below have erred in holding that the assessee had claimed deduction u/s 36(l)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the -* appellant that the assessee has not considered the profits from short- term housing finance for computing the deduction claimed rightly u/s 36(l)(viii) of the Act. 5. The authorities below have also erred in holding that the claim for deduction lawfully due to the appellant would result in double deduction on the same loans/advances without even considering the explanation given by the appellant pointing out that no double ^ deduction would be allowed by virtue of the assessee's claim for deduction being allowed as no deduction has already been allowed of the same amount. 6. The authorities below also erred in disallowing the appellant's claim rightiy made u/s 36(l)(viii) of the Act on the erroneous view that in view of the amendment to the section made by the Finance from A Y 2010- 11 ignoring the fact that it is nothing but a clarificatory amendment which is clearly applicable retrospectively for all passed and pending cases as the objective is to remove unintended hardship and consequences arising from the incorrect and negative view of the Revenue which was sought to be redressed by the legislative clarificatory amendment retrospective in nature. 7. The authorities below also erred in ignoring the fact that the legislative amendment by the Finance Act, 2009 is nothing but clarificatory in nature and intended to remove unintended consequences and hence, required to be applied retrospectively as if that had been the law all times and failure to do so has vitiated the impugned orders. 8. The authorities below have also erred in rejecting the appellant's claim for long-term capital loss of RS.33,52,98,304/- to be carried forward as right y claimed by the appellant and further erred in making addition of this sum as income of the appellant, without any basis or justification valid in law. 9. The authorities below had erred in making /sustaining illegal additions and disallowances to enhance the income returned of Rs.107,63,81,9937- to the assessed income of Rs. 211,16,80,300/- along with illegal levies of interest and adverse action and notice for penalty all of which are wholly unwarranted and unsustainable. 10. The appellant prays for further/additional submissions and grounds to be allowed to be filed before final hearing and further prays for early out-of-turn hearing to allow the appeal with consequential relief, after hearing both sides.” 6. The assessee has raised the following grounds of appeal in ITA No. 1514/Del/2013:- “1. On the facts and in the circumstances of the case, the CIT(A) h erred, both on facts and in law, in upholding the illegal order assessment passed by the Respondent and dismissing the appeal the appellant without fair and objective consideration of all the factual and legal submissions, records and documents and case law, placed by the appellant and the impugned order is liable to be vacated.

Page 7 of 50 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of Rs. 53,53,45,30; u/s 36(1)(viii) of the I T Act ignoring the fact that the appellant rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the low authorities have erred in holding that refinance of housing loans 1 construction or purchase of residential housing in India is not cover by Section 36(1)(viii) of the Act without giving reasons for not considering the binding Circular No.72 dated 6.1.1972 issued CBDT, binding on the Revenue which clarifies that the expression 'refinance' has to be considered as part of providing long-term finance. 4. The authorities below have erred in holding that the assessee ha: claimed deduction u/s 36(1)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the appellant that the assessee has not considered the profits from short-term housing finance for computing the deduction claimed rightly u/s 36(1)(viii) of the Act. 5. The authorities below have also erred in holding that the claim for deduction lawfully due to the appellant would result in double deduction on the same loans/advances without even considering the explanation given by the appellant pointing out that no double deduction would be allowed by virtue of the assessee's claim for deduction being allowed as no deduction has already been allowed of the same amount. 6. The authorities below also erred in disallowing the appellant's claim rightly made u/s 36(l)(viii) of the Act on the erroneous view that in view of the amendment to the Section made by the Finance Act, 2009 being only prospective for granting deduction with effect from A Y 2010-11 ignoring the fact that it is nothing but a clarificatory amendment which is clearly applicable retrospectively for all passed and pending cases as the objective is to remove unintended hardship and consequences arising from the incorrect and negative view of the Revenue which was sought to be redressed by the legislative clarificatory amendment retrospective in nature. 7. The authorities below also erred in ignoring the fact that the legislative amendment by the Finance Act, 2009 is nothing but clarificatory in nature and intended to remove unintended consequences and hence, required to be applied retrospectively as if that had been the law all times and failure to do so has vitiated the impugned orders. 8. The authorities below had erred in making/sustaining illegal additions and disallowances to enhance the income returned of Rs. 36,61,94,363/- to the assessed income of Rs. 90,15,39,665/- along with illegal levies of interest and adverse action and notice for penalty all of which are wholly unwarranted and unsustainable. 9. The appellant prays for further/additional submissions and grounds to be allowed to be filed before final hearing and further prays for early out- of-turn hearing to allow the appeal with consequential relief, after hearing both sides.” 7. The assessee has raised the following grounds of appeal in ITA No. 1515/Del/2013:- 1. On the facts and in the circumstances of the case, the CIT(A) had erred, both on facts and in law, in uphplding the illegal order of assessment passed by the Respondent and dismissing the appeal of the appellant without fair and objective consideration of all the factual and legal

Page 8 of 50 submissions, records and documents and case law, placed by the appellant and the impugned order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of Rs. 21,10,00,000/- u/s 36(1)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in holding that refinance of housing loans for construction or purchase of residential housing in India is not covered by Section 36(l)(viii) of the Act without giving reasons for not considering the binding Circular No.72 dated 6.1.1972 issued by CBDT, binding on the Revenue which clarifies that the expression 'refinance' has to be considered as part of providing long-term finance. 4. The authorities below have erred in holding that the assessee had claimed deduction u/s 36(l)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the appellant that the assessee has not considered the profits from short-term housing finance for computing the deduction claimed rightly u/s 36(l)(viii) of the Act. 5. The authorities below have also erred in holding that the claim for deduction lawfully due to the appellant would result in double deduction on the same loans/advances without even considering the explanation given by the appellant pointing out that no double deduction would be allowed by virtue of the assessee's claim for deduction being allowed as no deduction has already been allowed of the same amount. 6. The authorities below also erred in disallowing the appellant's claim rightly made u/s 36(l)(viii) of the Act on the erroneous view that in view of the amendment to the Section made by the Finance Act, 2009 being only prospective for granting deduction with effect from A Y 2010-11 ignoring the fact that it is nothing but a clarificatory amendment which is clearly applicable retrospectively for all passed and pending cases as the objective is to remove unintended hardship and consequences arising from the incorrect and negative view of the Revenue which was sought to be redressed by the legislative clarificatory amendment retrospective in nature. 7. The authorities below also erred in ignoring the fact that the legislative amendment by the Finance Act, 2009 is nothing but clarificatory in nature and intended to remove unintended consequences and hence, required to be applied retrospectively as if that had been the law all times and failure to do so has vitiated the impugned orders. 8. The authorities below had erred in making/sustaining illegal additions and disallowances to enhance the income returned of Rs. 121,86,77,107/- to the assessed income of ? 142,96,77,107/-along with illegal levies of interest and adverse action and notice for penalty all of which are wholly unwarranted and unsustainable. 9. The appellant prays for further/additional submissions and grounds to be allowed to be filed before final hearing and further prays for early out- of-turn hearing to allow the appeal with consequential relief, after hearing both sides.”

Page 9 of 50 without fair and objective consideration of all the factual and legal submissions, records and documents and case law, placed by the appellant and the impugned order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of Rs. 11,19,30,645/- u/s 36(1)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in holding that refinance of housing loans for construction or purchase of residential housing in India is not covered by Section 36(1)(viii) of the Act without giving reasons for not considering the binding Circular No.72 dated 6.1.1972 issued by CBDT, binding on the Revenue which clarifies that the expression "refinance' has to be considered as part of providing long-term finance. 4. The authorities below have erred in holding that the assessee had claimed deduction u/s 36(1)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the appellant that the assessee has not considered the profits from short-term housing finance for computing the deduction claimed rightly u/s 36(1)(viii) of the Act. 5. The authorities below have also erred in holding that the claim for deduction lawfully due to the appellant would result in double deduction on the same loans/advances without even considering the explanation given by the appellant pointing out that no double deduction would be allowed by virtue of the assessee's claim for deduction being allowed as no deduction has already been allowed of the same amount. 6. The authorities below also erred in disallowing the appellant's claim rightly made u/s 36(l)(viii) of the Act on the erroneous view that in view of the amendment to the Section made by the Finance Act, 2009 being only prospective for granting deduction with effect from A Y 2010-11 ignoring the fact that it is nothing but a clarificatory amendment which is clearly applicable retrospectively for all passed and pending cases as the objective is to remove unintended hardship and consequences arising from the incorrect and negative view of the Revenue which was sought to be redressed by the legislative clarificatory amendment retrospective in nature. 7. The authorities below also erred in ignoring the fact that the legislative amendment by the Finance Act; 2009 is nothing but clarificatory in nature and intended to remove unintended consequences and hence, required to be applied retrospectively as if that had been the law all times and failure to do so has vitiated the impugned orders. 8. The authorities below had erred in making/sustaining illegal additions and disallowances to enhance the income returned of Rs. 221,66,10,148/- to the assessed income of Rs. 232,85,40,790/-along with illegal levies of interest and adverse action and notice for penalty all of which are wholly unwarranted and unsustainable. 9. The appellant prays for further/additional submissions and grounds to be allowed to be filed before final hearing and further prays for early out- of-turn hearing to allow the appeal with consequential relief, after hearing both sides.” 9. The assessee has raised the following grounds of appeal in ITA No. 1517/Del/2013:- “1. On the facts and in the circumstances of the case, the CIT(A) had erred, both on facts and in law, in upholding the illegal order of assessment

Page 10 of 50 passed by the Respondent and dismissing the appeal of the appellant without fair and objective consideration of all the factual and legal submissions, records and documents and case law, placed by the appellant and the impugned order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of Rs. 11,54,28,402/- u/s 36(1)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in holding that refinance of housing loans for construction or purchase of residential housing in India is not covered by Section 36(1)(viii) of the Act without giving reasons for not considering the binding Circular No.72 dated 6.1.1972 issued by CBDT, binding on the Revenue which clarifies that the expression 'refinance' has to be considered as part of providing long-term finance. 4. The authorities below have erred in holding that the assessee had claimed deduction u/s 36(1)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the appellant that the assessee has not considered the profits from short-term housing finance for computing the deduction claimed rightly u/s 36(1)(viii) of the Act. 5. The authorities below have also erred in holding that the claim for deduction lawfully due to the appellant would result in double deduction on the same loans/advances without even considering the explanation given by the appellant pointing out that no double deduction would be allowed by virtue of the assessee's claim for deduction being allowed as no deduction has already been allowed of the same amount. 6. The authorities below also erred in disallowing the appellant's claim rightly made u/s 36(1)(viii) of the Act on the erroneous view that in view of the amendment to the Section made by the Finance Act, 2009 being only prospective for granting deduction with effect from A Y 2010-11 ignoring the fact that it is nothing but a clarificatory amendment which is clearly applicable retrospectively for all passed and pending cases as the objective is to remove unintended hardship and consequences arising from the incorrect and negative view of the Revenue which was sought to be redressed by the legislative clarificatory amendment retrospective in nature. 7. The authorities below also erred in ignoring the fact that the legislative amendment by the Finance Act, 2009 is nothing but clarificatory in nature and intended to remove unintended consequences and hence, required to be applied retrospectively as if that had been the law all times and failure to do so has vitiated the impugned orders. 8. The authorities below had erred in making/sustaining illegal additions and disallowances to enhance the income returned of Rs. 277,91,77,684/- to the assessed income of Rs. 289,46,06,090/- along with illegal levies of interest and adverse action and notice for penalty all of which are wholly unwarranted and unsustainable. 9. The appellant prays for further/additional submissions and grounds to be allowed to be filed before final hearing and further prays for early out- of turn hearing to allow the appeal with consequential relief, after hearing both sides.” 10. Parties before us submitted that appeal No. 3704/Del/2010 for AY 2007-08 may be taken as the lead case as there is no difference in the facts of the case of other years. Therefore, firstly we record the facts for AY 2007-08 and

Page 11 of 50 decide the issue. Thereafter, we will apply our decision to the other appeals of the assessee. 11. The assessee is a financial institution that is set up under the National Housing Bank Act, 1987. Accordingly, the main objects of the assessee were enlisted in section 14 of that Act. The assessee was enjoying exemption under the Income Tax Act 1961 by virtue of provisions of section 48 of the National Housing Bank Act, 1987. The above section was omitted w.e.f. 01.04.2002 and therefore the income of the assessee is now chargeable to tax from A Y 2002-03 onwards. The assessee provides refinance to various banks and housing finance companies and income stream of the assessee is interest on these loans and advances. It also earns revenue from investment in bonds, mutual funds, shares and securities. 12. For AY 2007-08 the assessee filed its return of income on 29.10.2007 for total income of Rs. 2015167765/-. Subsequently, it revised its original return of income on 31.03.2009 to Rs. 1703076554/- for claiming deduction u/s 36(1)(viia) and 36(1)(vii) of the Act. The assessee claimed deduction u/s 36(1)(vii) of Rs. 350428356/-. The claim was based on the belief that the main object of the assessee is to promote Housing Finance Companies. However, the ld Assessing Officer denied the claim of the assessee for the following reasons:- “9. I have carefully considered the submissions of the assessee, which are mentioned supra, but I do not find any merits in the same for the reasons given below : (i) The preamble of the National -Housing Bank Act, 1987 (NHB Act, 1987) read with Chapter IV ( Business of the National Housing Bank ) of the NHB Act, 1987 clearly stipulates the purpose of M/s NHB is to promote housing finance institutions and not to provide long term housing finance for purchase and construction of residential houses as claimed by the AR of the assessee. The preamble of the National Housing Bank Act, 1987 is reproduced below : " An act to establish a bank to be known as the National Housing Bank to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support to such institutions and for mattes connected therewith or incidental thereto." Thus it is clear that assessee's claim that it is a public company formed and registered in India ( incidentally assessee is also not a public company formed and registered in India, it is an statutory body created by an Act of Parliament) with the main objective of carrying on the business of providing long term finance for construction or purchase of houses in India for residential purposes is not correct and without any basis.

Page 12 of 50 The claim of assessee us/36(1)(viii) is a colourable device used for tax avoidance. Hon'ble Supreme court in the case of M/s McDowell & co. Ltd Vs. CTO(1985) 154 ITR 148 has observed that tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be a part of tax planning. (ii) The AR of the assessee has given examples that the claim or the assessee does not amount to double deduction. However, this calculation is not so simple as presented by them and it is subjected to various qualifications such as , if the financial institutions/ public company is not engaged mainly in the business of long term residential housing within the meaning of section 36(1)(viii) then it will not be eligible for deduction u/s 36(1)(viii) of the IT Act at all. But it does not put any bar on NHB to refinance the loans advanced by the financial institutions. The model agreement submitted by the assessee for refinancing financial institutions put more emphasis on prompt recovery of advances rather than putting the conditions as laid out in section 36(1)(viii) of the !T Act, 1961 for the obvious reason that the main objective of NHB is promoting housing financing institutions and not the long term residential housing refinance. Since NHB is not financing long term residential housing loans on its own, thus, the fulfillment of conditions for claiming deduction u/s 36(1)(viii) will always remain in twilight. Therefore, when the public company/ financial institutions advancing housing loans originally is not eligible for deduction u/s 36(1)(viii) of the IT Act, then there is no question of allowability of deduction in case of NHB. In the case of Me Dowell & Co. Ltd Vs. CTO 154 ITR 148 (SC) and Union of India Vs. Plywood Electronics ( 1990 ) 184 ITR 308 (SC), Hon'ble Supreme Court has held that when two interpretations are possible, one leading to avoidance or evasion of tax should be avoided and that which prevents such avoidance or evasion should be adopted. In the case of the assessee, the interpretation by the assessoe leads to avoidance of tax on facts and on merits it leads to incorrect interpretation of law also. (iii) The deduction u/s 36(1)(viii) is available for long term finance only. It means the loans and advances given for purchase or construction of house having repayment period of 5 years or more than 5 years. Since NHB refinancing the housing loans to various other housing finance institutions and banks, thus, in the case of NHB, it cannot be ascertained that the actual loaner has given a long term housing finance from time to time for purchase and construction of residential houses within the meaning of section 36(1)( viii). Thus, it clearly negates the assessee's claim of deduction u/s 36(1)(viii) of the IT Act, 1961. (iv) The AR of the assessee has also contended that the deduction is in respect of profits and not the quantum of loans. While making the above submission, AR of the assessee disregarded the fact that section 36(1}(viii) clearly stipulates that deduction is available for " profits derived from such business of providing long term finance" and it is well settled law that expression " derived from " has much narrower meaning than

Page 13 of 50 the expression " attributable to" or " incidental to". These expression have been defined many times by the Apex Court on many occasions, though, in different circumstances, however, affirming the general principle that the expression " derived from" has been used by the Legislature whenever it wanted to give restricted meaning The principle has been succinctly explained by the Apex Court in Cambay Electric Supply Industrial Co. Ltd Vs. CIT(1978) 113 ITR 84(SC) in the following words : " As regards the aspect emerging from the expression " attributable to" occurring in the phrase ' profit and gains attributable to the business of the specified industry ( here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the Legislature has deliberately used the expression " attributable to" and not the expression " derived from". It cannot be disputed that the expression "attributable to" is certainly wider in import than the expression ' derived from' Had the expression ' derived from' been used, it could have with some force been contended that a balance charge arising from the sale of old machinery and building cannot be regarded as profits and gain derived from the conduct of the business of generation and distribution of electricity In this connection, it may be pointed out (hat whenever the Legislature wanted to give a restricted meaning ffi the manner suggested by the learned Solicitor General, it has used the expression 'derived from' as for instance, in section 80-J. In our view,, since the expression of wider import, namely, attributable, has been used, the Legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. The scope of expression " derived'from" was again considered by the Apex court in CIT Vs. Sterling Food ( 1999) 237 ITR 579 (S) and it was held thus : " Held reversing the decision of the High Court, that the provisions of section 28 as amended made no difference. The words " derived" is usually followed by the word " from" and it mean " get" to trace from a source, arise from' originate in show the origin or formation of the source of import entitlements could not be said to be the industrial undertaking of the assessee. The source of the import entitlements could only be said to be the Export Promotion Scheme of the Central Government where under the export entitlements became available There must be, for the application of the words " derived from" a direct nexus between the profit and gains and the industrial undertaking, in the instant case, the nexus was not direct but only incidental. The industrial undertaking exported processed sea foods. By reasons of the such export, the Export Promotion Scheme applied. Thereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute an profit and

Page 14 of 50 gain derived from the assessee's industrial undertaking. The receipts from the sale of import entitlements could not be included in the income of the assessee for the purpose of computing the relief u/s 80-HH f the Income-tax Act, 1961." To similar effect is the decision of the Supreme Court in Hindustan Lever Ltd Vs. CIT ( 1999} 239 ITR 297(SC). It is clear that profits of M/s NHB is not derived from the business of long term finance for purchase or construction of residential houses'within the meaning of section 36(1)(viii) of the IT Act, 1961. (v) The section 36(1)(viii) clearly stipulates that the deduction under this section is available only for public companies formed and registered in India with the main object of carrying on the business of providing long term finances for construction or purchase of houses in India for residential purposes. When the details of interest received filed by the assessee with its letter dt 05.11.2009 was perused, it was noted that assessee provides the refinances of long term housing loans. Further in the details given by the assessee ( Annexure 2 of above letter ), it is crystal clear that assessee not only provided refinancing to housing finance institutions but it also provided refinances to various scheduled banks which are not engaged mainly in the business of providing long term finance for purchase or construction of houses. (vi) The assessee itself has accepted that it refinances loans for housing purposes which actually advanced by various companies, banks, housing financial institutions, etc. It is clear that public companies which actually advanced long term housing loans for purchase or construction of residential house, the housing finance institutions will be eligible for deduction u/s 36(1)(viii) subject to the fulfillment of the provisions of the said section. Therefore, the claim of deduction of the assessee amounts to double deduction on the same loan/ advance and if assessee's contention is accepted then this claim can be extended up to any level making each level eligible for deduction u/s 36f1)fviii) on the same loan, which certainly cannot be the intention of the Legislature and it stretches the meaning of the provisions of Section 36(1)(viii) of the IT Act. 1961 to absurdity and it is settled law that the absurd interpretation of the law cannot be construed. Moreover, section 36(1)(viii) of the IT Act, 1961 which is a specific section enacted by the Legislature and no general meaning can be assigned to it. Whatever benefit is not provided in the Income- tax Act directly to the assessee cannot be claimed by the assessee indirectly. When the wordings of section is clear, no benefit can be conferred upon the assessee to misconstruing or misrepresentation of the words of the section. In the case of CIT Vs. H Begum { 1989} 176 ITR 38 (SC), Hon'ble Apex Court has observed that, "one of the pillars of statutory interpretation, viz, the literal rule, demands that, if the meaning of the statutory provisions is plain, the courts must apply it regardless of the result." Again in the case of Good Year India Limited Vs. State of Haryana ( 19^1) 188 ITR 402(SC)( Hon'ble Apex Court observed that, "it has boon said on numerous occasions

Page 15 of 50 that fiscal laws must be strictly construed, words used must say what they mean, nothing should be presumed as implied." Assessee's presumption that finance include re finance in the present set of circumstances devoid of any merit as in the case of re-finance even the mandatory conditions laid by the Section 36(1)(viii) of the Income-tax Act ( like, whether loans is for residential housing purpose or not? Whether it is short term or long term ? Whether it is used for purchase and construction of new houses? Etc. } cannot be met verified. Therefore, on this ground also, assessee is not entitled for deduction u/s 3G(1)(viii) of the IT Act, 1961. (vii) Further, from the discussion in the Budget for 2009-10 ( reproduced supra ) it is clear that amendment has been brought to the covering the re-financing w.e.f. 1st April, 2010 which shall be applicable in your case from the assessment year 2010-11 and subsequent years. From the above amendment, it is crystal clear that, claim of deduction u/s 36(1)(viii) was not applicable in this case and the submission that 're-finance' is included in 'finance' cannot be accepted as the same is devoid of any merits. In case the ' finance' includes ' re-finance', there is no necessity to bring the amendment in the statute. 10. In view of the detailed discussion above, it is clear that assessee is not entitled to deduction u/s 36{1)(viii) of the IT Act, 1961 and its claim of deduction u/s 36(1){viii) devoid of merits on fact and in law and it is claimed without any basis. Therefore, I disallowed by the claim of deduction u/s 3G(1)(viii) of the IT Act, 1961 as claimed by the assessee in its return of income amounting to Rs. 35,04,28,356/ and add back the same to the taxable income of the assessee. 13. Consequently assessment u/s 143(3) of the Act was passed on 02.12.2009 determining the total income of Rs. 2053504910/- wherein to disallowance of claim of deduction u/s 36(1)(viii) of Rs. 350428356/- was made. Assessee being aggrieved with the order of the ld Assessing Officer preferred an appeal before the ld CIT(A) who by order dated 26.05.2010 dismissed the appeal of the assessee vide para No. 5 of his order as under:- “5. I have carefully considered the facts of the case and the various judicial r-pronouncements cited by the learned AO and the learned appellate counsel. On a careful consideration of the relevant provisions of section 36(l)(viii), it is evident that the explanation of the term "eligible business" for the purpose of the above provision in case of housing activities means "business of providing of long term finance for 'construction or purchase of houses' in India for residential purposes". The term "long term finance", for the purpose of the above provision, means any loan or advances where the term in which the monies are loaned or advances provide for repayment along with interest thereof during the period of not less than 5 years. Thus, the enabling provisions of section 36(l)(viii), if strictly construed, restricts its benefit to only business of providing long-term finance for long term finance for construction and purchase of house for residential purpose and not for providing finance to Housing Finance for construction and purchase of house.

Page 16 of 50 5.2 It will also be useful to take cognizance of objectives for which the National Housing Bank was set up, on going through the National Housing Bank, 1987. The preamble to the NHB Act, 1987 reads as under:- "An Act to establish a bank to be known as the National Housing Bank to operate as a principal agency to promote housing finance institutions both at local and regional levels and to provide financial and other support to such institutions and for matters connected therewith or incidental thereto" Further, section 14 of the said Act exhaustively defines the business of the National Housing Bank, as under:- "(a)promoting, establishing or supporting or aiding in the promotion, establishment and support of Housing finance institution. " (b) Making of loans and advances or rendering any other form of financial assistance whatsoever for housing activities to housing finance institutions, scheduled banks, stated co-operative agricultural and rural development banks or any other institution or class of institution as may be notified by the Central Government. (d)Guaranteeing the financial obligations of housing finance institutions and underwriting the issue of stocks, shares, bonds, debentures and securities of every other description of housing finance institutions.” 5.3 On careful perusal of the above, I find that the role of the National Housing Bank, as was envisaged by the legislature was to operate as a principal agency to promote housing finance institutions. The term "Housing Finance Institutions" has been defined as under:- "housing finance institution" includes every institution, whether incorporated or not, which primarily transacts or has as (one of its principal objects), the transacting of the business or providing finance for housing, whether directly or indirectly.” 5.4 On a careful perusal of the section 36(1)(viii), I find that the eligible business for the purpose of the above deduction means, "the business of providing of long term finance for construction or purposes of housing in India for residential purposes". It is thus evident that the above provisions were in effect, meant for the 'housing finance institutions' only and not for the National Housing Bank, which was given the mandate to promote such institutions in the country for which finance and other support were to be provided by it. However, while appreciating the role of the NHB in development of housing in India, it is observed that the tax benefits were, however, not intended for the National Housing Bank per se which were brought on the statute originally with effect from 1/4/1972 in the case of the housing sector. The National Housing Bank, however, continued to avail tax exemption by an enabling provision built therein that overrided the provisions of the Income tax Act 1961. However, by a specific amendment brought about with effect from 1/4/2002 in the Finance Act, 2001 such an exemption was withdrawn by the Government. Therefore, it is amply clear that the provisions of section 36(l)(viii) were never intended for the National Housing Bank Act 1987. This fact is further clarified by the amendment brought about in this provision vide the Finance Act, 2009, which substituted the terms "construction or purchase of houses" with "development of housing", the latter term being much wider, which includes construction or purchases of house and any other major activity leading to development of houses. 5.5 The relevant explanatory memo of the said Finance Act, 2009 reads as under "Clause (viii) of sub section (1) of section 36 (section 36(l)(viii) provides special deduction to financial corporations and banking

Page 17 of 50 companies of an amount not exceeding 20% of the profits subject to creation of a reserve. National Housing Bank is wholly owned by Reserve Bank of India and is engaged in promotion and regulation of housing finance institution in the country. It provides re-financing support to housing finance institution, banks. ARDBs, RRBs etc., for the development of housing in India. It also undertakes financing of slum projects, rural housing project and housing projects for EWS and LIG cargegohes etc. NHB is also a notified financial corporation under section 4A of the Companies Act. A view has been expressed that NHB is not entitled to the benefits of section 36(1)(vii) on the ground that it is not engaged in the long-term capital financing for construction or purchase of houses in India for residential purpose. The proposed amendment seeks to provide that corporations engaged in providing long-term finance (including - refinancing) for development of housing in India will be eligible for the benefit under section This amendment will take effect from the 1st April and will, accordingly, apply in relation to assessment year 2010-11 and subsequent years." The explanatory memo thus clearly points out the conflicting views in respect of National Housing Bank's claim u/s. 36(l)(viii) and after examining the same issue, legislature decided to make prospective amendment, in order to allow the appellant bank the benefit under the above section. Therefore, the fact that the legislature only brought about the amendment with^ effect from 1/4/2010 clearly shows that the above provisions were made prospectively only and cannot be treated as clarificatory in nature and retrospective in operations, as the nature of amendment entailed much wider scope and significant substitution of the eligible business activities, which have significant bearing on the eligibility criterion of that provision, and which is not merely a clarificatory exercise. 5.7 In view of the above, I hold that the learned AO was justified in not allowing the deduction under the above section to the appellant as the said provisions for the appellant, being meant for Housing Finance Institution only and the appellant bank, which continued to enjoy the blanket tax exemption due to an over-riding provision in the National Housing Bank Act, 1987 till 2002, before it was over-ridden by the provision of Finance Act 2001, was never an eligible beneficiary of the provisions of section 36(l)(viii). 5.8 Without prejudice to the above, since, the above beneficial provision is with respect to the profits derived from the long term finance activities only, I had directed the learned counsel to furnish break up of the interest income derived by the appellant bank in respect of loans and advances given for five years and above and those were originally upto 5 years only or where premature repayment of long term loans/advances was made within 5 years. The learned appellate counsel vide their letter dated 8/4/2010 had informed that out of the total interest of Rs.11,89,58,85,883/-, the short terms loans, that were upto 5 years to Rs.697,48,74,606/- while the interest from long term amounted to Rs.492,10,11,277/-. Therefore, without prejudice to my decision in para 5.7 above, even if the appellant's claim was to be allowed, the quantum of deduction shall not exceed 20% of the eligible profit, which in the case of the appellant shall be computed by taking the total interest income derived by the appellant only. Therefore, the claim of deduction made by the appellant with be reduced accordingly,

Page 18 of 50 even if the claim of the appellant under the above section was allowable.” 14. Therefore, aggrieved with the ld CIT(A), the assessee is in appeal before us. 15. The ld Authorised Representative of the assessee has reiterated similar argument that was raised before the lower authorities. It was contended that the deduction u/s 36(1)(viii) is available to the assessee to the extent of amount not exceeding 20% of the profits derived from eligible business. It was further submitted that eligible business means providing of long-term finance for purchases of houses in India for residential purposes. Therefore, the business of the assessee falls into eligible business. With respect to the amendment made in Finance Act 2009 it was stated that now the section is eligible to the business of development of housing in India and earlier it was providing long term finance for purchase of houses in India. Therefore, he submitted that amendment of development of housing in India is retrospective in nature and demonstrates intention of the legislature. He further referred to the provisions of section 14 of NHB Act that assessee‟s business is of providing long term finance for purchase of houses in India for residential purposes. He further submitted that reliance by the ld Assessing Officer on the preamble of the Act is irrelevant. In nutshell it was contended that the lower authorities have erred in not allowing the claim of the assessee u/s 36(1)(viii) of the Act. 16. The ld Departmental Representative vehemently supported the order of the lower authorities and submitted that assessee is engaged in the business of providing finance to the other financial companies but do not provide finance for purchase of houses in India for residential purposes which is the primary condition. Therefore, according to him the business of the assessee is of providing refinanced to the housing company. He further referred to the amendment made in the definition of eligible business by the Finance No. (2) Act 2009 w.e.f. 01.04.2010 has submitted that development of housing in India is applicable from that date only. He further referred to page No. 121 to 122 of the paper book which is memorandum explaining the provision in the Finance Bill No. 2 of 2000 which provides that National Housing Bank would be entitled to deduction under this section from AY 2010-11 and subsequent years only. He further referred to the paragraph 3 of the memorandum, which explained the rational of the amendment. Therefore, he vehemently opposed the claim of the assessee and submitted that the argument of the assessee that this amendment applies retrospective does not hold water in view of the above memorandum.

Page 19 of 50 17. We have carefully considered the rival contentions. The provisions of Section 36(1)(viii) for AY 2007-08 provides as under:-

“(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28-- (viii) in respect of any special reserve and maintained created by a financial corporation which is engaged in providing long-term finance for industrial or agricultural development or development of infrastructure facility in India or by a public company formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, an amount not exceeding forty per cent. of the profits derived from such business of providing long-term finance (computed under the head "Profits and gains of business or profession" before making any deduction under this clause) carried to such reserve account: Provided that where the aggregate of the amounts carried to such reserve account from time to time exceeds twice the amount of the paid- up share capital (excluding the amounts capitalized from reserves) of the corporation or, as the case may be, the company, no allowance under this clause shall be made in respect of such excess: Explanation In this clause, (a) "financial corporation" shall include a public company and a Government company ; (b) "public company" shall have the meaning assigned to it in section 3 of the Companies Act, 1956 (1 of 1956) ; (c) "Government company" shall have the meaning assigned to it in section 617 of the Companies Act, 1956 (1 of 1956) ; (d) "infrastructure facility" means- (i) an infrastructure facility as defined in the Explanation to clause (i) of sub-section (4) of section 80-IA, or any other public facility of a similar nature as may be notified by the Board in this behalf in the Official Gazette and which fulfils the conditions as may be prescribed ; (ii) an undertaking referred to in clause (ii) or clause (iii) or clause (iv) of sub-section (4) of section 80-IA ; and (iii) an undertaking referred to in sub-section (10) of section 80-IB ; (e) "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years.” 18. According to the above provision the deduction is provided to the financial corporation who is engaged in providing long term finance for construction or purchase of houses in India. Admittedly, the assessee has not provided any finance for purchase of houses in India but is providing refinance to the various housing finance companies. The main business of the assessee is providing long-term housing finance through the housing finance institutions, scheduled banks, state cooperative, agricultural and rural development banks as well as to public agencies and micro finance institutions. Therefore, the assessee is not providing long term finance for

Page 20 of 50 construction and purchase of houses in India for residential purposes. Furthermore, the subsequent amendment made to the definition of eligible business by the Finance No. 2 Act of 2009 has amended the definition of eligible business from “long-term finance for construction or purchase of houses in India for residential purposes” to “development of housing in India”. The memorandum explaining the bill has abundantly made clear about the above amendment in memorandum explaining the provisions as under:- “Special deduction under section 36(1)(viii) to National Housing Bank (NHB) Clause (viiii) of sub-section (1) of Section 36 [section 36(1)(viii)] provides special deduction to financial corporations and banking companies of an amount not exceeding 20% of the profits subject to creation of a reserve. National Housing Bank (NHB) is wholly owned by Reserve Bank of India and is engaged in promotion and regulation of housing finance institutions in the country. It provides re-financing support to housing finance institutions, banks, ARDBs, RRBs etc., for the development of housing in India. It also undertakes financing of slum projects, rural housing projects, housing projects for EWS and LIG categories etc. NHB is also a notified financial corporation under section 4A of the Companies Act. A view has been expressed that NHB is not entitled to the benefits of section 36(1)(viii) on the ground that it is not engaged in the long-term financing for construction or purchase of houses in India for residential purpose. The proposed amendment seeks to provide that corporations engaged in providing long-term finance (including re- financing) for development of housing in India will be eligible for the benefit under section 36(1)(viii). This amendment will take effect from the 1st April 2010 and will, accordingly, apply in relation to assessment year 2010- 11 and subsequent years. [Clause 14]” 19. On analysis of above amendment it is understood that apparent that Section 36(1)(viii) provides special deduction to financial corporations and banking companies of an amount not exceeding 20% of the profits subject to creation of a reserve. 20. Hitherto, the benefit of section 36(1)(viii) was available, inter alia, to entities engaged in long-term financing for construction or purchase of houses in India for residential purpose. The definition of eligible business has now been amended with effect from assessment year 2010-11 to provide that eligible business will include provision of long-term finance for development of housing in India. In other words, corporations engaged in providing long- term finance (including re-financing) for development of housing in India will now be eligible for the benefit under section 36(1)(viii). 21. Therefore from the above amendment it is clear that the national housing bank is entitled to the benefit of section 36(1)(viii) of the Act w.e.f. AY 2010-

Page 21 of 50 11 onwards and nor prior to that. Now the moot question here in whether refinancing activities can be considered as provision of long term finance for construction and purchase of houses in India for residential purposes or not. our answer to this is in negative because whenever govt the legislature wanted to include refinancing activities also eligible for deduction u/s 36(1)(viii) it has amended the provisions in the similar manner in which the amendment is made by Finance (2) of the Act of 2009. As the agricultural refinance activity was not eligible for deduction u/s 36(1)(viii) prior to Finance No. (2) Act, 1971 and the eligible business inserted was „industrial or agricultural development‟ by which agricultural refinance activities were made eligible for deduction. The amendment by Finance No. (2) Act of 2009 is also the similar amendment where the eligible business is included as “development of Housing in India” from “construction or purchase of houses in India”. Therefore, it is apparent that prior to this assessee was not eligible for deduction u/s 36(1)(viii) of the Act. in view of this Ground Nos. 1 and 2 of the appeal of the assessee which are against sustenance of disallowance of Rs. 350428356/- u/s 36(1)(viii) of the Act are dismissed. 22. Ground Nos. 3 and 4 of the appeal of the assessee are against initiation of penalty proceedings u/s 271(1)(c) of the Act. According to us these grounds are premature at this stage and hence, same are dismissed. 23. In the result appeal of the assessee in ITA No. 3704/Del/2010 for AY 2007- 08 is dismissed. 24. Now we come to the appeal of the assessee for following Assessment years where the identical grounds with respect to disallowance u/s 36(1)(viii) is contested as under:- ITA No. AY Claim for Ground Nos deduction u/s 36(1)(viii) in Rs. 2005-06 535345302/- 1 to 9 1514/Del/2013 2006-07 211000000/- 1 to 9 1515/Del/2013 2008-09 111930645/- 1 to 9 1516/Del/2013 2009-10 115428402/- 1 to 9 1517/Del/2013

Page 22 of 50 deduction u/s 36(1)(viii) amounting to Rs. 100820653/-. In view of our decision in ITA No. 3704/Del/2010 for AY 2007-08 wherein we have held that assessee is not entitled to deduction u/s 36(1)(viii) prior to AY 2010-11 and therefore, following decision we dismiss ground No. 1 to 7 of the above appeal of the assessee for AY 2003-04. 27. Now we come to ground No. 8 of the appeal of the assessee, which is against disallowing the loss of Rs. 1504532696/- with respect to securities. 28. Brief facts of the case are described by the Assessing Officer at page No. 12 to 20 of his order vide para No. D as under:- “Expenditure on account of loss on security transactions of 1991-92 amounting to Rs.1,50,45,32,696/- D(1) On perusal of the return of income and profit & loss a/c filed by the assessee, it was observed that assessee has claimed loss amounting to Rs. 1,50,45,32,969A on account of loss on security transactions of 1991-92. On further perusal of the Notes forming part of the accounts as per Schedule-XIII of the Balance Sheet and Profit & Loss A/c, it was observed that this amount was related to security transactions of M/s. NHB during 1991-1992. Cheques aggregating to Rs. 707.56 crores were issued by M/s. NHB in favour of State Bank of India (SBI) for securities transactions which were credited to the account of Share Broker, Shri Harshad Mehta, by SBI after collecting proceeds of the cheques It is pertinent to mention that SBI has returned this sum of Rs. 70756 crores to M/s. NHB on 13/6/1992 under protest and SBI also filed a suit No. 35 of 1995 against Ms. NHB in the Special Court claiming the amount of Rs. 707.56 crores which was returned to NHB, M/s NHB also filed a petition before the Hon'ble Supreme Cou-1 against the order dated 4/2/2002 of the Special Court, Mumbai as the Hon'ble Special Court had given decision in favour of SBI. Later on, Ministry of Finance, worked out a proposal to resolve the dispute which was accepted try both SBI and NHB and "directed that a sum of Rs. 35378 crores (being 50% of Rs. 707.56 crores would be paid by NHB to SBI after appropriating the sum of Rs. 131.20 crores with interest accrued thereon which had been lying with the Special Court. Pursuant to the order of the Hon'ble Supreme Court dated 1/11/2002 (passed after out of court settlement by NHB and SBI). NHB paid a sum of Rs. 150.45 crores to SBI on 17/12/2002 and the assessee has claimed this amount of Rs. 1,50,45,32,696/-as business loss in its P & L Account for the previous year under consideration. D(2) It is also pertinent to mention here that assessee accounts for its income from security transactions under the head "Income from Capital Gains" and as per audit report follows mercantile system of accounting. In the current year itself, the assessee has shown Short Term Capital Gain of Rs. 11.61 crores and Long Term Capital Gain at NIL after setting off B/F capital losses. In these circumstances,

Page 23 of 50 assessee was asked to show cause vide this office letter dated 7/2/2005 as under: "Please explain why loss on securities transactions for 1991-1992 should be allowed as expenses in the previous year under consideration as prima facie it appears a loss of capital in nature? Your reply should also contain complete details of the above mentioned loss," Assessee was further asked to show cause vide order sheet entry dated 16/3/2005 as under: "Please show cause why loss on security transactions of 1991'1992 should not be disallowed as: (a) it was a loss of capital in nature as it was claimed to be given for purchase of securities for which no evidence produced and moreover, assessee is showing income from security transactions under the head "capital gains" is clearly shows that this is a loss of capital in nature and cannot be allowed as a business loss and thus, as revenue expenditure. (b) the loss is also not related to the previous year under consideration." D(3) In reply to the same, the AR of the assessee vide its letter dated 16/03/2005 had submitted as under: "This has reference to various letters on the subject receiving with letter dated 7/2/2005. It is also refers to the discussions had regarding the debit of Rs. 150.45 crores to the P&LA/c. as "Loss insecurities transactions of 1991-1992". Particulars regarding it have already been given at SI. No. 5(ii) of Schedule-XIII -Notes to the Accounts. The bank had issued certain cheques to State Bank of India during 1991-2992 for purchase of securities. The said cheques were credited by SBI to Stock Broker "Mr, Harshad Mehta " instead of the State Bank. It is in public knowledge that the stock broker Mr. Harshad Mehta did indulge in a number of malpractice during 1991-1992 and the Government had set up a special court to decide the disputes. The present one happens to be one of such disputes in which the assessee claimed Rs. 707.56 crores from SB!. The matter traveled upto the Supreme Court of India. The Hon'ble Supreme Court had directed vide order dated 29/ 7/2002 (copy enclosed as Annexure -A) that both NHB and SBI, being owned by the Government of India/ RBI, should not litigate but should settle among themselves on the directions of the Banking Division, Ministry of Finance. Government

Page 24 of 50 of India. Banking Division, Department of Economic Affairs, Ministry of Finance vide letter dated 26th August, 2002 settled the issue (copy enclosed Annexure-B). In short the decision was that:

(a) Both NHB and SBI should bear the loss of Rs. 707.56 crores equally (or Rs. 353.78 crores each). (b) A sum of Rs. 131.20 crores deposited by NHB with SBS (State Bank of Saurashtra) on 13/7/1998 in another related dispute would get adjusted with interest @ 12% per annum - towards the present dispute which would be about Rs. 196 crores (c) Both NHB and SBI should pursue the matter before the Special Court and recover from the assets of Mr. Harshad Mehta Please find enclosed a copy of the terms of settlement dated 30/10/2002 between NHB and filed before the Supreme Court (Annexure (=).

Copy of the order of the Supreme Court which was passed shortly thereafter (around November, 2002) will be submitted after obtaining a copy of it from the lawyer/court Accordingly, the assessee paid Rs. 150 45 crores to SBI during this year It is submitted that since the liability has occurred in the normal course of business and has got settled by the Supreme Court of India during the year under consideration. It has accrued and arisen during this year. It is brought to your kind notice that the assessee has included in its business receipts of a sum of Rs. 113 crores in A.Y. 2002-2003 on the same principle of settlement of a dispute by the Supreme Court on account of similar securities transactions of 1991- 1992 Your kind attention is invited to the fact that the Bank had purchased and sold a number of securities during the year resulting in a gain of Rs. 11.61 crores. These purchases and sales of securities were under the category of investments available for sales/trading investments. The gains of Rs. 11.61 crores occurring on such transactions have been shown separately and offered for tax - without showing it as a part of profits of housing finance. Therese have not been set off against B/F long term capital gains. D(4) The authorized representative of the assessee in its letter dated 18/3/2005 had further submitted as under. "Banks, financial institutions, etc., can hold securities both as investments as well as stock-in-trade.

Page 25 of 50 The assessee (NHB) classifies the investment in securities under "held to maturity" (HIM), available for sale (AFS) and held for trading (HFT). The Resent Bank of India permits the Bunk to change the classification once in a year from one class to another. That cheques/funds of Rs. 707.56 crores belonging to the assessee (NHB) issued in favour of State Bank of India were misappropriated or got credited by Mr. Harshad Mehta to his account unauthorizedly and fraudulently in the year 1991-1992. The Bank claimed the amount from the SBI as well as Mr. Harshad Mehta and the matter traveled upto the Supreme Court The Ministry of Finance, Govt. of India had, during the current year under consideration at the directions of the Supreme Court decided that the loss on account of unauthorized/fraudulent misappropriation by Mr. Harshad Mehta should be borne equally by SBI and NHB. Further, the amount recovered if any from the assets to Harshad, Mehta, etc., frozen by the Special Court, be shared between SBI and NHB. This was made an order of the Supreme Court in November, 2002, which also falls within the year. The assessee has therefore, correctly claimed it as a loss of this year as it got settled and crystallized in the year under consideration. It did not get settled or finalized in 1991-1992 and any claim of deduction - would not have been allowed as it was sub-judice and -was contingent to the decision of the Courts. It is also brought to your kind notice that the assessee has in A. 2002-2003 admitted a sum of Rs. 113 crores as income folio-wing a decision of the Supreme Court in a similar matter. If the present claim does not pertain to the year under consideration but to a "prior period" as expressed by yourself, then the sum of Rs. 113 crores included in A. Y. 2002-2003 is not to be included on the same ground. Similarly, any sums recovered in future on account of various claims pending in Courts -would not be includable in income and the department should follow its stand consistently. This letter may be treated as a claim for exclusion of Rs. 113 crores from income of A.Y. 2002-2003 the proceedings for which were also heard simultaneously and the orders have not yet been served on the assessee. " D(5) In the course of current proceedings, the assessee filed the following submissions vide letter dated 3/8/2010 was filed on 12/11/2010 :-

Page 26 of 50 " Our part submission with regard to allowance of expenditure on account of loss on security transaction of 1991-1992 amounting to Rs. 150,45,32,696/- 6.1 Regarding the payment of Rs. 150,45,32,6967-, it is respectfully submitted that learned assessing officer and learned CIT(A) had held that the Loss/payment is clearly of capital nature and cannot be allowed as business loss. 6.2 In this regard, it is respectfully submitted that in case of NHB, purchase/sale of securities is both part of trading activities as well as for investment purpose. Section 14 of National Housing Bank Act describes the business of National Housing Bank. Clause (e) of the said section states "Buying or selling and dealing in bills of exchange, promissory notes, bonds, debentures, hundies, coupons and other instruments by whatever name called". Thus, it is evident that purchase/sale of securities is also part of the business of National Housing Bank. 6.3 Regarding the transaction is question, assessee, as a part of its business activity, entered into back to back transactions for purchase of certain securities like Govt. Bonds, IRFC Bonds, Treasury Bills etc for an aggregate amount of Rs. ; 707.56 crores (Approx.) in year 1991-92 with the State Bank of India (SB!) and sold the same on the same date to other banks and institutions. While on purchase of securities, NHB issued cheques in favour of SBI, however, it was credited to the account of share broker, Shri Harshad Mehta, by SBI, The Banker's receipt evidencing holding of securities on behalf of NHB was not issued by the SBI. When on due date, NHB requested the SBI to reverse the transaction or hand over the securities, SBI denied having any transaction with NHB and informed that the proceeds of the cheques received from NHB in its name has been credited in the account of its customer as per the instructions of NHB. However, there was no such instructions from NHB to SB!. Subsequently, on intervention of RBI, SBI returned this sum of Rs. 707,56 crore to NHB on 13,06,1992 under protest and filed a case against Harshad S. Mehta for having got wrong credit of the amount in his account. Later on, SBI also filed a suit in the Special Court claiming the amount of Rs. 707.56 crores alleging that NHB has entered into such transaction with Harshad Mehta It is in the public knowledge that the Stock broker, Mr. Harshad Mehta did indulge in a number of malpractices during 1991-92 and then

Page 27 of 50 Government had set up a special court to decide the dispute. Thus, the loss of Rs. 150 crore is a loss arising out of the business activity of purchase and sale of securities. 6.4 The case between NHB and SBI was resolved with the intervention of the Hon'ble Finance Minister at the behest of the Supreme Court whereby the loss caused due to non receipt of securities by NHB against the payments made to SBI for the same, was shared 50:50 between NHB and SBI. Therefore it was decided that a sum of Rs. 353.78 crore, being 50% of Rs. 707.56 crores would be paid by NHB to SB!. NHB in a separate suit had deposited Rs. 131.20 crore with the Special Court On 1307 1998 As per terms of settlement filed by the parties in the Supreme Court which was approved by Hon'ble Supreme Court, the amount of Rs, 131.20 crore along with the interest accrued thereon shall be reduced from 353.78 crore and the balance amount shall be paid by NHB to SBI. Pursuant to the order of Supreme Court dated 1.11.2002, NHB paid a sum of Rs. 150.45 crore to SBI on 17.12.2002 after appropriating the sum of Rs. 131.20 crore with interest accrued thereon and the assessee claimed this payment as business loss in its profit and loss account. The copy of the order of Hon'ble Supreme Court, terms of settlement, Supreme Court Record of Proceedings and letter from Ministry of Finance regarding the settlement has been attached for your kind reference. 6.5 From the above facts, it is clear that the loss on these securities was incurred because of non receipt of securities purchased by NHB from SBI for which the payment was made by NHB to SBI in the normal course of business, The said amount was misappropriated by Mr. Harshad Mehta with the help of two employees of NHB, Mr. C. Ravikumar and Shri S. Suresh Babu. All the funds management operations were centralized with Shri C. Ravikumar. The back up functions were with Shri S. Suresh Babu who reported to Mr. C. Ravikumar and acted under his instructions. These two officers were solely responsible for all the fund management functions including making a deal, recording the same, preparing the vouchers, preparing the cheques, signing the cheques (as one of two signatories), preparing and signing BRs, custody of BRs received from counterparties etc. All the above facts has been affirmed by the Janaki Raman Committee, which was an independent committee formed

Page 28 of 50 to investigate the possibility of irregularities in funds management. It is also respectfully submitted that the assessee has taken disciplinary action against these officers and even terminated their service. The copy of termination orders are attached for your reference. The loss incurred by NHB due to non receipt of securities being purchased by it which resulted due to fraudulent activities is clearly a trading loss as per section 28 of the Act and should be allowed as business loss. The assessee has placed reliance on following judicial pronouncements wherein it is held that embezzlement of funds by wrong/fraudulent deals are allowable as deduction: (a) Badrinath Daga v. CIT[1958] 34 ITR 10 (SC) . (b) CIT v. Nainital Bank [1965] 55 ITR 707 (SC) (c) Indian Insurance Banking corporation limited v. CIT [1963] 50 ITR 123 (Ker) (d) Ramachandra Shivnarayan v. CIT [1978] 111 ITR 263 (SC). In Badrinath Daga v. CIT [1958J 34 ITR 10(SC), Hon'ble Supreme Court, while deciding the question whether amount lost through embezzlement by an employee is a trading loss which could be deducted in computing the profits of a business has held that "in deciding whether loss resulting from embezzlement by an employee in a business is admissible as a deduction, what has to be considered is whether it arises out of the carrying on of the business and is incidental to it. Viewing the question as business would, it seems difficult to maintain that it does not. A business especially such as is calculated to yield taxable profits has to be carried on through agents, cashiers, clerks and peons. Salary and remuneration paid to them are admissible as expenses incurred for the purpose of the business. If the employment of agents is incidental to the carrying on of business, it must logically follow that losses which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer, and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it. If a loss by embezzlement can be said to be necessarily incurred in carrying on the trade

Page 29 of 50 it is allowable as deduction from profits. I an ordinary case, it springs directly from the necessity of deputing certain duties to an employee, and should therefore be allowed." The said decision was further affirmed by Hon'ble Supreme Court in the case of - CITv. Nainital Bank [1965] 55 ITR 707 (SC). In the case of NHB, the conditions as laid down by Hon'ble Supreme court for allowability of trading losses are fulfilled inasmuch as the loss was incurred because of misappropriation of funds by the employees of NHB while performing the duties during the normal course of business, therefore, in the light of above decisions, the losses incurred by NHB are the trading losses and are allowable as deductions while computing the taxable profits. 6.6 Learned AO also disallowed the claim stating that it relates to a prior period and even if held to pertain to this year, it is a capital loss. In this regard it is respectfully submitted that since the liability has occurred in the normal course of business and has got settled by the Supreme Court of India during the year under consideration, therefore the liability is crystallized in the current year, hence shall be considered to be accrued and arisen during the relevant assessment year. In the light of the above submission, it is requested that the payment made by NHB in lieu of settlement relating to security transactions of 1991-92 should be treated as business loss as per section 28 of the Act and deduction should be allowed accordingly." D(6) It is also important to discuss here the submissions of the assessee filed vide its letter dated 18/3/2005 that it had included a similar sum of Rs. 113 crores as taxable income in the Asstt. Year 2002-03. The AR of the assessee requested that its letter may be treated as a claim for exclusion of Rs. 113 crores from the income of Assessment Year 2002-03. It clearly shows that assessee itself is not sure on the issue that whether the Loss claimed by it is Capital Loss or a Business Loss in nature and whether the same pertains to previous year under consideration or not. As far as the claim for Asstt. Year 2002-2003 is concerned, it does not relate to the Asstt. Year under consideration and hence, does not require any comments. However, the claim of the assessee that Loss on securities transactions for 1991 -1992 is similar in nature to the sum of Rs. 113 crores for the financial year 2001-2002 is not correct on facts. The assessee itself has submitted vide its letter dated 11 3/2005 during the course of assessment proceedings

Page 30 of 50 for the Asstt. Year 2002-2003 that NHB had to deposit a sum of Rs. 912 crores with the Supreme Court till the disposal of its appeal by it. It had availed a loan of Rs. 700 cores from the RBI for the purpose and had paid interest thereon, ,as per the order of the Supreme Court the assessee received a revenue of Rs. 113 crores (Rs 1025 crores - Rs. 912 crores} in the financial year 2001-2002. The excess of Rs. 113 - crores was shown by assessee as an income and the relevant interest paid amounting to Rs. 87 crores on the loan from RBl has been accounted as an expenditure. Thus, the assessee has shown an income of Rs.26 crores (Rs. 113 crores - Rs. 87 crores} only as against the claimed amount of Rs.113 crores. It is ample clear that the facts and nature of the Business Loss claimed at Rs. 150.45 crores in the asstt Year under consideration and the amount of Rs 26 crores or Rs 113 crores shown in the Asstt. year 2002-2003 are quite different in nature. Moreover, as each assessment year is an 'ndepsndent assessment year as confirmed by the, Hon'ble Supreme Court, tn the case of CIT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC), the Hon'ble Supreme Court has held that there is no estoppel in the Income Tax assessment proceedings Each assessment is separate and it is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessee, the correctness of which has not been questioned in past. There is no estoppel in these matters. Thus, the contentions of the assessee are devoid of any merit. D(7). I have carefully considered the submissions of the assessee and am unable to find any merit in the same. The assessee itself has accepted that it was related to transactions for purchase of securities/investments, thus, the Loss in question was for purchase of capital asset. Therefore, the Loss on securities transactions of 1991-1992 amounting to Rs. 1,50,45,32,696/- was a Capital Loss in nature. It is settled law that Loss being capital in nature cannot be allowed as a Business Loss. This principle has been duly affirmed by Hon'ble Supreme Court in the case of Hasimara Industries Ltd. vs. CIT (1997) 230 ITR 927 (SC) and m the case of CIT, Uttar Pradesh vs. Nainital Bank Limited (1965) 55 ITR 707 (SC). The assessee has itself accepted vide its letter dated 16/3/2005 that "the bank has issued certain cheques to State Bank of India during 1991-1992 for purchase of securities." The assessee has further made a general statement vide its letter dated 18/3/2005 that "Banks, financial institutions, can hold securities both as investments as well as stock-in-trade". The assessee has nowhere submitted that the amount paid to SBl was for purchase of stock-in-trade or on account of revenue transactions. No concrete evidence was produced by the assessee inspite of being given

Page 31 of 50 repeated opportunities during the original assessment proceedings on 15/2/2005 (vide notice dated 7/2/2005), 2/3/2005, 11/3/2005, 16/3/2005 and 18/3/2005 and subsequently during the reassessment proceedings on 03/08/2010, 12/11/2010 and 30/11/2010 to prove that how the claimed Loss from securities transactions of 1991- 1992 amounting to Rs.1,50,45,32,696/- was a Business Loss and not a Capital Loss. Till date no reply has been received. Sufficient opportunity has been provided to the assessee during the original assessment proceedings, proceedings before Ld. CIT(A) and also during the reassessment proceedings. No fresh evidence has been brought on record tilt date. Thus, assessee has not discharged its onus. Therefore, I hold that this amount of Rs. 1,50,45,32,696/- paid to SBl was on account of a settlement between the assessee and SBl, by an order of Hon'ble Supreme Court and was not a Business Loss on account of securities transactions as claimed by the assessee but clearly a Capital Loss in nature as evident from the facts of the case. D(8) In view of the above discussion and the facts of the case, I disallow the expenditure /Business Loss claimed by the assessee in its Profit & Loss A/c. amounting to Rs. 1,50,45,32.696'- on account of securities transactions of 1991-92 being capital in nature and add back this amount to the returned income of the assessee. I am satisfied that the assessee has made inadmissible claim of expenditure/Business Loss on account of securities transactions of. 1991-92 and has thus suppressed the taxable income. Therefore, penalty proceedings u/s 271(l)(c) of the Income Tax Act, 1961 have been initiated separately for furnishing of inaccurate particulars of its income.

Page 32 of 50 M/s. NHB in favour of State Bank of India (SBI) for securities transactions which were credited to the account of the share broker, Late Sh. Harshad Mehta by SBI after collecting the proceeds of the cheques. It is pertinent to mention here that SBI returned this sum of Rs.707.56 crore to M/s. NHB on 13.6.1992 under protest and SBI also filed a suite no.35 1995 against M/s. NHB in the special court claiming the amount of Rs. 707.56 crores. M/s. NHB also filed the petition before the Hon'ble' Supreme Court against the order dated 04.02.2002, of the special court Mumbai as the Hon'ble Special Court Mumbai gave the decision in favour of SBI. Later on, Ministry of Finance, worked out a proposal to resolve the dispute which was accepted by both SBI and NHB and directed that a sum of Rs. 353.78 crores (being 50% of Rs. 707.56 crores) would be paid by NHB to SBI after appropriating a sum of Rs. 131.20 crores with interest accrued thereon which had been lying with the Special Court. Pursuant to the order of the Hon'ble Supreme Court dated 01.11.2012 (passed after out of court settlement by NHB and SBI), NHB paid a sum of Rs. 150.45 crores to SBI on 17.12.2002 and the appellant claimed this amount of Rs. 150.45 crores as business loss in its P &-L A/c for the previous year relevant to the assessment year under consideration. 11.2 The Assessing Officer also observed that the appellant followed mercantile system of accounting and as per the audit report, showed its income from securities transactions under the head "income from capital gains". It was also noted by the Assessing Officer that the appellant showed short term capital gains of Rs.11.61 crores and long term capital gain at Nil after setting off of brought forward capital losses. In these circumstances vide dated 7.2.2005, a show cause letter was issued by Assessing Officer as under: "Please explain why loss on securities transactions for 1991- 92 should be allowed as expenses in the previous year under consideration as prima facie it appears a loss of capital in nature? Your reply should also contain complete details of the above mentioned loss". Further, vide order sheet entry dated 16.3.2005 the appellant was asked to furnish an explanation as to why loss on security transaction of 1991-92: "Please show cause why loss on security transactions of 1991-92 should not be disallowed as: (a) it was a loss of capital in nature as it was claimed to be given for purchase of securities for which no evidence produced and moreoever, assessee is showing income from security transactions under the head "capital gains" is clearly shows that this is a loss of capita! in nature and cannot be allowed as a business loss and thus as revenue expenditure. (b) the loss is also not related to the previous year under consideration."

Page 33 of 50 11.3 In reply to the same, vide its letter dated 16.3.2005, the appellant submitted as under; "This has reference to various letters on the subject receiving with letter dated 07.02.2005. It is also refers to the discussions had regarding the debit of Rs. 150.45 crores to theP&L A/c: as "Loss insecurities transactions of 1991-92". Particulars regarding it have already been given at SI No. 5(ii) of Schedule-XIH- Notes to the Accounts. The bank had issued certain cheques to State Bank of India during 1991-92 for purchase of securities. The said cheques were credited by SBl to Stock Brocker "Mr. Harshad Mehta" instead of the State Bank. It is in public knowledge that the stock broker Mr. Harshad Mehta did indulge in a number of malpractice during 1991-1992 and the Government had set up a special court to decide the disputes. The present one happens to be one of such disputes in which the assessee claimed Rs. 707.56 crores from SBl. The matter travelled upto the Supreme Court of India. The Hon'ble Supreme Court had directed vide order dated 29.07.2002 (copy enclosed as Annexure-A) that both NHB and SBL being owned by the Government of India/RBl, should not litigate but should settle among themselves on the directions of the Banking Division, Department of Economic Affairs, Ministry of Finance vide letter dated 26th August, 2002 settled the issue (copy enclosed Annexure-BJ. In short the decision was that: a) Both NHB and SBl should bear the loss ofRs. 707.56 crores equally (or Rs. 353.78 crores each. b) A sum of Rs. 131.20 crores deposited by NHB with SBS (State Bank of Saurashtra) on 13.07.1998 in another related dispute would get adjusted with interest @ 12% per annum- towards the present dispute which would be about Rs. 196 crores. c) Both NHB and SBl should pursue the matter before the Special Court and recover from the assets of Mr. Harshad Mehta. Please find enclosed a copy of the terms of settlement dated 3O.10.2002 between NHB and SBl filed before the Supreme Court (Annexure(=). Cajyofthe order of the Supreme court which was passed shortly thereafter, (around November,_ ) will be submitted after obtaining a copy of it from the lawyer/court. the assessee paid Rs. 150.45 crores to SBl during this year. It is submitted that since the liability has occurred in the normal course of business and has got settled by the Supreme Court of India during the year under consideration. It has accrued and arisen this year. It is brought to your kind notice that the assessee has included in its business receipts of a sum of Rs. 113 crores in A.Y. 2002-2003 on the same principle of settlement of a dispute by the Supreme :.; Mint of similar securities transactions of 1991-1992. Your kind attention is invited to the fact that Bank had purchased and sold a number of securities during the year resulting in a gain of Rs. 11.61 crores. These purchases and

Page 34 of 50 sales of securities were under the category of investments available for sales/trading investments. The gains of Rs. 11.61 crores occurring on such transactions have been shown separately and offered for tax-without showing it as a part of profits of housing finance. There have not been set off against B/F long term capital gains." D(4) The authorized representative of the assessee in its letter dated 18/3/2005 had further submitted as under: "Banks, financial Institutions, etc.. can hold securities both as investments as well as stock-in-trade. The assessee (NHB) classifies the investment in securities under "held to maturity" (HTM), available for sale (AFS) and held for trading (HFT). The Resent Bank of India permits the Bunk to change the classification once in a year from one class to another. That cheques/funds ofRs, 707.56 crores belonging to the assessee [NHB) issued in favour of State Bank of India were misappropriated or got credited by Mr Harshad Mehta to his account unauthorizedly and fraudulently in the year 1991-1992. The Bank claimed the amount from the SBI as well as Mr, Harshad Mehta and the matter traveled upto the Supreme Court The Ministry of Finance, Govt of India had, during the current year under consideration at the directions of the Supreme Court decided that the loss on account of unauthorized/fraudulent misappropriation by Mr. Harshad Mehta should be brone equally by SB! and NHB. Further, the amount recovered if any from the assets of Sh. Harshad Mehta, etc., frozen by the Special Court, be shared between SBI and NHB. This was made an order of the Supreme Court in November, 2002 which also falls within the year. The assessee has therefore, correctly claimed it as a loss of this year as it got settled and crystallized in the year under consideration. It did not get settled or finalized in 1991-1992 and any claim of deduction -would not have been allowed as it was sub-judice and -was contingent to the decision of the Courts. It is also brought to your kind notice that the assessee has in A. Y. 2002-2003 admitted a sum of Rs 113 crores as income folio-wing a decision of the Supreme Court in a similar matter If the present claim does not pertain to the year under consideration but to a "prior period" as expressed by your self, then the sum of Rs.113 crores included in A. Y. 2002- 2003 is not to be included on the same ground. Similarly, any sums recovered in future on account of various claims pending in Courts _ would not be includable in income and the department should follow its stand consistently. This letter may be treated as a claim for exclusion of Rs. 113 crores from income of A. Y. 2002-2003 the proceedings for which were also heard simultaneously and the orders have not yet been served on the assessee"

Page 35 of 50 D(5) In the course of current proceedings, the assessee filed the following submissions vide letter dated 3/8/2010 was filed on 12/11/2010 :- "Our pan submission with regard to allowance of expenditure on account of loss on security transaction of 1991-92 amounting to Rs. 150,45,32,696/- 6.1 Regarding the payment ofRs.150,45,32,696/-, it is respectfully submitted that that the assessing officer and learned CIT(A) had held that the loss/payment is clearly of capital nature and cannot be allowed as business loss. 6.2 In this regard, it is respectfully submitted that in case of NHB, purchase/sate of securities is both part of trading activities as well as for investment purpose. Section 14 National Housing Bank Act describes the business of National Housing Bank clause € of the said section states "Buying or selling and dealing in bills of exchange, promissory notes, bonds, debentures, hundies, coupons and other instruments by whatever name called". Thus, it is evident that purchase/sale of securities is also part of the business of National Housing Bank. 6.3 Regarding the transaction is question, assessee, as .a part of its business activity, entered into back to back transactions for purchase of certain securities like Govt. Bonds, IRFC Bonds, Treasury Bills etc. for an aggregate amount of Rs. 707.56 crores (Approx.) in year 1 991 -92 with the State Bank of India (SBI) and sold the same on the same date to other banks and institutions. While on purchase of securities, NHB issued cheques in favour of SBI, however, it was credited to the account of share broker, Shri Harshad Mehta, by SBI, The Banker's receipt evidencing holding of securities on behalf of NHB was not issued by the SBI. When on due date, NHB requested the SBI to reverse the transaction or hand over the securities, SBI denied having any transaction with NHB and informed that the proceeds of the cheques received from NHB in Its name has been credited in the account of its customer as per the instructions of NHB. However, there was no such instructions from NHB to SBI. Subsequently, on intervention ofRBI, SBI returned this sum ofRs.707.56 crore to NHB on 13.06.1992 under protest and filed a case against Harshad S, Mehta for having got wrong credit of the amount in his account. Later on, SBI also filed a suit in the Special Court claiming the amount ofRs.707.56 crores alleging that NHB has entered into such transaction with Harshad Mehta. It is in the public knowledge that the Stock broker, Mr. Harshad Mehta did indulge in a number of malpractices during 1991-92 and then Government had set up a special court to decide the dispute. Thus, the loss of Rs.150 crore is a loss arising out of the business activity of purchase and sale of securities. 6.4 The case between NHB and SBI was resolved with the intervention of the Hon'ble Finance Minister at the behest of the Supreme Court whereby the Joss caused due to non receipt of securities by NHB against the payments made to SBI for the same, was shared 50:50 between NHB and SBI

Page 36 of 50 Therefore, it was decided that a sum ofRs.353.78 crore, being 50% ofRs.707.56 crores would be paid by NHB to SBI NHB in a separate suit had deposited Rs.131.20 crore with the Special Court On 13.07.1 998. As per terms of settlement filed by the . parties in the Supreme Court which was approved by Hon'ble Supreme Court, the amouni of Rs.131.20 crore along with the interest accrued thereon shall be reduced from 353.78 crore and the balance amount shall be paid by NHB to SBI. Pursuant to the order of Supreme Court dated 1.11.2002, NHB paid a sum ofRs.150.45 crore to, SBI on 17.12.2002 after appropriately the sum of Rs. 131.20 crore with interest accrued thereon and the assessee claimed this payment as business loss in its profit and loss account The copy of the order of the Hon'ble Supreme Court, terms of settlement, Supreme Court Record of Proceedings and letter from Ministry of Finance regarding the settlement has been attached for your kind reference. 6.5 From the above facts, it is clear that the loss on these securities was incurred because of non receipt of-securities purchased by NHB from SBl^forwhichthe payment-was made-by-NH£ to SBI in the normal course of business. The said amount was misappropriated by Mr. Harshad ' Mehta with the-help of two employees of NHB, Mr. C. Ravi Kumar and Shri S. Suresh Babu. All the funds management operations were centralized with Shri C. Ruvi Kumar. The bucks up functions were with Shri S. Suresh Babu who reported to Mr. C. Ravi Kumar and acted under -his instructions. These two officers were solely responsible for all the fund management functions including making a deal recording the same preparing and signing BRs, custody of Brs received from counterparties etc. All the above facts has been affirmed by the Janaki Raman Committee, which was an independent committee formed to investigate the possibility of irregularities in funds management. It is also respectfully submitted that the assessee has taken disciplinary action against these officers and even terminated their service. The copy of termination orders are attached for your reference. The loss incurred by NHB due to non receipt of securities being purchased by it which resulted due to fraudulent activities is clearly a trading loss as per section 28 of the Act and should be allowed as business loss. The assessee has placed reliance on,J Allowing judicial pronouncements wherein it ,/s held that embezzlement of funds by wrong/fraudulent deals are allowable as deduction; (a) Badrinath Daga vs. CIT[1958] 34ITR 10 (SC) (b) CIT v. Nainital Bank [1965] 55 ITR 707 (SC) (c) Indian Insurance Banking corporation limited vs. CIT[1963] 50 ITR 123 (Ker) (d) RamachandraShivnarayan vs. CIT[1978] 111 ITR 263 (SC)

In Badrinath Daga vs. CIT[1958] 34 ITR 10(SC)t Hon'ble Supreme Court, while deciding the question whether amount

Page 37 of 50 lost through embezzlement by an employee is a trading loss which could be deducted in computing the pro/its of a business has held that "in deciding whether loss resulting from embezzlement by an employee in a business is admissible as a deduction, what has to be considered in whether it arista; nut nfthe carrying on of the business and is incidental to it Viewing the question as business would, it seems difficult to maintain that it does not A business especially such as is calculated to yield taxable profits has to be carried on through agents, cashiers, clerks and peons Salary and remuneration paid to them are admissible as expenses Incurred for the purpose of the business. If the employment of agents is incidental to the carrying on of business, it must logically follow that losses which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer, and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it.. If a loss by embezzlement can be said to be necessarily incurred in carrying on the trade it is allowable as deduction from profits. I an ordinary case, it springs directly from the necessity of deputing certain duties to an employee, and should therefore be allowed. The said decision was further affirmed by the Hon'ble Supreme Court in the case of CIT vs. Nainital Bank [1965] 551TR 707 (SC). In the case of NHB, the conditions as laid down by Eon 'ble Supreme court for allow ability of trading losses are fulfilled inasmuch as the loss was incurred because of misappropriation of funds by the employees of NHB while performing the duties during the normal course of business, therefore, in the light of above decisions, the losses incurred by NHB are the trading losses and are allowable as deductions while computing the taxable profits. 6.6 Learned AO also disallowed the claim stating that it relates to a prior period and even if held to pertain to this year, it is a capital loss. In this regard it is respectfully submitted that since the liability has occurred in the normal course of business and has got settled by the Supreme Court of India during the year under consideration, therefore the liability is crystallized in the current year, hence shall be considered to be accrued and arisen during the relevant assessment year. In the light of the above submission, it is requested that the payment made by NHB in lieu of settlement relating to security transactions of 1991-92 should be treated as business loss as per section 20 of the Act and deduction should be allowed accordingly.

Page 38 of 50 D(6) It is also important to discuss here the submissions of the assessee filed vide its letter dated 18/3/2005 that it had included a similar sum of Rs. 113crores as taxable, income in the Asstt. Year 2002-03. The AR of the assessee requested that its letter may be treated as a claim for exclusion of Rs. 113 cm res from the income of Assessment Year 2002-03. It clearly shows that assessee itself is not sure on the issue that whether the Loss claimed by it is Capital Loss or a Business Loss in nature and whether the same pertains to previous year under consideration or not. As far as the claim for Asstt. Year 2002-2003 is concerned, it does not relate to the Asst. year under consideration and hence, does not require any comments. However, the claim of. the assessee that Loss on securities transactions for 1991-1992 is similar in nature to the sum of Rs.113 crores for the financial year XWL-20U2 is not correct on facts The assessee itself has submitted vide its letter dated 11/3/2005 during the course of assessment proceedings for the Asstt. Year 2002-2003 that NHB had to deposit a sum of Rs.912 crores with the Supreme Court till the disposal of its appeal by it. It had availed a loan ofRs.700 cores from the RBl for the purpose and had paid interest thereon. As per the order of the Supreme Court the assessee received a revenue of Rs.113 crores (Rs.1025 crores Rs.912 crores) in the financial year 2001-2002, The excess of Rs.113 - crores was shown by assessee as an income and the relevant interest paid amounting to Rs.87 crores on the loan from RBl has been accounted as an expenditure Thus, the assessee has shown an income of Rs.26 crores (Rs.113 crores - Rs.87 crores) only as against the claimed amount of Rs.113 crores. It is ample clear that the facts and nature of the Business Loss claimed at Rs.150.45 crores in the asstt Year under consideration and the amount of Rs.26 crores or Rs.113 crores shown in the Asstt year 2002-2003 are quite different in nature. Moreover, as each assessment year is an independent assessment year as confirmed by the Hon'ble Supreme Court In the case of CIT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC), the Hon'ble Supreme Court has held that there is no estoppels in the Income Tax assessment proceedings. Each assessment is separate and it is incorrect to say that the officer is bound to accept the system of accounting regularly employed by the assessee, the correctness of which has not been questioned in past There is no estoppels in these matters Thus, the' contentions of the assessee are devoid of any merit." 12. After carefully considering the submissions of the appellant, the Assessing Officer stated that the appellant itself accepted that loss was related to transactions pertaining to -purchase of securities/investments and hence the loss in question was on account of purchase of capital asset. Therefore, the loss on securities transactions of 1991- 92 amounting to Rs.150,45,32,696/- was in the nature of the capital loss. The Assessing Officer observed that the loss being capital in nature cannot be allowed as business loss. To say so, the Assessing Officer relied on the judgments in the cases of CIT vs. Hashimara Industries Ltd. (1997) 230 ITR 927 (SC) and CIT vs. Nainital Bank Limited (1965) 55 ITR

Page 39 of 50 707 (SC). The Assessing Officer also noted that the appellant vide its letter dated 16.3.2005 accepted that "the bank has issued certain cheques to State Bank of India during 1991- 92 for purchase of securities". It was also noted by the Assessing Officer that the appellant did not submit anytime that the amount paid to SBI was for purchase of stock-in- trade or on account of revenue transactions it was also stated that despite of giving several repeated opportunities during the original assessment proceedings to prove how it claimed loss from securities transactions of 1991-92 amounting to Rs.150,45,32,696/- as a business loss and not as a capital loss. Since the appellant did not furnished ~any evidence pertaining- to the same despite of affording repeated opportunities, the Assessing Officer held that the amount of Rs. 150,45, 32, 6967-paid to SDI on account of a settlement between the appellant and SB), by an order of Hon'ble Supreme Court was not a business loss and treated it as capital loss and added the same in the returned income as expenditure. 13. In the course of the appeal proceedings, the-AR of the appellant filed the following submissions: "4.1 The learned Assessing Officer while computing the total income of the appellant has disallowed loss ofRs.1,50,45,32,696/- on the contention that the loss/payment is clearly of capital nature and cannot be allowed as business loss. 4.2 In this regard, it is respectfully submitted that in case of National Housing Bank, purchase/ sale of securities is both part of trading activities as well as for investment purpose. Section 14 of National Housing Bank Act describes the business of National Housing Bank. Clause (e) of the said section states "Buying or selling and dealing in bills of exchange. promissory notes, bonds, debentures, hundies, coupons and other instruments by whatever name called. Thus, it is evident that purchase/ sale of securities is also part of the business of National Housing Bank. Copy of the National Housing bank Act, 1987 is already enclosed on pages _ of the paper book. 4.3 Regarding the transaction is question, the appellant, as a part of its business activity, entered into back to back transactions for purchase of certain securities like Govt. Bonds, IRFC Bonds, Treasury Bills etc. for an aggregate amount of Rs. 707.56 crores (Approx.) in year '1991-92 with the State Bank of India (SB!) and sold the same on the same date to other banks and Institutions. The fact that the entire transactions were back to back transactions in itself shows that the transactions were entered into for trading and not with any intention to the hold the same till maturity. Copy of the said letter along with the details of back to back transactions is enclosed on pages of the paper book. Prior to 2002-03, all transactions in securities used to form a pan of the business of NHB. Thereafter in 2002-03, RB1 issued guidelines with regard to categorization of securities as Held for Trading (HFT) and Held to Maturity (HTM). As per RBI guidelines the securities acquired by the bank with the intention to hold them up to maturity have to be classified under Held for Maturity. And the securities acquired by the

Page 40 of 50 bank with the intention to trade by taking advantage of short term price have to be classified under Held for trading. The transaction in question was a back to back transaction, which in itself clears the intention of the bank that it purchased the securities not to hold it till maturity but for a very short period. 4.4 While on purchase of securities, NHB issued cheques in favour of SB/, however, it was credited to the account of share broker, Shri Harshad Mehta, by SB!. The Banker's receipt . evidencing holding of securities on behalf of NHB was not issued by the SB!. When on due date, NHB requested th_e SB! to reverse the transaction or hand over the securities, SB/ denied having any transaction with NHB and informed that the proceeds of the cheques — received from NHB in its name has been credited in the account of its customer as per the instructions of NHB. However, there were no such instructions from NHB to SB!. Subsequently, on intervention of RBI, SB/ returned this sum of Rs.707.56 crore to NHB on 13.06.1992 under protest and filed a case against Harshad S. Mehta for having got wrong credit of the amount in his account Later on, SBl also filed a suit in the Special Court claiming the amount of Rs. 707.56 crores-alleging that NHB has entered Into such transaction with Ilarshad Mehta.-4t is in the public knowiedqe that the Stock broker, Mr. Harsilad Mehta did indulge in a number of malpractices during 199 "192 and then Government had set up a special court to decide the dispute. Thus, the loss ofRs. 150 crore is a loss arising out of the business activity of purchase and sale of securities. 4.5 The case between NHB-Qnd SB! was resolved with the intervention of.the Hon 'ble Finance Minister at the behest of the Supreme Court whereby the loss caused due to non receipt of securities by NHB against the payments made to SB! for the same, was shared 50:50 bctivccn NHB and SB! Therefore, it was decided that a sum ofRs. 353.78 crore being 50% ofRs. 707.56 crores would be paid by NHB to SBl NHB in a separate suit had deposited Rs.131.20 crore with the Special Court On 13.07.1998. As per terms of settlement filed by the parties in the Supreme Court which was approved by Hon'ble Supreme Court, the amount of Rs.131.20 crore along with the interest accrued thereon shall be reduced from 353.78 crore and the balance amount shall be paid by NHB to SBL Pursuant to the order of Supreme Court dated 1.11.2002, NHB paid a sum of Rs.150.45 crore to SBI on 17.12.2002 after appropriating the sum ofRs. 131.20 crore with interest accrued thereon and the appellant claimed this payment as business loss in its profit and loss account The copy of the order of Hon'ble Supreme Court, terms of settlement, Supreme Court Record of Proceedings and letter from Ministry of Finance regarding the settlement has been enclosed on pages of the paper book, 4.6 From the above facts, it is clear that the loss on these securities was incurred because of non receipt of securities purchased by NHB from SBI for which the payment was made by NHB to SBI in the normal course of business. The said amount was misappropriated by Mr. Harshad Mehta with the help of two employees of NHB, Mr. C. Ravikumar

Page 41 of 50 and Shri S. Suresh Babu AHlhe funds management operations were centralized with Shri C. Ravikumar. The back up functions were with Shri S. Suresh Babu who reported to Mr. C. Ravikumar and acted under his instructions. These two officers were solely responsible for all the fund management functions including making a deal recording the same, preparing the vouchers, preparing the cheques, signing the cheques (as one of two signatories), preparing and signing BRs, custody of BRs received from counterparties etc AH the above facts have been affirmed by the janaki Roman Committee, which was an independent committee formed to investigate the possibility of irregularities in fund management It is also respectfully submitted that the appellant has taken disciplinary action against these officers and even terminated their service. The copy of termination orders are enclosed on pages of the paper book. The loss incurred by NHB due to non receipt of securities being purchased by it which resulted due to fraudulent activities is clearly a trading loss as per section 28 of the Act and should be allowed as business loss. The appellant has placed reliance on following judicial pronouncements wherein it is held that embezzlement of funds by wrong/fraudulent deals are allowable as deduction: (a) Badridas Oaga v CIT [1958) 34ITR 10 (SQ (b) CIT v. Nainital Bank [1965) 55 ITR 707 (SQ (c) Indian Insurance Banking corporation limited v. CIT [1963] 50 ITR 123 (Kerala) (d) (d) RamachandraShivnarayanv. CIT[1978]111 ITR263(SC) (e) CITv. Smt, Pukhraj Wati Bubber [2008] 296 ITR 290 (Punjab & Haryana) In Badridas Daga v. CIT (1958) 34 ITR 10, the Hon’ble Supreme Court, while deciding the question whether amount lost through embezzlement by an employee is a trading loss which could be deducted in computing the profits of a business, has held that “in deciding whether loss resulting from embezzlement by an employee in a in a business is admissible as a deduction, what has to be considered is whether it arises out of the on of the business and is incidental to it. Viewing the question as business would, it seems difficult to maintain that it does not A business especially such as is calculated to yield taxable profits has to be carried on through agents, cashiers, clerks and peons. Salary and remuneration paid to them arc admissible as expenses incurred for the purpose of the business. If the employment of agents is incidental to the carrying on of business, it must logically follow thai fosses" which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position..-as- such employee and misappropriating the funds of his employer, and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it. If a loss by embezzlement can be said to be necessarily incurred in carrying on the trade it is allowable as deduction from

Page 42 of 50 profits. I an ordinary case, it springs directly from the necessity of deputing certain duties to an employee, and should therefore be allowed. The said decision in the case of Badridas Daga v. CIT (supra) was further affirmed by Hon'ble Supreme Court in the case of CIT v. Nainital Bank [1965] 55ITR 707. In this case the assessee was carrying on a business of banking wherein retention of money in the bank IS a part of the operation of banking. There is, thus, an ordinary risk of embezzlement, theft, dacoity or destruction by fire and such other things. Therefore, it was held that the loss of cash by dacoity is an admissible deduction while computing the assessee's income in a banking business. In Indian Insurance Banking corporation limited v. CIT [1963]SO ITR 123, the Hon'ble Kerala High Court held that embezzlement of cash by an employee of one of the branches of the assessee bank is a loss incidental to the business of banking and is a deductible expense It was also held-that the fact the money was not taken during office hours is irrelevant The assessee, in the case of Ramachandra Shivnarayan v. CIT[197B) 111 ITR 263, is a registered firm carrying on the business in gold, silver and gunnies. It also derived income from investment in Government securities. In the ordinary course of business of purchasing Government securities, there was loss on account of theft committed by some stranger The Court stated that if there IS a direct and proximate nexus between the business operations and the loss or it is Incidental to it, then the loss is deductible because without the business operation and doing all that is incidental to it, no profit can be earned. The decision in the case of Ramachandra Shivnarayan v, CIT (supra) was further affirmed by CIT v. Smt Pukhraj Watt Bubber [2008} 296 ITR 290, wherein the Hon 'ble Punjab and Haryana High Court held that loss occurring to the assessee on account of embezzlement of money by a recovery agent, is incidental to the carrying on the business and has a direct and proximate connection with the business operation of the assessee. Therefore, the same is allowable as deduction. Copy of the aforesaid judgments has been enclosed on pages of the paper book. In the case of NHB, the conditions as laid down by the Hon'ble Supreme court for allowability of trading losses are fulfilled inasmuch as the loss was incurred because of misappropriation of funds by the employees of NUB while performing the duties during the normal course of business, therefore, in the, light of above decisions, the losses incurred by NHB are the trading losses and are allowable as deductions while computing the taxable profits 4.7 The learned Assessing Officer also disallowed the claim stating that it relates to a prior period and even if held to pertain to this year, it is a capital loss. In this regard it is respectfully submitted that since the liability has occurred in the normal course of business and has got settled by the Supreme Court of India during the year under consideration, therefore the liability is crystallized in the current year, hence shall be considered to be accrued and arisen during the relevant assessment year.

Page 43 of 50 4.8 The learned Assessing Officer in his order has taken reference of submissions made by the appellant during the original assessment that profit on account of similar security transaction in Assessment Year 2002-03 amounting to Rs.113 crorc was considered as business income by the appellant and if learned Assessing Officer in the Assessment Year 2003-04 considers losses on similar transactions as capital losses, then the appellant should be allowed exclusion of Rs.113 crore from the business income of Assessment Year 2002-03 The above contention was raised by the appellant for the reason that department cannot change its stand on year to year basis though the appellant has never changed its contention and has always maintained that the said profits/ losses on the facts of the case is a business profit/loss in the submission filed by the appellant on the subsequent assessment proceedings, the appellant did not raise the above contention because the income for the assessment year 2002-03 was considered to be exempt by the Hon'ble IT AT; hence the question of treating Rs.113 crore as business income or capital gain income does not arise It is respectfully submitted that the appellant has not changed its contention rather has given the submission based on the facts. Further. Learned Assessing Officer was not justified in stating that the assessee has not filed the reply of show cause notices without considering the detailed explanation filed by the assessee vide letter dated 3.8.2010 No further information was called for by the learned assessing officer. 4.9 In the light of the above submission, it is requested that the payment made by NHB in lieu of settlement relating to security transactions of 1991-92 should be treated as business loss as per section 28 of the Act and deduction should be allowed accordingly." 14. I have carefully considered the written submissions filed by the appellant and perused the Assessing Officer's order dated 9.12.2010 and also the details submitted in the paper book. I also perused the citations of the case laws submitted and relied upon the appellant as well as the Assessing Officer and position in law. The appellant in its submissions has contended that loss on securities was incurred due to the non-receipt of' securities purchased by NHB from SBI for which the payment was made by NHB to SBI in the normal cause of carrying on of its business. 14.1 It was stated by the appellant that the amount was misappropriated by Sh. Harshad Mehta with the help of two of its employees, who were responsible for fund management functions of NHB including the making of detail, preparation of vouchers, signing the cheque, custody of books etc. The appellant has contended that the loss on securities was incurred by NHB due to non receipt of securities purchased by it from SBI which arose due to fraudulent activities of late Sh. Harshad Mehta in connivance with its two employees is a trading loss in terms of section 28 of the IT Act and deserves to be allowed as business loss. The appellant cited a number of judgments to plead that the embezzlement of funds by wrong/fraudulent acts of employees is an allowable deduction. The Assessing Officer has held that the

Page 44 of 50 appellant no where during the course of the assessment proceedings i.e. either during the original assessment proceedings or during the re-assessment proceedings, contended that the amount paid to SBI was for purchase of stock-in-trade for business purposes. Despite of repeated opportunities given by the Assessing Officer, the appellant has failed to justify as to how the loss of Rs.150.45 crore was a business loss. All the above facts were confirmed by Janki-Raman Committee, an independent committee formed to investigate the issue of irregularity in fund management. 14.2 On perusal of the material on record, I find that the issue in question arose due to the transactions which NHB had Hastened into for purchase of certain securities government bonds, IFRC bonds, treasury bills etc. for an aggregate amount of Rs.707.56 crore in 1992 through State Bank of India and sold the same on the same date to other banks and institutions. The NHB issued cheques in favour of SBI. However, the same were credited fraudulently to the account of the share broker late Sh. Harshad Mehta by SBI. M/s. SBI did not issue the normal bankers receipts evidencing the holding of securities on behalf of NHB on the due date when NHB requested the SBI to reverse the transactions or hand over the securities to it, SBI denied having any such transactions with NHB and informed that the proceeds of cheques of Rs.707.56 crores had been credited to the account of its customer as per the instructions of NHB. There was no such instruction issued by NHB to SBI. Subsequently on intervention of the Reserve bank: of India SBI paid the sum of Rs. 707.56 crores to NHB on 13/06/1992 under protest and filed a case against late Sh. Harshad S. Mehta-for having got wrong credit of the said amount and SBI also filed a suit no. 35 of 1995 against NHB in the special court. 14.3 The Ministry of Finance worked out proposal to resolve the dispute which was accepted both by SBI and NHB and directed that 50% of the amount was to be borne both by NHB and SBI after appropriating the sum of Rs. 131.2 crores along with interest accrued thereon which had been lying with the special court. M/s. NHB had paid a sum of Rs. 150.45 crores to SBI on 17112/2002 and has claimed this amount of settlement of Rs. 1 ,50,45,32,698/- as business loss. 14.4 The appellant has itself admitted during the course of assessment proceedings that the bank can hold securities both for trading activities and for investment purpose and that the bank had issued certificate, to State Bank of India during 1991-92 for purchase of securities. The appellant has nowhere been able to justify or state that the amount paid to SBI was on revenue account. The appellant has submitted that the amount paid for securities was in the ordinary course of business of the appellant. It has cited the provisions of National Housing Bank 1987 wherein, in the objectives the purchase of shares bonds etc has been mentioned. The appellant has contended that the business of National Housing Bank among other financing activities included the following

Page 45 of 50 "Buying or selling and dealing in bills of exchange, promissory note, bonds, debentures, handles, coupons and other instruments by whatever name is called" The appellant has submitted that the purchase of shares and securities was the normal business of the bank: and any loss arising on its sale should be allowed as a business loss. The assessing officer has disallowed loss on securities transactions of Rs.1,50,45,32,696/-on the contention that it was capital in nature. 14.5 The assessing officer after narrating the above facts in the body of the assessment order further held that the appellant itself accounted its income from securities transaction under the head income from capital gains. As per the audit report submitted in the course of assessment proceedings, the appellant stated that it followed mercantile system of accounting. The assessing officer stated that in the current year itself the appellant had shown income from long term capital gain amounting to Rs.11.61 crores. The submission of the appellant during the course of the assessment proceedings and before me was that it is a normal trading loss which has accrued on account of mal practice adopted by Harshad Mehta which is in public knowledge. 14.6 The appellant in his submissions during the assessment proceedings, argued, the crux of which is that it was the Hon'ble Supreme Court's order on the basis of which 50% of the 707.56 crores was to be borne by each of the parties namely NHB and SBI. 14.7 I have carefully considered the submissions of the appellant and unable to find merit in the contention of the appellant. The appellant itself has accepted that the loss was on account of transactions for purchase of securities/investments, thus, the loss in question was for purchase of capital asset. Therefore, the loss on securities transactions of 1991- 92 amounting to Rs.150,45,32,696/- is of a capital nature which cannot be allowed as a business loss. This principle has been duly affirmed by the Hon'ble Supreme Court in the case ot Hasimara Industries Ltd vs. CIT (1997) 230 ITR 927 (SC), and in the case of GIT, Uttar Pradesh vs. Nainital Bank Limited (1965) 55 ITR 707 (SC). The assessee has itself accepted vide its letter dated 16/03/2005 that “the bank has issued certain cheques to State Bank of India during 1191-92 for purchase of securities. “The assessee has further made a general statement vide its letter dated 18.03.2005 that “Banks, financial, institutions, can hold securities both as investments as well as stock in trade.” 14.8 No concrete evidence was produced by the appellant inspite of being given repeated opportunities during the original assessment proceedings on 15/02/2005 (vide notice dated 07/02/2005), 2/03/2005, 11/03/2005, 16/03/2005 and 18/03/2005 and subsequently during the reassessment proceedings on 03/08/2010, 12/11/2010 and 30/11/2010 to prove that how it claimed loss from securities transactions of 1991-1992 amounting to Rs.1,50,45,32,696/- was a business loss and not a capital loss. No fresh evidence has

Page 46 of 50 been brought on record till date. The appellant's argument that it had made payment of Rs.707.56 crores for purchase of securities for stock in trade is not acceptable as the appellant had neither produced any evidence before the assessing officer during original assessment proceedings nor during the reassessment proceedings and also nor before me to establish that the payments made to SBI was on account of purchase of stock in trade. Thus, appellant has not discharged its onus. Therefore, I hold that this amount of Rs.1,50,45,32,696/- paid to SBI was on account of a settlement between the appellant and SBI, by an order for the Hon'ble Supreme Court and was not a revenue loss. 14.9 The appellant had paid Rs.707.56 crores to SB! for purchase of securities but had not received any amount from any single party with whom appellant had entered into back to back sale agreement. The appellant had also not furnished details/documents to justify as to what happened with respect to sale contract entered with other parties as the appellant had not received securities from SBI on the due date. The appellant to claim the security loss as revenue loss has further argued that it had returned profit of Rs.113 crores on similar securities transaction as business income in the assessment-year2002-03. It has argued that department cannot change-its stand the year to year basis. However the Assessing Officer in para D (6) of his order as correctly stated that the claim of the appellant that loss on securities transaction of 1991-92 is similar in nature of Rs.1 13 crores is not correct on facts. The income returned by the appellant of 113 crores has arisen on account of interest which is chargeable to income and relates to a different year. The argument of the appellant does not help it to claim security transaction as a business loss, in view of which the loss claimed by the appellant is not allowed as business loss. In the result of the aforesaid discussion, this ground of the appellant is rejected and the addition made by the Assessing Officer on account of the securities transaction amounting to Rs. 1504532696/- is sustained and confirmed.”

Page 47 of 50 Schedule XIII of the balance sheet wherein it is mentioned that this amount was related to security transaction of National Housing Bank during 1991- 92. The assessee issued cheques aggregating to Rs. 707.56 crores to State Bank of India for purchase of securities , which were credited to the account of one share broker Shri Harshad Mehta. Further, as securities were not made available to the assessee the above cheque was returned by State Bank of India on 13.06.1992 and State Bank of India filed a suit against the assessee for above sum. The assessee also filed a petition before the Hon'ble Supreme Court against the order of special court. Later on, Finance Ministry worked out a proposal to resolve the above dispute and accordingly directed the assessee to pay 50% of sum amounting to Rs. 353.78 crores to SBI. Meanwhile, the interest of Rs. 131.20 cores was also appropriated and assessee paid a sum of Rs. 150.45 crores to State Bank of India on 17.12.2002 and it was claimed as a business loss in profit and loss account for the previous year under consideration. The assessee before the Assessing Officer claimed the above amount as deduction as loss on securities transaction. The ld Assessing Officer stated that the above loss is in capital nature for which no evidence was produced and further the loss was also not related to the previous year under consideration. The facts emerging from the assessment order is that the assessee had issued cheque to State Bank of India for purchase of securities, which was credited to the account of stock broker Shri Harshad Mehta. The ld Assessing Officer has mentioned in para No. D7 that despite several opportunities the details of loss has not been provided. Before the ld CIT(A) similar arguments were advanced and vide para No. 14.8 the claim of the appellant was dismissed. the claim of the assessee that in AY 2002-03 the assessee has earned business income on securities and same was accepted. Therefore this security loss should also be considered as revenue loss is devoid of merit because of peculiar facts for this year as assessee has lost money due to scam of Shri Harshad Mehta. It is further important to read Note No. 16 of the Notes on accounts to the Annual accounts of the assessee for the year ended on 31.03.2007. “16. Security Transactions of 1991-92 16.1 A sum of Rs. 237.20 crore appearing in the Balance Sheet under the head “other Liabilities” includes a sum of Rs. 237.6 crores representing the decreed amount received from State Bank of Saurashta (SBS) in a suit filed by NHB. This amount will be adjusted on final disposal of the appeal filed by the SBS and NHB in the Supreme Court. 16.2 The sum of Rs. 149.37 crores appearing in the Balance Sheet under the head “Other Assets” represents the sum

Page 48 of 50 of Rs. 95.40 crore paid by the Bank to SBS During the 19961-92 for purdahse of securities and Rs. 53.97 crores paid by the Bank of the custodian pursuant to be orders of the special court. Both the amounts and interest thereon, if any, will be adjusted on final disposal of the appeal filed by the SBS and NHB ini the Supreme Court. 16.3 A sum of Rs. 40.25 cores was appearing in the books of NHB as unclaimed amount since 1991-92. While passing a decree in the year 1999 in favor of NHB in the above suit against SBS, the special Court noted this fact and directed NHB to deposit a sum of Rs. 40.22 cores with the custodian, which was duly deposited. Provisions of Rs. 35.29 cores for interest has been made on the above sum from 1991-92 till date of deposit with the Custodian and thereafter on the difference amount of Rs. 0.03 croes. It is being shown under the head “other liabilities” and will be adjusted on final disposal of the appeal pending in the Supreme Court as referred above. 16.4 The disputes between NHB and SBI and NHB & Grindlays Bank have been settled and no claim exists between the parties against each other, however, any money to be received from the assets of the late Sh. Harshad Mehta by SBI and Grindlays Bank in accordance with the decrees passed in their favour by the special court will be shared by them with NHB in the agreed manner and will be a accounted for on actual receipt.” 34. In view of above notes on accounts it is also necessary to record a clear cut finding by looking at the annual accounts of the company when such losses have been accrued to the assessee in accordance with the accounting standards applicable to the assessee. Therefore, in our view if the loss is arising to the assessee during the course of the business then same shall be allowable to the assessee in the year in which it is incurred. In the present case the lower authorities have viewed it as loss arising on purchase of securities but in fact there is no information about whether the securities were at all purchases by the assessee or not. if the assessee has lost sum paid by it for purchase of security i.e. advance for security and the same has been lost then it would be business loss allowable in the year in which it is incurred. It is undoubtedly this money has been lost by assessee in Shri Harshad Mehta scam. This aspect is also required to be examined with respect to the provisions of National Housing Bank Act wherein section 14 of that act provides nature of business it can carry on. In view of the above facts it is necessary to examine whether the assessee has incurred loss on account of securities transactions entered transaction or it is a case of loss of advances given by the assessee for purchase of securities. If the transaction of securities are backed by physical possession of security notes or securities in Demat form then only it can be considered as loss on

Page 49 of 50 transaction in securities. If it is advance given by the assessee for the purchase of security and lost then it may be considered as business loss provided same is incurred during the course of the business of the assessee. If the same is incurred during the course of the business of the assessee then same shall be allowable as revenue loss in the year in which it is incurred. In the present case it is not available before us that assessee was engaged in business of trading of the securities for which money was paid to the state bank of India. As the assessee itself claims that it is managing two portfolios of securities: one as trader and another as investor then if the funds were given for purchase of securities which are to be held as stock in trade then it can be considered as allowable loss and if it is given for the purpose of purchase of securities to be held as investor it cannot be allowed as business loss. Furthermore, if the loss is held to be business loss then it can be allowed only in the year in which it is incurred. As the reason for the loss is Shri Harshad Mehta Scam it also needs to be examined whether the loss is allowable in the year it is detected or in the year in which it crystallized. All these issues needs to be examined afresh along with the year incurring of the loss. In view of this we set aside the whole issue to the file of ld Assessing Officer to reexamine the claim of allowability of the loss of the security transaction during the year. In the result ground No. 8 of the appeal of the assessee is allowed with above direction. 35. Ground Nos. 9 and 10 of the appeal of the assessee are general in nature and no arguments were advanced before us therefore, they are dismissed. 36. In the result appeal of the assessee in ITA No. 1512/Del/2013 for AY 2003- 04 is partly allowed. 37. Now we come to the appeal of the assessee for AY 2004-05 in ITA No. 1513/Del/2013 wherein ground No. 1 to 7 are with respect to claim of deduction u/s 36(1)(viii) amounting to Rs. 70,00,00,000/-. In view of our decision in ITA No. 3704/Del/2010 for AY 2007-08 wherein we have held that assessee is not entitled to deduction u/s 36(1)(viii) prior to AY 2010-11 and therefore, following decision we dismiss ground No. 1 to 7 of the above appeal of the assessee for AY 2003-04. 38. The ground No. 8 of the appeal of the assessee is with respect of allowability of long term capital loss of Rs. 335298304/- to be carried forward. 39. We have carefully considered the above ground and also perused the grounds of appeal filed before the ld CIT(A). On reading of the assessment order the item No. iii of paragraph vi of the Assessment order the ld Assessing Officer has considered and held that long term capital loss to be

Page 50 of 50 carried forward is Rs. 335298304/-. Therefore, we do not find any reason for the assessee to be aggrieved on this count. In the result the ground No. 8 of the appeal is dismissed. 40. Ground No. 9 and 10 of the appeal of the assessee are general in nature and therefore same are dismissed. 41. In the result, appeal of the assessee for AY 2004-05 in ITA No. 1513/Del/2013 is dismissed. 42. In the result the appeals of the assessee for AY 2003-04 to 2009-10 are disposed off accordingly. Order pronounced in the open court on 14/02/2017. -Sd/- -Sd/- (KULDIP SINGH) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:13/02/2017 A K Keot Copy forwarded to 1. Applicant 2. Respondent 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, New Delhi