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order of the of the CIT(A)- Mumbai,has filed the present appeal.Assessee- company,engaged in the business of merchant banking, leasing, investment and investment management, filed its return of income on 29.12.89 ,declaring income of Rs.5.48 crores.The Assessing officer(AO)completed the assessment on 31.03.89 u/s.143(3)of the Act,determining its income at Rs.9.04 crores. 2.Vide its letter dated 21.11.2012,the assessee had filed additional evidence in form of a paper book containing 29 pages.It was stated that at the time of filing of appeal before the Tribunal it was advised by the Counsel to file the documents.During the course of hearing before us, it was argued by the Authorised Representative that documents produced were vital to decide the issues raised by the assessee and were not considered by lower authorities. i.The Departmental Representative(DR)opposed the admission of new evidences.We have gone through the documents and find that same would be very helpful in adjudicating the appeal before us,that as per the order of the CIT(A),he had not admitted certain documents produced during appellate proceedings.Considering the peculiar facts and circumstances of the case,we are of the opinion that additional evidences should be admitted,as same would be useful to decide the issues raised in appeal. ii.During the course of hearing before us,the AR stated that the assessee was not interested in pressing Ground no.13 in absence of details.Hence,we dismiss Ground 13,as not pressed. 2.1.First effective Ground of appeal(GOA.1-7)is about disallowance of depreciation and invest -ment allowance on assets leased out by the assessee to Indodem Industries Ltd.(IIL)
9044/M/92(89-90) SBI Capital Markets Ltd. and Foremost Industries (I)Ltd.(FIIL).During the assessment proceedings,the AO found that the assessee had purchased assets worth Rs.1.64 crores and had leased out same to FIIL, Saharan -pur,that assets worth Rs.1.34 crores were leased out to IIL,Muzaffarnager, that the lease agreements between the assessee and FIIL and IIL were entered into on 28.06.1988, that various suppliers gave quotation to the lessees for purchase of certain equipments/machinery, that the assessee advanced loans to FIIL and IIL,that the letters of orders to supply the machinery to both the lessees were issued from the Bombay Office of the assessee.
The AO asked the DDIT,Delhi and ADIT-Meerut to conduct enquiries and make verifica - tions about the assets supplied by the manufactuers to FIIL and IIL.As per the AO the enquiries made by the DDIT Delhi revealed that most of the suppliers did not exist at the given addresses or the addresses were not correct .Vide his letter,dt.20.2.92,the AO informed the assessee that summons issued by the AO of IIL and FIIL to 13 parties were received back un-served by the postal authorities with the noting that ‘the concerns did not exist at the given addresses’.Similarly vide his letter,dtd.02.03.92,he infirmed the assessee about the enquiries carried out by ADIT.He directed it to prove genuineness of transaction in respect of supplies made by the 13 concerns and which were shown to have been leased out to both the lessees along with the proof of the genuineness of the price of the assets.After considering the letters of the assessee,dtd.24.01.92 and 04.02.1992,the AO observed that the assessee had furnished copies of certificates issued by Aggarwal and Associates, CA.s New Delhi, certifying that IIL and FIIL had placed order to the supplier for fabrication and supply of the equipments, that the cost estimates were discussed with the technical staff of the companies, that the value of the equipments, as per the given specifications when completed would not be less than the figures quoted. The AO held that the assets were not verified and inspected by the assessee at the time of purchase, that it merely relied on the certificate of the CA,that the CA had stated before the departmental authorities that certificates were issued on the basis of cost estimati- on produced by IIL and FIIL,that assessee had released payment without any basis, that it had not taken help of any qualified valuer to value the assets,that it had not verified about the existence of equipments before releasing the funds,that all the invoices were raised on 29.6.88, that the sequence of events proved that it was a pre-planned affair,that the final invoices were never received by the assessee, that the suppliers of the goods did not send delivery challan of excise gate passes to the assessee, that both the lease agreements were 9044/M/92(89-90) SBI Capital Markets Ltd. signed by K.C Jain,G.M Finance,that indeminity bonds were signed by H.S. Jalan, Chairman, that suppliers had sent equipments directly to the business premises of the lessees, that the payment had been made after the supplies had been affected.He further observed that that out of total 15 suppliers 14 were not traceable at the given addresses,that the summons by Registered Post had returned unserved that on the spot enquiry made at certain places revealed that the supplier did not live at the addresses given,that one supplier traced by department denied to have received any amount from the assessee,that most of the bank accounts were introduced by authorised signatories of the lessees,that money deposited through drafts/cheques had been withdrawn by the employee of the lessees,that both the lessess had common addresses and chairman ,that there was no evidence of fabrication of machines at the sites of the lessees,that assessee had not stamped receipts for payments made by it, that it had not inspected the assets at the time of purchase, that the value had also not been verified by any valuer,that money had been given back to the lessee,that inspection report of the assessee for the month of March and May,1989 were incomplete,that the report for that period did not show purchase of machinery,that merely issue of cheque /drafts in favour of some parties would not prove the genuineness of the transaction, that the alleged purchase of machinery by an assessee from various suppliers and giving them on lease to IIL and FIIL was merely an eyewash, that the transaction in question was not genuine, that the ownership of the assessee on the assets was not tenable,that the assessee could have legal title on the assets only if there was a seller having a legal title,that in the case under consideration the sellers were not existing,that ownership of the assets was not established, that the assessee was not entitled to depreciation and investment allowance.He further held that money advanced by the assessee to various suppliers which was received by the lessees had to be considered as a loan by it to IIL and FIIL,that the receipts by the assessee from the lessee had to be taken as interest received.
2.2.Aggrieved by the order of AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,the assessee filed additional evidences including an inspection report of the assets.The FAA observed that those papers were not filed before the AO and no specific prayer had been made for their admission under Rule 46A of the Income-Tax Rules,1962(Rules).The FAA was of the view that papers could not be admitted as additional evidences as the assessee could not specify the particular clause of Rule 46A of the Rules
9044/M/92(89-90) SBI Capital Markets Ltd. under which those documents could be admitted.Finally, he did not admit the additional evidences.
2.3. The assessee made elaborate submissions before him.After considering the assessment order and submissions of the assessee,the FAA held that AO had confronted the assessee with all the material which was in his possession,that the local enquiries indicated that suppliers did not exist at the addresses given, that it was for the assessee to produce complete evidence in support of purchase bills, that assessee had to establish that certain machineries were purchased and were leased out,that it did not make any serious effort to meet the adverse inferences confronted by the AO from time to time,it wanted to rely on purchase bills,that assessee had not produced any of the suppliers of the machinery,that it could not get away by merely saying that it should get an opportunity to cross examine all the persons who might have been contacted by the department, in the course if local enquiries,that AO had not violated any principle of natural justice,that the assessee did not contest any of the observa - tions of the AO about withdrawal of money by the employees of the lessees or evidence of fabrication of the machines at the sites of the lessees, that mere existence of a bank account in the name of a party did not establish its existence, it had not produced proper receipts from the manufacturers regarding receipt of the cheques,that the totality of the circumstances was that parties in question were not genuine,that the only traceable party had denied the transact -tion,that the assessee had not come forward with any positive evidence to rebut the material gathered by the AO,that the employees of the lessees had withdrawn the money from the bank accounts,that the assessee had failed to rebut the circumstantial evidence brought on record by AO to prove the real character by the purchases.Existence of bank account and purchase bills could not establish the genuineness of the transaction,that assessee had claimed depreciation on the assets that it cannot say that it merely signed the documents, that it was difficult to believe that the lesser of costly plant and machinery would merely rely on the word of lessees regarding installation/fabrication,that the mere existence of plant and machinery at later date could not establish the claim of the assessee that the assets in question were purchased from sources claimed or were installed/fabricated at the time in a manner claimed by the assessee,that the assessee had filed a vague explanation regarding absence of delivery challans,that receipt by lessees could not be treated as receipt by the suppliers of the assets,that there was no evidence that the suppliers had authorised the lessees to receive the cheques, that mere operation of a bank account could not establish either the genuineness of 9044/M/92(89-90) SBI Capital Markets Ltd. account holder or the genuineness of the transaction,that no assessee would disburse such huge amounts without actually inspecting the assets, that the earliest inspection reports were of May,1989 and March 1989,that the reports could not substantiate the claim of the assessee that plant and machinery in question were installed by June 1998, that the assessee had produced insurance policies about the assets, that the policies at a later date could not prove the installation of machinery by June,1988,that entry in the balance -sheet about the assets could not prove that purchases in question were genuine, that the assessee could not prove its claim regarding depreciation and investment deposit allowance in respect of certain assets, that the AO had rightly rejected the claim made by the assessee, that there was nothing on record to indicate that lease rent shown in the books was not a revenue receipt.
2.4.During the course of hearing before us,the Authorised Representative(AR) argued that existence of the leased assets and their ownership was proved beyond doubt before the departmental authorities,that on default of by the lessees the assessee had filed winding up petition before the Hon’ble Bombay High Court,that as per the request made by it the Hon’ble court had appointed a Court Receiver(CR)to take possession of the machinery,that the CR took symbolic possession of the assets also,that the assets in question were in existence and the assessee held ownership rights in the same,that the action of the AO and the FAA-in denying depreciation on the said leased assets on the ground that the assets did not exist- was not justified,that both had observed that the CR had not certified that the assets found at the time of inspection were in fact supplied by the assessee,that there was no proof that the lessees had acquired the assets from some undisclosed sources.He further contended that the assessee did not issue any bearer cheque and in fact had issued bank Drafts to the suppliers from whom the assets in question were purchased,that it had no control over the manner of utilisation of the funds after the draft was deposited into the bank accounts of the suppliers,that the assessee had already furnished copies of all the insurance policies obtained for the leased assets during the course of the assessment proceedings,that there were typogra -phical error in the copies of the insurance policies,that the assessee had also requested the AO to give an opportunity to cross examine the persons whose statements have been relied upon by the AO,that the assessee had requested the AO to obtain the current addresses of the suppliers from the bank account details available with him,that during the course of the assessment proceedings it had requested the AO to visit the premises of the lessees to verify the physical existence of the leased assets,that in response to the show cause Notices of 9044/M/92(89-90) SBI Capital Markets Ltd.
02.03.1992 and 18.03.1992 issued by the AO,the assessee vide its letters dated 13.03.1992 and 21.03.1992 filed detailed submissions/explanations vis-a-vis all the suppliers as mentioned by the AO in his show cause notice.He referred to page Nos. 312 to 361,369 to 385 of the PB in support of his said submission.He further stated that all the details were also filed before the AO/FAA in the subsequent years.He referred to the appellate order 28/09/ 1994 of the FAA for the AY.1990-91 and assessment Order of the AO for the AY.1991-92 in that regard,that the departmental authorities had neither approached the suppliers of the assets nor had to gone to the lessees premises for verification of existence of the asset,that the High Court proceedings,including the report of the CR,were primary evidence to show existence of the assets. The AR relied upon the decision of I.C.D.S. Ltd.(350 ITR 527) of the Hon’ble Apex Court and contended that the Hon’ble Court had held that the assessee was entitled to claim depreciation since it was the owner of the assets so leased.
2.4.1.The Departmental Representative(DR)argued that the assessee had issued bearer cheques to the employees of the lessees,that one of the insurance policy document stated the period of insurance as 19.07.1988 to 18.07.1988,that in the inspection reports,there were few instances where the insurance details were not mentioned/were incomplete,that as per the inspection report of the inspector some of the assets were not available on the spot,that the officers making inspection had stated that inspection of some assets was not possible since they formed an integral part of another asset/ were fitted inside a big plant.Further,it was also argued that the inspections were not carried out by a technical expert, that the suppliers were non-existing,that there was no evidence for manufacturing or erection,that evidence about vat or sales tax number of the manufacturers were not made available ,that the bank accounts of the alleged manufacturers by the lessees or their employees,that funds flowed from suppliers’ accounts either to accounts of the lessees or the accounts of the milk vendors,that all those discrepancies were found during the investigation done about the suppliers of the machinery at the time of assessment,that the assessee was relying upon the Court proceedings,that the Inspection Report and symbolic position by the CR did not prove beyond doubt the existence of the very assets leased out by the assessee as claimed,that the Hon'ble High Court had not held that the assets belonged to assessee,that the AO even on his visit at the site could not have been found the assets as reported in Inspection report, that most of the assets could not be seen by the Inspecting Team,that lessee companies had taken a part of plant/machinery instead of the entire plant & machinery,that the Inspection report and note enclosed clearly
9044/M/92(89-90) SBI Capital Markets Ltd. proved that the report was prepared without ascertaining physical existence of the assets,that funds arranged by the assessee had gone into the hands of the lessees.He further argued that in the case of I.C.D.S.Ltd.,the issue under consideration was regarding the higher rate of depreciation claimed by the assessee,that the AO had rightly held the transaction as a finance lease.
In his rejoinder,the AR argued that the AO nowhere in the assessment order had given any finding that the said transaction was a finance lease,that his case was only that the asset did not exist and that the assessee was not entitled to depreciation.
2.5.We have heard the rival submissions and perused the material on record.In the case under consideration,certain basic facts are not denied by the both the parties and those facts are that lessees existed,that lease agreements were executed by the assessee and the lessees for hiring machineries,that lease rent was received by the assessee in the initial period of the agreement,that it had approached the Hon’ble Bombay High Court when the lessees failed in paying regular rent,that the AO rejected the claim made by the assessee under the heads depreciation and investment allowance for the assets leased out to IIL and IFLL,that the FAA confirmed the order of the AO,that the departmental authorities held that the assets in question did not exist,that the assessee was not the owner of the machinery,that when the lessee companies had defaulted in payment of lease rentals the assessee had filed petitions u/s.434 of the Companies Act,before the Bombay High Court for winding up of IIL and FIIL, that as an interim relief it also prayed for appointment of CR to take charge of the leased assets and to hand them over to it,that the Hon’ble Bombay High Court by its Orders dated 15.12.1993 appointed a CR and directed him to take physical possession of the leased assets, that later on,the Bombay High Court, on an appeal filed by IIL and FIIL in respect of the above orders,vide its Orders dated 31.12.93 it directed the CR to take symbolic possession instead of physical possession of the leased assets,that the receiver was also accompanied by a technical expert/valuer M/s. Nadkarni & Associates,that the valuer had verified and taken inventory of the leased assets referred to in the report as suit machinery,that the Hon’ble Court vide its order dated 14.11.1995 upheld suspension of the above proceedings as IIL and FIIL had become sick companies in view of the provisions of section 22 of The Sick Industrial Companies (Special Provisions) Act,1985,that it further directed the receiver to take physical possession of the leased assets as per the declaration given by the IIL to BIFR. 7
9044/M/92(89-90) SBI Capital Markets Ltd.
2.5.1.We find that pages 1-17 of the paper book produced as additional evidences have relevance to decide the issue.As these were produced before us,for the first time.So,in the interest of justice we want to remit them to the file of the FAA,as he had no occasion to consider the same.He is directed to consider these papers while adjudicating the issue afresh and afford a reasonable opportunity of hearing to the assessee. First effective ground of appeal (GAO.1-7), are decided in favour of the assessee, in part.
3.Grounds.8 &9 are alternate to Ground No.1-7.As we have already restored the substantive ground of appeal to the file of the FAA,so,we direct him to decide the alternative grounds also.
4.Second effective Ground (GOA-10)is about excluding interest on securities and dividend income from business income,while computing eligible profits for the purpose of computing deduction u/s.32AB of the Act.During the assessment proceeding the AO found that the assessee had income from interest on securities of Rs.6.87 crores and dividend income of Rs. 2.17crores. He referred to the assessment orders of the earlier years and following the same held that incomes from such interest had to be assessed under the head income from other sources as against the business income claimed by the assessee. He further held that interest income was not eligible for deduction u/s. 32AB, that as per the audit report the eligible profits was 6.61 crores,that interest totalling to Rs. 9.04 crores (6.87 crores+2.17crores) did not constitute the part of the business income, that same had to be reduced to arrive at the eligible profit of the business for arriving at deduction under section 32 AB. He further held that assessee was not eligible for deduction on the fictitious purchase of plant and machinery was Rs. 2.89 crores which had been shown to have been leased out to ILL and FILL.
4.1.Before us,the AR argued that the interest on securities and investment would qualify as income for benefit u/s.32AB of the Act.He relied upon the cases of Parle Biscuits Ltd.(282 ITR547),Godrej & Boyce Mfg.Co.(2DTR36),Porots Engg.Co.Pvt.Ltd.(282 ITR 550).The DR supported the order of the FAA and relied upon the cases of Sunil Ambwani and Kashi Nathi Pandey(12 taxmann.com 261); Dinjoye Tea Estate (P.) Ltd.(93 Taxman 114); D&H Secheron Electrodes Ltd.(298 ITR 101); Warren Tea Ltd.(251 ITR 382);Parry Agro Industries Ltd. (285 ITR 440) and Trichy Distilleries Chemicals Ltd.(272ITR227).
4.2.We find that the issue had direct link with the machinery leased to IIL and FILL.As the outcome of first effective ground of appeal will have direct bearing on the issue before us, so, 8
9044/M/92(89-90) SBI Capital Markets Ltd. we restore the issue of its eligibility of deduction under section 32 AB to the file of FAA for fresh adjudication.He is directed to afford the reasonable opportunity of hearing to the assessee and consider the case laws referred before us by both the parties. Ground 10 stands partly allowed.
5.Next effective Ground(GOA 11 and 14)deals with treating profit on sale of short term investments to be Short-Term Capital Gain(STCG) and not as business profits.During the assessment proceedings,the AO found that the assessee had showed investment in shares, securities and bounds under the head investment in the balance sheet in the earlier year,that during the year under consideration for the first time it showed the investment into two categories namely investment and Short-Term Investments(STI),that STI were shown under the head current assets,that as per the notes to the balance sheet it had valued the investment at cost. He directed the assessee as to how it has distinguished the investment and STI and as to why while calculating the income under other provisions of the Act the provision made for shortfall in value in the STI was not added back. The assessee argued that as per the articles of association and memorandum the main object of the assessee was to deal in securities and to act as dealers in the course of its business, that in pursuance of the above it had started actively trading in securities and such securities were part of schedule H of the balance sheet under the head other current assets, that such STI were valued at cost or market value whichever was lower,that the STI were stock in trade of the assessee, that the shortfall in the value of such securities were provided for in the profit and loss account for the purpose of reflecting the true and fair picture of the accounts, that the STI included units, government securities,Treasury bills and bonds, that those were stock in trade of the company and were traded very frequently in the market, that shares/bounds shown under the head investment were those which were not held with the intention of trading and which were held for long- term purposes. After considering the submission of the assessee, the AO held that it was showing investments under the head investment in schedule F of the balance sheet, that under the head other current assets also it had been showing the securities and bonds as short-term investment and not as stock in trade,that only during the hearings stays the assessee came up with the plea that STI were the stock in trade of the assessee, that it was required to prepare the balance sheet as per schedule VI of the Companies Act, that in the balance sheet nowhere a note had been put up either in the notes or even in schedule capital H stating that the STI were stock in trade of the assessee,that it had not distinguish between the profit on sale of 9044/M/92(89-90) SBI Capital Markets Ltd. investment and sale of STI,that if it had kept them separately the profit on sale of investment would have been shown as capital gain and profit on sale of stock in trade is business profit.Finally,he held that all the investments were to be treated as investment only and the profit on sale of investment had to be taxed under the head capital gains, that it had not furnished any evidence to show that in all the sale of investment led to LTCG,that the profit on sale of investment, amounting to Rs. 1.99 crores head to considered as STCG.
5.1.During the appellate proceedings,the assessee argued before the FAA that the securities were held as stock in trade by it,that interest on securities was its business income,that the dividend income was part of the business income. After considering the relevant material,the FAA held that in the balance sheet for the period ending on 30.06.1988 shares and securities were appearing as investments,that in the balance sheet ending on 31.3.1989 it had included securities and certain shares under the head current assets, that securities and shares could not become stock in trade just because the memorandum of the company permitted the assessee to deal in shares,that assessee did not explain as to how the securities appearing earlier as investments in the balance sheet were treated as stock in the current year, that the assessee did not took him through the necessary entries in its books of accounts which could have established the fact that it converted its investment into stock in trade, that the main business of the assessee was leasing and banking and that there was not sufficient material on record to show that it’s investments were part of its stock.Finally,he upheld the order of the AO.
5.2.Before us,the AR argued that investments classified under the head other current assets in the balance sheet should have been assessed as business profit, that profit on sale of SIT was assessed as business income in the immediately succeeding year. Alternatively it was argued that even if it was held that gains should be assessed at STCG the said income would qualify for benefit of section under section 32 AB of the Act. He referred to pages 18-29 of the paper book containing additional evidences and relied upon cases of Parle Biscuits Ltd(supra) J Thomas & Co (P.)Ltd. (275 ITR 467) and Tata Yodogawa Ltd.(351 ITR 379). The DR supported the order of the FAA.
5.3.We find that pages 18-29 filed as additional evidence deal with the issue and they were not available to the FAA during the appellate proceedings.So,in the interest of the justice we are restoring that the issue to the file of the FAA for the fresh adjudication. He is directed to 9044/M/92(89-90) SBI Capital Markets Ltd. consider the additional evidences produced before us and afford a reasonable opportunity of hearing to the assessee.Effective GOA.3 is decided in favour of the assessee, in part.
6.Ground number 12 is about not allowing a deduction of Rs. 2.56 lakhs under the head finance charges. During the assessment proceedings, the AO found that in the revised return, filed on 04/01/1991,the assessee had claimed excess income(Rs.9.73 lakhs)as allowable deduction. He directed it to furnish details and breakups of prior period expenses. He found that the assessee had shown reduction of an amount of Rs. 2.25 lakhs being lease finance charges. It was stated that lease finance charges were receivable during the year that in the subsequent year it was decided that the assessee would convert it into part of lease rental, that the interest accrued shown by the assessee should be reversed. The AO held that amount accrued to the assessee as per the terms of lease agreement was to be taxed during the year under consideration, that income had accrued to it during the year, that any change of method of opinion or happening of certain things should be considered in the subsequent year.
6.1.During the appellate proceedings, the FAA held that decision was taken in a subsequent year that financial charges would be realised as part of lease rental, that the assessee admitted before him that no written agreement was entered to that effect, that the assessee wanted to take deduction of an amount on the basis of an event which did not take place during the year in question, that the income had already accrued to the assessee on the basis of documents valid till date of the previous year, that once income had accrued for a particular year its accrual could not be nullified by any subsequent event. He upheld the order of the AO.
6.2.Before us, the AR stated that it was decided the subsequent year that financial charges would be charged as these rental in case of a particular assessee. On a querry by the bench about the agreement entered into with the said assessee,it was admitted that it was only an oral understanding.The DR supported the order of the FAA.
6.3.We find that the assessee had not produced any evidence to support its grip, that the income had accrued to it during the year under consideration. Therefore, we hold that there was no justification for claiming the deduction in the revised return.We don’t find any infirmity in the order of the FAA.Therefore, confirming it, we decide Ground No.12 against the assessee.
9044/M/92(89-90) SBI Capital Markets Ltd.
7.Ground 15 deals with adding back provision for diminution in value of the short-term investment to the total income.
7.1.Ground raised by the assessee is directly linked with effective GOA.3.In the earlier part of our order, we have restored back the issue of treating the certain portion of the securities/ bonds as STI to the file of the FAA for fresh adjudication. As the outcome of that issue would have bearing on the issue before us. So, we direct the FAA to decide the issue of adding back provision for diminution in value of the short-term investment to the total income, after adjudicating effective GOA-3.Ground 15 is partly allowed.
Similarly the last ground is also adding back the provision for diminution in value of short- term investment and provision for shortfall in value of investment to the book profit determined as per the section 115J of the Act. The FAA would decide the issue after adjudi- cating effective GOA-3.Last ground is decided in favour of the assessee, in part.