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Income Tax Appellate Tribunal, ―G‖ BENCH, MUMBAI
Before: SHRI B.R. BASKARAN (AM) & SHRI SANDEEP GOSAIN (JM)
These cross appeals are directed against the order passed by Ld CIT(A)-40, Mumbai for assessment year 1992-93.
The facts relating to the assessee are discussed in brief. The assessee is a registered broker in shares and securities and is registered with Bombay
2 Shri Bhupendra C. Dalal & 1672/Mum/2011 Stock Exchange. He was also one of the recognised brokers for dealing in Government Securities. The assessee has also carried on trading activities in securities on his own account. A major securities scam was unearthed in the year 1992, which led to enactment of a special Act known as ―Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. The assessee was also implicated as a person involved in the securities scam. A custodian was appointed to take control of all the assets of persons implicated in the scam. All the persons so implicated were called as ―Notified persons‖. Hence the assessee became one of the notified persons. Prior to the enactment of the above said Special Act, a Committee named as ―Janakiraman Committee‖ was appointed to probe the scam related matters. A Joint Parliamentary Committee was also formed to investigate into the matters.
The CBI conducted search on the assessee on 22.06.1992 and the income tax department conducted search on the assessee on 16.10.1992. The appeals under consideration have been filed in the second round of proceedings. The assessments were originally completed after the search operations. The assessee challenged the assessment orders by filing appeal before Ld CIT(A) and then the matters were taken before the ITAT by both the parties on the issues decided by Ld CIT(A) against each of them. Before the Tribunal, the assessee contended that the assessing officer had made huge additions on the basis of certain materials, which were not confronted with him. Hence, the Tribunal set aside the orders of tax authorities and restored all the matters to the file of the Assessing officer with the direction to complete the assessments afresh after providing all the materials, which were relied upon by the AO to make additions, to the assessee. Consequently, the present assessment orders were passed by the assessing officer in the second round of proceedings. The assessee again challenged the assessment orders by filing appeals before Ld CIT(A) and both the parties have filed the appeals
3 Shri Bhupendra C. Dalal & 1672/Mum/2011 under consideration challenging the orders passed by Ld CIT(A) on the issues decided against each of them.
The assessee has filed returns of income for AY 1987-88 to 1991-92. However the assessee did not file returns of income for AY 1992-93 and 1993- 94. It was explained that he could not file the return of income for those years, since all the records were seized by the CBI/revenue and further he was constrained to undergo imprisonment and to face enquiries of various investigating agencies.
In the order dated 09-11-2016 passed by us in the hands of the assessee for AY 1987-88 to 1989-90, we have discussed in brief the nature of business activities carried on by the assessee. The discussions are available in paragraph 5 to 13 of the order. The same may be read as part of this order also.
A ) ADDITION ON ACCOUNT OF ALLEGED TRANSFER OF PROFIT TO M/s EXCEL & CO. (Ground No.4A in assessee’s appeal) 6. The AO noticed from the details furnished by the assessee’s bank, viz., Bank of Karad that the bank has purchased 86 lakh units from Bank of America for Rs.11.32 crores on behalf of the assessee on 01-07-1991 and sold the same on very same day for Rs.13.03 crores to Hong Kong Bank. The above said transaction resulted in a profit of Rs.1.71 crores. However, both the above said transactions were reversed on 8th July 1991 by transferring them to M/s Excel & Co. The AO noticed that the purchase value of Rs.11.32 crores was debited in the account of the assessee (A/c No.348) maintained with Bank of Karad and the sum of Rs.13.02 crores was also credited. But the above said debit was not recorded in the book (Bank book) of the assessee. In the security ledger maintained by the assessee, the above transactions were not recorded.
4 Shri Bhupendra C. Dalal & 1672/Mum/2011
In this connection, the AO noticed that the bank held unsigned delivery orders of the assessee, but did not hold the delivery orders from M/s Excel & Co. Accordingly the AO took the view that the assessee has transferred the profit of Rs.1.71 crores to M/s Excel & Co. and accordingly assessed the same as income of the assessee in the original as well as in set aside proceedings. The Ld CIT(A) also confirmed the same.
We heard the parties on this issue and perused the record. The main contention of the assessee is that the above said transactions were wrongly entered by Bank of Karad in the account of the assessee and they were reversed on noticing the mistake by the Bank. He further submitted that the AO did not provide following documents on the basis of which addition was made:- a) B R of Hong Kong Bank b) Bank Statement of Excel & Co. with Bank of Karad c) Alleged delivery of order No.2795 & 3326 of the assessee d) Details of inquiries made with Excel & Co. e) Copy of Security ledger a/c of the assessee with Bank of Karad f) Copy of statement recorded with the proprietor of Excel & Co.
The Ld A.R further submitted that the assessing officer chose not to make any enquiry with Bank of Karad, particularly, when the assessee has denied the transactions. Accordingly it was contended that the AO should not have made and the ld CIT(A) should not have confirmed the addition without providing the materials on the basis of which the addition was made. The Ld A.R submitted that these transactions were noticed by the Janakiraman Committee and the same was also taken support by the tax authorities. He submitted that the Hon’ble Supreme Court has observed in Civil Appeal
5 Shri Bhupendra C. Dalal & 1672/Mum/2011 No.5176 of 2009 in the case of Jyothi Mehta Vs. Custodian at page 38 has observed as under:- ―It is an accepted fact that reports of the Jankiraman Committee, the Joint Parliamentary Committee and the Inter Disciplinary Group (IDG) are admissible only for the purpose of tracing the legal history of the Ac alone. The contents of the report should not have been used by the Ld Judge of the Special Court as evidence.‖ He further submitted that the assessee has been shown as second largest broker with transaction of volume of 61,045 crores initially in the Jankiraman report, whereas at page 280 of the sixth and final report, the transaction volume of the assessee is shown at 34,264 crores. Accordingly the Ld A.R submitted that the report of Jankiraman Committee cannot come to the help of the AO to support the addition.
On the contrary, the Ld D.R submitted that the transactions of purchase and sale of securities have been recorded in the accounts of the assessee by Bank of Karad and the assessee has failed to explain those transactions.
On a careful perusal of facts available with regard to this issue, we notice that the AO has fully relied upon the entries made by Bank of Karad on 01-07-1991 in the account of the assessee with regard to the purchase of securities and sale of securities and also on the transfer entries found on 08- 07-1991. It is a fact that the assessee’s book of account did not reflect those transactions entered on 01-07-1991 as well as on 08-07-1991. The assessee has denied those transactions and has also sought the documents, which were relied upon by the AO to make this addition. It is the case of the assessee that he has not been given those documents. We also notice that the assessing officer did not make any enquiries with Bank of Karad with regard to the entries passed by them. Even though the AO appears to have 6 Shri Bhupendra C. Dalal & 1672/Mum/2011 made enquires with M/s Excel & Co., the assessing officer has not brought on record the results of those enquiries.
We notice that the Ld CIT(A) has taken the view that the assessee should have sought necessary clarification from the Bank of Karad. He has further submitted that the assessee is trying to get away from his responsibility by shifting the onus on the department to prove the income. Accordingly the Ld CIT(A) has confirmed the addition.
The undisputed fact remains that neither the assessee nor the assessing officer has made enquiries with the Bank of Karad with regard to the entries passed in the accounts of the assessee on 01-07-1991 and 08-07- 1991. The AO has not supplied to the assessee various information/documents relied upon by him to make this addition. We have noticed that the Ld CIT(A) has put the responsibility upon the assessee to collect the information from the Bank of Karad and since the assessee has failed to discharge the said responsibility, he has confirmed the addition. However, the principles of ―audi alteram partem‖ puts the responsibility upon the assessing officer to confront the materials relied upon by him with the assessee, which the AO has failed to do. Further, the initial responsibility to prove the charge lies upon the person making the charge.
Another important fact remains that the assessee was subjected to CBI search on 22.6.1992 and the income tax search on 16.10.1992. It was stated that the assessee was not in a position to complete his accounts. The data available in the computer has been used by the revenue to prepare the Profit and Loss account. Since the books of accounts were seized by the CBI and Income tax department, there is merit in the contention of the assessee that there was some handicap in offering correct explanations. If the AO had made enquiries with Bank of Karad and M/s Excel & Co., the true facts would
7 Shri Bhupendra C. Dalal & 1672/Mum/2011 have come to light. Though the AO has made enquiries with M/s Excel & Co., the result of such enquiry was not brought on record. Accordingly we are of the view that the tax authorities have formed their view by drawing certain inferences and without confronting the various materials with the assessee. Accordingly, we are unable to agree with the view taken by Ld CIT(A) that the assessee has failed to discharge the onus placed upon him. Accordingly we are of the view that this addition is not sustainable in law. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.
B) DISALLOWANCE OF ALLEGED BOGUS LOSS CLAIMED IN SECURITY TRANSACTIONS (Ground 4B in assessee’s appeal) 14. The AO noticed that the assessee has purchased and sold the same securities on the same day at varying rates and the said transactions have resulted in loss to the assessee as per following details:-
(a) Purchase and sale on 1.6.1991 & 1.7.91 - 1,05,16,900 (b) Purchase from Bank of Madura on 21.9.91 - 2,10,000 & sales to Excel & Co. on the same date (c) Purchase from Sharada & Co. on 21.3.92 - 26,00,000 & Sales to M Puran (d) Purchase and sale from/to Monica Patel - 31,60,000 on 5.12.91 (e) Purchase and sale on 25.1.1992 - 19,81,000 (f) Purchase and sale on 17.6.1991 with Bank - 89,30,000 of America (g) Purchase and sale on 01-07-1991 with - 93,50,000 Bank of America 3,67,47,650
8 Shri Bhupendra C. Dalal & 1672/Mum/2011 In respect of transaction entered with Monica Patel, the AO made enquiries with her. She stated that she purchased securities from the assessee and sold them to M/s Lupin Laboratories. Hence the AO made enquiries from the Finance Manager of M/s Lupin Laboratory, who also confirmed the transactions. However, the Bank of America denied the transactions. The AO also referred the report given by Janakiraman Committee, wherein it was opined that the transactions were not genuine and were artificially structured to enable the broker to pay the difference in amounts to the counter party. The AO also referred to a letter dated 16.8.1991 written by Bank of America to the assessee herein, wherein they had referred to the transactions entered from 15.7.1991 to 15.10.1991.
The assessee contended that these are normal trading transactions and he has also earned profit from such type of transactions. He referred to the working made by the AO, wherein the profit was shown at Rs.4.09 crores. The assessee also pointed out that the AO has failed to supply a copy of reply given by Bank of America, wherein the BOA had denied the transactions. The assessee submitted that the transactions entered with BOA in a day are netted off and the delivery was given only in respect of final net transactions. However, the AO held that the assessee has failed to prove the genuineness of the transactions and also failed to show that they were settled by actual delivery or same were settled otherwise than by actual delivery. Accordingly the AO disallowed the above said losses aggregating to Rs.3,95,38,500/-. According to the assessee, the addition was excessive by Rs.27,90,600/- due to casting error. The Ld CIT(A) confirmed the disallowance, subject to verification of casting error of Rs.27,90,600/-.
We heard the parties on this issue. The Ld A.R submitted that the assessing officer has computed the profit and loss account from the computer
9 Shri Bhupendra C. Dalal & 1672/Mum/2011 data seized from the assessee. He submitted that the records seized were unaudited and were subject to finalisation. He submitted that the following transactions are regular business transactions carried on with regular brokers. There was transfer of money between the brokers, even though the transactions were entered on the same day:-
(a) Purchase and sale on 1.6.1991 & 1.7.91 1,05,16,900 (b) Purchase from Bank of Madura on 21.9.91 & sales to Excel & Co. on the same date 2,10,000 (c) Purchase from Sharada & Co. on 21.3.92 & Sales to M Puran 26,00,000 (d) Purchase and sale on 25.1.1992 19,81,000 He submitted that the transactions entered with Monica Patel, who was also a broker, has been confirmed by her. The AO did not found fault with her when he made enquiries with Monica Patel. Accordingly he submitted that the loss of Rs.31,60,000/- incurred in the transactions entered through Monica Patel should be allowed. He submitted that the assessee has also made profits in the same day transactions. For eg., the transaction entered on 8-2-1992 with Bank of America for sale of security was sold at 171.42 crores and was repurchased for Rs.169.80 crores and thus the assessee has made a profit of Rs.1.62 crores. He further submitted that the workings made by the AO also would show that the assessee has made profit to the tune of about Rs.4.00 crores.
In respect of loss of Rs.89.30 lakhs and Rs.93.50 lakhs booked in the transactions entered with Bank of America, even though the assessing officer has claimed that the Bank of America has denied these transactions, the AO could not provide copy of the alleged letter written by Bank of America to the assessee. The assessee has also denied these transactions, i.e it was claimed
10 Shri Bhupendra C. Dalal & 1672/Mum/2011 that he also did not enter into these transactions with Bank of America and hence there was no occasion to enter these transactions in the books of account.
We notice that the assessing officer has taken the view that these transactions should be considered as tailor made transactions artificially created to generate loss to the assessee and profit to others. The AO has also observed that these transactions are not backed by delivery of securities. We notice that this allegation of the AO has not been rebutted by the assessee, even though he has claimed that the transactions have been routed through banking channels. At the same time, it is contended by the assessee that all these transactions have been carried on through other brokers, but the said brokers have not been enquired by the AO to substantiate his view. We have also noticed that certain documents like the letter from Bank of America and the statement taken from M/s Lupin Ltd, were not furnished by the AO to the assessee, which is against the Principles of Natural Justice.
Since the transactions entered with Monica Patel has been confirmed by her and also by M/s Lupin Ltd, we are of the view that there is no justification in disallowing the loss of Rs.31.60 lakhs. Accordingly we direct the AO to delete this addition. In respect of loss of Rs.89.30 lakhs and Rs.93.50 lakhs incurred in the transactions entered with Bank of America, we notice that the assessee as well as Bank of America has denied these transactions. The AO has also observed that these transactions do not find place in the books of accounts of the assessee. Since both the parties have denied the transactions and since the assessee has not entered these transactions in his books of account, we are of the view that there is no necessity to disallow the above said losses. Accordingly we direct the AO to delete the alleged loss of Rs.89.30 lakhs and Rs.93.50 lakhs pertaining to the transactions entered with Bank of America.
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In respect of remaining transactions, we are of the view that the allegation made by the tax authorities has not been conclusive proved and the assessee has also not rebutted the same with convincing evidences. Under these set of facts, we are of the view that this issue may be put at rest by restricting the addition to some extent. Accordingly we modify the order passed by Ld CIT(A) and direct the AO to restrict the addition to 20% of the remaining amount of loss amount, after verification of casting error pointed out by the assessee. The order passed by Ld CIT(A) on this issue stands modified accordingly.
C) DISALLOWANCE OF EXCEPTIONAL LOSS IN SECURITY TRANSACTIONS:- (Ground 4C in assessee’s appeal) 21. The AO noticed that the Janakiraman Committee has reported that the Bank of America has concluded a number of sale and purchase transactions in the same security having same value on the same day with the same party. The modus operandi of Bank of America was to issue Bank Receipts (BR) to the other party and thereafter square the transaction by getting back the BR duly discharged by other party. In many cases, the Bank of America had issued BR without holding the adequate amount of concerned security. Thus the Bank of America had earned sizeable profits in majority of the one-day paper transactions. The AO has listed out six transactions, wherein the Bank of America made a profit of Rs.30.47 crores. The AO took the view that the corresponding loss of equivalent amount was borne by the assessee.
When these transactions were confronted to the assessee, he submitted that he has acted as broker only in these transactions. He further submitted that the above said loss was not booked in his accounts and hence the question of disallowing a non-existent item does not arise. It was also 12 Shri Bhupendra C. Dalal & 1672/Mum/2011 submitted that there was a handicap in offering proper explanations, since the relevant books of account was not available to the assessee.
The AO, however, held that the assessee was provided full opportunity to take copies of the books of account. Accordingly the AO took the view that the assessee has not discharged the burden to show that the loss was genuine. Accordingly the AO made the addition of Rs.30.47 crores to the total income of the assessee. The Ld CIT(A) also confirmed the same on the reasoning that the assessee has failed to discharge the onus to show that the transactions were genuine.
We heard the parties on this issue and perused the record. The main contention of the assessee is that he has acted as a broker only in these transactions. Alternatively, it was submitted that the assessee was following cash system of accounting and hence loss, if any, would not have been booked as deduction, since the assessee has not made payment thereof. The Ld A.R submitted that the assessee has not booked the alleged loss of Rs.30.47 crores in the books. On the contrary, the Ld D.R placed strong reliance on the order passed by Ld CIT(A).
Having heard rival contentions, we are of the view that there is merit in the contentions of the assessee. The question of disallowing a claim would arise only if the said claim has been debited to the profit and loss account. We notice that the assessee has repeatedly claimed that he has not claimed the alleged loss of Rs.30.47 crores in his books/profit & loss account. We notice that the tax authorities have not examined this claim and instead rested their decision on the reasoning that the assessee has failed to prove the genuineness of the transactions. In our view, the question of examining the genuineness of transactions would arise only if a deduction is claimed by the assessee. Hence, the tax authorities should first establish that the 13 Shri Bhupendra C. Dalal & 1672/Mum/2011 assessee has claimed the above said loss as deduction. Accordingly we are of the view that this aspect would require examination at the end of the assessing officer. Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to examine from the profit and loss account as to whether the assessee has claimed the above said amount of Rs.30.47 crores as deduction or not. If the assessee has not claimed the same as deduction, the question of disallowing the same would not arise. If the assessee has claimed the same as deduction, the assessing officer is directed to re-examine this issue afresh by providing all the relevant documents to the assessee.
D) ADDITION IN RESPECT OF PROFIT AND LOSS ACCOUNT (Ground 4D in assessee’s appeal):- 26. The next issue urged by the assessee relates to the addition of net profit as computed by the AO. We noticed earlier that the revenue conducted search and seizure operations on 16.10.1992. By that time, the assessee had not filed his return of income for the AY 1992-93. Hence the AO prepared a profit and loss account on the basis of computer data, trial balance, general ledger and subsidiary ledger etc. seized from the premises of the assessee. As per the Profit and loss account so prepared by the AO, the gross receipts was Rs.6,81,47,601/- and the aggregate expenses was Rs.50,99,915/-. Accordingly the profit was worked out at Rs.6,30,47,686/-. The AO assessed the same as income of the assessee and the Ld CIT(A) also confirmed the said addition.
We heard the parties on this issue. We notice that the assessee has submitted before the tax authorities that the books of accounts found at the time of search were incomplete and they require proper adjustments as per the accounting principles. Further the assessee has also pointed out that the income of Rs.4,09,38,413/- worked out by the AO under the head ―Profit on 14 Shri Bhupendra C. Dalal & 1672/Mum/2011 securities‖ was a debit balance and not credit balance. The assessee has also pointed out that the bank records require to be incorporated. However, the tax authorities have taken the view that the assessee could not establish that the figure of Rs.4,09,38,413/- was a debit balance and further the assessee was not able to point out specific deficiencies. Accordingly they rejected the explanations of the assessee.
In our considered view, the approach adopted by the AO may not be correct. There should not any dispute that the profit and loss account prepared from an incomplete book will not give correct result. In fact, the assessing officer could have compared the profit and loss account prepared by him from the computer data (which is said to be incomplete) with the profit and loss account of the earlier years, in order to ascertain the omissions and inaccuracies. Before the Ld CIT(A), the assessee has submitted that he has been provided with Summary position of various accounts and not the detailed day to day print outs. In our view, one can point out the omissions, deficiencies etc., in a ledger account only by examining the detailed day to day ledger account and not from its summary. We further notice that the claim of the assessee that the ―Profit on Securities‖ was actually showing ―debit balance‖ and not credit balance, was not addressed by the tax authorities at all. It is pertinent to note that the Profit and loss account was prepared by the assessing officer and the mistake, if any, is pointed out by the assessee, then the same has to be addressed by the AO by examining the records from which he prepared the Profit and Loss account. On the other hand, the AO has observed as under:-
―The assessee has been given full opportunity to inspect all the seized material but has not established that the figure of Rs.4,09,38,413/- was not profit but loss claimed by him.‖
15 Shri Bhupendra C. Dalal & 1672/Mum/2011 First of all, it is not the case of the assessee that he has incurred a loss of Rs.4,09,38,413/-. In our view, the assessee has simply pointed out the error in the Profit and Loss account prepared by the AO, i.e., the debit balance shown in a Revenue Account, cannot be entered in the Income side. We notice that the assessee has pointed out before the Ld CIT(A) that the debit balance would mean that either it was a loss or it may represent ―Stock in trade‖. We notice that neither the AO nor the Ld CIT(A) gave a categorical finding that the figure of Rs.4,09,38,413/- was a CREDIT balance and hence they were right in taking the same as income of the assessee.
In view of the foregoing discussions, we are of the view that the Profit and Loss account prepared by the AO may not be depicting the correct results of the financial year relevant to the assessment year 1992-93, since they have been prepared from the data pending finalization and further the tax authorities have not addressed a specific error pointed out by the assessee. It is also the case of the assessee that the books of accounts require finalization as per the accounting principles. Further, it is the contention of the assessee that he was not provided with detailed ledger account copies. Under these set of facts, we are of the view that the Profit and Loss account needs to be prepared after finalization of books of accounts properly. Accordingly we are of the view that the assessee should be provided proper opportunity to finalise and close the books of accounts by passing necessary entries as per the accounting principles and law.
In view of the above, we are of the view that this issue requires fresh examination. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to allow the assessee to finalise the books of accounts and prepare the Profit and Loss account, by providing all the materials, ledger accounts that may be required to finalise the books of accounts. The AO may examine the Profit and Loss
16 Shri Bhupendra C. Dalal & 1672/Mum/2011 account so prepared by the assessee and then take appropriate decision in accordance with the law.
E) ADDITION ON ACCOUNT OF NEGATIVE BALANCE OF SECURITIES:- (Ground No.4E in assessee’s appeal) 31. The next issue relates to the addition relating to Negative balance of securities amounting to Rs.241.40 lakhs. The Ld CIT(A) gave relief to the tune of Rs.40.77 lakhs and confirmed balance amount of addition of Rs.240.99 crores. As in earlier years, the assessing officer prepared quantity details of purchase and sale of securities on the basis of entries made in the Sauda book and other records. His working revealed that the assessee has sold the shares without having stock of the same. Hence the AO interpretated that the negative stock would represent undisclosed income of the assessee.
The contention of the assessee is that he was provided with summary position of stock summary only and the AO has not provided the actual workings made by him to arrive at the negative stock. It is also submitted that the transactions in securities take place between banks and financial institutions where payment for sale and purchase of security was routed through banks only. The assessee explained the modalities of the trade and the accounting practice followed by him, i.e., the entries for purchase and sale of securities are made on cash basis, Conversion of physical shares into SGL, SGL shares into physical shares, splitting up of shares, consolidation of shares etc., and submitted that all these activities might have resulted in a confusion. The assessee also submitted that there may be punching errors in the workings prepared by the assessing officer.
However, the AO took the view that the explanations given by the assessee are not satisfactory in respect of negative balance of various securities given in the assessment order. The AO, in the original proceedings,
17 Shri Bhupendra C. Dalal & 1672/Mum/2011 added the same as income of the assessee. In the set aside proceedings, the assessee asked the AO to furnish the details of workings made by him to arrive at the alleged negative balance. Without prejudice to the same, the assessee also submitted that the transactions of purchase and sale are carried out for RBI, banks and other reputed institutions. He also submitted that the assessee sells securities without having stock, but later cover the same by buying from the market. The assessee also submitted that the ready forward transactions, in which the sale made shall be reversed subsequently, would also give rise to a situation of negative balance. The said explanations were not found to be satisfactory to the AO and hence he again made the addition of Rs.241.40 lakhs in the set aside proceedings also. The Ld CIT(A) also confirmed the addition to the extent of Rs.240.99 lakhs, mainly by following his decision rendered in the original assessment proceedings.
We heard the parties on this issue and perused the record. Identical additions towards negative balance of securities were made in AY 1987-88 and 1991-92. We have dealt with the same in a detailed manner in that year. In the instant year, we notice that the matter was remanded to the file of the assessing officer by Ld CIT(A) and the assessee has given detailed reply to the various comments made by the AO. The entire remand report as well as the reply given by the assessee has been fully extracted by the Ld CIT(A) in his order. According to the Ld A.R, the assessee has reconciled all the items and the reasons for the alleged negative balance have been summarised as under by the assessee:-
1) Transactions, which did not materialize, have been considered by the AO as Sales 94,88,80,600 2) Punching errors 54,49,65,118 3) Subsequent purchases not considered 24,82,35,167 4) Sales reversed 4,01,61,477
18 Shri Bhupendra C. Dalal & 1672/Mum/2011 5) Delivery effected on the next day 21,31,403 6) No Negative as per books 40,66,55,182 7) DOR/Trading receipts 3,89,24,352 8) Transactions directly settled between buyer and seller. No implication in books 18,00,00,000 ------------------- 240,99,53,298 ========= Unlike in the earlier years, the AO has given comments on each of the item. A perusal of the same would show that the assessing officer has mainly commented that the explanations of the assessee are not supported by external evidences, i.e., they are supported by his own vouchers. Another major reasoning given by the AO is that the assessee could not prove that these transactions have been recorded in the books of accounts.
We heard the parties on this issue. There is no dispute with regard to the fact that the books of accounts of the year under consideration were incomplete and hence the AO was constrained to prepare a Profit and Loss account by himself. While adjudicating the issue of profit assessed from the said Profit and Loss account, we have observed that the finalization of books of accounts require passing of many journal entries to make various adjustments in conformity with the accounting principles. We notice that the assessing officer has prepared the quantity details of purchase and sale of securities on the basis of Sauda books and other available records, which have been held to be incomplete, meaning thereby, it would be difficult to say that the negative balance of securities arrived at by the AO would be a correct one.
The main contention of the assessee is that the explanations given by the assessee in respect of each of the item of alleged negative balance has 19 Shri Bhupendra C. Dalal & 1672/Mum/2011 been brushed aside by making general observations. It was further contended that more than 95% of the transactions of purchase and sale were effected through banks and hence the question of negative balance shall not arise. The Ld A.R submitted that the Hon’ble Supreme Court has observed in the case of Harshad Mehta that, if an oversold position is covered by subsequent purchases, then no addition can be made. Accordingly it was contended that the impugned addition has been made without properly examining each of the transactions. He submitted that the assessee has pointed out that the addition of Rs.52.00 crores pertaining to 9% HUDCO, which is given in Sr No.43, has been made due to wrong punching of dates of delivery. The correct date was 6-10-1991, whereas it was wrongly punched as 3-10-1991, which resulted in negative stock. The Ld A.R also pointed out that the addition of Rs.40.64 crores made in respect of 11.5% 2010 GOI security (Page no.68 of CIT(A)’s order) has been properly explained and the AO could not rebut the same and he has only stated ―No comments‖, meaning thereby, no addition is called for. Accordingly he submitted that both the above said addition requires to be deleted. On the contrary, the Ld D.R submitted that the assessee could not support the explanations with evidences.
We find merit in the submissions made. A transaction can be considered to be a case of negative stock, only if it is shown that the assessee has sold a security by recording the sales in the books and without recording corresponding purchases. Then it has to be shown that the assessee had purchased the security outside the books of accounts and in that case only, an addition may be warranted if the assessee fails to offer proper explanations. We notice that the assessee has offered explanations with regard to each of the items of negative stock pointed out by the AO. Unlike in the earlier years, the AO has commented upon the explanations given by the assessee. As stated earlier, the AO has rejected the submissions of the assessee by making
20 Shri Bhupendra C. Dalal & 1672/Mum/2011 general observations, i.e., without critically examining the claim of the assessee. The Ld CIT(A) has also accepted the observations of the AO by citing one instance of flaw in the explanation of the assessee. We notice that the Ld CIT(A) has also failed to seek explanations from the assessee with regard to the flaw pointed out by him. Since the submissions made by the assessee have been examined in a generalized manner and since the books of accounts of the assessee were incomplete, we are of the view that this issue requires fresh examination at the end of the assessing officer. The Ld A.R also submitted that the addition of Rs.52.00 crores pertaining to 9% HUDCO and Rs.40.64 crores pertaining to 11.5% 2010 GOI security are not warranted. Accordingly we set aside this issue relating to the addition of Rs.240.99 crores confirmed by Ld CIT(A) and restore the same to the file of the AO for examining the same afresh. The relief granted by Ld CIT(A) to the extent of Rs.40.77 lakhs would stand confirmed, since the same has not been contested by the revenue.
F) ADDITION ON ACCOUNT OF NET D.O.R (Difference of Rate) – Rs.2.60 crores. (Ground No. 4F in assessee’s appeal):- 38. The AO noticed that the assessee has shown DOR receipt of Rs.8.06 crores and DOR payment of Rs.5.46 crores. In the original assessment proceedings, the AO made enquiries with Bank of America, G.N. Hegde, NSN Raju & Co., and M/s Sharda & Co to whom payments aggregating to Rs.2,28,77,950/- were made.
The Bank of America replied that they do not appear to have received payment of Rs.1.55 crores from the assessee. G.N. Hegde did not confirm the transactions. The AO took the view that the transactions entered with other two parties appeared to be paper entries. Hence the AO assessed the entire DOR receipt of Rs.8.06 crores in the original assessment proceedings without allowing any deduction. In the first round of appeal before Ld CIT(A), the 21 Shri Bhupendra C. Dalal & 1672/Mum/2011 first appellate authority held that the disallowance should be made only to the extent of Rs.2,28,77,950/-.
In the set aside proceedings, the AO disallowed the DOR payments to the extent of Rs.2,28,77,950/- and allowed the balance amount of payments against the DOR receipts of Rs.8.06 crores. Accordingly he sustained the addition to the extent of Rs.4,89,18,173/-. The Ld CIT(A) also confirmed the assessment on this account.
The Ld A.R submitted that the AO has collated the figure of DOR receipts from following bank accounts:-
Bank of Karad 7,22,48,029 Bank of India 64,37,411 Bank of Baroda 19,75,490 ---------------------- 8,06,60,930 =========== The Ld A.R submitted that the AO has not provided the detailed workings made by him to arrive at the above said figures. The Ld A.R contended that it would not be possible to locate the items of DOR from the bank accounts. He further submitted that the same items of income has been assessed several times, viz., DOR addition under this head, second time addition at the time of working out Negative balance of securities and third time addition at the time of considering Profit from securities. With regard to the DOR payments, it was submitted that the Bank of America has not altogether denied the transactions and the enquiries made with others were interpreted against the assessee on surmises.
On the other hand, the Ld D.R submitted that the assessee was provided with the copies of letters received from Bank of America and others.
22 Shri Bhupendra C. Dalal & 1672/Mum/2011
We have heard the parties on this issue. We notice that the DOR receipts of Rs.8.06 crores have been collated by the AO from three bank accounts. According to the assessee, it would not possible to identify the DOR transactions from the bank accounts without making further enquiries. We notice the details of workings relating to Rs.8.06 crores have not been given to the assessee. It is also the contention of the assessee that very same item of receipt has been assessed under three different heads. There should not be any dispute that multiple assessment of same item of receipt is not permissible under the Act. In the earlier paragraphs, we have set aside the issue relating to Preparation of Profit and Loss account to the file of the AO. Hence, we are of the view that this issue also requires fresh examination at the end of the AO. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to provide the details of workings of DOR receipts and payments made by the AO to the assessee and examine this issue afresh by duly considering the information and explanations that may be furnished by the assessee.
G) ADDITION ON ACCOUNT OF ESTIMATION OF BROKERAGE IN RESPECT OF SHARE TRANSACTIONS – Rs.1,33,32,000/- (Ground 4G in assessee’s appeal):- 44. The AO took the view that the share market was in its boom phase during the year under consideration and accordingly took the view that the assessee has not properly shown the brokerage income from share broking activities. Accordingly he estimated the turnover of the assessee at Rs.300 crores and estimated the brokerage income at Rs.2.25 crores by taking the rate of brokerage at 0.75%. The Ld CIT(A) noticed that the assessee has declared income from brokerage at Rs.91.68 lakhs and accordingly allowed
23 Shri Bhupendra C. Dalal & 1672/Mum/2011 set off of the same. Accordingly he confirmed the addition to the extent of Rs.1.33 crores.
We heard the parties and perused the record. We have earlier noticed that the books of accounts of the assessee were incomplete and accordingly restored the matter of preparing the Profit and Loss account to the file of the AO. Hence this issue also requires set aside. At the same time, we are of the view that there is no scope for making any estimate without bringing any corroborative material. Accordingly, in the set aside proceedings, the AO may make any addition only on the basis of materials, if any, and not upon presumptions and surmises. With these observations, we set aside the order passed by Ld CIT(A) on this issue and restore this issue to the file of the AO for fresh examination.
H) DISALLOWANCE OF LOSS IN SHARE TRANSACTIONS ENTERED WITH ANMOL CHEMICALS (GUJARAT) PRIVATE LIMITED – Rs.27,000/- (Ground No. 4H in assessee’s appeal) 46. The AO noticed that the assessee has sold shares of six companies on different dates for an aggregate sum of Rs.6,16,050/- and repurchased the very same shares on different dates for an aggregate sum of Rs.8,21,450/-. Accordingly the assesseee claimed loss of Rs.2,05,400/-, which was disallowed by the AO in the original assessment proceedings. The Ld CIT(A) noticed that the purchase and sale were in different settlement periods in all except one shares, i.e., in respect of shares of Vindhya telelinks, the transactions of purchase and sale had taken place in the same settlement period. Hence the Ld CIT(A), in the first round, confirmed the loss from the transactions relating to Vidya telelinks amounting to Rs.27,200/- and deleted the addition in respect of remaining transactions.
24 Shri Bhupendra C. Dalal & 1672/Mum/2011 47. In the set aside proceedings, the AO made the addition of Rs.27,200/- and the same was confirmed by the Ld CIT(A) in the second round.
We heard the parties on this issue. We notice that the assessee has sold 1700 shares of Vindhya Telelinks on 16.01.1992 and repurchased them on 24.01.1992. Even though both the transactions have taken place in the same settlement period, yet it is not shown by the tax authorities that the transactions were not conducted at market rates. The Ld A.R submitted that the other party, viz., M/s Anmol Chemicals has confirmed this transaction and offered the profit also. Under these set of facts, we are of the view that the tax authorities are not justified in disallowing the loss mainly on the reasoning that the transactions of purchase and sale have taken place in the same settlement period. Accordingly, we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.
(I) ADDITION IN RESPECT OF DIVIDEND STRIPPING – Rs.2,85,760/- (Ground No.4 I in assessee’s appeal) 49. The AO noticed that the assessee has sold 154200 shares of CIFCO finance Ltd to M/s Muller & Phipps India Ltd on 17.09.1991. Subsequently the assessee purchased the very same shares back from the above said company on 1.11.1991. The AO noticed that the share holders book of CIFCO Finance Ltd was closed on 18.09.1991 for the purpose of declaration of dividend and the above said shares were transferred to the name of M/s Muller & Phipps Ltd on 18-09-1991. Accordingly M/s Muller & Phipps received dividend of Rs.2,85,760/-. The AO took the view that the same is a stage managed dividend stripping transactions and accordingly, by invoking the provisions of sec. 94(1), assessed the above said dividend income in the hands of the assessee. The Ld CIT(A) also confirmed the same.
25 Shri Bhupendra C. Dalal & 1672/Mum/2011 50. The Ld A.R submitted that the assessee has not carried out such kind of transactions regularly and it is a case of exceptional one. Accordingly he submitted that the tax authorities are not justified in imposing a motive in these transactions. He submitted that the exceptional transactions have been excluded from the ambit of sec. 94(1) of the Act by sec. 94(3)(b) of the Act. On the contrary, the Ld D.R supported the orders passed by Ld CIT(A) on this issue.
We have heard the rival contentions. The dates of sale and repurchase transactions show that the purpose of these transactions may be to strip the dividend. However, the provisions of sec. 94(3)(b) read as under:-
―94(3) The provisions of sub-section (1) or sub-section (2) shall not apply if the owner, or the person who has had a beneficial interest in the securities, as the case may be, proves to the satisfaction of the Assessing Officer— (a) That there has been no avoidance of income tax or (b) That the avoidance of income tax was exceptional and not systematic and that there was not in his case in any of the three preceding years any avoidance of income tax by a transaction of the nature referred to in sub-section (1) or sub-section (2).‖ We have noticed that these transactions were exceptional one and there was not any avoidance of income tax through dividend stripping in any of the three preceding years. Hence these transactions cannot be considered to be systematic also. Under these set of facts, we are of the view that the assessee is covered by the exception provided in sec. 94(3)(b) of the Act. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete this addition.
J) ADDITION ON ACCOUNT OF CASH DEPOSITS – Rs.11.00 lakhs (Ground No.4J in assessee’s appeal)
26 Shri Bhupendra C. Dalal & 1672/Mum/2011 52. The AO noticed that the assessee has made cash deposits into the bank account maintained with Bank of Karad on three dates aggregating to Rs.11.00 lakhs. In the absence of explanations, the assessing officer assessed the same as unexplained income and the Ld CIT(A) also confirmed the same.
The main contention of the assessee is that these deposits were made out of cash balance available in the books of account and the AO has made this addition without verifying the books of account. We find merit in the said submissions. The question of treating the cash deposit as unexplained shall arise only if the sources there of were not explained. The sources, according to the assessee, are the cash balance available in the books of accounts and withdrawals made on the earlier occasions. We notice that the AO did not examine the books of accounts at all to ascertain the veracity of the explanations. It is also pertinent to note that the books of accounts of the instant year (incomplete books) were seized and were available with the AO. Hence there appears to be some handicap for the assessee to explain these transactions properly. Accordingly we are of the view that this issue needs to be examined afresh.
Accordingly we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO with the direction to allow the assessee to examine the books of accounts and offer explanations. The AO is also directed to examine the books of account along with the explanations of the assessee and take appropriate decision in accordance with the law.
K) ADDITION ON ACCOUNT OF RECEIPT FROM A.D. NAROTTAM – Rs.67.69 Crores (Ground No.4K of assessee’s appeal and Ground Nos. (a) to (e) in Revenue’s appeal)
27 Shri Bhupendra C. Dalal & 1672/Mum/2011 55. The AO noticed that the assessee has received funds from Shri A.D. Narottam to the tune of Rs.67.69 crores. In the assessment proceedings of Shri A.D.Narottam, he had submitted that all the transactions belong to the assessee herein, i.e., the transactions put through his account belong to either the assessee herein or J.P. Gandhi or T.B. Ruia or H.P. Dalal or Excel & Co. Accordingly he disowned the transactions carried in his account. During the course of original assessment proceedings, the assessee did not offer any explanations. Hence the AO took the view that the assessee has siphoned off funds from banking system by using the accounts of Shri Hiten Dalal and Shri A.D. Narottam. The AO took the view that the assessee has failed to furnish any evidence to prove the genuineness of the so called ―security transactions‖. The AO also took support from the following observations made in the Janaki Raman Committee in its report no.3:-
―The securities transactions of Book indicates that huge deposits were ―created‖ in the current account of A.D. Narottam through sale of securities which were backed by BRs issued by Book (sic. Bank). These BRs were issued without backing of securities or were backed by BRs issued by NCB without backing of securities.‖ Hence the AO took the view that the assessee was the ultimate beneficiary of scam and he has created a façade in books to show that they represent moneys received through security transactions. Accordingly the AO took the view that the assessee has failed to prove, by adducing adequate evidence, the identity of creditor, the credit worthiness of the creditor and the genuineness of transactions. Accordingly he took the view that the money received from the account of Shri A.D. Narottam represents unexplained cash credits and accordingly assessed the entire deposit of Rs.67.69 crores as income of the assessee. Before Ld CIT(A), the assessee strongly objected to the addition by stating that these transactions represent security transactions carried on in the normal course of business with the support of BRs received from bank. It was also submitted that major part of receipts was received
28 Shri Bhupendra C. Dalal & 1672/Mum/2011 from Shri Hiten Dalal. It was also submitted that a sum of Rs.1.41 crores has already been assessed as DOR. The Ld CIT(A) gave relief for the amount of Rs.1.41 crores stated above and confirmed the addition of balance amount of Rs.66.28 crores.
The assessee is aggrieved by the decision of Ld CIT(A) in confirming part of addition and the revenue is aggrieved against the relief granted.
The Ld A.R submitted that the assessing officer has made this addition on the basis of (a) Ledger account copy available in the books of A.D Narottam (b) Letter dated 15.3.1995 given by Shri ADN disowning the transactions. The Ld A.R submitted that the AO did not furnish the above said documents to the assessee even in the set aside proceedings. He submitted that the AO furnished a copy of letter dated 15.3.1995 issued by ADN, but the same pertained to AY 1991-92 and not to the year under consideration. Accordingly he contended that the addition made by the AO on the basis of materials collected behind the back of the assessee is illegal and liable to be dismissed. Besides the above, the said action of the AO is against the specific direction given by the Tribunal in the original assessment proceedings, wherein the ITAT has specifically stated that no addition should be made without providing the copy of materials to the assessee.
The Ld A.R submitted that the impugned receipts includes a sum of Rs.25,05,52,309/- received from Shri H.P Dalal in respect of sale of security. In support of the same, the assessee provided copy of Bank advice of Bank of Karad debiting the account of H.P Dalal to the AO, but the same was ignored by the AO. Besides the above, the assessee has also given explanations to some of the entries and also pointed out that the above said list includes sale
29 Shri Bhupendra C. Dalal & 1672/Mum/2011 of securities to ADN to the tune of Rs.6.56 crores and to Shri H P Dalal to the tune of Rs.51.92 crores and both the amounts have been disclosed as sale of securities. Accordingly it was contended that there is no reason to make addition.
On the contrary, the ld D.R submitted that the assessee has failed to discharge the onus placed upon him u/s 68 of the Act in respect of amounts received from ADN and hence the AO was justified in making the addition of Rs.67.69 crores. He further submitted that the Ld CIT(A) has given relief of Rs.1.41 crores without making verification
We heard the parties on this issue and perused the record. The Ld A.R furnished an analysis of receipts as shown by ADN, wherein it is stated as under:- (Rs. In crores) Transactions with H P Dalal as per assessee’s accounts - 51.92 No Details available 0.69 Reversal transactions 5.89 Debit transactions 1.39 We notice that the assessee has specifically pointed out the above said items before the AO in the remand proceedings, but they have not been considered by the AO. Further the assessee has submitted that major part of credits have been disclosed as ―Sale of Securities‖ and included in the Profit and Loss account. If that be the case, the addition of amount received towards sale of securities, which has already been disclosed in the Profit and Loss account would amount to double addition of the same amount. It was also submitted that the actual amount of DOR transactions was Rs.2.64 crores, but the Ld CIT(A) has given relief to the extent of Rs.1.41 crores only. Hence we are of the view that the tax authorities have made this addition without properly
30 Shri Bhupendra C. Dalal & 1672/Mum/2011 examining the details furnished by the assessee. We have already set aside the issue relating to DOR receipts to the file of the AO and hence the matter relating to the relief of Rs.1.41 crores granted by the assessee towards DOR transactions also requires to be set aside to the file of the AO.
In view of the above, we set aside the order passed by Ld CIT(A) on this issue and restore the same to the file of the AO. If these transactions have already been included in the ―Sale of Securities account‖ and disclosed in the Profit and Loss account, then no addition of the same amount is called for. Similarly the reversal transactions and debit transactions do not call for any addition. The other transactions relating to DOR and ―no details transactions‖ also require fresh examination. Accordingly we direct the AO to examine this issue afresh in the light of discussions made supra by providing all the details and materials on the basis of which the above said addition was made.
L) INTEREST CHARGED U/S 234A & 234B:- (Ground No. 4L in assessee’s appeal) 62. Charging of interest is consequential in nature and hence this ground does not require adjudication.
REVENUE’S APPEAL:- 63. The Ground Nos.(a) to (e) relates to the relief of Rs.1.41 crores granted by Ld CIT(A) from the addition made in respect of A D Narottam transactions. This issue has already been dealt in the earlier paragraphs and the matter has been set aside to the file of the AO.
The ground Nos. (f) to (i) relates to the relief of Rs.1.54 crores granted by Ld CIT(A), which relates to the Securities received by the assessee free. Identical addition was made by the AO in AY 1991-92, i.e., the AO noticed
31 Shri Bhupendra C. Dalal & 1672/Mum/2011 that certain security transactions was noted as ―Free‖ by the bank. Accordingly the AO took the view that the assessee has received the securities at free of cost and accordingly assessed the aggregate amount of Rs.1.54 crores relating to those transactions as income of the assessee. The Ld CIT(A) accepted the submissions of the assessee that they do not mean that the securities were received at free of cost, but represents instructions to the Bank not to make any payment against the receipt of securities. During the year under consideration, the assessee explained various transactions, i.e., three transactions were entered with ADN against which payment has actually been made on different occasion and other transactions were interbank transactions between two accounts of the assessee, i.e., they represent transfer of securities from the account of the assessee maintained with Bank of Karad to the account of the assessee maintained with Bank of India. The Ld CIT(A) accepted the explanations of the assessee and accordingly, by following his order passed on identical issue in AY 1991-92, deleted this addition.
We heard the parties on this issue and notice that we have uphold the decision rendered by Ld CIT(A) on an identical issue in AY 1991-92. By following the same, we uphold the order passed by Ld CIT(A) on this issue in the instant year also.
In the result, the appeal of the assessee is treated as partly allowed and the appeal of the revenue is dismissed. Order pronounced in the open court on 9th December, 2016.