Appeal Details
Counselvise Citation
[2016] 131 COUNSELVISE.COM (IT) 2099 (ITAT-MUMBAI)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
5 year(s) 8 month(s) 24 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
09-11-2016
Appeal Filed By
Assessee
Bench Allotted
G
Next Hearing Date
01-12-2015
Assessment Year
1987-1988
Appeal Filed On
15-02-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL G BENCH, MUMBAI BEFORE SHRI B.R. BASKARAN (AM) & SHRI SANDEEP GOSAIN (JM) I.T.A. NO. 1350 /MUM/ 2011 (ASSESSMENT YEAR 1987 - 88 ) I.T.A. NO. 1351/MUM/2011 (ASSESSMENT YEAR 1988 - 89) I.T.A. NO. 1352/MUM/2011 (ASSESSMENT YEAR 1989 - 90) SHRI BHUPENDRA C. DALAL BHUPEN CHAMBERS GROUND FLOOR DALAL STREET , FORT MUMBAI - 400 001. VS. DCIT OSD II/CR 7 4 TH FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020. ( APPELLANT ) ( RESPONDENT ) I.T.A. NO. 1625/MUM/2011 (ASSESSMENT YEAR 1988 - 89) I.T.A. NO. 1627/MUM/2011 (ASSESSMENT YEAR 1989 - 90) DCIT OSD II/CR 7 4 TH FLOOR AAYAKAR BHAVAN M.K. ROAD MUMBAI - 400 020. VS. SHRI BHUPENDRA C. DALAL BHUPEN CHAMBERS GROUND FLOOR DALAL STREET, FORT MUMBAI - 400 001. ( APPELLANT ) ( RESPONDENT ) PAN N O . AABPD3308H ASSESSEE BY SHRI VIPUL JOSHI DEPARTMENT BY DR. P. DANIEL DATE OF HEARING 13.5 . 201 6 DATE OF PRONOUNCEMENT 9 . 11 . 201 6 O R D E R PER BENCH : - ALL THESE APPEALS, PERTAINING TO AY 1987 - 88 TO 1989 - 90, WERE HEARD TOGETHER, SINCE TH E FACTS SURROUNDING THE ADDITIONS ARE IDENTICAL IN NATURE AND SHR I BHUPENDRA C. DALAL 2 HENCE THEY ARE BEING DISPOSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. ALL THE APPEALS ARE DIRECTED AGAINST THE ORDERS PASSED BY LD CIT(A) - 40, MUMBAI. 2. 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 STOCK EXCHANGE. HE WAS ALSO ONE OF THE RECOGNISED BROKERS FOR DEALING IN GOVERNMENT SECURITIES. THE ASSESSEE HAS ALSO CARR IED 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 TH E MATTERS. 3. 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 W ERE 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 TH EM. 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 MAT TERS TO SHR I BHUPENDRA C. DALAL 3 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 UNDER CONSIDERATION CHALLENGING THE ORDERS PASSED BY LD CIT(A) ON THE ISSUES DECIDED AGAINST EACH OF THEM. 4. 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 O F 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. 5. BEFORE GOING INTO SPECIFIC ISSUES, WE FEEL IT PERTINENT TO DISCUSS IN BRIEF ABOUT THE NATURE OF ACTIVITIES CARRIED ON BY THE ASSESSEE, SINCE THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE AO HAS MADE MOST OF THE ADDITIONS WITHOUT PROPERLY APPRECIATING THE NATURE OF ACTIVITIES CARRIED ON BY THE ASSESSEE. AS N OTICED EARLIER, THE ASSESSEE WAS ACTING AS A BROKER AND DEALER IN SECURITIES MARKET. THE SECURITIES ARE DEBT INSTRUMENTS ISSUED BY CENTRAL GOVERNMENT, STATE GOVERNMENTS, LOCAL/STATE INSTITUTIONS AND BODIES. THE DEBT INSTRUMENTS SHALL HAVE FIXED RATE OF INTEREST AND ALSO ISSUED FOR A FIXED TENURE. THE INTEREST SHALL BE PAID TO THE HOLDER OF SECURITIES EITHER ANNUALLY OR BI - ANNUALLY ON PRE - DETERMINED DATES. THE SAID PRE - DETERMINED DATE IS COMMONLY CALLED AS COUPON DATE. THESE SECURITIES ARE TRANSFER RABLE BY ENDORSEMENT AND DELIVERY. SHR I BHUPENDRA C. DALAL 4 6. SINCE GOVERNMENTS AS WELL AS LOCAL BODIES/STATUTORY CORPORATIONS HAVE ISSUED VARIOUS TYPES OF SECURITIES OVER THE YEARS, A NUMBER OF SECURITIES OF VARIOUS TYPES, I.E., HAVING DIFFERENT RATE OF INTEREST AND TENUR E, CAME TO BE AVAILABLE IN THE MARKET. SINCE THESE SECURITIES ARE TRANSFERRABLE BY ENDORSEMENT AND DELIVERY, THE INITIAL SUBSCRIBER OF THE SECURITIES HAVE OPTION TO SELL THEM BEFORE ITS MATURITY DATE, DEPENDING UPON THEIR REQUIREMENT OF FUNDS OR MARKET CO NDITIONS. SINCE THE INTEREST RATES ARE REGULATED BY THE RBI BY INCREASING OR DECREASING THE SAME, THE MARKET VALUE OF SECURITIES WOULD ALSO INCREASE OR DECREASE AND THE SAME WOULD ALSO TRIGGER SALE OF SECURITIES. THE BANKS AND FINANCIAL INSTITUTIONS ARE REQUIRED TO MAINTAIN A PORTION OF THEIR LIABILITIES AS DEPOSITS IN BANKS AND GOVERNMENT SECURITIES AS PER THE STATUTORY LIQUIDITY RATIO (SLR) FIXED BY RBI. THE GOVERNMENT SECURITIES IS ONE OF THE MOST PREFERRED METHODS OF INVESTMENTS BY THE BANKS/FINANCIA L INSTITUTIONS. SINCE THE LIABILITIES IN THE FORM OF DEPOSITS KEEPS CHANGING, THE BANKS/FINANCIAL INSTITUTIONS ARE REQUIRED TO VARY THE SLR INVESTMENTS EITHER BY MAKING FRESH PURCHASES OR BY SELLING THE EXISTING HOLDING. SIMILARLY, THE BANKS, FINANCIAL I NSTITUTIONS, PROVIDENT FUNDS, OTHER ENTERPRISES AND EVEN INDIVIDUALS MAY ALSO LIKE TO INVEST THEIR SURPLUS FUNDS IN THE GOVERNMENT SECURITIES. OVER THE YEARS, THE NUMBER OF SECURITIES AVAILABLE IN THE MARKET HAS INCREASED AND SO THE SELLERS AND BUYERS. HENCE THERE AROSE A NECESSITY TO CREATE A PLATFORM, WHERE THE SELLERS AND BUYERS COULD BE CONNECTED. HENCE FOR CONNECTING THE BUYERS AND SELLERS, THERE AROSE A NECESSITY OF HAVING MIDDLEMEN, WHO ARE POPULARLY CALLED BROKERS. HOWEVER THE ABOVE SAID PEO PLE SHALL ALWAYS DEAL WITH BROKERS REGISTERED WITH A RECOGNISED STOCK EXCHANGE. THE PLATFORM SO CREATED IS POPULARLY CALLED AS SECONDARY MARKET AND IT IS BEING REGULATED BY RESERVE BANK OF INDIA. HENCE THE INITIAL SUBSCRIBER CAN SELL THE SECURITIES THR OUGH THE SECONDARY MARKET TO A PROSPECTIVE BUYER. THE ROLE OF BROKER IN SECURITIES MARKET IS TO ESTABLISH A LINK BETWEEN THE SELLER AND BUYER. ONLY THE BROKERS HOLDING A MEMBERSHIP CARD IN A SHR I BHUPENDRA C. DALAL 5 RECOGNISED STOCK EXCHANGE AND PERMITTED BY THE STOCK EXCHANGE A RE ALLOWED TO ACT AS BROKERS IN THE SECURITIES MARKET. HENCE FOR THE INSTITUTIONS PLANNING TO SELL/BUY SECURITIES, THE SECONDARY MARKET HAS EMERGED AS THE SAFE PLATFORM AND ALL OF THEM INCLUDING RBI AND BANKS PREFERRED TO TRANSACT THROUGH THE BROKERS EMPA NELLED BY THEM. 7. BESIDES THE ABOVE, THE FINANCIAL INSTITUTIONS, PROVIDENT FUNDS, THE INSURANCE COMPANIES ALSO PREFER TO INVEST THEIR LONG TERM FUNDS IN GOVERNMENT SECURITIES. SINCE DEMAND FOR SALE AND PURCHASE OF SECURITIES INCREASED IN THE SECOND ARY MARKET, IT HAS MOTIVATED SOME OF THE BROKERS TO ACT AS DEALERS IN SECURITIES, I.E., THEY STARTED BUYING SECURITIES ON THEIR OWN ACCOUNT AND THEN SELL THE SAME TO THE PROSPECTIVE BUYERS. 8. IT IS STATED THAT THE GOVERNMENT SECURITIES ARE ISSUED IN THREE FORMS, VIZ., (A) BY CREDIT TO THE SUBSIDIARY GENERAL LEDGER ACCOUNT (SGL ACCOUNT) OF THE BANKS AND INSURANCE COMPANIES. (B) IN THE FORM OF PROMISSORY NOTES (C) IN THE FORM OF STOCK CERTIFICATE. IT WAS STATED THAT THE SGL ACCOUNT W AS THE MOST PREFERRED METHOD OF DEALING IN SECURITIES. THE SGL ACCOUNT IS AKIN TO THE PRESENT DAY D - MAT ACCOUNT MAINTAINED BY THE INVESTORS IN SHARES WITH NSDL/CDSL. THE SGL ACCOUNTS ARE MAINTAINED BY RBI AND THE PURCHASER OF SECURITIES WOULD NOT BE GI VEN THE SECURITIES IN THE PHYSICAL FORM AND INSTEAD, THE SECURITIES ALLOTTED TO A SUBSCRIBER SHALL BE CREDITED IN A SGL ACCOUNT MAINTAINED BY RBI IN THE NAME OF THE PURCHASER. IN THE SGL ACCOUNT, ALL RELEVANT DETAILS OF SECURITIES SHALL BE RECORDED. BE CAUSE OF THE CONVENIENCE IN HAVING SGL ACCOUNT, EVEN THE SECURITIES HELD IN PHYSICAL FORMAT WERE ALLOWED TO BE CONVERTED INTO SGL ACCOUNT CREDIT, I.E., THE HOLDER OF PHYSICAL SECURITIES CAN LODGE THEIR CERTIFICATES WITH RBI SHR I BHUPENDRA C. DALAL 6 FOR CREDITING THEM INTO SGL ACCO UNT. THE RBI HAS ALSO ALLOWED RECONVERSION OF SECURITIES HELD IN SGL ACCOUNT INTO PHYSICAL FORMAT, IF THE INVESTOR DESIRES SO. THE SALE OF SECURITIES HELD IN SGL ACCOUNT WAS CARRIED BY ISSUING A SGL TRANSFER FORM, WHICH WAS AKIN TO TRANSFER DEEDS. THE BUYER OF SECURITIES SHALL LODGE THE SGL TRANSFER FORM WITH RBI. UPON RECEIPT OF SGL TRANSFER FORM, THE RBI SHALL REDUCE THE SECURITIES BY DEBITING THE SGL ACCOUNT OF THE SELLER AND ADD THE SAME TO THE ACCOUNT OF THE BUYER BY CREDITING HIS SGL ACCOUNT. U PON PASSING OF THIS ENTRY BY RBI, THE TRANSFER OF SECURITIES SHALL STAND COMPLETED. IT IS PERTINENT TO NOTE THAT THE FACILITY OF HOLDING SGL ACCOUNT WAS RESTRICTED ONLY TO BANKS AND LARGE FINANCIAL INSTITUTIONS. HENCE, WHENEVER THE BANKS/FINANCIAL INSTIT UTIONS SELL THEIR SECURITIES TO PERSONS WHO ARE NOT HAVING SGL ACCOUNT, THEY ARE REQUIRED TO RECONVERT THE SECURITIES HELD IN THEIR SGL ACCOUNT INTO PHYSICAL FORMAT AND DELIVER THEM TO THE BUYERS. 9. THE SECOND METHOD OF ISSUING SECURITIES IS BY WAY OF PROMISSORY NOTES AND THEY ARE TRANSFERRABLE BY ENDORSEMENT AND DELIVERY. THE HOLDER IN DUE COURSE IS REQUIRED TO LODGE HIS CLAIM FOR INTEREST AND REDEMPTION. SINCE THE INVESTORS IN THE SECURITIES MARKET ARE MAINLY BANKS AND OTHER BIG INSTITUTIONS, THIS METHOD OF ISSUING SECURITIES IS NOT POPULAR WITH THEM. ONLY SMALL INVESTORS LIKE PROVIDENT FUNDS AND INDIVIDUALS USE THIS FORM OF INVESTMENT. 10. THE THIRD METHOD IS ISSUING STOCK CERTIFICATE IN PHYSICAL FORM, WHICH IS AKIN TO SHARE CERTIFICATES. EACH CERTIFICATE WOULD HAVE DISTINCTIVE NUMBER AND THE TRANSFER TAKES PLACE BY MAKING ENDORSEMENT OF TRANSFER ON THE BACK SIDE OF THE STOCK CERTIFICATE. THE REGISTERED HOLDER WILL RECEIVE INTEREST AND THE STOCK CERTIFICATE HAS TO BE LODGED FOR REDEMPTION . THIS IS ALSO NOT SO POPULAR METHOD. 11. ROLE OF BROKERS: - SHR I BHUPENDRA C. DALAL 7 OVER THE YEARS, THE GOVERNMENT, SEMI - GOVERNMENT, INSTITUTIONS, LOCAL BODIES ETC., HAVE ISSUED SECURITIES FROM TIME TO TIME. HENCE THE NUMBER AND VARIETY OF SECURITIES AVAILABLE IN THE MAR KET HAVE ALSO INCREASED. THE FLUCTUATION IN THE RATE OF INTEREST HAS INCREASED THE DEMAND FOR SECURITIES. DUE TO STATUTORY COMPULSION OF PARKING FUNDS IN GOVERNMENT SECURITIES AND AVAILABILITY OF SURPLUS FUNDS ALSO, THE DEMAND FOR SECURITIES INCREASED. SI NCE THE INVESTORS ARE SCATTERED ALL OVER THE COUNTRY, THE NECESSITY OF BROKER OR MIDDLEMEN HAS ARISEN, WHO WOULD CREATE A LINK BETWEEN A BUYER AND A SELLER. AS NOTICED EARLIER, ONLY PERSONS HOLDING MEMBERSHIP OF RECOGNISED STOCK EXCHANGE ARE PERMITTED TO ACT AS BROKERS IN THE SECURITIES MARKET. DUE TO INCREASE IN THE VOLUME, THE RBI, BANKS, INSTITUTIONS ETC HAVE ALSO AVOIDED DIRECT DEALING AND INSTEAD PREFERRED TO PURCHASE AND SELL SECURITIES THROUGH THE BROKERS. IT WAS STATED THAT IN THE YEAR 1992, THE RBI HAD EMPANELLED 12 BROKERS AND IT WOULD TRANSACT ONLY THROUGH ONE OF THE 12 BROKERS. 12. BROKERS AS DEALERS AND ROLE OF ROUTING BANK: - AS NOTICED EARLIER, SOME OF THE BROKERS HAVE ALSO ACTED AS DEALER IN THE SECURITIES DUE TO HUGE DEMAND, I.E., TH EY WOULD PURCHASE AND HOLD THE SECURITIES ON THEIR OWN ACCOUNT AND SELL THEM WHEN THERE IS A DEMAND FOR THEM. SINCE THE SGL ACCOUNT IS MAINTAINED BY RBI IN THE NAME OF BANKS, INSTITUTIONS ETC. (IT IS STATED THAT SGL ACCOUNT WILL NOT BE MAINTAINED IN INDIV IDUAL BROKER NAMES), THE SAID BROKERS WERE CONSTRAINED TO CARRY ON DEALING OF SHARES THROUGH A BANK, WHICH ARE CALLED ROUTING BANKS. THE ROUTING BANK SHALL MAINTAIN SGL ACCOUNT WITH RBI IN ITS OWN NAME AND IN TURN, SHALL MAINTAIN A SEPARATE LEDGER ACCOU NT IN THE NAME OF DEALER - BROKER IN ITS ACCOUNTS, I.E., CLIENT SECURITY LEDGER ACCOUNT. THE ROUTING BANK SHALL RECEIVE AND DELIVER THE SECURITIES /SGL TRANSACTION SLIPS ON BEHALF OF ITS CLIENT. FOR EXAMPLE, IF THE DEALER - BROKER (CLIENT) PURCHASES A SEC URITY, IT WOULD ACCEPT DELIVERY OF THE SECURITY SLIPS AND WOULD SHR I BHUPENDRA C. DALAL 8 CREDIT THE CLIENT SECURITY LEDGER ACCOUNT OF THE DEALER WITH THE DETAILS OF SECURITIES. THE PAYMENT FOR THE SAID PURCHASE WOULD BE MADE BY DEBITING THE BANK ACCOUNT OF THE DEALER - BROKER. W HEN THE DEALER - BROKER SELLS ANY SECURITY, THE CLIENT LEDGER ACCOUNT OF THE DEALER SHALL BE DEBITED AND THE SALE PROCEEDS SHALL BE CREDITED TO THE BANK ACCOUNT OF THE DEALER - BROKER. IN MOST OF THE OCCASIONS, THE ROUTING BANK SHALL EXTEND OVERDRAFT LOAN FAC ILITIES TO THE DEALER - BROKER ON THE SECURITY OF THE SECURITIES HELD BY IT ON BEHALF OF THE CLIENT. SINCE THE SECURITY TRANSACTION SLIPS/SECURITIES ARE DIRECTLY SENT/RECEIVED TO/FROM THE ROUTING BANK, IT IS STATED THAT THE DEALER - BROKER SHALL HAVE ONLY CON TRACT NOTES AS EVIDENCE FOR PURCHASE AND SALE OF SECURITIES. FOR EXAMPLE, IF THE DEALER - BROKER PURCHASES A SECURITY, SAY FROM BANK OF MAHARASHTRA ON HIS OWN ACCOUNT, HE WOULD HAVE FOLLOWING DOCUMENTS IN SUPPORT OF THE SAME: - (A) CONTRACT NOTE ISSUED BY DEALER - BROKER TO BANK OF MAHARASHTRA (B) DELIVERY ORDER ISSUED BY THE DEALER - BROKER TO BANK OF MAHARASHTRA (C) BANK ACCOUNT DEBIT ADVICE ISSUED TO THE DEALER - BROKER BY HIS ROUTING BANK SUPPORTED BY ENTRIES MADE IN THE CLIENT LEDGER ACCOUNT. IT IS PERTINENT TO NOTE THAT THE SGL TRANSACTION SLIP SHALL BE ISSUED BY BANK OF MAHARASHTRA IN FAVOUR OF THE ROUTING BANK, WHO SHALL LODGE THE SAME WITH RBI FOR EFFECTING THE TRANSFER OF SECURITIES TO ITS NAME (TO BE HELD ON BEHALF OF DEALER - BROKER). 13. PURCHASE AND SALE OF SEC URITIES CUM INTEREST THE INTEREST ON SECURITIES ARE GENERALLY PAID ON HALF YEARLY BASIS BY THE PUBLIC DEBT OFFICE OF RESERVE BANK OF INDIA AT THE RATE OF INTEREST AT WHICH THE SECURITIES WERE ISSUED. THE PRESCRIBED DATE OF PAYMENT OF INTEREST IS CALLED AS COUPON DATE. THE TRANSACTIONS OF PURCHASE AND SALE OF SECURITIES ARE MADE ON CUM INTEREST BASIS, SINCE THE DATE OF PAYMENT OF INTEREST AS WELL AS THE RATE OF INTEREST IS VERY WELL KNOWN. THIS CAN BE EXPLAINED BY WAY OF AN ILLUSTRATION. LET SHR I BHUPENDRA C. DALAL 9 US ASS UME THAT COUPON DATE OF A SECURITY HAVING A FACE VALUE OF RS.1.00 LAKH IS 30 TH JUNE AND 31 ST DECEMBER. IT CARRIES INTEREST RATE OF 12% P.A. IF AN INVESTOR WISHES TO PURCHASE A SECURITY ON 30 TH SEPTEMBER, HE WILL HAVE TO PAY THE PRICE OF SECURITY (RS.1.00 LAKH) PLUS INTEREST FOR THE PERIOD FROM 1 ST JULY TO 30 TH SEPTEMBER (RS.3,000/ - ) AGGREGATING TO RS.1,03,000/ - . THIS IS CALLED CUM INTEREST PRICE OF THE SECURITY. THE BUYER WILL RECEIVE INTEREST OF RS.6,000/ - ON 31 ST DECEMBER AND THE NET INTEREST RECEIVED BY HIM WILL BE RS.3000/ - (RS.6000 RECEIVED (LESS) RS.3000/ - PAID AT THE TIME OF PURCHASE OF SECURITY). 14. WE SHALL NOW TAKE UP THE APPEAL FILED BY THE ASSESSEE FOR ASSESSMENT YEAR 1987 - 88. THE ASSESSEE, BESIDES RAISING GROUNDS ON LEGAL ISSUES, ARE CONTESTING FOLLOWING ADDITIONS CONFIRMED BY LD CIT(A): - (A) UNEXPLAINED CASH CREDITS. (B) DISALLOWANCE OF INTEREST PAID ON PURCHASE OF SECURITIES. (C) ADDITION ON ACCOUNT OF NEGATIVE BALANCE OF SECURITIES. 15. THE FIRST ISSUE RELATES TO THE ADDI TION MADE U/S 68 OF THE ACT TOWARDS UNEXPLAINED CASH CREDITS. THE LD CIT(A) CONFIRMED THE ADDITION PERTAINING TO FOLLOWING CASH CREDITS: - (A) RITA CHOPRA - 32,100 (B) RONAK PATEL - 40,000 (C) SAURIN PATEL - 12,000 (D) VIKRAM U PATEL - 10,000 ------------- 94,100 ====== 15.1 THE FIRST CASH CREDIT RELATES TO RITA CHOPRA. IN THE BOOKS OF THE ASSESSEE, THE BALANCE OUTSTANDING AS ON 31.12.1986 IN THE NAME OF THE ABOVE PARTY WAS SHOWN AT RS.2,11,500/ - . DURING THE CALENDAR YEAR ENDING 31.12.1986, THE ASSESSEE HAD RECEIVED FRESH CREDIT OF RS.1,12,500/ - . HOWEVER IN THE CONFIRMATION OBTAINED FROM THE ABOVE SAID PARTY, THE TOTAL PAYMENT WAS SHOWN SHR I BHUPENDRA C. DALAL 10 AT RS.80,400/ - . HENCE THE AO ADDED THE DIFFERENCE OF RS.32,100/ - AS UNEXPLAINED C ASH CREDIT. THE ASSESSEE COULD FURNISH THE CONFIRMATION LETTER PERTAINING TO 31.12.1987 AND NOT 31.12.1986. SINCE THE ASSESSEE DID NOT FURNISH CONFIRMATION LETTER, THE LD CIT(A) CONFIRMED THIS ADDITION. 15.2 THE LD A.R SUBMITTED THAT THE ASSESSEE HAS S UBMITTED THE CONFIRMATION LETTER FOR THE YEAR ENDING 31.12.1987. THE ASSESSEE COULD NOT OBTAIN CONFIRMATION LETTER FOR THE YEAR ENDING 31.12.1986, SINCE RITA CHOPRA HAS MIGRATED TO USA. HE SUBMITTED THAT THE LD CIT(A) HAD DELETED THIS ADDITION IN THE FIR ST ROUND OF PROCEEDING BY ACCEPTING THE EXPLANATION OF THE ASSESSEE THAT IT COULD NOT OBTAIN CONFIRMATION LETTERS FOR THE REASONS BEYOND HIS CONTROL. HE FURTHER SUBMITTED THAT THE ASSESSEE HAD RECEIVED A SUM OF RS.1,12,500/ - , OUT OF WHICH CREDIT OF RS.91, 000/ - PERTAIN TO SHARE TRADING TRANSACTIONS. HE SUBMITTED THAT THE ASSESSEE HAD FILED CONFIRMATION LETTERS OBTAINED FOR THE YEAR ENDING 31.12.1984 AND 31.12.1985. ACCORDINGLY HE PRAYED THAT THE ADDITION OF RS.32,100/ - CONFIRMED BY LD CIT(A) SHOULD BE DEL ETED. 15.3 THE LD D.R, ON THE CONTRARY, STRESSED THE POINT THAT THE ASSESSEE HAS FAILED TO FURNISH THE CONFIRMATION LETTER FOR THE CURRENT YEAR, I.E., YEAR ENDING 31.12.1986 AND THE ASSESSEE HAS FAILED TO DISCHARGE THE INITIAL ONUS PLACED UPON HIM U/S 68 OF THE ACT. 15.4 WE HAVE HEARD THE PARTIES ON THIS ISSUE. WE NOTICE THAT THE ADDITION OF RS.32,100/ - WAS MADE ON THE REASONING THAT THERE WAS A DIFFERENCE BETWEEN THE AMOUNTS SHOWN AS RECEIVED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE AND THE CONF IRMATION LETTER. THE ASSESSEE HAS POINTED OUT THAT THE ASSESSING OFFICER HAS COMPARED THE RECEIPTS PERTAINING TO THE YEAR ENDING 31.12.1986 WITH THE RECEIPTS PERTAINING TO THE YEAR ENDING 31.12.1987. THERE SHOULD NOT BE ANY DISPUTE THAT THE ASSESSING OFF ICER HAS MADE THE ADDITION BY COMPARING TWO SHR I BHUPENDRA C. DALAL 11 DIFFERENT YEARS, WHICH IS NOT CORRECT. FURTHER, THE ASSESSEE HAS POINTED OUT THAT HE HAS FILED CONFIRMATION LETTER FOR THE YEARS ENDING 31.12.1984, 31.12.1985 AND 31.12.1987. HE HAS EXPRESSED ITS INABILITY TO O BTAIN CONFIRMATION LETTER FOR THE CURRENT YEAR, SINCE THE CREDITOR HAS MIGRATED TO USA AND ALSO DUE TO PASSAGE OF LONG TIME. IN OUR VIEW, THE DIFFICULTY OF THE ASSESSEE SHOULD BE APPRECIATED. FURTHER, THE ASSESSEE HAS ALSO SUBMITTED THAT, OUT OF THE TOTA L CREDIT OF RS.1,12,500/ - A SUM OF RS.91,000/ - RELATED TO THE SHARE TRADING TRANSACTIONS. HENCE, ON A CONSPECTUS OF THE MATTER, WE ARE OF THE VIEW THAT THERE IS NO REASON TO SUSPECT THE CREDIT OBTAINED FROM THIS PARTY. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 16. THE NEXT ADDITION RELATES TO CASH CREDIT AVAILABLE IN THE NAME OF RONAK PATEL. THE ASSESSEE HAS RECEIVED FRESH DEPOSIT OF RS.40,000/ - FROM THIS CREDITOR DURING THE YE AR UNDER CONSIDERATION. THIS ACCOUNT HAD A OPENING BALANCE OF RS.85,000/ - AND WITH THE FRESH CREDIT CITED ABOVE, THE CLOSING BALANCE WAS SHOWN AT RS.1,25,000/ - . THE ASSESSEE DID NOT OBTAIN ANY CONFIRMATION LETTER FROM THIS PARTY. HOWEVER, HE PLACED RELI ANCE ON THE REPAYMENT OF RS.93,000/ - MADE ON 10 - 05 - 1991 MADE TO THIS CREDITOR. THE ASSESSEE HAS STATED THAT HE COULD NOT OBTAIN ANY CONFIRMATION LETTER FROM THE PARTY DUE TO PASSAGE OF LONG TIME. THUS, WE NOTICE THAT THE ASSESSEE HAS SIMPLY PLACED RELIANC E ON HIS BOOKS OF ACCOUNT TO SUBSTANTIATE THIS CREDIT AND THE ASSESSEE DID NOT PRODUCE ANY CONFIRMATION LETTER PERTAINING TO EITHER PRIOR YEARS OR TO SUBSEQUENT YEARS. WE FURTHER NOTICE THAT THE ASSESSEE HAS PAID INTEREST OF RS.11,890/ - TO THIS CREDITOR D URING THE YEAR UNDER CONSIDERATION. THUS, WE ARE OF THE VIEW THAT THE SOURCES TO THE EXTENT OF RS.12,000/ - CAN BE CONSIDERED TO HAVE BEEN EXPLAINED IN VIEW OF THE PAYMENT OF INTEREST, REFERRED ABOVE. ACCORDINGLY WE MODIFY THE ORDER PASSED BY LD CIT(A) O N THIS ISSUE AND DIRECT THE AO TO SUSTAIN THE ADDITION IN RESPECT OF THIS CASH CREDIT TO THE EXTENT OF RS.28,000/ - . WE ORDER ACCORDINGLY. SHR I BHUPENDRA C. DALAL 12 17. THE NEXT ADDITION RELATES TO THE CASH CREDIT OF RS.12,000/ - RECEIVED FROM SHRI SAURIN PATEL. IN THIS CASE ALSO, THE ASSESSEE HAS PLACED RELIANCE ON HIS OWN BOOKS OF ACCOUNT AND DID NOT FURNISH ANY OTHER CORROBORATIVE MATERIAL. THE ASSESSEE HAS CITED THE REASON OF PASSAGE OF TIME ONLY TO SUBSTANTIATE HIS FAILURE TO OBTAIN CONFIRMATION LETTER. HOWEVER, ON A PE RUSAL OF THE ACCOUNT COPY OF THE CREDITOR, WHICH IS PLACED AT 215 OF THE PAPER BOOK, WE NOTICE THAT THE ASSESSEE HAS PAID INTEREST OF RS.12,600/ - IN FEB & AUG, 1986. THE FRESH CREDIT OF RS.12,000/ - WAS OBTAINED ON 3 - 12 - 1986. HENCE, WE ARE OF THE VIEW THA T THE INTEREST PAYMENT OF RS.12,600/ - IS SUFFICIENT TO EXPLAIN THE SOURCES FOR THE FRESH CREDIT OF RS.12,000/ - . ACCORDINGLY WE ARE OF THE VIEW THAT THIS CASH CREDIT MAY BE TREATED AS EXPLAINED. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) AND DIREC T THE AO TO DELETE THIS ADDITION. 18. THE NEXT ADDITION RELATES TO THE CASH CREDIT OF RS.10,000/ - RECEIVED FROM SHRI VIKRAM U PATEL. ON A PERUSAL OF THE ACCOUNT COPY OF THE ABOVE SAID CREDITOR, WHICH IS PLACED AT PAGE 219 OF THE PAPER BOOK, WE NOTICE THAT THE ASSESSEE HAS PAID INTEREST OF RS.7,057/ - ON 01.12.1985 AND PRINCIPAL OF RS.50,000/ - ON 19.03.1986. THEREAFTER, THE ASSESSEE HAS RECEIVED A SUM OF RS.60,000/ - ON 06.05.1986. WE NOTICE THAT THE AO HAS GIVEN CREDIT FOR PRINCIPAL PORTION OF RS.50,0 00/ - REPAID BY THE ASSESSEE AND ACCORDINGLY MADE THE ADDITION OF RS.10,000/ - . HOWEVER, HE HAS NOT GIVEN CREDIT FOR THE INTEREST AMOUNT OF RS.7,057/ - REFERRED ABOVE. CONSIDERING THE OPENING BALANCE OF RS.1,00,000/ - AVAILABLE IN THIS ACCOUNT AND THE INTERES T PAYMENT MADE TO THIS CREDITOR, WE DO NOT FIND ANY REASON TO SUSTAIN THE ADDITION OF RS.10,000/ - . ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 19. THE NEXT ISSUE RELATES TO THE DIS ALLOWANCE OF INTEREST EXPENDITURE OF RS.47,45,108/ - DEBITED AS INTEREST ON SECURITIES. SINCE THE SECURITIES ARE SHR I BHUPENDRA C. DALAL 13 PURCHASED AND SOLD ON CUM INTEREST BASIS, THE PAYMENT MADE FOR PURCHASE OF SECURITIES SHALL CONSIST OF TWO PARTS, VIZ., PURCHASE VALUE OF S ECURITIES AND INTEREST ACCRUED FROM LAST COUPON DATE TO THE DATE OF PURCHASE. SIMILARLY WHEN A SECURITY IS SOLD, THE SALE RECEIPT WOULD CONSIST OF SALE VALUE PLUS INTEREST ACCRUED FROM LAST COUPON DATE TO THE DATE OF SALE. WHILE ACCOUNTING THE VALUE OF P URCHASE AND SALE OF SECURITIES, THE ASSESSEE HAS ACCOUNTED THE INTEREST COMPONENT IN A SEPARATE ACCOUNT CALLED INTEREST ON SECURITIES ACCOUNT, WHICH WOULD BE DEBITED WITH THE AMOUNT OF INTEREST PAID AT THE TIME OF PURCHASE OF SECURITIES AND CREDITED WITH THE AMOUNT OF INTEREST RECEIVED AT THE TIME OF SALE OF SECURITIES. DURING THE YEAR RELEVANT TO AY 1987 - 88, THIS ACCOUNT, VIZ., INTEREST ON SECURITIES ACCOUNT WAS SHOWING DEBIT BALANCE OF RS.47.45 LAKHS AND THE ASSESSEE CLAIMED THE SAME AS EXPENDITURE. 20. THE AO NOTICED THAT THE SECURITIES PURCHASED BY THE ASSESSEE DID NOT REMAIN WITH THE ASSESSEE FOR A LONG TIME, I.E., THEY WERE SOLD WITHIN FEW DAYS. HENCE THE AO TOOK THE VIEW THAT THE INTEREST PAID ON SECURITIES AND INTEREST RECEIVED ON SECURITI ES SHOULD HAVE BEEN EQUAL AND HENCE THE NET INTEREST EXPENDITURE COULD NOT HAVE BEEN AT A HIGH FIGURE OF RS.47.45 LAKHS. IN THE FIRST ROUND OF PROCEEDINGS, THE ASSESSEE FURNISHED MONTH WISE DETAILS OF GROSS AMOUNT OF INTEREST PAID AND RECEIVED. THE ASSES SEE ALSO FURNISHED INSTANCES OF INTEREST PAID AND RECEIVED THROUGH BANK ACCOUNTS. THE ASSESSEE SUBMITTED THAT THE INTEREST PAYMENTS AND RECEIPTS ARE ALSO TRANSFERRED FROM SECURITIES ACCOUNT BY WAY OF JOURNAL ENTRIES, WHEN THEY ARE ACCOUNTED IN OTHER ACCOU NTS. IT IS STATED THAT THE ASSESSING OFFICER HAS DISALLOWED THE NET INTEREST CLAIM IN THE FIRST ROUND OF PROCEEDINGS, ONLY ON THE GROUND THAT THE ASSESSEE DID NOT FURNISH THE DETAILS OF INTEREST ACCOUNTED THROUGH JOURNAL ENTRIES. HENCE, IN THE SECOND ROU ND OF PROCEEDINGS, THE ASSESSEE FURNISHED COPIES OF FEW JOURNAL VOUCHERS RELATING TO INTEREST PAID ON SECURITIES. SHR I BHUPENDRA C. DALAL 14 21. HOWEVER, THE AO TOOK THE VIEW THAT THE INTEREST PAID ON SECURITIES IS EXCESSIVE AND NON - GENUINE AND ACCORDINGLY DISALLOWED THE CLAIM. THE RELEVANT OBSERVATIONS MADE BY THE AO IN AY 1987 - 88 ARE EXTRACTED BELOW, FOR THE SAKE OF CONVENIENCE: - IN THE ONGOING PROCEEDINGS THE ASSESSEE HAS PRODUCED FEW JOURNAL VOUCHERS SHOWING THE INTEREST AS PAID ON SECURITIES. IT IS SEEN THAT THE MAIN ISS UE IN THE CASE OF ASSESSEE FOR THE ASSESSMENT YEARS 1987 - 88 TO AY 1992 - 93 WAS THAT THE INTEREST SHOWN TO BE PAID BY THE ASSESSEE ON PURCHASE AND SALE OF SECURITIES WAS EXCESSIVE AND NOT GENUINE. IN THOSE YEARS TOO, THE ENTRIES OF INTEREST PAID WERE MADE T HROUGH JOURNAL VOUCHERS, WHICH WAS NOT ACCEPTED BY THE DEPARTMENT. IN THE CURRENT ASSESSMENT PROCEEDINGS, THE ASSESSEE HAS NOT JUSTIFIED THE PAYMENT OF THE INTEREST AT A HIGH RATE. THE ASSESSEE HAS NOT ESTABLISHED THE NEXUS BETWEEN THE INTEREST PAID AND INCOME RECEIVED ON THE SAME. HENCE AS IN THE ORIGINAL ASSESSMENT THE INTEREST PAID ON PURCHASE AND SALE OF SECURITIES OF RS.47,45,108/ - IS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE . 22. IN THE APPELLATE PROCEEDINGS, THE LD CIT(A) FOLLOWED THE DECISION RENDERED BY HIS PREDECESSOR IN THE FIRST ROUND OF PROCEEDINGS, WHEREIN THE PREDECESSOR HAD FOLLOWED THE DECISION RENDERED ON AN IDENTICAL ISSUE IN AY 1984 - 85 TO 1986 - 87. FINALLY THE LD CIT(A) UPHELD THE ADDITION BY CONCURRING WITH THE AO THAT TH E INTEREST PAID OR RECEIVED SHOULD HAVE BEEN ALMOST EQUAL, SINCE THE SECURITIES WERE NOT HELD BY THE ASSESSEE FOR A LONG PERIOD. 23. THE CONTENTION OF LD A.R IN RESPECT OF THIS ADDITION ARE SUMMARISED BELOW: - (A) THE INTEREST ON SECURITIES IS PAID AT A FIXED RATE. THEREFORE THE QUESTION OF ACCOUNTING OF ANY BOGUS INTEREST OR EXCESS INTEREST DOES NOT ARISE. (B) IF THE ASSESSEE HOLDS ANY SECURITY ON THE COUPON DATE, HE WOULD RECEIVE THE INTEREST AND THE SAME IS CREDITED TO INTEREST ON PDO ACCOUNT . THE ASSESSEE HAS ACCOUNTED THE CUM - INTEREST PAID / CUM - INTEREST RECEIVED AT THE TIME OF PURCHASE OF SECURITIES IN ANOTHER ACCOUNT TITLED AS INTEREST ON SECURITIES ACCOUNT. HENCE BOTH THE SHR I BHUPENDRA C. DALAL 15 ACCOUNTS, VIZ., INTEREST ON PDO ACCOUNT AND INTEREST ON SEC URITIES ACCOUNT SHOULD BE NETTED OFF. (C) IN MOST OF THE CASES, THERE IS TIMING MIS - MATCH, I.E., THE CUM - INTEREST PAID AT THE TIME OF PURCHASE OF SECURITY SHALL BE DEBITED IN ONE YEAR AND THE COUPON DATE, I.E., THE DATE OF RECEIPT OF INTEREST MAY F ALL IN THE SUCCEEDING YEAR. FOR EXAMPLE, IF THE INTEREST ON A SECURITY IS PAYABLE ON 30 TH JUNE AND 31 ST DECEMBER AND IF THE ASSESSEE PURCHASES A SECURITY ON 28 TH FEBRUARY, HE SHALL PAY CUM - INTEREST FOR THE PERIOD FROM 1 ST JANUARY TO 28 TH FEBRUARY AND THE SAME SHALL BE CLAIMED AS EXPENDITURE UNDER THE HEAD INTEREST ON SECURITIES. IF THE ASSESSEE CONTINUES TO HOLD THE SECURITY TILL 30 TH JUNE, THEN HE WILL RECEIVE INTEREST ON 30 TH JUNE OF THE SUCCEEDING YEAR AND THE SAME SHALL BE CREDITED TO INTEREST ON P DO ACCOUNT IN THE SUCCEEDING YEAR. THE ASSESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING AND HENCE THE INTEREST PAYMENT AS WELL AS RECEIPT WERE ACCOUNTED ONLY WHEN IT WAS PAID OR RECEIVED. (D) SOMETIMES, THERE WOULD BE A TIMING GAP BETWEEN THE SALE OF SECURITIES AND PURCHASE OF SECURITIES. THE INTEREST PERTAINING TO THAT DELAYED PERIOD SHALL BE BORNE BY THE ASSESSEE. FOR EXAMPLE, IF A CLIENT WANTED TO PURCHASE A SECURITY FROM THE ASSESSEE ON 19 TH MAY OF A YEAR, THE ASSESSEE WOULD ISSUE CONTRACT NOTE FOR CUM INTEREST PRICE AND THE INTEREST PERTAINING TO 1 ST JANUARY TO 19 TH MAY SHALL BE CREDITED TO INTEREST ON SECURITIES ACCOUNT. IT IS PERTINENT TO NOTE THAT THE ASSESSEE WOULD ISSUE THE CONTRACT NOTE, EVEN IF HE IS NOT IN READY POSSESSION OF THE SECU RITY WITH THE HOPE THAT THE SAME CAN BE PURCHASED FROM THE MARKET. SUPPOSE, IF THE PARTICULAR SECURITY IS NOT READILY AVAILABLE IN THE MARKET IN THE FORM OF REQUESTED LOT, HE IS REQUIRED TO SEARCH FOR THE SAME LOT IN THE MARKET AND IT MAY TAKE SOME TI ME TO LOCATE THE SAME. SUPPOSE IF THE ASSESSEE COULD FINALLY PURCHASE THE SECURITY ON 20 TH OF JUNE, HE WOULD PURCHASE THE SAME BY PAYING CUM - INTEREST FROM 1 ST JANUARY TO 20 TH JUNE. AT THE TIME OF PURCHASE, THE ASSESSEE HAD RECEIVED INTEREST FROM 1 ST JANU ARY TO 19 TH MAY. THUS, THE ASSESSEE WOULD BE CONSTRAINED TO BEAR THE INTEREST BURDEN FOR THE PERIOD FROM 20 TH MAY TO 20 TH JUNE AND THE SAME WOULD GO TO INCREASE THE EXPENDITURE DEBITED UNDER THE HEAD INTEREST ON SECURITIES. IF THE ASSESSEE COULD PURCHA SE THE SECURITY AFTER THE COUPON DATE, I.E, SAY ON 10 TH JULY, THEN THE ASSESSEE WOULD BE PAYING SIX MONTHS INTEREST FROM 1 ST JANUARY TO 30 TH JUNE TO THE BUYER, WHERE AS HE WOULD BE COLLECTING INTEREST ONLY FROM 1 ST JULY TO 10 TH JULY FROM SHR I BHUPENDRA C. DALAL 16 THE SELLER OF SECU RITIES. IF THE ACCOUNTING YEAR CHANGES, THEN ALSO THERE WILL BE INTEREST MIS - MATCH. (E) THE ASSESSEE HAS ALSO AVAILED OVERDRAFT FACILITY FROM BANKS. THE AVERAGE RATE OF INTEREST PAYABLE ON OVERDRAFT FACILITY IS 18%, WHERE AS THE AVERAGE CUM - INTEREST RATE PAYABLE ON THE SECURITY IS BETWEEN 6 TO 9%. HENCE, THE FUNDS COLLECTED BY THE ASSESSEE FOR SALE OF SECURITY SHALL BE CREDITED TO OVERDRAFT FACILITY ACCOUNT, WHICH WILL GO TO REDUCE THE INTEREST BURDEN ON THE LOAN. IN THIS MANNER, THE ASSESSEE WOULD BE ACTUALLY BENEFITTED, IF THE PURCHASE OF THE SECURITY ORDERED BY THE CLIENT IS DELAYED, SINCE THE INTEREST BURDEN BORNE FOR THE DELAYED PERIOD WILL BE LESS THAN THE INTEREST BURDEN OF OVER DRAFT FACILITY. I.E., THE CORRESPONDING REDUCTION IN THE INTEREST COMPONENT OF OVERDRAFT FACILITY WILL BE MORE THAN THE CUM - INTEREST BORNE BY HIM. HENCE, EVEN THOUGH THE INTEREST ON SECURITIES IS SHOWING HIGHER DEBIT, THE CORRESPONDING REDUCTION OF EXPENDITURE CLAIMED UNDER THE HEAD INTEREST ON BANK LOAN WILL BE MORE THAN THE INTEREST EXPENDITURE BORNE BY THE ASSESSEE. (F) THE ASSESSEE WAS PURCHASING AND SELLING SECURITIES AS A DEALER AND HENCE HIS VOLUME OF TURNOVER WAS HIGH. HENCE INTEREST EXPENDITURE BORNE BY HIM EVEN FOR FEW DAYS WOULD RUN INTO LAKHS OF RUP EES. THE PRESUMPTION MADE BY THE TAX AUTHORITIES THAT THE SECURITIES WERE NOT HELD FOR A LONG PERIOD, BUT THEY HAVE BEEN SOLD WITHIN FEW DAYS IS NOT BORNE OUT OF THE RECORD. THE FACT THAT THE ASSESSEE WAS HOLDING SECURITIES IN HIS HANDS IS EVIDENCED BY T HE OPENING BALANCE AND CLOSING BALANCE OF SECURITIES SHOWN IN THE BALANCE SHEET. (G) THE CUM - INTEREST PAID AT THE TIME OF PURCHASE OF SECURITIES IS GENERALLY DEBITED DIRECTLY TO INTEREST ON SECURITIES ACCOUNT AT THE TIME OF PURCHASE ITSELF. SOME TIM E, THE ASSESSEE WOULD DEBIT THE CONSOLIDATED AMOUNT OF PAYMENT TO SECURITIES ACCOUNT AND THEREAFTER WOULD TRANSFER THE CUM - INTEREST TO INTEREST ON SECURITIES ACCOUNT BY PASSING A JOURNAL ENTRY. HOWEVER, THE FACT REMAINS THAT THE CONSOLIDATED AMOUNT IS PAID AT THE TIME OF PURCHASE THROUGH ASSESSEES BANK ACCOUNT ONLY. HENCE THE TAX AUTHORITIES ARE NOT CORRECT IN PRESUMING THAT THE INTEREST ON SECURITIES DEBITED BY WAY OF JOURNAL ENTRIES ARE BOGUS OR INFLATED FIGURES. (H) ALL THE PAYMENTS OF C UM - INTEREST AS WELL AS THE CONSOLIDATED PAYMENTS MADE AT THE TIME OF PURCHASE OF SECURITIES ARE BY WAY OF ACCOUNT PAYEE CHEQUES AND HENCE THEY HAVE BEEN DULY REFLECTED IN SHR I BHUPENDRA C. DALAL 17 THE BANK ACCOUNTS OF THE ASSESSEE. HENCE THE QUESTION OF ANY BOGUS PAYMENT OR EXCES SIVE PAYMENT OF INTEREST SHALL NOT ARISE. (I) THE AO DID NOT MAKE ANY SUCH KIND OF DISALLOWANCE IN AY 1992 - 93 AND 1993 - 94. THE LD CIT(A) DELETED IDENTICAL DISALLOWANCE MADE IN AY 1988 - 89 IN FIRST ROUND AND IN AY 1989 - 90 BOTH IN FIRST AND SECOND ROUND OF PROCEEDINGS. 24. BESIDES THE CONTENTIONS URGED ON MERITS OF ADDITION, THE LD A.R ALSO SUBMITTED THAT THE ASSESSEE WAS NOT PROVIDED WITH ALL THE RELEVANT MATERIALS AVAILABLE WITH THE AO. HE SUBMITTED THAT THE COPIES OF LETTER DATED 28 - 09 - 2001 WRITTE N BY LD CIT(A), LETTER DATED 25 - 02 - 2003 WRITTEN BY AO TO LD CIT(A), ASSESSEES LETTER DATED 19 - 03 - 1998 AND LETTER DATED 23.08.2010 WRITTEN BY LD CIT(A) WERE NOT PROVIDED TO THE ASSESSEE. HE FURTHER SUBMITTED THAT THE ASSESSEE, DURING THE COURSE OF INSPECT ION OF ASSESSMENT RECORDS, NOTED DOWN CONTENTS OF THE LETTER DATED 23.08.2010 ADDRESSED BY LD CIT(A) TO THE ASSESSING OFFICER AND THE SAME READS AS UNDER: - THE SECOND ISSUE RELATES TO INTEREST PAID ON SECURITIES. THE APPELLANT HAS WITH EXAMPLE GIVEN JUST IFICATION FOR ALL ITEMS OF INTEREST EXCEEDING RS.20,000/ - PAID UNDER ONE TRANSACTION TO ESTABLISH THAT INTEREST HAS BEEN INCURRED EXCLUSIVELY FOR PURPOSE OF BUSINESS AND IS, THEREFORE, ALLOWABLE U/S 36(1)(III) OF THE ACT. THE SAME IS FOUND TO HAVE BEEN PA ID OR PAID FOR PURPOSE OTHER THAN BUSINESS THE SAME CAN BE DISALLOWED. THIS EXERCISE HAS NOT BEEN DONE UNDER THE REMAND PROCEEDINGS WHICH MAY BE_________ OUT NOW AND THEN REPORT SUBMITTED. BESIDES THE ABOVE SAID LETTER, THE LD CIT(A) ALSO ASKED THE AO T O SUBMIT REMAND REPORT AFTER VERIFYING THE DETAILS, VIDE HIS LETTERS DATED 16 - 09 - 2010 AND 30 - 09 - 2010. THE AO DID NOT SUBMIT THE REMAND REPORT. THE FIRST REMAND REPORT DATED 11.03.2010 WAS SUBMITTED BY AO WITHOUT CARRYING OUT ANY VERIFICATION AND HE HAS S UBMITTED THE SAME BY SIMPLY RELYING UPON THE OBSERVATIONS MADE IN OTHER YEARS. SHR I BHUPENDRA C. DALAL 18 25. ACCORDINGLY, THE LD A.R CONTENDED THAT THERE IS NO JUSTIFICATION ON THE PART OF THE TAX AUTHORITIES IN PRESUMING THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE UNDER THE H EAD INTEREST ON SECURITIES IS BOGUS OR EXCESSIVE IN NATURE. HE SUBMITTED THAT THE TAX AUTHORITIES HAVE DISALLOWED THIS AMOUNT WITHOUT UNDERSTANDING THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE AND ALSO THE TRADE PRACTICE PREVAILING IN THIS KIND OF TRADE. ACCORDINGLY HE SUBMITTED THAT THE IMPUGNED ADDITION SHOULD BE DELETED. 26. ON THE CONTRARY, THE LD D.R SUBMITTED THAT THE ASSESSEE WAS NOT CORRECT IN STATING THAT THE COPIES OF INCRIMINATING MATERIALS AND OTHER RELEVANT PAPERS WERE NOT PROVIDE D TO HIM. HE SUBMITTED THAT THE ASSESSEE HAS BEEN PROVIDED WITH OPPORTUNITY TO TAKE COPIES OF THE REQUIRED DOCUMENTS. IN THIS REGARD, HE INVITED OUR ATTENTION TO THE FOLLOWING OBSERVATIONS MADE BY LD CIT(A) IN PARAGRAPH 7.1 OF HIS ORDER: - 7.1 BEFORE THESE GROUNDS ARE CONSIDERED, IT IS WORTHWHILE TO MENTION THAT WHILE THIS APPELLATE PROCEEDINGS WAS IN PROGRESS, THE APPELLANT ALSO FILED A WRIT PETITION NO.1404 OF 2009 WITH THE HONBLE BOMBAY HIGH COURT FOR STAY OF RECOVERY PROCEEDINGS, IN WHICH THE ISSU E OF INSPECTION/PHOTOCOPY WAS RAISED, IN RESPONSE TO WHICH HONBLE HIGH COURT, VIDE THEIR ORDER DATED 24.09.2009, PROVIDED A GUIDELINE FOR ALLOWING INSPECTION/PHOTOCOPY, HEARING OF APPELLATE PROCEEDINGS 7.2 AS PER ORDER SHEET NOTING DATED 21/01/2010 WHICH IS KEPT IN THE APPEAL PROCEEDINGS FOLDER FOR AY 1987 - 88 IN THE CIT(A)S PROCEEDINGS, THE CONFIRMATION OF INSPECTION HAVING BEEN PROVIDED IS NOTED BY THE APPELLANT AND HIS LD COUNSEL. THE COPY OF THE SAID ORDER SHEET NOTING IS REPRODUCED HEREUNDER: - MR. BHUPEN DALAL AND MR. M.D. PANDYA CA APPEAR. ADDL. CIT, CENTRAL RANGE - 7 IS ALSO PRESENT. THE APPELLANT FILES LETTER DATED 21.01.10 IN RESPONSE TO ASSESSING OFFICERS LETTER DATED 12.1.10. ACCORDING TO MINUTES SUBMITTED BEFORE THE HONBLE HIGH COURT, NOW WITH THE FINAL CERTIFICATION BY THE ASSESSING OFFICER, THE INSPECTION IS HELD AS COMPLETE. THE APPELLATE HAS EXPRESSED SOME RESERVATIONS. HOWEVER, IN TERMS OF THE MINUTES OF HONBLE HIGH COURT THE HEARING SHR I BHUPENDRA C. DALAL 19 IS TO COMMENCE ON COMPLETION OF THE INSPECTI ON, WHICH IS FULFILLED AS THE DOCUMENTS DISPUTED IN CONNECTION WITH THE INSPECTION ARE STATED TO BE NOT AVAILABLE BY THE AO. SO THE HEARING CAN NOW PROCEED IN TERMS OF THE MINUTES. THE DATE OF AOS LETTER DATED 12.1.10 IS BEING TAKEN AS THE BASE FOR TIME LINE FOR THE 4 MONTHS PERIOD ALLOWED BY THE HONBLE HIGH COURT FOR COMPLETION OF THE HEARING. CASE FIXED FOR HEARING ON 2.2.10 AT 3 P.M. THE LD D.R FURTHER SUBMITTED THAT THE ASSESSEE HIMSELF HAS ADMITTED THAT THE RECORDS SEIZED WERE VOLUMINOUS AND HEN CE IT WAS NOT POSSIBLE FOR HIM TO OBTAIN PHOTOCOPY OF ALL THE MATERIALS. ACCORDINGLY HE SUBMITTED THAT THE TAX AUTHORITIES COULD NOT BE FOUND FAULT WITH, WHEN THE ASSESSEE HIMSELF HAS REFRAINED FROM TAKING PHOTOCOPIES OF SEIZED DOCUMENTS. HE FURTHER SUBMI TTED THAT THE ASSESSEES EXPLANATIONS WITH REGARD TO THE DEBIT BALANCE FOUND IN THE ACCOUNT OF INTEREST ON SECURITIES WERE NOT FOUND TO BE SATISFACTORY BY THE TAX AUTHORITIES. 27. WE HAVE HEARD RIVAL CONTENTIONS ON THIS ISSUE AND PERUSED THE RECO RD. WE NOTICE THAT THE INCOME TAX DEPARTMENT HAS CONDUCTED SEARCH IN OCTOBER, 1992 IN THE HANDS OF THE ASSESSEE AND THE ORIGINAL ASSESSMENT FOR THE ASSESSMENT YEAR 1987 - 88 WAS COMPLETED U/S 143(3) R.W.S. 148 OF THE ACT ON 25.3.1997. THERE AFTER THE TRIBU NAL HAS SET ASIDE THE MATTER TO THE FILE OF THE ASSESSING OFFICER AND THE SET ASIDE PROCEEDING WAS COMPLETED ON 31.12.2007 U/S 143(3) R.W.S. 254 OF THE ACT. THE FIRST ASSESSMENT WAS FRAMED AFTER THE EXPIRY OF ABOUT 10 YEARS FROM THE END OF THE ACCOUNTING YEAR AND THE SECOND ASSESSMENT WAS FRAMED AFTER THE EXPIRY OF ABOUT 20 YEARS. ACCORDING TO THE ASSESSEE, THE REVENUE HAS SEIZED ALMOST ALL THE DOCUMENTS DURING THE COURSE OF SEARCH PROCEEDINGS. WITH THESE BACK GROUND, WE SHALL PROCEED TO ADDRESS THE ISSU E UNDER CONSIDERATION. 28. THE ASSESSING OFFICER HAS TAKEN THE VIEW THAT THERE SHOULD NOT BE DEBIT BALANCE TO THE EXTENT CLAIMED BY THE ASSESSEE IN THE INTEREST ON SECURITIES SHR I BHUPENDRA C. DALAL 20 ACCOUNT. THIS IS FOR THE REASON THAT THE ASSESSEE USUALLY SELLS THE SECURI TIES WITHIN FEW DAYS OF PURCHASE, I.E., THE ASSESSEE DOES NOT RETAIN THE SECURITIES FOR A LONGER PERIOD. THE ASSESSEE EXPLAINED THE TRADE PRACTICE FOLLOWED WITH REGARD TO THE PURCHASE AND SALE OF SECURITIES, THE CONCEPT OF CUM - INTEREST, THE METHOD ADOPTED BY THE ASSESSEE WHILE SELLING SECURITIES, THE METHOD OF ACCOUNTING FOLLOWED, METHOD OF ACCOUNTING OF CUM - INTEREST ON SECURITIES, RECEIPT OF INTEREST FROM PUBLIC DEBT OFFICE ETC. DURING THE COURSE OF FIRST ASSESSMENT PROCEEDINGS, THE ASSESSEE HAS EXPLAINE D THAT THE CUM - INTEREST IS RECEIVED AND PAID THROUGH BANKING CHANNELS. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE ALSO ACCOUNTS ENTIRE PAYMENT IN SECURITIES ACCOUNT AND THEREAFTER THE CUM INTEREST PORTION IS TRANSFERRED BY WAY OF JOURNAL ENTRIES. T HE AO, IN THE FIRST ROUND, DISALLOWED THE CLAIM MAINLY FOR THE REASON THAT THE ASSESSEE DID NOT PRODUCE THE JOURNAL VOUCHERS. HENCE, THE ASSESSEE PRODUCED SAMPLE JOURNAL VOUCHERS IN THE SECOND ROUND. HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE SAME AND HENCE HE AGAIN DISALLOWED THE EXPENDITURE CLAIMED UNDER THE HEAD INTEREST ON SECURITIES WITH THE FOLLOWING OBSERVATIONS: - THE ASSESSEE WAS ASKED TO PRODUCE ALL THE JOURNAL ENTRIES FOR INSPECTION. HOWEVER, HE HAD STATED THAT THE SAME WERE N OT AVAILABLE. THE ISSUE OF INTEREST WAS DISCUSSED IN THE ASSESSMENT ORDER FOR AY 1988 - 89 TO 1991 - 92. IN NONE OF THE YEARS THE ASSESSEE HAD GIVEN ANY SATISFACTORY RESPONSE. IN THE AY 1991 - 92, IT WAS SEEN THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.1.15 CRORES BY MEANS OF FOUR JOURNAL ENTRIES FOR WHICH NO EXPLANATION WAS GIVEN. IN ABSENCE OF ANY EXPLANATION AND IN THE ABSENCE OF JOURNAL BOOKS, THE CORRECTNESS OF THE AMOUNT REMAINED UNVERIFIABLE. HENCE AN AMOUNT OF RS.47,45,108/ - WAS DISALLOWED AND ADDE D BACK TO THE INCOME IN THE ORIGINAL ASSESSMENT ORDER. IN THE ONGOING PROCEEDINGS THE ASSESSEE HAS PRODUCED FEW JOURNAL VOUCHERS SHOWING THE INTEREST AS PAID ON SECURITIES. IT IS SEEN THAT THE MAIN ISSUE IN THE CASE OF ASSESSEE FOR THE ASSESSMENT Y EARS 1987 - 88 TO AY 1992 - 93 WAS THAT THE INTEREST SHOWN TO BE PAID BY THE ASSESSEE ON PURCHASE AND SALE OF SECURITIES WAS EXCESSIVE AND NOT GENUINE. IN THOSE YEARS TOO, THE ENTRIES OF INTEREST PAID WERE MADE THROUGH JOURNAL VOUCHERS, WHICH WAS NOT ACCEPTED BY THE DEPARTMENT. IN THE CURRENT SHR I BHUPENDRA C. DALAL 21 ASSESSMENT PROCEEDINGS, THE ASSESSEE HAS NOT JUSTIFIED THE PAYMENT OF INTEREST AT A HIGH RATE. THE ASSESSEE HAS NOT ESTABLISHED THE NEXUS BETWEEN THE INTEREST PAID AND INCOME RECEIVED ON THE SAME. HENCE AS IN THE ORIGI NAL ASSESSMENT ORDER THE INTEREST PAID ON PURCHASE AND SALE OF SECURITIES OF RS.47,45,108/ - IS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE. WE NOTICE THAT THE LD CIT(A) HAS ALSO CONFIRMED THE ADDITION MAINLY FOLLOWING THE REASONING GIVEN BY THE AO , VIZ., (A) THE ASSESSEE HAS NOT EXPLAINED THE REASON FOR DEBIT BALANCE IN INTEREST ON SECURITIES ACCOUNT, WHEN THE SECURITIES ARE PURCHASED AND SOLD WITHIN SHORT TIME AND (B) THE JOURNAL VOUCHERS CANNOT BE TAKEN AS RELIABLE EVIDENCE FOR THE CLAIM OF INT EREST. 29. WE NOTICE THAT THE ASSESSING OFFICER HAS FAILED TO APPRECIATE THE SUBMISSIONS MADE BY THE ASSESSEE WITH REGARD TO THE TRADE PRACTICE FOLLOWED AND THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. WE NOTICE THAT THE ASSESSING OFFICER HAS NO T NOTED DOWN THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE IN THE ASSESSMENT ORDER IN BOTH ORIGINAL ASSESSMENT ORDER AND REASSESSMENT ORDER. THE LD A.R SUBMITTED THAT THE ASSESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING AND THIS SUBMISSION WAS NOT CO NTROVERTED BY THE LD D.R. FURTHER, EXPLANATIONS GIVEN BY THE ASSESSEE ABOUT THE PURCHASE AND SALE OF SECURITIES, CUM - INTEREST, INTEREST RECEIVED ON COUPON DATE AND THE EXPLANATIONS GIVEN AS TO HOW THEY ARE ACCOUNTED FOR IN THE BOOKS OF ACCOUNT, IN OUR VIE W, SUBSTANTIATE THE CLAIM OF THE ASSESSEE THAT HE IS FOLLOWING CASH SYSTEM OF ACCOUNTING. 30. WHEN THE MATTER OF RECOGNISING INCOME/EXPENDITURE, THERE IS CONSIDERABLE DIFFERENCE BETWEEN CASH SYSTEM OF ACCOUNTING AND MERCANTILE SYSTEM OF ACCOUNTING. UN DER MERCANTILE SYSTEM OF ACCOUNTING, THE INCOME/EXPENDITURE ACCRUED DURING THE YEAR SHALL BE ACCOUNTED FOR. HOWEVER, UNDER CASH SYSTEM OF ACCOUNTING, THE EXPENDITURE/INCOME SHALL BE ACCOUNTED FOR ON PAYMENT/RECEIPT SHR I BHUPENDRA C. DALAL 22 BASIS. THIS DIFFERENCE WILL LEAD TO COMP UTING DIFFERENT AMOUNT OF INCOME UNDER BOTH THE METHODS. THIS DIFFERENCE CAN BE EXPLAINED BY WAY OF AN ILLUSTRATION. SUPPOSE A SECURITY BEARING 12% INTEREST RATE IS PURCHASED FOR A SUM OF RS.1.00 LAKH ON 01 - 02 - 2007 AND THE COUPON DATE IS 30 TH JUNE. THE PURCHASER SHALL PAY RS.1,01,000/ - AND DEBIT THE ACCOUNT OF SECURITIES WITH RS.1.00 LAKH AND DEBIT THE ACCOUNT OF INTEREST ON SECURITIES WITH RS.1,000/ - . UNDER BOTH THE METHOD OF ACCOUNTING, THE PURCHASE OF SECURITIES SHALL BE ACCOUNTED IN IDENTICAL MA NNER, SINCE THE PAYMENT HAS BEEN MADE. LET US ASSUME THAT THE ACCOUNTING YEAR ENDS ON 31 ST MARCH 2007. UNDER CASH SYSTEM OF ACCOUNTING, NO FURTHER ENTRY SHALL BE PASSED. HOWEVER, UNDER MERCANTILE SYSTEM OF ACCOUNTING, THE INTEREST FOR THE PERIOD FROM 1 S T JANUARY TO 31 ST MARCH AMOUNTING TO RS.3,000/ - SHALL BE RECOGNISED AS INCOME. HENCE THE INTEREST ON SECURITIES ACCOUNT SHALL SHOW A CREDIT BALANCE OF RS.2,000/ - (INCOME OF RS.3000/ - LESS EXPENDITURE OF RS.1000/ - ) UNDER MERCANTILE SYSTEM OF ACCOUNTING, WHEREAS THE SAME ACCOUNT SHALL SHOW A DEBIT BALANCE OF RS.1000/ - UNDER CASH SYSTEM OF ACCOUNTING. UNDER CASH SYSTEM OF ACCOUNTING, THE INCOME FOR THE PERIOD FROM 1 ST JANUARY TO 30 TH JUNE AMOUNTING TO RS.6000/ - SHALL BE ACCOUNTED IN THE BOOKS AFTER RECEIPT OF PAYMENT ONLY, I.E., THE SAME SHALL BE ACCOUNTED IN SUCCEEDING YEAR. HENCE, THE INTEREST ON SECURITIES ACCOUNT SHALL SHOW A CREDIT BALANCE OF RS.3000/ - (INTEREST FROM 1 ST APRIL TO 30 TH JUNE) UNDER MERCANTILE SYSTEM OF ACCOUNT AND RS.6000/ - UNDER CASH SYSTEM OF ACCOUNTING. FOR THE SAKE OF CONVENIENCE, WE TABULATE BELOW THE ABOVE SAID ILLUSTRATION: - INTEREST ON SECURITIES ACCOUNT I YEAR II YEAR NET CREDIT MERCANTILE SYSTEM OF ACCOUNTING 2000 (CR.) 3000 (CR.) 5000 CASH SYSTEM OF ACCOUNTING 1000 (DR.) 6000 (CR.) 5000 WE HAVE NOTED THAT THE ASSESSEE HAS FOLLOWED CASH SYSTEM OF ACCOUNTING. HENCE, IN THE FIRST YEAR, THE INTEREST ON SECURITIES ACCOUNT WILL SHOW A DEBIT BALANCE. SHR I BHUPENDRA C. DALAL 23 31. THE ASSESSEE HAS SUBMITTED THAT HE HAS ACCOUNTED THE PAYMENT/RECEIPT OF CUM INTEREST ALONE UNDER THE HEAD INTEREST ON SECURITIES . THE ASSESSEE HAS FURTHER SUBMITTED THAT INTEREST RECEIVED ON COUPON DATE IS ACCOUNTED UNDER THE HEAD INTEREST FRO M PDO ACCOUNT . IN VIEW OF THIS METHOD OF ACCOUNTING OF INTEREST EXPENDITURE/INCOME, THE ACCOUNTS SHOULD REFLECT FOLLOWING POSITION IN THE CASE OF THE ASSESSEE: - ACCOUNT NAME I YEAR II YEAR INTEREST ON SECURITIES ACCOUNT 1000 ( C R.) INTEREST ON PDO ACCOUNT 6000 (CR.) THE NET EFFECT IS THAT THE ASSESSEE HAS ACCOUNTED NET INCOME OF RS.5000/ - WHEN BOTH THE YEARS ARE COMBINED TOGETHER. WE HAVE NOTICED THAT THE ASSESSEE HAS SUBMITTED THAT THE EXPENDITURE CLAIMED UNDER THE IN TEREST ON SECURITIES SHOULD BE NETTED OFF AGAINST INCOME ACCOUNTED UNDER THE HEAD INTEREST FROM PDO ACCOUNT. CONSIDERING THE METHOD OF ACCOUNTING EXPLAINED BY THE ASSESSEE, THERE IS MERIT IN THE SAID SUBMISSIONS. HOWEVER, WE NOTICE THAT THE ASSESSING OFFICER HAS REJECTED THE SAME WITHOUT FURNISHING ANY VALID REASON. 32. ANOTHER MAJOR REASON EXPLAINED BY THE ASSESSEE WITH REGARD TO THE DEBIT BALANCE AVAILABLE IN THE INTEREST ON SECURITIES ACCOUNT IS THE SALE OF SECURITIES, WHICH ARE NOT AVAILABLE ON HAND. THE ASSESSEE HAS EXPLAINED THAT HE WOULD ISSUE SALES CONTRACT, WHEN HE RECEIVES ORDER FOR PURCHASE OF SECURITY EVEN IF IT IS NOT AVAILABLE IN HIS HANDS. THE AMOUNT RECEIVED FROM HIS CLIENT IS DEPOSITED INTO HIS OVERDRAFT ACCOUNT. ACCORDING TO T HE ASSESSEE, HE HAS TO PAY CUM - INTEREST AT THE RATE OF AROUND 6% OR MAY BE UPTO 9%. HOWEVER, THE AMOUNT DEPOSITED INTO HIS OVERDRAFT ACCOUNT WILL REDUCE INTEREST BURDEN BY THE RATE APPLICABLE TO OVERDRAFT FACILITY, WHICH IS AROUND 16%. SINCE THERE IS N ET GAIN TO THE ASSESSEE ON ACCOUNT OF INTEREST LEVERAGE, THE ASSESSEE USED TO ISSUE SALES CONTRACT EVEN IF THE SECURITY IS NOT AVAILABLE WITH HIM AND WOULD PURCHASE THE SAME LATER FROM SHR I BHUPENDRA C. DALAL 24 THE MARKET AND DELIVER THE SAME. ACCORDING TO THE ASSESSEE ADDITIONAL INTEREST BORNE BY HIM TOWARDS CUM - INTEREST IS MORE THAN COMPENSATED BY THE REDUCTION OF INTEREST EXPENDITURE ON THE OVERDRAFT FACILITY. IN OUR VIEW, THIS APPEARS TO BE A REASONABLE EXPLANATION, SINCE THE BUSINESSMEN WILL ALWAYS EXPLOIT THE INTEREST LEVE RAGE OPPORTUNITIES, SINCE IT WOULD INCREASE THEIR PROFITABILITY. THE LD A.R SUBMITTED THAT THE ASSESSEE HAS ACCOUNTED FOR INTEREST ON OVERDRAFT FACILITY SEPARATELY AND HENCE ANY INCREASE IN THE EXPENDITURE RELATING TO INTEREST ON SECURITIES WILL HAVE AL MOST DOUBLE EFFECT OF CORRESPONDING REDUCTION IN THE INTEREST EXPENDITURE ON OVERDRAFT FACILITY. WE NOTICE THAT THIS REASONING OF THE ASSESSEE HAS NOT BEEN APPRECIATED BY THE TAX AUTHORITIES. 33. THE ASSESSEE HAS DEBITED THE INTEREST ON SECURITIES A CCOUNT UNDER TWO METHODS, VIZ., DIRECTLY WHEN THE PAYMENT OF CUM - INTEREST IS MADE AND ALSO BY WAY OF TRANSFER FROM SECURITIES ACCOUNT BY PASSING JOURNAL ENTRIES, IF THE CONSOLIDATED AMOUNT IS DEBITED TO SECURITIES ACCOUNT. IN THE FIRST ROUND OF PROCEEDI NG, THE ASSESSING OFFICER DISALLOWED THE EXPENDITURE ON THE REASONING THAT THE JOURNAL VOUCHERS WERE NOT PRODUCED TO SUBSTANTIATE THE CLAIM. EVEN THOUGH THE ASSESSEE PRODUCED CERTAIN SAMPLE JOURNAL VOUCHERS, YET THE AO DID NOT EXAMINE THE SAME AND MADE TH E ADDITION AGAIN ON THE REASONING THAT THE REVENUE HAS NOT ACCEPTED JOURNAL VOUCHERS. WE NOTICE THAT THE REVENUE HAS NOT GIVEN ANY REASON AS TO WHY THEY ARE NOT ACCEPTING THE JOURNAL VOUCHERS. EVEN, IF THERE STAND IS ACCEPTED AS CORRECT FOR A MOMENT, W E FAIL TO UNDERSTAND AS TO WHY THE ASSESSING OFFICER DISALLOWED THE EXPENDITURE DEBITED OTHERWISE THAN BY JOURNAL ENTRIES. 34. BE THAT AS IT MAY, THE CONTENTION OF THE ASSESSEE IS THAT THE JOURNAL ENTRIES HAVE BEEN PASSED BY HIM WHENEVER THE PURCHASE/ SALE OF INTEREST ON SECURITIES WERE ACCOUNTED IN SOME OTHER ACCOUNT. WE HAVE EARLIER NOTICED THAT WHEN THE ASSESSEE PURCHASES A SECURITY HAVING NOMINAL VALUE OF RS.1.00 LAKHS SHR I BHUPENDRA C. DALAL 25 WITH CUM - INTEREST OF RS.1000/ - , HE WOULD PAY A SUM OF RS.1,01,000/ - . THE SAID PAYMENT WOULD BE ACCOUNTED AS UNDER, VIZ., RS.1,00,000/ - WILL BE DEBITED TO SECURITIES ACCOUNT AND RS.1000/ - WILL BE DEBITED TO INTEREST ON SECURITIES ACCOUNT. SUPPOSE IF THE ASSESSEE HAS DEBITED ENTIRE PAYMENT OF RS.1,01,000/ - TO SECURITIES ACCOUNT , THEN THERE ARISES A NECESSITY TO PASS A JOURNAL ENTRY TO TRANSFER THE INTEREST ON SECURITIES ACCOUNT FROM THE SECURITIES ACCOUNT. A JOURNAL ENTRY SHALL BE PASSED BY DEBITING INTEREST ON SECURITIES ACCOUNT AND CREDITING THE SECURITIES ACCOUNT. 35. IT MAY BE NOTICED HERE THAT THE ASSESSEE HAS PAID THE CONSOLIDATED AMOUNT OF RS.1,01,000/ - BY WAY OF CHEQUE ONLY AND THE PASSING OF JOURNAL ENTRY WAS NECESSITATED ONLY FOR THE REASON OF INCORRECT ACCOUNTING. IT MAY ALSO BE NOTICED THAT THE PASSING OF JOUR NAL ENTRIES ARE PART AND PARCEL OF NORMAL ACCOUNTING PROCEDURE AND IT IS NECESSITATED IN MANY SITUATIONS. WE MAY GIVE CERTAIN ILLUSTRATIONS: - (A) A PERSON PURCHASES GOODS FOR RS.5,00,000/ - ON CREDIT. HE WOULD DEBIT THE PURCHASES ACCOUNT WITH RS.5,00,000 / - AND CREDIT SUPPLIER ACCOUNT WITH THE SAME AMOUNT. SUBSEQUENTLY, HE NEGOTIATES WITH THE SUPPLIER AND SETTLE THE PAYMENT AT RS.4,90,000/ - . AFTER MAKING PAYMENT, THE SUPPLIERS ACCOUNT WILL SHOW A CREDIT BALANCE OF RS.10,000/ - , WHICH IS NO LONGER PAYABLE. HENCE A JOURNAL ENTRY WILL BE PASSED BY DEBITING SUPPLIERS ACCOUNT WITH RS.10,000/ - AND CREDITING DISCOUNT RECEIVED ACCOUNT WITH THE SAME AMOUNT. (B) A PERSON MAKES AN ADVANCE PAYMENT OF RS.10.00 LAKHS TO A SUPPLIER IN CONNECTION WITH THE SUPPLY OF G OODS. HE WILL DEBIT ADVANCE PAYMENT ACCOUNT WITH RS.10.00 LAKHS. LET US ASSUME THAT THE SUPPLIER SUPPLIED THE GOODS IN THREE DIFFERENT LOTS AT THREE DIFFERENT POINT OF TIME. WHEN THE FIRST LOT OF GOODS AND BILL IS RECEIVED, SAY RS.2,00,000/ - , HE WILL PASS A JOURNAL ENTRY BY DEBITING PURCHASES ACCOUNT WITH RS.2.00 LAKH AND CREDITING ADVANCE PAYMENT ACCOUNT WITH THAT AMOUNT. SIMILAR JOURNAL ENTRIES SHALL BE PASSED WHEN HE RECEIVED SUBSEQUENT LOTS. SHR I BHUPENDRA C. DALAL 26 (C) IN THE ABOVE SAID EXAMPLE, IF THE AGGREGATE AMO UNT OF GOODS RECEIVED IN ALL THE LOTS IS RS.10.50 LAKHS, THEN THE ADVANCE PAYMENT ACCOUNT WOULD SHOW A CREDIT BALANCE OF RS.50,000/ - , WHICH HE IS REQUIRED TO PAY. SUPPOSE HE SETTLES THE ACCOUNT BY PAYING RS.35,000/ - , THEN THERE ARISES A NECESSITY TO PASS A JOURNAL ENTRY TO ACCOUNT FOR DISCOUNT AMOUNT OF RS.15,000/ - RECEIVED BY THE ASSESSEE . THE EXPENDITURE RELATING TO DEPRECIATION, BAD DEBTS, DISCOUNT GIVEN, WRITING OFF OF PRELIMINARY EXPENSES, OUTSTANDING EXPENSES ETC. ARE ALSO ACCOUNTED BY WAY OF JOURNA L ENTRIES ONLY. 36. HENCE, WHAT IS REQUIRED TO BE SEEN IS THAT THE PASSING OF JOURNAL ENTRY IS JUSTIFIED OR NOT. ACCORDINGLY ONE SHOULD NOT STRAIGHT AWAY COME TO THE CONCLUSION THAT THE EXPENDITURE ACCOUNTED THROUGH JOURNAL VOUCHERS ARE BOGUS ONE WIT HOUT VERIFYING THE FACTORS AND EVIDENCES THAT NECESSITATED THE PASSING OF JOURNAL ENTRIES. IN THE INSTANT CASE, THE ASSESSEE HAS EXPLAINED AS TO WHY HE WAS REQUIRED TO PASS JOURNAL ENTRIES. WE NOTICE THAT THE TAX AUTHORITIES DID NOT EXAMINE THE SAID EXPL ANATIONS OF THE ASSESSEE AT ALL. MORE IMPORTANTLY, THE ASSESSEE HAS POINTED OUT THAT THE SECURITIES WERE PURCHASED BY HIM BY WAY OF CHEQUE ONLY AND THE JOU R NAL ENTRY WAS PASSED TO CORRECT THE ACCOUNTING TREATMENT, MEANING THEREBY WHEN THE ASSESSEE DEBITS INTEREST ON SECURITIES ACCOUNT, THE CORRESPONDING CREDIT SHOULD HAVE BEEN GIVEN IN SOME OTHER ACCOUNT, HERE MOSTLY SECURIT I ES ACCOUNT. IF THE ASSESSING OFFICER HAD EXAMINED THE CORRESPONDING CREDIT GIVEN, HE WOULD HAVE BEEN ABLE TO APPRECIATE THE SUBMIS SIONS OF THE ASSESSEE. WE NOTICE THAT THE TAX AUTHORITIES DID NOT MAKE ANY ATTEMPT TO EXAMINE THE SAME. 37. FURTHER, THE JOURNAL VOUCHER PER SE IS NOT THE EVIDENCE IN SUPPORT OF THE EXPENDITURE CLAIM. IT IS ONLY A METHOD OF TRANSFERRING A TRANSAC TION FROM ONE ACCOUNT TO ANOTHER ACCOUNT. IN TRADE CIRCLES, CASH VOUCHER SHALL BE PREPARED WHEN THE PAYMENT IS MADE BY WAY OF CASH AND A BANK VOUCHER SHALL BE SHR I BHUPENDRA C. DALAL 27 PREPARED WHEN THE PAYMENT IS MADE BY WAY OF CHEQUE. THESE VOUCHERS ARE MERE DOCUMENTS TO SHOW T HE WAY IN WHICH THE EXPENDITURE WAS ACCOUNTED. HENCE, THEY ARE NOT PER SE EVIDENCE IN SUPPORT OF THE EXPENDITURE. INSTEAD, THE GENUINENESS OF THE EXPENDITURE SHALL ALWAYS BE EXAMINED WITH REFERENCE TO UNDERLYING EVIDENCES, VIZ., THE INVOICE, BILLS, PAYMEN T DETAILS, THE PARTY DETAILS ETC., WHETHER THE EXPENDITURE IS ACCOUNTED THROUGH JOURNAL VOUCHERS OR THROUGH CASH VOUCHERS OR BANK VOUCHERS. THUS, THE METHODOLOGY OF EXAMINING THE GENUINENESS OF EXPENDITURE IS IDENTICAL IN ALL THE THREE METHOD OF ACCOUNTIN G THE EXPENDITURE. WE NOTICE THAT THE TAX AUTHORITIES HAVE FAILED TO UNDERSTAND THIS FUNDAMENTAL PRINCIPLE AND INSTEAD PROCEEDED TO SUSPECT THE EXPENDITURE ONLY FOR THE REASON THAT THE SAME HAS BEEN ACCOUNTED THROUGH JOURNAL VOUCHERS AND FURTHER THE JOURN AL VOUCHERS WERE NOT PRODUCED. IN OUR VIEW, THE PASSING OF ENTRIES THROUGH JOURNAL VOUCHERS IS PART AND PARCEL OF ACCOUNTING PROCEDURE IN ANY TYPE OF BUSINESS AND HENCE ANY EXPENDITURE ACCOUNTED THROUGH JOURNAL VOUCHERS CANNOT BE DOUBTED WITH, ONLY FOR TH E REASON THAT THEY HAVE BEEN ACCOUNTED THROUGH JOURNAL VOUCHERS. 38 . WE HAVE NOTICED THAT THE ASSESSEE HAS SUBMITTED CERTAIN JOURNAL VOUCHERS BEFORE THE ASSESSING OFFICER, BUT THE ASSESSING OFFICER HAS FAILED TO EXAMINE THE SAME TO APPRECIATE THE C ONTENTIONS OF THE ASSESSEE. INSTEAD HE HAS PROCEEDED TO MAKE THE ADDITION AGAIN ON THE REASONING THAT THE ASSESSEE HAS FAILED TO FURNISH ALL THE JOURNAL VOUCHERS. IN OUR VIEW, THE FURNISHING OF ALL THE JOURNAL VOUCHERS WOULD NOT SERVE ANY PURPOSE UNLESS THE UNDERLYING DOCUMENTS EVIDENCING THE EXPENDITURE ARE EXAMINED IN A PROPER MANNER. THE CONTENTION OF THE ASSESSEE IS THAT THE UNDERLYING DOCUMENTS WOULD SHOW THAT THE PAYMENT WAS MADE TOWARDS PURCHASES/CUM - INTEREST BY WAY OF CHEQUE ONLY. FURTHER, ONE CANNOT REACH THE CONCLUSION THAT THE EXPENDITURE WAS BOGUS OR NON - GENUINE WITHOUT EXAMINING THE UNDERLYING DOCUMENTS. ACCORDINGLY, WE ARE OF THE VIEW SHR I BHUPENDRA C. DALAL 28 THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN REJECTING THE EXPENDITURE ACCOUNTED FOR BY WAY OF JOURNAL VOUCHERS WITHOUT EXAMINING THE UNDERLYING DOCUMENTS. 39. THE ASSESSING OFFICER HAS ALSO EXPRESSED THE VIEW THAT THE EXPENDITURE IS EXCESSIVE IN NATURE. WE NOTICE THAT THE ASSESSING OFFICER HAS NOT GIVEN ANY REASONING TO COME TO THIS CONCLUSION. ACCORDING TO LD A.R., THE ASSESSEE HAS DEBITED CUM - INTEREST AMOUNT ONLY TO INTEREST ON SECURITIES ACCOUNT. WE NOTICE THAT THE ASSESSING OFFICER HAS NOT EXAMINED THE ACCOUNT TO LIST OUT ANY SPECIFIC INSTANCES OF EXCESS PAYMENT OF INTEREST, IF ANY. THE A O APPEARS TO HAVE REACHED THE CONCLUSION ONLY FOR THE REASON THAT THE INTEREST ON SECURITIES ACCOUNT SHOW A DEBIT BALANCE AND SINCE HE PRESUMED THAT THE CUM - INTEREST PAYMENT AND CUM - INTEREST RECEIPT SHOULD BE ALMOST EQUAL AS THEY ARE SOLD WITHIN FEW DAYS O F PURCHASE. THUS WE NOTICE THAT THE AO HAS REACHED HIS CONCLUSIONS ON CERTAIN PRESUMPTIONS WITHOUT EXAMINING THE ACCOUNT AT ALL AND HIS OBSERVATIONS ARE TOO GENERAL IN NATURE. 40. THE AO HAS ALSO EXPRESSED THE VIEW THAT THE ASSESSEE HAS NOT SHOWN TH E NEXUS BETWEEN THE INTEREST EXPENDITURE AND INTEREST RECEIPT. WE ARE OF THE VIEW THAT THE NECESSITY TO ESTABLISHING NEXUS MAY NOT BE RELEVANT, SINCE THE PURCHASE OF SECURITIES AND SALE OF SECURITIES ARE TWO DIFFERENT AND INDEPENDENT TRANSACTIONS SO FAR AS THE ASSESSEE IS CONCERNED. WHEN HE PURCHASES THE SECURITY, HE WOULD ALSO PAY FOR CUM - INTEREST AND WHEN HE SELLS THE SECURITY, HE WOULD RECEIVE CUM - INTEREST. WHEN HE HOLDS THE SECURITY TILL THE COUPON DATE, HE WOULD RECEIVE INTEREST FROM PDO, WHICH WIL L BE ACCOUNTED IN INTEREST ON PDO ACCOUNT. IT CAN BE VISUALISED THAT A PERSON WHO PURCHASES A SECURITY FROM THE ASSESSEE WILL NOT BOTHER TO ASCERTAIN THE CUM - INTEREST RECEIVED BY THE ASSESSEE FROM THE PERSON FROM WHOM THE ASSESSEE HAD PURCHASED THE SECU RITY. THE PURCHASER WILL ONLY ENSURE THAT THE HE MAKES PAYMENT TOWARDS CUM - INTEREST SHR I BHUPENDRA C. DALAL 29 FROM THE LAST COUPON DATE TO THE DATE OF PURCHASE. HENCE THE QUESTION OF NEXUS, IN OUR VIEW, MAY NOT ARISE IN THESE TYPE OF TRANSACTIONS. 41. WE NOTICE THAT THE LD CI T(A) HAS ALSO CONFIRMED THE ADDITION WITHOUT CRITICALLY EXAMINING THE ISSUE. HOWEVER, THE FOREGOING DISCUSSIONS WOULD SHOW THAT THE INTEREST EXPENDITURE CLAIMED UNDER THE HEAD INTEREST ON SECURITIES HAVE BEEN MADE ONLY ON SURMISES AND CONJECTURES. WE FUR THER NOTICE THAT THE ASSESSING OFFICER HAS TAKEN SUPPORT OF IDENTICAL ADDITIONS MADE IN AY 1988 - 89 TO AY 1991 - 92 TO MAKE THIS ADDITION IN THE SECOND ROUND OF PROCEEDINGS. THE LD CIT(A) HAS ALSO CONFIRMED THE SAME. THE ASSESSEE HAS POINTED OUT THAT THE ID ENTICAL ADDITION MADE IN AY 1989 - 90 HAS BEEN DELETED BY LD CIT(A) IN AY 1989 - 90 IN BOTH FIRST AND SECOND ROUND OF PROCEEDINGS. HE ALSO DELETED IDENTICAL ADDITION MADE IN AY 1988 - 89 IN THE FIRST ROUND OF PROCEEDINGS. THE AO DID NOT MAKE ANY ADDITION OF IDE NTICAL NATURE IN AY 1992 - 93 AND 1993 - 94. 42. IN VIEW OF THE FOREGOING DISCUSSIONS, WE ARE OF THE VIEW THAT THE AO HAS NOT GIVEN PROPER REASONING OR ANY CREDIBLE MATERIAL TO MAKE THIS ADDITION AND THE SAME IS NOT WARRANTED IN THE FACTS AND CIRCUMSTAN CES OF THE CASE, WHEN ONE CONSIDERS THE TRADE PRACTICE, METHOD OF ACCOUNTING ETC. HENCE THE SAME IS LIABLE TO BE DELETED. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THE ADDITION RELATING TO INTEREST ON SECURITIES. 43. NEXT ISSUE CONTESTED BY THE ASSESSEE PERTAINS TO THE ADDITION MADE ON ACCOUNT OF NEGATIVE BALANCE OF SECURITIES AMOUNTING TO RS.3.22 CRORES. 44. THE AO, IN THE FIRST ROUND OF PROCEEDINGS, HAS OBSERVED THAT THE ASSESSEE HAS MAINT AINED THE BOOKS OF ACCOUNT IN SUCH A MANNER THAT IT WAS NOT POSSIBLE TO WORK OUT THE POSITION OF STOCK OF SECURITIES ON A DAY TO DAY BASIS. HENCE THE AO PROCEEDED TO PREPARE DAY TO DAY STOCK ON HIS OWN ON THE BASIS OF SECURITY SHR I BHUPENDRA C. DALAL 30 LEDGER OF THE ASSESSEE. THE AO FOUND FROM THIS EXERCISE THAT THE POSITION OF STOCK OF UNITS OF UTI WAS NEGATIVE TO THE EXTENT OF RS.3,22,72,000/ - , I.E., THE STATEMENT PREPARED BY THE ASSESSING OFFICER SHOWED THAT THE ASSESSEE HAS SOLD UNITS OF UTI WITHOUT HAVING STOCK. ACCORDINGLY THE AO TREATED THE NEGATIVE STOCK AS INCOME OF THE ASSESSEE BY OBSERVING THAT SIMILAR PHENOMENON WAS SEEN IN AY 1988 - 89 TO 1992 - 93. BEFORE LD CIT(A) THE ASSESSEE CONTENDED IN THE FIRST ROUND OF PROCEEDINGS THAT HE WAS NOT PROVIDED WITH THE WORKINGS MADE B Y THE AO AND FURTHER CONTENDED THAT THE ALLEGED DIFFERENCE COULD BE RECONCILED. HENCE THE LD CIT(A) REMANDED THE MATTER TO THE FILE OF THE AO. HOWEVER, THE ASSESSING OFFICER REPORTED THAT THE RELEVANT MATERIALS WERE NOT IMMEDIATELY AVAILABLE AND FURTHER STOOD BY THE ADDITION MADE BY HIM. THE LD CIT(A) WAS NOT CONVINCED WITH THE STAND OF THE AO AND HENCE HE, VIDE HIS ORDER DATED 01 - 01 - 1999, RESTORED THE MATTER TO THE FILE OF THE AO FOR EXAMINING THE SAME AFRESH AFTER PROVIDING THE WORKING SHEETS TO THE AS SESSEE AND AFTER HEARING THE ASSESSEE. WE HAVE EARLIER NOTICED THAT THE ITAT ALSO, IN THE FIRST ROUND OF PROCEEDINGS, DIRECTED THE AO TO DO THE ASSESSMENT DE - NOVA. 45. IN THE SECOND ROUND OF PROCEEDINGS, I.E., IMPUGNED PROCEEDINGS ALSO, THE AO MADE TH E ADDITION WITH THE OBSERVATION THAT THE ASSESSEE COULD NOT SATISFACTORILY EXPLAIN THE NEGATIVE BALANCE IN SECURITIES. THE LD CIT(A) CONFIRMED THE SAME BY FOLLOWING HIS DECISION RENDERED IN AY 1991 - 92 IN THE SECOND ROUND OF PROCEEDINGS. 46. THE LD A. R SUBMITTED THAT THE STOCK SUMMARY HAS BEEN PREPARED BY THE ASSESSING OFFICER HIMSELF AND HE HAS NOT FURNISHED THE BASIS FOR ARRIVING ALLEGED NEGATIVE STOCK. HE SUBMITTED THAT THE TRIBUNAL, IN THE FIRST ROUND OF PROCEEDING, HAD GIVEN FOLLOWING DIRECTIONS: - SHR I BHUPENDRA C. DALAL 31 WE WOULD LIKE TO REITERATE THAT IF THE RELEVANT MATERIAL ON THE BASIS OF WHICH ANY ADDITION IS PROPOSED, IS NOT CONFRONTED TO THE ASSESSEE, THE ASSESSING OFFICER SHALL NOT MAKE ANY SUCH ADDITION. THE LD A.R SUBMITTED THAT THE ASSESSING OFFICER HAS MADE THE ADDITION AGAIN WITHOUT PROVIDING THE RELEVANT MATERIALS IN CONTRAVENTION OF THE SPECIFIC DIRECTION GIVEN BY THE TRIBUNAL. HE SUBMITTED THAT ON THIS COUNT ALONE, THIS ADDITION IS LIABLE TO BE DELETED. HE FURTHER SUBMITTED THE ADDITION MADE BY TH E AO WITHOUT CONFRONTING THE RELEVANT MATERIALS TO THE ASSESSEE IS NOT LEGAL AS HELD BY HONBLE SUPREME COURT IN THE CASE OF KISHINCHAND CHELLARAM VS, CIT (1980)(125 ITR 713)(SC). 47. THE LD A.R SUBMITTED THAT THE ASSESSING OFFICER HAS FURNISHED THE STOCK STATEMENT PREPARED BY HIM. HOWEVER HE DID NOT FURNISH THE MATERIALS ON THE BASIS OF WHICH THE STOCK STATEMENT WAS PREPARED. HE SUBMITTED THAT THE ADDITION OF RS.3,22,72,000/ - RELATE TO ONLY ONE SCRIP, VIZ., UNITS OF UTI. THE DETAILS OF THE SAME AR E GIVEN AS UNDER: - ITEM DEBIT CREDIT UNITS OF UTI (AT FACE VALUE) 5,59,02,495 5,59,02,495 - (AT COST) 74,57,37,510 71,34,65,510 THE AO CONSIDERED THE DIFFERENCE BETWEEN T HE DEBIT & CREDIT OF COST PRICE AMOUNTING TO RS.3,22,72,000/ - (RS.74,57,37,510/ - ( - ) RS.71,34,65,510/ - ) AS THE NEGATIVE STOCK AND ASSESSED THE SAME AS INCOME OF THE ASSESSEE. THE LD A.R SUBMITTED THAT THE UNITS OF UTI SHOWN AT FACE VALUE REPRESENTS THE ACTUAL QUANTITY PURCHASED AND SOLD BY THE ASSESSEE AND THE SAID FIGURES CLEARLY SHOW THAT THERE IS NO DIFFERENCE IN THE QUANTITY DETAILS. HENCE THE QUESTION OF ANY NEGATIVE STOCK DOES NOT ARISE. HE SUBMITTED THAT THE COST PRICE OF THE UNITS OF UTI SHOWN BY THE ASSESSEE WAS RS.74.57 CRORES AND THE SALE PRICE OF THE SAME WAS SHOWN AT RS.71.34 CRORES. ON APPRECIATION OF THESE TWO FIGURES, ONE WOULD SHR I BHUPENDRA C. DALAL 32 COME TO THE CONCLUSION THAT THE ASSESSEE HAS INCURRED LOSS OF RS.3.22 CRORES. HE SUBMITTED THAT THE ASSESSEE IS ONLY MAKING POSSIBLE INTERPRETATION OF THE FIGURES FURNISHED BY THE AO, SINCE THE ASSESSING OFFICER DID NOT FURNISH THE MATERIALS ON THE BASIS OF WHICH THESE FIGURES WERE ARRIVED AT. ACCORDINGLY HE SUBMITTED THAT THE INTERPRETATION OF THE AO IN THIS MA TTER IS NOT CORRECT AND HENCE THE LD CIT(A) WAS NOT JUSTIFIED IN CONFIRMING THIS ADDITION. 48. THE LD D.R, ON THE CONTRARY, SUBMITTED THAT THE ASSESSING OFFICER WAS CONSTRAINED TO PREPARE THE STOCK SUMMARY, SINCE THE ASSESSEE DID NOT MAINTAIN DAY TO DAY STOCK REGISTER. HE SUBMITTED THAT THE ASSESSEE WAS GIVEN THE COPY OF STOCK SUMMARY, BUT THE ASSESSEE DID NOT FURNISH ANY EXPLANATION FOR THE NEGATIVE BALANCE. HE SUBMITTED THAT THE LD CIT(A) HAS MADE IDENTICAL ADDITION IN AY 1991 - 92 AND FOLLOWING THE SAME HE HAS ALSO CONFIRMED THE ADDITION OF THIS YEAR. HE SUBMITTED THAT THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE NEEDS TO BE CONFIRMED, SINCE THE ASSESSEE DID NOT FURNISH ANY EXPLANATION OR RECONCILIATION. 49. WE HEARD THE PARTIES ON THIS IS SUE AND PERUSED THE RECORD. WE NOTICE THAT THE TRIBUNAL, IN THE FIRST ROUND OF PROCEEDING, HAS GIVEN FOLLOWING DIRECTIONS TO THE AO, IN ITS ORDER DATED 30 - 03 - 2006 PASSED IN ITA NO.1621/MUM/1999 RELATING TO AY 1987 - 88: - 7. IN VIEW OF THE DISCUSSION GIV EN ABOVE AND FOLLOWING OUR ORDER FOR THE ASSESSMENT YEAR 1992 - 93 REFERRED TO SUPRA, WE SET ASIDE THE ASSESSMENT ORDERS PASSED BY THE ASSESSING OFFICER FOR THE ASSESSMENT YEARS UNDER APPEAL WITH THE DIRECTION THAT THE ASSESSMENTS SHOULD BE REFRAMED AFTER AL LOWING ADEQUATE OPPORTUNITY TO THE ASSESSEE AND AFTER CONFRONTING THE ASSESSEE WITH RELEVANT MATERIAL. WE WOULD LIKE TO REITERATE THAT IF THE RELEVANT MATERIAL ON THE BASIS OF WHICH ANY ADDITION IS PROPOSED, IS NOT CONFRONTED TO THE ASSESSEE, THE ASSESSIN G OFFICER SHALL NOT MAKE ANY ADDITION. SHR I BHUPENDRA C. DALAL 33 THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSEE WAS PROVIDED WITH ONLY STOCK SUMMARY PREPARED BY THE AO AND THE BASIS FOR PREPARING THE SAME WAS NOT GIVEN. HENCE, ON THIS POINT ALONE, THIS ADDITION IS LIABLE TO BE DISMISSED. 50. ON MERITS, WE NOTICE THAT THE INTERPRETATION GIVEN BY THE ASSESSEE APPEARS TO BE CORRECT ONE. THE LD A.R HAS POINTED OUT THAT THERE IS NO DIFFERENCE IN THE QUANTITY, SINCE THE DEBIT AND CREDIT OF FACE VALUE OF UNITS OF UTI ARE SAME. SINCE THERE IS NO DIFFERENCE IN THE QUANTITY OF UNITS ALLEGED TO HAVE BEEN PURCHASED AND SOLD, THE QUESTION OF NEGATIVE STOCK DOES NOT ARISE AT ALL. THE ALLEGED DIFFERENCE RELATES TO THE MARKET VALUE (DESCRIBED AS COST BY THE AO). HOW EVER, THE FIGURES COMPILED BY THE AO SHOWS THAT THE PURCHASE PRICE OF THE SECURITIES IS HIGHER THAN THE SALES VALUE, MEANING THEREBY THE ASSESSEE HAS INCURRED LOSS OF RS.3.22 CRORES. ON THE BASIS OF THESE FIGURES, IN OUR VIEW, ONE CANNOT COME TO THE CONCL USION THAT THE ASSESSEE HAS SOLD SHARES WHICH WERE NOT AVAILABLE WITH HIM, I.E, NEGATIVE STOCK. HENCE WE HOLD THAT THE INFERENCE DRAWN BY THE ASSESSING OFFICER ON THE BASIS OF ABOVE SAID FIGURES IS WRONG AND HENCE THE IMPUGNED ADDITION OF RS.3,22,72,000/ - IS NOT JUSTIFIED. WE NOTICE THAT THE LD CIT(A) HAS ALSO CONFIRMED THE ADDITION WITH THE OBSERVATION THAT THE ASSESSEE HAS FAILED TO FURNISH ANY EXPLANATION WITH REGARD TO THE NEGATIVE STOCK. SINCE THE QUESTION OF NEGATIVE STOCK DOES NOT ARISE IN THIS CA SE AND SINCE THE LD CIT(A) HAS ALSO NOT EXAMINED THE FIGURES FURNISHED BY THE AO PROPERLY, WE ARE UNABLE TO SUSTAIN THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE. IN ANY CASE, THE PROPER INTERPRETATION OF FIGURES WOULD ONLY SHOW THAT THE ASSESSEE HAS INCURR ED LOSS IN THE TRANSACTION OF PURCHASE AND SALE OF UNITS OF UTI. HOWEVER THIS LOSS ALSO COULD NOT BE RECOGNISED, SINCE THE ASSESSEE IS DISPUTING THE STOCK SUMMARY WORKED OUT BY THE ASSESSING OFFICER. SHR I BHUPENDRA C. DALAL 34 51. IN VIEW OF THE FOREGOING DISCUSSIONS, WE ARE O F THE VIEW THAT THERE IS NO MERIT IN THE ADDITION RELATING TO NEGATIVE STOCK. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 52. THE ASSESSEE HAS ALSO RAISED MANY LEGAL GROUNDS IN THE APPEAL FILED FOR AY 1987 - 88. HOWEVER, SINCE WE HAVE DECIDED MOST OF THE ISSUES URGED ON MERITS IN FAVOUR OF THE ASSESSEE, WE DO NOT FIND IT NECESSARY TO DEAL WITH THE SAME IN THIS YEAR. 53. WE SHALL NOW TAKE UP THE APPEALS FILED BY BOTH THE PARTIES FO R AY 1988 - 89. 54. IN THIS YEAR ALSO, THE ASSESSEE HAS RAISED CERTAIN LEGAL GROUNDS AND BEFORE CONSIDERING THEM, WE PREFER TO DISPOSE OF THE GROUNDS URGED ON MERITS. THE FIRST ISSUE RELATES TO THE ADDITION OF RS.19.61 LAKHS PERTAINING TO NEGATIVE BRO KERAGE. DURING THIS YEAR, THE ASSESSEE HAS UNDERTAKEN TRADING IN SHARES UNDER THE FIRM NAME M/S B.C.DEVIDAS. HE HAS ALSO CARRIED OUT SHARE TRANSACTIONS ON BEHALF OF HIS CLIENTS ON BROKERAGE BASIS, BESIDES TRADING IN HIS OWN ACCOUNT. THOUGH THE ASSESSEE WAS A RECOGNISED BROKER OF BSE, YET IT IS STATED THAT HE WAS NOT OPERATING HIS CARD. HENCE, IT IS STATED THAT THE SHARE TRANSACTIONS WERE CARRIED OUT THROUGH OTHER BROKERS. 55. THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE IN RESPECT OF THESE T RANSACTIONS IS STATED TO BE AS UNDER: - (A) ALL SHARE TRANSACTIONS SHALL BE ENTERED IN POSITION BOOK, WHICH CONTAIN DETAILS REGARDING THE TRANSACTION, VIZ., NAME OF PARTY, NUMBER OF SHARES, PRICE, DATE OF DELIVERY ETC. THESE TRANSACTIONS HAVE BEEN MAINT AINED SCRIP WISE. (B) ALL THE TRANSACTIONS ARE SUPPORTED BY CONTRACT NOTES AND BILLS, WHICH AGAIN CONTAIN ALL THE RELEVANT DETAILS STATED ABOVE. B - 1 VOUCHER IS PREPARED FOR SALE OF SHARES AND B - 2 VOUCHER IS PREPARED FOR PURCHASE OF SHARES. SHR I BHUPENDRA C. DALAL 35 (C) THE ASSES SEE SHALL PREPARE PATWAT SHEET (B - 7), WHICH IS A SUMMARY OF ALL PURCHASES AND CORRESPONDING SALES TRANSACTED IN A MONTH. THIS PATWAT SHEET SHALL BE PREPARED ON THE LAST DATE OF EVERY MONTH ON THE BASIS PAYMENT RECEIVED OR AMOUNT PAID DURING THE MONTH. (D) THE ACCOUNTING FOR SHARE TRANSACTIONS WERE DONE AT THE END OF EACH MONTH BASED ON PAYMENT MADE TO AND AMOUNT RECEIVED FROM PARTIES/BROKERS. THIS IS IN ACCORDANCE WITH THE CASH METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. (E) THE DIFFERENCE BETWE EN THE PURCHASE AND SALE VALUE OF SHARES IS RECORDED AS BROKERAGE IN PATWAT BOOK. THE CUMULATIVE NET DIFFERENCE IS TRANSFERRED TO THE BROKERAGE ACCOUNT IN THE REGULAR BOOKS OF ACCOUNT. (F) IN THE SHARE TRADING METHODOLOGY, A BUYER OF SHARES IS ENTIT LED TO ROLL OVER HIS CONTRACT TO THE NEXT SETTLEMENT PERIOD ON PAYMENT OF NOMINAL CHARGES, I.E., A BUYER IS REQUIRED TO MAKE THE PAYMENT FOR PURCHASES BEFORE THE END OF THE SETTLEMENT PERIOD. HOWEVER, HE MAY ROLL OVER THE SAME TO THE NEXT SETTLEMENT PERIO D ON PAYMENT OF NOMINAL CHARGES, WHICH IS CALLED BADLA CHARGES. THIS ROLL OVER IS CALLED BADLA TRANSACTIONS. IF A BUYER OPTS FOR ROLL OVER, THE PURCHASES MADE BY HIM SHALL BE DEEMED AS SOLD AT THE MARKET RATE ON THE LAST DATE OF THE CURRENT SETTLEMENT PERIOD AND AGAIN IT WILL BE PURCHASED AT THE MARKET RATE ON THE BEGINNING OF THE SUCCEEDING SETTLEMENT PERIOD. THE ASSESSEE HAD ALSO ENTERED THE BADLA TRANSACTIONS ALSO IN THE PATAWAT SHEETS. 56. THE ASSESSING OFFICER EXAMINED THE PATAWAT SHEETS AND NOTICED THAT THE ASSESSEE HAS MIXED UP ALL THE TRANSACTIONS OF PURCHASE AND SALE IN THE PATWAT SHEETS. HE FURTHER NOTICED THAT CERTAIN PURCHASE AND SALE OF SHARES HAS RESULTED IN LOSS AND THE SAID LOSS HAS NOT BEEN SEPARATED, BUT ADJUSTED AGAINST BROKERAG E INCOME WHILE ARRIVING AT THE CUMULATIVE MONTHLY BROKERAGE INCOME. THE AO PICKED UP 16 TRANSACTIONS OF PURCHASE AND SALE, IN WHICH THE ASSESSEE HAD SHOWN LOSS. THE AO TOOK THE VIEW THAT THE ASSESSEE HAS RECORDED THESE TRANSACTIONS ONLY WITH THE INTENTIO N TO REDUCE HIS PROFIT. ACCORDINGLY HE CONCLUDED ALL THESE TRANSACTIONS, WHEREIN THE ASSESSEE HAD INCURRED LOSS, ARE BOGUS. THE ASSESSING OFFICER DESCRIBED THESE LOSSES AS NEGATIVE BROKERAGE SHR I BHUPENDRA C. DALAL 36 AND THE SAME WORKED OUT TO RS.19,61,363/ - . THE AO, ACCORDING LY, DISALLOWED THE NEGATIVE BROKERAGE. 57. IN THE SET ASIDE PROCEEDINGS, THE ASSESSEE CONTENDED BEFORE THE AO THAT THERE IS NO QUESTION OF ANY NEGATIVE BROKERAGE AND THE LOSSES POINTED OUT BY THE AO ACTUALLY REPRESENTS TRADING LOSS IN TRADING OF SHARES . HE FURTHER SUBMITTED THAT HE IS NOT GIVEN THE BASIS OF ARRIVING AT THE SUMMARY OF BROKERAGE. THE ASSESSEE ALSO GAVE A LIST OF TRANSACTIONS OF PURCHASE AND SALE OF SHARES, WHERE HE MADE PROFIT. HOWEVER, THE AO HELD THAT, IN THE EXAMPLES GIVEN IN THE FI RST ROUND OF PROCEEDINGS, THE PURCHASE AND SALE OF SHARES HAVE TAKEN PLACE WITH THE SAME PARTY ON THE SAME DATE, WHERE AS IN THE EXAMPLES GIVEN BY THE ASSESSEE, THE PURCHASE AND SALE OF SHARES WERE ON DIFFERENT DATES WITH DIFFERENT PERSONS. ACCORDINGLY HE CAME TO THE CONCLUSION THAT THE LOSSES SHOWN IN THE PATAWAT SHEETS HAVE BEEN ENGINEERED BY THE ASSESSEE FOR BOOKING ARTIFICIAL LOSSES. ACCORDINGLY, THE AO AGAIN DISALLOWED THE AMOUNT OF RS.19,61,363/ - OBSERVING THE SAME AS NEGATIVE BROKERAGE. 58. THE LD CIT(A) OBSERVED THAT THE ASSESSEE HAS NOT BROUGHT ON RECORD ANY THIRD PARTY CONFIRMATION AT LEAST IN RESPECT OF TRANSACTIONS INCLUDED IN THE ILLUSTRATIVE LIST PREPARED BY THE AO. BEFORE LD CIT(A), THE ASSESSEE CONTENDED THAT THERE ARE PROFIT MAKING TR ANSACTIONS AND THE AO HAS OMITTED TO CONSIDER THE SAME. THE SAID CONTENTIONS DID NOT FIND FAVOUR WITH THE LD CIT(A), SINCE THE ASSESSEE HAS FAILED TO SHOW THE PROFIT MAKING TRANSACTIONS OF PURCHASE AND SALE ON THE VERY SAME DATE. ACCORDINGLY HE CONFIRMED THE ADDITION MADE BY THE AO. 59. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS ISSUE AND PERUSED THE RECORD. THE MAIN SUBMISSION OF THE LD A.R WAS THAT THE TRANSACTIONS OF PURCHASE AND SALE CARRIED OUT BY THE ASSESSEE IN A MONTH, EITHER ON HIS OWN AC COUNT OR ON BEHALF OF HIS CLIENTS, ARE SUMMARISED IN THE PATAWAT BOOK. HENCE THE SHR I BHUPENDRA C. DALAL 37 TRANSACTIONS OF PURCHASE AND SALE SHALL APPEAR TO HAVE TAKEN PLACE ON THE LAST DAY OF THE MONTH AND THE SAME HAS BEEN VIEWED ADVERSELY BY THE AO. HE SUBMITTED THAT THE AO AR RIVED AT SUCH A CONCLUSION WITHOUT APPRECIATING THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE, I.E., THE DAY TO DAY TRANSACTIONS ARE ENTERED INTO IN POSITION BOOK AND THEY ARE SUMMARISED IN PATAWAT BOOK ON THE LAST DAY OF MONTH. ON THE CONTRARY, THE LD D.R SUBMITTED THAT THE ENTRIES RECORDED IN PATAWAT BOOK ARE NOT SUPPORTED BY THIRD PARTY CONFIRMATIONS. 60. WE HAVE EARLIER NOTICED THAT THE ASSESSING OFFICER HAS GIVEN 16 ILLUSTRATIONS, WHEREIN THE ASSESSEE HAD BOOKED LOSS. THE DATES OF THOSE TR ANSACTIONS ARE STATED AS UNDER: - ITEM NO. DATE 1 31.01.1987 2 31.01.1987 3 28.02.1987 4 28.02.1987 5 31.03.1987 6 30.04.1987 7 31.05.1987 8 31.05.1987 9 31.05.1987 10 30.06.1987 11 30.06.1987 12 30.06.1987 13 30.07.1987 14 31.08.1987 15 31.08.1987 16 30.11.1987 ALL THESE DATES FALL O N THE LAST DAY OF THE MONTH. THE AO HAS TAKEN THE VIEW THAT THESE ENTRIES ARE BOGUS IN NATURE, SINCE THE PURCHASE AND SALES HAVE BEEN SHOWN ON THE SAME DATE. ACCORDING TO THE ASSESSEE, IT IS ONLY A SUMMARISED POSITION OF THE TRANSACTIONS ENTERED IN RESPE CT OF A SCRIP. IN THE WRITTEN SUBMISSIONS, THE ASSESSEE HAS SUBMITTED THAT ACTUAL DATES OF TRANSACTIONS. FOR SHR I BHUPENDRA C. DALAL 38 EXAMPLE, THE TRANSACTION NO.1 PERTAINED TO PURCHASE AND SALE OF 2100 SHARES OF HINDUSTAN COCOA AND ACCORDING TO THE AO THEY HAVE TAKEN PLACE ON 3 1.1.1987. THE ASSESSEE HAS STATED THAT THE SHARES OF HINDUSTAN COCOA WAS PURCHASED ON 31.1.1987 FROM SUNDER PUNWANI AND SOLD TO LALLU RANCHHODAS ON 15.12.1986, I.E., THE ASSESSEE HAS SOLD THE SHARES INITIALLY WITHOUT HAVING STOCK OF THE SAME AND THEN COVE RED THE SAME BY PURCHASING THE SAME LATER. THIS IS CALLED SHORT SALE, WHICH IS QUITE COMMON IN SHARE TRADING CIRCLES. SIMILARLY, THE AO HAS STATED THAT THE ASSESSEE PURCHASED AND SOLD 900 SHARES OF HINDUSTAN COCOA ON 28.02.1987. THE ASSESSEE HAS EXPLAIN ED THE ABOVE SAID SHARES WERE PURCHASED ON 24.12.1986 AND SOLD ON 17.2.1987. 61. IN SOME OF THE ILLUSTRATIONS, THE AO HAS POINTED OUT THAT THE PURCHASE AND SALE OF SHARES HAVE BEEN CARRIED OUT WITH THE SAME PERSON. FOR EXAMPLE, IN THE ILLUSTRATION NO. 10, THE AO HAS POINTED THAT THE ASSESSEE HAS PURCHASED AND SOLD 11000 SHARES OF TATA TEA FROM M.D. SHUKLA AS PER PATAWAR SHEET NO.6004. THE ASSESSEE HAS EXPLAINED THE SAME TO BE BADLA TRANSACTIONS. WE HAVE EARLIER NOTICED THAT A BUYER/SELLER OF SHARES IS ENTITLED TO ROLL OVER HIS POSITION TO THE NEXT SETTLEMENT PERIOD ON PAYMENT OF PRESCRIBED FEES, IN WHICH CASE, THE EXISTING POSITION SHALL BE CLOSED ON THE LAST DAY OF THE SETTLEMENT PERIOD AND A CORRESPONDING NEW POSITION WILL BE CREATED ON THE FIRST DAY OF SUCCEEDING SETTLEMENT PERIOD. THIS IS CALLED AS BADLA TRANSACTIONS IN THE TRADE CIRCLES. 62. WE HAVE EARLIER NOTICED THAT THE ASSESSEE IS FOLLOWING CASH SYSTEM OF ACCOUNTING, AS PER WHICH THE PURCHASE AND SALE OF SHARES SHALL BE ACCOUNTED ON PAYME NT/RECEIPT BASIS, EVEN THOUGH THE RELEVANT CONTRACT WAS ENTERED IN A DIFFERENT DATE. 63. WITH REGARD TO THE LOSS SHOWN IN THE TRANSACTIONS, THE ASSESSEE HAS SUBMITTED THAT THEY ARE TRADING LOSS INCURRED BY HIM ON PURCHASE AND SALE OF SHR I BHUPENDRA C. DALAL 39 SECURITIES. WE NO TICE THAT THE TAX AUTHORITIES DID NOT EXAMINE THIS EXPLANATION AT ALL. SINCE THE TRANSACTIONS HAVE BEEN ENTERED ON THE LAST DAY OF THE MONTH IN THE PATAWAT SHEETS, THE AO TOOK THE VIEW THAT THE ASSESSEE HAS ENGINEERED ARTIFICIAL LOSSES. ACCORDING TO THE ASSESSEE, THESE TRANSACTIONS ARE SUPPORTED BY THE CONTRACT NOTES, WHICH LAY SEIZED BY THE REVENUE AND ARE AVAILABLE WITH THE AO. WE NOTICE THAT THE ASSESSING OFFICER DID NOT BOTHER TO EXAMINE THE CONTRACT NOTES IN ORDER TO FIND OUT THE VERACITY OF THE EXP LANATIONS. IN OUR CONSIDERED VIEW, THE INFERENCE DRAWN BY THE AO MAY BE RIGHT, IF INSTANCES POINTED OUT BY HIM ARE MERE BOOK ENTRIES WITHOUT ANY SUPPORT OF CONTRACT NOTES. WE HAVE EARLIER NOTICED THAT THE ASSESSEE HAS CARRIED OUT SHARE TRADING THROUGH OT HER BROKERS, SINCE HE DID NOT HAVE OPERATING LICENSE FOR HIS CARD. HENCE, IN OUR VIEW, THE CONTRACT NOTES CONSTITUTE THIRD PARTY RECORDS AND THE SAME SHALL SUBSTANTIATE THE ENTRIES MADE IN THE POSITION BOOK AND PATAWAT SHEETS. WITHOUT EXAMINING THE CONTR ACT NOTES, THE AO AS WELL AS LD CIT(A) HAS COME TO THE CONCLUSION THAT THEY ARE BOGUS IN NATURE AND FURTHER THE ASSESSEE HAS FAILED TO OBTAIN THIRD PARTY CONFIRMATIONS. 64. IN ANY CASE, THE ASSESSEE HAS POINTED OUT THAT THE INSTANCES GIVEN BY THE AO F ROM PATAWAT SHEETS ARE NOT SAME DAY TRANSACTIONS. THE EXPLANATION OF THE ASSESSEE APPEARS TO BE RIGHT, IF ONE UNDERSTANDS THE METHOD OF ACCOUNTING FOLLOWED BY HIM, I.E., THE PATAWAT SHEETS ARE ONLY SUMMARY OF TRANSACTIONS (PAYMENT MADE AND RECEIVED IN RES PECT OF CONTRACT NOTES) CARRIED OUT IN A MONTH. THE ASSESSEE HAS ALSO GIVEN EXPLANATION AS TO THE DATE OF PURCHASE AND SALE OF SHARES IN CERTAIN CASES. FURTHER THE EFFECT OF BADLA TRANSACTIONS HAS ALSO BEEN EXPLAINED. FURTHER, THE ASSESSEE HAS POINTED T HAT THE ASSESSING OFFICER DID NOT MAKE ANY ADDITION OF IDENTICAL NATURE IN THE EARLIER YEAR OR IN ANY OF THE SUBSEQUENT YEARS, EVEN THOUGH THE OPERATION OF THE ASSESSEE WAS IDENTICAL IN NATURE IN ALL OF THE YEARS. SHR I BHUPENDRA C. DALAL 40 65. IN VIEW OF THE FOREGOING DISCUSSION S, WE ARE OF THE VIEW THAT THE ASSESSING OFFICER SHOULD NOT HAVE COME TO SUCH A CONCLUSION WITHOUT EXAMINING RELEVANT CONTRACT NOTES ISSUED BY THE THIRD PARTY BROKERS. ACCORDINGLY WE ARE OF THE VIEW THAT THE TAX AUTHORITIES HAVE NOT GIVEN PROPER JUSTIFICA TION IN PRESUMING THAT THE LOSS SHOWN BY THE ASSESSEE IS BOGUS ONE AND CONSTITUTES NEGATIVE BROKERAGE. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 66. THE NEXT ISSUE URGED BY THE ASS ESSEE RELATES TO THE ADDITION OF RS.29,61,353/ - PERTAINING TO UNDISCLOSED INVESTMENT IN STOCK, WHICH WAS SUSTAINED TO THE EXTENT OF RS.20,59,607/ - SUSTAINED BY LD CIT(A). THE ASSESSEE HAS PURCHASED AND SOLD SHARES ON HIS OWN ACCOUNT, WHICH WAS ACCOUNTED U NDER THE HEAD BCD SHARE ACCOUNT. THE AO ANALYSED THE TRANSACTIONS ACCOUNTED IN THAT ACCOUNT BY ENTERING THE DETAILS IN A COMPUTER AND ARRIVED AT THE POSITION OF CLOSING STOCK. THIS STATEMENT OF CLOSING STOCK WAS COMPARED WITH THE LIST OF CLOSING STOCK OF SHARES FURNISHED BY THE ASSESSEE. IN MANY CASES, THERE WERE MISMATCH AND HENCE THE AO MADE AN ADDITION OF RS.31,38,502/ - IN THE ORIGINAL ASSESSMENT PROCEEDINGS. SINCE THE DETAILS OF WORKINGS MADE BY THE AO WAS NOT FURNISHED TO THE ASSESSEE, THE LD CIT (A) RESTORED THE MATTER TO THE FILE OF THE AO. IN THE SET ASIDE PROCEEDINGS, THE ASSESSEE POINTED OUT CERTAIN MISTAKES COMMITTED BY THE AO, SOME OF WHICH ARE GIVEN BELOW: - (A) THE AO HAS WORKED OUT NEGATIVE BALANCE OF 18,550 SHARES IN RELIANCE INDUSTRIE S LTD. IN FACT, THERE WAS SALE/RENUNCIATION OF RIGHTS TO APPLY 18,550 SHARES OF RELIANCE G SERIES. HOWEVER, THE AO HAS TAKEN THE SAME AS SALE OF SHARES. (B) WHILE PUNCHING THE DATA, THE TRANSACTIONS PERTAINING TO CIFCO FINANCE LTD AND CIFCO LTD HAVE BE EN MIXED UP. (C) TWO ACCOUNTS HAVE BEEN OPENED FOR SHARES OF TVS SUZUKI, VIZ., ONE IN THE NAME OF SUZUKI AND ANOTHER ONE IN THE NAME OF TVS SUZUKI. SHR I BHUPENDRA C. DALAL 41 THE AO ACCEPTED THE EXPLANATIONS OF THE ASSESSEE IN RESPECT OF SUZUKI, TVS SUZUKI, IND SUZUKI, CIFCO/ CIFC O FIN. HE DID NOT ACCEPT THE EXPLANATIONS OF THE ASSESSEE IN RESPECT OF REMAINING ITEMS AND ACCORDINGLY MADE AN ADDITION OF RS.29,61,353/ - . 67. BEFORE LD CIT(A), THE ASSESSEE REITERATED ITS SUBMISSIONS MADE BEFORE THE AO. HOWEVER, THE LD CIT(A) TOOK THE VIEW THAT THE ASSESSEE HAS FAILED TO FURNISH SPECIFIC REPLIES IN RESPECT OF EACH OF THE DISCREPANCY. ACCORDINGLY HE CONFIRMED THE ADDITION, HOWEVER TO THE EXTENT OF RS.20,59,607/ - . 68. THE LD A.R SUBMITTED THAT THERE WAS A GLARING MISTAKE IN THE COMPUTATIONS MADE BY THE AO, I.E., THE ASSESSEE WAS ENTITLED TO SUBSCRIBE FOR 21260 SHARES AGAINST G SERIES OF FULLY CONVERTIBLE DEBENTURES OF RELIANCE INDUSTRIES. THE ASSESSEE HAD SOLD OR RENOUNCED HIS RIGHTS TO APPLY FOR 18,550 SHARES. THIS SALE OF RI GHTS IS PRESUMED BY THE AO AS SALE OF SHARES AND BY APPLYING A HYPOTHETICAL RATE OF RS.111/ - PER SHARE, THE AO ARRIVED AT THE FIGURE OF UNDISCLOSED STOCK OF RS.20,59,607/ - . IN THIS REGARD, HE INVITED OUR ATTENTION TO PAGES 337 - 338 OF PAPER BOOK AS WELL A S PAGES 354 - 355, WHEREIN THE DETAILS OF RENUNCIATION HAVE BEEN NOTED IN THE ORIGINAL BOOKS OF ACCOUNT. HE FURTHER INVITED OUR ATTENTION TO THE WORKINGS MADE BY THE AO, WHICH ARE PLACED AT PAGES 313 TO 335, MORE PARTICULARLY THE PAGES 329 - 330. THE LD A.R SUBMITTED THAT THE AO DID NOT MAKE ANY COMMENT OR EXPRESSED ANY OPINION ABOUT THE MISTAKE POINTED OUT BY THE ASSESSEE. HE SUBMITTED THAT THE LD CIT(A) ALSO REJECTED THE EXPLANATIONS OF THE ASSESSEE WITHOUT EXAMINING THE SAME. 69. ON THE CONTRARY, THE LD D.R INVITED OUR ATTENTION TO PARAGRAPH 9.6 OF THE ORDER PASSED BY LD CIT(A), WHEREIN HE HAS OBSERVED THAT THE ASSESSEE HAS NOT FURNISHED SPECIFIC REPLIES. SHR I BHUPENDRA C. DALAL 42 70. WE HAVE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. WE NOTICE THAT THE ASS ESSEE HAS POINTED OUT THE MISTAKES THAT OCCURRED IN THE COMPUTATION MADE BY THE ASSESSING OFFICER, WHICH INCLUDED THE SALE/RENUNCIATION OF RIGHTS, I.E., THE RENUNCIATION OF RIGHTS HAVE BEEN CONSIDERED AS SALE OF SHARES BY THE ASSESSING OFFICER. THE ASSESS EE HAS ALSO POINTED OUT OTHER MISTAKES ALSO. WE NOTICE THAT THE AO HAS ACCEPTED THE OTHER MISTAKES, BUT DID NOT GIVE ANY REASON FOR NOT ACCEPTING THE MISTAKES POINTED OUT BY THE ASSESSEE IN RESPECT OF RENUNCIATION OF RIGHT TO APPLY FOR SHARES. EVEN THOUG H THE LD CIT(A) HAS OBSERVED THAT THE ASSESSEE HAS FAILED TO GIVE SPECIFIC REPLIES, YET WE NOTICE THAT THE TAX AUTHORITIES HAVE ALSO FAILED TO ADDRESS THE SPECIFIC MISTAKE POINTED OUT BY THE ASSESSEE. IN ORDER TO ARRIVE AT THE ALLEGED UNDISCLOSED STOCK, T HE ASSESSING OFFICER HAS ADOPTED AN ESTIMATED RATE OF RS.111/ - PER SHARE. 71. SINCE THE ASSESSEE HAS HELD FULLY CONVERTIBLE DEBENTURES OF RELIANCE G SERIES, HE BECAME ENTITLED TO APPLY FOR SHARES ON A PRESCRIBED RATE UPON CONVERSION. AS PER THE MA RKET MECHANISM, THE ASSESSEE IS ENTITLED TO SELL HIS RIGHTS IN FAVOUR OF ANOTHER PERSON, INSTEAD OF APPLYING FOR THE SHARES. ACCORDING TO THE ASSESSEE, HE HAS SOLD THE RIGHTS, WHICH HAS ACCRUED FROM THE DEBENTURES, WHICH ARE ALREADY HELD BY HIM, I.E., HE HAS NOT PURCHASED SUCH RIGHTS, BUT THE RIGHT HAS ACCRUED TO HIM FROM THE DEBENTURES HELD BY HIM. HENCE THE RIGHT TO APPLY FOR SHARES, IN OUR VIEW, CANNOT BE TAKEN AS UNDISCLOSED ITEM OF ASSET. WE NOTICE THAT THOUGH THE ASSESSEE HAS SUBMITTED THESE EXPL ANATIONS AND ACCORDINGLY CONTENDED THAT THE ASSESSING OFFICER WAS WRONG IN CONSIDERING THE SALE OF RIGHTS AS SALE OF SHARES, YET THE AO DID NOT ADDRESS THE SAME. HENCE, WE ARE OF THE VIEW THAT, IN THE ABSENCE OF ANYTHING TO CONTRADICT THE SUBMISSIONS MADE BY THE ASSESSEE, HIS EXPLANATIONS SHOULD BE ACCEPTED. ACCORDINGLY, WE HOLD THAT THE SALE OF RIGHTS CANNOT BE CONSIDERED TO BE THE SALE OF SHARES AND ACCORDINGLY, WE DIRECT THE AO TO DELETE THE ADDITION RELATING TO UNDISCLOSED STOCK SHR I BHUPENDRA C. DALAL 43 OF SHARES OF REL IANCE INDUSTRIES LTD. THE ORDER OF LD CIT(A) STANDS SET ASIDE ACCORDINGLY. 72. THE NEXT ISSUE RELATES TO THE ADDITION OF CREDIT BALANCE STANDING IN THE NAME OF M/S CHAMPAKLAL DEVIDAS. SINCE THE LD CIT(A) HAS GIVEN PARTIAL RELIEF, BOTH THE PARTIES AR E CHALLENGING THE DECISION OF LD CIT(A), I.E., THE ASSESSEE IS CHALLENGING THE DECISION CONFIRMED AND THE REVENUE IS CHALLENGING THE RELIEF GRANTED. 73. THE SUNDRY CREDITORS LIST FURNISHED BY THE ASSESSEE INCLUDED AN ACCOUNT IN THE NAME OF M/S CHAMPAK LAL DEVIDAS WITH AN OUTSTANDING BALANCE OF RS.1,26,12,035/ - . THE PROPRIETOR OF M/S CHAMPAKLAL DEVIDAS WAS SHRI J.P.GANDHI, WHO WAS A CLOSE ASSOCIATE OF THE ASSESSEE HEREIN. IN AY 90 - 91 AND 91 - 92, THE AO NOTICED THAT THE ASSESSEE HAD ENTERED INTO SHARE TR ANSACTIONS WITH M/S CHAMPAKLAL DEVIDAS AND THE NET RESULT OF THE TRANSACTIONS WAS LOSS TO THE ASSESSEE IN MOST OF THE CASES. FURTHER IT WAS NOTICED THAT THERE WAS A RUNNING ACCOUNT WITH THIS PARTY AND THE TRANSACTIONS WERE COMPLETED BY PASSING BOOK ENTRIE S, I.E., ACTUAL DELIVERY OF SHARES WAS NOT THERE. THE ASSESSEE ALSO RELIED UPON JOURNAL ENTRIES ONLY IN SUPPORT OF THOSE TRANSACTIONS. M/S CHAMPAKLAL DEVIDAS ALSO REPORTED THAT ITS BOOKS OF ACCOUNTS UP TO 1990 - 91 WERE DESTROYED IN FIRE AND HENCE NO CROSS VERIFICATION WAS POSSIBLE. IT WAS FURTHER NOTICED THAT THE CREDIT BALANCE OUTSTANDING IN THE NAME OF M/S CHAMPAKLAL DEVIDAS WAS INCREASING EVERY YEAR, I.E., AS ON 31.12.1987 THE BALANCE WAS SHOWN AT RS.1.26 CRORES AND THE SAME INCREASED TO RS.14.12 CRORES AS ON 31.3.1991. IT WAS FURTHER NOTICED THAT THE ASSESSEE HAS SETTLED THE BALANCE BY PAYING A SUM OF RS.15.40 CRORES BY WAY OF CHEQUES TO M/S CHAMPAKLAL DEVIDAS. HOWEVER, THE ABOVE SAID AMOUNT WAS RETURNED BACK TO THE ASSESSEE AND HIS GROUP COMPANIES ON 26.3.1992. FURTHER M/S CHAMPAKLAL DEVIDAS HAS NOT CHARGED ANY INTEREST FROM THE ASSESSEE ON THE HUGE OUTSTANDING AMOUNT. SHR I BHUPENDRA C. DALAL 44 ACCORDINGLY A VIEW WAS TAKEN IN THOSE YEARS THAT THE ASSESSEE HAS SHIFTED HIS PROFITS TO M/S CHAMPAKLAL DEVIDAS. THE AO TOOK NOTE O F THE OBSERVATIONS MADE IN AY 1990 - 91 AND 1991 - 92. ACCORDINGLY, HE CAME TO THE CONCLUSION THAT THE BALANCE SHOWN IN THE ACCOUNT OF M/S CHAMPAKLAL DEVIDAS WAS NOT GENUINE ONE. ACCORDINGLY HE ADDED OUTSTANDING BALANCE OF RS.1,26,12,036/ - IN THE FIRST ROUND OF PROCEEDINGS. 74. THE LD CIT(A), IN THE FIRST ROUND OF PROCEEDINGS, EXAMINED THE LEDGER ACCOUNT OF M/S CHAMPAKLAL DEVIDAS AND NOTICED THAT THE SHARE TRANSACTIONS WERE HAVING BOTH PROFIT AND LOSS. FURTHER, THERE WERE MANY CHEQUE TRANSACTIONS ALSO. A CCORDINGLY HE CAME TO THE CONCLUSION THAT THE AO HAS MADE THE ADDITION BY MAKING GENERAL OBSERVATIONS AND ACCORDINGLY HELD THAT THIS ISSUE REQUIRES CLOSER EXAMINATION. ACCORDINGLY HE SET ASIDE THE MATTER TO THE FILE OF THE AO. 75. IN THE SET ASIDE P ROCEEDINGS, THE ASSESSEE POINTED OUT THAT THERE WAS AN OPENING BALANCE OF RS.54,13,442/ - AND THAT COULD NOT HAVE BEEN ASSESSED IN THIS YEAR. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS RECEIVED AND MADE PAYMENTS BY WAY OF CHEQUES. IT WAS ALSO SUBMITTED THAT THE AO HAS ACCEPTED THE PURCHASE AND SALE OF SHARES AS GENUINE AND HENCE HE COULD NOT HAVE REJECTED THE LOSS FROM THE TRANSACTIONS. IT WAS ALSO SUBMITTED THAT THE REPAYMENT OF LOANS HAVE BEEN ACCEPTED. IT WAS FURTHER ARGUED THAT THE TRANSACTIONS WI TH M/S CHAMPAKLAL DEVIDAS WERE ACCEPTED AS GENUINE IN THE EARLIER YEARS. HOWEVER, THE AO TOOK THE VIEW THAT THE BOOKS OF ACCOUNTS CANNOT BE RELIED UPON. HE FURTHER OBSERVED THAT THE ASSESSEE DID NOT PRODUCE ANY EVIDENCE IN SUPPORT OF OPENING BALANCE. HE FURTHER OBSERVED THAT THE ASSESSEE HAS USED CIRCUITOUS ROUTE TO TRANSFER FUNDS WITHOUT PAYING TAX. ACCORDINGLY HE HELD THAT THE ENTIRE BALANCE OF RS.1,26,12,035/ - BELONGED TO THE ASSESSEE ONLY AND ACCORDINGLY ADDED THE SAME TO THE INCOME OF THE ASSESSEE. SHR I BHUPENDRA C. DALAL 45 76. THE LD CIT(A), IN THE SECOND ROUND OF PROCEEDINGS, ACCEPTED THE CLAIM OF THE ASSESSEE ABOUT THE OPENING BALANCE OF RS.54,13,442/ - , BY ACCEPTING THE CONTENTIONS OF THE ASSESSEE THAT THE AUDITED ACCOUNTS PERTAINING TO THE YEAR ENDING 31.12.1986 ARE A LREADY AVAILABLE WITH THE AO. ACCORDINGLY THE LD CIT(A) HELD THAT THE OPENING BALANCE OF RS.54,13,442/ - CANNOT BE ASSESSED IN AY 1988 - 89. HOWEVER, SINCE THE CREDITOR DID NOT CHARGE ANY INTEREST ON THE ASSESSEE AND SINCE THE REPAYMENTS MADE TO THE CREDITO R HAVE BEEN ROUTED TO THE ASSESSEES GROUP, THE LD CIT(A) HELD THAT M/S CHAMPAKLAL DEVIDAS IS ONLY A NAME LENDER AND THE ASSESSEE IS HAVING CONTROL OVER THE SAID MONEY. ACCORDINGLY HE CONFIRMED THE ADDITION TO THE EXTENT OF RS.71,98,594/ - , I.E., THE BALAN CE REMAINING AFTER EXCLUSION OF OPENING BALANCE. 77. IN THE APPEAL OF THE REVENUE, THE EXCLUSION OF OPENING BALANCE OF RS.54,13,442/ - IS BEING CONTESTED. WE HAVE NOTICED THAT THE AO REFUSED TO EXCLUDE THE OPENING BALANCE ONLY ON THE REASONING THAT THE ASSESSEE DID NOT PRODUCE ANY EVIDENCE. HOWEVER, THE LD CIT(A) HAS NOTICED THAT THE ACCOUNTS RELATING TO AY 1987 - 88 WERE AVAILABLE WITH THE AO AND HENCE ACCEPTED THE CONTENTIONS OF THE ASSESSEE. SINCE THE ACCOUNTS RELATING TO AY 1987 - 88 ARE AVAILABLE WIT H THE AO, WE ARE ALSO OF THE VIEW THAT THE AO COULD NOT HAVE OBSERVED THAT THE ASSESSEE DID NOT PROVE THE OPENING BALANCE. THE ADDITION OF OPENING BALANCE, IF REQUIRED, MAY BE MADE IN THE RESPECTIVE YEAR OF TRANSACTIONS AND NOT DURING THE YEAR UNDER CONSID ERATION. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE DECISION SO TAKEN BY HIM. ACCORDINGLY WE DISMISS THE APPEAL FILED BY THE REVENUE FOR AY 1988 - 89. 78. THE ASSESSEE IS CONTESTING THE ADDITION OF RS.71,98,594/ - CONFIRMED BY THE LD CIT(A). THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE ASSESSEE WAS HAVING TRADING TRANSACTIONS WITH M/S CHAMPAKLAL DEVIDAS AND THE AO HAS ADDED THE OUTSTANDING CLOSING BALANCE WITHOUT MAKING ANY INDEPENDENT ENQUIRY WITH SHR I BHUPENDRA C. DALAL 46 REGARD TO THE VERACITY OF THE TRANSACTIONS. THE AO HAS MAINLY RELIED UPON CERTAIN OBSERVATIONS MADE IN SUBSEQUENT YEARS, I.E., AY 1990 - 91 & 1991 - 92. THE LD A.R SUBMITTED THAT THE ASSESSING OFFICER DID NOT MAKE ANY TYPE OF VERIFICATION IN THE ORIGINAL AS WELL AS SET ASIDE PROCEEDINGS. HE SUBMITTED THAT THE REPAYMENTS MADE BY THE ASSESSEE IN SUBSEQUENT YEARS HAVE BEEN TAKEN INTO CONSIDERATION IN ORDER TO HOLD THAT THE TRANSACTIONS ARE NOT GENUINE. THE LD A.R FURTHER SUBMITTED THAT THE PROPRIETOR OF M/S CHAMPAKLAL DEVIDAS, VIZ., SHRI J.P.GANDHI IS AL SO ASSESSED BY THE VERY SAME ASSESSING OFFICER AND THE PROFIT DECLARED BY HIM HAS BEEN ACCEPTED. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS TRANSACTED WITH THE ABOVE SAID PERSON IN THE NORMAL COURSE OF BUSINESS. HE FURTHER SUBMITTED THAT SHRI J.P. GANDHI HAS CONFIRMED ALL THE TRANSACTIONS IN HIS STATEMENT TAKEN FROM HIM. HE FURTHER SUBMITTED THAT ALL THE TRANSACTIONS HAVE BEEN ROUTED THROUGH THE BANK ACCOUNTS. HE SUBMITTED THAT THE LD CIT(A), IN THE FIRST ROUND OF PROCEEDINGS, DID NOT APPROVE THE ADDITI ON MADE BY THE AO, SINCE IT WAS MADE BY MAKING GENERAL OBSERVATIONS. HE FURTHER SUBMITTED THAT THE OPENING BALANCE WAS RS.94,13,442/ - AND NOT RS.54,13,442/ - AND THE ADDITION TO THE EXTENT OF RS.94,13,442/ - IS LIABLE TO BE DELETED AS IT DOES NOT BELONG TO THE YEAR UNDER CONSIDERATION. THE REMAINING BALANCE REPRESENTS NORMAL BUSINESS TRANSACTIONS AND HENCE THE ADDITION CONFIRMED BY LD CIT(A) WAS NOT JUSTIFIED. 79. ON THE CONTRARY, THE LD D.R SUBMITTED THAT THE BALANCE OUTSTANDING IN THE NAME OF M/S CHA MPAKLAL DEVIDAS WAS INCREASING EVERY YEAR AND IT WAS NOT CHARGING ANY INTEREST TO THE ASSESSEE. FURTHER THE ANALYSIS OF THE TRANSACTIONS SHOWS THAT THE ASSESSEE HAS INCURRED LOSS IN THOSE TRANSACTIONS. FURTHER SHRI J.P.GANDHI WAS A CLOSE ASSOCIATE OF THE ASSESSEE. THE ASSESSEE HAS PAID THE OUTSTANDING BALANCES DURING MARCH 1992 AND THE SAID PAYMENT WAS, IN TURN, RECEIVED BACK BY THE GROUP CONCERNS OF THE ASSESSEE. THE LD D.R SUBMITTED SHR I BHUPENDRA C. DALAL 47 THAT ALL THESE POINTS SHOW THAT THE ACCOUNT OF M/S CHAMPAKLAL DEVIDAS W AS NOT GENUINE ACCOUNT AND HENCE THE TAX AUTHORITIES HAVE HELD THAT THE OUTSTANDING BALANCE IS ASSESSABLE IN THE HANDS OF THE ASSESSEE. 80. WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS ISSUE AND PERUSED THE RECORD. WE FEEL IT PERTINENT TO EXTRACT THE OBSERVATIONS MADE BY LD CIT(A) IN HIS ORDER DATED 16.2.1996 PASSED IN THE FIRST ROUND OF PROCEEDINGS: - 20. I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE LEARNED A.R. RIGHT IN THE BEGINNING I HAVE TO NOTE THAT THE ADDITION HAS BEEN MADE ON THE BASIS OF GENERALITIES. ONLY THE LAST BALANCE IN THE ACCOUNT OF CHAMPAKLAL DEVIDAS HAS BEEN ADDED WITHOUT LOOKING INTO ENTIRE VOLUME OF TRANSACTION AND ALSO ARRIVAL AND DISBURSEMENT OF MONEY HAVE NOT GONE INTO BY THE AO. I HAVE A COPY OF ACCOUNT OF CHAMPAKLAL DEV IDA IN THE BOOKS OF THE ASSESSEE FILED BY THE LEARNED A.R. IT IS ALSO FOUND THAT ON CERTAIN DATES THE CREDIT BALANCE WAS RS.1,40,00,000/ - . THIS DATE IS 3.1.1987. IT IS NOT DENIED THAT THE ASSESSEE HAS TRANSACTIONS OF SECURITIES AND SHARES WITH CHAMPAKLA L DEVIDAS. THE AO HAS TRIED TO TAX ONLY THE LAST CREDIT BALANCE. THE QUESTION OF TAXABILITY FOR THE PURPOSES OF SECTION 68, 69 ETC., HAVE TO BE DECIDED WITH REFERENCE TO THE DATES OF ARRIVAL OR FUNDS. AS NO INQUIRY IN THIS ASPECT OF THE MATTER HAS BEEN MADE BY THE AO THERE WOULD NOT BE ANY JUSTIFICATION FOR THIS ADDITION. NEVERTHELESS, IT IS REQUIRED THAT EACH ENTRY OF DEBIT AND CREDIT APPEARING IN THE ACCOUNT OF CHAMPAKLAL DEVIDAS HAS TO BE VERIFIED AS TO WHETHER THEY ARE RECORDED IN THE BANK ACCOUNT O F CHAMPAKLAL DEVIDAS. THE REFERENCE TO THE BANK ACCOUNT IS MADE BY ME BECAUSE IT IS THE CLAIM OF CHAMPAKLAL DEVIDAS THAT HIS BOOKS OF ACCOUNTS HAVE BEEN DESTROYED. THE SYSTEM OF ACCOUNT FOLLOWED BY THE ASSESSEE IS THAT B - 1 VOUCHERS ARE FOR ALL RECEIPTS I N BANKS OTHER THAN FOR SECURITY TRANSACTION. B - 2 VOUCHERS ARE FOR ALL PAYMENTS FROM BANKS OTHER THAN FOR PAYMENT FOR SECURITY. B - 5 VOUCHERS ARE FOR GENERAL ENTRIES. A PERUSAL OF STATEMENT OF ACCOUNT INDICATES THAT MOST OF THE RECEIPTS AND DISBURSEMENTS ARE THROUGH B - 1 AND B - 2 VOUCHERS RESPECTIVELY. THERE ARE CERTAIN ENTRIES THROUGH B - 5 VOUCHERS ALSO. MOST OF THE MONIES HAVE COME AND GONE IN ROUND FIGURES OF LACS. THESE FACTS NEED CLOSER EXAMINATION AND HENCE I SET ASIDE THIS ISSUE BACK TO THE FILE OF THE AO FOR MAKING DEEPER AND CLOSER INQUIRY. THE AO SHOULD MAKE INVESTIGATIONS AND CONFRONT THE ASSESSEE WITH THE FACTS FOUND. IN THE RESULT THE ISSUE ADJUDICATED IN GROUND NO.11 IS SET - ASIDE BACK TO THE FILE OF THE AO. SHR I BHUPENDRA C. DALAL 48 81. THOUGH THE LD CIT(A) HAS GIVEN CLEAR DIRECTIONS AS TO HOW THE ACCOUNT OF M/S CHAMPAKLAL DEVIDAS HAS TO BE EXAMINED, YET THE AO DID NOT CARRY OUT THE EXAMINATION AS SUGGESTED BY LD CIT(A). INSTEAD, THE AO HAS PROCEEDED TO RELY UPON CERTAIN OBSERVATIONS MADE IN AY 1990 - 91 AND 1991 - 92 AND HE EVEN DID NOT EXAMINE AS TO WHETHER THOSE OBSERVATIONS SHALL APPLY TO THE FACTS PREVAILING IN THE INSTANT YEAR. IT IS A WELL SETTLED PROPOSITION THAT EACH ASSESSMENT YEAR IS DIFFERENT AND THE INCOME OF A YEAR HAS TO BE COMPUTED ON THE BASIS OF FA CTS PREVAILING IN THAT YEAR AND THE FINDINGS GIVEN IN OTHER YEARS SHALL ONLY HAVE GUIDANCE VALUE, UNLESS THE FACTS ARE SHOWN TO BE IDENTICAL. IN THE INSTANT YEAR, THE ASSESSING OFFICER HAS NOT SHOWN THAT THERE WAS PARITY OF FACTS BETWEEN THE INSTANT YEAR AND AY 1990 - 91 & 1991 - 92. FURTHER, THE DECISION RENDERED BY LD CIT(A) IN THE FIRST ROUND OF PROCEEDINGS, WHICH ARE EXTRACTED ABOVE, WOULD SHOW THAT MOST OF THE TRANSACTIONS ARE BANK TRANSACTIONS, I.E., THERE ARE RECEIPTS AND PAYMENTS THROUGH BANK ACCOUNTS ONLY. ONLY CERTAIN TRANSACTIONS HAVE BEEN ENTERED THROUGH JOURNAL VOUCHERS, I.E., B - 5 VOUCHERS. THESE FACTS HAVE NOT BEEN EXAMINED AT ALL BY THE AO. FURTHER, THE AO HAS REFERRED TO THE PAYMENTS MADE BY THE ASSESSEE TO SETTLE THE ACCOUNTS OF M/S CHAMPAK LAL DEVIDAS AND HOW THE SAID PAYMENTS HAVE BEEN RECEIVED BACK BY THE GROUP CONCERNS OF THE ASSESSEE. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT EACH OF THE GROUP CONCERNS IS DIFFERENT ASSESSEE. FURTHER, IT IS NOT THE CASE OF THE AO THAT THE ASSESSE E HAS MADE PAYMENTS FROM UNACCOUNTED SOURCES. WHEN THE PAYMENTS WERE MADE FROM THE BOOKS OF ACCOUNTS AND THE RECIPIENT HAVE TRANSFERRED THE FUNDS THROUGH BANKING CHANNELS TO OTHER CONCERNS, WE ARE UNABLE TO UNDERSTAND AS TO HOW THE SAME WOULD MAKE THE TRA NSACTIONS NON - GENUINE. 82. THE AO HAS OBSERVED THAT M/S CHAMPAKLAL DEVIDAS HAS NOT CHARGED INTEREST ON THE BALANCE DUE FROM THE ASSESSEE. IT IS A MATTER TO BE DECIDED BETWEEN THE PARTIES AND IT IS WELL SETTLED PROPOSITION THAT THE TAX AUTHORITIES AR E SHR I BHUPENDRA C. DALAL 49 NOT ENTITLED TO SIT IN THE ARM CHAIR OF THE BUSINESSMAN TO REGULATE THE BUSINESS AFFAIRS. IN ANY CASE, NON - CHARGING OF INTEREST ONLY BENEFITS THE ASSESSEE HEREIN AND THE CAUSE OF ACTION DOES NOT ARISE HERE. ANOTHER IMPORTANT POINT IS THAT THE LD A.R HA S STATED THAT THE PROPRIETOR OF M/S CHAMPAKLAL DEVIDAS, SHRI J P GANDHI HAS CONFIRMED THE TRANSACTIONS AND HE IS ALSO ASSESSED TO INCOME TAX BY THE VERY SAME ASSESSING OFFICER. IN THESE SET OF FACTS, WE ARE OF THE VIEW THAT THE TAX AUTHORITIES ARE NOT JUS TIFIED IN HOLDING THAT THE TRANSACTIONS ENTERED WITH M/S CHAMPAKLAL DEVIDAS ARE NOT GENUINE. WHEN THE TRANSACTIONS ENTERED WITH THIS CONCERN HAS BEEN ACCEPTED AS GENUINE IN THE EARLIER YEAR, THEN THE TRANSACTIONS ENTERED DURING THIS YEAR SHOULD NOT HAVE B EEN DOUBTED WITH, WITHOUT BRINGING ANY OTHER STRONG MATERIAL ON RECORD. IN ANY CASE, THE AO HAS NOT CARRIED OUT THE EXAMINATION AS DIRECTED BY LD CIT(A). 83. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THAT THE AO HAS MADE THIS ADDITION ON GENERAL OBS ERVATIONS, SURMISES AND CONJECTURES WITHOUT BRINGING ANY MATERIAL TO SUBSTANTIATE HIS VIEWS. THE OBSERVATIONS MADE BY THE AO ABOUT THE REPAYMENTS MADE IN MARCH 1992 AND TRANSFER OF FUNDS TO GROUP CONCERNS ARE ALSO, IN OUR OPINION, WOULD NOT JUSTIFY THE AD DITION UNDER THE INCOME TAX ACT. ACCORDINGLY, WE ARE OF THE VIEW THAT THE AO WAS NOT JUSTIFIED IN CONSIDERING THE CLOSING BALANCE AVAILABLE IN THE ACCOUNT OF M/S CHAMPAKLAL DEVIDAS AS NON - GENUINE. ACCORDINGLY HE WAS NOT JUSTIFIED IN ASSESSING THE OUTSTAN DING BALANCE AS INCOME OF THE ASSESSEE. IN ANY CASE, THE OPENING BALANCE SHOWN IN THE ACCOUNT CANNOT BE ASSESSED IN THIS YEAR. 84. IN VIEW OF THE FOREGOING DISCUSSIONS, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELE TE THIS ADDITION RELATING TO M/S CHAMPAKLAL DEVIDAS. SHR I BHUPENDRA C. DALAL 50 85. THE ISSUE CONTESTED BY THE ASSESSEE RELATES TO THE ADDITION OF UNEXPLAINED CASH CREDIT. THE ASSESSEE HAD BORROWED FUNDS FROM 10 PERSONS DURING THE YEAR FOR AN AGGREGATE AMOUNT OF RS.6,09,090/ - . THE AO ASSESSED THE SAME U/S 68 OF THE ACT IN THE ORIGINAL ASSESSMENT PROCEEDINGS. IN THE FIRST APPELLATE PROCEEDINGS, THE LD CIT(A) DELETED ADDITION OF RS.53,000/ - AND THE BALANCE ITEMS OF ADDITIONS WERE RESTORED TO THE FILE OF THE AO. IN THE SECOND R OUND, THE AO AGAIN ADDED THE BALANCE AMOUNT OF RS.5,56,090/ - . THE LD CIT(A) ALSO CONFIRMED THE SAME. 85.1 THE FIRST ITEM OF ADDITION RELATES TO THE AMOUNT OF RS.29,724/ - RECEIVED FROM SHRI DATTARAYA N TRODKAR. THE LEDGER ACCOUNT COPY OF THE SAID CREDI TOR IS PLACED AT PAGE 383 OF THE PAPER BOOK. A PERUSAL OF THE SAME WOULD SHOW THAT THE ACCOUNT WAS HAVING OPENING BALANCE OF RS.76,726/ - AND THE AMOUNT OF RS.29,724/ - REPRESENTS INTEREST CREDITED TO THAT ACCOUNT. HENCE THE AMOUNT OF RS.29,724/ - WAS NOT R ECEIVED BY WAY OF FRESH CREDIT AND HENCE THE QUESTION OF ASSESSING THE SAME U/S 68 OF THE ACT DOES NOT ARISE. ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 85.2 THE SECOND ITEM OF ADDI TION RELATES TO THE AMOUNT OF RS.15,000/ - RECEIVED FROM SMT. KUSUMBEN V PATEL. THIS ACCOUNT SHOWS AN OPENING BALANCE OF RS.2,57,555.88 AND THE AMOUNT OF RS.15,000/ - REPRESENTS THREE CREDITS BY WAY OF BILLS, MEANING THEREBY, THE AMOUNT OF RS.15,000/ - DOES NOT REPRESENT CASH CREDIT. THE LEDGER ACCOUNT COPY IS PLACED AT PAGE 377 OF THE PAPER BOOK. THE ASSESSEE HAS ALSO FURNISHED LEDGER ACCOUNT COPY OF THIS ASSESSEE FOR YEAR ENDING 31.12.1984 AT PAGE 365 OF THE PAPER BOOK, WHICH SHOWS THAT THIS CREDITOR IS H AVING ACCOUNT FROM PAST YEARS ALSO. THE ASSESSEE IS ALSO REGULARLY PAYING INTEREST TO THIS CREDITOR. THE ASSESSEE HAS ALSO FURNISHED CONFIRMATION LETTER OBTAINED FROM THIS CREDITOR FOR THE YEAR ENDING 31.12.1986 AND 31.3.1991. SHR I BHUPENDRA C. DALAL 51 IN VIEW OF THE ABOVE, WE A RE OF THE VIEW THAT THERE IS NO REASON TO SUSPECT THE SOURCES OF RS.15,000/ - . ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 85.3 THE THIRD ITEM OF THE ADDITION RELATES TO THE AMOUNT OF R S.3.00 LAKHS RECEIVED FROM M/S MAMTA ENTERPRISES. THE ASSESSEE HAS FURNISHED ACCOUNT COPY OF THE CREDITOR, COPY OF RECEIPT ISSUED TO THE CREDITOR, CONFIRMATION LETTER OBTAINED FOR THE YEAR ENDING 31.3.1989 AND 31.3.1991. THE CONFIRMATION LETTERS CONTAIN THE GIR NUMBER OF THE CREDITOR. THE SUBMISSION OF THE ASSESSEE IS THAT THE BOOKS OF ACCOUNTS WERE MADE AVAILABLE TO HIM ONLY IN AUGUST 2009 AND HENCE DUE TO PASSAGE OF TIME OF ABOUT 20 YEARS, HE COULD NOT OBTAIN CONFIRMATION LETTER FROM THIS CREDITOR. WE HAVE EXAMINED THE LEDGER ACCOUNT COPY OF THE CREDITOR AND THE RECEIPT ISSUED TO IT. IT IS NOT CLEAR AS TO WHETHER THIS CREDIT WAS RECEIVED BY WAY OF CHEQUE. APART FROM GIVING GIR NUMBER, THE ASSESSEE HAS NOT PROVIDED THE ADDRESS OF THE CREDITOR. IT IS A LSO NOT CLEAR AS TO WHETHER THE ASSESSEE IS PAYING INTEREST TO THIS CREDITOR AND THE DETAILS OF REPAYMENT WERE ALSO NOT GIVEN. IN THESE SET OF FACTS, WE ARE OF THE VIEW THAT THE ASSESSEE HAS FAILED TO DISCHARGE THE INITIAL BURDEN PLACED UPON HIM U/S 68 OF THE ACT IN RESPECT OF THIS CREDITOR. ACCORDINGLY WE CONFIRM THE ASSESSMENT OF THE AMOUNT RECEIVED FROM THIS CREDITOR U/S 68 OF THE ACT. 85.4 THE NEXT ITEM OF ADDITION RELATES TO THE AMOUNT OF RS.10,000/ - RECEIVED FROM SHRI PARESH V PATEL. THIS CREDIT ORS ACCOUNT IS EXISTING WITH THE ASSESSEE PRIOR TO 1984 ONWARDS. THE CLOSING BALANCE AVAILABLE AS ON 31.3.1984 WAS RS.1,55,000/ - . THERE IS INTEREST PAYMENT OF ABOUT RS.10,000/ - MADE DURING THE YEAR 1984. SIMILARLY INTEREST HAS BEEN PAID IN THE YEAR 198 5 ALSO. HENCE WE ARE OF THE VIEW THAT THERE IS NO REASON TO SUSPECT THE GENUINENESS OF THE CREDIT OF RS.10,000/ - RECEIVED FROM THIS CREDITOR. ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. SHR I BHUPENDRA C. DALAL 52 85.6 THE NEXT ITEM OF ADDITION RELATES TO THE AMOUNT OF RS.58,200/ - RECEIVED FROM SMT. SUDHA V PATEL. THOUGH THE ASSESSEE COULD NOT FURNISH CONFIRMATION LETTER FROM THIS CREDITOR DUE TO PASSAGE OF TIME, THE DOCUMENTS FURNISHED BY THE ASSESSEE, VIZ., TH E CONFIRMATION LETTER OBTAINED FOR 31.3.1991, THE LEDGER ACCOUNT COPY OF SUBSEQUENT PERIOD WHICH DEPICTS REGULAR PAYMENT OF INTEREST, COPY OF PAY ORDER ISSUED TOWARDS REPAYMENT OF LOAN, IN OUR VIEW, ESTABLISHES THE GENUINENESS OF THE LOAN. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 85.7 THE NEXT ITEM OF ADDITION RELATES TO THE AMOUNT OF RS.10,000/ - RECEIVED FROM SHRI VITHALBHAI C PATEL HUF. THIS CREDITOR WAS HAVING ACCOUNT PRIOR TO 1 985. THERE HAS BEEN REGULAR PAYMENT OF INTEREST AND THE CREDITOR HAS BEEN FULLY REPAID ON 14.6.1991. THE CREDITOR WAS RECEIVING INTEREST OF ABOUT RS.7000/ - PER ANNUM FROM THE ASSESSEE. THE ASSESSEE HAS FURNISHED CONFIRMATION LETTER OBTAINED FOR 31.12.19 85 AND ALSO THE LEDGER ACCOUNT COPY OF THE SUBSEQUENT YEAR. IN VIEW OF THESE FACTS, WE ARE OF THE VIEW THAT THERE IS NO REASON TO SUSPECT THE CREDIT OR RS.10,000/ - RECEIVED DURING THIS YEAR. ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 85.8 THE NEXT ITEM OF ADDITION RELATES TO THE AMOUNT OF RS.1,25,000/ - RECEIVED FROM SHRI V.C.PATEL. THE ASSESSEE HAS FURNISHED LEDGER ACCOUNT COPY FOR THE YEAR 1992 TO SHOW THAT THE CREDITORS ACCOUNT I S BEING REGULARLY SERVICED WITH INTEREST AND IT HAS BEEN REPAID IN THAT YEAR BY WAY OF PAY ORDER. THE ASSESSEE HAS SUBMITTED THAT HE COULD NOT OBTAIN CONFIRMATION LETTERS DUE TO PASSAGE OF TIME. CONSIDERING THE LEDGER ACCOUNT COPY AS WELL AS THE REPAYMEN T DETAILS, WE ARE OF THE VIEW THAT THERE WAS GENUINE DIFFICULTY FOR THE ASSESSEE TO OBTAIN CONFIRMATION LETTER FROM THIS CREDITOR. ACCORDINGLY, WE ARE OF THE VIEW THAT THE SHR I BHUPENDRA C. DALAL 53 GENUINENESS OF THIS CREDITOR MAY BE ACCEPTED. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 85.9 THE LAST ITEM OF ADDITION RELATES TO THE AMOUNT OF RS.3,616/ - RECEIVED FROM SHRI VEDNARAYAN SARDESHPANDE. THE ASSESSEE HAS FURNISHED CONFIRMATION LETTER OBTAINED FR OM THIS CREDITOR AND IN VIEW OF THE SAME, WE ARE OF THE VIEW THAT THE ADDITION IS NOT CALLED FOR. ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 86. THE NEXT ISSUE CONTESTED BY THE ASSE SSEE RELATES TO THE DISALLOWANCE OF INTEREST PAID TO BANKS & OTHERS AMOUNTING TO RS.8,99,443/ - . THE AO NOTICED THAT THE ASSESSEE HAS BORROWED LOAN FROM BANKS AND OTHERS TO THE TUNE OF ABOUT RS.60 LAKHS AND PAID INTEREST OF RS.8,99,443/ - . THE ASSESSEE HAS ADVANCED AGGREGATE AMOUNT OF RS.169 LAKHS, BUT HAS RECEIVED INTEREST OF RS.3,07,943/ - . FURTHER ANALYSIS SHOWED THAT THE ASSESSEE HAS GIVEN INTEREST FREE FUNDS TO PERSONS COVERED BY SEC. 40A(2)(B) OF THE ACT. ACCORDINGLY THE AO TOOK THE VIEW THAT THE ASS ESSEE HAS USED INTEREST BEARING FUNDS FOR GIVING INTEREST FREE LOANS. ACCORDINGLY HE DISALLOWED INTEREST CLAIM OF RS.8,99,443/ - . IN THE FIRST ROUND, THE LD CIT(A) DELETED THIS DISALLOWANCE BY OBSERVING THAT THE AO HAS MADE THIS ADDITION BY MAKING GENERAL OBSERVATIONS. WHEN THIS MATTER WAS SET ASIDE TO THE FILE OF AO, HE MADE THE ADDITION AGAIN ON IDENTICAL REASONS. IN THE SECOND ROUND, THE LD CIT(A) CONFIRMED THE DISALLOWANCE. 87. THE LD A.R SUBMITTED THAT THE TAX AUTHORITIES HAVE IGNORED THE FACT TH AT THE ASSESSEE WAS POSSESSING INTEREST FREE SUNDRY CREDITORS BALANCE OF RS.4.26 CRORES, WHICH IS IN FAR EXCESS OF THE INTEREST FREE ADVANCES. HE FURTHER SUBMITTED THAT MOST OF THE ADVANCES WERE MADE IN THE NORMAL COURSE OF BUSINESS. HE SUBMITTED THAT TH E BANK OVERDRAFT FACILITY WAS USED PURELY FOR BUSINESS PURPOSES ONLY. HE SUBMITTED THAT THE INTEREST CLAIM WAS ALLOWED IN THE SUBSEQUENT YEARS SHR I BHUPENDRA C. DALAL 54 AND IN EARLIER YEARS. ON THE CONTRARY, THE LD D.R SUBMITTED THAT THE ASSESSEE HAS NOT COLLECTED INTEREST FROM R ELATED PARTIES AND HENCE THE TAX AUTHORITIES HAVE DISALLOWED THE INTEREST EXPENDITURE. 88. WE HAVE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. IN THE EARLIER PARAGRAPHS, WE HAVE DISCUSSED THE METHOD OF USAGE OF BANK OVERDRAFT FACILITY, I. E., IT WAS MAINLY USED FOR PURCHASE AND SALE OF SECURITIES. THUS, THE POSSIBILITY OF DIVERTING FUNDS FROM BANK OVERDRAFT FACILITY IS MINIMAL. WE NOTICE THAT THE ASSESSING OFFICER HAS COMPARED THE FIGURES AVAILABLE IN BALANCE SHEET AND HAS TAKEN ADVERSE V IEW OF THE MATTER. ACCORDING TO THE ASSESSEE, HE WAS HAVING HUGE INTEREST FREE SUNDRY CREDITORS BALANCE WITH HIM AND THE AO HAS FAILED TO RECOGNIZE THE SAME. IN OUR VIEW, THERE IS MERIT IN THE SAID SUBMISSIONS OF THE ASSESSEE. WHEN INTEREST FREE FUNDS A ND INTEREST BEARING FUNDS ARE MIXED TOGETHER, THEY LOOSE THEIR RESPECTIVE IDENTITY AND HENCE THE PRESUMPTION SHOULD BE THAT THE ASSESSEE HAS USED INTEREST FREE FUNDS TO GIVE INTEREST FREE ADVANCES. FOR THIS PROPOSITION, WE GET SUPPORT FROM THE DECISION RE NDERED BY HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD (313 ITR 340). ACCORDINGLY WE ARE OF THE VIEW THAT THERE IS NO JUSTIFICATION IN DISALLOWING INTEREST CLAIM, WHEN THE ASSESSEE IS POSSESSING HUGE INTEREST FREE FUNDS. ACCO RDINGLY WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS DISALLOWANCE. 89. THE NEXT ISSUE URGED BY THE ASSESSEE RELATES TO THE DISALLOWANCE OF INTEREST PAID ON SECURITIES. THE ASSESSEE HAD CLAIMED A SUM O F RS.38,02,299/ - AS INTEREST PAID ON SECURITIES. SINCE THE ASSESSEE HAS PURCHASED AND SOLD THE SECURITIES WITHIN A SHORT SPAN OF TIME AND CORRESPONDING INTEREST IS DEBITED & CREDITED, THE AO TOOK THE VIEW THAT THE CLAIM OF INTEREST ON SECURITIES ON THE H IGHER SIDE. THE AO NOTICED THAT IDENTICAL CLAIM WAS DISALLOWED IN AY 1990 - 91 SHR I BHUPENDRA C. DALAL 55 AND 1991 - 92. HENCE THE AO DISALLOWED THE CLAIM. THE LD CIT(A) ALSO CONFIRMED THE SAME. 90. THE LD A.R PLACED RELIANCE ON THE DECISION GIVEN BY LD CIT(A) ON THIS ISSUE IN THE FIRST ROUND OF PROCEEDINGS AND THE SAME IS EXTRACTED BELOW, FOR THE SAKE OF CONVENIENCE: - 11. GROUND NO.7(A) IS THAT THE AO ERRED IN MAKING AN ADDITION OF RS.38,02,299/ - BY DISALLOWING INTEREST PAID ON PURCHASE AND SALE OF SECURITIES BY THE APPELLANT . THE AO HAS DISCUSSED THIS ISSUE IN PARAGRAPH 7 OF HIS ORDER. IT WAS ARGUED BEFORE THE AO AND HAS ALSO BEEN ARGUED BEFORE ME THAT WHENEVER SECURITIES ARE PURCHASED OR SOLD, THE CORRESPONDING INTEREST TILL DATE OF TRANSACTION IS DEBITED OR CREDITED IN IN TEREST ACCOUNT. THE AO HAS OBSERVED THAT SECURITIES DO NOT REMAIN IN STOCK OF THE ASSESSEE FOR A VERY LONG TIME. I FIND THAT THE AO HAS MENTIONED SOMETHING AS TO HOW ACCOUNTS HAVE BEEN MAINTAINED BY THE ASSESSEE FOR AY 1990 - 91 AND 1991 - 92. THE LEARNED A .R ON THE OTHER HAND HAS ARGUED THAT BOOKS OF ACCOUNTS WERE IN POSSESSION OF THE AO AND HE HAS NOT GIVEN EVEN ONE INSTANCE OF BOGUS INTEREST HAVING BEEN DEBITED IN THIS INTEREST ACCOUNT. I HAVE GONE THROUGH THE ASSESSMENT ORDER. NO SUCH INSTANCES OF BOGUS INTEREST HAVE BEEN CITED BY THE LEARNED AO. THE ANALOGY WITH A LATER ASSESSMENT YEAR CANNOT LEAD TO THE ADDITION IN THIS YEAR. THE ASSESSEE HAS MAINTAINED CLOSED BOOKS OF ACCOUNTS AND UNLESS DISCREPANCY IS POINTED OUT NO DISALLOWANCE COULD BE SUSTAINED. THE DISALLOWANCE IS, THEREFORE, DELETED. IDENTICAL ISSUE WAS CONSIDERED BY US IN THE IMMEDIATELY PRECEDING YEAR, I.E., IN AY 1987 - 88, WHEREIN THE METHOD OF ACCOUNTING, METHOD OF TRADING IN SHARES ETC. WERE DISCUSSED BY US. WE HAVE ALSO DISCUSSED ABOUT THE VARIOUS REASONS CITED BY THE ASSESSEE FOR THE DEBIT AVAILABLE IN INTEREST ON SECURITIES. WE HAVE ALSO POINTED OUT THAT THE ASSESSING OFFICER HAS NOT EXAMINED ANY SPECIFIC INSTANCES OF EXPENDITURE CLAIM IN ORDER TO SUPPORT HIS CONCLUSIONS. ACCORDINGLY WE HELD THAT THE AO HAS MADE THIS ADDITION BY ENTERTAINING CERTAIN PRESUMPTIONS. WE HAVE SEEN THAT THE LD CIT(A), IN THE FIRST ROUND OF PROCEEDINGS, HAS TAKEN IDENTICAL VIEW, I.E., THE ADDITION HAS BEEN MADE ON THE BASIS OF OBSERVATIONS MADE IN AY 1990 - 9 1 AND 1991 - 92. THE LD CIT(A) HAS RIGHTLY POINTED OUT THAT THE ASSESSING SHR I BHUPENDRA C. DALAL 56 OFFICER SHOULD HAVE EXAMINED SPECIFIC ENTRIES FOUND IN INTEREST ON SECURITIES ACCOUNT AND SHOULD HAVE REACHED THE CONCLUSION ON THE BASIS OF SUCH EXAMINATION. WE NOTICE THAT THE AO , IN THE SECOND ROUND OF PROCEEDINGS ALSO, HAS BEEN PERSUADED BY GENERAL PRESUMPTIONS, I.E., THE AO DID NOT EXAMINE THE EXPLANATIONS GIVEN BY THE ASSESSEE WITH THE LEDGER ACCOUNT. WE NOTICE THAT THE LD CIT(A), IN THE SECOND ROUND OF PROCEEDINGS, HAS SIMPL Y UPHELD THE ORDER OF THE AO PASSED ON THIS ISSUE. IN THE ABSENCE OF SUCH KIND OF EXAMINATION AND IN THE ABSENCE OF POINTING OUT ANY CASE OF BOGUS BOOKING, WE HAVE NO OTHER OPTION BUT TO DELETE THE ADDITION BY FOLLOWING THE DECISION RENDERED BY US IN AY 19 87 - 88. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 91. THE NEXT ISSUE CONTESTED BY THE ASSESSEE RELATES TO THE DISALLOWANCE OF LOSS ON SECURITIES TRANSACTIONS. THE ASSESSEE HAD SHO WN LOSS ON PURCHASE AND SALE OF CERTAIN SECURITIES AT RS.16,05,045/ - . THE AO FURTHER NOTICED THAT THE LOSS HAS BEEN BOOKED BY THE ASSESSEE BY PASSING JOURNAL ENTRIES. IN THE FIRST ROUND OF PROCEEDINGS, THE AO ASKED THE ASSESSEE TO PROVE THE GENUINENESS O F LOSS AND THE SAME WAS NOT DONE AND HENCE HE DISALLOWED THE LOSS. IN THE SECOND ROUND ALSO, THE AO HELD THAT THE LOSS OF RS.16,05,045/ - REMAINED UNEXPLAINED. ACCORDINGLY HE DISALLOWED THE CLAIM IN THE SECOND ROUND ALSO. THE LD CIT(A) CONFIRMED THIS DIS ALLOWANCE BY FOLLOWING THE DECISION RENDERED BY HIM IN AY 1992 - 93. IN THAT YEAR, THE LD CIT(A) HAD TAKEN THE VIEW THAT THE ASSESSEE HAS FAILED TO PROVE THE LOSS AND FURTHER THE TRANSACTIONS WERE OUTSIDE THE FRAMEWORK OF RULES DECIDED BY INDIAN BANKS ASSOC IATION AND DOES NOT HAVE LEGAL SANCTION. EVEN THOUGH THE ASSESSEE HAD CLAIMED THAT HE HAS MADE PROFITS ALSO, YET THE LD CIT(A) REJECTED THOSE CONTENTIONS BY OBSERVING THAT THE ASSESSEE HAS FAILED TO CITE SPECIFIC INSTANCES. SHR I BHUPENDRA C. DALAL 57 92. THE LD A.R SUBMITTED T HAT THE PURCHASE AND SALE OF SECURITIES ARE IN THE COURSE OF NORMAL TRADE AND THE PAYMENTS AND RECEIPTS WERE BY WAY OF ACCOUNT PAYEE CHEQUES ONLY. HE SUBMITTED THAT THE ASSESSEE HAS DISCLOSED PROFIT FROM PURCHASE AND SALE OF SECURITIES TO THE TUNE OF RS.4 ,05,740/ - . HE SUBMITTED THAT THE ASSESSEE HAS PASSED JOURNAL ENTRIES TO TRANSFER THE PROFIT/LOSS ARISING ON SALE OF SECURITIES. HE SUBMITTED THAT THE ASSESSEE HAS PURCHASED AND SOLD SECURITIES THROUGH BANKING CHANNELS, WHICH FACT CAN BE VERIFIED FROM THE BOOKS OF ACCOUNT. ACCORDINGLY HE SUBMITTED THAT THE JOURNAL ENTRIES PASSED FOR TRANSFERRING THE PROFIT/LOSS HAS GOT SUPPORT FROM THE PAMENT MADE/RECEIVED FOR PURCHASE AND SALE OF SECURITIES. ACCORDINGLY HE SUBMITTED THAT THE AO WAS NOT JUSTIFIED IN PRES UMING THAT THE JOURNAL ENTRIES HAVE BEEN PASSED BY THE ASSESSEE TO BOOK BOGUS LOSSES. HE SUBMITTED THAT THE LD CIT(A) HAS DELETED THIS ADDITION IN THE FIRST ROUND OF PROCEEDINGS. HE SUBMITTED THAT THE ASSESSEE HAS FURNISHED RELEVANT VOUCHERS BEFORE THE L D CIT(A) AND THE COPIES OF THE SAME ARE PLACED AT PAGE 404 TO 443 OF THE PAPER BOOK. ACCORDINGLY HE SUBMITTED THAT THE LD CIT(A) WAS NOT JUSTIFIED IN CONFIRMING THE DISALLOWANCE WITHOUT LOOKING INTO THE VOUCHERS AND BOOKS OF ACCOUNT. 93. ON THE CONTRA RY, THE LD D.R SUBMITTED THAT THE ASSESSEE HAS FAILED TO FURNISH THE EXPLANATIONS BEFORE THE AO. FURTHER THE AO HAS NOTICED THAT THE LOSSES HAVE BEEN BOOKED BY THE ASSESSEE BY PASSING JOURNAL ENTRIES. HENCE THE AO WAS CONSTRAINED TO DISALLOW THE CLAIM IN THE ABSENCE OF PROPER EXPLANATIONS. HE FURTHER SUBMITTED THAT THE LD CIT(A) HAS ALSO POINTED OUT THAT THE TRANSACTIONS CARRIED ON BY THE ASSESSEE ARE IN CONTRAVENTION OF THE RULES FRAMED BY THE INDIAN BANKS ASSOCIATION AND RBI. FURTHER THE ASSESSEE HAS FAILED TO GIVE INSTANCES, WHERE HE HAS MADE PROFITS. SHR I BHUPENDRA C. DALAL 58 94. WE NOTICE THAT THE ASSESSING OFFICER HAS DISALLOWED THIS CLAIM IN THE FIRST ROUND OF PROCEEDINGS MAINLY ON THE REASONING THAT THE ASSESSEE HAS PASSED THE JOURNAL ENTRIES TO BOOK THE LOSSES. IN THE SECOND ROUND, THE AO CHANGED HIS STAND AND DISALLOWED THE CLAIM ON THE REASONING THAT THE ASSESSEE HAS FAILED TO FURNISH EXPLANATIONS. WE NOTICE THAT THE ASSESSEE FURNISHED VOUCHERS RELATING TO CERTAIN TRANSACTIONS BEFORE THE LD CIT(A), BUT THE FIRST APPELLATE AUTHORITY ALSO CONFIRMED THE ADDITION BY FOLLOWING THE DECISION RENDERED BY HIM IN A SUBSEQUENT YEAR. THE ASSESSEE HAS EXPLAINED THAT PURCHASE AND SALE OF SECURITIES WERE BY WAY OF ACCOUNT PAYEE CHEQUES ONLY. IT IS SUBMITTED THAT AFTER THE SALE OF SECURITY, THE RESULTING PROFIT/LOSS ARE TRANSFERRED TO THE REVENUE ACCOUNT BY PASSING JOURNAL ENTRY ONLY. IN THE EARLIER PARAGRAPHS, WE HAVE EXPLAINED CERTAIN SITUATIONS, WHEREIN THE JOURNAL ENTRIES ARE PASSED AND FURTHER PASSING OF JOURNAL ENTRIES TO TRANSFER THE TRANSACTIONS TO THE CORRECT HEAD OF ACCOUNT IS PART OF NORMAL ACCOUNTING PROCEDURE. FOR EXAMPLE, LET US ASSUME THAT A SECURITY IS PURCHASED FOR RS.1,00,000/ - AND SOLD FOR RS.1,01,000/ - . THE PURCHASE SHALL BE DEBITED TO SECURITIES ACCOUNT AND THE SALE SHALL BE CREDITED TO THAT ACCOUNT. SINCE THE SAID SECURITY WILL NOT EXIST AFTER ITS SALE, THE SECURITIES ACCOUNT SHALL SHOW A CREDIT BALANCE OF RS.1,000/ - , WHICH REPRESENTS PROFIT MADE IN THAT TRANSACTION. HENCE TO TRANSFER THE ABOVE SAID AMOUNT OF RS.1,000/ - TO THE REVENUE ACCOUNT, THE ASSESSEE SHALL BE PASSING A JOURNAL ENTRY. IF THE ASSESSEE HAD PURCHASED THE SECURITY AT RS.1,00,000/ - AND SOLD THE SAME AT RS.98,000/ - , THEN HE WOULD INCUR A LOSS OF RS.2,000/ - AND THE SAME SHALL ALSO BE TRANSFERRED TO REVENUE ACCOUNT BY PASSING A JOURNAL ENTRY. 95. ACCORDING TO THE ASSESSEE, THE PAYMENTS MADE/RECEIVED FOR PURCHASE AND SALE OF SECURITIES WERE BY WAY OF ACCOUNT PAYEE CHEQUES. HENCE, IN ORDER TO VERIFY THE GENUINENESS OF THE CLAIM OF LO SS, THE AO SHOULD HAVE EXAMINED THE CORRESPONDING PURCHASE AND SALES, THE PREVAILING MARKET RATE AT THAT POINT OF SHR I BHUPENDRA C. DALAL 59 TIME, THE PARTIES TO WHOM THEY HAVE BEEN SOLD ETC., IN ORDER TO ARRIVE AT A CONCLUSION. IN OUR VIEW, WITHOUT CARRYING OUT SUCH KIND OF CONSTR UCTIVE EXAMINATION, ONE CANNOT COME TO THE CONCLUSION THAT THE ASSESSEE HAS BOOKED BOGUS LOSS. IF THAT BE THE CASE, THE RELEVANT PURCHASE AND SALE OF SECURITIES SHOULD ALSO BE BOGUS, BUT THAT FACT HAS NOT BEEN ESTABLISHED BY THE AO WITH DUE EXAMINATION. BEFORE LD CIT(A), THE ASSESSEE HAS FURNISHED RELEVANT VOUCHERS AND ALSO MADE A REFERENCE TO THE BANK ACCOUNTS, BUT THE LD CIT(A) HAS PROCEEDED TO UPHOLD THE DISALLOWANCE BY PUTTING UP THE RESPONSIBILITY ON THE ASSESSEE. IN OUR VIEW, THE ASSESSEE HAS BEEN ASKED BY THE TAX AUTHORITIES TO PROVE THE LOSS, BUT ACCORDING TO THE ASSESSEE THE SAME CAN BE EXAMINED FROM THE DETAILS AVAILABLE IN THE BOOKS OF ACCOUNT ONLY, I.E., BY EXAMINING THE CORRESPONDING PURCHASE AND SALE. HENCE, IN OUR VIEW, THE TAX AUTHORITIES HAVE DISALLOWED THIS CLAIM BY DRAWING INFERENCES WITHOUT ACTUALLY CARRYING OUT EXAMINATION, WHICH IS NOT JUSTIFIED. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS DISALLOWANCE. 96. THE NEXT ISS UE CONTESTED BY THE ASSESSEE RELATES TO THE LEVYING OF INTEREST U/S 139(8) AND 217 OF THE ACT. THE LEVYING OF INTEREST IS CONSEQUENTIAL AND HENCE THIS ISSUE DOES NOT REQUIRE ADJUDICATION. 98. THE ASSESSEE HAS ALSO RAISED CERTAIN LEGAL GROUNDS. AS O BSERVED BY US IN AY 1987 - 88, WE DO NOT FIND IT NECESSARY TO ADJUDICATE THEM, SINCE WE HAVE DELETED MOST OF THE ADDITIONS ON MERITS. 99. THE REVENUE IS CONTESTING THE RELIEF GRANTED BY LD CIT(A) IN RESPECT OF ADDITION RELATING TO M/S CHAMPAKLAL DEVIDAS . WE HAVE DELETED THE ENTIRE ADDITION MADE BY THE AO WHILE DEALING WITH THIS ISSUE IN ASSESSEES APPEAL. HENCE ALL THE GROUNDS URGED BY THE REVENUE ON THIS ISSUE ARE LIABLE TO BE DISMISSED. WE ORDER ACCORDINGLY. SHR I BHUPENDRA C. DALAL 60 100. WE SHALL NOW TAKE UP THE APPEAL FILED BY THE ASSESSEE FOR AY 1989 - 90. THE FIRST ISSUE RELATES TO THE DISALLOWANCE OF INTEREST OF RS.12,19,181/ - PAID TO BANKS AND OTHERS. AS IN AY 1988 - 89, THE AO DISALLOWED THE ABOVE SAID CLAIM ON THE REASONING THAT THE ASSESSEE HAS DIVERTED INTEREST B EARING FUNDS FOR GIVING INTEREST FREE ADVANCES. HOWEVER, THE SAID ADDITION WAS DELETED BY US IN THE PRECEDING PARAGRAPH ON THE REASONING THAT THE ASSESSEE ALSO POSSESSED INTEREST FREE SUNDRY CREDITORS BALANCES. THE LD A.R SUBMITTED THAT THE POSITION IS S AME DURING THE AY 1989 - 90 ALSO. HE SUBMITTED THAT, EVEN IF THE SUNDRY DEBTORS BALANCE IS SET OFF AGAINST SUNDRY CREDITORS BALANCE, STILL THE ASSESSEE IS LEFT WITH SUFFICIENT AMOUNT OF INTEREST FREE FUNDS OVER AND ABOVE THE ADVANCES GIVEN FREE OF INTEREST. 101. HAVING HEARD RIVAL SUBMISSIONS ON THIS ISSUE, WE ARE OF THE VIEW THAT THIS ADDITION NEEDS TO BE DELETED, SINCE THE ASSESSEE IS IN POSSESSION OF SUFFICIENT AMOUNT OF INTEREST FREE FUNDS. THE ASSESSEE FURNISHED A STATEMENT OF FUNDS POSITION AS ON 31.3.1989 AND THE DETAILS OF SUNDRY DEBTORS & INVESTMENTS ARE GIVEN BEFORE LD CIT(A). ON A CONSIDERATION OF BOTH, WE ARRIVE AT THE FOLLOWING POSITION OF FUNDS: - INTEREST FRE E OWN FUNDS 13 (RS. IN LAKHS) INTEREST FREE LOANS 138 SUN DRY CREDITORS (INT. FREE) 933 -------- 1,084 ===== LOANS & ADVANCES 234 SUNDRY DEBTORS 525 INVESTMENTS 180 --------- 939 ====== IT CAN BE NOTICED THAT THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE IS SUFFICIENT TO TAKE CARE OF INTEREST FREE ADVANCES MADE. THE LD A.R ALSO RELIED SHR I BHUPENDRA C. DALAL 61 UPON THE DECISION RENDERED BY HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SRIDEV ENTERPRIESES (1991)(192 ITR 165), WH EREIN THE HONBLE KARNATAKA HIGH COURT HAS HELD THAT IN THE CASE OF INTERRELATED BUSINESS TRANSACTIONS, THE OPENING BALANCE OF ADVANCE CANNOT BE CONSIDERED TO COMPUTE INTEREST DISALLOWANCE, IF ANY. HE ALSO RELIED UPON THE DECISION RENDERED BY DELHI BENCH OF TRIBUNAL IN THE CASE OF VIJAI SHRI (P) LTD VS. ACIT (2005)(145 TAXMAN 23), WHEREIN THE TRIBUNAL HAS HELD THAT THE INTEREST IS ALLOWABLE, IF IT IS SHOWN THAT THE BORROWED FUNDS WERE USED FOR THE PURPOSE OF BUSINESS. THE LD A.R SUBMITTED THAT THE BANK B ORROWINGS HAVE BEEN FULLY USED FOR THE PURPOSE OF BUSINESS ONLY. IN THE IMMEDIATELY PRECEDING YEAR, WE HAVE RECOGNISED THIS FACT ALSO. ACCORDINGLY, CONSISTENT WITH THE VIEW TAKEN IN AY 1988 - 89, WE ARE OF THE VIEW THAT THE TAX AUTHORITIES ARE NOT JUSTIFIE D IN DISALLOWING INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 102. THE NEXT ISSUE RELATES TO THE ADDITION MADE U/S 68 OF THE ACT IN RES PECT OF CASH CREDITS. IN THE FIRST ROUND OF PROCEEDINGS, THE AO ADDED A SUM OF RS.33,26,921/ - U/S 68 OF THE ACT. IN THE SET ASIDE PROCEEDINGS, THE AO REDUCED THE ADDITION TO RS.20,20,367/ - . THE LD CIT(A) ALSO CONFIRMED THE SAME. 102.1 THE FIRST ITE M OF ADDITION IS THE CASH CREDIT OF RS.14,15,157/ - TAKEN FROM SHR PARESH PATEL. DURING THE YEAR UNDER CONSIDERATION, THE AGGREGATE AMOUNT OF CREDIT AVAILABLE IN THIS ACCOUNT WAS RS.15,53,929/ - . HOWEVER, IN THE CONFIRMATION LETTER, A SUM OF RS.1,38,772/ - ALONE WAS CONFIRMED. HENCE THE AO MADE ADDITION OF DIFFERENCE AMOUNT OF RS.14,15,157/ - . THE LD A.R SUBMITTED THAT THE AGGREGATE CREDIT OF RS.15,53,929/ - RELATE TO THE TRADING TRANSACTIONS AND THE CLOSING BALANCE AVAILABLE AT THE END OF THE YEAR WAS RS.1, 38,772/ - . HENCE THE CREDITOR HAS CONFIRMED THE CLOSING CREDIT BALANCE ONLY. HE SUBMITTED THAT VERY SAME BALANCE WAS CARRIED FORWARD IN THE SUCCEEDING YEARS AND THE CREDITOR SHR I BHUPENDRA C. DALAL 62 HAS ALSO CONFIRMED THE BALANCE AVAILABLE ON 31.3.1991 ALSO. THE SAID AMOUNT WAS REPAID ON 14.6.1991. THUS, WE NOTICE THAT THE ASSESSING OFFICER HAS MADE THE ADDITION WITHOUT PROPERLY EXAMINING THE REPLIES GIVEN BY THE ASSESSEE AS WELL AS LEDGER ACCOUNT COPY OF THE CREDITOR. WHEN THE DEBIT ENTRIES OF THE TRADING TRANSACTIONS ARE ACCE PTED AS GENUINE, THERE IS NO REASON TO SUSPECT THE CORRESPONDING CREDIT ENTRIES. FURTHER, THE CREDITOR HAS ONLY CONFIRMED THE CLOSING BALANCE, WHICH IS IN AGREEMENT WITH THE BOOKS OF ACCOUNT OF THE ASSESSEE. ACCORDINGLY, WE ARE OF THE VIEW THAT THE AO HA S MADE THIS ADDITION WITHOUT PROPER REASONING AND ACCORDINGLY THE DESERVES TO BE DELETED. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 102.2 THE NEXT ITEM OF ADDITION RELATES TO THE C ASH CEDIT OF RS.31,840/ - TAKEN FROM SHRI NITIN PATEL. THE ASSESSEE HAS FURNISHED CONFIRMATION LETTER OBTAINED FROM THE CREDITOR FOR THE YEAR ENDING 31.12.1986. THE LEDGER ACCOUNT COPY FURNISHED IN THE PAPER BOOK SHOWS THAT THE OUTSTANDING BALANCE WAS REP AID SUBSEQUENTLY. A PART OF CREDIT ALSO INCLUDES TRADING TRANSACTION. IT IS THE PLEA OF THE ASSESSEE THAT HE COULD NOT OBTAIN CONFIRMATION LETTER AFTER EXPIRY OF ABOUT 20 YEARS. CONSIDERING THE EXPLANATIONS OF THE ASSESSEE, WE ARE OF THE VIEW THAT THERE IS NO REASON TO SUSPECT THIS CASH CREDIT. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 102.3 THE NEXT ITEM OF ADDITION RELATES TO THE CASH CREDIT OF RS.20,000/ - RECEIVED FROM RANAK PATEL. A PERUSAL OF LEDGER ACCOUNT PLACED AT PAGES 258 - 259 SHOWS THAT THIS CREDITOR WAS HAVING A OPENING BALANCE OF RS.1,25,000/ - AND INTEREST PAYMENTS HAVE BEEN REGULARLY PAID. THUS THIS CREDITOR IS CONTINUING FROM THE EARLIER YEARS AND DURING THE YEAR UNDER CONSIDERATION, A SUM OF RS.20,000/ - WAS RECEIVED. CONSIDERING THE FACT THAT THE ASSESSEE IS PAYING INTEREST REGULARLY TO THIS CREDITOR, WE ARE OF THE VIEW THAT THERE IS NO NEED TO SHR I BHUPENDRA C. DALAL 63 MAKE THE ADDITION OF RS.20,000/ - AND ACCORDINGLY WE DIRECT THE AO TO DELETE THE SAME. 102.4 THE NEXT ITEM OF ADDITION RELATES TO THE CASH CREDIT OF RS.1,22,555/ - RECEIVED FROM SUDHA PATEL. THE AO HAS MADE THE ADDITION ON THE GROUND THAT THE AGGREGATE AMOUNT OF CREDITS AVAILABLE IN THE ACCOUNT WAS RS.1,76,250/ - , BUT CON FIRMATION LETTER WAS GIVEN FOR A SUM OF RS.47,715/ - ONLY. HENCE THE DIFFERENCE WAS ADDED BY THE AO. IT IS SUBMITTED THAT THE CREDIT TRANSACTIONS RELATE TO THE SHARE TRADING TRANSACTIONS AND MAJOR PORTION OF THE CREDIT HAS BEEN REPAID DURING THE INSTANT YEAR AND THE OUTSTANDING BALANCE OF RS.47,715/ - WAS SETTLED AFTER 31.3.1991. THUS, WE NOTICE THAT THE ASSESSING OFFICER HAS MADE THE ADDITION WITHOUT PROPERLY EXAMINING THE REPLIES GIVEN BY THE ASSESSEE AS WELL AS LEDGER ACCOUNT COPY OF THE CREDITOR. WHE N THE DEBIT ENTRIES OF THE TRADING TRANSACTIONS ARE ACCEPTED AS GENUINE, THERE IS NO REASON TO SUSPECT THE CORRESPONDING CREDIT ENTRIES. FURTHER, THE CREDITOR HAS ONLY CONFIRMED THE CLOSING BALANCE, WHICH IS IN AGREEMENT WITH THE BOOKS OF ACCOUNT OF THE A SSESSEE. ACCORDINGLY, WE ARE OF THE VIEW THAT THE AO HAS MADE THIS ADDITION WITHOUT PROPER REASONING AND ACCORDINGLY THE DESERVES TO BE DELETED. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITI ON. 101.5 THE NEXT ITEM OF ADDITION RELATES TO THE CASH CREDIT OF RS.3,94,415/ - TAKEN FROM SHRI V.C.PATEL. IN THIS CASE ALSO, THE AGGREGATE AMOUNT OF CREDITS WERE RS.5,14,127/ - , BUT THE CONFIRMATION WAS GIVEN FOR RS.1,19,712/ - . HENCE THE DIFFERENCE WAS ADDED BY THE AO. IT IS SUBMITTED THAT THE CREDIT TRANSACTIONS RELATE TO THE SHARE TRADING TRANSACTIONS AND MAJOR PORTION OF THE CREDIT HAS BEEN REPAID DURING THE INSTANT YEAR AND THE OUTSTANDING BALANCE OF RS.47,715/ - WAS SETTLED AFTER 31.3.1991. TH E LD A.R SUBMITTED THAT THE CREDITS FOUND IN THE ACCOUNT CONSISTED OF BOTH LOAN TRANSACTIONS AND TRADING TRANSACTIONS. THUS, WE SHR I BHUPENDRA C. DALAL 64 NOTICE THAT THE ASSESSING OFFICER HAS MADE THE ADDITION WITHOUT PROPERLY EXAMINING THE REPLIES GIVEN BY THE ASSESSEE AS WELL AS LEDGER ACCOUNT COPY OF THE CREDITOR. WHEN THE DEBIT ENTRIES OF THE TRADING TRANSACTIONS ARE ACCEPTED AS GENUINE, THERE IS NO REASON TO SUSPECT THE CORRESPONDING CREDIT ENTRIES RELATING TO TRADING TRANSACTIONS. FURTHER, THE CREDITOR HAS ONLY CONFIRMED TH E CLOSING BALANCE, WHICH IS IN AGREEMENT WITH THE BOOKS OF ACCOUNT OF THE ASSESSEE. IN RESPECT OF FRESH LOANS TAKEN DURING THE YEAR, THE ASSESSEE HAS CITED HIS INABILITY TO OBTAIN FRESH CONFIRMATION DUE TO PASSAGE OF ABOUT 20 YEARS AND ALSO DUE TO NON - REL EASE OF BOOKS. IN VIEW OF THE ABOVE, WE ARE OF THE VIEW THAT THERE IS NO REASON TO SUSPECT THE LOAN TRANSACTIONS ALSO. ACCORDINGLY, WE ARE OF THE VIEW THAT THE AO HAS MADE THIS ADDITION WITHOUT PROPER REASONING AND ACCORDINGLY THE DESERVES TO BE DELETED. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 102.6 THE LAST ITEM OF ADDITION RELATES TO THE CASH CREDIT OF RS.30,400/ - TAKEN FROM SRI VITHALBHAI PATEL. IN THIS CASE ALSO, THE AGGREG ATE CREDIT AVAILABLE IN THE ACCOUNT WAS RS.1,70,000/ - , BUT THE CREDITOR CONFIRMED THE CLOSING BALANCE OF RS.1,39,600/ - . HENCE THE AO HAS ADDED THE DIFFERENCE. THE ASSESSEE HAS REPAID THE BALANCE SUBSEQUENTLY. THUS, WE NOTICE THAT THE AO HAS ADDED THE DI FFERENCE WITHOUT PROPERLY APPRECIATING THE ACCOUNT. ACCORDINGLY, WE SET ASIDE THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THIS ADDITION. 103. THE ASSESSEE HAS ALSO RAISED A GROUND RELATING TO CHARGING OF INTEREST U/S 234A, 234B AND 234C OF THE ACT. THE LEVYING OF INTEREST IS CONSEQUENTIAL IN NATURE AND ACCORDINGLY THIS GROUND DOES NOT REQUIRE ADJUDICATION. SHR I BHUPENDRA C. DALAL 65 104. THE ASSESSEE HAS ALSO RAISED CERTAIN LEGAL GROUNDS IN THIS YEAR ALSO. SINCE MOST OF THE ISSUES HAVE BEEN DECID ED IN FAVOUR OF THE ASSESSEE ON MERITS, WE DO NOT FIND IT NECESSARY TO ADJUDICATE THEM. 105. WE SHALL NOW TAKE UP THE APPEAL FILED BY THE REVENUE. THE ONLY ISSUE URGED IN THIS APPEAL RELATES TO THE DELETION OF VARIOUS ADDITIONS AGGREGATING TO RS.10,89 ,30,545/ - . VARIOUS TYPES OF ADDITIONS AGGREGATING TO THE ABOVE SAID AMOUNT WERE MADE BY THE AO IN THE ORIGINAL ASSESSMENT PROCEEDINGS. IN THE APPEAL FILED BY THE ASSESSEE, THE LD CIT(A) DELETED THESE ADDITIONS. THE REVENUE DID NOT PREFER APPEAL CHALLEN GING THE ORDER OF LD CIT(A) ON THESE ISSUES AND HENCE THE SAME HAS ATTAINED FINALITY. THE ASSESSEE ALONE WENT IN APPEAL BEFORE ITAT CHALLENGING THE ADDITIONS CONFIRMED BY LD CIT(A). AS STATED EARLIER, THE TRIBUNAL RESTORED THOSE ADDITIONS WHICH WERE CONF IRMED BY THE LD CIT(A) TO THE FILE OF THE AO FOR FRESH EXAMINATION. IN THE SET ASIDE PROCEEDINGS, THE AO ASSESSED VARIOUS ADDITIONS AGGREGATING TO RS.10,89,30,545/ - AGAIN, EVEN THOUGH THEY HAVE ALREADY BEEN DELETED BY LD CIT(A) IN THE FIRST ROUND OF PROCE EDINGS AND THE CONCERNED MATTERS HAVE ATTAINED FINALITY. THESE FACTUAL ASPECTS WERE APPRECIATED BY LD CIT(A) IN THE SECOND ROUND OF PROCEEDINGS AND ACCORDINGLY HE HELD THAT THE AO WAS NOT LEGALLY ENTITLED TO MAKE THESE ADDITIONS AGAIN IN THE SECOND ROUND OF PROCEEDINGS. THE REVENUE IS AGGRIEVED BY THE SAID DECISION. 106. WE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. FOR THE SAKE OF CONVENIENCE, WE EXTRACT BELOW THE OPERATIVE PORTION OF THE ORDER PASSED BY LD CIT(A) ON THIS ISSUE: - 11.1 AS IS APPARENT FROM THE GROUND ITSELF THAT THESE ADDITIONS HAD BEEN DELETED IN THE EARLIER ROUND OF APPEAL BY MY LD. PREDECESSOR BASED ON THE REASONS GIVEN IN HIS ORDER. SINCE NO APPEAL AGAINST THE SAME WERE FILED BEFORE THE ITAT, IT CAN BE SAFELY TAKEN TO BE VIEW OF THE DEPARTMENT THAT THESE ADDITIONS WERE NOT REQUIRED TO BE MADE ON THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE. THUS, THE MATTER WAS NOT PENDINGBEFORE THE HONBLE ITAT WHEN THE ORDER WAS SET ASIDE BY THEM. IF THE AO INTENDED SHR I BHUPENDRA C. DALAL 66 TO MAKE ANY ONE OR MORE OF THE ADDITIONS LISTED ABOVE IN THE FRESH ROUND OF ASSESSMENT, HE OUGHT TO HAVE MENTIONED SO IN ANY OF THE NOTICES U/S 142(1). HAVING NOT INCLUDED THESE ISSUES IN THE NOTICE U/S 142(1), THE NATURAL PRESUMPTION WOULD BE THAT THE AO HAD AL SO ACCEPTED THE CIT(A)S EARLIER ORDER IN VIEW OF NO APPEAL BEING FILED ON THESE ISSUES. INCLUSION OF THESE ADDITIONS IN THE COMPUTATION OF INCOME IN THE SUBSEQUENT ASSESSMENT ORDER, THEREFORE, IS WITHOUT ANY BASIS. THESE ADDITIONS ARE, THEREFORE, DIRECT ED TO BE DELETED. THE LD A.R CONTENDED THAT AN ITEM OF ADDITION, WHICH IS NOT SUBJECT MATTER OF APPEAL BEFORE THE TRIBUNAL, CANNOT BE SAID TO HAVE BEEN SET ASIDE BY THE TRIBUNAL. ACCORDINGLY HE CONTENDED THAT THE ASSESSING OFFICER DOES NOT HAVE POWER TO CONSIDER ANY ISSUE WHICH WAS NOT SET ASIDE BY THE TRIBUNAL. HE FURTHER SUBMITTED THAT THE AO DID NOT ISSUE ANY NOTICE IN RESPECT OF THESE ISSUES AND DID NOT DISCUSS ANYTHING ABOUT THE ADDITIONS. HE FURTHER SUBMITTED THAT ORDER PASSED BY THE CIT(A) DELET ING THESE ADDITIONS IN THE FIRST ROUND OF PROCEEDINGS HAS ATTAINED FINALITY, SINCE THE REVENUE HAS ACCEPTED THE ORDER OF LD CIT(A) BY NOT FILING APPEAL BEFORE ITAT. EVEN IF IT IS CONSIDERED AS NOT HAVING DELETED BY LD CIT(A) (WHICH IS AGAINST THE FACTS), BUT HAS BEEN SET ASIDE BY LD CIT(A) IN THE FIRST ROUND OF PROCEEDINGS TO THE FILE OF AO FOR FRESH CONSIDERATION, THEN ALSO THESE ADDITIONS COULD NOT HAVE BEEN MADE BY THE AO, SINCE THE TIME LIMIT PRESCRIBED U/S 153(2A) OF THE ACT FOR PASSING FRESH ORDER H AD ALSO EXPIRED. 107. WE FIND MERIT IN THE CONTENTIONS OF THE LD A.R. WE ARE OF THE VIEW THAT THE LD CIT(A) HAS APPLIED CORRECT PRINCIPLES OF LAW IN ADJUDICATING THE MATTER AND HENCE WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER PASSED BY HIM ON THIS ISSUE. SHR I BHUPENDRA C. DALAL 67 108. IN THE RESULTS, THE APPEALS OF THE ASSESSEE FOR A.Y. 1987 - 88 AND 1988 - 89 ARE PARTLY ALLOWED . THE APPEAL OF THE ASSESSEE FILED FOR A.Y. 1989 - 90 IS ALLOWED. THE APPEALS OF THE REVENUE ARE DISMISSED. ORDER HAS BE EN PRONOUNCED I N THE COURT ON 9 .1 1 .2016 SD/ - SD/ - (SANDEEP GOSAIN ) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED : 9 / 1 1 / 20 1 6 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// ( DY./ASSTT. REGISTRAR) ITAT, MUMBAI PS
Other Referred Cases
-
Laws Referred To
-
Consultation on Entity Formation
₹0
360 Brand Audit (30 mins)
₹299
1:1 Consultation with family dentist -Your Smile Deserves the Best Care!
₹250
Affidavit - Application for condonation of delay in filing the appeal before ITAT - Type 2
Mehul₹0
Assignment of Registered Trademark
Mehul₹500
Minimum Alternate Tax (MAT): Comprehensive Overview and Key Changes under Finance Bill, 2026
Team Counselvise - February 06, 2026
Why Lacoste Won a 20-Year Trademark Battle Against Crocodile ?
Team Counselvise - March 10, 2026
Budget 2026: 5 Major Personal Tax Changes Every Taxpayer Must Know
Team Counselvise - February 05, 2026