Maruthi Securities Ltd., Secunderabad V. ACIT, Circle-16, Hyderabad

ITA 841/HYD/2012

• Counselvise Citation: 84122514 RSA 2012
• Duration Of Justice: 2 year(s) 6 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-12-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 28-05-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: K A SAI PRASAD
• Keywords: Earning of tax free income; Assessment record; Notional interest; Revised return; Reason to believe
• Section: 143(3); 14A; 145; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NOS. 841 & 1176/HYD/2012 ASSESSMENT YEAR : 2007-08 MARUTHI SECURITIES LTD., HYDERABAD PAN AABCM3651M ASST. COMMISSIONER OF INCOME- TAX, CIRCLE 16(2), HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI K.A. SAI PRASAD REVENUE BY SHRI D. SUDHAKAR RAO DATE OF HEARING 19-11-2014 DATE OF PRONOUNCEMENT 03-12-2014 O R D E R PER SAKTIJIT DEY, J.M.: THESE ARE TWO APPEALS BY ASSESSEE, ONE AGAINST ORD ER PASSED U/S 263 OF THE ACT AND THE OTHER IS AGAINST ORDER D ATED 22/05/12 PASSED BY LD. CIT(A), HYDERABAD, BOTH PERTAINING TO AY 2007-08. ITA NO. 1176/HYD/12 2. THE ONLY ISSUE IN THE PRESENT APPEAL IS WITH R EGARD TO ADDITION OF RS. 58,10,000 MADE BY AO AND CONFIRMED BY LD. CI T(A). 3. BRIEFLY THE FACTS ARE DURING THE ASSESSMENT PROC EEDING, AS NOTED BY AO, ON GOING THROUGH THE DETAILS OF LOANS AND ADVANCES AS ON 31/03/2007 ALONG WITH DETAILS OF INTEREST ACCRUE D, HE NOTICED THAT IN RESPECT OF LOANS AND ADVANCES WHERE THE AGREEMEN TS ARE ENTERED BETWEEN ASSESSEE AND OTHER PARTY, INTEREST HAS BEEN RECOGNIZED AT 2 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. 14% WHEREAS IN RESPECT OF LOANS AND ADVANCES WHERE THERE IS NO WRITTEN AGREEMENT, NO INTEREST HAS BEEN RECOGNIZED BY SHOWING IT AS INCOME. AO BY FOLLOWING THE OBSERVATION MADE IN ASS ESSMENT ORDER PASSED FOR AY 2006-07 ON THE VERY SAME ISSUE QUANTI FIED NOTIONAL INTEREST INCOME AT RS. 58,10,000 ON THE LOANS AND A DVANCES WHERE THERE IS NO WRITTEN AGREEMENT BETWEEN ASSESSEE AND OTHER PARTY AND MADE ADDITION ACCORDINGLY WHICH RESULTED IN THE RED UCTION OF LOSS TO RS. 2,37,51,957 AS AGAINST RS. 2,95,61,957 AS CLAI MED IN THE REVISED RETURN. BEING AGGRIEVED OF THE ADDITION SO MADE, A SSESSEE PREFERRED APPEAL BEFORE LD. CIT(A). LD. CIT(A) FOLLOWING THE ORDERS PASSED BY HIM FOR AY 2005-06 AND 2006-07 CONFIRMED THE ADDITI ON MADE. 4. THE LEARNED AR, AT THE OUTSET, SUBMITTED BEFORE US THAT ADDITIONS MADE FOR THE AY 2005-06 AND 2006-07, IN THE MEANWHILE HAVE BEEN DELETED BY ITAT WHILE CONSIDERING ASSESSE ES APPEAL IN ITA NOS. 468/HYD/09 AND 1111/HYD/2011 DATED 05/09/1 4. LD. DR ALSO AGREED THAT THE ISSUE HAS BEEN DECIDED IN FAVOUR OF ASSESSEE IN THE PRECEDING AYS BY ITAT IN ASSESSEES OWN CASE. 5. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS OT HER MATERIAL ON RECORD. A PERUSAL OF THE ASSESSMENT ORDER AS WELL A S ORDER PASSED BY LD. CIT(A) WOULD MAKE IT CLEAR THAT ADDITION OF NOT IONAL INTEREST WAS MADE ON THE BASIS OF ORDERS PASSED FOR THE PRECEDIN G AYS. HOWEVER, WHEN THE ISSUE WAS AGITATED BEFORE ITAT, BY ASSESSE E IN ITA NOS. 468/HYD/09 AND 1111/HYD/11 FOR AYS 2005-06 AND 2006 -07, THE COORDINATE BENCH OF THIS TRIBUNAL WHILE DELETING TH E ADDITIONS HELD AS UNDER: 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE IMPUGNED ORDERS OF THE REVENUE AUTHORIT IES AND OTHER MATERIAL ON RECORD. WE HAVE ALSO GONE THROUGH THE WRITTEN SUBMISSIONS FILED AND THE DECIS IONS RELIED UPON BY THE PARTIES BEFORE US. WE ARE OF THE OPINION THAT TO ARRIVE AT A REAL INCOME, ACCRUAL BA SIS 3 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. CANNOT BE A JUSTIFYING FACTOR AND THE COMMERCIAL AN D BUSINESS REALTIES OF THE ASSESSEE, SHOULD BE CONSID ERED. THE INTEREST INCOME HAS BEEN RECOGNIZED IN THE BOOK S OF ACCOUNTS ONLY TO THE EXTENT OF ACTUAL COLLECTION, W HICH IS THE RECOMMENDED/ RECOGNIZED METHOD AS PER ACCOUNTIN G STANDARD 9 OF ICAI WHICH LAYS DOWN THAT WHEN UNCERTAINTIES EXIST REGARDING THE DETERMINATION OF THE AMOUNT OR ITS COLLECTABILITY, THE REVENUE SHALL NOT BE TREATED AS ACCRUED AND HENCE SHALL NOT BE RECOGNIZE D UNTIL COLLECTION. THE RECOGNITION OF REVENUE ON ACC RUAL BASIS PRESUPPOSES THE SATISFACTION OF TWO CONDITION S- (A) THE REVENUE IS MEASURABLE (B) THE REVENUE IS COLLECTABLE WITH CERTAINTY. THE INTEREST INCOME HAS BEEN ADMITTEDLY RECOGNISED ONLY ON RECEIPT BASIS. THE CONTENTION OF THE REVENUE THA T THE LOAN AGREEMENTS HAVE INTEREST CLAUSE PERMITTING THE ASSESSEE TO CHARGE INTEREST AT THE RATE OF 14% IS N OT TENABLE. THE TERMS OF THE AGREEMENTS, WHICH ENABLED THE ASSESSEE COMPANY TO DEMAND INTEREST WERE ONLY ENABLING PROVISIONS AND THOSE ENABLING PROVISIONS D ID NOT GUARANTEE THE COLLECTION OF OVERDUE INTEREST. T HEY ONLY GAVE A CAUSE OF ACTION TO THE APPLICANT. 22. THE METHOD OF ACCOUNTING, AS FOLLOWED BY THE ASSESSEE, DOES NOT CREATE ANY INCOME; BUT THE METHO D OF ACCOUNTING ONLY RECOGNIZES INCOME. THERE IS SOME MERIT IN THE SUBMISSION OF THE ASSESSEE THAT WHEN T HE PRINCIPAL ITSELF IS OVERDUE AND NOT COLLECTED, THER E IS NO BASIS FOR MAKING OUT A CASE THAT INTEREST INCOME WO ULD BE COLLECTABLE WITH CERTAINTY. EVEN WHERE AN ASSESS EE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING, IT I S ONLY ACCRUAL OF REAL INCOME WHICH IS CHARGEABLE TO TAX, THAT ACCRUAL IS A MATTER TO BE DECIDED ON COMMERCIAL BEL IEF HAVING REGARD TO THE NATURE OF BUSINESS OF THE ASSE SSEE AND CHARACTER OF THE TRANSACTION. ACCORDINGLY, FOR THE PURPOSE OF DETERMINING WHETHER THERE HAS BEEN ACCRU AL OF REAL INCOME OR NOT, RECOURSE IS TO BE MADE TO ASCERTAIN THE NATURE OF BUSINESS AND CHARACTER OF T HE TRANSACTION AND THE REALITIES AND PECULIARITIES OF THE SITUATIONS. THE DECISION VERY HEAVILY RELIED UPON B Y THE FIRST APPELLATE AUTHORITY IN THE CASE OF STATE BANK OF TRAVANCORE VS CIT (1986) 158 ITR 102 WAS SUBSEQUENT LY 4 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. OVERRULED IN ITS LAND MARK DECISION IN THE CASE OF UCO BANK VS CIT 237 ITR 889. IN THIS REGARD, WE PLACE RELIANCE ON THE RATIO LAID DOWN BY VARIOUS JUDICIAL AUTHORITIES ON THE PROPOSITION THAT THE INCOME CANN OT BE TAXED ON HYPOTHETICAL BASIS, AND IT IS ONLY THE REA L INCOME THAT IS TO BE BROUGHT TO TAX. IN THIS BEHAL F, WE ALSO RELY, GIVING BELOW SUMMARY OF THE RATIO LAID D OWN, ON THE FOLLOWING DECISIONS- A) CIT VS. GODHRA ELECTRICITY CO. 225 ITR 746 (SC), THE VIEW EXPRESSED WAS THAT IF INCOME DOES NOT RESU LT AT ALL, THERE CANNOT BE ANY TAX AND THAT IF AN INCOME HAS N OT MATERIALIZED, THEN MERELY AN ENTRY MADE ABOUT A HYPOTHETICAL INCOME BY FOLLOWING BOOK KEEPING METHO DS, THE LIABILITY TO TAX CANNOT BE ATTRACTED. B) ANDHRA BANK(225 ITR 447)(SC): IT WAS HELD, THAT THERE CANNOT BE A TAX IF NO INCOM E RESULTED, DESPITE THE ENTRY IN THE BOOK KEEPING. THE CASE DEA LS WITH S. 148. ASSESSEE CHANGED METHOD OF ACCOUNTING FROM AY 1960 ONWARDS. BUT DURING AY 1963-64, THE AO OBJECTED THE CHANGE AND REOPENED ASSESSMENTS FOR AY 1960 ONWARDS . APEX COURT HELD THAT THIS AMOUNTS TO CHANGE OF OPIN ION AND RE-ASSESSMENT IS NOT VALID. 23. FURTHER, THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE HONBLE SUPR EME COURT CIT VS. EXCEL INDUSTRIES LTD. & ORS. (358 ITR 295) AND SUBMITTED THAT GOING BY THE ACCOUNTING STANDARD THOUGH THE REVENUE IS COLLECTIBLE BY CERTAINTY, THE ASSESSEE IN THE PRESENT CASE, IN FACT, HAD NOT REC EIVED ANY INTEREST AND HENCE, INTEREST IN QUESTION REMAIN ED ONLY NOTIONAL INTEREST. AS CANVASSED BY THE LEARN ED COUNSEL FOR THE ASSESSEE, SOME OF THE PARTIES DID N OT REPAY EVEN THE PRINCIPAL AMOUNT AND SOME OF THE PAR TIES SETTLED THE ACCOUNTS BY PAYING SOME INTEREST AND HE NCE, WE AGREE THAT COMPUTATION OF NOTIONAL INTEREST AT 1 4% ON ALL THE ADVANCES AND MAKING ADDITIONS ON THAT BA SIS TO THE INCOME OF THE ASSESSEE, IS NOT JUSTIFIED. 24. WE MAY, AT THIS JUNCTURE, REFER TO THE AHMEDABAD BENCH DECISION OF THE TRIBUNAL IN THE CAS E OF ITO VS. CJ RATHOD (11 ITR (TRIB.) 252), RELIED UPON BY 5 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. THE LEARNED COUNSEL FOR THE ASSESSEE. IN THIS CAS E THE ASSESSEE HAD GIVEN INTEREST FREE LOANS TO SOME PERS ONS. THE ASSESSING OFFICER ADDED CERTAIN SUMS AS DEEMED INTEREST ON SUCH LOANS. IT WAS HELD THAT THERE WAS NO AGREEMENT BETWEEN THE ASSESSEE AND THE PERSONS TO WHOM THE MONEY HAD BEEN ADVANCED REGARDING CHARGES OF INTEREST AND THE ASSESSEE HAD ACTUALLY NOT CHARG ED ANY INTEREST AND THESE LOANS WERE INTEREST FREE LOA NS. AS THERE WAS NO CHARGE OF INTEREST IT WAS HELD THAT THE ASSESSEE WAS NOT ENTITLED TO ANY INCOME AND THE DEE MED ADDITION MADE BY THE ASSESSING OFFICER IS TO BE DEL ETED. 25. WE MAY FURTHER REFER TO THE DECISION OF THIS TRIBUNAL IN CCI FINANCE V/S. ACIT (91 ITD 573) , ALSO RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE , WHEREIN IT WAS HELD THAT ACCRUAL OF INTEREST INCOME ON NON-PERFORMING ASSETS ACCOUNT HAS TO BE JUDGED FROM REALISTIC POINT OF VIEW. NON RECOGNITION OF INTERE ST INCOME ON THE GROUND THAT THE INTEREST HAD NOT REAL LY ACCRUED AS THE REALISABILITY OF PRINCIPAL OUTSTANDI NG ITSELF WAS DOUBTFUL WAS HELD TO BE LEGALLY CORRECT UNDER T HE MERCANTILE SYSTEM OF ACCOUNTING. 26. WE MAY FURTHER REFER TO THE DECISION OF THIS TRIBUNAL IN THE CASE OF NSL POWER INFRASTRUCTURE LT D. V/S. CIT IN ITA NO. 1219/HYD/2011 DATED 24.1.2013, RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE US, DULY POINTING THAT THE HIGH COURT IN ITT A NO. 607 OF 2013, HAS DISMISSED THE APPEAL BY THE DEPARTMENT, BY HOLDING THAT NON-OFFERING OF INTERES T INCOME IS DISTINGUISHED WHEN THERE IS NO CERTAINTY AND THE COMPANY HAS NOT DERIVED ANY INTEREST. AS FOR T HE DECISION OF STATE BANK OF TRAVANCORE V/S. CIT (158 ITR 102), RELIED UPON BY THE LEARNED CIT(A) IN THE IMPUGNED ORDER, AS POINTED OUT BY THE LEARNED COUN SEL FOR THE ASSESSEE THE HONBLE SUPREME COURT HAS REVERSED THE VIEW TAKEN IN THAT CASE, VIDE ITS DECI SION IN UCO BANK (237 ITR 889) WHEREIN IT HAS BEEN HELD AS FOLLOWS: THE QUESTION WHETHER INTEREST EARNED, ON WHAT HA VE COME TO BE KNOWN AS 'STICKY' LOANS, CAN BE CONSIDERED AS INCOM E OR NOT UNTIL ACTUAL REALISATION, IS A QUESTION WHICH MAY ARISE BEFORE S EVERAL INCOME-TAX OFFICERS EXERCISING JURISDICTION IN DIFFERENT PARTS OF THE COUNTRY. UNDER THE ACCOUNTING PRACTICE, INTEREST WHICH IS TRANSFER RED TO THE SUSPENSE ACCOUNT AND NOT BROUGHT TO THE PROFIT AND LOSS ACCO UNT OF THE COMPANY IS 6 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. NOT TREATED AS INCOME. THE QUESTION WHETHER IN A GI VEN CASE SUCH 'ACCRUAL' OF INTEREST IS DOUBTFUL OR NOT, MAY ALSO BE PROBLEMATIC. IF, THEREFORE, THE BOARD HAS CONSIDERED IT NECESSARY TO LAY DOWN A GENERAL TEST FOR DECIDING WHAT IS A DOUBTFUL DEBT, AND DIRE CTED THAT ALL INCOME-TAX OFFICERS SHOULD TREAT SUCH AMOUNTS AS NOT FORMING P ART OF THE INCOME OF THE ASSESSEE UNTIL REALISED, THIS DIRECTION BY WAY OF A CIRCULAR CANNOT BE CONSIDERED AS TRAVELLING BEYOND THE POWERS OF THE B OARD UNDER SECTION 119 OF THE INCOME-TAX ACT. SUCH A CIRCULAR IS BINDI NG UNDER SECTION 119. THE CIRCULAR OF OCTOBER 9, 1984, THEREFORE, PROVIDE S A TEST FOR RECOGNISING WHETHER A CLAIM FOR INTEREST CAN BE TRE ATED AS A DOUBTFUL CLAIM UNLIKELY TO BE RECOVERED OR NOT. THE TEST PRO VIDED BY THE SAID CIRCULAR IS TO SEE WHETHER, AT THE END OF THREE YEA RS, THE AMOUNT OF INTEREST HAS, IN FACT, BEEN RECOVERED BY THE BANK O R NOT. IF IT IS NOT RECOVERED FOR A PERIOD OF THREE YEARS, THEN IN THE FOURTH YEAR AND ONWARDS THE CLAIM FOR INTEREST HAS TO BE TREATED AS A DOUBTFUL CLAIM WHICH NEED NOT BE INCLUDED IN THE INCOME OF THE ASS ESSEE UNTIL IT IS ACTUALLY RECOVERED. IN THE CASE OF NAVNIT LAL (C.) JAVERI V. K.K. SEN, AAC [1965] 56 ITR 198, THE LEGAL EFFECT OF SUCH CIRCULAR IS, INTER AL IA, CONSIDERED BY A BENCH OF FIVE JUDGES OF THIS COURT. SECTION 2(6A)(E) AND SECTION 12(1B) WERE INTRODUCED IN THE INCOME-TAX ACT BY THE FINANCE ACT 15 OF 1955, WHICH CAME INTO FORCE ON APRIL 1, 1955. THE GOVERNMENT, H OWEVER, REALISED THAT THE OPERATION OF SECTION 12(1B) WOULD LEAD TO EXTREME HARDSHIP BECAUSE IT WOULD HAVE COVERED THE AGGREGATE OF ALL OUTSTANDING LOANS OF PAST YEARS AND WOULD IMPOSE AN UNREASONABLY HIGH LI ABILITY ON THE SHAREHOLDERS TO WHOM THE LOANS MIGHT HAVE BEEN ADVA NCED. THE MINISTER, THEREFORE, GAVE AN ASSURANCE IN PARLIAMEN T THAT OUTSTANDING LOANS AND ADVANCES WHICH ARE OTHERWISE LIABLE TO BE TAXED AS DIVIDENDS IN THE ASSESSMENT YEARS 1955-56 WILL NOT BE SUBJECT ED TO TAX IF IT IS SHOWN THAT THEY HAD BEEN GENUINELY REFUNDED TO THE RESPEC TIVE COMPANIES BEFORE JUNE 30, 1955. ACCORDINGLY, A CIRCULAR WAS I SSUED BY THE CENTRAL BOARD OF REVENUE ON MAY 10, 1955, POINTING OUT TO A LL INCOME-TAX OFFICERS THAT IT WAS LIKELY THAT SOME OF THE COMPAN IES MIGHT HAVE ADVANCED LOANS TO THEIR SHAREHOLDERS AS A RESULT OF GENUINE TRANSACTIONS OF LOANS, AND THE IDEA WAS NOT TO AFFECT SUCH TRANS ACTIONS AND NOT TO BRING THEM WITHIN THE MISCHIEF OF THE NEW PROVISION . THE OFFICERS, THEREFORE, WERE ASKED TO INTIMATE TO ALL THE COMPAN IES THAT IF THE LOANS WERE REPAID BEFORE JUNE 30, 1955, IN A GENUINE MANN ER, THEY WOULD NOT BE TAKEN INTO ACCOUNT IN DETERMINING THE TAX LIABIL ITY OF THE SHAREHOLDERS TO WHOM THEY MAY HAVE BEEN ADVANCED DESPITE THE NEW SECTION. THIS CIRCULAR WAS HELD BY THIS COURT AS BINDING ON THE R EVENUE, THOUGH LIMITING THE OPERATION OF SECTION 12(1B) OR EXCLUDI NG CERTAIN TRANSACTIONS FROM THE AMBIT OF SECTION 12(1B). IT W AS SO HELD BECAUSE THE CIRCULAR WAS CONSIDERED AS ISSUED FOR THE PURPOSE O F PROPER ADMINISTRATION OF THE PROVISIONS OF SECTION 12(1B) AND THE COURT DID NOT LOOK UPON THIS CIRCULAR AS BEING IN CONFLICT WITH S ECTION 12(1B). 7 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. A SIMILAR VIEW OF THE CENTRAL BOARD OF DIRECT TAXES CIRCULARS HAS BEEN TAKEN IN THE CASE OF K.P. VARGHESE V. ITO [1981] 13 1 ITR 597, BY A BENCH OF TWO JUDGES CONSISTING OF P.N. BHAGWATI AND E.S. VENKATARAMIAH, JJ. THE BENCH HAS HELD THAT CIRCULAR S OF THE CENTRAL BOARD OF DIRECT TAXES ARE LEGALLY BINDING ON THE RE VENUE AND THIS BINDING CHARACTER ATTACHES TO THE CIRCULARS EVEN IF THEY BE FOUND NOT IN ACCORDANCE WITH THE CORRECT INTERPRETATION OF THE S ECTION AND THEY DEPART OR DEVIATE FROM SUCH CONSTRUCTION. CITING THE DECIS ION OF NAVNIT LAL (C.) JAVERI V. K.K. SEN, AAC [1965] 56 ITR 198 (SC), THI S COURT OBSERVED THAT CIRCULARS ISSUED BY THE CENTRAL BOARD OF DIREC T TAXES UNDER SECTION 119 OF THE ACT ARE BINDING ON ALL OFFICERS AND PERS ONS EMPLOYED IN THE EXECUTION OF THE ACT EVEN IF THEY DEVIATE FROM THE PROVISIONS OF THE ACT. IN KESHAVJI RAVJI AND CO. V. CIT [1990] 183 ITR 1, A B ENCH OF THREE JUDGES OF THIS COURT HAS ALSO TAKEN THE VIEW THAT CIRCULAR S BENEFICIAL TO THE ASSESSEE WHICH TONE DOWN THE RIGIOUR OF THE LAW AND ARE ISSUED IN EXERCISE OF THE STATUTORY POWERS UNDER SECTION 119 ARE BINDING ON THE AUTHORITIES IN THE ADMINISTRATION OF THE ACT. THE B ENEFIT OF SUCH CIRCULARS IS ADMISSIBLE TO THE ASSESSEE EVEN THOUGH THE CIRCU LARS MIGHT HAVE DEPARTED FROM THE STRICT TENOR OF THE STATUTORY PRO VISION AND MITIGATED THE RIGOUR OF THE LAW. THIS COURT, HOWEVER, CLARIFI ED THAT THE BOARD CANNOT PREEMPT A JUDICIAL INTERPRETATION OF THE SCO PE AND AMBIT OF A PROVISION OF THE ACT. ALSO A CIRCULAR CANNOT IMPOSE ON THE TAXPAYER A BURDEN HIGHER THAN WHAT THE ACT ITSELF, ON A TRUE I NTERPRETATION, ENVISAGES. THE TASK OF INTERPRETATION OF THE LAWS I S THE EXCLUSIVE DOMAIN OF THE COURTS. HOWEVER, THE BOARD HAS THE STATUTORY POWER UNDER SECTION 119 TO TONE DOWN THE RIGOUR OF THE LAW FOR THE BENE FIT OF THE ASSESSEE BY ISSUING CIRCULARS TO ENSURE A PROPER ADMINISTRATION OF THE FISCAL STATUTE AND SUCH CIRCULARS WOULD BE BINDING ON THE AUTHORIT IES ADMINISTERING THE ACT. IN THE CASE OF C.B. GAUTAM V. UNION OF INDIA [1993] 199 ITR 530 AT PAGE 546, A BENCH OF FIVE JUDGES OF THIS COURT CONS IDERED AS ENFORCEABLE, INSTRUCTION NO. 1A-88 ISSUED BY THE CENTRAL BOARD O F DIRECT TAXES RELATING TO THE ENFORCEMENT OF THE PROVISIONS OF CH APTER XX-C OF THE INCOME-TAX ACT. THE CENTRAL BOARD POINTED OUT IN TH E SAID INSTRUCTION THAT IN ADMINISTERING THE PROVISIONS OF THE SAID CH APTER, IT HAS TO BE ENSURED THAT NO HARASSMENT IS CAUSED TO BONA FIDE A ND HONEST PURCHASERS OR SELLERS OF IMMOVABLE PROPERTY AND THA T THE POWER OF PRE- EMPTIVE PURCHASE HAS TO BE EXERCISED BY THE APPROPR IATE AUTHORITY ONLY WHEN IT HAS GOOD REASON TO BELIEVE THAT THE PROPERT Y HAS BEEN SOLD AT AN UNDERVALUE AND THERE IS PAYMENT OF BLACK MONEY IN T HE TRANSACTION. THE INSTRUCTION THAT WHEN THE PROPERTY IS PUT UP FOR SA LE BY THE APPROPRIATE AUTHORITY, THE RESERVE PRICE SHOULD BE FIXED AT A M INIMUM OF 15 PER CENT. ABOVE THE PURCHASE PRICE SHOWN AS THE APPARENT CONS IDERATION UNDER THE AGREEMENT BETWEEN THE PARTIES, WAS HELD TO BE BINDI NG ON THE AUTHORITY. THE CONSTITUTION BENCH IN THE ABOVE CASE ALSO APPRO VED OF THE DECISION OF THIS COURT IN K.P. VARGHESE V. ITO [1981] 131 IT R 597. 8 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. THERE ARE, HOWEVER, TWO DECISIONS OF THIS COURT WHI CH HAVE BEEN STRONGLY RELIED UPON BY THE RESPONDENTS IN THE PRESENT CASE. THE FIRST DECISION IS THE MAJORITY JUDGMENT IN STATE BANK OF TRAVANCORE V . CIT [1986] 158 ITR 102, DECIDED BY A BENCH OF THREE JUDGES OF THIS COURT BY A MAJORITY OF TWO TO ONE. THIS JUDGMENT DIRECTLY DEALS WITH IN TEREST ON 'STICKY ADVANCES' WHICH HAVE BEEN DEBITED TO THE CUSTOMER B UT TAKEN TO THE INTEREST SUSPENSE ACCOUNT BY A BANKING COMPANY. THE MAJORITY JUDGMENT HAS REFERRED TO THE CIRCULAR OF OCTOBER 6, 1952, AN D ITS WITHDRAWAL BY THE SECOND CIRCULAR OF JUNE 20, 1978. THE MAJORITY APPEARS TO HAVE PROCEEDED ON THE BASIS THAT BY THE SECOND CIRCULAR OF JUNE 20, 1978, THE CENTRAL BOARD HAD DIRECTED THAT INTEREST IN THE SUS PENSE ACCOUNT ON 'STICKY' ADVANCES SHOULD BE INCLUDIBLE IN THE TAXAB LE INCOME OF THE ASSESSEE AND ALL PENDING CASES SHOULD BE DISPOSED O F KEEPING THESE INSTRUCTIONS IN VIEW. THE SUBSEQUENT CIRCULAR OF OC TOBER 9, 1984, BY WHICH, FROM THE ASSESSMENT YEAR 1979-80 THE BANKING COMPANIES WERE GIVEN THE BENEFIT OF THE CIRCULAR OF OCTOBER 9, 198 4, DOES NOT APPEAR TO HAVE BEEN POINTED OUT TO THE COURT. WHAT WAS SUBMIT TED BEFORE THE COURT WAS, THAT SINCE SUCH INTEREST HAD BEEN ALLOWED TO B E EXEMPTED FOR MORE THAN HALF A CENTURY, THE PRACTICE HAD TRANSFORMED I TSELF INTO LAW AND THIS POSITION SHOULD NOT HAVE BEEN DEVIATED FROM. NEGATI VING THIS CONTENTION, THE COURT SAID THAT THE QUESTION OF HOW FAR THE CON CEPT OF REAL INCOME ENTERS INTO THE QUESTION OF TAXABILITY IN THE FACTS AND CIRCUMSTANCES OF THE CASE, AND HOW FAR AND TO WHAT EXTENT THE CONCEPT OF REAL INCOME SHOULD INTERMINGLE WITH THE ACCRUAL OF INCOME, WILL HAVE T O BE JUDGED 'IN THE LIGHT OF THE PROVISIONS OF THE ACT, THE PRINCIPLES OF ACCOUNTANCY RECOGNISED AND FOLLOWED, AND FEASIBILITY'. THE COUR T SAID THAT THE EARLIER CIRCULARS BEING EXECUTIVE IN CHARACTER CANNOT ALTER THE PROVISIONS OF THE ACT. THESE WERE IN THE NATURE OF CONCESSIONS WHICH COULD ALWAYS BE PROSPECTIVELY WITHDRAWN. THE COURT ALSO OBSERVED TH AT THE CIRCULARS CANNOT DETRACT FROM THE ACT. THE DECISION OF THE CO NSTITUTION BENCH OF THIS COURT IN NAVNIT LAL (C.) JAVERI V. K.K. SEN, A AC [1965] 56 ITR 198, OR THE SUBSEQUENT DECISION IN K.P. VARGHESE V. ITO [1981] 131 ITR 597 (SC), ALSO DO NOT APPEAR TO HAVE BEEN POINTED OUT T O THE COURT. SINCE THE LATER CIRCULAR OF OCTOBER 9, 1984, WAS NOT POINTED OUT TO THE COURT, THE COURT NATURALLY PROCEEDED ON THE ASSUMPTION THAT TH E BENEFIT GRANTED UNDER THE EARLIER CIRCULAR WAS NO LONGER AVAILABLE TO THE ASSESSEE AND THOSE CIRCULARS COULD NOT BE RESORTED TO FOR THE PU RPOSE OF OVERCOMING THE PROVISIONS OF THE ACT. INTERESTINGLY, THE CONCU RRING JUDGMENT OF THE SECOND JUDGE HAS NOT DEALT WITH THIS QUESTION AT AL L BUT HAS DECIDED THE MATTER ON THE BASIS OF OTHER PROVISIONS OF LAW. THE SAID CIRCULARS UNDER SECTION 119 OF THE INCOME- TAX ACT WERE NOT PLACED BEFORE THE COURT IN THE CORRECT PERSPECTIVE BECAUSE THE LATER CIRCULAR CONTINUING CERTAIN BENEFITS TO THE ASSESSE ES WAS OVERLOOKED AND THE WITHDRAWN CIRCULAR WAS LOOKED UPON AS IN CONFLI CT WITH LAW. SUCH CIRCULARS, HOWEVER, ARE NOT MEANT FOR CONTRADICTING OR NULLIFYING ANY PROVISION OF THE STATUTE. THEY ARE MEANT FOR ENSURI NG PROPER ADMINISTRATION OF THE STATUTE, THEY ARE DESIGNED TO MITIGATE THE RIGOURS OF THE APPLICATION OF A PARTICULAR PROVISION OF THE ST ATUTE IN CERTAIN 9 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. SITUATIONS BY APPLYING A BENEFICIAL INTERPRETATION TO THE PROVISION IN QUESTION SO AS TO BENEFIT THE ASSESSEE AND MAKE THE APPLICATION OF THE FISCAL PROVISION, IN THE PRESENT CASE, IN CONSONANC E WITH THE CONCEPT OF INCOME AND IN PARTICULAR, NOTIONAL INCOME AS ALSO T HE TREATMENT OF SUCH NOTIONAL INCOME UNDER ACCOUNTING PRACTICE. IN THE PREMISES THE MAJORITY DECISION IN THE STATE BANK OF TRAVANCORE V. CIT [1986] 158 ITR 102 (SC), CANNOT BE LOOKED UPON AS LAYING DOWN THAT A CIRCULAR WHICH IS PROPERLY ISSUED UNDER SECT ION 119 OF THE INCOME- TAX ACT FOR PROPER ADMINISTRATION OF THE ACT AND FO R RELIEVING THE RIGOUR OF TOO LITERAL A CONSTRUCTION OF THE LAW FOR THE BE NEFIT OF THE ASSESSEE IN CERTAIN SITUATIONS WOULD NOT BE BINDING ON THE DEPA RTMENTAL AUTHORITIES. THIS WOULD BE CONTRARY TO THE RATIO LAID DOWN BY TH E BENCH OF FIVE JUDGES IN NAVNIT LAL (C.) JAVERI V. K.K. SEN [1965] 56 ITR 198 (SC). IN FACT STATE BANK OF TRANVANCORE V. CIT [1986] 158 ITR 102 (SC), HAS ALREADY BEEN DISTINGUISHED IN THE CASE OF KESHAVJI RAVJI AN D CO. V. CIT [1990] 183 ITR 1 (SC), BY A BENCH OF THREE JUDGES IN A SIM ILAR FASHION. IT IS HELD ONLY AS LAYING DOWN THAT A CIRCULAR CANNOT ALTER TH E PROVISIONS OF THE ACT. IT BEING IN THE NATURE OF A CONCESSION, COULD ALWAYS BE PROSPECTIVELY WITHDRAWN. IN THE PRESENT CASE, THE CIRCULARS WHICH HAVE BEEN IN FORCE ARE MEANT TO ENSURE THAT WHILE ASSESSING THE INCOME ACCRUED BY WAY OF INTEREST ON A 'STICKY' LOAN, THE NOTIONAL INTEREST WHICH IS TRANSFERRED TO A SUSPENSE ACCOUNT PERTAINING TO DOUBTFUL LOANS WOULD NOT BE INCLUDED IN THE INCOME OF THE ASSESSEE, IF FOR THREE YEARS SUCH INTEREST IS NOT ACTUALLY RECEIVED. THE VERY FACT THAT THE ASSESSEE, ALTHOUGH GENERALLY USING A MERCANTILE SYSTEM OF ACCOUNTING, KEEPS SUCH INTERES T AMOUNTS IN A SUSPENSE ACCOUNT AND DOES NOT BRING THESE AMOUNTS T O THE PROFIT AND LOSS ACCOUNT, GOES TO SHOW THAT THE ASSESSEE IS FOLLOWIN G A MIXED SYSTEM OF ACCOUNTING BY WHICH SUCH INTEREST IS INCLUDED IN IT S INCOME ONLY WHEN IT IS ACTUALLY RECEIVED. LOOKING TO THE METHOD OF ACCO UNTING SO ADOPTED BY THE ASSESSEE IN SUCH CASES, THE CIRCULARS WHICH HAV E BEEN ISSUED ARE CONSISTENT WITH THE PROVISIONS OF SECTION 145 AND A RE MEANT TO ENSURE THAT ASSESSEES OF THE KIND SPECIFIED WHO HAVE TO AC COUNT FOR ALL SUCH AMOUNTS OF INTEREST ON DOUBTFUL LOANS ARE UNIFORMLY GIVEN THE BENEFIT UNDER THE CIRCULAR AND SUCH INTEREST AMOUNTS ARE NO T INCLUDED IN THE INCOME OF THE ASSESSEE UNTIL ACTUALLY RECEIVED IF T HE CONDITIONS OF THE CIRCULAR ARE SATISFIED. THE CIRCULAR OF OCTOBER 9, 1984, ALSO SERVES ANOTHER PRACTICAL PURPOSE OF LAYING DOWN A UNIFORM TEST FOR THE ASSESSING AUTHORITY TO DECIDE WHETHER THE INTEREST INCOME WHICH IS TRANSFERRED TO THE SUSPENSE ACCOUNT IS, IN FACT, AR ISING IN RESPECT OF A DOUBTFUL OR 'STICKY' LOAN. THIS IS DONE BY PROVIDIN G THAT NON-RECEIPT OF INTEREST FOR THE FIRST THREE YEARS WILL NOT BE TREA TED AS INTEREST ON A DOUBTFUL LOAN. BUT IF AFTER THREE YEARS THE PAYMENT OF INTEREST IS NOT RECEIVED, FROM THE FOURTH YEAR ONWARDS IT WILL BE T REATED AS INTEREST ON A DOUBTFUL LOAN AND WILL BE ADDED TO THE INCOME ONLY WHEN IT IS ACTUALLY RECEIVED. WE DO NOT SEE ANY INCONSISTENCY OR CONTRADICTION BE TWEEN THE CIRCULAR SO ISSUED AND SECTION 145 OF THE INCOME-TAX ACT. IN FA CT, THE CIRCULAR 10 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. CLARIFIES THE WAY IN WHICH THESE AMOUNTS ARE TO BE TREATED UNDER THE ACCOUNTING PRACTICE FOLLOWED BY THE LENDER. THE CIR CULAR, THEREFORE, CANNOT BE TREATED AS CONTRARY TO SECTION 145 OF THE INCOME-TAX ACT OR ILLEGAL IN ANY FORM. IT IS MEANT FOR A UNIFORM ADMI NISTRATION OF LAW BY ALL THE INCOME-TAX AUTHORITIES IN A SPECIFIC SITUATION AND, THEREFORE, VALIDLY ISSUED UNDER SECTION 119 OF THE INCOME-TAX ACT. AS SUCH, THE CIRCULAR WOULD BE BINDING ON THE DEPARTMENT. THE OTHER JUDGMENT ON WHICH RELIANCE WAS PLACED BY THE DEPARTMENT WAS A JUDGMENT OF A BENCH OF TWO JUDGES OF THIS COU RT IN KERALA FINANCIAL CORPORATION V. CIT [1994] 210 ITR 129, WH ERE THIS COURT, FOLLOWING THE MAJORITY VIEW IN STATE BANK OF TRAVAN CORE V. CIT [1986] 158 ITR 102 (SC), HELD THAT INTEREST WHICH HAD ACCR UED ON A 'STICKY' ADVANCE HAS TO BE TREATED AS INCOME OF THE ASSESSEE AND TAXABLE AS SUCH. IT IS SAID THAT ULTIMATELY, IF THE ADVANCE TAKES TH E SHAPE OF A BAD DEBT, REFUND OF THE TAX PAID ON THE INTEREST WOULD BECOME DUE AND THE SAME CAN BE CLAIMED BY THE ASSESSEE IN ACCORDANCE WITH L AW. FOR REASONS SET OUT ABOVE, WE ARE NOT IN AGREEMENT WITH THE SAID JU DGMENT. THE RELEVANT CIRCULARS OF THE CENTRAL BOARD OF DIRECT TAXES CANN OT BE IGNORED. THE QUESTION IS NOT WHETHER A CIRCULAR CAN OVERRIDE OR DETRACT FROM THE PROVISIONS OF THE ACT; THE QUESTION IS WHETHER THE CIRCULAR SEEKS TO MITIGATE THE RIGOUR OF A PARTICULAR SECTION FOR THE BENEFIT OF THE ASSESSEE IN CERTAIN SPECIFIED CIRCUMSTANCES. SO LONG AS SUCH A CIRCULAR IS IN FORCE IT WOULD BE BINDING ON THE DEPARTMENTAL AUTHORITIES IN VIEW OF THE PROVISIONS OF SECTION 119 TO ENSURE A UNIFORM AND P ROPER ADMINISTRATION AND APPLICATION OF THE INCOME-TAX ACT. 27. IN THE LIGHT OF THE FOREGOING DISCUSSION AND THE CASE-LAW ON THE POINT, WE DELETE THE ADDITION O F RS.2,76,38,140 MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE CIT(A), ALLOWING THE GROUNDS OF TH E ASSESSEE ON THIS ISSUE. 6. AS FACTS IN THE PRESENT CASE ARE MATERIALLY THE SAME, FOLLOWING THE AFORESAID DECISION OF THE COORDINATE BENCH IN A SSESSEES OWN CASE, WE DELETE THE ADDITION MADE BY AO AND CONFIRM ED BY LD. CIT(A). 7. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. 11 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. ITA NO. 841/HYD/2012 8. IN THIS APPEAL ASSESSEE HAS CHALLENGED THE ORDER PASSED U/S 263 OF THE ACT REVISING THE ASSESSMENT ORDER PASSED U/S 143(3) FOR THE AY 2006-07. 9. BRIEFLY THE FACTS ARE, ASSESSEE COMPANY IS ENGAG ED IN THE BUSINESS OF INVESTMENTS AND SECURITIES. ASSESSEE F ILED ITS RETURN OF INCOME FOR THE AY UNDER CONSIDERATION ON 30/10/2007 DECLARING INCOME OF RS. 71,39,680. SUBSEQUENTLY, ASSESSEE FIL ED A REVISED RETURN ON 31/03/09 CLAIMING LOSS AT RS. 2,95,61,957 UNDER NORMAL PROVISIONS AND BOOK PROFIT AT NIL U/S 115JB. THE DIFFERENCE WAS ON ACCOUNT OF REDUCTION OF CLOSING STOCK. ASSESSMENT I N CASE OF THE ASSESSEE WAS COMPLETED U/S 143(3) OF THE ACT VIDE A SSESSMENT ORDER DATED 31/12/2009 BY ASSESSING LOSS AT RS. 2,37,51,9 57. IN EXERCISE OF POWER U/S 263 OF THE ACT, LD. CIT CALLED FOR THE AS SESSMENT RECORD OF ASSESSEE FOR THE IMPUGNED AY AND AFTER EXAMINING TH E SAME, FOUND THE ASSESSMENT ORDER PASSED TO BE ERRONEOUS AND PRE JUDICIAL TO THE INTERESTS OF REVENUE FOR THE FOLLOWING REASONS: 1. IN THE REVISED COMPUTATION OF INCOME SUBMITTED D URING THE SCRUTINY ASSESSMENT ASSESSEE HAS REVISED THE VALUE OF CLOSING STOCK BEING THE DIFFERENCE BETWEEN THE VALUE OF CLO SING STOCK AS PER THE ANNUAL REPORT AND THE VALUE OF CLOSING STOC K AS PER THE REVISED WORKINGS. THE AMOUNT SO REDUCED WAS RS. 4,8 6,95,344. ON VERIFICATION OF P&L ACCOUNT, IT WAS FOUND THAT T HE CREDIT SIDE DOES NOT INCLUDE ANY FIGURE FOR VALUE REPRESENTING CLOSING STOCK. HE OBSERVED THAT GENERALLY CLOSING STOCK IS REFLECT ED ON THE CREDIT SIDE OF THE P&L ACCOUNT AND GOES TO INCREASE THE PROFIT. WHEREAS IN ASSESSEES CASE FIGURE OF CLOSING STOCK AS PER ANNUAL REPORT AMOUNTING TO RS. 23,19,14,273 HAS NOT BEEN REFLECTED ON THE CREDIT SIDE. ASSESSEE HAS ALSO NOT EXPLAINED HOW IT ARRIVED AT THE VALUE OF CLOSING STOCK AT RS. 18,32,18,929 12 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. AS PER THE REVISED COMPUTATION. LD. CIT OBSERVED TH AT THIS ASPECT HAS NOT BEEN VERIFIED BY AO WHILE COMPLETING THE ASSESSMENT U/S 143(3), WHICH HAS RESULTED IN UNDER ASSESSMENT OF INCOME TO THE EXTENT OF RS. 4,86,95,344. 2. P&L ACCOUNT REFLECTS RECEIPT OF DIVIDEND INCOME TO THE EXTENT OF RS. 39,51,789 WHICH HAS BEEN CLAIMED AS EXEMPT. HOWEVER, AO HAS FAILED TO EXAMINE THE ISSUE OF PROPORTIONATE DISALLOWANCE OF EXPENDITURE U/S 14A. 3. WHILE COMPLETING ASSESSMENT, AO HAS MADE ADDITIO N TO THE TUNE OF RS. 58,10,000 TOWARDS UNACCOUNTED INTEREST INCOME. HOWEVER, HE HAS FAILED TO INITIATE PENALTY PROCEEDI NGS U/S 271(1)(C). 10. POINTING OUT THE AFORESAID DEFECTS AND DEFICIEN CIES IN THE ASSESSMENT WHICH ACCORDING TO LD. CIT HAS RENDERED THE ASSESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVENUE, HE ISSUED SHOW CAUSE NOTICE TO ASSESSEE. IN RESPONSE TO SHOW CAUSE NOTICE, ASSESSEE SUBMITTED HIS REPLY OBJECTING TO THE INITI ATION OF PROCEEDING U/S 263 BY MAKING FOLLOWING SUBMISSIONS: ' . THE COMPANY IS ENGAGED IN THE BUSINESS OF BUYING AND SELLING OF SECURITIES. THEREFORE, SECURITIES HELD BY IT CONSTITUTE STOCK IN TRADE OF THE BUSINESS. II. THE COMPANY FOLLOWS GENERALLY ACCEPTED PRINCIPL E OF STOCK VALUATION I.E. COST OR MARKET PRICE WHICHEVER IS LOWER AS IS EVIDENT FROM SCHEDULE- B AS PER NOTES TO ACCOUNTS OF THE ANNUAL REPORT. III, THE VALUE OF CLOSING STOCK AS ON 31.3.2007 AS PER ANNUAL REPORT OF RS.23, 19,14,273 HAS BEEN ERRONEOUSLY ARRIVED AT ON THE BASIS OF WEIGHTED AVERAGE COST PRICE, WITHOUT TAKING INTO AC COUNT THE MARKET PRICE OF THE SECURITIES AS ON THAT DATE. IV. THE ASSESSEE COMPANY SUBSEQUENTLY, NOTICED THE DISCREPANCY AND WORKED OUT THE VALUE OF THE CLOSING STOCK ON THE BA SIS OF COST OR MARKET 13 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. PRICE WHICHEVER IS LOWER, AND ARRIVED AT THE VALUE OF CLOSING STOCK AT 18,32,18,929. BASED ON THE SAME THE ASSESSEE FILED A REVISED RETU RN ON 31.3.2009 DECLARING A LOSS OF RS. 2,95,61,957. V. COMPLETE SCRIP WISE DETAILS OF VALUATION OF CLOS ING STOCK PER ANNUAL REPORT WERE SUBMITTED TO THE ASSESSING OFFICER DURI NG THE ASSESSMENT PROCEEDINGS VIDE LETTER DATED 9.12.2009. (ANNEXURE # 1). FURTHER, RELEVANT WORKINGS/DOCUMENTS IN SUPPORT OF THE QUANTITIES AND COST PRICE OF THE SECURITIES WERE SUBMITTED ALONG WITH THE SAI D STATEMENT. VI. FURTHER, COMPLETE SCRIP WISE DETAILS OF THE REV ISED VALUATION OF CLOSING STOCK PER REVISED RETURN WERE ALSO SUBMITTED DURING ASSESSMENT PROCEEDINGS VIDE LETTER DATED 9.12.2012. IN TERMS OF THE SAID REVISED STATEMENT, THE ASSESSEE CONSIDERED BOTH THE COST PRICE AS WELL AS THE MARKET PRICE OF EACH OF THE INDIVIDUAL SCRIP AND AD OPTED THE LOWER OF THE SAME. IT ACCORDINGLY, ARRIVED AT THE REVISED VALUE OF CLOSING STOCK AT RS. 18,32,18,929. FURTHER, COPIES OF DOCUMENTS EXTRACTED FROM THE WEBSITE OF BOMBAY STOCK EXCHANGE, IN SUPPORT OF CLO SING MARKET PRICE OF THE SCRIPTS] AS ON THE RELEVANT DATE, RELEVANT WERE SUBMITTED AL ONG WITH THE SAID STATEMENT. VII. THE ASSESSEE DURING THE COURSE OF ASSESSMENT P ROCEEDINGS EXPLAINED AS TO HOW THE VALUE OF CLOSING STOCK OF RS. 18,32,18,929 HAS BEEN' ARRIVED BY IT ALONG WITH SUPPORTING DOCUMENTS MENTIONED ABOVE. VIII. THEREFORE, IT IS CLEAR THAT THE RELEVANT STAT EMENTS/ DOCUMENTS SUBSTANTIATING THE BASIS FOR REVISED VALUATION OF C LOSING STOCK WERE AVAILABLE WITH THE ASSESSING OFFICER WHO PASSED THE ASSESSMENT ORDER U/ S 143(3) DATED 31.12.2009. THE ASSESSING OFFICER HAS EXAMINED THE REVISED VALUATION AND ALL THE RELEVANT INFORMAT ION/ DOCUMENTS SUBMITTED DURING THE ASSESSMENT PROCEEDINGS. IX. THE ASSESSING OFFICER IN FACT, CALLED FOR A FUR THER NOTE ON THE VALUATION OF STOCK BOTH AS PER ANNUAL REPORT AND RE VISED RETURN, WHICH NOTE WAS SUBMITTED VIDE LETTER DATED 15/12/20 09 (ANNEXURE # 2). X. IT IS ONLY AFTER SUCH VERIFICATION OF THE SUBMIT TED STATEMENTS/DOCUMENTS, THE ASSESSING OFFICER ACCEPTE D THE REVISED VALUE OF CLOSING STOCK WORKED OUT BY THE ASSESSEE C OMPANY. XI. THEREFORE, IT CAN NEITHER BE SAID THAT THE ASPECT OF REVISED V ALU ATION OF CLOSING STOCK HAS NOT BEEN EXPLAINED BY THE ASSESSEE NOR THAT THE SAID ASPECT HAS NOT BEEN EXAMINED BY T HE ASSESSING OFFICER WHILE PASSING THE ORDER U/ S 143(3). XII. ACCORDINGLY, THERE IS NO UNDER ASSESSMENT OF INCOME TO THE EXTENT OF RS.4,86, 95,344 ( I.E. RS.23,1 9,273 - RS.18,32, 18,929) 14 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. XII. FURTHER TO THE ABOVE, IT WAS STATED THAT THE CREDIT SIDE OF THE P&L DOES NOT REFLECT THE CLOSING STOCK OF RS. 23,19,14,273. IT IS SUBMITTED THAT INCOME FROM CAPITAL MARKET OPERATIONS OF RS. 1,61,43,246 REFLECTED IN THE P&L ACCOUNT IS ARRIVED AT AFTER TAKING INTO ACCOUNT THE CLOSING STOCK OF RS. 23,19,14,273. 11. AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE, LD. CIT, HOWEVER, WAS NOT IN AGREEMENT WITH THE SAME. HE OBS ERVED THAT ASSESSEE HAS VALUED THE SHARES AT COST AND ARRIVED AT THE VALUE OF CLOSING STOCK OF SHARES AT RS. 23,19,14,273, WHICH HAS BEEN REFLECTED IN THE BALANCE SHEET. HOWEVER, DURING THE ASSESSMEN T PROCEEDING, ASSESSEE DID NOT INFORM AO THAT IT HAS CHANGED THE VALUATION OF SHARES FROM COST PRICE TO COST OR MARKET PRICE WHIC HEVER IS LOWER. REFERRING TO THE NOTE SUBMITTED BY ASSESSEE BEFORE AO ON 15/12/09, LD. CIT OBSERVED THAT ASSESSEE STATED THAT IT IS EN GAGED IN THE BUSINESS OF BUYING AND SELLING OF SECURITIES AND FO LLOWING GENERALLY ACCEPTED PRINCIPLE OF STOCK VALUATION I.E. COST OR MARKET PRICE WHICHEVER IS LOWER. HE ALSO OBSERVED THAT IN EARLIE R ASSESSMENT YEARS ALSO, ASSESSEE VALUED CLOSING STOCK AT COST PRICE. HE NOTED THAT FOR THE FIRST TIME, ASSESSEE CHANGED VALUATION OF CLOSI NG STOCK OF SHARES IN THE IMPUGNED AY BY VALUING OPENING STOCK OF SHAR ES AT COST PRICE WHILE HE CHANGED THE METHOD OF VALUATION OF CLOSING STOCK WITHOUT INFORMING AO. HE OBSERVED THAT CHANGE OF METHOD OF VALUATION OF CLOSING STOCK OF SHARES IS NOT BONAFIDE AS IT HAS CONVERTED THE TOTAL INCOME OF RS. 71,39,000 INTO LOSS OF RS. 2.95 CRORE S. LD. CIT WAS OF THE VIEW THAT AO HAS ACCEPTED THE VALUE OF CLOSING STOCK WITHOUT VERIFICATION OF ASSESSMENT RECORDS OF EARLIER YEARS AND WITHOUT APPLICATION OF MIND. HE OBSERVED THAT HAD AO VERIFI ED THE ASSESSMENT RECORDS RELATING TO EARLIER AY, HE WOULD HAVE REALI ZED THAT ASSESSEE HAS CHANGED METHOD OF VALUATION OF CLOSING STOCK FO R THE PURPOSE OF CLAIMING REFUND. LD. CIT NOTED THAT ASSESSEE HAS S UPPRESSED THE MATERIAL FACTS OF CHANGE IN METHOD OF VALUATION OF SHARES AND FURNISHED A NOTE BEFORE AO AS IF IT HAD NOT CHANGED THE METHOD OF VALUATION AND MADE A STATEMENT BEFORE AO THAT IT HA S ADOPTED THIS 15 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. METHOD OF VALUATION OF CLOSING STOCK REGULARLY. LD. CIT OBSERVED THAT ACCOUNTING STANDARDS ISSUED BY ICAI ARE BINDING ON THE COMPANIES UNDER THE COMPANIES ACT. REFERRING TO ACCOUNTING ST ANDARD I ISSUED BY ICAI, LD. CIT NOTED THAT SUCH ACCOUNTING STANDARD PRESCRIBES THAT INVENTORIES CAN BE VALUED AT THE LO WER OF THE COST AND UNDER REALIZABLE VALUE. HE NOTED THAT AS-2 PROVIDES FOR CERTAIN EXEMPTIONS AND ONE OF THE EXEMPTION IS THAT PRINCIP LE OF VALUATION OF CLOSING STOCK AT COST PRICE OR MARKET PRICE WHICHEV ER IS LOWER DOES NOT APPLY TO SHARES, DEBENTURES AND OTHER FINANCIAL INSTRUMENTS HELD AS STOCK-IN-TRADE. HOWEVER, AS-2 DOES NOT APPLY TO ASSESSEE. SIMILARLY, AS-3, WHICH DEALS WITH ACCOUNTING FOR IN VESTMENTS ALSO DOES NOT APPLY TO ASSESSEE. LD. CIT REFERRING TO VA RIOUS JUDICIAL PRECEDENTS OPINED THAT METHOD OF VALUATION ADOPTED BY A TAXPAYER SHOULD BE FOLLOWED REGULARLY. HE OBSERVED THAT ASSE SSEE IN THE PAST HAD CONSISTENTLY AND REGULARLY VALUED CLOSING STOCK OF SHARES AT COST PRICE. HOWEVER, DURING THE PREVIOUS YEAR CORRESPOND ING TO AY UNDER DISPUTE FOR CONVERTING INCOME INTO LOSS ASSESSEE CH ANGED THE VALUATION OF CLOSING STOCK FROM COST PRICE TO COST OR MARKET PRICE WHICHEVER IS LOWER. HE, THEREFORE, HELD THAT INTENT ION OF ASSESSEE IN REDUCING THE VALUE OF CLOSING STOCK IS TO CONVERT T HE TAXABLE INCOME IN TO LOSS, AS ASSESSEE DID NOT VALUE THE OPENING STOC K AT COST OR MARKET PRICE WHICHEVER IS LOWER. THEREFORE, VALUE OF CLOSI NG STOCK ADOPTED BY ASSESSEE DISTORTS THE PROFITS. AS AO HAS FAILED TO EXAMINE THE CHANGE IN VALUATION OF STOCK WHICH OTHERWISE, IF EXAMINED, WOULD HAVE RESULTED IN NOT ALLOWING LOSS ON THE VALUATION OF S HARES AMOUNTING TO RS. 4,86,95,344. HE, THEREFORE, DIRECTED AO TO ADOP T THE VALUE OF CLOSING STOCK OF SHARES AS REFLECTED IN THE FINANCI AL STATEMENTS AT RS. 23.19 CRORES AND IGNORED THE VALUE OF CLOSING STOCK OF SHARES AS SHOWN IN THE REVISED STATEMENT AT RS. 18.32 CRORES. IN OTHER WORDS, LD. CIT DIRECTED AO TO DISALLOW LOSS OF RS. 4,86,95 ,344 AS CLAIMED IN THE REVISED RETURN. 16 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. 12. LD. CIT ALSO OBSERVED THAT ASSESSEE HAS EARNED EXEMPT INCOME OF RS. 39,51,789 DURING THE YEAR. HE OBSERVED THAT THOUGH RULE 8D HAS COME IN TO EFFECT WITH EFFECT FROM 24/03/2008, THE PROVISIONS OF SECTION 14A EXISTED DURING THE RELEVANT AY. THEREFO RE, AO SHOULD HAVE BEEN EXAMINED THE APPLICABILITY OF SECTION 14A CONSIDERING THE FACT THAT ASSESSEE HAS SHOWN INTEREST EXPENDITURE O F RS. 4.84 CRORES IN THE P&L A/C. HE, THEREFORE, DIRECTED AO TO EXAMI NE THE APPLICABILITY OF PROVISIONS OF SECTION 14A AND QUANTIFY PROPORTIO NATE EXPENDITURE IN RELATION TO DIVIDEND INCOME OF RS. 39,51,789. FINAL LY, LD. CIT OBSERVED THAT AO WHILE COMPLETING ASSESSMENT HAS MADE ADDITI ON OF RS. 58,10,000 TOWARDS UNACCOUNTED INTEREST INCOME, HOWE VER, HE HAS FAILED TO INITIATE PENALTY PROCEEDING U/S 271(1)(C) . HE, THEREFORE, DIRECTED AO TO INITIATE PENALTY PROCEEDING U/S 271( 1)(C). WITH THE AFORESAID DIRECTIONS, LD. CIT PASSED THE IMPUGNED O RDER SETTING ASIDE THE ASSESSMENT ORDER PASSED BY AO. 13. THE LEARNED AR, AT THE OUTSET, SUBMITTED THAT E XERCISE OF POWER U/S 263 OF THE ACT IS INVALID NOT ONLY BECAUSE ASSE SSEE HAS SUBMITTED ALL MATERIAL FACTS AND EVIDENCES ON THE ISSUES ON W HICH LD. CIT(A) WAS OF THE VIEW THAT ASSESSMENT ORDER IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVENUE, BUT, AO ALSO DURING THE COURS E OF ASSESSMENT PROCEEDING, EXAMINED ALL THESE ASPECTS AND AFTER AP PLYING HIS MIND TO THE MATERIALS ON RECORD HAS COMPLETED ASSESSMENT, H ENCE, AS THERE IS NEITHER LACK OF ENQUIRY OR IN-APPLICATION OF MIND B Y AO, ASSESSMENT ORDER CANNOT BE REVISED U/S 263 OF THE ACT. TO SUB STANTIATE HIS CONTENTION, LD. AR REFERRED TO THE COMPLIANCE MADE BEFORE AO IN COURSE OF THE ASSESSMENT PROCEEDING, A COPY OF WHI CH IS AT PAGE 21 OF THE PAPER BOOK. REFERRING TO THE QUERY RAISED BY AO, WHICH WAS NOTED DOWN BY ASSESSEES REPRESENTATIVE AT PAGE 22, LD. AR SUBMITTED THAT AO CALLED FOR DETAILS RELATING TO VA LUATION OF CLOSING STOCK AND IN RESPONSE TO SUCH QUERY BY AO, ASSESSEE VIDE HIS LETTER DATED 09/12/09 SUBMITTED THE STATEMENT OF VALUATION OF CLOSING STOCK AS ON 31/03/2007. ON FURTHER QUERY RAISED BY AO ON THE SAID DATE, 17 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. ASSESSEE VIDE RELY DATED 15/12/09 SUBMITTED A NOTE IN RESPECT OF VALUATION OF CLOSING STOCK. IN THIS CONTEXT, LD. AR SPECIFICALLY REFERRED TO THE NOTE SUBMITTED BEFORE AO EXPLAINING THAT THO UGH ASSESSEE GENERALLY ADOPTS ACCEPTED ACCOUNTING PRINCIPLE FOR VALUING THE STOCK AT COST OR MARKET PRICE WHICHEVER IS LOWER, THE VAL UE OF CLOSING STOCK AS ON 31/03/07 AS PER THE ANNUAL REPORT HAS BEEN ER RONEOUSLY ARRIVED AT ON THE BASIS OF WEIGHTED AVERAGE COST PRICE WITH OUT TAKING INTO ACCOUNT THE MARKET PRICE OF THE SECURITIES AS ON TH AT DATE. ONCE ASSESSEE BECAME CONSCIOUS OF THE ERROR COMMITTED, I T REVISED THE VALUATION OF STOCK AS ON 31/03/07 BY WORKING OUT TH E VALUE OF CLOSING STOCK ON THE BASIS OF COST OR MARKET PRICE WHICHEVE R IS LOWER. LD. AR REFERRING TO THE VALUATION OF CLOSING STOCK AS PER THE WEIGHTED AVERAGE COST PRICE AND THE ACTUAL MARKET RATE OF THE STOCK AS PER THE BSE INDEX SUBMITTED THAT ADOPTING THE MARKET PRICE OF B SE, ASSESSEE REVALUED THE STOCK AS PER THE REVISED CLOSING STOCK STATEMENT SUBMITTED BEFORE AO. LD. AR SUBMITTED THAT FROM THE AFORESAID MATERIALS SUBMITTED BEFORE AO, IT BECOMES CLEAR, NO T ONLY ASSESSEE HAS SUBMITTED EVERY DETAIL RELATING TO REVISED VALU ATION OF CLOSING STOCK BUT AO AFTER EXAMINING ALL THE DETAILS AND HA VING FOUND THAT THE VALUATION MADE IN THE REVISED STATEMENT IS AS PER T HE ACCEPTED ACCOUNTING PRINCIPLES OF VALUATION OF CLOSING STOCK AT COST OR MARKET PRICE, WHICHEVER IS LOWER, COMPLETED THE ASSESSMENT . LD. AR SUBMITTED THAT THE ALLEGATION MADE BY LD. CIT THAT ASSESSEE HAS NOT BROUGHT THE CHANGE IN ACCOUNTING PRINCIPLE WITH REG ARD TO VALUATION OF CLOSING STOCK TO THE NOTICE OF AO AND AO WITHOUT EX AMINING THE ISSUE AND APPLYING HIS MIND HAS ACCEPTED ASSESSEES REVIS ED STOCK VALUATION IS WITHOUT ANY BASIS. LD. AR SUBMITTED T HAT IN THE SUBSEQUENT YEAR I.E. A.Y. 2008-09, AO ALSO ACCEPTED THE STOCK AS PER THE REVISED VALUATION WHILE COMPLETING THE ASSESSME NT, WHICH WAS PRIOR TO THE NOTICE ISSUED U/S 263 OF THE ACT. HOW EVER, LD. CIT HAS NOT INITIATED ANY PROCEEDING U/S 263 FOR AY 2008-09. LD . AR SUBMITTED THAT WHEN AO HAS COMPLETED THE ASSESSMENT AFTER MAK ING ENQUIRY AND APPLYING HIS MIND TO THE FACTS AND MATERIALS ON RECORD AND THE 18 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. VIEW ADOPTED BY AO IS A POSSIBLE VIEW, ONLY BECAUSE SUCH VIEW IS NOT ACCEPTABLE TO LD. CIT, IT CANNOT BE HELD THAT ASSES SMENT ORDER PASSED IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF RE VENUE. LD. AR SUBMITTED THAT FOR EXERCISING JURISDICTION U/S 263, TWO CONDITIONS ARE REQUIRED TO BE SATISFIED CUMULATIVELY. FIRSTLY, THE ORDER SOUGHT TO BE REVISED MUST BE ERRONEOUS AND SECONDLY IT MUST BE P REJUDICIAL TO THE INTERESTS OF REVENUE. IT WAS SUBMITTED THAT IN THE FACTS OF THE PRESENT CASE AS AO HAS COMPLETED THE ASSESSMENT AFTER MAKIN G ENQUIRY AND APPLYING HIS MIND AND THE VIEW ADOPTED BY HIM IS ON E OF THE POSSIBLE VIEW, ASSESSMENT ORDER PASSED CANNOT BE SAID TO BE ERRONEOUS, EVEN ASSUMING THAT SOME PREJUDICE MIGHT HAVE BEEN CAUSED TO REVENUE. IN THESE CIRCUMSTANCES, SINCE ONE OF THE CONDITIONS HA S NOT BEEN SATISFIED, EXERCISE OF POWER U/S 263 OF THE ACT IS INVALID. LD. AR SUBMITTED THAT LD. CIT IS ALSO UNDER MISCONCEPTION THAT ASSESSEE HAS CHANGED HIS ACCOUNTING POLICY IN SO FAR AS IT RELAT ES TO VALUATION OF CLOSING STOCK. LD. AR REFERRING TO ANNUAL REPORTS O F ASSESSEE FOR THE PRECEDING AY AS WELL AS THE IMPUGNED AY SUBMITTED T HAT ACCOUNTING PRINCIPLE ADOPTED BY ASSESSEE IS CONSISTENT IN ALL THESE YEARS IN SO FAR AS VALUATION OF STOCK IS CONCERNED, WHICH IS VA LUED AT COST OR MARKET PRICE WHICHEVER IS LOWER. THEREFORE, THE ALL EGATION OF LD. CIT THAT THERE IS A CHANGE IN VALUATION OF STOCK IN THE IMPUGNED AY IS WITHOUT ANY BASIS. LD. AR SUBMITTED THAT ONLY BECAU SE ASSESSEE HAS VALUED THE STOCK AT THE WEIGHTED AVERAGE IN STEAD O F VALUING IT COST OR MARKET PRICE WHICHEVER IS LOWER, ASSESSEE REVISED V ALUATION WITHOUT CHANGING ACCOUNTING POLICY. SO FAR AS THE OBSERVATI ON BY LD. CIT THAT AS-2 AND AS-13 OF ICAI DOES NOT APPLY TO SHARES, DE BENTURES AND OTHER FINANCIAL INSTRUMENTS HELD AS STOCK-IN-TRADE, LD. AR SUBMITTED THAT EVEN SUCH OBSERVATION OF LD. CIT IS FACTUALLY INCORRECT. IN THIS CONTEXT, LD. AR REFERRING TO AS-13 OF ICAI SUBMITTE D THAT EXPLANATORY NOTE TO CLAUSE 1 OF AS-13, MAKES IT CLEAR THAT PRO VISIONS OF AS-13 TO THE EXTENT THEY RELATE TO CURRENT INVESTMENTS ARE A LSO APPLICABLE TO SHARES, DEBENTURES AND OTHER SECURITIES HELD AS STO CK-IN-TRADE. LD. AR SUBMITTED THAT WHEN IT IS PATENT AND OBVIOUS THA T AO HAS ENQUIRED 19 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. INTO THE MATTER AND EXAMINED THE ISSUE, ASSESSMENT ORDER CANNOT BE REVISED ONLY BECAUSE IT WAS NOT DISCUSSED IN THE AS SESSMENT ORDER. IN SUPPORT OF SUCH CONTENTION, HE RELIED ON THE FOLLOW ING DECISIONS: 1. LANCO KONDAPALLI POWER LTD. VS. JCIT, 33 ITR (T RIB) 142 2. SPECTRA SHARES AND SCRIPS PVT. LTD., 354 ITR 35 (AP) 14. LD. AR SUBMITTED THAT WHEN THE CHANGE IN VALUAT ION IS BONAFIDE, ASSESSMENT ORDER CANNOT BE HELD TO BE ERRONEOUS. IN THIS CONTEXT, HE RELIED UPON A DECISION IN CASE OF DCIT VS. M/S TURN ER MORRISON LAND LTD., ITA NO. 1840/KOL/2009, DATED 11/03/11. FURTHE R LD. AR SUBMITTED THAT EVEN THE EFFECT OF REVISED VALUATION OF STOCK WOULD BE HAVING NO EFFECT ON REVENUE AS IT IS TAKEN CARE OF IN THE SUB SEQUENT AY. IN THIS CONTEXT, HE RELIED UPON A DECISION IN CASE OF CIT VS. EXCEL INDUSTRIES PVT. LTD. AND OTHERS, 358 ITR 295 (SC). 15. IN SO FAR AS LD. CITS DIRECTION WITH REGARD TO DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT IS CONCERNED, LD. AR SUBMITTED THAT LD. CIT WAS NOT CORRECT IN DIRECTING AO TO DISALLOW THE EXPENDITURE OF EXEMPTED INCOME BY APPLYING RULE 8D. LD. AR SUBMITT ED THAT AS RULE 8D WAS NOT IN THE STATUTE DURING AY UNDER DISPUTE, NO DISALLOWANCE CAN BE MADE. 16. FINALLY, LD. AR SUBMITTED THAT LD. CIT WAS NOT CORRECT IN DIRECTING AO TO INITIATE PROCEEDING U/S 271(1)(C) OF THE ACT. IN THIS CONTEXT, IT WAS SUBMITTED BY LD. AR THAT ADDITION OF NOTIONAL I NTEREST MADE IN THE ASSESSMENT ORDER, ON THE BASIS OF WHICH LD. CIT HA S DIRECTED AO TO INITIATE PENALTY PROCEEDING WERE ALSO MADE IN THE P RECEDING ASSESSMENT YEAR, HOWEVER, ITAT WHILE DECIDING ASSES SEES APPEAL DELETED THE ADDITIONS. THEREFORE, WHEN THE ADDITION ITSELF IS UNWARRANTED, AS HELD BY THE ITAT IN CASE OF SIMILAR ADDITIONS MADE IN EARLIER ASSESSMENT YEARS, QUESTION OF INITIATING PR OCEEDING U/S 271(1)(C) DOES NOT ARISE. THUS, IT WAS SUBMITTED BY LD. AR THAT IN THE 20 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. FACTS AND CIRCUMSTANCES OF THE CASE, EXERCISE OF PO WER U/S 263 IS NOT CORRECT. 17. THE LEARNED DR, ON THE OTHER HAND, SUPPORTING T HE ORDER OF LD. CIT SUBMITTED THAT AS AO HAS NEITHER EXAMINED NOR A PPLIED HIS MIND ON THE ISSUES RAISED BY LD. CIT WHILE EXERCISING PO WER U/S 263 OF THE ACT, THERE IS NO SUBSTANCE IN THE ARGUMENT OF ASSES SEE THAT THE EXERCISE OF POWER U/S 263 IS INVALID. ELABORATING F URTHER, LD. DR SUBMITTED A PERUSAL OF THE ASSESSMENT ORDER WOULD R EVEAL THAT AO HAS NOT AT ALL DEALT WITH THE ISSUE AS TO WHY ASSES SEE HAD TO REVISE THE VALUE OF CLOSING STOCK AND WITHOUT MAKING ANY E NQUIRY TO THE FACTS WHICH NECESSITATED REVALUATION OF CLOSING STOCK, AO HAS ACCEPTED THE REVISED VALUATION OF STOCK. THIS ACCORDING TO LD. DR HAS RESULTED IN LOSS OF REVENUE AND HAS MADE ASSESSMENT ORDER ERRON EOUS. 18. IN SO FAR AS DIRECTION OF LD. CIT TO DISALLOW THE EXPENDITURE U/S 14A, LD. DR SUBMITTED THAT LD. CIT HAS NOT DIRECTED AO TO APPLY RULE 8D. HOWEVER, THERE CANNOT BE ANY DISPUTE WITH REGAR D TO THE FACT THAT ASSESSEE HAS EARNED EXEMPT INCOME DURING THE YEAR F OR WHICH ASSESSEE CERTAINLY MUST HAVE INCURRED SOME AMOUNT O F EXPENDITURE. THEREFORE, IN TERMS WITH SECTION 14A OF THE ACT, DI SALLOWANCE HAS TO BE MADE. 19. AS FAR AS THE DIRECTION OF LD. CIT FOR INITIATI NG PROCEEDING U/S 271(1)(C), LD. DR SUBMITTED THAT, THOUGH, LD. CIT C AN DIRECT AO TO INITIATE PROCEEDING U/S 271(1)(C) BUT CONSIDERING T HE FACT THAT SIMILAR ADDITION MADE HAS BEEN DELETED BY ITAT, THE DIRECTI ON OF LD. CIT CAN BE MODIFIED. 20. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE ORDERS OF REVENUE AUTHORITIES AS WELL AS OTHER MATERIALS ON RECORD. WE HAVE ALSO APPLIED OUR MIND TO THE DECISIONS RELI ED UPON BY THE PARTIES. IT IS EVIDENT FROM THE SHOW CAUSE NOTICE I SSUED U/S 263 AS 21 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. WELL AS THE IMPUGNED ORDER OF LD. CIT THAT ASSESSME NT ORDER HAS BEEN REVISED BY CONSIDERING IT TO BE ERRONEOUS AND PREJU DICIAL TO THE INTERESTS OF REVENUE FOR THE FOLLOWING THREE REASON S: 1. AO HAS ACCEPTED THE REVISED VALUATION OF CLOSING STOCK WITHOUT ENQUIRY AND APPLICATION OF MIND. 2. AO HAS NOT DISALLOWED THE EXPENDITURE U/S 14A ON THE EXEMPTED INCOME. 3. AO HAS FAILED TO INITIATE PROCEEDING U/S 271(1)( C) ON THE ADDITIONS MADE WHILE COMPLETING THE ASSESSMENT. 21. SO FAR AS THE FIRST ISSUE IS CONCERNED, ON A PE RUSAL OF THE OBSERVATIONS MADE BY LD. CIT IN PARA 6 OF HIS ORD ER, IT WOULD BE CLEAR THAT LD. CIT WAS UNDER AN IMPRESSION THAT ASS ESSEE HAS DEVIATED FROM THE CONSISTENT ACCOUNTING POLICY ADOP TED BY IT WHILE VALUING THE CLOSING STOCK. IT IS THE VIEW OF LD. CI T THAT AS PER THE ANNUAL REPORT AND THE CONSISTENT ACCOUNTING POLICY, STOCK HAS TO BE VALUED AT COST, BUT, IN AY UNDER CONSIDERATION THOU GH ORIGINALLY ASSESSEE HAS VALUED THE CLOSING STOCK AT COST AS PE R ACCOUNTING POLICY FOLLOWED BY IT BUT, SUBSEQUENTLY ASSESSEE HA S CHANGED METHOD WHILE VALUING OF CLOSING STOCK IN THE REVISED RETUR N WITHOUT INFORMING THE AO. HOWEVER, ON GOING THROUGH THE FACTS AND MAT ERIALS ON RECORD, WE ARE OF THE VIEW THAT ASSESSEE HAS NOT CHANGED TH E METHOD OF VALUATION OF CLOSING STOCK. AS CAN BE SEEN FROM THE FACTS ON RECORD, ORIGINALLY, ASSESSEE HAD VALUED THE CLOSING STOCK O N THE BASIS OF WEIGHTED AVERAGE COST PRICE WITHOUT TAKING INTO ACC OUNT THE MARKET PRICE OF THE SECURITIES AS ON THAT. WHEREAS AS PER THE ACCOUNTING PRINCIPLE ADOPTED BY ASSESSEE THE STOCK HAS TO BE V ALUED AT COST OR MARKET PRICE WHICHEVER IS LOWER. SUBSEQUENTLY, WHEN ASSESSEE FOUND THAT MARKET PRICE AS PER THE BSE INDEX IS LOWER THA N THE WEIGHTED AVERAGE COST PRICE, THEN, HE REVISED THE STOCK VALU ATION AS PER THE BSE MARKET PRICE AND ACCORDINGLY FURNISHED REVISED STATEMENT OF STOCK VALUATION BEFORE AO. THEREFORE, THE ALLEGATIO N OF LD. CIT THAT ASSESSEE HAS CHANGED THE METHOD OF VALUATION IS INC ORRECT. WHAT THE 22 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. ASSESSEE HAS DONE WHILE REVISING THE VALUATION OF C LOSING STOCK IS CONSISTENT WITH ACCOUNTING PRINCIPLE ADOPTED BY IT FOR VALUING THE CLOSING STOCK. THIS FACT HAS BEEN EFFECTIVELY DEMON STRATED BY ASSESSEE BY BRINGING TO OUR NOTICE BSE STOCK PRICE, A COPY OF WHICH IS AT PAGE 36 OF PAPER BOOK AND THE ORIGINAL STOCK VAL UE AS PER THE WEIGHTED AVERAGE COST PRICE. A COMPARATIVE STATEMEN T AT PAGE 28 OF PAPER BOOK CLEARLY DEMONSTRATES THAT ASSESSEE IN TH E REVISED STOCK VALUATION HAS ADOPTED THE VALUE OF CLOSING STOCK AS PER THE COST OR MARKET PRICE WHICHEVER IS LOWER. THEREFORE, WE DO N OT FIND ANY SUBSTANCE IN THE ALLEGATION OF LD. CIT THAT ASSESSE E HAS DEVIATED FROM THE ACCOUNTING POLICY ADOPTED BY IT FROM THE EARLIE R YEARS. FURTHERMORE, IT IS EVIDENT FROM RECORD, DURING THE ASSESSMENT PROCEEDING, AO HAS SPECIFICALLY ENQUIRED INTO THE V ALUATION OF CLOSING STOCK AND THE NOTE SUBMITTED BY ASSESSEE DURING THE ASSESSMENT PROCEEDING, A COPY OF WHICH IS AT PAGE 50 OF PAPER BOOK, CLEARLY EXPLAINS THE SITUATION LEADING TO REVISION IN VALUA TION OF CLOSING STOCK. FROM THE AFORESAID FACTS IT IS ESTABLISHED THAT AO HAS ENQUIRED INTO THE MATTER AND AFTER EXAMINING THE EXPLANATION/SUB MISSIONS OF ASSESSEE ALONG WITH OTHER FACTUAL DETAILS SUBMITTED BEFORE HIM, HE HAS ACCEPTED THE REVISED VALUATION OF CLOSING STOCK . THEREFORE, WHEN THE AO HAS ENQUIRED IN TO THE MATTER AND AFTER PROP ER APPLICATION OF MIND TO THE FACTS AND MATERIALS ON RECORD HAS PASSE D THE ASSESSMENT ORDER, IT CANNOT BE SAID THAT ASSESSMENT ORDER PAS SED IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVENUE MERELY BECAUSE THERE IS NO REFERENCE IN THE ASSESSMENT ORDER WITH REGARD TO TH E STOCK VALUATION. 22. THE HONBLE AP HIGH COURT IN CASE OF SPECTRA SH ARES AND SCRIPTS PVT. LTD. VS. CIT (SUPRA) WHILE DEALING WI TH THE CITS POWER U/S 263 AFTER TAKING NOTE OF RATIO LAID DOWN BY THE HONBLE SUPREME COURT AS WELL AS DIFFERENT HIGH COURTS IN THE NUMBE R OF DECISIONS ON THE ISSUE HELD THAT IF A QUERY WAS RAISED DURING T HE COURSE OF ASSESSMENT PROCEEDING, WHICH WAS ANSWERED TO THE SA TISFACTION OF AO, BUT, NEITHER THE QUERY NOR ANSWER WAS REFLECTED IN THE 23 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. ASSESSMENT ORDER THAT ITSELF WOULD NOT LEAD TO THE CONCLUSION THAT THE ORDER OF AO BEING ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVENUE IS REQUIRED TO BE REVISED. ITAT, HYDERABAD BENCH IN CASE OF LANCO KONDAPUR VS. CIT 33 ITR (TRIB.) 142 HAS HELD THAT WHERE AO HAS CONDUCTED IN DEPTH ENQUIRY ON THE ISSUE ON WHIC H CIT HAS SOUGHT TO REVISE THE ASSESSMENT ORDER AND ASSESSEE HAS EXP LAINED THE QUERIES RAISED BY AO AND ALSO SUBSTANTIATED THEM WI TH NECESSARY DOCUMENTARY EVIDENCE, NON-MENTIONING OF ALL THESE I SSUES ON WHICH ENQUIRY WAS MADE BY AO IN THE ASSESSMENT ORDER, WOU LD BY ITSELF NOT MAKE ASSESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVENUE. SAME VIEW WAS ALSO EXPRESSED BY THE HONBL E AP HIGH COURT IN CASE OF CIT VS. ANAND FOODS PRODUCTS, 39 T AXMAN.COM 187 (AP). IN THE FACTS OF THE PRESENT CASE, IT IS CLEA RLY DEMONSTRATED FROM THE MATERIALS PLACED ON RECORD THAT AO NOT ONLY MAD E ENQUIRY WITH REGARD TO THE VALUATION OF CLOSING STOCK BUT ASSESS EE ALSO FURNISHED ALL THE DETAILS ALONG WITH EXPLANATORY NOTE. AO AFT ER HAVING APPLIED HIS MIND TO THE FACTS AND MATERIALS ON RECORD, FOUN D THE REVISED VALUATION OF CLOSING STOCK TO BE SATISFACTORY, ACCE PTED ASSESSEES CLAIM, HENCE, THERE WAS NO NECESSITY TO DISCUSS THE SAME IN THE ASSESSMENT ORDER. THEREFORE, WHEN THE EVIDENCES ON RECORD SHOW THAT AO HAS MADE ENQUIRIES AND APPLIED HIS MIND TO THE ISSUE AND COMPLETED THE ASSESSMENT, ONLY BECAUSE THE VIEW TAK EN BY AO IS NOT TO THE LIKING OF LD. CIT, THAT WILL NOT MAKE THE AS SESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVEN UE SO AS TO EMPOWER LD. CIT TO REVISE IT U/S 263. FURTHER, LD. CITS OBSERVATION THAT AS-13 IS NOT APPLICABLE TO ASSESSEE IS ALSO NO T CORRECT. ON GOING THROUGH AS-13 ISSUED BY ICAI, WE FIND THAT THE NOTE TO CLAUSE 1 OF AS- 13 CLEARLY PROVIDES THAT IT WILL APPLY TO SHARES, D EBENTURES AND SECURITIES HELD AS STOCK-IN-TRADE. THOUGH THEY MAY NOT BE TREATED AS INVESTMENT, BUT, AS-13 WILL APPLY TO THEM AS THEY A RE SIMILAR TO CURRENT INVESTMENTS. THUS, AS PER AS-13 ALSO, INVES TMENTS HAVE TO BE VALUED AT COST OR FAIR MARKET PRICE WHICHEVER IS LO WER. THE FINDING OF LD. CIT IN THIS REGARD IS ALSO NOT BASED ON PROPER APPRECIATION OF AS- 24 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. 13 OR THE FACTS ON RECORD. IN THE AFORESAID VIEW OF THE MATTER, WE ARE OF THE OPINION THAT ASSESSMENT ORDER ON THIS ISSUE CANNOT BE HELD TO BE ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF RE VENUE. ACCORDINGLY, WE SET ASIDE THE DIRECTION OF LD. CIT ON THIS ISSUE . 23. THE NEXT ISSUE ON WHICH LD. CIT HAS REVISED THE ASSESSMENT ORDER IS, AO HAS FAILED TO DISALLOW THE EXPENDITURE INCURRED ON EARNING EXEMPT INCOME IN TERMS WITH SECTION 14A OF THE ACT. THERE IS NO DISPUTE TO THE FACT THAT ASSESSEE DURING THE YEA R HAS SHOWN DIVIDEND INCOME OF RS. 39,51,789, WHICH IS CLAIMED AS EXEMPT. AS AO HAS NOT MADE ANY DISALLOWANCE U/S 14A OF THE ACT, L D. CIT DIRECTED HIM TO EXAMINE AND DISALLOW EXPENDITURE INCURRED ON EARNING THE DIVIDEND INCOME IN TERMS WITH SECTION 14A AFTER TAK ING NOTE OF THE FACT THAT ASSESSEE HAS INCURRED INTEREST EXPENDITURE OF RS. 4.84 CRORES DURING THE YEAR. 24. HAVING HEARD THE SUBMISSIONS OF THE PARTIES, WE ARE OF THE VIEW THAT THOUGH RULE 8D CANNOT BE APPLIED RETROSPECTIVE LY TO THE AY UNDER DISPUTE AS IT CAME INTO THE STATUTE W.E.F. 24/03/20 08, HOWEVER, IT CANNOT BE OVERLOOKED THAT THE PROVISIONS CONTAINED U/S 14A OF THE ACT WERE EXISTING IN THE STATUTE WHICH REQUIRED DISALLO WANCE OF EXPENDITURE. SUB-SECTION (3) OF SECTION 14A PROVIDE S FOR DEEMED DISALLOWANCE OF EXPENDITURE ON EARNING EXEMPT INCOM E EVEN IN A CASE WHERE ASSESSEE CLAIMS THAT HE HAS NOT INCURRED ANY EXPENDITURE FOR EARNING EXEMPT INCOME. THAT BEING THE CASE, WE ARE OF THE VIEW THAT LD. CIT WAS CORRECT IN DIRECTING AO TO EXAMINE THE APPLICABILITY OF PROVISIONS OF SECTION 14A TO THE EXEMPT INCOME EARN ED BY ASSESSEE DURING THE YEAR. IT IS FURTHER EVIDENT FROM RECORD THAT THIS ISSUE HAS NOT AT ALL BEEN EXAMINED BY AO WHILE COMPLETING THE ASSESSMENT OR AT LEAST NOTHING HAS BEEN BROUGHT TO OUR NOTICE THA T AO DURING THE ASSESSMENT PROCEEDING HAS EXAMINED THIS ISSUE. IT I S ALSO NOTEWORTHY TO MENTION, IN ASSESSEES OWN CASE IN ITA NOS. 468/ HYD/2009 AND OTHERS DT. 05/09/2014 FOR AY 2005-06 AND 2006-07 A COORDINATE BENCH 25 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. OF THIS TRIBUNAL HAS UPHELD DISALLOWANCE OF EXPENDI TURE U/S 14A AT 10% OF EXEMPT INCOME EARNED DURING THE YEAR. IN THA T VIEW OF THE MATTER, WE DO NOT FIND ANY INFIRMITY IN THE DIRECTI ON OF LD. CIT IN SO FAR AS THIS ISSUE IS CONCERNED. 25. THE THIRD ISSUE RELATES TO THE DIRECTION TO AO TO INITIATE PROCEEDING U/S 271(1)(C) OF THE ACT. CONSIDERING TH E FACT THAT WE HAVE DELETED THE ADDITION OF NOTIONAL INTEREST INCOME OF RS. 58,10,000 WHILE DECIDING ASSESSEES APPEAL IN ITA NO. 1176/HYD/2012 , HEREINBEFORE, THE DIRECTION OF LD. CIT TO INITIATE PROCEEDING U/S 271(1)(C) HAS BECOME INFRUCTUOUS, HENCE, NOT REQUIRED TO BE ACTED UPON. 26. THEREFORE, IN THE AFORESAID FACTS AND CIRCUMSTA NCES OF THE CASE, WHILE WE UPHOLD THE EXERCISE OF POWER UNDER SECTION 263 OF THE ACT IN RESPECT OF ISSUE RELATING TO DISALLOWANCE TO BE MA DE U/S 14A OF THE ACT, HOWEVER, SO FAR AS THE ISSUE RELATING TO VALUA TION OF CLOSING STOCK AND INITIATION OF PROCEEDING U/S 271(1)(C), EXERCIS E OF POWER U/S 263 IS INVALID. ACCORDINGLY, WE MODIFY THE ORDER OF LD. CIT BY DIRECTING AO TO CONFINE HIMSELF TO EXAMINE THE ISSUE RELATING TO DISALLOWANCE OF EXPENDITURE U/S 14A OF THE ACT BY KEEPING IN VIEW T HE LEGAL PRINCIPLES AS WELL AS PROVISIONS OF THE ACT. 27. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. 28. TO SUM UP APPEAL IN ITA NO. 841/HYD/12 IS PARTL Y ALLOWED AND APPEAL IN ITA NO. 1176/HYD/12 IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 03/12/2014. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 3 RD DECEMBER, 2014 26 ITA NOS. 841 & 1176/HYD/2012 MARUTHI SECURITIES LTD. KV COPY TO:- 1) MARUTI SECURITIES LTD., FLAT NO. 66, GROUND FLO OR, PARK VIEW ENCLAVE, MANOVIKAS NAGAR, SECUNDERABAD. 2) ACIT, CIRCLE 16(2), AAYAKAR BHAVAN, BASHEERBAG H, HYDERABAD 3) CIT(A)-V, HYDERABAD 4) CIT-IV, HYDERABAD 5)THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDER ABAD. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S. 2. DRAFT PLACED BEFORE AUTHOR SR.P.S 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER VP 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S. 6. KEPT FOR PRONOUNCEMENT ON SR.P S. 7. FILE SENT TO THE BENCH CLERK SR.P.S. 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER