DCIT - 3(2), MUMBAI V. M/s. KOTAK MAHINDRA CAPITAL CO. LTD., MUMBAI

ITA 927/MUM/2007

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 55541 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 8 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-10-2011
• Appeal Filed By: Department
• Bench Allotted: A
• Assessment Year: 2002-2003
• Appeal Filed On: 31-01-2007
• Court: TRIBUNAL
• Department Lawyers: P K B MENON
• Assessee Lawyers: F V IRANI
• Keywords: Reopening of assessment; Capital asset; Earning of tax free income; Reasonable cause; Speculation loss; Bad and doubtful debts; Difference of opinion; Competent authority; Reason to believe; Change of opinion; Reassessment proceedings
• Section: 234B; 14A; 147; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A : MUMBAI BEFORE SHRI D. MANMOHAN, (VICE PRESIDENT [MZ]) AND SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER) SL.NO. ITA NO. APPELLANT RESPONDENT AY 1. 5568/MUM/2005 ASST. COMMISSIONER OF INCOME TAX CIRCLE-3(2), ROOM NO. 608, 6 TH FLOOR, AAYKAR BHAVAN, MUMBAI-400 020. M/S. KOTAK MAHINDRA CAPITAL COMPANY. LTD. BAKTHWAR,2 ND FLOOR, 229, NARIMAN POINT, MUMABI 400 021. P.A. NO. (AAA CK 5577 D) 2000-01 2. 5563/MUM/2005 ASST. COMMISSIONER OF INCOME TAX CIRCLE-3(2), MUMBAI-20 M/S. KOTAK MAHINDRA CAPITAL CO. LTD. MUMBAI 400 021. 2001-02 3. 5235/MUM/2005 M/S. KOTAK MAHINDRA CAPITAL CO. LTD. MUMBAI 400 021. ASST. COMMISSIONER OF INCOME TAX RANGE-3(2), MUMBAI-20 2001-02 4. 927/MUM/2007 DY. COMMISSIONER OF INCOME TAX, CIRCLE-3(2), ROOM NO. 608, 6 TH FLOOR, AAYKAR BHAVAN, MUMBAI-400 020. M/S. KOTAK MAHINDRA CAPITAL CO. LTD. MUMBAI 400 021. 2002-03 5. 520/MUM/2007 M/S. KOTAK MAHINDRA CAPITAL CO. LTD. MUMBAI 400 021. ASSTT. COMMISSIONER OF INCOME TAX RANGE-3(2), MUMBAI-400020. 2002-03 6. 878/MUM/2008 DY. COMMISSIONER OF INCOME TAX -3(2), M/S. KOTAK MAHINDRA CAPITAL CO. LTD. 2004-05 ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 2 MUMBAI-400020. MUMBAI 400 021. 7. 4181/MUM/2008 DY. COMMISSIONER OF INCOME TAX-3(2), MUMBAI-400020. M/S. KOTAK MAHINDRA CAPITAL CO. LTD. MUMBAI 400 021. 2005-06 APPELLANT BY : SHRI P.K.B. MENON RESPONDENT BY : SHRI F. V. IRANI DATE OF HEARING : 22.09.2011 DATE OF PRONOUNCEMENT : 14 TH OCTOBER, 2011 O R D E R PER RAJENDRA SINGH (AM). THESE APPEALS BY THE ASSESSEE AND REVENUE ARE DIRECTED AGA INST DIFFERENT ORDERS OF CIT(A) DATED 28.2.2005, 28.3.200 5, 17.11.2006, 21.11.2007 AND 5.4.2008 FOR THE ASSESSMENT YEARS 2000-0 1, 2001- 02, 2002-03, 2004-05 AND 2005-06 RESPECTIVELY. THESE APPEALS WHICH ALSO INVOLVE SOME COMMON ISSUES WERE HEARD TOGETHER AND A RE THEREFORE BEING DISPOSED OF BY A SINGLE CONSOLIDATED ORD ER FOR THE SAKE OF CONVENIENCE. THE VARIOUS DISPUTES RAISED IN THESE APPE ALS RELATE TO DISALLOWANCE OF EXPENSES UNDER SECTION 14A, LEVY OF INTER EST UNDER SECTION 234C, LEGAL VALIDITY OF REASSESSMENT PROCEEDINGS, SET OFF OF SPECULATION LOSS AND CLAIM OF BAD DEBTS. ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 3 2. WE FIRST TAKE UP THE ISSUE RELATING TO DISALLOWANCE O F EXPENSES UNDER SECTION 14A OF THE INCOME TAX ACT WHICH IS RELEVANT TO ALL THE DEPARTMENT APPEALS. THE FACTS IN BRIEF ARE THAT THE A O DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE HAD EARNED HU GE INCOME FROM DIVIDEND AND INTEREST FROM TAX FREE BONDS WHICH WERE EXEMPT FROM TAX. THE AO THEREFORE, ASKED THE ASSESSEE T O EXPLAIN AS TO WHY THE EXPENSES RELATING EXEMPT INCOME SHOULD NOT B E DISALLOWED. THE ASSESSEE SUBMITTED THAT NO BORROWED FUNDS WERE USED IN MAKING INVESTMENTS. THE BORROWINGS HAD BEEN UTILIZED FOR FIN ANCING TRADING ACTIVITIES. IT WAS POINTED OUT THAT ONCE THE INVESTME NTS WERE MADE, THERE WERE HARDLY ANY EXPENSES REQUIRED FOR EARNING T HE DIVIDEND INCOME. IT WAS ALSO POINTED OUT THAT INVESTMENT DECISI ONS WERE TAKEN ONLY BY THE PD (PRIMARY DEALER) DIVISION. THE AO H OWEVER WAS NOT SATISFIED BY THE EXPLANATION GIVEN AND ATTRIBUTED 10% OF GENERAL EXPENSES OF PD DIVISION TO THE EARNING OF EXEMPT INCOM E IN ASSESSMENT YEARS 2000-01 AND 2001-02 AND DISALLOWED THE SA ME. THE AO NOTED THAT IN ASSESSMENT YEARS 2004-05 AND 2005-0 6, THE ASSESSEE ITSELF HAD DISALLOWED SUO-MOTO A SUM OF RS.18.50 LA CS AND RS.4,95,000/- AS EXPENSES RELATING TO EXEMPT INCOME. IN ASSESSMENT YEARS, 2002-03, 2004-05 AND 2005-06 THE AO CHANGED THE BASIS OF DISALLOWANCE FROM 10% OF EXPENSES TO 10% OF THE EXEMPT DIVIDEND INCOME. HE DREW ANALOGY TO EXPLANATION (BAA) OF SECTIO N 80 HHC AS ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 4 PER WHICH 10% OF THE INCOME WAS TREATED AS EXPENSES INCURR ED FOR EARNING THE INTEREST INCOME ETC. HE THEREFORE, DISALL OWED 10% OF DIVIDEND INCOME AS EXPENSES INCURRED FOR EARNING EXEMPT INCOME. IN APPEAL CIT(A) AFTER HEARING THE ARGUMENTS OF THE ASSESSE E REDUCED THE DISALLOWANCE TO 1% OF THE EXPENSES IN ALL THE YEARS UNDER REFERENCE. AGGRIEVED BY THE SAID DECISION, THE REVENU E IS IN APPEAL BEFORE THE TRIBUNAL. 2.1 BEFORE US THE LD. AR FOR THE ASSESSEE ARGUED THAT T HERE WAS NO DISPUTE THAT NO BORROWED FUNDS WERE USED FOR MAKING IN VESTMENTS AND ONCE INVESTMENTS WERE MADE THERE WERE HARDLY ANY EXPEN SES FOR EARNING DIVIDEND INCOME. HE REFERRED TO THE JUDGMEN T OF HONBLE HIGH COURT OF BOMBAY IN THE CASE OF CIT VS. GENERAL INSURAN CE COMPANY (254 ITR 203) IN WHICH IT WAS HELD, IN THE CONTEXT OF SECTION 80M THAT THE SALARY PAID TO STAFF WERE NOT RELATABLE TO EARNIN G OF DIVIDEND INCOME. SIMILARLY THE PAYMENT OF STAMP DUTY, TRANSFER CHARGES AND SAFE CUSTODY CHARGES WERE NOT RELATABLE TO EARNING OF D IVIDEND INCOME. THE HONBLE HIGH COURT HELD THAT THESE EXPENSES AMOUNT BE RELATABLE TO ACQUISITION OF SHARES BUT NOT TO EARNING OF DIVIDEND INCOME. IT WAS ALSO SUBMITTED THAT THE ASSESSEE IN ASSESSMENT YEARS 2004-05 A ND 2005-06 HAD MADE SOME SUO-MOTO DISALLOWANCE BUT THAT W AS WITHOUT PREJUDICE TO THE CLAIM THAT NO DISALLOWANCE WAS CALLED FO R. IT WAS FURTHER SUBMITTED THAT DISALLOWANCE MADE BY AO WAS VER Y EXCESSIVE. ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 5 IN THIS CONTEXT HE REFERRED TO THE DECISION OF THE TRIB UNAL IN CASE OF GRINDWEL NORTON LTD. VS. ADDL. CIT (IN ITA NO.3447/ M/2010 IN WHICH DISALLOWANCE HAD BEEN RETRACTED BY THE TRIBUNAL TO ONL Y 2% OF DIVIDEND INCOME. THE LD. AR HAS NO OBJECTION IF SOME REASONABLE AMOUNT OF EXPENDITURE WAS DISALLOWED ON ACCOUNT OF EXEM PT INCOME. THE LD. DR ON THE OTHER HAND SUPPORTED THE ORDER OF AO. IT WAS ARGUED THAT THE INVESTMENT DECISIONS REQUIRED CAREFUL P LANNING AND FOLLOW UP ACTION AT SENIOR LEVELS. THE INVESTMENTS MADE BY THE ASSESSEE WERE QUITE LARGE FOR WHICH SUBSTANTIAL INCOME HAD BEEN COLLECTED, AND THEREFORE, ESTIMATE OF INCOME MADE BY TH E AO WAS JUSTIFIED. IT WAS POINTED OUT THAT IN ASSESSMENT YEAR 20 04-05 THE ASSESSEE ITSELF HAD DISALLOWED A SUM OF RS.18.50 LACS. 2.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING DISAL LOWANCE OF EXPENSES RELATING TO DIVIDEND AND INTEREST INCOME FROM BONDS WHICH WERE EXEMPT FROM TAX UNDER THE PROVISIONS OF SECTION 1 4A. UNDER THE PROVISIONS OF THE SAID SECTION, EXPENDITURE INCURRED IN R ELATION TO EXEMPT INCOME IS NOT ALLOWABLE AS DEDUCTION. THERE IS N O DISPUTE THAT THE ASSESSEE HAD RECEIVED SUBSTANTIAL INCOME FROM DIVIDEND AND INTEREST FROM TAX FREE BONDS IN ALL THESE YEARS WHICH W AS EXEMPT FROM TAX. IT IS ALSO NOT IN DISPUTE THAT THE INVESTMENT HA D BEEN MANAGED ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 6 BY THE PD DIVISION. THE DISPUTE IS ONLY REGARDING QUA NTUM OF DISALLOWANCE OF EXPENSES. THERE IS NO DISALLOWANCE OF INT EREST RELATING TO BORROWED FUNDS WHICH SHOWS THAT THE CLAIM OF THE ASSESSE E THAT THE INVESTMENT HAD BEEN MADE FROM BORROWED FUNDS HAS BEEN ACCEPTED BY THE AO. THE DISALLOWANCE IS IN RESPECT OF GENERAL EXPEN SES OF THE PD DIVISION. THE AO IN ASSESSMENT YEARS 2000-01 AND 2001-0 2 ATTRIBUTED 10% OF GENERAL EXPENSES OF PD DIVISION TO THE EXEMPT INCOME WHICH WAS DISALLOWED. IN ASSESSMENT YEARS 2002-03, 2004-05 AND 2005-06, THE AO CHANGED THE BASIS OF DISALLOWANCE WHICH WAS MADE @ 10% OF EXEMPT DIVIDEND INCOME. CIT(A) IN ALL THE YEARS HAD CONFIRMED THE DISALLOWANCE ONLY TO THE EXTENT OF 1% OF GENERAL EXPE NSES WHICH HAS BEEN CHALLENGED BY THE REVENUE. 2.3 THE LD. AUTHORISED REPRESENTATIVE FOR THE ASSESSEE P LACING RELIANCE ON THE JUDGMENT OF THE HONBLE HIGH COURT OF BOMBAY IN CASE OF GENERAL INSURANCE CORPORATION OF INDIA (SUPRA), HAS ARGUED THAT THE SALARY PAID TO STAFF IN THE PD DIVISION CAN NOT BE TAKE N AS DIRECTLY RELATABLE TO EARNING OF INCOME AND THEREFORE, NO DISA LLOWANCE COULD BE MADE ON THIS ACCOUNT. WE ARE HOWEVER UNABLE TO ACCEPT THE ARGUMENTS ADVANCED. THE SAID JUDGMENT WAS IN THE CONTE XT OF DEDUCTION UNDER SECTION 80M WHICH WAS ALLOWABLE IN RESPECT OF DIVIDEND INCOME INCLUDED IN THE GROSS TOTAL INCOME. SI NCE ONLY THE ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 7 DIVIDEND INCOME COMPUTED UNDER THE PROVISIONS OF THE ACT COULD BE INCLUDED IN THE GROSS TOTAL INCOME HON'BLE SUPREME COURT IN THE CASE OF DISTRIBUTOR (BARODA) LTD. HELD THAT EXPENSES INCURRE D FOR EARNING DIVIDEND INCOME HAD TO BE EXCLUDED AND ONLY NET DIVID END INCOME BE CONSIDERED FOR DEDUCTION UNDER SECTION 80M. THE HONBLE HIGH COURT OF BOMBAY IN CASE OF GENERAL INSURANCE CORPORATION OF INDIA (SUPRA), THEREFORE, HELD THAT SALARY TO STAFF WHICH WAS NOT DIR ECTLY RELATED TO EARNING OF DIVIDEND INCOME COULD NOT BE DEDUCTED FROM DIVIDEND WHILE ALLOWING DEDUCTION UNDER SECTION 80M. THE PROVISIONS OF SECTION 14A ARE DIFFERENT FROM THOSE OF SECTION 80M. IN SECTION 80M , AS POINTED OUT EARLIER ONLY THE EXPENSES HAVING DIRECT NEXUS WITH EARNING OF DIVIDEND INCOME COULD BE DEDUCTED BUT AS PER SECTION 14 A ALL EXPENDITURE WHICH IS RELATABLE TO EXEMPT INCOME HAS TO BE DISALLOWED WHICH WILL INCLUDE BOTH DIRECT AND INDIRECT EXPENDITURE . THIS VIEW IS SUPPORTED BY THE JUDGMENT OF HONBLE HIGH COURT OF BOM BAY IN THE CASE OF GODREJ BOYCE LTD. (328 ITR 81) IN WHICH IT HA S BEEN HELD THAT BOTH DIRECT AND INDIRECT EXPENSES HAVE TO BE CONSIDERED FOR DISALLOWANCE ON REASONABLE BASIS UNDER SECTION 14A. 2.4 THEREFORE, THE CLAIM THAT EXPENSES SUCH AS SALARY ETC. WHICH ARE NOT DIRECTLY RELATABLE TO EARNING OF DIVIDEND INCOME CANNOT BE DISALLOWED, IS NOT LEGALLY TENABLE. THE DISALLOWANCE O F EXPENSES HAS ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 8 HOWEVER TO BE MADE ON A REASONABLE BASIS. THE LD. AUT HORISED REPRESENTATIVE HAS POINTED OUT THAT IN CASE OF GRINDW EL NORTON VS. ACIT (SUPRA), DISALLOWANCE HAS BEEN UPHELD BY THE TRIB UNAL @ 2% OF DIVIDEND INCOME. IN OUR VIEW EACH CASE IS DIFFERENT AN D HAS TO BE VIEWED ON ITS OWN FACTS. THE DISALLOWANCE AS PERCENTAGE O F DIVIDEND INCOME CANNOT BE JUSTIFIED IN ALL CASES. THERE MAY BE CA SES WHERE HUGE DIVIDEND INCOME MAY BE EARNED ONLY FROM FEW SHAR ES REQUIRING NOT MUCH EXPENDITURE AND DISALLOWANCE AS PERCENTAGE OF DIVIDEND INCOME IN SUCH CASES MAY LEAD TO ABSURD RESULTS. IN THI S PARTICULAR CASE WE NOTE THAT THE ASSESSEE IN ASSESSMENT YEAR 2004-05 ITSE LF DISALLOWED SUO-MOTO A SUM OF RS.18.50 LACS AS EXPENDITURE RELATABLE TO EXEMPT INCOME. THOUGH LD. AR ARGUED THAT SUO-MOTO DISALLOWANCE WAS WITHOUT PREJUDICE TO CLAIM OF NO DISALLOWANCE, IT IS DIFFICULT TO BELIEVE THAT THE ASSESSEE IN ITS OWN SUO-MOTO COMPUTATIO N WILL MAKE AN EXCESSIVE DISALLOWANCE. THEREFORE, SUO-MOTO DISALLOWAN CE COMPUTED BY THE ASSESSEE CAN BE REASONABLY TAKEN AS THE EX PENDITURE RELATABLE TO THE EXEMPT INCOME. IN THAT YEAR, CT(A ) RESTRICTED THE DISALLOWANCE TO 1% I.E. RS.1,87,760/- WHICH MEANS THAT SUO MOTO DISALLOWANCE MADE BY THE ASSESSEE WAS ABOUT 10% OF EXPENSES. AO HAS ALSO DISALLOWED 10% OF GENERAL EXPENSES RELATING TO PD DIVISION. UNDER THESE CIRCUMSTANCES DISALLOWANCE UPHELD BY CIT(A) @ 1 % OF GENERAL EXPENSES OF PD DIVISION CAN NOT BE UPHELD. CO NSIDERING THE ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 9 FACTS AND CIRCUMSTANCES ABOVE, WE SET ASIDE THE ORDER OF CIT (A) IN ALL THE YEARS AND UPHOLD THE DISALLOWANCE UNDER SECTION 14A @ 10% IF GENERAL EXPENSES IN THE PD DIVISION. 3. THE SECOND DISPUTE WHICH IS RELEVANT ONLY TO THE APPE ALS OF THE ASSESSEE FOR ASSESSMENT YEAR 2001-02 AND 2002-03 IS REGARDI NG LEVY OF INTEREST UNDER SECTION 234C OF THE INCOME TAX ACT. UNDER THE PROVISIONS OF SECTION 211, THE ASSESSEE IS REQUIRED TO PAY A DVANCE TAX ON ESTIMATED CURRENT INCOME IN QUARTERLY INSTALMENTS ON 15 TH JUNE, 15 TH SEPTEMBER, 15 TH DECEMBER AND 15 TH MARCH OF A FINANCIAL YEAR. SECTION 234C PROVIDES THAT IN CASE THE INSTALMENTS OF AD VANCE TAX IS NOT PAID BY THE ASSESSEE OR PAYMENT IS LESS THAN THE SPECIF IED PERCENTAGE OF TAX PAYABLE ON THE BASIS OF RETURNED INCO ME, THE ASSESSEE IS LIABLE TO PAY INTEREST ON THE SHORTFALL AT A S PECIFIED RATE. THE AO NOTED THAT THE ASSESSEE HAD PAID LESSER AMOUNT OF TAX IN THE INSTALMENTS. HE THEREFORE, LEVIED INTEREST OF RS.40,73 ,766/- IN ASSESSMENT YEAR 2001-02 AND RS.22,06,782/- IN ASSESSMENT YE AR 2002-03. 3.1 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT(A) THAT IN ASSESSMENT YEAR 2001-02, MAJOR PORTION OF INCOME FROM PD WAS EARNED BY THE ASSESSEE IN THE LAST THREE MONTHS OF THE ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 10 FINANCIAL YEAR WHICH COULD NOT BE ANTICIPATED. THE I NSTALLMENT HAD BEEN PAID ON THE BASIS OF ESTIMATE OF INCOME ON THE DAT E OF PAYMENT OF INSTALLMENT, THEREFORE, INTEREST WAS NOT LEVIABLE. IN RELATION TO ASSESSMENT YEAR 2002-03 IT WAS SUBMITTED THAT LOWER ESTIMA TE OF INCOME FROM PD DIVISION WAS ON ACCOUNT OF UNCERTAINTIES CR EATED IN THE FINANCIAL MARKET BY 9/11 (SEPTEMBER 11, 2001) TERR ORIST ATTACK WHICH RESULTED IN MUCH LOWER PAYMENT OF SEPTEMBER INSTALLMEN T. IT WAS ALSO SUBMITTED THAT THE SENTIMENTS TURNED POSITIVE ONLY TOWARDS END OF SEPTEMBER ON REMOVAL OF SANCTIONS IMPOSED BY USA ON IND IA. IT WAS ACCORDINGLY URGED THAT THE INTEREST LEVIED SHOULD BE DE LETED. CIT(A) DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT THE LEVY OF INTEREST UNDER SECTION 234A, 234B & 234C WAS MA NDATORY AS HELD BY HONBLE SUPREME COURT IN CASE OF ANJUM M.H. G HASWALA (252 ITR 1). THE AO THUS HAD NO DISCRETION IN THE MATTER. CIT(A) FURTHER OBSERVED THAT TO TAKE CARE OF ANY GENUINE CASES OF HARDSH IP, THE CBDT HAD ALREADY ISSUED CIRCULAR F.NO.400/334/95-IT(B) DAT ED 23.5.1996 PROVIDING MECHANISM OF WAIVER OF INTEREST IN SUITABLE CASES. CIT(A) ACCORDINGLY CONFIRMED THE ORDERS OF AO LEVYING INTEREST UNDER SECTION 234C, AGGRIEVED BY WHICH ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL IN BOTH THE YEARS. ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 11 3.3 BEFORE US THE LD. AUTHORISED REPRESENTATIVE FOR TH E ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE CIT(A) THAT LOWER PAYMENT OF INSTALLMENT WAS FOR A REASONABLE CAUSE. IT WAS POINT ED OUT THAT THERE WERE SPECIFIC REASONS OF SHORTFALL IN THE PAYMENT O F INSTALLMENTS AND THERE WAS NO OVER ALL SHORTFALL IN PAYMENT OF ADV ANCE TAX WHICH WAS CLEAR FROM THE FACT THAT NO INTEREST UNDER SECTION 23 4B HAD BEEN LEVIED. IT WAS ALSO SUBMITTED THAT MAIN BUSINESS OF TH E ASSESSEE WAS PD ACTIVITY WHICH WAS DEALING IN SECURITIES WHICH HAD BEE N BADLY AFFECTED BY THE TERRORIST ATTACK. IT WAS POINTED OUT THAT THE ASSESSEE HAD TO ESTIMATE CURRENT INCOME ON THE BASIS OF SITUATIO NS PREVAILING ON THE DATE OF INSTALMENTS. HE PLACED RELIANCE ON THE JUD GMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF PRIME SECURITI ES LTD. VS. ACIT (333 ITR 464) IN WHICH IN SIMILAR SITUATIONS THE HONBLE HIGH COURT HAD DELETED THE INTEREST LEVIED UNDER SECTION 23 4B OF I.T. ACT. HE ALSO REFERRED TO THE DECISION OF THE TRIBUNAL IN TH E CASE OF KOTAK MAHINDRA SECURITIES LTD. VS. ACIT (ITA NO.3272/M/2006 AND 1501/1502/1507 FOR ASSESSMENT YEAR 2004-05 IN WHICH THE TRIBUNAL FOLLOWING THE JUDGMENTS OF HONBLE BOMBAY HIGH COURT IN THE CASE OF PRIME SECURITIES LTD. (SUPRA), HAD RESTORED THE ISSUE OF LEVY OF INTEREST UNDER SECTION 234C TO THE FILE OF AO FOR FRESH DECISIONS. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND STRONG LY SUPPORTED THE ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 12 ORDERS OF AUTHORITIES BELOW AND PLACED RELIANCE ON THE FINDINGS GIVEN IN THE RESPECTIVE ORDERS. 3.4 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL SUBMISSIONS CAREFULLY. THE DISPUTE IS REGARDING LEVY OF I NTEREST UNDER SECTION 234C OF THE INCOME TAX ACT. UNDER THE PROVISION S OF SECTION 211, THE ASSESSEE IS REQUIRED TO PAY ADVANCE TAX ON ESTIM ATED CURRENT INCOME IN QUARTERLY INSTALLMENTS ON OR BEFORE 15 TH JUNE, 15 TH SEPTEMBER, 15 TH DECEMBER AND 15 TH MARCH OF FINANCIAL YEAR. IN CASE THE ASSESSEE HAS FAILED TO PAY ADVANCE OR PAYMENT OF INSTA LLMENT ON THE SPECIFIED DATES IS LESS THAN THE INSTALLMENT PAYABLE O N THE BASIS OF RETURNED INCOME, THE ASSESSEE IS REQUIRED TO PAY INTEREST ON THE SHORTFALL AT A SPECIFIED RATE. THE SECTION PROVIDES REL AXATION SUCH AS IN THE CASES WHERE SHORTFALL IS ON ACCOUNT OF UNDER ESTIMATION OR FAILURE TO ESTIMATE CAPITAL GAINS OR INCOME OF THE NATURE REFER RED TO IN SECTION 2(24)(IX) IN WHICH CASES NO INTEREST WILL BE PAYABLE IF THE SHORTFALL IN TAX IS MADE UP BY THE ASSESSEE IN THE REMAINING INSTALLM ENTS. THERE IS FURTHER RELAXATION IN CASE SHORTFALL IS ON ACCOUNT OF INCR EASE IN RATE OF SURCHARGE UNDER SECTION 2 OF THE FINANCE ACT 2000 AND THE ASSESSEE HAS MADE UP SHORTFALL BY 15 TH MARCH OF THE FINANCIAL YEAR. IN ALL OTHER CASES INTEREST IS PAYABLE IN CASE OF SHORTFALL. THERE IS N O DISPUTE IN THIS CASE THAT THERE WAS SHORTFALL IN PAYMENT OF INSTALLM ENTS W.R.T. INSTALLMENTS PAYABLE ON THE BASIS OF RETURNED INCOME. T HERE IS ALSO NO ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 13 DISPUTE THAT THE CASE OF THE ASSESSEE IS NOT COVERED BY THE RELAXATION PROVIDED IN SECTION 234C. 3.5 THE ARGUMENT OF THE LD. AR FOR THE ASSESSEE IS THAT THE SHORTFALL IN PAYMENT OF INSTALLMENT WAS BECAUSE OF LOWER ESTIMATE OF CURRENT INCOME DUE TO EXCEPTIONAL SITUATIONS WHICH WERE NOT UN DER THE CONTROL OF THE ASSESSEE. IN CASE OF ASSESSMENT YEARS 2000-01, 2001-02 , IT HAS BEEN SUBMITTED THAT MAJOR PROFITS AROSE IN THE LAST QUARTER OF THE YEAR WHICH COULD NOT BE FORESEEN BY THE ASSESSEE. SIMILAR LY IN ASSESSMENT YEAR 2002-03, THE UNDER ESTIMATION OF CURRENT INCOME HAS BEEN EXPLAINED ON ACCOUNT OF UNCERTAINTY CREATED IN THE FINANCIAL MARKET BY 9/11 (SEPTEMBER 11, 2001) TERRORIST ATTACK WHICH RESULTED IN MUCH LOWER SEPTEMBER INSTALLMENT. IN OUR VIEW TH E AO HAS NO DISCRETION TO REDUCE OR WAIVE INTEREST ONCE THERE IS SHORT FALL IN PAYMENT OF INSTALLMENTS AND INTEREST IS FOUND PAYABLE UNDER THE PROVISIONS OF SECTION 234C. THIS POSITION IS SETTLED BY JU DGMENT OF HON'BLE SUPREME COURT IN CASE OF ANJUM M.H. GHASWALA (SUP RA), IN WHICH THE HON'BLE SUPREME COURT HELD THAT LEVY OF INT EREST UNDER SECTION 234A, 234B AND 234C WAS MANDATORY IN VIEW OF TH E EXPRESSION SHALL USED IN THE SAID SECTION FROM ASSESSMENT YEAR 1989- 90. EVEN IN RELATION TO SETTLEMENT COMMISSION WHICH WAS EMPOWERED TO SETTLE THE TAX CASES, IT WAS HELD THAT SETTLEMENT COMMISSION HAD N O POWER TO ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 14 REDUCE OR WAIVE INTEREST ONCE INTEREST WAS PAYABLE EXCEPT TO THE EXTENT PROVIDED IN CIRCULAR 400/334/95-IT(PD OF CBDT ). THE SAID CIRCULAR PROVIDES FOR WAIVER OF INTEREST BY THE COMPETE NT AUTHORITY IN SUITABLE CASES. THE AO IS NOT AUTHORIZED TO WAIVE ANY I NTEREST AND THEREFORE, ONCE INTEREST IS FOUND PAYABLE UNDER SECTION 234A, 234B AND 234C, AO HAS NO DISCRETIONARY POWER TO REDUCE OR W AIVE THE INTEREST DUE TO ANY EXTRA ORDINARY CIRCUMSTANCES. IN CASE THE ASSESSEE FEELS THAT SHORTFALL IN PAYMENT OF ADVANCE TAX WA S DUE TO EXCEPTIONAL SITUATIONS BEYOND ITS CONTROL, IT COULD ALWA YS APPLY TO COMPETENT AUTHORITY FOR WAIVER OF INTEREST UNDER THE PROVISIONS OF CBDT CIRCULAR (SUPRA). ONCE THE INTEREST HAS BEEN LEVIE D CORRECTLY UNDER THE PROVISIONS OF LAW THE APPELLATE AUTHORITY CA NNOT INTERFERE WITH THE ORDER OF AO. 3.6 THE LD. COUNSEL FOR THE ASSESSEE HAS PLACED RELIANCE ON THE JUDGMENT OF HONBLE HIGH COURT OF BOMBAY IN THE CASE OF PRIME SECURITIES VS. ACIT (SUPRA) WHICH IN OUR VIEW IS DISTINGUI SHABLE. FIRSTLY, THE CASE RELATED TO SECTION 234B AND NOT 234C W HICH IS UNDER CONSIDERATION IN THIS APPEAL. SECONDLY, IN THAT CASE, SHO RTFALL WAS BECAUSE OF EXEMPTION OF CAPITAL GAIN ON SALE OF CAPITAL ASSETS TO 100% HOLDING COMPANY UNDER SECTION 47(V) AND THE ASSESSEE, THER EFORE, HAD NOT INCLUDED CAPITAL GAIN IN THE ESTIMATED INCOME. ONL Y AFTER FILING OF RETURN OF INCOME, FOR ASSESSMENT YEAR 1991-92, THE SHARE HOLDING OF ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 15 THE HOLDING COMPANY FELL BELOW 43% IN MARCH 1992, DUE TO FURTHER SHARES ISSUED BY ASSESSEE TO VARIOUS OTHER COMPANIES AND, THE REFORE, IN THE ASSESSMENT ORDER, AO ASSESSED THE CAPITAL GAIN TO TAX AS A RESULT OF WHICH THERE WAS SHORTFALL IN PAYMENT OF ADVA NCE TAX AND INTEREST WAS LEVIED UNDER SECTION 234B. THE HONBLE HIGH COURT OBSERVED THAT THE ASSESSEE AT THE TIME OF PAYMENT OF ADV ANCE TAX HAD CORRECTLY COMPUTED INCOME SUBJECT TO ADVANCE TAX, AND THER EFORE THERE WAS NO DEFAULT BY THE ASSESSEE AND ACCORDINGLY IT WAS HELD THAT INTEREST UNDER SECTION 234B WAS NOT LEVIABLE. IN CASE, CE RTAIN INCOME IS NOT TAXABLE AT ALL, THE ASSESSEE COULD NOT BE SAID TO B E IN DEFAULT IN NOT PAYING TAX IN RESPECT OF SAID INCOME. 3.7 THE PRESENT CASE IS DIFFERENT. THIS IS NOT A CASE THAT CERTAIN ITEMS OF INCOME WERE NOT TAXABLE AT ALL AT THE TIME O F FILING ADVANCE TAX ESTIMATED BY THE ASSESSEE. IT IS A CASE OF UNDER ESTIM ATION OF ADVANCE TAX BY THE ASSESSEE WHICH RESULTED INTO SHORTFALL. THE PROVISIONS OF SECTION 234C ARE QUITE SPECIFIC THAT IN CASE OF ANY SHORTFALL IN THE PAYMENT OF ADVANCE TAX INSTALLMENTS WI TH RESPECT TO INSTALLMENTS PAYABLE ON THE BASIS RETURNED INCOME, INTE REST IS PAYABLE ON THE SHORTFALL. THUS THE SHORTFALL IN TAX PAYMENT WHICH IS SUBJECT TO INTEREST UNDER SECTION 234C IS WITH RESPECT TO ASSESSEES OW N RETURNED INCOME WHICH WAS NOT SO IN CASE OF PRIME SECURIT IES LTD. (SUPRA), IN WHICH THE SHORTFALL WAS IN RELATION TO ASSESSE D INCOME. THE ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 16 JUDGMENT CITED HAS, THEREFORE, NO APPLICATION TO THE FACTS OF THE PRESENT CASE. THE LD. AR HAS ALSO REFERRED TO THE DECISIO N OF THE TRIBUNAL IN CASE OF KOTAK MAHINDRA SECURITES LTD. VS. ACIT (SUPRA) IN WHICH FOLLOWING THE JUDGMENT OF HONBLE HIGH COURT OF BOMBAY IN CASE OF PRIME SECURITIES LTD. VS. ACIT (SUPRA), THE TRIBUNA L HAD RESTORED THE ISSUE OF LEVY OF INTEREST TO THE FILE OF THE AO FOR FR ESH DECISION. WE HAVE CAREFULLY PERUSED THE SAID ORDER OF THE TRIBUNAL. THE TRIBUNAL HAD RESTORED THE ISSUE ON THE GROUND THAT NEITHER AO N OR CIT(A) HAD EXAMINED THE MATTER AS TO WHETHER THE ASSESSEE HAD COMMIT TED DEFAULT FOR PAYMENT OF ADVANCE TAX. IN THE PRESENT CA SE THERE IS NO DISPUTE THAT THERE WAS DEFAULT IN PAYMENT OF ADVANCE T AX INSTALLMENT AND THERE WAS SHORTFALL ON WHICH NO DISPUTE HAS BEEN RA ISED BY THE ASSESSEE. WE THEREFORE DO NOT CONSIDER IT NECESSARY TO RESTO RE THE ISSUE TO THE FILE OF THE AO AS THE SAME CAN BE DECIDED ON THE BASIS OF MATERIAL AVAILABLE ON RECORD. ONCE THERE IS SHORTFALL IN PAYMENT OF ADVANCE TAX INSTALLMENT, THE LEVY OF INTEREST IS MANDAT ORY AS WE HAVE POINTED OUT EARLIER. IN CASE, UNDER ESTIMATE OF INCOME FOR ADVANCE TAX PAYMENT WAS DUE TO CONDITIONS BEYOND THE CONTROL OF TH E ASSESSEE, IT COULD ALWAYS APPLY TO THE COMPETENT AUTHORITY, FOR WAIVER OF INTEREST IN TERMS OF THE CBDT CIRCULAR (SUPRA), WE SEE NO INFI RMITY IN THE ORDER OF CIT(A) IN CONFIRMING LEVY OF INTEREST AND T HE SAME IS THEREFORE UPHELD. ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 17 4. THE THIRD DISPUTE WHICH IS RELEVANT ONLY TO THE A SSESSEES APPEAL IN 2002-03 IS REGARDING LEGAL VALIDITY OF OPENING OF ASSESSMENT UNDER SECTION 147 OF THE I.T. ACT. THE RETURN OF INCOME FOR ASSESSMENT YEAR 2002-03 HAD BEEN FILED BY THE ASSESSEE ON 29.10.2002 DE CLARING TOTAL INCOME OF RS .74,32,38,137/- WHICH HAD BEEN PROCESSED UNDER SECTION 143(1) ON 19.2.2003. SUBSEQUENTLY THE AO NOTED THAT THE ASSESSEE HAD EARNED HUGE DIVIDEND INCOME AND INTEREST INCOME FR OM BONDS WHICH WERE EXEMPT FROM TAX BUT THE ASSESSEE HAD NOT DISAL LOWED ANY EXPENSES RELATING TO SUCH INCOME. HE, THEREFORE, REOPENE D THE ASSESSMENT AFTER RECORDING REASONS FOR ESCAPEMENT OF INCOME A ND ISSUED NOTICE UNDER SECTION 148 ON 26.10.2004. THE REAS ONS RECORDS BY AO WERE AS UNDER :- IN THE CASE OF THE ASSESSEE M/S. KOTAK MAHINDRA CO . LTD., THE RETURN OF INCOME FOR A.Y. 2002-03 WAS FIL ED ON 29.10.2002 DECLARING TOTAL INCOME OF RS.74,32,38,13 7/-. THIS RETURN HAS BEEN PROCESSED U/S.143(1) ON 19.02.2003 ACCEPTING THE INCOME RETURNED. ON VERIFICATION OF THE RECORD IT IS FOUND THAT IN COMPUTATION OF INCOME THE ASSESSEE HAS CLAIMED DIVI DEND INCOME OF RS.2,28,48,157/- AS EXEMPT U/S.10(33) OF THE ACT. HOWEVER, THE EXPENDITURE RELATED TO EARN THIS EXEMP TED INCOME HAS NOT BEEN CONSIDERED FOR DISALLOWANCE AS PROVIDE D IN SECTION 14A OF THE ACT. IN THE CASE OF UNITED GENERAL TRUST REPORTED AT 200 ITR 488 THE HON. APEX COURT HAS HELD THAT CERTA IN PROPORTIONATE EXPENSES CAN BE DISALLOWED U/S.80 M O UT OF ADMINISTRATIVE EXPENSES. ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 18 IN VIEW OF THE ABOVE, I HAVE A REASON TO BELIEVE T HAT INCOME TO THE EXTENT OF RS.22,84,815/- (10% OF THE AMOUNT OF THE DIVIDEND INCOME EARNED) HAS ESCAPED ASSESSMENT, BEING EXPENDITURE RELATED TO EXEMPTED INCOME, WITHIN THE MEANING OF SECTION 147 OF THE ACT. I AM SATISFIED THAT THIS IS A FIT CASE TO REOPEN THE ASSESSMENT BY ISSUE OF NOTICE U/S.148 OF THE ACT. SIMILARLY, I HAVE A REASON TO BELIEVE THAT INCOME T O THE EXTENT OF RS.23,18,973/- (10% OF THE AMOUNT OF INTE REST EARNED) HAS ESCAPED ASSESSMENT, BEING EXPENDITURE R ELATED TO EXEMPTED INCOME, BEING INTEREST ON TAX FREE BONDS O F RS.2,31,89,736/- WITHIN THE MEANING OF SECTION 147 OF THE ACT ON THE SAME REASONING MENTIONED ABOVE. ACCORDINGLY, NOTICE U/S.148 IS ISSUED FOR A.Y. 2002 -03 TODAY. 4.1 THE ASSESSEE CHALLENGED THE DECISION OF THE AO TO REOP EN THE ASSESSMENT AND SUBMITTED BEFORE CIT(A) THAT THE AO HAD N O EVIDENCE IN HIS POSSESSION TO COME TO THE CONCLUSION THAT ANY EXPENDI TURE HAD BEEN INCURRED FOR EARNING EXEMPT INCOME. THE JUDGMEN T OF THE HON'BLE SUPREME COURT IN THE CASE OF UNITED GENERAL TR UST (SUPRA), WAS NOT APPLICABLE AS THE SAME RELATE TO DISALLOWANCE OF EXPENSES UNDER SECTION -80M. THERE WAS NO CONNECTION BETWEEN THE MATERIAL AVAILABLE AND THE FORMATION OF BELIEF FOR ESCAPEMENT OF INCOME. IT WAS ALSO SUBMITTED THAT THE AO HAD REOPENED THE ASSESSMENT W ITHOUT THERE BEING ANY FRESH MATERIAL AND THEREFORE REOPENI NG WAS BASED ON CHANGE OF OPINION WHICH WAS NOT PERMITTED. CIT(A) HOWE VER DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM TH AT THE RETURN ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 19 OF INCOME IN THIS CASE HAD BEEN PROCESSED UNDER SECTION 143 (1) IN WHICH AO WAS NOT EMPOWERED TO TAKE ANY VIEW ON ANY MA TTER RELATING TO ASSESSMENT AND, THEREFORE, REOPENING OF ASSESSMENT WAS NO T BASED ON CHANGE OF OPINION. CIT(A) FURTHER OBSERVED THAT F OR ACTION UNDER SECTION 147, THE ONLY REQUIREMENT WAS THAT THE AO SHOUL D HAVE REASON TO BELIEVE THAT SOME INCOME CHARGEABLE TO TAX HAD ESCAP ED ASSESSMENT. DURING THE YEAR, ASSESSEE HAD SUBSTANTIAL DIVIDE ND INCOME OF RS.2.28 CORES AND INTEREST INCOME OF RS.2.38 CROR ES WHICH WERE EXEMPT FROM TAX. IT WAS NOT POSSIBLE TO EARN SUCH INCOME WITHOUT INCURRING ANY EXPENDITURE HOWEVER SMALL IT MA Y BE. THEREFORE, THE CIT(A) HELD THE AO WAS JUSTIFIED IN FORMING THE B ELIEF THAT THERE WAS ESCAPEMENT OF INCOME ON ACCOUNT OF CLAIM OF EXPENSES REL ATING TO EXEMPT INCOME. CIT(A) ACCORDINGLY UPHELD THE LEGAL VAL IDITY OF REOPENING OF ASSESSMENT, AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4.2 BEFORE US THE LD. AR FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE CIT(A) THAT THERE WAS NO MATERIAL EV IDENCE BEFORE THE AO FOR FORMATION OF BELIEF FOR THE ESCAPEMENT OF INCOME. IT WAS SUBMITTED THAT THE AO HAD REOPENED THE ASSESSMENT ON THE BASIS OF THE JUDGMENT OF HON'BLE SUPREME COURT IN CASE OF UNI TED GENERAL TRUST (SUPRA), WHICH RELATED TO DEDUCTION UNDER SECTION 80M. IN THAT CASE THERE WAS NO DISPUTE ABOUT NEXUS BETWEEN MANAGEMENT ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 20 EXPENSES AND DIVIDEND INCOME. THE DISALLOWANCE OF PROPO RTIONATE EXPENSES HAD THEREFORE BEEN UPHELD. IN THE PRESENT CASE THERE WAS NO MATERIAL SHOWING NEXUS BETWEEN EXEMPT INCOME AND TH E EXPENSES INCURRED. IT WAS ALSO ARGUED THAT THE REASONS AS RECORDED BY THE AO HAVE TO BE CONSIDERED AND CANNOT BE SUPPORTED BY AFFID AVIT OR ORAL SUBMISSIONS AS HELD BY HONBLE HIGH COURT OF BOMBAY IN THE CASE OF HUL VS. ACIT AND OTHERS (268 ITR 332). IT WAS POINTED OUT THAT ON THE BASIS OF REASONS RECORDED THERE WAS NO CASE MADE OUT FO R ESCAPEMENT OF INCOME. HE REFERRED TO THE JUDGMENT OF H ONBLE HIGH COURT OF BOMBAY IN THE CASE OF PRASHANT JOSHI AND ANOTH ER (324 ITR 154) IN WHICH IT WAS HELD THAT IN CASE THERE WAS NO MAT ERIAL FOR FORMATION OF REASONABLE BELIEF FOR ESCAPEMENT OF INCOME , THE NOTICE ISSUED UNDER SECTION 148 HAS TO BE HELD AS INVALID. ACCORD INGLY IT WAS URGED THAT REASSESSMENT PROCEEDINGS INITIATED BY THE AO U NDER SECTION 147 SHOULD BE QUASHED. THE LD. D.R ON THE OTHER HAND STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW. IT WAS SUBM ITTED THAT THE ASSESSEE HAD HUGE TAX FREE INCOME IN RELATION TO WHICH EX PENSES HAD NOT BEEN DISALLOWED. IT WAS NOT POSSIBLE TO EARN SUCH HUGE INCOME WITHOUT INCURRING ANY EXPENSES. THERE WAS THEREFORE, R EASONABLE GROUND FOR THE AO TO COME TO BELIEF THAT INCOME CHARGE ABLE TO TAX HAD ESCAPED ASSESSMENT. ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 21 4.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING LEGAL VALIDITY OF REOPENING OF ASSESSMENT UNDER SECTION 147 OF THE IT ACT F OR ESCAPEMENT OF INCOME CHARGEABLE TO TAX. THE RETURN OF INCOME IN THIS CASE HAD ONLY BEEN PROCESSED UNDER SECTION 143(1) OF THE I T ACT ON 19/2/2003 AND THEREAFTER ASSESSMENT HAD BEEN REOPENED FOR THE REASONS RECORDED WHICH HAVE BEEN REPRODUCED EARLIER. S INCE THE RETURN HAD ONLY BEEN PROCESSED UNDER SECTION 143(1) IN W HICH THE AO HAD NO JURISDICTION TO MAKE ANY ADDITIONS OR ALTERATIO NS TO THE RETURNED, REOPENING THE ASSESSMENT SUBSEQUENTLY CANNOT BE SAID TO BE BASED ON CHANGE OF OPINION. THIS ISSUE IS SUPPORTED BY TH E JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF RAJESH JHAVER I STOCK BROKERS PVT. LTD. (291 ITR 500) IN WHICH IT WAS HELD THAT THE RE WAS NO CHANGE OF OPINION INVOLVED IF ASSESSMENT IS REOPENED AFTER ISSUE OF INTIMATION UNDER SECTION 143(1). IN FACT, THE LD. A.R FOR THE ASS ESSEE FAIRLY CONCEDED THAT HE WAS NOT ARGUING THE CASE ON THE BASIS O F CHANGE OF OPINION. HIS ONLY ARGUMENT WAS THAT THERE WAS NO MAT ERIAL BEFORE THE AO FOR FORMATION OF REASONABLE BELIEF FOR ESCAPEME NT OF INCOME. IT HAS BEEN POINTED OUT THAT THE AO HAD REOPENED THE ASSE SSMENT ON THE BASIS OF THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF UNITED GENERAL TRUST(SUPRA), WHICH RELATED TO SECTION 80M AND, THEREFORE, NOT APPLICABLE TO THE CASE OF THE ASSESSEE. IT HAS ALSO BEEN PO INTED OUT ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 22 THAT IN THAT CASE THERE WAS NO DISPUTE ABOUT THE NEXUS B ETWEEN MANAGEMENT EXPENSES AND THE DIVIDEND INCOME AND THEREF ORE, PROPORTIONATE EXPENSES WERE HELD DEDUCTIBLE FROM GROSS D IVIDEND FOLLOWING THE EARLIER JUDGMENT OF HONBLE APEX COURT IN THE CASE OF DISTRIBUTOR (BARODA) PVT. LTD. (155 ITR 120). 4.4 ON CAREFUL CONSIDERATION OF ALL ASPECTS OF THE MATT ER WE DO NOT SEE ANY MERIT IN THE ARGUMENTS ADVANCED. NO DOUBT IT I S TRUE THAT WHILE CONSIDERING THE LEGAL VALIDITY OF THE RE-OPENIN G OF AN ASSESSMENT, THE REASON AS RECORDED BY AO HAVE TO BE SEEN. BUT ON T HE BASIS OF REASONS RECORDED, IN OUR VIEW, REASONABLE BELIEF CAN BE FORMED REGARDING ESCAPEMENT OF INCOME. THE AO IN THE REASON, RECORDED CLEARLY MENTIONED THAT THE ASSESSEE HAD RECEIVED DIVIDEND INCOME OF RS.2.28 CRORES WHICH WAS EXEMPT FROM TAX AND THE ASSESSEE H AD NOT DISALLOWED ANY EXPENSES RELATING TO EXEMPT INCOME UNDER SECTION 14A OF THE ACT. THOUGH THE AO REFERRED TO THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF UNITED GENERAL TRUST (SUP RA) WHICH RELATED TO DEDUCTION UNDER SECTION 80M BUT THE SAME CANN OT BE SAID TO BE TOTALLY IRRELEVANT. THE DEDUCTION UNDER SECTION 80 M IS ALLOWABLE IN RESPECT OF DIVIDEND INCOME RECEIVED FROM DOMESTIC COMPANIE S AND INCLUDED GROSS TOTAL INCOME. THEREFORE, THE HON'BLE SUP REME COURT IN CASE OF DISTRIBUTORS (BARODA) PVT. LTD. (SUPRA), HELD T HAT THE DIVIDEND ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 23 INCOME AS COMPUTED UNDER PROVISIONS OF THE ACT HAS TO BE CONSIDERED FOR DEDUCTION UNDER SECTION 80M WHICH, IN OTHER WORDS M EANT THAT EXPENSES INCURRED FOR EARNING OF EXEMPT INCOME HAD TO B E DEDUCTED AND ONLY NET DIVIDEND INCOME HAS TO BE CONSIDERED. THU S, IN CASE OF UNITED GENERAL TRUST (SUPRA) PROPORTIONATE MANAGEMEN T EXPENSES WERE HELD TO BE INCURRED FOR THE PURPOSE OF EARNING DIVIDEND INCOME. THE CASE OF SECTION 14A IS STILL WIDER AND UNDER THE SAID SECTION, EXPENSES RELATABLE TO THE EXEMPT INCOME HAVE TO BE DISA LLOWED AND, THEREFORE, NOT ONLY THE EXPENSES HAVING DIRECT NEXUS W ITH EARNING OF DIVIDEND INCOME BUT ALSO INDIRECT EXPENSES HAVE TO BE CON SIDERED FOR DISALLOWANCE UNDER SECTION14A. THIS VIEW IS SUPPORTED BY THE JUDGMENT OF HONBLE HIGH COURT OF BOMBAY IN THE CASE GO DREJ BOYCE MANUFACTURING CO. LTD.(328 ITR 81) IN WHICH IT HAS BE EN HELD THAT BOTH DIRECT AND INDIRECT EXPENSES RELATABLE TO THE EXEMPT IN COME HAVE TO BE CONSIDERED FOR DISALLOWANCE UNDER SECTION 14A. 4.5 THUS IF THE PROPORTIONATE MANAGEMENT EXPENSES COULD BE CONSIDERED AS INCURRED FOR THE PURPOSE OF EARNING DIVIDE ND UNDER SECTION 80M, THE SAME WOULD DEFINITELY BE CONSIDERED AS RELATABLE TO DIVIDEND INCOME UNDER SECTION 14A. UNDER THESE CIRCUMSTAN CES WHEN THE ASSESSEE HAD NOT DISALLOWED ANY EXPENSES RELATABLE TO EXEMPT DIVIDEND INCOME, IT WAS QUITE REASONABLE FOR THE AO TO FORM A BELIEF ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 24 THAT INCOME CHARGEABLE TO TAX HAD ESCAPED ASSESSMENT ON TH E GROUND THAT SOME EXPENSES RELATABLE TO EXEMPT INCOME HAVE BEEN CLAIMED AND ALLOWED IN THE INTIMATION ISSUED UNDER SECTION 143( 1). IT IS A SETTLED LEGAL POSITION THAT FOR REOPENING OF ASSESSMENT I T IS NOT NECESSARY THAT THERE SHOULD BE SUFFICIENT GROUND FOR ADDI TION TO BE FINALLY UP HELD. THE ONLY REQUIREMENT IS THAT THER E SHOULD BE SOME RELEVANT MATERIAL FOR FORMATION OF BELIEF AND THE SUFFICIENCY OF MATERIAL CANNOT BE QUESTIONED. THERE WAS MATERIAL AVAILABLE BE FORE AO CLEARLY SHOWED THAT NO EXPENSES IN RELATION TO EXEMPT INCOME HA D BEEN DISALLOWED BY THE ASSESSEE UNDER SECTION 14A WHICH IN OUR V IEW WAS RELEVANT MATERIAL FOR FORMATION OF REASONABLE BELIE F THAT SOME INCOME HAD ESCAPED ASSESSMENT AS IT WAS NOT POSSIBLE TO EARN SUCH HU GE DIVIDEND WITHOUT INCURRING ANY EXPENSES. IN FACT, TH E LD. A.R FOR THE ASSESSEE WHILE ARGUING THE GROUND REGARDING DISALLOWANCE OF EXPENSES UNDER SECTION 14A, HIMSELF ADMITTED THAT SOME REASONABLE DISALLOWANCE COULD BE MADE UNDER SECTION 14A OUT OF GENE RAL EXPENSES RELATING TO PD DIVISION WHICH WAS MANAGING THE INVESTME NTS FROM WHICH TAX FREE DIVIDEND INCOME HAD BEEN EARNED. WE A RE, THEREFORE, CONVINCED THAT REOPENING BY AO WAS BASED ON RELEVANT MA TERIAL AND SAME IS THEREFORE, HELD LEGALLY VALID AND ORDER OF CI T(A) IS ACCORDINGLY UPHELD. ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 25 5. THE FOURTH DISPUTE IS REGARDING SET OFF OF BROUGHT FORWARD SPECULATION LOSS AGAINST PROFITS FROM DEALING IN SHARES EAR NED BY THE ASSESSEE DURING THE RELEVANT YEAR. THIS GROUND IS RELEVA NT TO THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2002-03 AND DEPARTMENTAL APPEALS IN ASSESSMENT YEARS 2004-05 AND 2005 -06. IN ASSESSMENT YEAR 2002-03, THE ASSESSEE HAD EARNED INCOME OF RS.35,35,112/- FROM TRADING IN EQUITY AND INDEXED SHA RES WHICH WERE TREATED BY IT AS SPECULATION PROFIT UNDER PROVISION OF EXPLANATION TO SECTION 73 WHICH HAD BEEN SET OFF AGAINST THE BROUGHT F ORWARD SPECULATION LOSS OF ASSESSMENT YEAR 2001-02. THE AO HOWEVE R TOOK THE VIEW THAT EXPLANATION TO SECTION 73 WAS APPLICABLE ONLY IN THE CASE OF LOSSES AND NOT IN THE CASE OF PROFIT. HE ACCORDINGLY TR EATED THE PROFIT FROM TRADING IN EQUITY AND INDEXED SHARES AS NO RMAL BUSINESS PROFIT WHICH WAS NOT ALLOWED TO BE SET OFF AGAINST BR OUGHT FORWARD SPECULATION LOSS. IN APPEAL CIT(A) AGREED WITH THE AO THAT SECTION 73 WAS ONLY IN RELATION TO LOSS IN SPECULATION BUSINESS AND, T HEREFORE, EXPLANATION TO SECTION 73 WOULD APPLY ONLY TO LOSSES AND NOT PROFITS. HE THEREFORE, CONFIRMED THE ORDER OF THE AO FOLLOWING THE DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF GODA VARI CAPITAL LTD. VS. ACIT (91 ITD 274). AGGRIEVED BY THE SAID D ECISION, ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. IN ASSESSMENT YEARS 200 4-05 AND 2005-06, ALSO THE AO HAD TREATED THE PROFIT FROM SHAR E TRADING AS ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 26 BUSINESS PROFIT AND NOT SPECULATION PROFIT. HOWEVER, CIT (A) FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF SAMBA TRADI NG AND INVESTMENT PVT. LTD.(58 ITD 360) HELD THAT EXPLANATI ON TO SECTION 73 WAS APPLICABLE IN CASE OF PROFIT FROM SHARE TRADING ALSO AND ACCORDINGLY ALLOWED THE CLAIM OF THE ASSESSEE, AGGRIEVED BY WHICH REV ENUE IS IN APPEAL BEFORE THE TRIBUNAL IN THESE TWO YEARS. 5.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE RECORD S AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS WHETHER THE EXPLANATION TO SECTION 73 WOULD APPLY TO ONLY LOSSES FR OM PURCHASES AND SALE OF SHARES BY A COMPANY OR ALSO TO PROFITS. THE SAID EXPLANATION PROVIDES THAT IN CASE OF A COMPANY WHOSE GRO SS TOTAL INCOME DOES NOT CONSIST MAINLY OF INCOME FROM INTEREST, HO USE PROPERTY, CAPITAL GAIN, OTHER SOURCES OR A COMPANY THE P RINCIPAL BUSINESS OF WHICH IS BANKING OR GRANTING OF LOANS AND AD VANCES, A PART OF THE BUSINESS CONSISTS OF PURCHASE AND SALE OF SHARES OF OTHE R COMPANIES, SUCH ACTIVITY OF PURCHASE AND SALE OF SHARES WIL L BE DEEMED TO BE SPECULATION BUSINESS BEING CARRIED ON BY TH E SAID COMPANY. THUS THE EXPLANATION DEEMS PURCHASE AND SALE O F SHARES AS SPECULATION BUSINESS . THEREFORE, IT WOULD APPLY TO BOTH PROFITS AND LOSSES EARNED FROM SUCH PURCHASES AND SALE OF SHARES. THIS VIE W HAS BEEN UPHELD BY THE HONBLE HIGH COURT OF BOMBAY IN CA SE OF CIT VS. LOKMAT NEWS PAPERS PVT. LTD( 323 ITR 43) IN WHICH IT H AS BEEN HELD ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 27 THAT PROFIT FROM PURCHASE AND SALE OF SHARES ARE NOT TO BE EXCLUDED FROM THE DEEMING PROVISIONS OF EXPLANATION TO SECTION 7 3. IT WAS ACCORDINGLY HELD THAT THE ASSESSEE WAS ENTITLED TO SET OFF BROUGHT FORWARD SPECULATION LOSS AGAINST PROFIT FROM SALE AND P URCHASE OF SHARES IN THE CURRENT YEAR. FOLLOWING THE SAID JUDGMEN T, THE CLAIM OF THE ASSESSEE HAS TO BE ALLOWED. WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) FOR THE ASSESSMENT YEAR 2002-03 AND ALLOW THE CL AIM OF ASSESSEE. HOWEVER, ORDERS OF CIT(A) IN ASSESSMENT YEARS 2004-0 5 AND 2005-06 IN WHICH CLAIM OF THE ASSESSEE HAD BEEN ALLOWED ARE UPHELD. 6. THE FIFTH DISPUTE IS REGARDING DISALLOWANCE OF BAD DEBTS. THIS IS RELEVANT TO DEPARTMENTAL APPEAL FOR THE ASSESSMENT YEAR 2004-05. THE AO DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE A SSESSEE HAD WRITTEN OFF A SUM OF RS.56,98,589/- AS BAD DEBT WH ICH INCLUDED A SUM OF RS.22,934/- ON ACCOUNT OF IDBI AND RS.2,50,000/- ON ACCOUNT OF KEVIN CARE PVT. LTD. THE AO OBSERVED THAT THE CL AIM OF BAD DEBT COULD BE ALLOWED ONLY IF THERE WAS MATERIAL TO SHOW TH AT THE DEBT HAD BECOME IRRECOVERABLE. HE FURTHER OBSERVED THAT THE ASSE SSEE HAD NOT BROUGHT ANY MATERIAL TO PROVE THAT THE DEBTS WERE IR RECOVERABLE DURING THE YEAR. ACCORDINGLY HE DISALLOWED THE CLAIM AGGREGAT ING TO RS.2,72,934/-. THE ASSESSEE DISPUTED THE DECISION OF THE A O AND SUBMITTED BEFORE CIT(A) THAT THE ASSESSEE WAS ACTING AS AG ENT OF IDBI FOR ISSUE OF THEIR BONDS ON WHICH COMMISSION WAS GIVEN. I DBI DID NOT ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 28 AGREE WITH THE FULL AMOUNT OF COMMISSION CLAIMED BY TH E ASSESSEE AND THEREFORE BALANCE WRITTEN OFF. AS REGARDS KEVIN CARE PVT. LTD., IT WAS SUBMITTED THAT THE TRANSACTIONS WITH THE SAID PARTY DID NOT RESULT INTO FULL LEDGED INVESTMENT BANK MANDATE ARE THE CLIENT, T HEREFORE REFUSED TO SETTLE THE FULL AMOUNT INVOLVED RESULTING INTO WR ITING OFF BALANCE AMOUNT. IT WAS ALSO SUBMITTED THAT THE AMOUNT WERE A CTUALLY WRITTEN OFF IN THE BOOKS OF ACCOUNT AND WERE THEREFORE AVAILAB LE AS DEDUCTION. CIT(A) WAS SATISFIED BY THE EXPLANATION GIVEN AND TOO K THE VIEW THAT ONCE DEBT HAD BEEN WRITTEN OFF AS BAD, THE SAME HAD T O BE ALLOWED AND IT WAS NOT REQUIRED TO BE PROVED THAT IT HAD ACTU ALLY BECOME IRRECOVERABLE. AGGRIEVED BY THE SAID DECISION, REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 6.1 BEFORE US THE LD. AUTHORISED REPRESENTATIVE SUBMITTED T HAT THERE WERE NO DISPUTES THAT DEBTS WERE TRADING DEBTS. AO HAD DISALLOWED THE CLAIM ONLY ON THE GROUND THAT THERE WAS NO EVIDEN CE TO PROVE THAT IT HAD BECOME IRRECOVERABLE. IT WAS FURTHER SUBMITTED THAT THE ACTION OF AO COULD NOT BE JUSTIFIED IN VIEW OF THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF TRF LTD. (323 ITR 397) I N WHICH IT HAS BEEN HELD THAT BURDEN WAS NO LONGER ON THE ASSESSEE TO P ROVE THAT THE DEBT HAD ACTUALLY BECOME IRRECOVERABLE DURING THE YEAR . THE LD. DR PLACED RELIANCE ON THE ORDER OF THE AO. ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 29 6.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTE R CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF B AD DEBT WHICH HAD ARISEN ON ACCOUNT OF TWO PARTIES I.E., IDBI AND KEVIN CARE PVT. LTD. AGGREGATING TO RS.2,72,934/- . THE AO HAS NOT DISPUT ED THAT THE DEBTS WERE TRADING DEBTS AND MADE THE DISALLOWANCES ONLY ON THE GROUND THAT THERE WAS NO EVIDENCE TO PROVE THAT THE D EBT HAD BECOME IRRECOVERABLE DURING THE YEAR. THE ACTION OF THE AO CANNOT BE SUSTAINED IN VIEW OF THE AMENDED PROVISIONS FROM ASSESSMENT YEAR 1989-90 AS PER WHICH THE ONLY REQUIREMENTS FOR ALLOWIN G BAD DEBT IS THAT THE DEBT SHOULD HAVE BEEN TAKEN INTO ACCOUNT IN T HE COMPUTATION OF INCOME OF THE EARLIER YEAR AND SHOULD HAVE BEEN ACT UALLY WRITTEN OFF IN THE BOOKS OF ACCOUNT. THE BURDEN IS NO LONGER ON T HE ASSESSEE TO PROVE THAT THE DEBT HAD ACTUALLY BECOME IRRECOVERABLE WHICH IS SUPPORTED BY THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CASE OF TRF LTD. (SUPRA). FOLLOWING THE SAID JUDGMENT WE SEE N O INFIRMITY IN THE ORDER OF CIT(A) AND THE SAME IS THEREFORE, UPHELD . 7. IN THE RESULT, I) THE APPEAL OF THE DEPARTMENT FOR A.Y 2000-01 & 2001-02 ARE ALLOWED, WHEREAS THOSE FOR A.Y 2002-03, 2004-05, 2005 -06 ARE PARTLY ALLOWED. ITA NO. 5568/M/05 + (7 APPEALS)[KOTAK MAHINDRA] A.YS:00-01 TO 05-06 30 II) THE APPEAL OF THE ASSESSEE FOR A.Y 2001-02 IS DISMISSE D WHEREAS THAT OF A.Y 2002-03 IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14.10.2011. SD/- SD/- (D. MANMOHAN) (RAJENDRA SINGH ) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 14.10.2011. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.