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TMI Blog2003 (5) TMI 230X X X X Extracts X X X X X X X X Extracts X X X X ..... itor unless the AO proves that the special auditor has not given a correct audit report. 5. The allegation of the Department is that the special audit Report, which was incomplete and did not furnish the details required in the notice under s. 142(2A), could not be relied upon. Since the grounds No. 1 to 4 are argumentative in nature, we do not consider to reproduce the same here. 6. The facts concerning this issue has been set out in the assessment order and in the appellate order in detail. However, we consider it proper to briefly mention the facts relating in the special audit. There facts are as under: (i) The assessee-company carried on the business as a residuary non-banking company (RNBC) as defined in Art. 2 of Part II of the residuary non-banking companies (Reserve Bank) Directions 1987. During the assessment year under consideration, it mobilized deposits from its members under seven different schemes. The total amount of deposits was at Rs. 85,52,52,37,618. The assessee had also collected service charges directly from depositor at Rs. 28,23,37,872. (ii) The assessee-company filed its original return of income on 30th Nov., 1996, for the asst. yr. 1996-97. The return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of his observations as contained in para 4.5 of his order is as under: "4.5 It would be found from a close reading of the provisions of s. 142(2A) that a direction under that section can only be issued to the assessee and not to the special auditor and in the instant case also the assessee was directed to get the accounts audited by the special auditor within the time allowed. So, it was the responsibility of the assessee to get the audit done comprehensively in accordance with the specific directions given to it by me under s. 142(2A). If the assessee felt that the time provided was not sufficient to comply with my directions it was open to it to approach me for an extension of time which would have been granted by me upto the maximum period of 6 months as provided in s. 142(2A). But the assessee did not do that. In fact, the time originally allowed was fixed at one month keeping in mind that the assessee did not co-operate in getting the special audit done in the asst. yrs. 1994-95 and 1995-96 and there was a possibility that they might not co-operate this year also in which case allowing a longer time initially would unnecessarily delay the assessment and would serve no u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be accepted by the AO while framing the assessment. In para 4.7 of the assessment order the AO says that the special auditor has furnished the expenses on the basis of the figures furnished by the assessee. It is not known as to from where the auditor will manufacture the figures and in any case the relevant figures as required by the auditor have to be furnished by the appellant only. I, therefore, hold that the assessment order has to be framed in accordance with the observations of the special auditor unless the AO proves that the special auditor has not given a correct audit report." 7. The Department has challenged the above observations by taking grounds on 1 to 4 before us. 8. The learned senior Departmental Representative Shri S.C. Sen has assailed the audit report on various grounds. In doing so, he has mainly supported the order of the AO, who has treated the report as incomplete and demonstrative only According to Shri Sen, the special auditor appointed by the AO was to submit the report as per the terms of reference and if there was any difficulty with the special auditor, he should have made representation through the assessee and not directly to the AO. His next ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reliance on the audit report and submitted that having regard to the nature and complexity of the accounts, the special auditor was appointed and, therefore, the task assigned to him was to be done by him alone. According to the learned authorised representative, the auditor had discussed the matter with the AO and submitted that report only after such consultations. In this regard, it was argued by him that the AO, who is a statutory authority to make such appointment, has inherent power to modify the directions and extend the time for sufficient and good reasons. It was also pointed out that since the directions are issued by the Department to the special auditor and further since the special auditor is appointed by the Department, therefore, the empowerment by the AO to the special auditor is fully justified. The learned counsel also pointed out that in the case of the assessee as well as in the case of its sister-concern, special auditing is done almost every year and it was the third consecutive year in which the special audit was directed. Regarding the demonstrative aspect of the report, it was submitted by the learned counsel that in a case involving voluminous documents, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T (Central. Lucknow, and the test checking done and disclosures in the report are demonstrative but not exhaustive or full. However, it was discussed with the authorities mentioned hereinbefore and only upon their orally agreeing for demonstrative reporting, audit was started, hence, figures reported are on the basis of test vouching and ledger scrutiny of books specified in terms (i) hereinbefore. In our opinion and to the best of our information and according to the explanations given to us, the said accounts give a true and fair view: (a) In the case of the balance sheet of the state of the above named assessee's affairs as at 31st March, 1996; and (b) In the case of P&L a/c of the profit of the above named assessee for the accounting year ending on 31st March, 1996. The prescribed particulars and such other particulars as were required by the (AO), the Asstt. CIT CCI, Lucknow, by his order Ref. No. ACIT/CC-I/LKC/98-99 dt. 25th Jan., 1999, are annexed hereto. In our opinion and to the best of our information and according to explanation given to us, these are true and correct." 12. The learned CIT(A) has also reproduced the above portions of the letter is para. 18 of his or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... auditor is not binding upon the AO, because, if such a view is taken, then the statutory power conferred upon the AO under s. 144 and 145 shall not be available to him and he shall be bound to make the assessment only on the basis of such a report alone. This is not the object of s. 142(2A). The report of the DVO also cannot be equated with the report of the special auditor, because sub-cl. (6) of s. 16A of the WT Act, 1957, provides that on receipt of the order under sub-s. (3) or sub-s. (5), from the valuation cell, the AO shall, so far as the valuation of the asset in question is concerned, proceeds to complete the assessment in conformity with the estimate of the Valuation Officer. It is to be pointed out that no such provision has been made in IT Act, 1961, for making assessment in conformity with the special audit report. 17. The caption of s. 142 and s. 142(2A) is "Inquiry before assessment". This caption suggests that the AO can make inquiry and for such an inquiry, he can, at any stage of the proceedings, direct the assessee to get the account audited by an accountant. The modalities of appointment of the auditor are set out in this provision. However, it is nowhere provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the required details, then the AO was expected to grant further time to the special auditor and to issue further directions. In case, the report was not satisfactory then other special auditor could have been appointed under s. 142(2A), such course is not barred. Under s. 142(3), it is provided that the assessee shall be given an opportunity of being heard in respect of any material gathered on the basis of any inquiry conducted under sub-s. (2) or any audit report under sub-s. (2A) and proposed to be utilized for the purposes of the assessment. This provision is as under: "(2A) If, at any stage of the proceedings before him, the AO, having regard to the nature and complexity of the accounts of the assessee and the interests of the Revenue, is of the opinion that it is necessary so to do, he may, with the previous approval of the Chief CIT or CIT, direct the assessee to get the accounts audited by the accountant, as defined in the Explanation below sub-s. 2 of s. 288, nominated by the Chief CIT or CIT in this behalf and to furnish a report of such audit in the prescribed form duly signed and verified by such accountant and setting forth such particulars as may be prescribed and su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e kept in mind that the expenses of special auditor are borne by the assessee. Hence, the financial burden cast upon the assessee should always be kept in mind. 22. In view of the above, we do not accord our approval to the approach of AO and to the treatment given by him to the report of special auditor. However, on perusal of the order of the learned CIT(A), it is found that the learned CIT(A) has also not gone by the report of the special auditor, although he has observed that the assessment order had to be framed in accordance with the observations of the special auditor. He has considered other evidence and other material while adjudicating various issues. Although the learned CIT(A) was not justified in holding that the special audit report was binding but in the context of the facts and circumstances of the present case, which have been narrated above, the report should have been duly considered alongwith other material. However, since neither the AO has accepted the report nor the learned CIT(A) has placed absolute reliance on such report alone for deciding the various issues, the discussion remains only of academic interest. The grounds taken by the Department are, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kerala High Court in Edayanal Constructions vs. CIT (1990) 183 ITR 671 (Ker) and the decision of Delhi High Court in the case of CIT vs. Sofia Finance Limited (1993) 113 CTR (Del) 472 : (1994) 205 ITR 98 (Del). 25. The addition of Rs. 8,55,25,37,618 was challenged before the learned CIT(A). He has considered the issue in detail and has set aside the finding of the AO and has restored the matter back to him for deciding the issue afresh. The relevant findings and directions of the learned CIT(A) are contained in paras 168 to 171, which are as under: "168. The AO in the assessment order has said that there was very little time available for making test checks out of the deposits, whose details were furnished by the appellant. The appellant also claims that the time given to him was too short to furnish such details because the details of 2 branches themselves out of the 100 branches called for vide notice dt. 8th March,1999, were running into 37579 pages and 30 volumes and there was no reply to the appellant's letter dt. 4th Jan., 1999, by which the appellant offered to furnish the complete details of all deposits. The appellant submitted that with respect of 192 branches detailed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tity of the depositors, the genuineness of the transactions and the capacity of the depositors, despite repeated directions, the AO was fully justified in making addition under s. 68 of the IT Act, 1961, He also contended that, in view of the provisions contained under s. 68 of the IT Act, 1961, the Department is entitled and is rather under a legal obligation to inquire about the nature and source of sums credited in the books of account of the assessee. After making reference to several directions notices and also inquiries made by the AO, the learned Sr. Departmental Representative submitted that the response pattern of the assessee was not co-operative and, therefore, the AO was left with no option but to make inquiries independently. According to him, therefore, the AO cannot be blamed for not providing sufficient opportunity to the assessee. According to him, the learned CIT(A) has not properly appreciated the observations of the AO, which go to show that there was sufficient room for doubting the genuineness of the transaction of the assessee. 27. On the other hand, the contention of the learned counsel for the assessee was that the assessee had always co-operated and provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of learned CIT(A) and particularly paras 168 to 171, we find that whereas he has totally rejected the approach of the AO in making the addition of Rs. 8,55,25,37,608 and has deleted this addition as observed by him in para 168. However, vide para 171, he has restored the matter back to the AO for deciding the issue afresh. Hence, his own approach appears to be inconsistent and self-contradictory. However, since the direction of the learned CIT(A) contained in para 171 has been given effect by the Department and fresh assessment has been made by adjudicating the issue de novo, there remains little scope to reverse the findings of the learned CIT(A) on the ground of inconsistency. In any case after going through the entire material and, in particular, paras 162 to 169 of the order of the learned CIT(A). We do not find any force in the grounds taken by the Department as we are unable to uphold the approach adopted by the AO. Our reasons for coming to this conclusion are as under: (i) The AO has not considered the nature of the business of the assessee while making addition under s. 68. The assessee is a non-banking financial institution, which was recognized by the Reserve Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The approach of the AO in making addition on account of total deposits of Rs. 833 crores collected by the assessee is not in consonance with the approach of the Department adopted in earlier years. It was submitted on behalf of the assessee that prior to asst. yr. 1993-94, no addition was made and in asst. yr. 1994-95 and 1995-96, addition of 15 per cent of the opening balance and 30 per cent of the closing balance was made and in asst. yr. 1996-97 i.e., the assessment year under consideration, addition on account of 100 per cent deposits have been made. It was also pointed out that in the asst. yr. 1992-93 while making fresh assessment under s. 141(3)/254/148 of IT Act, 1961, vide order dt. 15th March, 2002, the AO has estimated the unexplained deposits to the extent of 50 per cent of the deposits collected during the year. Thus, there is no consistency in the approach of the Department. (iv) So far as the verification part is concerned in the case of the assessee, books of account are put to check and test by the authorities. The schemes are run by the assessee under the direct supervision of Reserve Bank of India. The accounts of the assessee are audited by the tax auditors, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edgers filed by the appellant (Basti and Khalilabad) 2 branches One branch details submitted on 4th Jan., 1999 (Gomtinagar) 1 branch Branches examined in the case of appellant's agent 8 branches Branch examined in the case of Sahara India Mutual Benefit Co. Ltd. 1 branch Branches checked by the special auditor 173 branches 192 branches (vii) Before the learned CIT(A) also, further fresh evidence was filed. The list of confirmation from depositors is available at pp. 1232 and 1233 of the paper book. Even the photocopy of the applications and confirmations etc. have been filed, which are available at pp. 1235 to 1291. The list of commission agent with code has also been given at p. 1292 and their confirmations have also been filed. Thus, before the learned CIT(A), the assessee had filed lot of material and after examining the same, the learned CIT(A) deleted the addition. Thus, it is not the case where verification was not made or the assessee did not co-operate or on verification, transactions were found to be of dubious nature or fake or non-genuine, rather in most of the matters, the deposits were found to be verified. Thus, there is no justification for treating of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (xi) In the case of CIT vs. Rohini Builders (2003) 182 CTR (Guj) 373 : (2002) 256 ITR 360 (Guj) it was held that unsatisfactorieness of the explanation of the assessee does not mean and need not automatically result in deeming the amount credited in the books as income of the assessee. In that case, the Tribunal had observed that the assessee was not expected to prove the genuineness of the cash deposit in the bank of these creditors, because under law, an assessee can be asked to prove the source of credits in its books of account, but not the source of source. This view of the Tribunal was upheld by the Hon'ble High Court and the SLP filed by the Revenue against the judgment of the Gujarat High Court was also dismissed. Thus, the provisions of s. 68 cannot be applied without having regard to the nature of deposits etc. (xii) In the case of Dy. CIT vs. Dhanalakshmi Bank Ltd. (2002) 76 TTJ (Cochin) 489, the Cochin Bench of ITAT, while considering the scope of burden of proof in the case of cash credit has observed as under: "Failure of brach manager, who identified certain deposits alone is not sufficient to treat the deposits as income of the assessee and add the same in the h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res. If not listed, to furnish the valuation of unquoted shares as per IT Rules, and to state why share premium amount may not be treated as its income." 34. According to the observations of the AO recorded in para 11.2, the reply of the assessee was that the shares were mobilized by way of private placement through more than 1200 branches maintained by its Agent, namely, M/s Sahara India it is also mentioned that the assessee furnished a list of persons to whom shares of more than Rs. 1 lakh were issued, which included the names of only three Directors. According to the AO, the assessee took several adjournments, but did not furnish the relevant material rather only the details of share applications were in two volumes were furnished. The AO also mentioned that the Departmental inspectors were deputed to collected the information directly from the shareholders, but most of the shareholders were not available. He also issued notices to the assessee as to why addition on account of unexplained credit under s. 68 may not be made. In reply, the assessee made a detailed submission. The AO rejected the reply of the assessee by assigning the reasons, which are contained in para 11.3. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld indeed be his duty to do so, whether the alleged shareholders do in fact exist or not. If the shareholders exist, then possibly no further enquiry need be made. But if the ITO finds that the alleged shareholders do not exist then, in effect, it would mean that there is no valid issuance of share capital." 206 On the same page the Delhi High Court has further held: "If the shareholders are identified and it is established that they have invested money in the purchase of shares then the amount received by the company would be regarded as capital receipt." 36. The learned CIT/Departmental Representative, Shri Sen has challenged the view taken by the learned First Appellate Authority. He has placed reliance on the observations and the findings of the AO, which are contained in para Nos. 11.1 to 11.9 of the assessment order. According to the learned Sr. Departmental Representative, the assessee did not discharge the burden which lay upon it for proving the identity of the investors, genuineness of transaction and the capacity of the depositors. On the other hand, the learned counsel for the assessee supported the order of the learned CIT(A). 37. The issue relating to the scope o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... teller Investment, stands merged with the order of the Hon'ble Supreme Court of India and in view of that decision, the rest laid down by the Hon'ble Delhi High Court in Steller's case stands approved by the Hon'ble Supreme Court of India and in view of the legal position emerging from the decision of the Hon'ble Supreme Court of India, the concept of proof identity of shareholder as a genuine investor cannot be uphold as a legally sound test. (ii) In the case of Sophia Investment also, the Full Bench of Hon'ble High Court, has observed that if the shareholder exists, then possibly no further inquiry need be made. This is clear from the following portion of the Hon'ble Court: "If the amount credited is a capital receipt then it cannot be taxed but it is for the ITO to be satisfied that the true nature of the receipt is that of capital. Merely because the company chooses to show the receipt of the company as capital, it does not preclude the ITO from going into the question whether this is actually so. Sec. 68 would clearly empower him to do so. Where, therefore, the assessee represents that it has issued shares on the receipt of share application money then the amount so received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, but in case after the above test is satisfied, an additional test of proving shareholder as genuine investor is applied, then his capacity to invest has also to be examined, which test will not be even in consonance even with the test laid down in the decision of Full bench of Hon'ble Delhi High Court in the case of Sophia Finance. (iii) In the case of CIT vs. Smt. P.K. Noorjahan,, the Hon'ble Supreme Court of India has affirmed the decision of Hon'ble Kerala High Court. In that case, the issue related to investments made by the assessee, a Muslim lady aged 20 years, in the purchase of land, which was not found recorded in the books of accounts. The explanation of the assessee as to the source for the purchase money for the investment was not found to be satisfactory by the AO, who made addition under s. 69. The AAC concurred with the findings of the AO. The Tribunal found the explanation about the nature and source of purchase money unsatisfactory, but it was of the opinion that although the explanation was liable to be rejected, but s. 69 of the IT Act, 1961, conferred only the discretion of the ITO to deal with the investment as income of the assessee and that it did not mak ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discharged the initial burden, which lay on it in terms of s. 68 by proving the identity of the creditors by giving their complete addresses, GIR Nos./PAN and copies of assessment orders, wherever readily available, that it had also proved the capacity of the creditors by showing that the amounts were received by the assessee by account-payee cheques drawn from bank accounts of the creditors. It was further observed by the Tribunal that the assessee was not expected to prove the genuineness of the cash deposit in the bank of those creditors, because under law an assessee can be asked to prove the source of creditors in its books of accounts, but not the source of the source. On this basis, the addition of Rs. 12,85,000 was deleted by the Tribunal. The Hon'ble High Court dismissed the appeal against the order of the Tribunal. The SLP filed by the Revenue against the judgment of Gujarat High Court (2002) 254 ITR (St) 275, was dismissed. Thus, the view of the Tribunal was upheld upto the stage of Hon'ble Supreme Court of India. In view of the above decision also, the assessee cannot be required to prove the source of the source and if the test of proving the identity of the sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , not of the explanation of the assessee, but of the explanation regarding the sources of income of the depositors, could not by itself lead to any inference regarding non-genuine or fictitious character of the entries in the assessee's books of account." (vii) The issue relating to onus of the assessee for proving the genuineness of the deposits under s. 68 also came before this Bench of Tribunal in the case of Krishna Avtar, M/s Krishna Agencies (ITA No. 6289/Del/94 and ITA No. 6256/Del/94). These appeals were decided by us following the decision of the Hon'ble Patna High Court referred to above and the other decisions. (viii) The Hon'ble Allahabad High Court has also considered the issue in the case of Nanak Chandra Laxman Das vs. CIT (1982) 28 CTR (All) 280 : (1983) 140 ITR 151 (All). In that case, the following observations were made by the Hon'ble Court: "Held, (i) that a mere confirmation letter from the alleged creditor could not be treated as sufficient evidence to prove the genuineness of the loan and the Tribunal was not swayed by any irrelevant consideration in arriving at its finding. Further, the assessee itself foreclosed any further enquiry in the matter by agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is clear i.e., the assessee has to show that the shareholders or the investors exist and if their identity or existence is proved by the assessee and it is further proved that they have invested the money, then no further inquiry can be conducted from the assessee regarding the capacity of the shareholders. In the instant cases, therefore, the learned CIT(A) was fully justified in holding that the inquiry shall be conducted by the AO and the addition shall be confined only in those cases, where the shareholders are found to be non-existent. Thus, we uphold the approach of the learned CIT(A) and reject ground Nos. 8 & 9. 40. Ground No. 10 is directed against deletion of addition of Rs. 81,50,93,679 on account of reimbursement of expenses. The facts concerning this matter are as under: (I) The assessee-company was collecting deposits under various schemes and for mobilizing the resources, it entered into an agreement and an MoU was executed between the assessee and the agent i.e., M/s Sahara India. Under the MoU dt. 22nd March, 1995, the agent was entrusted with the task of collecting requisite amount from the members of saving schemes and to send the same to the assessee-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a India Financial Corporation Ltd. Sahara India Financial Corporation Ltd. shall always have the right to verify these expenses. If it wants to do so, at any time and Sahara India will have no objection to Sahara India Financial Corporation Ltd. verifying the expenses. The MoU was executed for a period of three years and became effective from 1st April, 1995. Hence, for the assessment year under consideration, the clauses of this MoU regulate the payments of expenditure etc. to the agent by the assessee for rendering the services in carrying out its business activities. In view of this agreement/MoU, the agent issued debit notes to the assessee-company for claiming reimbursement of expenses. (II.) So far as the assessment year under consideration is concerned, the assessee had claimed following amounts as expenditure on account of expenses reimbursed to its agent under the terms and conditions of the MoU referred to above: (a) Rs. 1,01,10,35,500 This amount was claimed in the original return dt. 30th Jan., 1996, on the basis of debit note which is available at p. 1052 of the paper book. The debit note is dt. 8th Oct., 1996, and relevant part of it has been reproduced by the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business of the assessee : There are 2 types of expenses: (1) Incurred directly by the assessee in the ordinary course of its carrying out the business activities and (2) Incurred by its agent M/s Sahara India (Firm). The expenses incurred by the agent M/s Sahara India (Firm) are again of 2 types: (i) Directly relatable to procurement of business and collection charges paid to collectors for collecting instalments from the depositors, and (ii) Deposit service charges which are reimbursed by the Principlal in accordance with the agreement with the said agent. The details of the expenses reimbursed to the agent are given hereunder: Particulars of expenditure Amount reimbursed to M/s Sahara India (Firm) (Rs.) (a) Commission 52,53,17,942 (b) Collection charges 20,35,36,740 (c) Salary 13,74,64,314 (d) Incentive 1,96,95,388 (e) Rent 2,92,66,756 (f) Travelling 2,42,79,799 (g) Stationery 3,61.71,369 (h) Bank Charges 78,20,490 (i) Postage & Telegraph 72,88,114 (j) Office Maintenance 22,10,058 (i) Advertisement 22,10,058 (k) Advertisement 28,25,718 (l) Cutting, Folding & Binding charges 26,66,478 (m) Repairs & Maintenance 74,23,392 (n) Other expenses 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following submission was made. "As already explained to your honour on the last date of hearing, the expenses which are reimbursed to the agent are in accordance with the terms of Memorandum of Understanding. The direct expenses are reimbursed on actual basis. These expenses, comprise of daily collection facility charges, commission, promotional and development expenses. The indirect expenses are reimbursed on pro rata basis. These expenses comprise of salary, incentive, rent, travelling, stationery, Bank charges, postage and telegraphs, office maintenance, advertisement, cutting, folding and binding charges, repair and maintenance and other expenses and the details thereof are being given in the debited note enclosed herewith." VII. The AO considered the method of accounting adopted by the assessee of the agent-firm and pointed out that whereas the agent-firm was maintaining account on the basis of cash system, the assessee was following mercantile system of accounting. On this basis, he pointed out inconsistency in the accounts of the assessee. His relevant observations as contained in para 6.2 at p. 23 of the assessment order which are as under: "Since the claim of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o observed that the expenses which are claimed by the assessee have to be verified from the books of account of the assessee itself and not from the books of account of its agent. The AO also examined the books of account of the agent, M/s Sahara India with reference to the expenses claimed by the said assessee. The Assessing Officer has further stated in para. 7.3 of the assessment order that he made effort to test-verify certain expenses, namely commission and other expenses about Rs. 1,00,000 by obtaining details from the agent and sending notice under s. 133(6) to the parties concerned. The result of this enquiry was confronted to the assessee. XI. Thus, the AO rejected the claim of the assessee, but on the basis of the past history and following his order for 1989-90 and 1990-91 and ignoring the order of the Tribunal on the ground that reference application has been filed against the judgment of the Tribunal, the AO adopted the method of allowing expenditure @ 3 per cent of the total deposit mobilized during the assessment year under consideration. XII. The AO, thus, allowed expenditure of Rs. 25,65,76,128 which was 3 per cent of the total deposit of Rs. 8,55,25,37,618. Thus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the learned AO has erred in law and facts on record in disallowing a sum of Rs. 85,04,86,984 out of claim of reimbursement of expenses to agents in original return as well as revised return and revised computation as under: (a) Rs. 75,44,59,372 being reimbursement of expenses to agent (b) Rs. 5,51,81,673 being reimbursement of expenses to agent (c) Rs. 54,52,534 being collection charges to agent. (d) Rs. 28,23,379 being service charges to agent. (e) Rs. 3,25,70,026 being reimbursement of expenses to agent." The learned CIT(A) has discussed the addition from para 34 to 46 of his order. He has narrated the facts and the submissions of the assessee, from para 46 to 82 and from para 83, he has recorded his findings and observations. XV. In para 86, the learned CIT(A) has set aside the issue relating to the amount of Rs. 5,51,81,673 on the ground that it is not part of the amount reimbursed by the assessee and relates to his own administrative expenses. XVI. So far as amount of Rs. 29,23,379 is concerned, according to him, since it related to service charges payable to the agent as per MoU, this again is not an amount reimbursable to the agent. He followed the order of the Tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is on the assessee who claims expenditure. In support, the learned CIT placed reliance on the decision in the case of CIT vs. Motor General Finance (P) Ltd. (2002) 173 CTR (Del) 123 : (2002) 254 ITR 449 (Del) and also on the decision reported in Goodlas Narolac Paints Ltd. vs. CIT (1982) 28 CTR (Bom) 186 : (1982) 137 ITR 58 (Bom). He also placed reliance on the following decisions: 1. Smt. Indermani Jatia vs. CIT (1951) 19 ITR 342 (All) 2. J.K. Woollen Mfrs. (P) Ltd. vs. CIT (1963) 48 ITR 346 (All) Thus, the contention of the learned CIT was that the AO was justified in his approach in making the addition and the learned CIT(A) erred in deleting the addition. 42. The learned counsel for the assessee, Shri Thakkar, on the other hand, supported the order of the learned CIT(A). According to him, the AO was not justified in rejecting the claim of the assessee and in following the past practice by applying the method of 3 per cent of the total deposit for allowing the expenditure. The learned counsel for the assessee also pointed out that so far as the order of the Tribunal in earlier years is concerned, there remains no finality to that order because subsequently on this issue, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at this stage. It may also be pointed out even before the Tribunal, the assessee has not taken any ground in this regard. Since detailed investigation on facts is needed for considering such an oral plea taken before us, such plea cannot be considered at the stage of hearing the appeal. 46. It may be pointed out that since the learned CIT(A) has considered the facts relating to this issue in detail and has also made reference to entire relevant material including the orders passed by various authorities and the Tribunal earlier, we are not required to repeat the facts and the various orders again in this order and proceed to record our findings after considering the entire material. We have gone through the order of the AO as well as that of the learned CIT(A) and we find unable to agree with the approach adopted by the AO Our reasons for holding so are as under: (1) The assessee made its claim on account of reimbursement of expenses on the basis of debit notes issued by the agent-firm. These debit notes were in consonance with the terms and conditions of the MoU dt. 22nd March, 1995 applicable for this assessment year, relevant clauses of which have been reproduced above. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hers by the assessee for verifying the expenditure does not arise. The AO, therefore, was not at all justified in rejecting the claim of the assessee on the ground of unverifiability of the expenses. 50. In the context of the above, it may further be pointed out that the AO was simultaneously examining the books of account of the agent-firm. As pointed out by the learned CIT(A) in para 76 of his order in the case of M/s Sahara India, queries were made by the AO for furnishing the bills raised by it for reimbursement of expenses for giving break up of expenses pertaining to command office and para banking with evidence in support thereof, month-wise and principal-wise break up of expenses, apportionment of reimbursement of expenses between the agent and principals and the exact basis on which the account of reimbursement of expenses of principals was worked out and on these queries, detailed replies were given by that assessee. Thus, the expenses incurred by the agent-firm were thoroughly examined by the statutory auditors, special auditors and also by the AO while making assessment of that assessee. This was a proper course also, because the verifiability of expenses can be consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear. 52. Another aspect of the matter in asst. yr. 1992-93 is that the Tribunal had estimated expenditure by applying percentage of 4.5 per cent of the total deposits. While doing so, the Tribunal also observed in para 63 of its order as under: "This is a common knowledge that after a particular point, progress requires considered efforts and more often than not incurring of heavy expenditure. On the basis of this observation, the Tribunal raised the percentage from 2.79 in asst. yr. 1990-91 to 4.5 per cent in asst. yr. 1991-92 against 3 per cent allowed by the departmental authorities." The learned CIT(A) has also shown figures of total collection in percentage of expenses in para 96 of his order and according to him in 1996-97, the claim of the assessee towards reimbursement of expenditure was at 11.87 per cent of the total deposits collected. According to the learned CIT(A), this percentage is allowable even on the basis of observations of the Tribunal." 53. It may also be pointed out that even the order of the Tribunal applying the formula of 4.5 per cent of total deposit has been set aside and after recalling the earlier order, direction was given by the Tribunal to re-exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be a correct approach. 56. The Department has placed reliance on the following decisions: (a) CIT vs. Rayala Corporation (P) Ltd. (1995) 215 ITR 883 (Mad) (b) Manian Transports & Ors. vs. S. Krishna Moorthy, ITO (1991) 191 ITR 1 (Mad) (c) Lachminarayan Madan Lal vs. CIT 1972 CTR (SC) 418 : (1972) 86 ITR 439 (SC) (d) Bhavna Chemicals Ltd. vs. CIT (1998) 149 CTR (SC) 336 : (1998) 231 ITR 507 (SC) (e) Goodlas Narolac Paints Ltd. vs. CIT (f) CIT vs. Motor General Finance Ltd. (g) J.K. Woollen Mfrs. (P) Ltd. vs. CIT 57. The various cases on which reliance has been placed on behalf of the Department are distinguishable on facts from the present matter. (A) It may be pointed out that in the case of J.K. Woolen Mfrs. Ltd. vs. CIT, the issue related to applicability and scope of s. 10(2)(x) of the Act; it was held that even if there was an express agreement to pay commission at certain rates, the question of its admissibility can be considered under s. 10(2)(x) of IT Act, 1961. In that case, the assessee, who had taken textile mill on lease appointed a person as its Power of Attorney Agent and this person appointed his own son, who was only an under-graduate and who had no spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue in the books of account or unless it was not a bona fide transaction, it is not open to the Taxing Authorities to disregard the figures of the transaction shown in the books of account of the assessee. (G) In the case of Siddho Mal & Sons vs. ITO (1980) 122 ITR 839 (Del), the Hon'ble Delhi High Court considered the issue relating to allowability of expenditure and held that an expenditure is to be allowed if it satisfied the test of commercial expediency and commercial expediency has to be judged from the point of view of the assessee, who knows best how his business has to be run, but such point of view has to be a prudent reasonable point of view, which is free from an apparent excessiveness, collusiveness or a colourable discretion. After making this observation the Hon'ble High Court has laid down the following test: "Thus, on one hand, it is not for the ITO to judge whether the assessee could have avoided to reduce a particular expenditure, but on the other hand, unreasonable higher or excessive expenditure would normally and correctly caution the ITO to examine it more carefully and if combined with other circumstances. It leads to conclusion that the motive behind the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after recalling the order of the Tribunal, the matter was restored to the AO for readjudication. Thus, the order of the Tribunal for asst. yr. 1992-93 allowing expenditure at 4.5 per cent did not remain final. In our order dt. 31st Jan., 2001 rendered in ITA No. 374/All/96, while restoring the matter to the AO for deciding the same afresh, we have directed that the issue should be decided after taking into account the relevant material and assessment order of the firm. Hence, we adopt the same approach in this assessment year also. Since the assessment order of the firm has not been filed before, us, we direct that the issue relating to the reimbursement of expenses should be decided after considering such assessment order and if on verification the expenses have been allowed in the case of the firm, then the claim of the assessee should also be allowed. Therefore, this aspect should also be considered as per our directions and observations in that case. 58. The assessee had claimed total expenditure at Rs. 1,01,10,35,500. This claim is out of total expenditure of Rs. 1,52,01,00,000 which is shown in Annexure "A" at p. 143 of the order of learned CIT(A). These figures are also g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his assessment year. On the basis of the above, ground No. 10 is decided accordingly. Ground No. 11: 63. The assessee had also claimed a sum of Rs. 2,92,66,756 on account of rent. This figure was included in the total sum of Rs. 1,01,10,35,500 claimed under the head "Reimbursement of Expenses to the Agent" Under the head "Administrative and Other expenses", which totalled at Rs. 7,19,62,174, the amount of rent was shown at Rs. 2,23,80,594. The break up of this amount was shown as under: Mumbai Rs. 74,37,973 Lucknow Rs. 1,49,42,621 Rs. 23,23,80,594 64. The verification of the ledger account of rent pertaining to Sahara T.V. Mumbai, it was found that the amount of Rs. 74,37,973 was debited to that account being rent paid to Mumbai Office to M/s Champion Engineering. The AO also noticed that the assessee had not maintained any establishment of its own pertaining to its para banking business and all the expenses in connection thereof were incurred by the Agent, which were reimbursed to the agent by the assessee. The AO asked the representative of the assessee to clarify as to how the amount of Rs. 1,49,42,621 appearing against R.O. Lucknow was separately allowable to the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant. Accordingly, I delete the addition of Rs. 3,81,000 made by the AO." 66. Before, us, it was submitted that since the AO did not consider the letter dt. 24th Dec., 1998, which has been considered by the learned CIT(A), the addition was being wrongly made by him. After considering the entire material, we restore the matter to the AO and direct him to decide this issue after taking into, account the letter dt. 24th Dec., 1998, in which details of rent were given and which details have been considered by the learned CIT(A) for statistical purposes, this ground is allowed. Ground No. 12 67. This ground runs as under: "12. That the learned CIT(A) has erred in law as well as on facts in holding that liability for interest on deposit was real and not contingent as held by the AO." 68. The AO has found that the assessee provided interest of Rs. 71,03,37,564. The break up of this amount is as under: On deposit received under financial schemes run by the company 70,22,80,000 On other loans 80,57,564 71,03,37,564 69. The AO has examined various schemes run by the assessee. He has also examined depositors account in the case of Rohit Kumar Gupta and Rajkumar and after considerin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sits and adopting the monthly product balance method (as for Annexure B) out of the total interest of Rs. 20,10,34,205 found otherwise allowable by me. Thus, the total interest allowed by me under s. 37(1) comes to Rs. 1,45,24,51,438 and the balance amount of Rs. 54,98,28,562 claimed by the assessee in the P&L a/c is disallowed and added back to its total income. The above view adopted by me finds support in the principles enunciated by the following judicial pronouncements. 1. CIT vs. H.R. Sugar Factory (P) Ltd. (1990) 87 CTR (All) 132 : (1991) 187 ITR 363 (All) 2. CIT vs. Saraya Sugar Mills (P) Ltd. (1993) 110 CTR (Ahd) 23 : (1993) 201 ITR 181 (All) 3. Manria & Sons vs. CIT (1979) 9 CTR (All) 170 : (1981) 129 ITR 475 (All) 4. Triveni Engg. Works Ltd.vs. CIT (1987) 167 ITR 742 (All). 70. The learned CIT(A) has considered the issue in para 106 to 130. His directions are contained in para 130, which is as under: "130. Looking to all these facts, I am of the opinion that the interest liability cannot be said to be a contingent or unascertained liability. Therefore, the action of the AO in disallowing the total provision of Rs. 70,22,80,000 and allowing the interest on payment b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the notional interest chargeable on the money pending for transmission with the agent. Accordingly, the addition of Rs. 4,85,82,757 (sic)." 73. The same issue has been considered by the Tribunal and the addition on account of retention of the funds by the assessee was deleted. The relevant part of the observations of the Tribunal and the order dt. 30th June, 1998, rendered in ITA No. 372 to 374/All/98 for asst. yr. 1989-90 to 1992-93 is contained in para 43 to 46, which are as under: "43. The next challenge by the assessee is in respect of an addition of Rs. 76,14,468 on the count that the calculation made on the floating balance lying with the Agents of the assessee was hypothetical, the outstanding remaining in the usual course of business. 44. The assessee placed reliance on an order dt. 26th Aug., 1996, rendered by the Tribunal in the case of their sister-concern, M/s Sahara Investment India Ltd., Lucknow for the asst. yrs. 1987-88 to 1989-90 where similar issue arose. The MoU dt. 17th Aug., 1987, referred to hereinbefore more than once is quite silent on the point. In the sister-concern's case referred to supra, the first appellate authority had taken the view that in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same as revenue expenditure. The claim of the assessee is not acceptable as from the nature of the expenses itself it is clear that the same are capital in nature. These expenses are covered by the expenditure mentioned in s. 35D(1)(C)(iv) and 1/10th of the total expenses is allowable under s. 35D(1) in the relevant year as deduction. But since the total amount of share capital raised by the assessee during the year has been treated by me as unexplained credit under s. 68, no deduction under s. 35D(1) is allowable for any expenses incurred in connection with the issue of those shares. Hence, the entire amount of capital issue expenses amounting to Rs. 1,16,27,702 is disallowed and added back to the total income of the assessee." 77. The learned CIT(A) has considered the matter in para 207 to 209. He has directed the AO to allow a deduction of Rs. 11,62,770 i.e., 1/10 of the expenditure incurred by the assessee. His observations are contained in para 209, which are as under: "209. I have considered the facts and circumstances and to me it appears that the AO has completely forgotten the facts as per provisions of s. 35D(1); expenditure by the appellant before the commencement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered the issue while deciding ground Nos. 8 & 9 in ITA No. 747/All/2000. Thus, our findings in relation to grounds No. 7 & 8 of appeal shall also apply to ground No. 12 of the cross-objection. Hence, ground No. 12 is decided accordingly. 88. Ground No. 3 & 4: These grounds are as under: 3. That the learned CIT(A) is not justified in confirming the disallowance of claim of excess provision written off amounting to Rs. 62,50,000. 4. That the learned CIT(A) has failed to appreciate that the aforesaid amount of Rs. 62,50,000 written back during the year has already been subjected to tax which was in the nature of provision of dividend income on mutual fund made in the preceding year. 89. The assessee has pointed out that in the preceding year, provision of Rs. 62,50,000 was made on accrual basis in respect of dividend receivable from mutual fund based on the rate of dividend declared by the mutual fund in the earlier year. It was further pointed out that as the dividend declared was less during this year, the provision made in earlier year was reversed to the extent of Rs. 62.50 lakhs, which was claimed as a deduction during this year, as the same accrued on the declaration of di ..... X X X X Extracts X X X X X X X X Extracts X X X X
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