9911796707
TMI Blog2006 (11) TMI 368X X X X Extracts X X X X X X X X Extracts X X X X ..... he investment-facilitator of the assessee-company. In the original return filed by the assessee, it has offered an income of Rs. 17,19,22,744 as income from the said PMS Accounts. The assessee-company has also claimed a deduction of Rs. 56,93,55,216 by way of interest eligible for deduction under section 36(1)(iii). The interest expenditure related to the new units set up by the assessee, but prior to the commencement of their operations. 3. In the original scrutiny-assessment completed under section 143(3), the income offered by the assessee-company under PMS was accepted and the interest expenditure claimed by way of deduction was allowed. The said assessment was taken in first appeal on certain other grounds and finally the income was determined at Rs. 105,11,65,009. This income has been determined on the basis of the order passed by the Assessing Authority w.r.t. section 250 of the Act on 25-6-1998. 4. Later on, in the course of assessment proceedings relating to the succeeding assessment year 1993-94, the Assessing Officer came across certain materials which might have bearing on the assessment of the impugned assessment year 1992-93. According to the Assessing Authority, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e first ground raised by the assessee before the CIT(A) was against the legality of the re-opening of assessment. It was the case of the assessee before the CIT(A) that the details of income and expenditure were furnished before the Assessing Authority in the course of original assessment itself and the reopening was made only for a change of opinion. On the basis of a detailed discussion from pages 2 to 18 of his order, the CIT(A) held that issue of notice under section 148 was justified at least at the time of initiation of the proceedings. Accordingly, the said legal ground was dismissed. 8. The second ground raised by the assessee before the CIT(A) was that the Assessing Officer has erred in adding back the interest expenditure of Rs. 56,93,55,216. The ground was considered by the CIT(A) in detail in pages 18 to 24 of his order. The Assessing Officer has added back the interest expenditure relying on various decisions including : Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 (SC) Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802 (SC) Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172 (SC). 9. The Assessing Officer had also distingui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al to show that the assessee-company was paid anything more what has been disclosed and returned by the assessee. (iii)The report of the Jankiraman Committee appointed by the Central Government to enquire into the PMS scheme and other matters of Security Scam and also the report of Joint Parliamentary Committee have consistently indicated Citibank for a number of violations and manipulations in respect of the PMS Accounts and have held that Citibank has fiddled away funds from the PMS Accounts. (iv)No agency has found out any evidence against the assessee-company or passed any adverse comments on the assessee-company in respect of the PMS Accounts managed by Citibank. (v)The unlawful conduct of the Citibank is evidenced by the penalty levied by Reserve Bank of India. (vi)The Citibank has issued certificates on 1-4-1992 and 3-1-1995 certifying that the returns passed over to the assessee from PMS Accounts were Rs. 171,19,22,744. (vii)The officials who made statements before the Assessing Officer were the officials of Citibank who had no personal knowledge of transactions made under PMS Accounts. (viii)The real character of the PMS Accounts with Citibank, was that of a deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invested the amount only in security permitted by Controller of Capital Issues. The understanding between the assessee and the Citibank was that it was entitled to 1 per cent return on unit lending (PMS Account Nos. 2 & 3) and 17 per cent on funds placed with bank (PMS Account Nos. 1 & 4). The assessee had received returns from the bank on the basis of this understanding. The assessee was not entitled to receive anything over and above the assured return nor has it received any higher amount from the bank. The above understanding is clear from a series of letters addressed by the bank to the assessee and vice versa during the period 1988 to 1992. (xi)M/s. Chandrakant & Seventilal, Chartered Accountants, in their interim report furnished to the Assessing Officer have pointed out a series of discrepancies in the script-wise details submitted by the bank. Some of the discrepancies highlighted by the Chartered Accountants are difference in purchase/sale rate on the same date for the same securities; Variation in Stock Exchange Quotation and Transaction rate; Transactions recorded when stock market was closed; Inter se Transaction in different accounts of the assessee; statement of pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order does not contain any clear indication of the materials used in computing and estimating the PMS Accounts income. (xvii)The officials who handled the PMS operation of Citibank were not made available for examination and cross-examination by the assessee. It has rendered the evidentiary value of the whole reassessment proceedings questionable. 12. The Assessing Officer has also placed his strong arguments before the CIT(A). His contentions and submissions before the CIT(A) are briefed below : (i)The transactions in the Four PMS Accounts have resulted in profit/income that has not been accounted, according to the respective transactions either by the assessee or by the Citibank. The assessee-company maintains that they were to receive assured/guaranteed/fixed return on its PMS Accounts whereas Citibank maintained that the assessee was entitled to receive entire profit/to incur loss from the PMS Accounts and it was not a case of assured returns. (ii)Script-wise accounts of transactions received from Citibank were handed over to the assessee-company and the copies of registers containing date-wise transactions etc. were also made available to the assessee-company an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er finding on this crucial issue of income earned by the assessees from PMS Accounts. The conclusions and answers arrived at by the CIT(A) against the points/questions framed by him are discussed in paragraphs 16.11 to 16.27 from pages 96 to 108 of his order. Those findings and conclusions arrived at by the CIT(A) are as follows : (i)The Assessing Officer has not been able to prove that there was sufficient materials to support the reassessment order. The Assessing Officer has not complied with the directions of the Hon'ble Bombay High Court given in the course of writ proceedings regarding the transactional documents on the basis of which the enquiries had to be made. (ii)The Hon'ble Bombay High Court has specifically directed the Assessing Officer to verify the Deal Slip of every transaction supposed to be maintained by Citibank, among other items of transactional documents. The Court has held that the Deal Slip is the basic document of the transaction. In para No. 35 of the order, the Assessing Officer has stated that the transactions are as old as nine years, relating to financial year 1991-92 and therefore it would not be possible for Citibank to produce all documents relati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Joint Parliamentary Committee. (viii)Wherever interest and dividends are credited in the PMS accounts of the assessee-company with Citibank, tax has been deducted at source as per law. The credit for the TDS amounts were claimed and availed by the Citibank and not by the assessee-company. In view of this fact, it is very clear that the income from dividend and interest were the income of Citibank and that is why Citibank has claimed credit for the TDS. This action clearly shows that the income by way of interest and dividends never belonged to the assessee-company. (ix)Either in the assessment order or even in the remand report submitted before the CIT(A), the Assessing Officer has not discussed anything about the documentary evidences availed from the Citibank to support the finding of the Assessing Officer that the alleged income was earned on behalf of the assessee-company. Equally there was not a piece of documentary evidence to support the case that the Citibank had paid any amount to the assessee-company over and above what has been accounted and reported by the assessee-company. (x)The Citibank was obliged to produce the transactional documents identified by the Hon'bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... convincing reason to make an addition by way of short-term capital gains and dividends and interest to the returned income of the assessee-company with reference to the PMS accounts maintained with Citibank. The addition was accordingly deleted and relief was granted to the assessee. 15. In addition to the grounds discussed hitherto before, the assessee-company had also raised grounds No. 6, 7 and 8 relating to classifying the income as short-term capital gains instead of income from other sources, relating to deduction available under section 80M etc. These grounds have been dismissed by the CIT(A) as infructuous as the main subject-matter of the appeal, the addition itself being deleted. 16. The assessee has also raised another additional ground before the CIT(A) on the ground that no income could be conceived for the impugned assessment year 1992-93, as there was a mandatory lock-in-period of one year on the PMS account operated with Citibank. This ground also has been dismissed by the CIT(A) as infructuous. 17. Another additional ground raised by the assessee before the CIT(A) was regarding levy of interest under section 234B. The CIT(A) held that in view of the amended pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee-company had entered into with Citibank and also the script-wise details of security transactions entered into by Citibank through the PMS accounts maintained by the assessee. 21. The Ld. Commissioner has taken great pains to explain the intricacies of this case as the facts related mainly to tailor made accounts maintained by banks and also because of the involvement of the accounts in security transactions. The relevant arguments advanced by the Ld. Commissioner may briefed as below : (i )In the course of assessment proceedings for the subsequent assessment year 1993-94, the Assessing Officer has discovered that as per the details submitted by Citibank, the assessee-company had earned about 130 crores of income for the impugned assessment year 1992-93 out of the PMS Accounts operated through Citibank. The above finding and conclusion of the Assessing Authority have been arrived at on the basis of formidable evidences. (ii )There is no reason in the argument of the assessee that the details of the transactions have not been furnished by the Assessing Authority. The assessee had maintained 4 accounts with Citibank under the Portfolio Management Scheme. The Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions were carried out through the PMS accounts resulting in profit to the assessee-company, which were not disclosed by them. (xi)It is to be seen that there was no written agreement for any assured return and the defence of assessee-company was that everything was managed only on oral understanding. This position has been denied by Citibank. (xii)The assessee-company had written a number of letters and sent communications to Citibank directing investments in PMS accounts and these acts on the part of the assessee-company signified that the accounts were operational at the directions and instance of the assessee-company. (xiii)In paragraph-38 of the assessment order, the Assessing Officer has clearly stated that he is computing short-term capital gains at Rs. 112.15 crores and 14.06 crores as dividends and interest and both are in addition to the income of Rs. 17.19 crores already declared by the assessee-company. (xiv)The contention of the assessee-company that they had entered into an oral agreement with the Citibank for fixed return on investments is not supported by the facts and evidences brought out by the Assessing Authority. On the other hand, the finding and conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erriding the written agreement entered into between them. (xx)Shri S.K. Saboo through his letter dated 12-4-1991 has informed the Citibank that the assessee-company desired to receive the dividends on the Units directly in their name and therefore to hold the units in the name of the assessee in the month of June, 1991. (xxi)The civil dispute between the assessee-company and Citibank cannot cover up the fact that PMS accounts income has accrued to the assessee-company who was the original investor. The Citibank has written its letter dated 1-6-2000 to its Assessing Authority that the PMS accounts and the profits thereof belonged to the assessee-company. (xxii)The assessee-company also has written to the Assessing authority of the Citibank that Citibank had not assured any specific return. (xxiii)All the above materials available on record show that Citibank was only facilitating the operation of PMS Accounts of the assessee-company and obviously all the income arising out of the said PMS accounts should be attributed in the hands of the assessee-company. (xxiv)When the assessee challenged the notice under section 148 before the Hon'ble Bombay High Court, the petition was dismi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6,93,55,216 and submitted that the order of the Assessing Officer on this point is self-explanatory and supported by cogent facts and therefore the CIT(A) should not have allowed the expenditure as a deduction in computing the income of the assessee-company. 25. Shri J.D. Mistry, the Ld. Counsel appearing for the assessee argued the case again at length. His contentions are summarised as below : (i)The Citibank has certified two times, on 1-4-1992 and 3-1-1995 that the Citibank has not paid anything to the assessee-company more than the amount disclosed by the assessee-company. These certificates have never been controverted by the Assessing Officer or by the Citibank. (ii)Commissioner has referred to letter of Shri S.K. Saboo of the assessee-company on 12-4-1991 where he has directed the Citibank to hold the units in assessee's own account for the month of June, 1991. But it is to be noted that Shri Saboo has further stated in the same letter that the Citibank was free to deploy the proceeds of this Portfolio as per Schedule 'B' for the balance period. This is a strong supporting evidence to show that Citibank was utilising the funds at its own will and the assessee-company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the transactions in a PMS Account would be entered into at the sole risk of the customer and on behalf of the customer and the bank would be entitled only for a specified rate of remuneration and the customer alone would be entitled for the profit and responsible for the loss. There is no dispute on the above statutory framework designed by the Reserve Bank of India. But the case is that Citibank has fluted all the guidelines and regulations. It is on record of the reports of High Power Committees appointed by Reserve Bank of India and Government of India. Those reports categorically stated that the Citibank has not followed the rules and regulations and guidelines framed by the Reserve Bank of India. In such circumstances what is the sanctity of the argument of the Revenue to frame the case on the strength of those Rules and Regulations designed by Reserve Bank of India. If Citibank had followed the regulations and guidelines, of course there is a case against the assessee-company. Citibank never followed the rules. Therefore, the guidelines and regulations framed by the Reserve Bank of India cannot be taken as a basis for making an allegation that the entire profit deriv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, it is nothing but arbitrary and whimsical to attribute any amount of additional income in the hands of the assessee-company by exonerating the Citibank whose activities have been highly indicated by the competent committees in their enquiry reports. The Assessing Officer has not gathered any materials on record to rebut the findings of those High Powered Committees. The Assessing Officer acted only on the submissions and explanations offered by the Citibank which always suited to their own interest. 28. The Ld. Counsel therefore submitted that the finding made by the Assessing Authority towards additional income from PMS Account is just imaginary and nothing else. He, therefore, submitted that the order of the CIT(A) on this point is just, proper and lawful and therefore to be upheld by this Tribunal. 29. The Ld. Counsel further explained the point raised by the Commissioner of Income-tax on the settlement of accounts between the assessee-company and the Citibank. The Citibank entered into the settlement with assessee on 23-3-1993 and agreed to pay Rs. 55.55 crores as full and final settlement of all dues in PMS accounts of the assessee. However, the actual amount paid by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ible for us to come to a fair decision. 33. The crucial issue to be decided here is the income that might have been generated from PMS Accounts operated by Citibank for and on behalf of the assessee-company. The assessee-company has accounted and offered an income of Rs. 17.19 crores as income from the four PMS Accounts maintained by it with Citibank. The case of the assessee-company is that it had not received anything more than that. The basis of the said argument is that the investments were made by the assessee-company in the PMS accounts in the nature of deposit accounts for a guaranteed amount of return and not for enjoying the entire income that might have been generated in those accounts through the operations carried out by the Citibank. The case of the Revenue is that the assessee-company has grossly understated its income from the four designated PMS Accounts and it had in fact received more then 130 crores by way of income from those PMS accounts. The basis of the proposition made out by the Revenue is that the PMS accounts were operated by Citibank for and on behalf of the assessee-company and the entire profit arising out of the PMS accounts would be the income of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bank. 37. The whole edifice of the case of the Revenue is built on this contingent statement that the income would have been enjoyed either by the assessee-company or by the Citibank. 38. In such circumstances, the Citibank itself is in a fluid position. Therefore, obviously every statement given by the responsible executives of Citibank would be to protect its own self-interest and not for protecting the interest of the assessee or Revenue or for that matter to bring out the true facts of the case. They may be justified in doing so because nobody would move against ones own self-interest. But in a judicial process, we can consider the statements of the executives of the Citibank only as self-serving evidences. They are interested witnesses. Therefore, the overwhelming support drawn by the Assessing Authority out of the statements and submissions of the Executives of the Citibank does not command the support of law. 39. Apart from the inadequacy of the materials relied on by the Revenue, the assessee-company has advanced certain definite points of evidences to support its arguments. The first such argument is regarding the two certificates issued by Citibank itself stating that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and circumstances of the case, we are of the considered opinion that the balance of convenience is apparently tilting in favour of the assessee-company and therefore we have to agree with the Commissioner of Income-tax (Appeals) in holding that there is no evidence or materials to support the case of the Revenue that the assessee-company had earned any income from the four PMS accounts operated through Citibank over and above what has been accounted and returned by it for taxation purpose. 43. Therefore, the principal ground raised by the Revenue regarding the income addition is dismissed. 44. Next we will consider the ground regarding the deduction of interest payment. Similar interest claimed by the assessee-company by way of deduction for the succeeding assessment year 1993-94 was similarly allowed by the CIT(A). The department contested the matter in second appeal before the Tribunal. The Tribunal after examining the factual aspects of the claim confirmed the view of the CIT(A) in its order in ITA No. 1523/Mum./1997 (ITAT Mumbai 'A' Bench). The disallowance has been made by the Assessing Officer for the impugned assessment year 1992-93 and for the assessment year 1993-94 o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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