9911796707
TMI Blog2017 (2) TMI 1501X X X X Extracts X X X X X X X X Extracts X X X X ..... ted was industrial or agricultural development by which agricultural refinance activities were made eligible for deduction. The amendment by Finance No. (2) Act of 2009 is also the similar amendment where the eligible business is included as development of Housing in India from construction or purchase of houses in India . Therefore, it is apparent that prior to this assessee was not eligible for deduction u/s 36(1)(viii) of the Act. in view of this Ground Nos. 1 and 2 of the appeal of the assessee which are against sustenance of disallowance u/s 36(1)(viii) of the Act are dismissed. Nature of loss - Loss of the security transaction - disallowing the loss with respect to securities - money been lost by assessee in Shri Harshad Mehta scam - revenue or capital loss - HELD THAT:- In the present case the lower authorities have viewed it as loss arising on purchase of securities but in fact there is no information about whether the securities were at all purchases by the assessee or not. if the assessee has lost sum paid by it for purchase of security i.e. advance for security and the same has been lost then it would be business loss allowable in the year in which it is incurred. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the order of the ld CIT(A) confirming the disallowance of claim u/s 36(1)(vii) of the Income Tax Act to the assessee for respective years as well as in AY 2003-04 & 2004-05 of allowability of loss on securities. . 2. The assessee has raised the following grounds of appeal in ITA No. 3704/Del/2010:- "1. The learned CIT (A) has erred in confirming the disallowance of claim amounting to ₹ 35,04,28,356/- under section 36(l)(viii) of the Income-tax Act on the alleged contention that (a) The role of the appellant as per the National Housing Bank Act, 1987 was merely to operate as a principal agency in order to promote housing finance institutions and accordingly the business carried on by the appellant is not covered in the definition of 'eligible business' as per the said section; and (b) That the deduction is only available to an assessee who is into the business of providing long-term finance for construction and purchase of houses for residential purposes and not to an assessee who is engaged in the business of providing finance to the Housing Finance Institutions for the construction and purchase of houses. 2. The learned CIT (A) was not justified in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e erred in holding that the assessee had claimed deduction u/s 36(l)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the appellant that the assessee has not considered the profits from short-term housing finance for computing the deduction claimed rightly u/s 36(l)(viii) of the Act. 5. The authorities below have also erred in holding that the claim for deduction lawfully due to the appellant would result in double deduction on the same loans/advances without even considering the explanation given by the appellant pointing out that no double deduction would be allowed by virtue of the assessee's claim for deduction being allowed as no deduction has already been allowed of the same amount. 6. The authorities below also erred in disallowing the appellant's claim rightly made u/s 36(l)(viii) of the Act on the erroneous view that in view of the amendment to the Section made by the Finance Act, 2009 being only prospective for granting deduction with effect from AY 2010-11 ignoring the fact that it is nothing but a clarificatory amendment which is clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of f 70,00,00,0007- u/s 36(l)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in holding that refinance of housing loans for construction or purchase of residential housing in India is not covered by Section 36(l)(viii) of the Act without giving considering the binding Circular No.72 dated 6.1.1972 CBDT, binding on the Revenue which clarifies that the 'refinance' has to be considered as part of providing long term finance. 4. The authorities below have erred in holding that had claimed deduction u/s 36(l)(viii) on profits of housing loan given for construction or purchase of residential house in India for less than 5 years without even appreciating the explanation given by the appellant that the assessee has not considered the profits from short--term housing finance for computing the deduction ; -36(l)(viii) of the Act. 5. The authorities below have also erred in holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... illegal order of assessment passed by the Respondent and dismissing the appeal of the appellant without fair and objective consideration of all the factual and legal submissions, records and documents and case law, placed by the appellant and the impugned order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of ₹ 70,00,00,000/- u/s 36(l)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in holding that refinance of housing loans for construction or purchase of residential housing in India is not covered by Section 36(l)(viii) of the Act without giving reasons for not considering the binding Circular No.72 dated 6.1.1972 issued by CBDT, binding on the Revenue which clarifies that the expression "refinance" has to be considered as part of providing long-term finance. 4. The authorities below have erred in holding that the assessee had claimed deduction u/s 36(l)(viii) on profits of housing loan given for construction or purchase of res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and further prays for early out-of-turn hearing to allow the appeal with consequential relief, after hearing both sides." 6. The assessee has raised the following grounds of appeal in ITA No. 1514/Del/2013:- "1. On the facts and in the circumstances of the case, the CIT(A) h erred, both on facts and in law, in upholding the illegal order assessment passed by the Respondent and dismissing the appeal the appellant without fair and objective consideration of all the factual and legal submissions, records and documents and case law, placed by the appellant and the impugned order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of ₹ 53,53,45,30; u/s 36(1)(viii) of the I T Act ignoring the fact that the appellant rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the low authorities have erred in holding that refinance of housing loans 1 construction or purchase of residential housing in India is not cover by Section 36(1)(viii) of the Act without giving reasons for not considering the binding Circular No.72 dated 6.1.1972 issued C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and grounds to be allowed to be filed before final hearing and further prays for early outof-turn hearing to allow the appeal with consequential relief, after hearing both sides." 7. The assessee has raised the following grounds of appeal in ITA No. 1515/Del/2013:- 1. On the facts and in the circumstances of the case, the CIT(A) had erred, both on facts and in law, in uphplding the illegal order of assessment passed by the Respondent and dismissing the appeal of the appellant without fair and objective consideration of all the factual and legal submissions, records and documents and case law, placed by the appellant and the impugned order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of ₹ 21,10,00,000/- u/s 36(1)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in holding that refinance of housing loans for construction or purchase of residential housing in India is not covered by Section 36(l)(viii) of the Act without giving ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and unsustainable. 9. The appellant prays for further/additional submissions and grounds to be allowed to be filed before final hearing and further prays for early outof-turn hearing to allow the appeal with consequential relief, after hearing both sides." 8. The assessee has raised the following grounds of appeal in ITA No. 1516/Del/2013:- "1. On the facts and in the circumstances of the case, the CIT(A) had erred, both on facts and in law, in upholding the illegal order of assessment passed by the Respondent and dismissing the appeal of the appellant without fair and objective consideration of all the factual and legal submissions, records and documents and case law, placed by the appellant and the impugned order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of ₹ 11,19,30,645/- u/s 36(1)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in holding that refinance of housing loans for construction or purchase of residential hous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest and adverse action and notice for penalty all of which are wholly unwarranted and unsustainable. 9. The appellant prays for further/additional submissions and grounds to be allowed to be filed before final hearing and further prays for early outof-turn hearing to allow the appeal with consequential relief, after hearing both sides." 9. The assessee has raised the following grounds of appeal in ITA No. 1517/Del/2013:- "1. On the facts and in the circumstances of the case, the CIT(A) had erred, both on facts and in law, in upholding the illegal order of assessment passed by the Respondent and dismissing the appeal of the appellant without fair and objective consideration of all the factual and legal submissions, records and documents and case law, placed by the appellant and the impugned order is liable to be vacated. 2. On the facts and in the circumstances of the case, the authorities below have erred in not allowing the deduction of ₹ 11,54,28,402/- u/s 36(1)(viii) of the I T Act ignoring the fact that the appellant is rightly entitled to the deduction claimed by it. 3. On the facts and in the circumstances of the case, the lower authorities have erred in hold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - to the assessed income of ₹ 289,46,06,090/- along with illegal levies of interest and adverse action and notice for penalty all of which are wholly unwarranted and unsustainable. 9. The appellant prays for further/additional submissions and grounds to be allowed to be filed before final hearing and further prays for early outof turn hearing to allow the appeal with consequential relief, after hearing both sides." 10. Parties before us submitted that appeal No. 3704/Del/2010 for AY 2007-08 may be taken as the lead case as there is no difference in the facts of the case of other years. Therefore, firstly we record the facts for AY 2007-08 and decide the issue. Thereafter, we will apply our decision to the other appeals of the assessee. 11. The assessee is a financial institution that is set up under the National Housing Bank Act, 1987. Accordingly, the main objects of the assessee were enlisted in section 14 of that Act. The assessee was enjoying exemption under the Income Tax Act 1961 by virtue of provisions of section 48 of the National Housing Bank Act, 1987. The above section was omitted w.e.f. 01.04.2002 and therefore the income of the assessee is now chargeable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be legitimate provided it is within the framework of law. Colourable devices cannot be a part of tax planning. (ii) The AR of the assessee has given examples that the claim or the assessee does not amount to double deduction. However, this calculation is not so simple as presented by them and it is subjected to various qualifications such as , if the financial institutions/ public company is not engaged mainly in the business of long term residential housing within the meaning of section 36(1)(viii) then it will not be eligible for deduction u/s 36(1)(viii) of the IT Act at all. But it does not put any bar on NHB to refinance the loans advanced by the financial institutions. The model agreement submitted by the assessee for refinancing financial institutions put more emphasis on prompt recovery of advances rather than putting the conditions as laid out in section 36(1)(viii) of the !T Act, 1961 for the obvious reason that the main objective of NHB is promoting housing financing institutions and not the long term residential housing refinance. Since NHB is not financing long term residential housing loans on its own, thus, the fulfillment of conditions for claiming deduction u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds the aspect emerging from the expression " attributable to" occurring in the phrase ' profit and gains attributable to the business of the specified industry ( here generation and distribution of electricity) on which the learned Solicitor-General relied, it will be pertinent to observe that the Legislature has deliberately used the expression " attributable to" and not the expression " derived from". It cannot be disputed that the expression "attributable to" is certainly wider in import than the expression ' derived from' Had the expression ' derived from' been used, it could have with some force been contended that a balance charge arising from the sale of old machinery and building cannot be regarded as profits and gain derived from the conduct of the business of generation and distribution of electricity In this connection, it may be pointed out (hat whenever the Legislature wanted to give a restricted meaning ffi the manner suggested by the learned Solicitor General, it has used the expression 'derived from' as for instance, in section 80-J. In our view,, since the expression of wider import, namely, attri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 was perused, it was noted that assessee provides the refinances of long term housing loans. Further in the details given by the assessee ( Annexure 2 of above letter ), it is crystal clear that assessee not only provided refinancing to housing finance institutions but it also provided refinances to various scheduled banks which are not engaged mainly in the business of providing long term finance for purchase or construction of houses. (vi) The assessee itself has accepted that it refinances loans for housing purposes which actually advanced by various companies, banks, housing financial institutions, etc. It is clear that public companies which actually advanced long term housing loans for purchase or construction of residential house, the housing finance institutions will be eligible for deduction u/s 36(1)(viii) subject to the fulfillment of the provisions of the said section. Therefore, the claim of deduction of the assessee amounts to double deduction on the same loan/ advance and if assessee's contention is accepted then this claim can be extended up to any level making each level eligible for deduction u/s 36f1)fviii) on the same loan, which certainly cannot be the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the amendment in the statute. 10. In view of the detailed discussion above, it is clear that assessee is not entitled to deduction u/s 36{1)(viii) of the IT Act, 1961 and its claim of deduction u/s 36(1){viii) devoid of merits on fact and in law and it is claimed without any basis. Therefore, I disallowed by the claim of deduction u/s 3G(1)(viii) of the IT Act, 1961 as claimed by the assessee in its return of income amounting to ₹ 35,04,28,356/ and add back the same to the taxable income of the assessee. 13. Consequently assessment u/s 143(3) of the Act was passed on 02.12.2009 determining the total income of ₹ 2053504910/- wherein to disallowance of claim of deduction u/s 36(1)(viii) of ₹ 350428356/- was made. Assessee being aggrieved with the order of the ld Assessing Officer preferred an appeal before the ld CIT(A) who by order dated 26.05.2010 dismissed the appeal of the assessee vide para No. 5 of his order as under:- "5. I have carefully considered the facts of the case and the various judicial r-pronouncements cited by the learned AO and the learned appellate counsel. On a careful consideration of the relevant provisions of section 36(l)(viii), it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... term "Housing Finance Institutions" has been defined as under:- "housing finance institution" includes every institution, whether incorporated or not, which primarily transacts or has as (one of its principal objects), the transacting of the business or providing finance for housing, whether directly or indirectly." 5.4 On a careful perusal of the section 36(1)(viii), I find that the eligible business for the purpose of the above deduction means, "the business of providing of long term finance for construction or purposes of housing in India for residential purposes". It is thus evident that the above provisions were in effect, meant for the 'housing finance institutions' only and not for the National Housing Bank, which was given the mandate to promote such institutions in the country for which finance and other support were to be provided by it. However, while appreciating the role of the NHB in development of housing in India, it is observed that the tax benefits were, however, not intended for the National Housing Bank per se which were brought on the statute originally with effect from 1/4/1972 in the case of the housing sector. The Na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e prospective amendment, in order to allow the appellant bank the benefit under the above section. Therefore, the fact that the legislature only brought about the amendment with^ effect from 1/4/2010 clearly shows that the above provisions were made prospectively only and cannot be treated as clarificatory in nature and retrospective in operations, as the nature of amendment entailed much wider scope and significant substitution of the eligible business activities, which have significant bearing on the eligibility criterion of that provision, and which is not merely a clarificatory exercise. 5.7 In view of the above, I hold that the learned AO was justified in not allowing the deduction under the above section to the appellant as the said provisions for the appellant, being meant for Housing Finance Institution only and the appellant bank, which continued to enjoy the blanket tax exemption due to an over-riding provision in the National Housing Bank Act, 1987 till 2002, before it was over-ridden by the provision of Finance Act 2001, was never an eligible beneficiary of the provisions of section 36(l)(viii). 5.8 Without prejudice to the above, since, the above beneficial provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In nutshell it was contended that the lower authorities have erred in not allowing the claim of the assessee u/s 36(1)(viii) of the Act. 16. The ld Departmental Representative vehemently supported the order of the lower authorities and submitted that assessee is engaged in the business of providing finance to the other financial companies but do not provide finance for purchase of houses in India for residential purposes which is the primary condition. Therefore, according to him the business of the assessee is of providing refinanced to the housing company. He further referred to the amendment made in the definition of eligible business by the Finance No. (2) Act 2009 w.e.f. 01.04.2010 has submitted that development of housing in India is applicable from that date only. He further referred to page No. 121 to 122 of the paper book which is memorandum explaining the provision in the Finance Bill No. 2 of 2000 which provides that National Housing Bank would be entitled to deduction under this section from AY 2010-11 and subsequent years only. He further referred to the paragraph 3 of the memorandum, which explained the rational of the amendment. Therefore, he vehemently opposed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in sub-section (10) of section 80-IB ; (e) "long-term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for repayment along with interest thereof during a period of not less than five years." 18. According to the above provision the deduction is provided to the financial corporation who is engaged in providing long term finance for construction or purchase of houses in India. Admittedly, the assessee has not provided any finance for purchase of houses in India but is providing refinance to the various housing finance companies. The main business of the assessee is providing long-term housing finance through the housing finance institutions, scheduled banks, state cooperative, agricultural and rural development banks as well as to public agencies and micro finance institutions. Therefore, the assessee is not providing long term finance for construction and purchase of houses in India for residential purposes. Furthermore, the subsequent amendment made to the definition of eligible business by the Finance No. 2 Act of 2009 has amended the definition of eligible business from "long-term finance for construction or purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ousing in India will now be eligible for the benefit under section 36(1)(viii). 21. Therefore from the above amendment it is clear that the national housing bank is entitled to the benefit of section 36(1)(viii) of the Act w.e.f. AY 2010-11 onwards and nor prior to that. Now the moot question here in whether refinancing activities can be considered as provision of long term finance for construction and purchase of houses in India for residential purposes or not. our answer to this is in negative because whenever govt the legislature wanted to include refinancing activities also eligible for deduction u/s 36(1)(viii) it has amended the provisions in the similar manner in which the amendment is made by Finance (2) of the Act of 2009. As the agricultural refinance activity was not eligible for deduction u/s 36(1)(viii) prior to Finance No. (2) Act, 1971 and the eligible business inserted was "industrial or agricultural development‟ by which agricultural refinance activities were made eligible for deduction. The amendment by Finance No. (2) Act of 2009 is also the similar amendment where the eligible business is included as "development of Housing in India" from "construction or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of loss on security transactions of 1991-92. On further perusal of the Notes forming part of the accounts as per Schedule-XIII of the Balance Sheet and Profit & Loss A/c, it was observed that this amount was related to security transactions of M/s. NHB during 1991-1992. Cheques aggregating to ₹ 707.56 crores were issued by M/s. NHB in favour of State Bank of India (SBI) for securities transactions which were credited to the account of Share Broker, Shri Harshad Mehta, by SBI after collecting proceeds of the cheques It is pertinent to mention that SBI has returned this sum of ₹ 70756 crores to M/s. NHB on 13/6/1992 under protest and SBI also filed a suit No. 35 of 1995 against Ms. NHB in the Special Court claiming the amount of ₹ 707.56 crores which was returned to NHB, M/s NHB also filed a petition before the Hon'ble Supreme Cou-1 against the order dated 4/2/2002 of the Special Court, Mumbai as the Hon'ble Special Court had given decision in favour of SBI. Later on, Ministry of Finance, worked out a proposal to resolve the dispute which was accepted try both SBI and NHB and "directed that a sum of ₹ 35378 crores (being 50% of ₹ 707.56 cro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Accounts. The bank had issued certain cheques to State Bank of India during 1991-2992 for purchase of securities. The said cheques were credited by SBI to Stock Broker "Mr, Harshad Mehta " instead of the State Bank. It is in public knowledge that the stock broker Mr. Harshad Mehta did indulge in a number of malpractice during 1991-1992 and the Government had set up a special court to decide the disputes. The present one happens to be one of such disputes in which the assessee claimed ₹ 707.56 crores from SB!. The matter traveled upto the Supreme Court of India. The Hon'ble Supreme Court had directed vide order dated 29/ 7/2002 (copy enclosed as Annexure -A) that both NHB and SBI, being owned by the Government of India/ RBI, should not litigate but should settle among themselves on the directions of the Banking Division, Ministry of Finance. Government of India. Banking Division, Department of Economic Affairs, Ministry of Finance vide letter dated 26th August, 2002 settled the issue (copy enclosed Annexure-B). In short the decision was that: (a) Both NHB and SBI should bear the loss of ₹ 707.56 crores equally (or ₹ 353.78 crores each). (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... got credited by Mr. Harshad Mehta to his account unauthorizedly and fraudulently in the year 1991-1992. The Bank claimed the amount from the SBI as well as Mr. Harshad Mehta and the matter traveled upto the Supreme Court The Ministry of Finance, Govt. of India had, during the current year under consideration at the directions of the Supreme Court decided that the loss on account of unauthorized/fraudulent misappropriation by Mr. Harshad Mehta should be borne equally by SBI and NHB. Further, the amount recovered if any from the assets to Harshad, Mehta, etc., frozen by the Special Court, be shared between SBI and NHB. This was made an order of the Supreme Court in November, 2002, which also falls within the year. The assessee has therefore, correctly claimed it as a loss of this year as it got settled and crystallized in the year under consideration. It did not get settled or finalized in 1991-1992 and any claim of deduction would not have been allowed as it was sub-judice and -was contingent to the decision of the Courts. It is also brought to your kind notice that the assessee has in A. 2002-2003 admitted a sum of ₹ 113 crores as income folio-wing a decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of NHB was not issued by the SBI. When on due date, NHB requested the SBI to reverse the transaction or hand over the securities, SBI denied having any transaction with NHB and informed that the proceeds of the cheques received from NHB in its name has been credited in the account of its customer as per the instructions of NHB. However, there was no such instructions from NHB to SB!. Subsequently, on intervention of RBI, SBI returned this sum of ₹ 707,56 crore to NHB on 13,06,1992 under protest and filed a case against Harshad S. Mehta for having got wrong credit of the amount in his account. Later on, SBI also filed a suit in the Special Court claiming the amount of ₹ 707.56 crores alleging that NHB has entered into such transaction with Harshad Mehta It is in the public knowledge that the Stock broker, Mr. Harshad Mehta did indulge in a number of malpractices during 1991-92 and then Government had set up a special court to decide the dispute. Thus, the loss of ₹ 150 crore is a loss arising out of the business activity of purchase and sale of securities. 6.4 The case between NHB and SBI was resolved with the intervention of the Hon'ble Finance Minister at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for your reference. The loss incurred by NHB due to non receipt of securities being purchased by it which resulted due to fraudulent activities is clearly a trading loss as per section 28 of the Act and should be allowed as business loss. The assessee has placed reliance on following judicial pronouncements wherein it is held that embezzlement of funds by wrong/fraudulent deals are allowable as deduction: (a) Badrinath Daga v. CIT[1958] 34 ITR 10 (SC) . (b) CIT v. Nainital Bank [1965] 55 ITR 707 (SC) (c) Indian Insurance Banking corporation limited v. CIT [1963] 50 ITR 123 (Ker) (d) Ramachandra Shivnarayan v. CIT [1978] 111 ITR 263 (SC). In Badrinath Daga v. CIT [1958J 34 ITR 10(SC), Hon'ble Supreme Court, while deciding the question whether amount lost through embezzlement by an employee is a trading loss which could be deducted in computing the profits of a business has held that "in deciding whether loss resulting from embezzlement by an employee in a business is admissible as a deduction, what has to be considered is whether it arises out of the carrying on of the business and is incidental to it. Viewing the question as business would, it seems difficult to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d accordingly." D(6) It is also important to discuss here the submissions of the assessee filed vide its letter dated 18/3/2005 that it had included a similar sum of ₹ 113 crores as taxable income in the Asstt. Year 2002-03. The AR of the assessee requested that its letter may be treated as a claim for exclusion of ₹ 113 crores from the income of Assessment Year 2002-03. It clearly shows that assessee itself is not sure on the issue that whether the Loss claimed by it is Capital Loss or a Business Loss in nature and whether the same pertains to previous year under consideration or not. As far as the claim for Asstt. Year 2002-2003 is concerned, it does not relate to the Asstt. Year under consideration and hence, does not require any comments. However, the claim of the assessee that Loss on securities transactions for 1991 -1992 is similar in nature to the sum of ₹ 113 crores for the financial year 2001-2002 is not correct on facts. The assessee itself has submitted vide its letter dated 11 3/2005 during the course of assessment proceedings for the Asstt. Year 2002-2003 that NHB had to deposit a sum of ₹ 912 crores with the Supreme Court till the dispo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase of securities." The assessee has further made a general statement vide its letter dated 18/3/2005 that "Banks, financial institutions, can hold securities both as investments as well as stock-in-trade". The assessee has nowhere submitted that the amount paid to SBl was for purchase of stock-in-trade or on account of revenue transactions. No concrete evidence was produced by the assessee inspite of being given repeated opportunities during the original assessment proceedings on 15/2/2005 (vide notice dated 7/2/2005), 2/3/2005, 11/3/2005, 16/3/2005 and 18/3/2005 and subsequently during the reassessment proceedings on 03/08/2010, 12/11/2010 and 30/11/2010 to prove that how the claimed Loss from securities transactions of 19911992 amounting to ₹ 1,50,45,32,696/- was a Business Loss and not a Capital Loss. Till date no reply has been received. Sufficient opportunity has been provided to the assessee during the original assessment proceedings, proceedings before Ld. CIT(A) and also during the reassessment proceedings. No fresh evidence has been brought on record tilt date. Thus, assessee has not discharged its onus. Therefore, I hold that this amount of S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 04.02.2002, of the special court Mumbai as the Hon'ble Special Court Mumbai gave the decision in favour of SBI. Later on, Ministry of Finance, worked out a proposal to resolve the dispute which was accepted by both SBI and NHB and directed that a sum of ₹ 353.78 crores (being 50% of ₹ 707.56 crores) would be paid by NHB to SBI after appropriating a sum of ₹ 131.20 crores with interest accrued thereon which had been lying with the Special Court. Pursuant to the order of the Hon'ble Supreme Court dated 01.11.2012 (passed after out of court settlement by NHB and SBI), NHB paid a sum of ₹ 150.45 crores to SBI on 17.12.2002 and the appellant claimed this amount of ₹ 150.45 crores as business loss in its P &-L A/c for the previous year relevant to the assessment year under consideration. 11.2 The Assessing Officer also observed that the appellant followed mercantile system of accounting and as per the audit report, showed its income from securities transactions under the head "income from capital gains". It was also noted by the Assessing Officer that the appellant showed short term capital gains of ₹ 11.61 crores and long term c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d settle among themselves on the directions of the Banking Division, Department of Economic Affairs, Ministry of Finance vide letter dated 26th August, 2002 settled the issue (copy enclosed Annexure-BJ. In short the decision was that: a) Both NHB and SBl should bear the loss of₹ 707.56 crores equally (or ₹ 353.78 crores each. b) A sum of ₹ 131.20 crores deposited by NHB with SBS (State Bank of Saurashtra) on 13.07.1998 in another related dispute would get adjusted with interest @ 12% per annumtowards the present dispute which would be about ₹ 196 crores. c) Both NHB and SBl should pursue the matter before the Special Court and recover from the assets of Mr. Harshad Mehta. Please find enclosed a copy of the terms of settlement dated 3O.10.2002 between NHB and SBl filed before the Supreme Court (Annexure(=). Cajyofthe order of the Supreme court which was passed shortly thereafter, (around November,_ ) will be submitted after obtaining a copy of it from the lawyer/court. the assessee paid ₹ 150.45 crores to SBl during this year. It is submitted that since the liability has occurred in the normal course of business and has got settled by the Suprem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r finalized in 1991-1992 and any claim of deduction -would not have been allowed as it was sub-judice and -was contingent to the decision of the Courts. It is also brought to your kind notice that the assessee has in A. Y. 2002-2003 admitted a sum of ₹ 113 crores as income folio-wing a decision of the Supreme Court in a similar matter If the present claim does not pertain to the year under consideration but to a "prior period" as expressed by your self, then the sum of ₹ 113 crores included in A. Y. 20022003 is not to be included on the same ground. Similarly, any sums recovered in future on account of various claims pending in Courts _ would not be includable in income and the department should follow its stand consistently. This letter may be treated as a claim for exclusion of ₹ 113 crores from income of A. Y. 2002-2003 the proceedings for which were also heard simultaneously and the orders have not yet been served on the assessee" D(5) In the course of current proceedings, the assessee filed the following submissions vide letter dated 3/8/2010 was filed on 12/11/2010 :- "Our pan submission with regard to allowance of expenditure on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 1991-92 and then Government had set up a special court to decide the dispute. Thus, the loss of ₹ 150 crore is a loss arising out of the business activity of purchase and sale of securities. 6.4 The case between NHB and SBI was resolved with the intervention of the Hon'ble Finance Minister at the behest of the Supreme Court whereby the Joss caused due to non receipt of securities by NHB against the payments made to SBI for the same, was shared 50:50 between NHB and SBI Therefore, it was decided that a sum of₹ 353.78 crore, being 50% of₹ 707.56 crores would be paid by NHB to SBI NHB in a separate suit had deposited ₹ 131.20 crore with the Special Court On 13.07.1 998. As per terms of settlement filed by the . parties in the Supreme Court which was approved by Hon'ble Supreme Court, the amouni of ₹ 131.20 crore along with the interest accrued thereon shall be reduced from 353.78 crore and the balance amount shall be paid by NHB to SBI. Pursuant to the order of Supreme Court dated 1.11.2002, NHB paid a sum of₹ 150.45 crore to, SBI on 17.12.2002 after appropriately the sum of ₹ 131.20 crore with interest accrued thereon and the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by an employee in a business is admissible as a deduction, what has to be considered in whether it arista; nut nfthe carrying on of the business and is incidental to it Viewing the question as business would, it seems difficult to maintain that it does not A business especially such as is calculated to yield taxable profits has to be carried on through agents, cashiers, clerks and peons Salary and remuneration paid to them are admissible as expenses Incurred for the purpose of the business. If the employment of agents is incidental to the carrying on of business, it must logically follow that losses which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position as such employee and misappropriating the funds of his employer, and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it.. If a loss by embezzlement can be said to be necessarily incurred in carrying on the trade it is allowable as deduction from profits. I an ordinary case, it springs directly f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee itself has submitted vide its letter dated 11/3/2005 during the course of assessment proceedings for the Asstt. Year 2002-2003 that NHB had to deposit a sum of ₹ 912 crores with the Supreme Court till the disposal of its appeal by it. It had availed a loan of₹ 700 cores from the RBl for the purpose and had paid interest thereon. As per the order of the Supreme Court the assessee received a revenue of ₹ 113 crores (₹ 1025 crores ₹ 912 crores) in the financial year 2001-2002, The excess of ₹ 113 - crores was shown by assessee as an income and the relevant interest paid amounting to ₹ 87 crores on the loan from RBl has been accounted as an expenditure Thus, the assessee has shown an income of ₹ 26 crores (₹ 113 crores - ₹ 87 crores) only as against the claimed amount of ₹ 113 crores. It is ample clear that the facts and nature of the Business Loss claimed at ₹ 150.45 crores in the asstt Year under consideration and the amount of ₹ 26 crores or ₹ 113 crores shown in the Asstt year 2002-2003 are quite different in nature. Moreover, as each assessment year is an independent assessment year as confirmed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant filed the following submissions: "4.1 The learned Assessing Officer while computing the total income of the appellant has disallowed loss of₹ 1,50,45,32,696/- on the contention that the loss/payment is clearly of capital nature and cannot be allowed as business loss. 4.2 In this regard, it is respectfully submitted that in case of National Housing Bank, purchase/ sale of securities is both part of trading activities as well as for investment purpose. Section 14 of National Housing Bank Act describes the business of National Housing Bank. Clause (e) of the said section states "Buying or selling and dealing in bills of exchange. promissory notes, bonds, debentures, hundies, coupons and other instruments by whatever name called. Thus, it is evident that purchase/ sale of securities is also part of the business of National Housing Bank. Copy of the National Housing bank Act, 1987 is already enclosed on pages _ of the paper book. 4.3 Regarding the transaction is question, the appellant, as a part of its business activity, entered into back to back transactions for purchase of certain securities like Govt. Bonds, IRFC Bonds, Treasury Bills etc. for an agg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set up a special court to decide the dispute. Thus, the loss of₹ 150 crore is a loss arising out of the business activity of purchase and sale of securities. 4.5 The case between NHB-Qnd SB! was resolved with the intervention of.the Hon 'ble Finance Minister at the behest of the Supreme Court whereby the loss caused due to non receipt of securities by NHB against the payments made to SB! for the same, was shared 50:50 bctivccn NHB and SB! Therefore, it was decided that a sum of₹ 353.78 crore being 50% of₹ 707.56 crores would be paid by NHB to SBl NHB in a separate suit had deposited ₹ 131.20 crore with the Special Court On 13.07.1998. As per terms of settlement filed by the parties in the Supreme Court which was approved by Hon'ble Supreme Court, the amount of ₹ 131.20 crore along with the interest accrued thereon shall be reduced from 353.78 crore and the balance amount shall be paid by NHB to SBL Pursuant to the order of Supreme Court dated 1.11.2002, NHB paid a sum of ₹ 150.45 crore to SBI on 17.12.2002 after appropriating the sum of₹ 131.20 crore with interest accrued thereon and the appellant claimed this payment as business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in computing the profits of a business, has held that "in deciding whether loss resulting from embezzlement by an employee in a in a business is admissible as a deduction, what has to be considered is whether it arises out of the on of the business and is incidental to it. Viewing the question as business would, it seems difficult to maintain that it does not A business especially such as is calculated to yield taxable profits has to be carried on through agents, cashiers, clerks and peons. Salary and remuneration paid to them arc admissible as expenses incurred for the purpose of the business. If the employment of agents is incidental to the carrying on of business, it must logically follow thai fosses" which are incidental to such employment are also incidental to the carrying on of the business. Human nature being what it is, it is impossible to rule out the possibility of an employee taking advantage of his position..-as- such employee and misappropriating the funds of his employer, and the loss arising from such misappropriation must be held to arise out of the carrying on of business and to be incidental to it. If a loss by embezzlement can be said to be necessarily inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for allowability of trading losses are fulfilled inasmuch as the loss was incurred because of misappropriation of funds by the employees of NUB while performing the duties during the normal course of business, therefore, in the, light of above decisions, the losses incurred by NHB are the trading losses and are allowable as deductions while computing the taxable profits 4.7 The learned Assessing Officer also disallowed the claim stating that it relates to a prior period and even if held to pertain to this year, it is a capital loss. In this regard it is respectfully submitted that since the liability has occurred in the normal course of business and has got settled by the Supreme Court of India during the year under consideration, therefore the liability is crystallized in the current year, hence shall be considered to be accrued and arisen during the relevant assessment year. 4.8 The learned Assessing Officer in his order has taken reference of submissions made by the appellant during the original assessment that profit on account of similar security transaction in Assessment Year 2002-03 amounting to ₹ 113 crorc was considered as business income by the appellant and if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the cheque, custody of books etc. The appellant has contended that the loss on securities was incurred by NHB due to non receipt of securities purchased by it from SBI which arose due to fraudulent activities of late Sh. Harshad Mehta in connivance with its two employees is a trading loss in terms of section 28 of the IT Act and deserves to be allowed as business loss. The appellant cited a number of judgments to plead that the embezzlement of funds by wrong/fraudulent acts of employees is an allowable deduction. The Assessing Officer has held that the appellant no where during the course of the assessment proceedings i.e. either during the original assessment proceedings or during the re-assessment proceedings, contended that the amount paid to SBI was for purchase of stock-in-trade for business purposes. Despite of repeated opportunities given by the Assessing Officer, the appellant has failed to justify as to how the loss of ₹ 150.45 crore was a business loss. All the above facts were confirmed by Janki-Raman Committee, an independent committee formed to investigate the issue of irregularity in fund management. 14.2 On perusal of the material on record, I find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business of National Housing Bank among other financing activities included the following "Buying or selling and dealing in bills of exchange, promissory note, bonds, debentures, handles, coupons and other instruments by whatever name is called" The appellant has submitted that the purchase of shares and securities was the normal business of the bank: and any loss arising on its sale should be allowed as a business loss. The assessing officer has disallowed loss on securities transactions of ₹ 1,50,45,32,696/-on the contention that it was capital in nature. 14.5 The assessing officer after narrating the above facts in the body of the assessment order further held that the appellant itself accounted its income from securities transaction under the head income from capital gains. As per the audit report submitted in the course of assessment proceedings, the appellant stated that it followed mercantile system of accounting. The assessing officer stated that in the current year itself the appellant had shown income from long term capital gain amounting to ₹ 11.61 crores. The submission of the appellant during the course of the assessment proceedings and be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of purchase of stock in trade. Thus, appellant has not discharged its onus. Therefore, I hold that this amount of ₹ 1,50,45,32,696/- paid to SBI was on account of a settlement between the appellant and SBI, by an order for the Hon'ble Supreme Court and was not a revenue loss. 14.9 The appellant had paid ₹ 707.56 crores to SB! for purchase of securities but had not received any amount from any single party with whom appellant had entered into back to back sale agreement. The appellant had also not furnished details/documents to justify as to what happened with respect to sale contract entered with other parties as the appellant had not received securities from SBI on the due date. The appellant to claim the security loss as revenue loss has further argued that it had returned profit of ₹ 113 crores on similar securities transaction as business income in the assessment-year2002-03. It has argued that department cannot change-its stand the year to year basis. However the Assessing Officer in para D (6) of his order as correctly stated that the claim of the appellant that loss on securities transaction of 1991-92 is similar in nature of ₹ 1 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d loss account for the previous year under consideration. The assessee before the Assessing Officer claimed the above amount as deduction as loss on securities transaction. The ld Assessing Officer stated that the above loss is in capital nature for which no evidence was produced and further the loss was also not related to the previous year under consideration. The facts emerging from the assessment order is that the assessee had issued cheque to State Bank of India for purchase of securities, which was credited to the account of stock broker Shri Harshad Mehta. The ld Assessing Officer has mentioned in para No. D7 that despite several opportunities the details of loss has not been provided. Before the ld CIT(A) similar arguments were advanced and vide para No. 14.8 the claim of the appellant was dismissed. the claim of the assessee that in AY 2002-03 the assessee has earned business income on securities and same was accepted. Therefore this security loss should also be considered as revenue loss is devoid of merit because of peculiar facts for this year as assessee has lost money due to scam of Shri Harshad Mehta. It is further important to read Note No. 16 of the Notes on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be allowable to the assessee in the year in which it is incurred. In the present case the lower authorities have viewed it as loss arising on purchase of securities but in fact there is no information about whether the securities were at all purchases by the assessee or not. if the assessee has lost sum paid by it for purchase of security i.e. advance for security and the same has been lost then it would be business loss allowable in the year in which it is incurred. It is undoubtedly this money has been lost by assessee in Shri Harshad Mehta scam. This aspect is also required to be examined with respect to the provisions of National Housing Bank Act wherein section 14 of that act provides nature of business it can carry on. In view of the above facts it is necessary to examine whether the assessee has incurred loss on account of securities transactions entered transaction or it is a case of loss of advances given by the assessee for purchase of securities. If the transaction of securities are backed by physical possession of security notes or securities in Demat form then only it can be considered as loss on transaction in securities. If it is advance given by the assessee for ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
