Deputy Commissioner Of Income Tax vs Sahara India Financial Corpn. … on 20 May, 2003

ORDER

P.N. Parasbar, J.M.

1. This appeal filed by the Revenue and cross-objection filed by the assessee.

2. Shri S.C. Sen, CIT (Central), Calcutta, appeared for the Revenue, whereas Shri A.A. Thakkar and Shri J.J. Mehrotra, C.As, represented the assessee.

3. Vide order dt. 15th Jan., 2002, it was directed that ITA No. 747/All/2000 shall be heard alongwith ITA No. 304/Luck/2001 and 476/Luck/2000. However, since the arguments were concluded in this appeal only, we are deciding this appeal and the cross-objection concerned with this appeal. The other connected appeals shall be decided afterwards.

ITA No. 747/All/2000 :

Ground Nos. 1 to 4 :

4. The Department has taken these grounds to challenge the finding of the learned CIT(A) recorded in para 20 of his order, wherein he has observed 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.

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 Section 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 Article 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 was processed under Section 143(1)(a) on 25th March, 1997, on a total loss of Rs. 3,86,92,505. Subsequently, revised statement of income was also filed during the assessment proceedings.

(iii) On examination of books of account and details submitted by the assessee in response to requisitions made from time to time by the AO, the directions were issued under Section 142(2A), vide office letter dt. 25th Jan., 1999, to the assessee for getting its account audited by the special auditor, namely, M/s Sudhendra Jain & Co. C.A. Kanpur. Before issuing directions, prior approval of the CIT was obtained vide letter dt. 15th Jan., 1999. The directions were served upon the assessee on 27th Jan., 1999. The assessee was directed to furnish the report of the special audit under Section 142(2A) in the statutory forms No. 6-B duly signed and verified by the special auditor within one month of the date of the receipt of the direction i.e., 27th Dec., 1999.

(iv) While issuing directions under Section 142(2A), the AO also required the special auditor to furnish his report on the following points :

“1. Details of depositors who have defaulted in complying to the terms and conditions of various deposit schemes floated by the assessee indicating the amount of such deposits default for which arose during the relevant assessment year and which remained unclaimed to be appropriated by the assessee during the relevant assessment year. Also the details of new depositors who joined the scheme during the relevant year and defaulted in the subsequent years.”

(v) After issuance of these directions, the assessee requested the Department to supply the reasons for issuing the directions and also copy of approval letter from CIT (Central). The reasons as well as copy of approval letter were supplied to the assessee. These were received by the representatives of the assessee on 17th Feb., 1999.

(vi) The work of special audit was commenced from 1st Feb., 1999. The copy of the audit report dt. 24th Feb., 1999 was furnished on 25th Feb., 1999.

(vii) The AO on examination of the audit report under Section 142(2A) held that the report was partial, incomplete and demonstrative only. He also observed that the same is being utilized for the purpose of assessment, wherever considered relevant and necessary. The conclusions and directions of the AO in this regard are contained in para 4.4 to 4.8 of his order. The relevant 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 Section 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 Section 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 Section 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 useful purpose. At the sometime it was also kept in mind that if the assessee decided to co-operate this time there was always scope for extending the time limit, if so requested by the assessee. Since there is no provision for extending the time limit suo motu by me the same could not be done. It was the legal responsibility of the assessee to seek extension of time for making full compliance to my directions, which the assessee did not do. Hence the audit report furnished by the assessee.”

(viii) The AO also proceeded to conduct inquiry himself and required the assessee to furnish the list of depositors, who had made deposits of Rs. 20,000 or more. Several notices were issued to the assessee to furnish various other informations. The AO on the basis of examination of the material, completed assessment at Rs. 10,45,77,81,760 vide assessment order dt. 23rd April, 1999, under Section 144 of the IT Act, 1961.

(ix) The assessee challenged treatment given by the AO to the special audit report before the learned CIT(A). An additional ground was also taken before the learned CIT(A) by the assessee, which is as under:

“That the learned Asstt. CIT, Central Circle-I was on the facts and in law is not giving due congnizance to the special audit directed by him under Section 142(2A) and is not accepting the findings and conclusions given by the special auditor in his report dt. 24th Feb., 1999, which audit was carried out in accordance and conformity and in full compliance of the directions of the Asstt. CIT, CCI, as approved by the CIT (Central) in accordance with the provisions of S. 142(2A) of the IT Act, 1961.”

(x) The learned CIT(A) after considering the relevant portion of the assessment order, relating to the special audit and after hearing the arguments recorded his conclusions, which are contained in para 17 to 20 of his order. The relevant part of his order as contained in para 20 of the appellate order is as under:

“20. The special auditor was appointed by the AO and in my opinion the AO was competent to vary the terms of the audit either by issuing directions directly to the auditor or indirectly to the auditor through the appellant. The auditor has never complained that the appellant did not co-operate with him and, therefore, once the special audit Report has been duly furnished before the AO I am of the opinion that the findings of the special auditor has got 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 contention was that since the special auditor is to be appointed after obtaining the approval from the CIT, there is no authority with the AO to permit the special auditor to deviate from the terms of reference. The learned Senior Departmental Representative also made reference to the other assessment years, particularly to asst. yr. 1989-90 and subsequent assessment years, in which years, the assessee had objected to the appointment of the special auditor. According to the learned senior Departmental Representative, the attitude of the assessee had always been of non-cooperation and to evade compliance of the directions. After making reference of the observations of the AO is paras 4.1 and 4.2 of his order, the learned CIT(A) submitted that while dealing with the issue, the learned CIT(A) has not properly appreciated these observations, which highlight the defects in the audit report Regarding the nature and evidentiary value of the special audit report, the contention of the learned counsel was that the special auditor is meant to assist the AO and his report is not binding. In this regard, it was further contended by him that the special audit report cannot be equated with the report of the D.V.O. which has got a binding force in view of the provisions contained under Section 16A(5) of the WT Act. In support, he made reference to the decision of Hon’ble Supreme Court of India report in AIR 1980 SC 531. According to him, in view of the directions issued, the special auditor was to carry out the examination of the books of account and this is to be done on the basis of data submitted by the assessee. Regarding paucity of time with the auditors, the submission of the learned Sr. Departmental Representative was that for extension of time, the assessee was fully competent to move an application before the AO Lastly, the emphatic contention of the learned CIT/Departmental Representative was that the observations of the learned CIT(A) that the audit report is having binding effect is totally misconceived and erroneous,

9. On the other hand, the learned counsel for the assessee, Shri Thakkar submitted that the directions issued to the Auditor went beyond the examination of the record relating to assessment year under consideration. He also pointed out that there was no observation of the special auditor that the assessee did not co-operate. The learned counsel placed 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, the special audit is conducted only on test check basis and 100 per cent scrutiny of entire material is not physically possible and the issue how such test check is to be made, is left to the choice of professional expert, who, on the basis of experience etc. has to pick up the samples and nobody can sit in against the value judgment of such expert. The learned counsel further submitted that the object behind making reference to the special auditor is to ensure proper scrutiny by the special auditor for assisting the AO. The learned counsel also submitted that like the report of the Valuation Officer, the report of the special auditor is also binding upon the Department. In support, the learned counsel placed reliance on the decision of Allahabad High Court in the case of CIT v. dr. H. Rehman (1994) 217 ITR 107 (All) and on the following decisions :

(a) M.C. Kunnah v. Union of India and Ors. (1979) 118 ITR 414 (All)

(b) CIT v. Anand Theatres Etc. Etc. (2000) 244 ITR 192 (SC).

10. The learned counsel challenged the observations of the AO and submitted that the AO could have remanded the matter back to the special auditor, if he was not satisfied with the report of the special auditor or he could have issued further directions to him or he could have appointed another special auditor. But the AO did not opt any of these courses and, therefore, he is not justified in not placing reliance on such report.

11. We have carefully considered the facts and circumstances of the case, the material to which our attention was invited and the rival submissions. The audit report, which is on Form No. 6-B is dt 24th Feb., 1999. This report is available on pp. 1492 to 1497 of the paper book. In this report, it is stated that the auditors test checked books of account of Command office (Head office), five branches, Latoor, Balasinor, Katra, Allahabad, Balpur and Tejpur and depositors’ ledger of five branches of assessee’s agent M/s Sahara India (firm), out of more than 1100 branches spread all over India. It is further mentioned that the scope of audit could not be enlarged due to time limit directed by the Asstt. CIT Para (ii) of this report of letter dt. 24th Feb., 1999, is as under :

“(ii) In the light of our letter dt. 4th Feb., 1999, addressed to the Asstt. CIT, CC-I, Lucknow, copies thereof endorsed to the Addt. CIT (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 Ret 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 order and after extracting this part, he has made the following observations :

“The above observations of the special auditor are very important and even after the receipt of this special audit report the AO never contradicted the abovementioned statement of the special auditor that when the matter was discussed with the Department.

13. After considering the circumstances under which the special audit was done and also the time limit laid for completing the special audit and in view of the huge material in the shape of ledger and other account books, the auditors could not have been expected to do more than what has been done i.e., if the audit work was to be done by examination and scrutiny of all the books of account of 1100 branches of the sister concern and all the books of the assessee, then such exercise could have consumed not only several months but several years. Hence, the only proper method was to make sample scrutiny by taking up some of the branches and some of the documents. The method of test checking is well recognized and is also accepted by the Institute of Chartered Accountants. Even the AO has adopted the same course.

14. The auditors have also pointed out to this aspect of the matter and even wrote letter dt, 4th Feb., 1999, to the Asstt, CIT, Central Circle; copies of this letter have been sent to the superior authorities including CIT Central. It was further clearly mentioned that the audit report was only demonstrative and not exhaustive or full. It is also mentioned in the letter extracted above that the matter was discussed with the authorities of the Department i.e., with the Asstt. CIT, Additional CIT and CIT (Central). And they orally agreed for demonstrative reporting.

15. The facts mentioned in the letter dt. 24th Feb., 1999, were not controverted by the concerned authorities before the learned CIT(A) nor before us. In fact, the learned CIT(A) has specifically stated in para 18 of his order that the AO never contradicted the statement of special auditor. In para 20 of his order also, which has been reproduced above, the learned CIT(A) has highlighted these facts. In view of these circumstances and facts, the observations and findings of the AO made in para. 4.5 of his order cannot be sustained.

16. It is true that the object of making appointment of auditors for special audit is to assist the AO and the report of the special auditor is not binding upon the AO, because, if such a view is taken, then the statutory power conferred upon the AO under Section 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 Section 142(2A). The report of the DVO also cannot be equated with the report of the special auditor, because Sub-clause (6) of Section 16A of the WT Act, 1957, provides that on receipt of the order under Sub-section (3) or Sub-section (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 Section 142 and Section 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 provided that such report shall be binding or the assessment shall be made in conformity with the special audit report. Thus, so far as the evidentiary value of the audit report under Section 142(2A) is concerned, we are unable to agree with the learned CIT(A) that the special audit report is binding upon the AO, rather we agree with the contention of the CIT/Departmental Representative that the audit report is to be equated as an expert’s report and has to be considered and appreciated like any expert’s opinion i.e., it may be accepted or rejected or partly accepted and partly rejected or may be considered alongwith the other material and thus it does not have the same binding effect as the report of DVO has, while estimating the value of any asset. It means that the AO is not bound to accept the report of the special auditor and the same has to be considered in the facts and in the circumstances of the case, However, if there is no adverse material or adverse circumstances of sufficient and satisfactory reasons for rejecting or discarding such report, then such report has to be considered and relied upon, because the reference to special auditor is made after recording the satisfaction that there is complexity of the accounts, which necessitates the examination by the special auditor. Once such complexity of the accounts of the assessee is found by the AO and further he is of the opinion that it is necessary to get the accounts audited by an accountant under Section 142(2A), then the expert’s view obtained through such special audit report has to be taken into account while deciding the relevant issues.

18. In the present case, as is mentioned by the learned CIT(A) also and as pointed out by us, the special auditor had brought to the notice of the concerned Departmental authorities about the difficulties faced by him and it was only when the Departmental authorities orally agreed for demonstrative report, that test check was done and the report was accordingly submitted on the basis of such test check.

19. The AO received the report of the special audit on 25th Feb., 1999. He did not reject the report at this stage, nor examined the special auditor, nor issued any further directions to him. The AO could have remanded the matter to the special auditor with further directions. This course was also not adopted. In case report was not found satisfactory or did not furnish 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 Section 142(2A), such course is not barred. Under Section 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-section (2) or any audit report under Sub-section (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-section 2 of Section 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 such other particulars as the AO may require.”

20. The intention of the legislature in granting opportunity of being heard to the assessee against the utilization of adverse reports against the assessee appears to be very clear. It also means that if the report favouring the assessee is not going to be accepted, then also the assessee should be provided the opportunity or further direction should be given to the assessee for obtaining and furnishing a complete and correct report. In the present case, the AO neither rejected the report on its receipt nor asked the assessee to obtain a further report nor provided any opportunity to the assessee or to the auditor to meet out the defects Since none of such courses were opted, in our view, the AO was not justified in discarding the report while passing assessment order by observing that the same was incomplete and was demonstrative only. Although the AO has mentioned in para 4.5 that the report is being utilized for the purpose of assessment wherever considered relevant and necessary. But on perusal of the assessment order, it is found that the report has not been considered for deciding any point; rather the report has been criticized, condemned and has been discarded. In view of these facts, the AO was not justified in his approach while discarding the report of the special auditor in the manner in which he has done so.

21. It appears that the AO has not appreciated the correct import of Section 142(2A) and the intention of legislature behind this provision. The procedure laid down for making reference to the special auditor indicates that it is only when complexity of accounts is found, that an expert of accounts having specialized skill is appointed to examine the account books. The special auditor is appointed by the Department. He works under the Department and is to be treated as its agent. He carries out the directions issued to him by the Department and remains under direct control and supervision of the Department. The AO or the Departmental authorities can issue further directions and also remove the special auditor and can also appoint some other special auditor in place of the auditor appointed originally. Viewed in the context of the process of appointment etc. the principal i.e., the Department is not justified in discarding report of special auditor unless there are justifying reasons.

It is also to be 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, therefore, of no consequence. In. any case, we do not find substance in the grounds taken by the Department. Consequently, these grounds stands rejected.

Ground Nos. 5 to 7:

23. These grounds are directed against the deletion of addition of Rs. 8,55,25,37,608 on account of unexplained cash credit under Section 68.

24. The AO discussed the issue in para. 10. The findings of the AO are recorded in para. 10.9. The assessee had mobilized deposits amounting to Rs. 8,55,25,37,681. The AO has observed that despite several directions, the assessee did not furnish the details of deposits above. Rs. 20,000 or more requisitioned by him. He has further observed that since the assessee did not comply with the requisition, independent effort was made by him to verify the identity and capacity of the deposits and the genuineness of the relevant transaction by issuing notice under Section 133(6) directly to the depositors, through which they were required to furnish certain particulars. The AO has also mentioned that the Departmental inspectors were deputed to make enquiry directly by contacting the depositors concerned. The AO has pointed out various deficiencies in the address of the depositors. These deficiencies have also been specifically noted by him in para 10.2 of the assessment order. He also issued notice under Section 142(1) dt. 12th April, 1999, to the assessee to explain and to show cause as to why adverse inference may not be drawn about the entire deposits mobilized, by the assessee during the year and why the same may not be treated as unexplained deposits under Section 68 of the Act. The detailed replies of the assessee dt. 5th April, 1999 and 16th April, 1999, have also been reproduced in para. 10.5. Thereafter, the AO has proceeded to observe that the entries in the books of account of the assessee cannot be accepted as neither the genuineness of the transaction has been established nor the capacity of the depositors has been proved. The AO after pointing out several defects has concluded that the entire deposit of Rs. 8,55,25,37,618, are unexplained deposits credited in the books of account of the assessee. He has, thus, made an addition of this amount under Section 68 of the IT Act, 1961. In doing so, he has also placed reliance on the decision of Calcutta High Court in the case of CIT v. Precision Finance (P) Ltd (1994) 208 ITR 465 (Cal), the decision of Kerala High Court in Edayanal Constructions v. CIT (1990) 183 ITR 671 (Ker) and the decision of Delhi High Court in the case of CIT v. Sofia Finance Limited (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 in para 167, the AO after conducting enquiries confronted only 7 deposits to the appellant and when the appellant wanted the account numbers, the same were not furnished. In any case, this shows the smallness of the deposits which could be suspected to be unverifiable by the AO. Under these circumstances, as the AO has not been able to prove that the total deposits collected by the appellant during this year were unverifiable, the addition of Rs. 8,55,25,37,608 is deleted. However, as the time factor has been stated to be the main constraint in furnishing the details (by the appellant) and conducting the enquiries (by the AO), it would be in the interest of justifice if the matter is restored back to the AO. The appellant is directed to furnish the details in respect of remaining 98 branches called for by the AO vide notice dt. 8th March, 1999. Thereafter, the AO may conduct enquiry in respect thereto to the extent he deems fit. Before making any addition the appellant should be given a reasonable opportunity to rebut the conclusions drawn by the AO as a result of his enquiry. Following further directions are also issued :

169. During the course of the proceedings the appellant made an apprehension that in case he furnishes the list of deposits exceeding Rs. 20,000 only, the AO will reject the said list on he ground that the same is incomplete and again the complete depositors’ ledger will be called for. For this reason only he furnished the complete depositors in respect of 7 branches earlier from which the details were prepared by the AO and the deposit ledgers of Basti and Khalilabad which run into 37579 pages. The AO may take this aspect of the case into consideration and simply saying that if an assessee is carrying on the voluminous business, he would be ready to furnish voluminous details also, may not be sufficient. A Judicial approach should be adopted in the matter and in case the AO wants the details of deposits exceeding Rs. 20,000 only, he should believe the appellant in this regard, otherwise if the appellant wants to furnish the complete depositors’ ledger, the same should be accepted.”

26. The learned CIT/Departmental Representative, Shri Sen, has challenged the findings and the directions of the learned CIT(A). He has highlighted the observations of the AO and has submitted that since the assessee could not discharge its burden to prove identity 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 Section 68 of the IT Act, 1961, He also contended that, in view of the provisions contained under Section 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 provided the material demanded by the Departmental Authorities. It was also pointed out that regular inspections are carried out by RBI and the assessee is not found working in contradiction to the directions of the RBI. The learned counsel also pointed out that further list and confirmations were called by the learned CIT(A), which were filed before him and, thus, he was-convinced with the material Another contention of the learned counsel for the assessee was that Section 68 is to be interpreted in the context of the working of the assessee and since the assessee was doing a banking business or financial business, the rigour of Section 68 has to be relaxed as is done in the case of banks i.e., if somebody deposits the amount with the assessee-company, then the detailed inquiry is not required to be made and the deposit is to be accepted as is done in the banks. The learned counsel also submitted that the deposits have been coming from earlier years and continued in the assessment year under consideration. It was also pointed out that in the asst. yr. 1994-95 and 1995-96, the addition on account of 15 per cent of the opening balance and 30 per cent of the closing deposits was made, but in the assessment year under consideration 100 per cent deposits mobilized during the year have been treated to be non-genuine, which means that the deposits accepted to be genuine in earlier years, have also been treated to be the non-genuine, which approach is self-contradictory.

28. We have carefully considered the facts and circumstances relating to this issue, the case laws to which reference was made by both the sides and the rival, submissions. At the outset, it may be pointed out that the directions of the learned CIT(A) have been interpreted differently by the Department and by the assessee. Whereas, according to the assessee the learned CIT(A) has deleted the entire addition of Rs. 8,55,25,37,618 according to the Department, the entire matter has been set aside and the matter has been restored to the AO. On behalf of the assessee, it was also informed that the Department has assumed that the entire matter has been set aside the restored to the AO and on the basis of such assumption, even the assessment has been completed against which the assessee went in appeal before the learned CIT(A), which appeal has been allowed on this point in favour of the assessee.

29. On perusal of the 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 Section 68. The assessee is a non-banking financial institution, which was recognized by the Reserve Bank of India. The certificate of registration given by the Reserve Bank of India is available at p. 137 of the paper book. The registration has been continued even in subsequent years. The assessee in its reply dt. 5th April, 1999, available at p. 243 to 260 of the paper book, (volume 11) has explained the nature of its business. It was stated in clear terms that the assessee-company was carrying on the business of mobilization of deposit from its members under the direction and control of Reserve Bank of India and for carrying out these activities, it had engaged the services of M/s Sahara India as its agent. It was also stated that the business of the assessee-cornpany is akin to a banking company, inasmuch as during the relevant previous year, the business was conducted by the company through its agent. Thus, it is clear that the deposit received by the assessee are not in the nature of taking of any loan or deposit for the purposes of its business, rather it was the business of accepting the deposits. In view of this nature of business of the assessee, the scrutiny of the deposits cannot be same as in the case of an assessee making entry of deposit on account of loan etc. Since the business of the assessee is to receive deposit as a bank, the assessee cannot be expected to examine the entire details of depositors and also the capacity of the depositors before taking or receiving the deposits. If this lengthy process is undertaken by the assessee before accepting the deposit, then the business may not be carried off smoothly.

(ii) The AO was not at all justified in making addition of 100 per cent in respect of deposits. This approach is not justifiable at all. The learned CIT(A) has given detailed reasons against this approach and we fully concur with him. If the total deposits mobilized during the year were found to be unexplained credits under Section 68, there was no justification to allow reimbursement of expenses at 3 per cent of the deposits mobilized. Secondly, the deposits made were not the fresh deposits during this year, but the deposits were coming from the earlier years and in earlier years, a part of the deposits were treated as genuine Thus, if the action of the AO is upheld, it shall lead to absurdity, inasmuch as the deposits which have been treated to be genuine in earlier years have to be treated as non-genuine during this assessment year.

(iii) 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 Section 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, statutory auditors and special auditors. Even in writ petitions, the investigation is called for. The assessee has filed the copy of judgment of Hon’ble Delhi High Court in the case of B.S. Sehgal v. Governor of RBI, which is available at p. 1595 to 1621 of the paper book. The judgment is dt. 12th May, 2000. In the public interest litigation, the allegations of irregularities were made against Sahara groups of companies also. Although the allegations were regarding utilization of funds, but it has been observed at p. 1613 of the paper book that Sahara India Financial Corporation was inspected by RBI and the allegations were not found correct. The Hon’ble Court had rejected these applications by observing that no merit is found against the allegations made against Sahara groups. On that basis, the name of Sahara groups of companies arrayed at share numbers 30 to 34 was deleted from the array of parties by the Hon’ble High Court. This goes to show that the scrutiny of the affairs of the assessee-company is made for different purposes from time to time.

(v) So far as the present assessment year under consideration is concerned, the AO asked the assessee to produce the depositors having deposit of Rs. 20,000 or more. He did not direct the assessee to file verification from depositors having deposit lesser than Rs. 20,000. However, he has made the addition of entire deposits. Thus, from this angle also, the approach of the AO cannot be sustained.

(vi) It may be pointed out that in the case of the assessee, for this assessment year also, 192 branches have been checked. The details of this test-checking is given in para 167 of the order of the learned CIT(A). The details are as under :

“167. The AO initially wanted details of the deposits of Rs. 20,000 or more in respect of all the branches and the appellant explained that it was not possible to take out the details of deposits exceeding Rs. 20,000 only and he was ready to furnish the details of total deposits. May be that considering the large number of deposits the AO wanted such deposits only with respect to 100 branches selected by him whose details have been given in Annexure ‘B’ of the assessment order. The details of all deposits with respect to two branches only were furnished. The AO, in fact, examined the ledger in respect of 192 branches, detailed below :

List prepared by the AO

7 branches

Complete ledgers 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 cooperate 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 the deposits as unverifiable or non-genuine.

(viii) In view of the settled position relating to the deposits appearing in the books of account of the assessee, the inquiry by the AO cannot be denied, but the standard and volume of inquiry has to be considered in the nature of business activity of the assessee and the volume of such business. As submitted on behalf of the assessee, there were about three crores depositors and it was not possible even for the Department to go through the record relating to such a large number of depositors nor to examine such volumes containing such deposits. The assessee had offered to get the examination of all the deposits relating to one branch as a sample checking. In the case of Life insurance Corporation of India v. CIT (1996) 219 ITR 410 (SC), in a different context, the Hon’ble Supreme Court of India has observed that law does not contemplate or require the performance of act “Lex non cogit ad impossibilia” This maxim may be applied in the case of the assessee also.

(ix) The Department has placed reliance on the decision in the case of Kale Khan Mohammad Hanif v. CJT (1963) 50 ITR 1 (SC), the decision in the case of CIT v. Precision Finance (I) Ltd. (1994) 208 ITR 465 (Cal), and has also made reference to other decisions, but these decisions are distinguishable on facts. No doubt, the burden of proof lies on the assessee and it is for the assessee to prove the identity of the depositors etc. but the nature and volume of the business of the assessee has to be duly considered. Besides, in the case of the present assessee, even verification from some of the depositors was filed, which was not doubted by the Department and if the verification is filed in respect of some depositors and particular transactions were found to be genuine, then general addition under Section 68 cannot be justified.

(x) In the case of CIT v. Smt P.K. Noorjehan (1999) 237 ITR 570 (SC), it was observed by the Hon’ble Supreme Court of India in the context of Section 69 that although discretion has been conferred on the ITO under Section 69 of the Act to treat the source of investment as the income of the assessee if the explanation offered by the assessee is not found satisfactory and the discretion has to be exercised keeping in view facts and circumstances of the particular case.

(xi) In the case of CIT v. Rohini Builders (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 Section 68 cannot be applied without having regard to the nature of deposits etc.

(xii) In the case of Dy. CIT v. 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 hands of the assessee under Section 68.”

The Bench found considerable force in the argument of the assessee’s counsel that if the Revenue suspects genuineness of the deposits, it would have been proper to instruct the assessee to stop payment till the depositors appeared before the AO and satisfied him. After considering the nature of the business of bank, it was further observed :

“It is difficult to hold that when thousands of deposits are made with the assessee-bank, the assessee should be in a position to identify each and other depositor. It is true that as far as the taxing authorities are concerned, banks and individuals or for that matter any institutions are liable to be taxed and treated equally. At the same time, it is also true that law does not demand impossible. In view of this observation also, the nature of the business of the assessee and volume of work are to be treated as significant consideration.”

30. In view of the above, the approach of the AO cannot be upheld and the grounds taken by the Department in support thereof cannot be accepted. In fact, we find force in the conclusions of the learned CIT(A) in rejecting the approach of the AO. However, since the learned CIT(A) too has set aside the matter and has restored the same to the AO after deleting the addition, while upholding his approach, we are not required to confirm the deletion as such and, thus, approve the approach of the learned CIT(A) in setting aside the matter to the AO and for deciding the same’ afresh.

31. In view of the above, the grounds taken by the Department are decided accordingly.

Ground Nos. 8 & 9:

32. These grounds have been taken to challenge the deletion of addition of Rs. 74,89,65,000 on account of unexplained deposits under Section 68 of the IT Act, 1961.

33. The AO observed that the company had increased its share capital by mobilizing a sum of Rs. 24,65,08,900 as share capital, a sum of Rs. 32,58,80,100 as share premium and a sum of Rs. 17,65,76,000 as share application money. The AO required the assessee to furnish the following details vide notice dt. 15th Sept., 1998.

“(i) Details of share issued during the year above Rs. 1 lakh, (ii) Details of share application money received during the year.

(iii) Details of share premium account and to state whether the company is listed with stock exchange or not, so, if list price of share at the time of issue of shares. 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 Section 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 has, thus, made an addition of Rs. 74,89,65,000 by observing as under :

“11.9 On the basis of the above discussions the entire share capital of Rs. 24,65,08,900, share premium of Rs. 32,58,80,100 and share application money of Rs. 17,65,76,000 aggregating to Rs. 74,89,65,000 is treated as unexplained credit in the books of the assessee under Section 68 of the IT Act, 1961, and is accordingly added back to the total income of the assessee-company.”

35. The assessee challenged the addition made by the AO before the learned CIT(A). The learned CIT(A) has considered the issue in detail and has deleted the addition and has restored the matter to the AO for the limited purpose i.e., if it is found that share capital was introduced by non-existing shareholders then such capital shall be treated as unexplained deposit and the same shall be added to the total income of the appellant. The relevant observation of the learned CIT(A) are contained in paras 205 and 206 which are as under :

“205. The above shows that whatever details were called for, were furnished by the appellant. The sequence of events show that the AO also was trying to test check the share capital deposits by large number of shareholders and with respect to a large number of shareholders, without conducting any enquiry of any sort, the share capital invested by them has been completely treated as unexplained in spite of the fact that 3 directors made huge investment in the share capital and a number of depositors accepted to have invested in share capital with the appellant. This action of the AO by no stretch of imagination can be sustained. I, therefore, delete the addition made by the AO. Since the AO has already conducted the enquiry to test check the genuineness of the shareholders, he should furnish the result of his enquiry in respect of those shareholders who, as per the records of the AO, did not exist. To this extent the matter is restored back to the AO. Thereafter, it will be the duty of the appellant to prove the existence of such shareholders. In case the appellant fails in this regard, the share capital introduced by all such non-existence shareholders will be treated as unexplained deposit and added to the total income of the appellant. The Delhi High Court also on page 105 in their judgment in the case of Sophia Finance Ltd. held as below :

“The ITO would be entitled to enquire and it would 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 of Section 68 of IT Act, 1961, has been discussed and explained by various Courts. We consider it proper to make reference to some of the decisions on this point. These decisions are being referred in brief here.

(i) In the case of CIT v. Steller Investment Ltd. (1991) 192 ITR 287 (Del), the Hon’ble High Court of Delhi went to the extent of observing that even if the subscriber to the capital was not genuine, under “no circumstance, could the amount of share capital be regarded as undisclosed income of the company.” This decision of Hon’ble Delhi High Court has been subsequently upheld by the Hon’ble Supreme Court of India in the case of CIT v. Steller Investment Ltd. The Hon’ble Supreme Court of India has concluded as under:

“Even if the subscribers to the increased share capital of assessee-company were not genuine the amount could not be regarded as undisclosed income of the assessee-company. Tribunal having cancelled CIT’s order under Section 263 whereby the assessment was set aside on the ground that AO had accepted the genuineness of share capital without making enquiries, no question of law arises.”

The order of the Court dismissing the appeal of the Revenue is as under:

“We have read the question which the High Court answered against the Revenue. We are in agreement with the High Court. Plainly, the Tribunal came to a conclusion on facts and no interference is called for. The appeal is dismissed. No order as to costs.”

In view of the decision in the case of the Hon’ble Supreme Court of India in the case of V.M. Salgaocar & Bros. (P) Ltd. v. CIT (2000) 243 ITR 383 (SC) if appeal is dismissed by Hon’ble Supreme Court of India against the judgment of High Court in limine, the judgment appealed against stands confirmed. The Hon’ble Supreme Court of India in the case of Salgaocar (supra) has observed as under :

“When an appeal is dismissed by the Supreme Court by a non-speaking order, the order of the High Court or the Tribunal from which the appeal arose, merges with that of the Supreme Court. In such a case, the Supreme Court upholds the decision of the High Court or the Tribunal from which the appeal is, provided under Clause (3) of Article 133 of the Constitution.”

In view of the above observation of the Hon’ble Supreme Court of India, the decision of Hon’ble Delhi High Court in the case of Steller Investment (supra), 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 (supra) 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 (supra) 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. Section 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 would be credited in the books of account of the company. The ITO would be entitled to enquire, and it would 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. Shares cannot be issued in the name of non-existing persons. The use of the words “may be charged” (emphasis, italicised in print, added) in Section 68 clearly indicates that the ITO would then have the jurisdiction, if the facts so warrant to treat such a credit to be the income of the assessee.”

Thus, the identity of the shareholders can definitely be enquired and has to be proved and if the shareholder is found non-existing then the ITO can treat such a credit to be the income of the assessee. If a further test of ascertaining the identity of shareholder as genuine investor i.e., as a capital investor is applied, then necessarily the scope of inquiry will be extended to know the source of investment in the hands of the shareholder. Thus, if the assessee is required to prove the genuineness of the investor in terms of his capacity, then such an assessee will be under an obligation to prove the source of the source, which is not the requirement of law even according to the case of Sophia Finance Ltd. (supra) In this regard, we may quote the relevant observations of the Hon’ble Court, which are as follows :

“If the shareholders are identified and it is established that they have invested moneys in purchase of shares, then the amount received by the company would be regarded as capital receipt and to that extent, the observation in the case of Steller Investment are correct.”

In view of the above observations also, there is concurrence in the two decisions of the Hon’ble High Court on the requisite conditions which are :

(a) That the shareholder is identified; and

(b) That the shareholder has invested money in the purchase of shares.

If the abovementioned two requirements are satisfied, then no further inquiry should be made. Thus, in a case where identity of the shareholder is established and further shareholder confirms that he has invested money in the purchase of shares, then no further inquiry can be made against the company for the purposes of making addition under Section 68 of the IT Act, 1961, 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 (supra).

(iii) In the case of CUT v. Smt. P.K. Nooqahan, (supra), 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 Section 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 Section 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 make it mandatory on his part to deal with the investment, as income of the assessee as soon as latter’s explanation happened to be rejected. On reference to the Hon’ble High Court, the view taken by the Tribunal was affirmed. On further appeal, the Hon’ble Supreme Court of India upheld the decision of Hon’ble High Court as observed as under:

“Held, dismissing the appeal, that in the instant case, the Tribunal had held that the discretion had not been properly exercised by the ITO and the AAC taking into account the circumstances in which the assessee was placed and the Tribunal had found that the investments could not be treated as income of the assessee. The High Court had agreed with the said view of the Tribunal. There was no error in the finding recorded by the Tribunal. Section 69 could not be invoked in respect of the investments of the assessee.”

Although the decision of Hon’ble Supreme Court of India is in relation to Section 69, but on the same analogy, it can be said with reference to Section 68 that the word “May” cannot be taken as “Shall” and, thus, the ITO is not obliged to make addition in every case where the explanation offered by the assessee in respect of capacity of investor is not found to be satisfactory, The discretion has to be exercised keeping in view the facts and circumstances of the particular case.

(iv) In the case of Dy. CIT v. Rohini Builders (supra) the assessee-firm had taken loans from various parties and during the assessment proceedings, it furnished the loan confirmation giving full address, GIR/PAN etc. of all the depositors. After making inquiry, the AO doubted genuineness of the loans taken by the assessee and made on addition of Rs. 12,85,000 to the returned income of the assessee. The CIT(A) confirmed it. On further appeal, the Tribunal held that phraseology of Section 68 of the IT Act, 1961, was clear that the legislature has laid down that in the absence of satisfactory explanation, the unexplained cash credit may be charged to the income as the income of the assessee of previous year but the legislative mandate is not in terms of the word “shall be charged to income as the income of the assessee of that previous year”. It was also held that unsatisfactoriness of the explanation does not mean and need not automatically result in deeming the amount credited in the books as income of the assessee. The Tribunal found that the assessee had discharged the initial burden, which lay on it in terms of Section 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 shareholder as a genuine investor is applied, then the burden shall be cast upon the assessee to prove the source of the source, which is not the intention of the legislature so far as Section 68 is concerned.

(v) In the case of CIT v. Quick Travels (1993) 199 ITR (St) 84, the Hon’ble Supreme Court of India dismissed a SLP by the Department to appeal against the order of Hon’ble Delhi High Court, rejecting a reference application on the question, whether the onus cast on the assessee under Section 68 of the IT Act, 1961, extended to proving the source of funds, which resulted in cash credits. In that case, the assessee-company had increased its share capital, which it claimed, was paid for in cash. The ITO held that the identity of persons, who had acquired the shares as well as their creditworthiness were not established and treated the value of the shares as income from undisclosed sources of the assessee. The CIT(A) reduced the amount of such income and the Tribunal affirmed his order. Reference applications were rejected by the Tribunal and the Hon’ble High Court.

(vi) The Hon’ble Patna High Court has also considered the issue in the case of Saraogi Credit Corporation v. CIT (1976) 103 ITR 344 (Pat). The relevant observation of the Hon’ble High Court are reproduced below :

“Once the identity of the third party is established before the ITO and other such evidence are prima facie placed before him pointing to the fact that the entry is not fictitious, the initial burden lying on the assessee can be said to have been duly discharged by him. It will not, therefore, be for the assessee to explain further as to how or in what circumstances the third party obtained the money or how or why he came to make an advance of the money as a loan to the assessee. Once such identity is established and the creditors as in the present case, have pledged their oath that they have advanced the amounts in question to the assessee, the burden immediately shifts on to the Department to show as to why the assessee’s could not be accepted and as to why it must be held that the entity, though purporting to be in the name of a third party, still represented the source. And, in order to arrive at such a conclusion, even the Department has to be in possession of sufficient and adequate materials.”

The Hon’ble Patna High Court has further observed as under :

“The ITO’s rejection, 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 Section 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 v. CIT (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 agreeing to the decision of the question on the basis of the material already on record before the Tribunal.”

In that case, it was held that mere confirmatory letter from the creditor could not be sufficient evidence to prove the genuineness of the loan. But such observation has been made after taking into consideration the fact that ITO had relied upon same confessions made by the creditor in which they had disowned the advances of loans. In view of such contradiction and discrepancy coming on account of confessional statement of the creditors, the confirmatory letters were not found sufficient to prove the genuineness of the creditors. In that case, the assessee had also foreclosed any further inquiry in the matter by agreeing to the decision on this question on the basis of material already on record. Thus, this decision of Hon’ble High Court of Allahabad is distinguishable on facts.

38. We have also considered the scope of Section 68 in detail in our order dt, 31st Oct., 2002, rendered in ITA No. 511 & 627/All/2000 in the case of Sumek Power Cap Ltd v. Asstt. CIT for asst. yr. 1996-97 and 1997-98 after enlarging the relevant case laws, we have derived the following propositions.

“35. In view of the above decisions, the following legal proposition may be derived :

1. In the case of a company having credited the amount on receipt of share subscription money, Section 68 of the IT Act, 1961, empowers the ITO to make inquiry about the identity of the creditors and genuineness of the credits.

2. So far as the assessee is concerned, the burden is upon it or him to prove the identity of the creditors or shareholders as the case may be.

3. The assessee is also to prove that the sums credited against the creditors have been invested by them and the payments have been received by it.

5. The assessee cannot be required to prove the sources of the investment made by the creditors or shareholders as the case may be.

6. In case the capacity of the shareholder or investor is found doubtful, then necessary action may be taken against them by making a proper inquiry, but against the assessee-company.

7. In other words, no addition can be made under Section 68 against the assessee on account of credits appearing in his or its account merely on the ground that he or it could not explain the capacity of the investor or source of the source.”

39. In view of the above, the legal position 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-company through its branches. In consideration to the services rendered by the agent, the assessee-company agreed to reimburse the expenses incurred by the agent. The relevant stipulations in relation to this aspect were incorporated in the MoU, a copy of which has been filed by the assessee in the paper book which is available at pp. 1057 to 1063. The relevant stipulations regarding reimbursement of expenditure etc. are contained in Clause 3 to 8 of the MoU which are being reproduced below :

(1) Sahara India shall submit to Sahara India Finance Corporation Ltd. statement of accounts or such other information as Sahara India Financial Corporation Ltd. may require from time to time for its financial data or on other matters.

(2) Shah India shall render the services to Sahara India Financial Corporation Ltd. through its various offices being presently run or by opening new offices or shifting the offices from one place to other, through its staff and officers.

(3) That Sahara India for the present has entered into a Memorandum of Understanding with Sahara India Financial Corporation Ltd. to render its services as Agent to Sahara India Financial Corporation Ltd. Shara India Financial Corporation Ltd. hereby agrees that it will bear max. 60 per cent of the total expenditure incurred by Sahara India, in consideration of Sahara India acting as agents for and on behalf of Sahara India Financial Corporation Ltd. and in consideration of Shara India carrying out all such actions as are laid down in these presents.

(4) Sahara India Financial Corporation Ltd. shall bear service charges to Sahara India in the manner as stated hereunder for acting as Agent for and on behalf of Sahara India Financial Corporation Ltd.

(i) 2% of the deposits collected during the year upto a total collection of Rupees 300 crores.

(ii) 1.5 per cent of the deposits collected during the year exceeding Rupees 300 crores but not exceeding Rupees 500 crores.

(iii) 1 per cent of the deposits collected during the year in excess of Rupees 500 cores

(5) That any change in the constitution of M/s Sahara India following its reconstitution in future, shall not affect the carrying out of this agreement.

(6) Sahara India shall regularly in a manner as may be agreed upon from time to time with Sahara India Financial Corporation Ltd. furnish details of the percentage of expenses which are to be borne by Sahara 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, 5,500

This amount was
claimed in the original return dt.  0th
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 in para  .  of his order which is as under :

Dated : 8th Oct., 1996

To

M/s Sahara India Financial Corporation Ltd.

Sahara India Bhawan, Lucknow.

Debit Note

Dear Sir,

We have debited your account with the following expenditure incurred on your behalf in managing the financial schemes of your company in terms of MoU dt. 22nd March, 1995, for the year ending 31st March, 1996. :

1.

Establishment Expenses

21,89,03,952

2.

Travelling & Conveyance

2,42,79,779

3.

Stationery & Printing

3,61,71,369

4.

Advertisement & Publicity

28,25,718

5.

Commission, Promotional & Development
expenses

52,53,17,942

6.

Collection charges

20,35,36,740

 

Total

1,01,10,35,500

(Rupees one hundred one crores ten lacs thirty five thousand and five hundred only).

You are requested to kindly credit the above amount to our account in your books of accounts and confirm.

Thanking you,

For Sahara India

Sd/-

(Om Prakash Srivastava)

Partner

(b)

Rs. 54,52,534

This amount was
claimed by the assesses in revised return on 31st March, 1998, on the basis
of debit note dt. 4th Oct., 1997. The AO has mentioned about this debit note
in para 3.4 of his order.

(c)

Rs. 3,25,70,026

This amount was claimed
in the revised statement of computation filed by the assessee on 8th April,
1999. The details of this amount are given in annexure ‘B’ of the order of
the learned CIT(A) which is available on para. 144 of his order.

Thus, total claim of he assessee towards reimbursement of expenses was at Rs. 104,90,58,060.

(III) During the assessment proceedings, the AO appointed a special auditor. A copy of such appointment was served upon the assessee on 27th Jan., 1999. The assessee was directed to get the special audit done through Shri Sudhendra Jain & Co. Chartered Accountants. Direction No. 2 issued to the special auditor relate to the issue of verification of expenses. The directions have been reproduced on para. 8 of the assessment order. The relevant direction is as under :

“2. Details of expenditure incurred for running the schemes which are directly relatable to the business of the assessee giving the nature, mode and date of incurring of these expenditure.

(IV) The special auditor submitted the special audit report to the AO Regarding the expenses incurred by the assessee, following observations have been made in the special audit report :

“Expenditure directly relatable to the 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 Princlplal 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 cha                26,66,478
 (m) Repairs & Maintenance	                    74,23,392
 (n) Other expenses 	                            50,68,962 
 

 The expenses incurred directly by the assessee are explained by the assessee as directly relatable to the business of the assessee and are in agreement with objects specified in the Memorandum of Association of the company.
 

The above extract of the report has also been reproduced in para. 4.7 of the assessment order on page 11 & 12.
 

V. Regarding the special audit, the AO has made observations in para 4.8 of the assessment order, It is mentioned that according to the special auditors, the agent had maintained its accounts on cash system whereas the assessee has been shown to have maintained the accounts on mercantile basis.

VI. The AO has also considered the allocation of expenses by the agent in the hands of the assessee. The details of this allocation are prepared on the basis of the report of special auditor as given in annexure “A” attached with the assessment order. This annexure is also available on para. 76 to 78 of the paper book. In the special audit Report, expenditure incurred for running the scheme by the assessee is classified in two categories :

(A) Expenditure directly relatable to the scheme of the assessee.

   

(1) Commission paid to field staff, etc.	84,76,23,423
 

(2) Collection charges reimbursed in financial year 1996-97        20,35,36,740 
 

So far as (1) is concerned, this amount involve share of the assessee and of another principal. Hence the scheme of the assessee was to be separated from this amount. So far as (2) is concerned, this amount as spent only on the schemes relating to the assessee alone.
 

(B) Expenditure incurred for services towards old and new deposits Rs. 46,89,39,837. This amount was spent by the agent for both the principals i.e., the assessee and the other principal namely M/s Sahara India Mutual Benefit Co. Ltd. The share of the assessee out of this amount was at Rs. 28,21,80,818.

(C) The expenditure incurred by the agent for its own agency business Rs. 11,99,63,788.

(D) The expenditure incurred during financial year 1996-97, but accounted for in the subsequent year at Rs. 8,14,55,626. The share of the assessee, after this amount is worked out at Rs. 3,25,70,026.

VII. Before rejecting the books of account of the assessee, the AO issued show cause notice dt. 8th March, 1999, under Section 142(1). In reply to this notice, the assessee filed written submission dt, 5th April, 1999. Regarding the claim of expenditure, 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 assessee as regards reimbursement of expenses is entirely dependent on the debit notes issued by the Agent, the same should have been accounted for accordingly in the books of the assessee in the year in which the said debit notes were raised. But the assessee has not done so and as such, it cannot be said that the assessee was following a correct and consistent method of account. Moreover, a major portion of its expenses claimed is not entered in the books of accounts for the relevant year. The assessee is not sure about the actual expenses incurred by it which is evident from the fact that it revised its computation of income frequently. Hence, it cannot be said that the assessee followed its own admitted method of accounting which is claimed to be mercantile or for that matter that the assessee followed a correct method of accounting from which correct income of the assessee can be computed.”

IX. The AO also observed that the claim of the assessee for reimbursement of expenses amounting to Rs. 101,10,35,500 was not verifiable from the books of account of the assessee. This observation is contained in para. 6.3 which is as under:

“The assessee claimed reimbursement of expenses amounting to Rs. 101,10,35,500 as per computation of income filed along with return. The same were claimed on the basis of a debit note obtained from the agent in which only the grouping of the expenses were given and the same were not supported by any evidence on documents and as such, were not verifiable from the books of account of the assessee.”

X. In para 7.1, the AO discussed the issue relating to reimbursement of expenditure and also made reference to the order of the Tribunal for asst. yr. 1991-92 and 1992-93 wherein the Tribunal had allowed expenses at a specific percentage of the total deposits mobilized by the assessee during the relevant years (4.5%). The submission of the assessee vide reply dt. 5th April, 1999, regarding verification of the expenditure was that all the vouchers in respect of various heads of expenditure reimbursed by the assessee to the agent had been examined by the AO at the time of examination of the books of account, of the agent, M/s Sahara India whose examination have been taken by the AO on a number of occasions and this fact is verifiable from the assessment record of the agent. However, this submission of the assessee was not accepted by the AO who 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 Section 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, he disallowed a sum of Rs. 45,65,28,749 out of the claim made in P&L a/c at Rs. 31,04,877. Thus, so far as the claim made in original return at Rs. 1,01,10,35,500 is concerned, a total sum of Rs. 75,44,59,372 stood disallowed. Beside this, the following sums were also disallowed.

(a) Rs. 5,51,81,673 Relating to old administrative expenses of the assessee.

(b) Rs. 54,52,534 Collection charges made on the basis of debit note dt. 4th Oct., 1997.

(c) Rs. 28,23,379 Service charges

(d) Rs. 3,25,70,026 Accounted for subsequent assessment year.

On the basis of above disallowances, an addition of Rs. 81,50,93,579 was made by the AO by observing as under;

“7.8 The assessee mobilized deposits accounting to Rs. 8,55,25,37,618 through its agent during the year and claimed reimbursement of expenses amounting to Rs. 1,01,10,35,500 as per original return and further expenses for this year accounted for in the next year amounting to Rs. 5,51,81,673 and collection charges of Rs. 54,52,534 as per revised return. The asgessee further claimed Rs. 28,23,379 as service charges and reimbursement of expenses of Rs. 3,25,70,026 vide so called re-revised statement of income. On the basis of the discussion made in the foregoing paragraphs, I allow 3 per cent of Rs. 8,55,25,37,618 i.e., Rs. 25,65,76,128 as reimbursement out of expenses to agent and disallow the balance of other expenses claimed as above. Since the so-called re-revised statement of income filed on 9th April, 1999, does not have any legal validity and the computation of income would be made by me on the basis of revised return only, the actual addition which is to be made to the total income of the assessee on the basis of the revised return works out to Rs. 81,50,93,579.”

XIII. The AO also examined the issue from a different angle. According to him, out of the expenses of Rs. 9,79,39,855 shown by the agent, namely M/s Sahara India is its own expenses. The AO observed that out of it, the share allocable to the assessee was at Rs. 5,89,30,410 and this amount could have been allocated to the assessee, but then he concluded that since he had already allowed reimbursement of expenses at Rs. 25,65,76,128 as per para 7.8, this amount of Rs. 5,89,30,410 shall stand disallowed.

XIV. The assessee challenged the addition of Rs. 85,04,86,984 by taking ground No. 6 before the learned CIT(A). This ground is as under :

“6. That 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 (para 68 to 98F) 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 Tribunal for asst. yr. 1991-92 and 1992-93 and, allowed the claim of the assessee in respect of this amount. His relevant findings are recorded, in para. 88. In para 90, he had directed the AO to allow this claim.

XVII. So far as the remaining amount is concerned, he has considered the issue from para 91 to 98 of his order and after rejecting the approach of the AO in allowing expenditure by following the method of 3 per cent of total deposit moblized, he held that the liability of the assessee was to reimburse the agent to the extent of 60 per cent of the expenses incurred by the agent in view of the MoU. He has also observed that the expenses incurred by the agent were verifiable in the hands of the agent and not in the hands of the assessee. According to the learned CIT(A), the assessee was entitled to the entire claim. He, thus, deleted the addition made by the AO by observing as under:

“To sum up, the total expenditure reimbursable by the appellant to its Agent comes to Rs. 1,07,37,79,990 (1,02,57,35,331 + 2,84,96,143 + 1,40,95,982). Against the amount the appellant claimed reimbursement of expenses to the agent to the extent of Rs. 1,04,90,58,060. Clearly no disallowance. Accordingly the addition made by the AO on this ground is deleted.”

XVIII. The Department has challenged the approach of the learned CIT(A) by taking ground No. (sic) which is as under :

“That the learned CIT(A) has erred in law as well as on facts in deleting the addition of Rs. 81,50,93,079 on account of reimbursement of expenses, without appreciating the facts that such reimbursement of expenses was made simply on the advise of M/s Sahara India and without any supporting evidence in respect of the expenditure on reasonableness thereof.”

41. Before us Shri S.C. Sen, CIT (Central) submitted that reliance on debit note was not justified because the debit note is issued by the agent which is a sister-concern of the assessee. According to him, provisions of Section 40A(2) are also attracted in the case of the assessee. The learned CIT also submitted that although the AO has not invoked provisions of Section 40A(2), but it is within the power of the Tribunal to consider such plea. The learned CIT(A) also submitted that the AO doubted the legitimacy of the expenses and mere fact that in the case of M/s Sahara India tax was paid on the receipt of income will not be material, as the burden of profit is on the assessee who claims expenditure. In support, the learned CIT placed reliance on the decision in the case of CIT v. Motor General Finance (P) Ltd. (2002) 254 ITR 449 (Del) and also on the decision reported in Goodlas Narolac Paints Ltd. v. CIT (1982) 137 ITR 58 (Bom). He also placed reliance on the following decisions :

1. Smt. Indermani Jatia v. CIT (1951) 19 ITR 342 (All)

2. J.K. Woollen Mfrs. (P) Ltd. v. 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, the order was recalled by allowing M.A. of the assessee and the issue was adjudicated afresh by the Tribunal. The learned counsel for the assessee also submitted that regarding the relationship between the assessee and the agent, no finding has been recorded by the AO and fresh ground cannot be taken at the stage of this appeal. He also pointed out that debit note was a sufficient proof to show the genuineness of the expenses and detailed vouchers which were available with the agent could have been examined while considering the case of that assessee and since no disallowance was made in the case of that assessee, the claim of the assessee could not have been rejected.

43. We have carefully considered the facts and circumstances relating to this matter, the entire material on record and the rival submissions.

44. At the outset, it may be pointed out that the Department has raised the objection against admissibility of documents filed by the assessee on 7th Feb., 2002, before the Tribunal, A written objection dt. 28th Oct., 2002 was also filed by the Department in this regard. The assessee filed reply to this objection on 17th Dec., 2002. It was shown by the assessee that the copies of affidavits contained in volume 6 were very much before the learned CIT(A), who admitted these documents and duly considered the same and, therefore, no question arises for not admitting or not considering these documents by the Tribunal because it is not a fresh material, which is filed before the Tribunal. After considering the material on record, we found force in the submission of the learned counsel for the assessee. Hence, the objection of the Department was rejected by us by passing a detailed order on 13th Feb., 2003, on the ground that since the learned CIT(A) has himself made mention of these affidavits in his order, the assessee is not filing fresh material before us. In our view, therefore, the learned CIT(A) was fully justified in taking into account the material filed before him in the shape of confirmatory letters and affidavits.

45. During the course of hearing the learned CIT took another objection by pleading that provisions of Section 40A(2) are attracted in the present matter and the expenditure can be disallowed on that basis also. Since this issue was not raised nor decided by the AO, nor agitated before the learned CIT(A), such plea cannot be entertained by us 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 MoU has to be treated as valid agreement as it was not declared invalid or illegal by any competent authority. Even the AO has not declared this agreement as invalid or sham.

(2) The MoU was approved by the Company Law Board under Section 297 of the Companies Act vide order dt. 24th April, 1995. Hence, it got approval by a competent authority. Thus, the memorandum has been approved by a statutory body. The agreement has been made on account of business necessity and expediency and its stipulations have to be enforced between that parties.

(3) The AO has not invoked provisions of Section 40A(2). He has not examined the relationship between assessee and the agent and therefore, it cannot be said that the agreement was only a device to claim non-genuine expenditure.

(4) The expenditure claimed by the agent and reimbursed by the assessee has not been held to be non-genuine or unreasonable or excessive.

47. In the case of assessee as well as in the case of agent-firm, the accounts were audited by statutory auditors and by special auditors appointed by the Department and no defect was found in the accounts of the assessee or in the accounts of the agent by such auditors in respect of the items relating to expenses.

48. The AO has followed the earlier practice of allowing expenditure by applying 3 per cent of the total deposits. There appears to be no sound basis for adopting any percentage for allowing the expenditure or claim of the assessee towards reimbursement of the expenditure. If the expenditure was found to be non-genuine or found to be relating to the non-genuine transactions, then either the whole should have been disallowed or the disallowance should have been made in respect of such items which were not found to be genuine or were found to be fake or were found non-verifiable. The question of estimating the expenditure, therefore, does not arise in the context of the present matter.

49. The AO rejected the claim of the assessee on the ground of non-verifiability of the expenses. The whole structure of the business of the assessee has not been properly appreciated. The assessee was doing the business through its agent and incurred only nominal expenditure in its head office as the entire expenditure in the business activity of the assessee i.e., in running the schemes, and collecting the deposits was incurred by the agent. Hence, question of producing vouchers 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 considered and examined in the case of the agent-firm which incurred the expenditure. It has been pointed out before us by the learned counsel for the assessee that in assessment year under consideration, no allowance of expenditure has been made in the case of the agent i.e., M/s Sahara India. Since that the assessee has shown the expenditure which has been claimed by it from the principal i.e., the assessee and further since that the assessee has also paid income-tax on the receipt of reimbursement of expenses, the disallowance of the expenditure in the hands of the assessee cannot be justified.

51. The AO has applied the rate of 3 per cent of total deposits. While doing so, he has made reference to asst. yr. 1991-92 and 1992-93 by observing that the facts of those assessment years were similar. In our view, he has failed to examine the facts of those assessment years and the present assessment year properly. The comparison made by him cannot be sustained because for asst. yrs. 1991-92 and 1992-93, a different MoU dt. 1st April, 1991, was operating. Reference to this MoU has been made in the order of the learned CIT(A) as well as in the order of the Tribunal in its order for asst. yrs. 1991-92 and 1992-93. The terms and conditions of that MoU were totally different. In the MoU applicable to this assessment year, a ceiling of 60 per cent of the expenses to be reimbursed by the assessee was placed. In earlier MoU dt. 1st April, 1991, no such limitation was imposed. As per Clause 5 of the MoU dt. 1st April, 1991, expenditure incurred by the firm for rendering services was to be reimbursed on the basis of actual expenses supported by valid documents in the case of direct expenses and for indirect expenses, the allocation was to be made in proportion to the deposit. These conditions have been totally changed in the MoU dt. 22nd March, 1995. So far as this MoU is concerned, no distinction has been made between direct and indirect expenses and the assessee agreed to bear maximum of 60 per cent of the total expenditure incurred by the agent in consideration of M/s Sahare India acting as agent for and on behalf of the assessee. Thus, the AO was not justified in comparing the case and facts of the assessee for asst. yr. 1996-97 to the facts of asst. yrs. 1991-92 and 1992-93 as there is no similarity of facts pertaining to these assessment years with the present assessment year.

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-examine the matter and on re-examination of the matter in asst. yr. 1992-93, the assessment order dt. 15th March 2002, has been passed and claim of the assessee has been considered and adjudicated. Thus, the order of the Tribunal for asst. yr. 1992-93, wherein rate of 4.5 per cent of total deposit was applied is not to be treated as final order.

54. The AO did not accept the report of the special authority on this issue. He was not justified in doing so, particularly when no further directions were issued to the special auditor by the AO on this issue. Besides, the AO also proceeded to examine the accounts of the agent for deciding the claim of the assessee regarding reimbursement of expenses. The enquiry made by him was half-hearted. Most of the commission agents later on confirmed the receipt of commission, etc. The learned CIT(A) has considered the additional evidence filed before him. These documents have also been placed in volume 6 of the paper book. Thus, on the basis of the scrutiny made by the learned CIT(A), most of the payment made to the commission agents were found to be verifiable. This evidence cannot be ignored, as no objection was taken before the learned CIT(A) by the Department while admitting this material by him.

55. In view of the above, the approach of the AO cannot be justified. Likewise, the arguments advanced by the learned Sr. Departmental Representative can also not be accepted. The leaned Sr. Departmental Representative has contended that the burden was on the assessee to prove the genuineness of the expenditure, etc. Such argument is definitely a legally correct argument, but the standard of proof and the volume of material required to prove the claim has to be considered in relation to the particular facts of the case. In a case where the assessee is himself incurring the expenditure, it will be completely justified to ask such assessee to produce vouchers etc. and verify the expenses, but in a case where the assessee is getting the work done through other assessee, then asking for vouchers maintained by such assessee will be a cumbersome process. To iterate, if such vouchers are examined in the case of such assessee and are not found to be non-genuine or if the expenditure is not found to be the un-verified and consequently not disallowed in the case of such assessee, then demanding such vouchers again from the principal shall not be a correct approach.

56. The Department has placed reliance on the following decisions :

(a) CIT v. Rayala Corporation (P) Ltd. (1995) 215 ITR 883 (Mad)

(b) Manian Transports and Ors. v. S. Krishna Moorthy, ITO (1991) 191 ITR 1 (Mad)

(c) Lachminarayan Madan Lal v. CIT (1972) 86 ITR 439 (SC)

(d) Bhavna Chemicals Ltd. v. CIT (1998) 231 ITR 507 (SC)

(e) Goodlas Naiolac Paints Ltd. v. CIT (supra)

(f) CIT v. Motor General Finance Ltd. (supra)

(g) J.K. Woollen Mfrs. (P) Ltd. v. CIT (supra)

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. v. CIT (supra), the issue related to applicability and scope of Section 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 Section 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 special engineering or business qualification as General Manager on a salary of Rs. 1,000 per month and other allowances and commission of 25 per cent on the net profit if such profit exceeded Rs. 1 lakh, The assessee claimed an allowance of Rs. 75,465, which it had paid as commission to the General Manager, but the Tribunal agreeing with the AAC held that the entire sum could not be regarded as having been wholly and exclusively laid out and expended for the purposes of business and allowed only 1-1/2 of this amount. This approach was upheld by the Hon’ble High Court. The facts of the present matter are not similar to the case of J.K. Woollen Mills (supra) and, therefore, this decision cannot be of any help to the Department.

(B) In the case of Lakchminarayan Madanlal v. CIT (supra), on facts, it was found that the agreement was a make-believe and the payment of commission made on the basis of agreement was not found allowable. In that case, three partners constituted a firm, the shares in the selling agency firm were of wives and sons of the partners. The selling agency had entered into an agreement, but on facts, it was found that the selling agency firm was not genuine as it had no godown of its own nor any transport vehicles. Thus, it was held that the agreement was made only to minimize the assessee’s tax liability.

In the present case, there is no allegation that the agreement between the principal and the agent was only to reduce the tax liability of the assessee. Hence, this case is not applicable.

(C) In the case of Manian Transport and Ors. v. S. Krishnamoorthy, ITO (supra), the facts were totally different. The case related to prosecution of managing partner. Hence, this decision is not relevant.

(D) In the case of CIT v. Rayala Corporation (supra), the issue related to the Power of Attorney. Thus, this case is not directly applicable.

(E) Similar is the position with Hon’ble Supreme Court of India in the case of Bhavna Chemicals Ltd. v. CIT (supra)

(F) On the other hand, the issue relating to allowability of expenditure has been considered in the case of Godavari Sugar Mills Ltd, v. CIT (1985) 155 ITR 306 (Bom). In that case the ITO can disallow expenditure on the ground that such expenditure is excessive or unreasonable. It was further held that unless it can be shown that the transaction in question is sham one or unless the value shown was not the value 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 v. HO (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 expenditure is to unduly benefit someone, the ITO is well within his right to come to a finding that the expenditure is not exclusively for the purposes of business.”

If we apply the above test in the case of the present assessee, we find that the ITO has not held that the expenditure reimbursed by the assessee was not for the business purposes or that it was excessive or unreasonable. So far as the appointment of the Agent and the task assigned to it was concerned, the wisdom of the assessee cannot be challenged, particularly, when the agreement has not been found to be sham.

(H) In the case of ITO v. Balsam Hygiene Products (1985) 12 ITD 335 (Bom) the issue related to payment of commission to selling agent. The selling agent was a close associate of the assessee firm itself. There was an agreement between the assessee and the Agent. The rates of commission were fixed under an agreement. The ITO held that the payment was excessive. He estimated the payment of commission at 5 per cent as reasonable as against 22 per cent claimed by the assessee. On appeal, the learned CIT(A) estimated the expenses at 22.5 per cent as reasonable. In further appeal filed by the Department, the Tribunal upheld the claim of the assessee by observing as under:

“Whether an agency will be profitable to the selling agent, has to be only decided by the expenditure that the agency will have to incur. Unless the agency commission is sufficient to cover the expenditure, no selling agency would be taken up in the course of a business. Therefore, we will accept the assessee’s submission that the rate of agency commission has to be fixed up in such a way that the agent makes a profit. Any rate of commission which will not cover the expenses of the selling agent per se, will not be a business proposition. Consequently, It cannot be considered excessive or unreasonable. Therefore, the expenses incurred by the company in this case is a very material point to decide whether the agency commission is excessive or unreasonable. We, therefore, do not accept the Department’s contention that the expenses of the company are not relevant to this issue.”

In view of the above approach of the AO in estimating the expenditure at 3 per cent cannot be upheld.

57.A It may also be pointed out that in the case of the assessee, in asst. yr. 1992-93, the Tribunal had allowed expenditure at 4.5 per cent and 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. 3747 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 given at p. 1306 of the paper book. According to, the assessee, our of Rs. 1,52,01,00,000 indirect expenses are at Rs. 46,89,39,837, whereas direct expenses on commission and collection charges were at Rs. 84,76,23,423 and Rs. 20,35,36,740 respectively. The learned CIT(A) has bifurcated direct and indirect expenses. In our view, this approach is not justified, because as per the MoU, 60 per cent of the total expenditure incurred by the Agent is to be allowed. Thus, it is 60 per cent out of which Rs. 1,52,01,00,000 which may at the most be reimbursible expenditure as per MoU.

59. So far as the other expenditure as per Annexure ‘B1’ is concerned, the total expenditure is shown at Rs. 5,42,83,373.09 out of which the own expenditure of Sahara Firm was at Rs. 5,15,64,979. Thus, the remaining amount of Rs. 5,37,67,724 was to be allocated between the two Principals. The share of the assessee has to be taken at 60 per cent of Rs. 5,37,67,724. Thus, the reimbursement of expenditure out of.Rs. 5,42,83,373.79 shown in Annexure ‘B’ is to be worked out accordingly.

60. The above working is subject to the further condition that in case of the firm, if the expenditure is found to be verifiable and is allowed, then on the basis of the above working, the reimbursement in the case of the assessee shall be worked out and allowed in the light of our observations made in para 57 and 57A.

61. So far as the addition of Rs. 81,50,93,679 is concerned, as observed above, the learned CIT(A) has set aside the issue relating to Rs. 5,51,81,673 and has also allowed the claim of the assessee in respect of Rs. 28,23,379. We uphold his order on these aspects.

In view of the above, we do not uphold the findings of the learned CIT(A) as such, but direct the AO to work out the relief to the assessee by taking into consideration the allowance or acceptance of expenditure in the case of the agent in this assessment year and in the light of our observation in para 57, 58, and 59.

62. So far as the expenditure of Rs. 8,14,55,626 is concerned, it is further directed that the AO shall further verify that this expenditure which is claimed in this assessment year and accounted for in the subsequent assessment year, is not claimed in the subsequent assessment year and in case it is found that such an expenditure has also been claimed for asst. yr. 1997-98, then the claim shall not be considered in this 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 assessee-company, over and above the reimbursement of the expenses claimed, which also included the rent. The version of the assessee was that due to clerical error the amount, which should have been shown in the balance-sheet under the head “other assets” by sub-name “Rent Receivable Account”, it was debited in the general ledger under the head “Rent paid account”, because of which the rent paid was debited to the P&L a/c. The AO after considering the reply of the assessee and after examining the P&L a/c made an addition of Rs. 3,81,000, which was difference between Rs. 78,18,973 and Rs. 74,37,973. The relevant finding of the AO are as under:

“7.13. On verification of the profit and loss account and computation filed alongwith return it is found that the assessee has in fact, shown net profit as per P&L A/c at Rs. 21,35,27,643 in the computation of income whereas actual amount reflected in the P/L A/c is Rs. 19,89,66,022 difference between which comes to Rs. 1,45,61,621. So, it transpires that Rs. 1,45,61,621 has already been included in the total income of the assessee in the computation of income filed alongwith return and as such no separate addition of that amount is called for. However, assessee’s claim that actual rent paid during the year was Rs. 78,18,973 is not correct as I have already shown above that the rent paid for the Mumbai office included ‘In schedule 15 is Rs. 74,37,973. Hence, the difference between the two i.e., Rs. 3,81,000 stand unexplained and is disallowed and added back to the total income of the assessee,”

65. The learned CIT(A) has considered this issue in paras 103 and 104 of his order. He has deleted the addition by observing as under:

“104. Shri Thakkar submitted that vide letter dt. 24th Dec., 1998, the details of rent were furnished and the complete details were as below :

   M/s Champion Engg.				72,87,073
Rent for staff residence			 1,50,000
Paid to M/s Sahara India			 2,40,000
Paid to M/s Sahara Estates (P) ltd.		 1,32,000
Misc payment below Rs. 50,000			    9,000
						_________
						78,18,973
						_________
 

Whereas the AO has allowed the first two amounts mentioned above, for no reason he has disallowed the remaining 3 amounts even though the complete details were furnished before him.
 

105. I have considered the submissions raised on behalf of the appellant and it appears that the AO without assigning any reason has overlooked the balance 3 payments made by the appellant. 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:

   

Interest
 On deposit received under financial schemes run by the		70,22,80,000
company
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 considering the monthwise figures of interest paid (1995-96), he has noticed that additional interest of Rs. 11,17,49,000, which has been provided in this year as per RBI’s instructions to pay interest at 8 per cent per annum instead of 5 per cent provided by the assessee Against the additional interest provided at Rs. 11,17,49,000, the explanation of the assessee was called for. After considering the same, the AO has made addition of Rs. 54,98,28,562 by observing as under :

9.12 The above amounts were unduly retained by the Agent in the absence of any specific and clearout stipulation in the MoU in this regard which simply mentions that the Agent shall collect the requisite deposit amounts from the members of the savings schemes of the assessee-company and shall send the money so collected to the assessee-company alongwith statement of accounts. If we forget for the time being that the MoU and the relevant transactions were between two sister-concerns and assume that the same were entered into between two concerns who are not related to each other by any consideration other than purely commercial consideration mutually beneficial to each other, we will logically find that any Principal would try to ensure that money collected by way of deposit on its behalf is remitted to it and deposited in its account within the quickest possible time, if possible on the same day itself on which the money is collected, so that it can utilize and invest the same in no time to earn maximum return therefrom as it has to incur interest payable on the deposits collected with effect from the very day on which the same is collected. This rationale does not find place in the MoU or the actual transactions which took place between the agent and the Principal in the instant case. The assessee-company unduly allowed the interest bearing funds belonging to it to be retained by the Agent to be remitted to it according to the sweet will and convenience of the Agent in the absence of any specific stipulation in the MoU. Hence, it can not be said that the entire amount of interest Rs. 20,10,34,2054 determined by me as otherwise allowable was incurred wholly and exclusively for the purpose of business of the assessee under Section 37(1) of the IT Act, 1961, Accordingly I disallow a sum of Rs. 4,85,82,767, worked out by applying the minimum rate of interest of 8 per cent p.a. paid by the assessee on deposits 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 Section 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 v. H.R. Sugar Factory (P) Ltd. (1991) 187 ITR 363 (All)

2. CIT v. Saraya Sugar Mills (P) Ltd. (1993) 201 ITR 181 (All)

3. Manna & Sons v. CIT (1981) 129 ITR 475 (All)

4. Triveni Engg. Works Ltd. v. Off (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 basis cannot be upheld. The Supreme Court also in the case of Calcutta Co. Ltd. (supra) has held that difficulty in ascertaining the quantum of liability with reasonable precision does not prevent accrual of liability. I fully agree with the appellant that the liability is a present liability and accrues from day-to-day. Simultaneously, I do not agree with the appellant that interest liability should be provided on estimate basis. As the appellant fully knows all the 3 ingredients i.e., the principal, the rate of interest and the period for which the interest is to be allowed, there should be no difficulty in giving the actual working of interest payable on the deposits, I, therefore, restore the matter back to the AO and direct the appellant to provide the actual interest liability payable on the deposits. The AO will be at liberty to check/test check these calculations. Certainly, if the status of account in the year under consideration is a lapsed account, no interest liability will accrue on such an account. While providing the calculations of interest, the appellant may take into consideration the directions of the Reserve Bank of India issued to him in this regard and interest was provided @ 5 per cent only, certainly the excess interest liability will be admissible in this year. With these directions, the matter is restored back to the AO.”

71. Since the matter is restored back to the AO to decide the issue afresh, in our view, there should be no grievance to the Department. Thus, in view of the above the entire issue shall be considered and examined de novo and shall be decided afresh after providing opportunity to the assessee of being heard and the observations of the CIT(A) shall not effect the decision of the AO. The ground is, therefore, allowed for statistical purposes.

Ground No. 13.

72. This ground is direct against the deletion of addition of Rs. 4,85,82,467 being disallowance of interest in respect of funds retained by the sister-concern. The learned CIT(A) deleted the disallowance by observing as under:

“134. I have carefully considered the submissions raised on behalf of the appellant and this issue was involved in 1994-95 and 1995-96 and the appeals for these two years were decided by me. For the detailed reasons given by me in my order for asst. yrs. 1994-95 and 1995-96. I do not find any justification of making any addition with respect to 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/A11/98 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 absence of any agreement to charge interest the assessee-company could not be compelled to change it from its sister-concern. This view was upheld by the Tribunal to which both of us are a party.

45. Further, on facts, the AO as is evident from p. 77 of the paper book informed the assessee that the interest was not charged by them on the balance with the firm for an initial period of 2 months in respect of each amount. To this, the assessee took the stand that the amount to reach from the collection stage to the principals was to pass through various levels, such as branch, sector region, zone and Head Office and would take two months period for which no interest was being charged. The AO however, allowed one month period, The learned counsel for the assessee submitted that they could not be charged with any notional interest. The learned Sr. Standing Counsel supported the view taken by the Revenue authorities,-

46. Having considered the matter carefully, we feel that there is no legal jurisdiction for disturbing the system being followed. The relicence of the MoU, the view taken by the Tribunal in a sister-concern’s case referred to supra, and the likelihood of the assessee’s stand about the reaching of the collected amount to the principals in a span of 2 months not being very unusual impel us to reverse the approach accorded to the issue by the authorities below. In the result, the addition of Rs. 76,14,468 is deleted.

74. Since the facts relating to these assessment years are not dissimilar, we respectfully follow the order of the Tribunal and delete the disallowance made by the AO.

Ground No. 14

75. This ground runs as under:

“The learned CIT(A) has erred in law and on facts in allowing the assessee’s claim albeit partially, for deduction of share issue expenses of Rs. 11,62,770 by wrong application of Section 35D of the Act.”

76. The AO has considered the matter regarding disallowance of share issue expenses in para 12 of his order. He has made addition of Rs. 11,62,77,802 by observing as under :

“12. The assessee claimed deduction for the entire amount of capital issue expenses amounting to Rs. 1,16,27,702 in the computation of income filed alongwith the revised return. On verification it is found that the same represents expenses incurred in connection with issue of shares. Hence, the same represents capital expenditure. But the assessee has claimed 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 Section 35D(1)(C)(iv) and 1/10th of the total expenses is allowable under Section 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 Section 68, no deduction under Section 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 Section 35D(1); expenditure by the appellant before the commencement of his business or after the commencement of business in connection with the extension of his individual undertaking or in connection with his setting up a new industrial unit is an admissible deduction, The appellant undertook the setting up of a new unit namely Sahara India TV net work and certainly with respect to the issue of share capital, l/10th of the expenditure incurred by the appellant was an admissible deduction. I have already held that the AO is not justified in coming to the conclusion that the total issue of shares was unverifiable because atleast the AO also has admitted that no addition on account of share capital was to be made with respect to the shares subscribed by the 3 Directors. I, therefore, direct the AO to allow a deduction of Rs. 11,62,770 (i.e. 1/10th of the expenditure incurred by the appellant)”

78. The issue stands by the decision of Hon’ble Delhi Court in the case of CIT v. Hindustan Insecticides Ltd. (2001) 250 ITR 338 (Del). In that case, it was held that the expenditure was of capital nature. It was also held that the claim was not admissible under Section 35D(2)(c) of the Act also. In view of the above, the assessee is not entitled to any relief. This ground is, therefore, allowed.

Ground No. 15

79. The ground is directed against deletion of addition of Rs. 2,42,120 out of telephone expenses.

80. Since it is the case of the company, the disallowance is not justified, because personal use of telephone is not to be considered in the case of the company. Hence, the learned CIT(A) was justified in deleting the addition of Rs. 2,42,120. His findings are contained in para. 238. The same is, therefore, upheld.

Ground No. 16

81. This ground is of general nature, which does not require any specific adjudication

82. In the result, the appeal is partly allowed for statistical purposes.

C.O. No. 4/LUC/2002 ;

83. In the cross objection, the assessee has taken fifteen grounds.

84. Grounds No. 1, 2, 5, 8, 9, 10, 13 and 14 have not been pressed at the time of hearing of the appeal in the cross-objection.

85. So far as ground No, 11 is concerned, in view of our findings on ground Nos. 5 to 7 of the ground of appeal in ITA No. 747/A11/2000, this ground has become infructuous and is not required to be adjudicated,

86. Ground No. 12 relates to, the addition on account of share capital issue.

87. We have considered 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 dividend during the year. As per the assessee, income of Rs. 62.50 lakhs has already been taxed in the preceding year and, therefore, it should be allowed during this year.

90. The relevant facts and figures are required to be verified in the context of the assessment order for earlier assessment years. Hence, we direct the AO to verify the version of the assessee as stated above. In case, on verification, the version is found to be correct on the basis of assessment order on earlier assessment years, then the claim of the assessee should be considered and allowed accordingly.

91. In view of the above, ground Nos. 3 & 4 of the cross-objection are decided accordingly.

92. The cross-objection is partly allowed.

93. In the result, the appeal and the cross-objection are partly allowed for statistical purposes.