ORDER
R.K. Gupta, J.M.
1. These are two appeals by assessee and the Department against the order of CIT(A) relating to asst. yr. 1991-92.
2. We will take first the appeal of the Department in ITA No. 2038. The following grounds of appeal have been taken by the Department in its appeal:
“On the facts and in the circumstances of the case, the learned CIT(A) has erred in law in:
(i) Deleting the addition of Rs. 13,185 in respect of service charges, which were paid vide voucher dt. 30th March, 1989, and were inadmissible being related to earlier assessment year in view of the method of accounting followed by the assessee.
(ia) Admitting fresh plea/evidence regarding above, without recording reasons for the same and without giving an opportunity to the AO under Rule 46A of the IT Rules.
(ii) Deleting the disallowance of Rs. 9,000 paid to Shri P.L. Jain on account of income-tax matters even when the payment was covered under Section 40A(12) of the Act.
(iii) Allowing relief of Rs. 5,150 out of total disallowance of Rs. 10,150 made out of subscription paid to various clubs.
(iv) Allowing relief of Rs. 1,10,601 out of disallowance of Rs. 2,28,593 made on account of commission paid to managing director and other executives.
(v) Deleting the disallowance of Rs. 49,591 made out of managerial remuneration to the managing director.
(vi) Allowing relief of Rs. 3,33,059 treating the same as revenue expenditure out of total disallowance of Rs. 3,50,609 made out of expenses debited under the head repairs and maintenance of building.”
3. At the time of hearing the learned counsel of the assessee stated that except ground Nos. 1 and 2, all other grounds are covered by the orders of the Tribunal for earlier years. The attention of the Bench was drawn on copies of the orders of the Tribunal placed in the record. On the other hand, the learned Departmental Representative fairly conceded to the submissions made by the learned Authorised Representative. Regarding ground Nos. 1 and 2, the learned Departmental Representative placed reliance on the order of the AO. On the other hand, the learned counsel of the assessee placed reliance on the order of the CIT(A).
4. After perusing the material on record, we find that ground Nos. 3 to 6 are covered by the order of the Tribunal passed for asst. yrs. 1987-88 to 1990-91, as the similar issues were involved in those years. These orders were passed in ITA No. 3898/Del/1990, ITA No. 6399/Del/1990, ITA No. 7019/Del/1992 and ITA No. 2337/Del/1996 vide its orders dt. 27th Feb., 1997; 17th Aug., 1995; 15th April, 1998 and 31st March, 2000, for asst. yrs. 1987-88, 1988-89, 1989-90 and 1990-91, respectively. Therefore, in view of the precedence, we confirm the order of the CIT(A) in respect of ground Nos. 3 to 6.
5. Ground No. 1 is against the deletion of addition of Rs. 13,185 in respect of service charges. The AO disallowed the claim of the assessee by observing that the expenses did not relate to the year under consideration. The CIT(A) deleted the addition by ascertaining the fact that the bill on account of service charges paid to M/s C.P. Consultancy Service (P) Ltd. was received during the year and the expenses were claimed during the year under consideration only, as no expenses were claimed in previous year. The claim of the assessee, therefore, was allowed by the CIT(A). These findings of the CIT(A) are findings of fact. Accordingly, we confirm his order on this issue.
6. The remaining issue in appeal of the Department is against deleting the disallowance of Rs. 9,000 under Section 40A(12), paid to Shri P.C, Jain. A sum of Rs. 9.000 was paid to one Shri P.C. Jain on account of handling the income-tax matters pertaining to asst. yrs. 1988-89 and 1989-90. The AO disallowed the claim of the assessee under Section 40A(12) of the Act. The CIT(A) deleted the addition by observing that Shri P.C. Jain had attended the income-tax matters and there is nothing on record that no services were rendered by Shri P.C. Jain. Therefore, the disallowance made by the AO was deleted.
6.1 Again, we do not find any unreasonableness on the part of CIT(A) who deleted the addition of Rs. 9,000 after ascertaining the fact that the amount was paid to Shri P.O. Jain on account of rendering the services in regard to income-tax matters. Therefore, we confirm the deletion.
7. Now, we will take the appeal of the assessee, i.e., ITA No. 1711/Del/1997. As many as 15 grounds of appeal have been taken by the assessee in its appeal. The counsel of the assessee filed a concise chart in regard to all the additions sustained by the CIT(A) and had stated that except ground Nos. 1 and 5, all other grounds have already been decided by the Tribunal while deciding the appeals for earlier years, either in favour of the assessee or against the assessee or the matter was restored to the file of the AO. Therefore, it was requested that in regard to all those grounds, similar view may be taken.
8. On the other hand, the learned Departmental Representative fairly stated that most of the issues involved in the appeal of the assessee have already been decided by the Tribunal as stated by the counsel of the assessee. As per chart, the grounds of the assessee are summarized as under:
Rs.
1. Sale of UTI units treated as speculation loss 51,61,875 2. Deduction under Section 80-1 20,97,948 3.1 Add back of amount paid to auditors 14,000 for taxation matters under Section 40A(12) 3.2 Retainership fee paid to Sh. Anoop Gupta 24,000 disallowed as non-business purposes 3.3 Professional charges paid to Lall Lahiri & 14,200 Salhotra disallowed as non-revenue expenses 4. Subscription and membership to clubs disallowed as non-business expenses 5,000 5. General expenses disallowed as earlier year expense 54,177 6. Commission paid to employees disallowed as non-business expenditure 1,17,992 7. Reward/incentive paid to employees 84,235 8. Disallowance under Rule 6D 12,512 9. Staff welfare expenses 1,39,080 10. Telephone provision at the residence of directors & executive 10,000 11. Expenses on annual general meeting 10,000 12. Foreign travelling expenditure disallowed as non-business expenses 84,552 13. Repair and maintenance expenses on building 17,550 14. Labour charges 32,720 15. Deductions under Section 80HHC - - - 9. In ground Nos. 1 and 5, the issues involved are new, which we will consider on a later stage.
10. Ground No. 2, which is in regard to deduction under Section 80-1, has been restored by the Tribunal to the file of the AO in earlier years, i.e., for asst. yrs. 1989-90 and 1990-91, decided in ITA No. 3547/Del/1997 and in ITA No. 2337/Del/1996 vide its order dt. 3rd Nov., 1999, and 31st March, 2000, respectively for deciding the issue afresh. Therefore, for this year also, we restore the matter to the file of the AO to decide the issue afresh after affording a proper opportunity.
11. Ground No. 3(1) has been decided in favour of the assessee by the Tribunal for asst. yrs. 1987-88, 1989-90 and 1990-91 (supra). Accordingly, here also, we decide this issue in favour of the assessee.
12. Ground No. 3(2) has been restored to the file of the AO by the Tribunal for asst. yr. 1990-91 (supra). Here also we restore the matter back to the file of the AO to decide afresh, in view of the decision of the Tribunal for asst. yr. 1990-91.
13. Ground No. 3(3) has been decided by the Tribunal against the assessee in ITA No. 2337/Del/1996 for asst. yr. 1990-91. Therefore, in view of the precedence, the order of the CIT(A) on this issue is confirmed.
14. Ground Nos. 4, 6, 7, 9, 10, 11, 13 and 14 have been decided by the Tribunal in favour of the assessee while deciding the appeals for earlier years, i.e., asst. yrs. 1987-88 to 1990-91, as mentioned above. Therefore, in view of the reasoning given by the Tribunal for earlier years, we decide these issues in favour of the assessee by deleting the respective additions sustained by the CIT(A).
15. Ground No. 8 is against disallowance under Rule 6D at Rs. 12,512. This issue has been decided against the assessee in immediately preceding year, i.e., asst. yr. 1990-91 decided in ITA No. 2337/Del/1996 (supra). Accordingly, we confirm the order of the CIT(A) on this issue.
16. Ground No. 12 was not pressed, as the same was decided by the Tribunal against assessee in earlier year. Therefore, the same is dismissed as not pressed.
17. Ground No. 15, which is against the deduction under Section 80HHC, was partly allowed by the Tribunal for asst. yr. 1990-91 in ITA No. 2337/Del/1996 (supra). Therefore, we direct the AO to recompute the deduction, in view of the finding of the Tribunal given for asst. yr. 1990-91.
18. Ground No. 5 is against the sustenance of addition of Rs. 54,177 on account of general expenses. The AO disallowed the entire claim of the assessee by observing that these expenses pertain to earlier year. The contention of the assessee was not accepted by the CIT(A), that the payment of these bills were cleared during the year under consideration because there was a dispute and the matter was not settled during the year under consideration.
18.1 The counsel reiterated his contentions as raised before the CIT(A). It was further submitted that no expenses were claimed by the assessee in earlier year. Further, reliance was placed on the decision reported in Saurashtra Cement & Chemical Industries Ltd. v. CIT (1995) 213 1TR 523, 530 (Guj). On the other hand, the learned Departmental Representative placed reliance on the order of the CIT(A).
18.2 After considering the submissions of both sides, we find that the assessee deserves to succeed in this ground. The bill from M/s Hindustan Investment Security Services was received during the year under consideration, and the same was settled during the year under consideration, and no deduction whatsoever was claimed by the assessee earlier. Therefore, we hold that the claim of the assessee is allowable. The ratio of the decision reported in (1995) 213 ITR 523 (Guj) (supra) is also in support of the cause of the assessee. Therefore, we delete the addition of Rs. 54,177.
19. Now, we will take the remaining ground, i.e., ground No. 1 in the appeal of the assessee. The assessee is objecting in treating Rs. 51,61,875 being loss on sale of units of Unit Trust of India as speculation loss. It is also urged that the loss on sale of units is not covered by the Explanation to Section 73 of the IT Act.
19.1 The assessee purchased 25 lakhs units of UTI from M/s ANZ Grindlays Bank (for short hereinafter referred to as “ANZ”) vide its letter dt. 21st May, 1990, for a consideration of Rs. 3.75 crores. The same units were sold to ANZ on 5th July, 1990, which resulted into loss of Rs. 51,61,875 which was claimed by assessee while filing the return of income. During the assessment proceedings the assessee was required to prove the genuineness of the loss. A copy of board resolution dt. 27th May, 1990, in regard to purchase transaction of units was filed. It was further submitted that all the transactions were made through banking channel and the units were transferred in the name of the assessee. Relevant evidences were also filed. However, the AO was not satisfied. In his view, this was only a device to reduce the tax liability. Therefore, he held that the transaction involved was not a bona fide transaction, but was a speculation loss. While holding so, various reasons were recorded by the AO in his order. Some of them were, that units were purchased on 21st May, 1990, whereas the board passed resolution on 27th May, 1990; no correspondence could be filed by assessee in support of the claim. The employee of the bank was also examined, who stated that he had not advised to enter into transaction. It was also found by the AO that bank has not charged any interest on the amount of loan sanctioned for purchase of these units. It was further noted by the AO that in the month of May there was highest price of the units, whereas in the month of July, there was decline in price of units. Examples for last four years were also quoted in his order. Further, by placing reliance on the decision of McDowell & Co. v. CTO (1985) 154 ITR 148 (SC), the AO held that the transactions are of speculation in nature which were entered with a device for the motive to reduce the taxability. Accordingly, the claim of loss of the assessee was negatived.
19.2 Before the CIT(A), same contentions were reiterated. It was further submitted that there was no colourable device, as neither assessee was related to ANZ nor with UTI. It was further submitted that units were transferred in the name of assessee and heavy dividend of Rs. 45 lakhs was earned by assessee, which has already been offered for taxation. Further, reliance was placed in the case of M.V. Valliappan and Ors. v. CIT (1988) 170 ITR 238 (Mad) and Appollo Tyres v. Dy. CIT. (1992) 44 TTJ (Coch) 534: (1992) 43 ITD 464 (Coch). After considering the submissions and perusing the other material on record, the CIT(A) was also of the view that this was a speculation loss. Therefore, the order of the AO was upheld. While doing so, few further reasonings were also recorded by the CIT(A) in his order. Some of the observations/reasonings are as under:
(a) The units transferred to the appellant were not transferred in the name of the appellant in the register of UTI.
(b) It seems that there was a clear understanding between the appellant and the bank that this transaction was only for the period of 60 days and immediately after the completion of 60 days, the units were returned back to ANZ Grindlays Bank.
19.3 The Explanation to Section 73 of the IT Act provides that where any income is earned by the company from purchase and sale of shares and the company’s income does not consist mainly from interest on securities, income from house property, capital gains, etc., then it would be deemed for the purpose of Section 73 of the IT Act that the company was carrying on speculation business. Further observing that the appellant has claimed deduction under Section 80M in respect of dividend earned and the AO’s observation that the prices of the units are at their peak in the month of May and least in the month of July, as no explanation has been furnished by the appellant as to why it decided to purchase units in the month of May and why they have sold in the month of July, the CIT(A) upheld the order of the AO.
19.4 Lengthy arguments were putforth by the counsel of the assessee. Reliance was placed on various case law and attention of the Bench was drawn on various papers placed in the paper book. It was further added that the reasoning of CIT(A) that units were not transferred in the name of assessee, is factually incorrect as units were duly transferred in the name of assessee by the UTI and only then the dividend was paid to the assessee. For this, the attention of the Bench was drawn on pp. 90-92 of the paper book, where copies of the transfer certificates are placed. It was also added that the CIT(A) was also wrong in observing in his order that the ownership of the units remained with ANZ because the ownership was duly transferred in the name of the assessee. Again, attention of the Bench was drawn on same pp. 90-92 of the paper book. It was further stated that all the transactions, as and when they took place, were duly recorded in regular books of account. The attention of the Bench was drawn on various pages of the paper book. It was further submitted that huge dividend, i.e., of Rs. 45 lakhs was earned and has been shown in the P&L a/c. Regarding the observation of the CIT(A) that assessee has claimed exemption under Section 80M, it was submitted that the deduction was claimed as per the provisions of law and the same was allowed also, therefore, it cannot be said that there was any mala fide. Regarding provisions of Section 73, it was stated that now it does not survive, because in the case of Appollo Tyres Ltd. v. CIT (2002) 255 ITR 273 (SC), the Hon’ble Supreme Court has held that the AO cannot disturb the consistent method of accounting adopted by the assessee. On a query from the Bench, the learned counsel fairly admitted that this was the planning of the assessee to buy units in the month of May, 1990, with a mind that those will be sold after the expiry of 60 days’ period. It was further submitted that there was no bar in law to make planning for its better commercial expediency. It was also submitted by the counsel of the assessee that many assessees have planned in this fashion. It was also added that there was no mala fide of the assessee while making such planning, i.e., to buy units in the month of May on a higher price and then selling the same in the month of July, at the lowest price.
19.5 On the other hand, the learned Departmental Representative strongly placed reliance on the orders of the authorities below.
20. We have heard rival submissions on this issue and have also considered them carefully. We have also perused the relevant material on which our attentions were drawn, along with case law relied upon by the counsel of the assessee. After considering all the relevant material, we find that there is no infirmity in the finding of the CIT(A) on this issue. At the cost of repetition, we will like to take brief facts in this regard once again. The assessee purchased 25 lakhs units of UTI on 21st May, 1990 @ Rs. 15 per unit aggregating to Rs. 3.75 crores. These units were purchased from ANZ. The units were sold again to ANZ on 21st July, 1990 @ Rs. 13.01 per unit, which resulted into a loss of Rs. 51,61,875. During the assessment proceedings, the assessee was required to file the details and correspondence with the bank on account of purchase and sale of these units. A letter from ANZ was filed in regard to purchase and sale. The assessee was also required to explain that why the units were purchased in the month of May, as in the month of May the prices of the units were always on higher side. It was also required to explain that why these units were sold in the month of July as the prices of these units were always lower in the month of July. The assessee was also required that how much interest was paid to the bank on the consideration on which the units were purchased. In reply, it was claimed that no interest was paid/payable on those investments to their banker, However, no correspondence entered between the assessee and bank could be filed by assessee, except the certificate issued by the bank which was in regard to purchase and sale of the units. The AO enquired from the bank that how they extended loan of Rs. 3.75 crores, and a letter dt. 27th Dec., 1993, received from the bank, which reads as under:
“We had extended the facility for Rs. 3,75,00,000 at an interest rate of 16 per cent for a period of 60 days in purchase of the units. The interest on this facility was adjusted in the price of the units sold to the company. This facility was secured by a demand promissory note given by the company.”
20.1 The assessee was confronted with this letter received from the bank. The assessee vide its letter dt. 18th March, 1994, relied on its office letter dt. 21st May, 1990, written by the company secretary to the bank that the payment for the units was to be made after two months without interest.
20.2 After perusing all these replies and letter from the bank, the AO noted that the assessee entered into these transactions just to reduce its taxability. It was noted by him that no correspondence was made with the bank in regard to purchase of the units from ANZ. It was also noted by the AO that the units were shown as purchased on 21st May, 1990, but minutes of the board meeting dt. 27th May, 1990, ratify the purchase. Therefore, it was inferred by the AO that even there was no proper authorisation to the person, who purchased the units. It was further ascertained by the AO that even no debit entry has been passed by the bank on 21st May, 1990, as only a single entry was passed on 20th July, 1990, the date of repurchase of the units from the assessee by the bank. On this date the account of the assessee was debited by a sum of Rs. 3.75 crores and a credit entry on account of sale consideration of Rs. 3,25,25000 was passed, which resulted in a debit entry of Rs. 51,61,875. It was further found by the AO that there was a debit balance outstanding of Rs. 90,30,185 on 20th July, 1990. The AO sought information from UTI in regard to rates of units in the months of May and July of last four years and information was received, whereby it was noted that the rates of the units in the month of May of last four years were on higher side and the rates of the units in the month of July were on lower side. This information was received by the AO from UTI vide their letter dt. 21st March, 1991. The rate of last four years, as mentioned at p. 5 of the order of the AO, were as under:
1989 1990 1991
May July May July May July
1-15 16-31 1-15 16-31
Sale 15.35 13.40 15.50 13.75 13.90 15.60 14.00 14.10
Purchase 14.25 12.80 14.40 13.00 13.15 14.50 13.20 13.30
20.3 After analysing this chart, the AO found that prices of the units are highest in the month of May and are lowest in the month of July each year. Further, by observing in his order that it is a matter of common knowledge that prices of units were highest in the month of May and lowest in the month of July, no experts/tax advisors/management consultants will advise for purchasing units in the month of May and for selling the same in the month of July. Therefore, he drew the conclusion that this was a mala fide intention of the assessee for reducing its tax effect. While holding so, the reliance was placed on the decision of the Hon’ble Supreme Court in the case of McDowell & Co. (supra). This action of the AO, as stated above, was confirmed by the CIT(A). As stated above that during hearing on this issue, the Bench asked a specific question that it was a common knowledge that the prices of the units are highest in the month of May and lowest in the month of July, then why the assessee entered into these transactions. The reply of the learned counsel was that it was tax planning of the assessee and many assessees have made similar planning. In our considered view, this type of planning cannot be and should not be approved by any authority of law. It is commonly known factor that tax planning is permitted but only those tax plannings are permitted, which are bona fide. This is a settled position that assessee wants to earn as much profit as it can, and, on the other hand, the assessee likes to pay minimum tax thereon. It is never seen that a person will knowingly enter into the transaction which results into losses. This is undisputed fact that prices were highest in the month of May, when the assessee purchased 25 lakhs of units for a consideration of Rs. 3.75 crores and the same were sold on 20th July, when the prices were on the lowest side.
20.4 In the case of Twin Star Holding Ltd. v. Anand Kedia, Dy. CIT (2003) 260 ITR 6 (Bom), the Hon’ble Bombay High Court has held that where on a resolution converting investment into shares to stock-in-trade, immediately prior to liquidation of the company and transfer of such shares to a holding company for a consideration, which was not adequate, the action of the TRO under Section 281 of the Act declaring the transfer itself to be void, cannot be challenged. While holding so, the Hon’ble High Court referred to the judgment of the Supreme Court in the case of McDowell & Co., (supra) and pointed out that even if the transaction is genuine, it could be ignored if the object is tax avoidance and the method adopted is a colourable device. The principle in WT Ramsay Ltd. v. IRC 2 WLR 449 was invoked, so as to consider the fiscal consequences of a preplanned series of transactions and not merely the result of separate stages of this plan.
20.5 The Hon’ble Supreme Court in the case of McDowell & Co. (supra) has held long back that “tax planning may be legitimate, provided it is within the framework of the law. Colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuge………”
20.6 After going through these decisions, we find that they are applicable on the facts of the present case. No doubt, transactions were genuine, as ANZ bank confirmed in having selling the units to assessee and then buying the same from assessee. Though one entry was passed on 20th July, 1990, but there was an entry showing debit balance against the assessee on account of purchase and sale of these units, But these transactions cannot be said that they were entered bona fidely as clearly emerges from the facts of the present case that assessee was knowing that the prices of units were highest in the month of May and lowest in the month of July, even then the assessee entered into transactions. On one hand, the bank says that it has already adjusted the amount of interest @ 16 per cent in selling price of units sold to assessee, and, on the other hand, the assessee is saying that no interest was paid. These two contradictory stands themselves show that there was a planning to purchase the shares and then sell the same after 60 days, and this planning was with a motive, as the assessee was knowing that dividend will be declared in the month of June and the same was declared also. The assessee claimed deduction under Section 80M of the IT Act. On the other hand, the assessee was knowing that there will be a loss on account of sale in the month of July and there was a loss of Rs. 51 lakhs and odd, which it claimed against its business income. In this way, the assessee claimed deduction under s, 80M and then he claimed deduction on account of loss against business income also. This planning, in our considered view, cannot be approved, as the same was a clear cut planning to reduce the tax effect, which is not permissible in the eyes of law. It is also worth noting that no banker will pass the entry after 60 days from the date of actual transaction, which was entered on 21st May, 1990, as the same was entered on 21st July, the day when the units were sold by the assessee to the bank. This also clearly proves that there was a clear understanding between the banker and the assessee that the units will be sold after 60 days. Though the units were transferred in the name of assessee and then in the name of bank, but there is no material on record which suggests that physical delivery of the units in question was handed over to the assessee or not, as it seems that the physical possession was with ANZ, to secure the sum of Rs. 3.75 crores invested on behalf of assessee against sale of units to the assessee.
20.7 We have also considered the decision in the case of CWT v. Arvind Narottam (1988) 173 ITR 479 (SC) at p. 487, on which the reliance was placed by the counsel of the assessee and found that these observations on p. 487, are not in help of assessee, as the observations of Mr. Justice Reddy only are given on this page. If whole of the judgment is taken into consideration, then it will be found that the judgment is on a different issue, which was in regard to wealth-tax. Therefore, the same is distinguishable on facts.
20.8 In view of all these facts and circumstances and in view of the discussions of ours made above, we find that the CIT(A) was justified in negating the claim of loss of the assessee. Accordingly, we confirm his order on this issue.
21. In the result, both the appeals are allowed in part.