INCOME TAX OFFICER WD 4(3)(1), MUMBAI v. M/S. OM MITRA SECURITIES LTD., MUMBAI

ITA 4808/MUM/2008 | 2004-2005
Pronouncement Date: 30-12-2011 | Result: Partly Allowed

Appeal Details

RSA Number 480819914 RSA 2008
Assessee PAN AAACN0533H
Bench Mumbai
Appeal Number ITA 4808/MUM/2008
Duration Of Justice 3 year(s) 5 month(s) 7 day(s)
Appellant INCOME TAX OFFICER WD 4(3)(1), MUMBAI
Respondent M/S. OM MITRA SECURITIES LTD., MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 30-12-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 30-12-2011
Date Of Final Hearing 27-12-2011
Next Hearing Date 27-12-2011
Assessment Year 2004-2005
Appeal Filed On 23-07-2008
Judgment Text
ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 1 OF 14 IN THE INCOME TAX APPELLATE TRIBUNAL 'C' BENCH MUMBAI BEFORE SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER AND SHRI V.DURGA RAO JUDICIAL MEMBER ITA NO. 4267/MUM/2008 (ASSESSMENT YEAR: 2004-05) OM MITRA SECURITIES LTD INCOME TAX OFFICER 26/86-B GOBIND MAHAL N.S. ROAD 4(3)(3) MARINE DRIVE MUMBAI MUMBAI 400 002 VS PAN AAACN 0533 H APPELLANT RESPONDENT ITA NO.4808/MUM/2008 (ASSESSMENT YEAR 2004-05) INCOME TAX OFFICER OM MITRA SECURITIES LTD 4(3)(1) ROOM NO.651 6 TH FLOOR AAYAKAR BHAVA 26/86-B GOBIND MAHAL N.S. ROAD MARINE DRIVE MK ROAD MUMBAI 400002 MUMBAI 400020 VS PAN NO.AAACN 0533H APPELLANT RESPONDENT ASSESSEE BY: SHRI VIJAY MEHTA DEPARTMENT BY: SHRI A.C. TEJPAL CIT (DR) DATE OF HEARING: 27/12/2011 DATE OF PRONOUNCEMENT: 30/12/2011 O R D E R PER B. RAMAKOTAIAH A.M. THESE ARE THE CROSS APPEALS BY ASSESSEE AND REVENU E AGAINST THE ORDER OF THE CIT (A)-15 MUMBAI DATED 16/05/2008 . WE HAVE HEARD THE LEARNED COUNSEL AND THE LEARNED DEPARTMEN TAL REPRESENTATIVE IN DETAIL. ITA NO. 4267/MUM/2008 2. ASSESSEE HAS RAISED ONLY ONE GROUND WHICH IS AS UND ER: ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 2 OF 14 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE HON'BLE CIT (A) GROSSLY ERRED IN CONFIRMIN G ADDITION MADE TO THE EXTENT OF 33 84 090/- ON ACCOUNT OF INTEREST ON INVESTMENT MADE IN SHARES OF M/S MITRA FIDELITY LTD AT 2 25 60 603/- DURING THE YEAR. THE APPELLANT RESERVES ITS RIGHT TO ADD ALTER AME ND OR DELETE THE GROUNDS OF APPEAL. 3. BRIEFLY STATED ASSESSING OFFICER FOUND THAT ASSESS EE MADE AN INVESTMENT OF 3 61 83 093/- IN A GROUP COMPANY M/S MITRA FIDELITY LTD AND AS ASSESSEE CLAIMED INTEREST ON BO RROWED FUNDS HE PROPORTIONATELY DISALLOWED INTEREST TO THE TUNE OF 54 77 464/- CALCULATED AT 15% ON THE ENTIRE INVESTMENT. THE REA SON FOR DISALLOWANCE WAS THAT ASSESSEE OBTAINED CONTROLLING INTEREST IN GROUP COMPANY AND THE PURCHASE IS FOR INVESTMENT. B EFORE THE CIT (A) IT WAS SUBMITTED THAT ASSESSEE HAS ITS OWN FUN DS AND THERE IS NO NEXUS BETWEEN BORROWED FUNDS AND THE PURCHASE OF SHARES AND FURTHER THAT THE SHARES ARE IN THE TRADING ACCOUNT AND NOT AN INVESTMENT. ALTERNATELY IT WAS FURTHER SUBMITTED TH AT PART OF SHARES WERE PURCHASED IN THE EARLIER YEARS AND THEREFORE W HEN THE INTEREST WAS NOT DISALLOWED IN THE EARLIER YEARS THE SAME CA NNOT BE MADE IN THIS YEAR ALSO. THE CIT (A) PARTLY ACCEPTED ASSESSE ES CONTENTION AND RESTRICTED DISALLOWANCE TO THE EXTENT OF INVESTMENT MADE IN THIS AY FOR RS. 2 25 60 603/- AND RESTRICTED THE DISALLOWAN CE TO 33 84 090/. ASSESSEE IS CONTESTING THE ABOVE DISALL OWANCE. 4. DRAWING OUR ATTENTION TO THE PAPER BOOK AT PAGE 50 IT WAS THE SUBMISSION THAT ASSESSEE HAD OWN CAPITAL OF RS . 14.24 CRORES AND INVESTMENT MADE IN THE GROUP COMPANY WAS ONLY R S. 2.25 CRORES DURING THE YEAR. FURTHER IT WAS SUBMITTED TH AT THE PURCHASES ARE UNDER THE TRADING ACCOUNT WHICH WAS ACCEPTED IN THE EARLIER YEARS AND GAIN ON SALE OF THE SHARES WHICH WAS OFFE RED AS INCOME IN THE LATER YEAR UNDER THE HEAD BUSINESS WAS ALSO AC CEPTED BY THE ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 3 OF 14 ASSESSING OFFICER IN THE NEXT ASSESSMENT YEAR AND P LACED ASSESSMENT ORDER ON RECORD. IT WAS FURTHER SUBMITTE D THAT BOTH THE ASSESSING OFFICER AND THE CIT (A) ERRED IN DISALLOW ANCE OF 15% FOR THE WHOLE YEAR WHEN IN FACT ASSESSEE PURCHASED SHAR ES ON 21.11.2003 AND SOLD THEM ON 1.10.2004. THE DISALLOW ANCE CAN ONLY BE FOR PART OF THE YEAR IF AT ALL TO BE MADE BUT N OT FOR FULL YEAR AS CALCULATED BY THE ASSESSING OFFICER AND THE CIT (A) . THE LEARNED COUNSEL IN THE COURSE OF ARGUMENTS RELIED ON THE DE CISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE U TILITIES & POWERS LTD 313 ITR 340 AND ALSO IN THE COORDINATE B ENCH DECISION IN THE CASE OF SHOPPERS STOP LTD IN ITA NOS.1448 & 4475/MUM/2010 DATED 30.8.2011. THE LEARNED DEPARTME NTAL REPRESENTATIVE HOWEVER RELIED ON THE ORDERS OF THE REVENUE AUTHORITIES. 5. WE HAVE CONSIDERED THE FACTS AND ARGUMENTS AND ARE OF THE OPINION THAT THERE IS NO NEED FOR DISALLOWANCE OF I NTEREST. FIRST OF ALL THE ARGUMENTS THAT ASSESSEE OBTAINED CONTROLLING IN INTEREST BY PURCHASING THE SHARES HAS NO VALIDITY AS ALL THE SH ARES ARE HELD BY THE GROUP COMPANIES AND NOT LISTED AND OUTSIDE PUBL IC SHARE HOLDERS ARE NOT AVAILABLE. ASSESSEE OR GROUP COMPAN Y IS IN CONTROL OF THE SHARES OF THE SAID COMPANY. APART FROM THE A BOVE FACT IT IS SEEN FROM THE BALANCE SHEET THAT ASSESSEE HAS OWN C APITAL MORE THAN THE INVESTMENT MADE IN SUCH SHARES. ANOTHER FA CTOR TO BE CONSIDERED IS THAT ASSESSEE HAS PURCHASED SHARES OF THE GROUP COMPANY AS PART OF ITS TRADING ACTIVITY WHICH WERE ACCEPTED IN THE EARLIER YEARS AND ALSO IN THE LATER YEARS. IN FACT THE SHOW CAUSE NOTICE ISSUED BY THE ASSESSING OFFICER TO ASSESSEE ALSO INDICATED THE INTENTION OF THE ASSESSING OFFICER TO TREAT IT AS I NVESTMENT BUT NOT AS TRADING PURCHASE. IT IS ALSO THE FACT THAT ASSESSEE SOLD SHARES AND OFFERED THE GAIN IN THE NEXT YEAR WHICH WAS ALSO AC CEPTED AS SEEN FROM THE ORDER PLACED ON RECORD. SINCE THE TRANSACT ION IS OF TRADING ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 4 OF 14 NATURE THERE IS NO NEED TO DISALLOW ANY INTEREST A S THE PURCHASES WERE MADE IN THE COURSE OF BUSINESS ACTIVITY OF ASS ESSEE. THEREFORE THERE IS NO NECESSITY IN INVOKING PROVISIONS OF SEC 36(1)(III). WE DIRECT THE ASSESSING OFFICER TO ALLOW THE INTEREST AS CLAIMED. ASSESSEES GROUND IS THEREFORE ALLOWED. ITA NO.4808/MUM/2008 6. IN THE REVENUE APPEAL THE REVENUE HAS RAISED 9 GROU NDS. GROUND NO.1 PERTAINS TO THE ISSUE OF DISALLOWANCE O F INTEREST AT 18% IN RESPECT OF PREMIUM ON DEBENTURES. THE ASSESSING OFFICER NOTICED THAT ASSESSEE ACQUIRED NON CONVERTIBLE DEBENTURES OF FACE VALUE OF RS. 1000/- PER NCD OF 41 800. THESE WERE TO BE REDE EMED ON 1.4.2004. HOWEVER THIS YEAR BEING THE 3 RD YEAR AFTER ISSUANCE ON 1.4.2001 ASSESSEE PAID AN AMOUNT OF INTEREST AT RS. 49 09 935/- @ 18% P.A. AS PREMIUM ON DEBENTURES. THE ASSESSING O FFICER NOTICED THAT THE RATE OF INTEREST PAID WAS VERY HIGH CONSID ERING THE MARKET RATE AND FURTHER THE SAID INTEREST WAS NOT OFFERED AS INCOME BY THE COMPANY MITRA FIDELITY LTD IN ITS BOOKS OF ACCOUNT. HOWEVER HE RESTRICTED DISALLOWANCE TO AN AMOUNT AT 3% OF THE A MOUNT PAID I.E. DIFFERENCE BETWEEN 18% TO 15%. THE CIT (A) CONSIDER ING THE FACT THAT THESE NCDS WERE ISSUED IN FINANCIAL YEAR 2001- 02 AS PER THE MARKET RATE THEN PREVAILING HELD THAT THERE IS NO C ASE FOR RESTRICTING DISALLOWANCE TO15% ON THE BASIS OF THE MARKET RATE AVAILABLE IN THIS YEAR. 7. AFTER CONSIDERING THE ARGUMENTS OF THE RIVAL PARTIE S WE DO NOT SEE ANY JUSTIFICATION TO INTERFERE WITH THE ORDER O F THE CIT (A). THE GROUND RAISED BY THE REVENUE IS ALSO MISLEADING IN THE SENSE THAT THE CONTENTION IS TO RESTRICT THE AMOUNT ON THE REA SON THAT THE DEBENTURES WERE NOT REDEEMED IN THE LATER YEAR AND THE DEBENTURE PREMIUM WAS NOT OFFERED FOR TAXATION BY THE OTHER C OMPANY. THESE ISSUES ARE NOT RELEVANT FOR THE YEAR UNDER CONSIDER ATION. AS RIGHTLY HELD BY THE CIT (A) THE NCDS WERE ISSUED IN THE FIN ANCIAL YEAR 2001- ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 5 OF 14 02 @ 18%. INTERESTS ARE BEING ALLOWED IN THE EARLIE R 2 YEARS. THIS BEING 3 RD YEAR THERE IS NO REASON FOR DISALLOWING PART OF AM OUNT. THE ISSUES RAISED IN THE GROUNDS BY THE REVENUE MAY ARI SE IN THE LATER YEAR OF ASSESSEES OWN CASE OR IN THE CASE OF MITRA FIDELITY WHICH IS STATED TO HAVE BEEN NOT OFFERING THE INCOME BUT NOT IN ASSESSEES CASE IN THIS YEAR. THEREFORE THE GROUND IS REJECTE D. 8. GROUND NO.2 PERTAINS TO DELETION OF INTEREST OF RS . 2 05 854/- ON THE REASON THAT ASSESSEE WAS RECEIVING INTEREST AT 11.5% WHEREAS IT WAS PAYING INTEREST @ 15%. ASSESSEE DEPLOYED FUN DS IN CUMULATIVE FIXED DEPOSITS WITH M/S WEIZMANN HOME LT D AND RECEIVED INTEREST AT 11.5%.THE ASSESSING OFFICER WA S OF THE VIEW THAT ASSESSEE SUPPOSED TO RECEIVE 15% INTEREST AS THE FU NDS WERE BORROWED AT THAT RATE AND THEREFORE MADE AN ADDITI ON OF RS. 2 05 854/-. THE CIT (A) DELETED THE SAME ON THE REA SON THAT THE ASSESSING OFFICER TRIED TO CHARGE THE INTEREST AT 1 5% ON THE FIXED DEPOSITS MADE IN EARLIER YEAR 2001 WHICH WAS AGREED AT 11.5%. FURTHER HE WAS OF THE VIEW THAT THE ASSESSING OFFI CER HAS NO LEGAL MANDATE TO CHARGE INTEREST ON THE BASIS OF MARKET R ATE OVER AND ABOVE THE RATE OF INTEREST AGREED. HE HAS RELIED ON VARIOUS DECISIONS IN THIS REGARD IN PARA 4.3 OF THE ORDER. AFTER CONS IDERING THE RIVAL CONTENTIONS AND EXAMINING THE FACTS ON RECORD WE D O NOT SEE ANY REASON TO INTERFERE WITH WELL REASONED ORDER OF TH E CIT (A). ASSESSING OFFICER CANNOT BRING TO TAX THE DIFFERENC E AMOUNT ON THE REASON THAT ASSESSEE HAS BORROWED FUNDS AT LATER PA RT OF TIME AT 15% WHEREAS THE FIXED DEPOSITS WERE MADE IN 2001 AT 11.5%. THEREFORE THE GROUND IS ACCORDINGLY REJECTED. 9. GROUND NO.3 PERTAINS TO DISALLOWANCE OF INTEREST OF RS. 16 50 000/- ON DEBENTURES. ASSESSING OFFICER FOUND THAT ASSESSEE MADE AN INVESTMENT OF 8000 NON CONVERTIBLE DEBENTUR ES AT 13% PER NCD PLUS 525/- PREMIUM PER DEBENTURES IN A COMPANY KNOWN AS KOTTA ENTERPRISES LTD ON 14.02.2002. SINCE NO IN TEREST WAS ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 6 OF 14 RECEIVED AND NO PREMIUM ON DEBENTURES WERE OFFERED TO TAX THE ASSESSING OFFICER DISALLOWED THE INTEREST CLAIM OF 16 50 000 ON THE REASON THAT THE INTEREST BEARING FUNDS HAVE BEEN DI VERTED FOR INVESTMENT ON WHICH NO RETURN WAS RECEIVED BY ASSES SEE. AFTER CONSIDERING THE FACTS OF THE INVESTMENT OF FUNDS I NCOME OFFERED IN LATER YEARS CIT (A) ALLOWED THE SAME BY GIVING THE FOLLOWING FINDINGS. 6.4 I HAVE CAREFULLY CONSIDERED THE ARGUMENTS GIVE N BY THE RIVAL PARTIES VIS--VIS THE FACTS OF THE CASE. IN FIRST PLACE IT IS TO BE MENTIONED THAT THE ENTIRE INVEST MENT IN NCDS IN THE COMPANY NAMELY KOTTA ENTERPRISES LTD WA S MADE BY ALFL DURING THE PREVIOUS YEAR RELEVANT TO A Y 2002-03. THE APPELLANT GOT THE SAID INVESTMENT IN N CD ONLY BY VIRTUE OF AMALGAMATION OF THE COMPANY ALFL WITH THE APPELLANT COMPANY. THIS SHOWS THAT ORIGINA L INVESTMENTS IN NCDS COULD NOT BE FUNDED BY THE APPELLANT COMPANY FOR A VERY OBVIOUS REASON. THEREF ORE THE WHOLE FOUNDATION OF THE FINDING OF THE ASSESSIN G OFFICER THAT INTEREST BEARING FUND HAS BEEN DIVERTE D FOR NON-BUSINESS PURPOSE IN NCDS GOT DEMOLISHED ON FACE OF IT. HENCE THE FINDING OF THE ASSESSING OFFICER TO DISALLOW INTEREST AT 16 50 000 UNDER SECTION 36(1)(III) IS WITHOUT ANY FACTUAL SUBSTRATUM. I FIND THAT THE ASSESSING O FFICER APPEARS TO HAVE PROCEEDED TO MAKE THE DISALLOWANCE ON MISTAKEN NOTION OF FACT THAT IT IS THE APPELLANT WH O MADE THE INVESTMENT IN NCD IN KOTTA ENTERPRISES LTD. IF AT ALL THE ASSESSING OFFICER HAS ENTERED INTO THE MISADVEN TURE OF DISALLOWING INTEREST UNDER SECTION 36(1)(III) I T WOULD HAVE BEEN ONLY POSSIBLE IN THE HANDS OF ALFL FOR TH E AY 2002-03. 6.5 WITHOUT PREJUDICE TO THE ABOVE FINDING IT MAY ALSO BE LOOKED INTO THAT THE INVESTMENT IN NCD CANNOT BE SA ID FOR NON-BUSINESS PURPOSE BY ANY STRETCH OF IMAGINATION AS THE NCD CARRIES PREMIUM ON IT WHICH IS TO BE RECEI VED IN FORM OF INTEREST AND SUCH INCOME IS VERY MUCH TAXAB LE ON IT. THE APPELLANT APPEARS TO HAVE OFFERED THE INCOM E FOR THE AY 2005-06. THEREFORE ON THIS ACCOUNT ALSO T HE ASSESSING OFFICER DOES NOT HAVE ANY CASE FOR DISALLOWANCE OF INTEREST. IN VIEW OF FOREGOING DISCUSSION I HAVE NO HESITATION TO DELETE THE DISALLOWANCE OF 16 50 000/- UNDER SECTION 36(1)(III) . ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 7 OF 14 10. AFTER CONSIDERING THE RIVAL ARGUMENTS AND EXAMINING THE RECORD WE ARE OF THE OPINION THAT NO CASE WAS MADE OUT BY THE REVENUE TO DISTURB THE FINDINGS OF THE CIT (A).SINC E THE FACTS CLEARLY INDICATE THAT INVESTMENT WAS MADE BY THE AMALGAMATE D COMPANY AND ASSESSEE HAS NOT FUNDED THE INVESTMENT THE ASS ESSING OFFICERS REASON FOR DISALLOWING THE INTEREST CANNOT BE ACCEP TED. SINCE THE ISSUE IS ON FACTS AND AS LD. CIT (A) CORRECTLY CON SIDERED IT WE UPHOLD THE ORDER. GROUND IS ACCORDINGLY REJECTED. 11. GROUND NOS. 4 TO 7 IN THE REVENUES APPEAL PERTAIN TO THE ISSUE OF LIQUIDATED DAMAGES AMOUNTING TO RS. 31 20 928/- PAID TO M/S WEIZMANN HOMES LTD. AT THE OUTSET IT WAS SUBMIT TED THAT THIS ISSUE IS COVERED BY THE ORDER OF THE ITAT IN AY 2 003-04 WHERE THE LIQUIDATED DAMAGES ARE ALLOWED PER SE ON LEGAL PRIN CIPLES SUBJECT TO VERIFICATION AND EXAMINING THE FACT THAT THE FUNDS WERE UTILIZED FOR THE PURPOSE OF BUSINESS. THE ORDER OF THE ITAT ON THIS ISSUE IS AS UNDER: 2.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDI NG ALLOWABILITY OF DEDUCTION ON ACCOUNT OF LIQUIDATED CHARGES OF RS.59 58 458/- PAID BY ASSESSEE TO A GROUP CONCE RN NAMELY M/S. WHL. ANOTHER GROUP CONCERN OF ASSESSEE I.E. ALFL HAD EARLIER ENTERED INTO AN AGREEMENT WITH WHL FOR SELLING OFFICE PREMISES IN THE PROPERTY BEING CONST RUCTED BY IT AT BANDRA KURLA COMPLEX AS PER THE AGREEMENT DATED 14.2.2002. THE AGREEMENT PROVIDED FOR PAYMENT OF RS.2 CRORE BY WHL TO THE ALFL AT THE TIME OF AGREEM ENT AND BALANCE AMOUNT OF RS.3.5 CRORES WAS TO BE PAID LATER IN INSTALLMENTS. IN TERMS OF THE CLAUSE 14 OF THE AGREEMENT IN CASE ALFL WAS NOT ABLE TO HANDOVER TH E POSSESSION OF THE PREMISES ON OR BEFORE 31.7.2002 IT WAS REQUIRED TO REFUND THE AMOUNT RECEIVED IN ADVANCE F ORTH WITH THE LIQUIDATED DAMAGES @ 1.4% PER MONTH FROM T HE DATE OF ADVANCE TILL THE DATE OF REFUND. AFTER THE AGREEMENT ALFL WAS MERGED WITH ASSESSEE W.E.F.1.4.2002 AND THEREFORE IT BECAME LIABILITY OF ASSESSEE TO HANDOVER THE BUSINESS PREMISES TO WHL A S PER TERMS AND CONDITIONS OF THE AGREEMENT. ASSESSEE COULD NOT HONOUR THE COMMITMENT AS PER THE AGREEMEN T TO ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 8 OF 14 PROVIDE THE OFFICE PREMISES TO WHL AND THEREFORE TH E LATTER VIDE LETTER DATED 31.3.2003 CANCELLED THE AGREEMENT AND IN TERMS OF THE CLAUSE 14 OF THE AGRE EMENT ASSESSEE HAD TO PAY LIQUIDATED DAMAGES AMOUNTING TO RS.59 58 458/-. THE ASSESSING OFFICER DID NOT ACCEP T THE GENUINENESS OF THE AGREEMENT ON THE GROUND THAT THE SAME WAS NOT REGISTERED AND THE STAMP PAPER USED AL SO DID NOT MENTION THE NAME OF THE PARTY AND THE STAMP VENDOR. HE ALSO TOOK THE VIEW THAT LOSS ARISING ON ACCOUNT OF PAYMENT WAS A CAPITAL LOSS AS THE SAME RELATED T O ACQUISITION OF PROPERTY. CIT(A) HAS NOT UPHELD THE VIEW TAKEN BY THE AO. WE AGREE WITH THE FINDING OF THE C IT(A) THAT THE AGREEMENT COULD NOT BE REJECTED AS NON GEN UINE ONLY ON THE GROUND THAT STAMP PAPER SAME DID NOT CONTAIN THE NAME OF THE PARTIES. AN AGREEMENT COULD BE EVEN ON PLAN PAPER OR ORAL AND STILL COULD BE A GEN UINE AGREEMENT. IN THIS CASE IN TERMS OF THE AGREEMENT ADVANCE OF RS.2 CRORES HAD BEEN RECEIVED BY ASSESSE E BY CHEQUE AND THEREFORE IT COULD NOT BE SAID THAT THE AGREEMENT WAS NOT GENUINE. AGREEMENT CAN ALSO NOT B E CONSIDERED AS A DEVICE TO AVOID PAYMENT OF TAX AS I T HAS BEEN RIGHTLY POINTED OUT BY THE LEARNED AR THAT ASS ESSEE HAD SUBSTANTIAL CARRIED FORWARD LOSSES AND EVEN IF THE DEDUCTION ON ACCOUNT OF LIQUIDATED DAMAGES WAS NOT CLAIMED INCOME COULD HAVE BEEN SET OFF BY THE LOSS ES AND SOME LOSSES WOULD HAVE STILL TO BE CARRIED FORWARD. MOREOVER WHL BELONGED TO THE HIGH INCOME GROUP HAV ING PRE-TAX INCOME OF RS.6.34 CRORES IN THE RELEVANT YE AR AND HAD PAID THE TAX ON THE INCOME ON ACCOUNT OF LIQUID ATED DAMAGES RECEIVED BY IT. THERE IS NO MATERIAL PLACED ON RECORD TO SHOW THAT ASSESSEE HAS USED THE AGREEMENT AS A COLOURABLE DEVICE TO REDUCE THE TAX LIABILITY. AS SESSEE PAID LIQUIDATED DAMAGES @ 1.4% PER MONTH ON THE MON EY RECEIVED BY IT FROM WHL. CIT(A) HAS GIVEN A FINDING THAT RATE OF 1.4% PER MONTH MATCHED WITH THE MARKET RATE OF INTEREST AT THE RELEVANT TIME. THIS FINDING HAS NOT BEEN CONTRAVERTED BEFORE US BY THE LEARNED DR. THEREFORE EVEN IF THERE WAS NO AGREEMENT AND ASSESSEE HAD RECEIVED THE MONEY AS ADVANCE FROM WHL IT WOULD HAVE TO PAY THE INTEREST @ 1.4% PER MONTH. WE THEREFORE UPHELD THE VIEW OF CIT(A) THAT THE AGREEMENT WAS GENUINE AND THAT N O COLORABLE DEVICE WAS INVOLVED. 2.4 AS REGARDS THE NATURE OF PAYMENT THE HONBLE SUPREME COURT IN CASE OF PRAKASH COTTON MILLS PVT. LTD. VS CIT (SUPRA) HAVE HELD THAT IN ORDER TO UNDERSTAN D THE TRUE NATURE OF DAMAGES/ PENALTY/ INTEREST THE RELE VANT ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 9 OF 14 PROVISIONS OF THE SCHEME UNDER WHICH PAYMENT HAD BE EN MADE HAS TO BE EXAMINED TO FIND OUT WHETHER THE PAYMENT WAS COMPENSATORY OR PENAL IN NATURE. IN THI S CASE AS WE HAVE POINTED OUT EARLIER THE PAYMENT WA S NOTHING BUT INTEREST AT THE MARKET RATE WHICH COULD ONLY TERMED AS COMPENSATORY IN NATURE. IT IS NOT A CASE THAT ASSESSEE HAD RECEIVED LUMP SUM AMOUNT UNRELATED TO THE ADVANCE RECEIVED FOR CANCELLATION OF AGREEMENT IN W HICH CASE PROBABLY THERE WOULD HAVE BEEN DISPUTE WHETHER THE AMOUNT COULD BE ALLOWED AS DEDUCTION. IN THE PR ESENT CASE IT IS A CASE OF COMPENSATION AT THE MARKET RAT E OF INTEREST. HOWEVER THE DAMAGES WHICH WERE OF THE NA TURE OF COMPENSATORY INTEREST CAN BE ALLOWED AS DEDUCTIO N ONLY IF THE ADVANCE RECEIVED BY ASSESSEE WAS USED I N THE BUSINESS. THE CASE OF ASSESSEE IS SIMILAR TO THE CA SE OF NEW CENTRAL JUTE MILLS LTD. VS CIT (SUPRA). IN THAT CASE ASSESSEE HAD AGREED TO OBTAIN RELEASE OF THE LAND F ROM UP GOVERNMENT AND CONVEY IT BY A SPECIFIC TIME FAIL ING WHICH IT HAD AGREED TO REFUND THE SAME AND PAY DAMAGES OF RS.1 LAC AND INTEREST ON THE SUM OF RS.4 0 LACS RECEIVED AS ADVANCE FROM THE CONCERNED PARTY. ASSESSEE WAS UNABLE TO OBTAIN RELEASE OF THE LAND A ND REFUNDED THE SUM OF RS.40 LACS AND PAID RS. 1 LAC A S DAMAGES AND RS.1 85 123/- AS INTEREST ON THE SUM OF RS.40 LACS. THE HONBLE HIGH COURT HELD THAT DAMAGE S OF RS. 1 LAC PAYABLE BY ASSESSEE RELATED TO CAPITAL AS SET AND SAME WAS NOT ALLOWABLE AS DEDUCTION. HOWEVER IT WAS HELD THAT THE INTEREST HAD BEEN PAID FOR USER O F THE MONEY AND IT HAD TO BE CONSIDERED AS FACILITATING T HE RUNNING OF THE BUSINESS AND THE INTEREST HAD THEREF ORE TO BE ALLOWED IF THE MONEY WAS UTILIZED FOR THE PURPOS E OF BUSINESS. AS THESE ASPECTS HAD NOT BEEN EXAMINED T HE HIGH COURT RESTORED THE MATTER TO THE TRIBUNAL FOR FRESH CONSIDERATION. IN THE PRESENT CASE ALSO IT HAS NOT BEEN EXAMINED WHETHER THE ADVANCE RECEIVED BY ASSESSEE H AD BEEN UTILIZED BY ASSESSEE IN THE BUSINESS OR DIVERT ED FOR SOME NON BUSINESS PURPOSES. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER TO THE FILE OF AO FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION I N THE LIGHT OF OBSERVATIONS MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARING TO ASSESSEE . 12. RESPECTFULLY FOLLOWING THE ABOVE WE SET ASIDE THE ORDER OF THE CIT (A) AND THE ASSESSING OFFICER ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR PAS SING FRESH ORDER AFTER NECESSARY EXAMINATION AS DIRECTED BY THE ITA T IN THE EARLIER ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 10 OF 14 YEAR IN THE SAME MANNER IN THIS YEAR. GROUND IS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. 13. GROUND NO.8 PERTAINS TO THE ISSUE OF DELETION OF RS . 3 24 09 894/- MADE ON ACCOUNT OF DISALLOWANCE OF LO SS INVOKING THE PROVISIONS OF EXPLANATION TO SECTION 73 OF THE I.T. ACT. ASSESSING OFFICER WHILE EXAMINING THE RETURN NOTICED THAT THE RE IS A CLAIM OF DISALLOWANCE OF LOSS TO THE EXTENT OF RS. 3 24 09 8 94/-. INVOKING PROVISIONS OF SECTION 73 AO DISALLOWED THE SAME AS SPECULATION LOSS. THE CIT (A) CONSIDERED THE FACTS OF THE CLAIM AND GAVE FINDING THAT THE ASSESSING OFFICER LACKS BASIC KNOWLEDGE OF ACCOUNTING IN CONSIDERING THE DIMINUTION IN VALUE OF STOCK AS SPE CULATION LOSS AND FURTHER CONSIDERED THAT THERE IS PROFIT IN TRANSACT IONS THEREFORE PROVISIONS OF SPECULATION LOSS DOES NOT ARISE UNDER SECTION 73. HIS ORDER IN PARA 8.5 AND 8.6 ARE AS UNDER: 8.5 IT MAY BE SEEN THAT THE CUMULATIVE DIMINUTION I N THE STOCK AS ON 31.3.2003 & 31.3.2004 WAS 3 57 53 239/- AND 3 24 09 894/- RESPECTIVELY. IT MAY ALSO BE NOTED THAT THE CUMULATIVE DIMINUTION OF STOCK TAKEN AS ON 31.3.2004 AT 3 24 09 894/- IS BASICALLY A BROUGHT FORWARD FIGURE FROM THE CUMULAT IVE DIMINUTION ARRIVED AT RS. 3 57 53 239/- AS ON 31.3.2003. FROM THE COMPARISON OF THESE TWO FIGURES I FIND THAT THE CUMULATIVE DIMINUTION IN STOCK HAS CO ME DOWN BY 33.44 LACS AS ON 31.3.2004 IN COMPARISON TO CUMULATIVE DIMINUTION AS ON 31.3.2003 AND THE APPELLANT IN FACT OFFERED INCOME TO THE EXTENT OF 33.44 LACS ON THIS ACCOUNT. IT MAY ALSO BE NOTED THAT THE OPENING AND CLOSING STOCK AS SUCH EACH OTHER NULLIF Y THE EFFECT ON GROSS PROFIT IN THE TRADING ACCOUNT. ANY ATTEMPT TO TAKE ONLY INTO ACCOUNT OF CLOSING STOCK WITHOUT TAKING INTO ACCOUNT OF OPENING STOCK IN ISOLATION WILL HAV E DISTORTING EFFECT ON THE GROSS PROFIT. THE ASSESSIN G OFFICER PRIMA-FACIE APPEARS TO HAVE GONE ON HIS S HORT- SIGHTED APPROACH ONLY TO TAKE INTO ACCOUNT IN CUMUL ATIVE DIMINUTION IN STOCK OF SHARE AS ON 31.3.2004 IGNOR ING THE FACT THAT THERE WAS HIGHER FIGURE OF CUMULATIVE DIMINUTION OF STOCK ALSO AS ON 31.3.2003. IT IS TOT AL ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 11 OF 14 MISUNDERSTANDING OF ACCOUNT BY THE ASSESSING OFFICE R TO TAKE ALONE OF DIMINUTION OF STOCK IN SHARE AT RS. 3 24 09 894/- AS ON 31.3.2004 TO ASSIGN AS SPECULATION LOSS IGNORING THE DIMINUTION OF STOCK AS ON 31.3.2003. IT APPEARS THAT THE ASSESSING OFFICER LA CKS THE BASIC KNOWLEDGE OF ACCOUNTS. 8.6. FURTHER FROM THE PROFIT & LOSS A/C I FIND THA T THE APPELLANT HAS SHOWN INCREASE/DECREASE IN STOCK AT ( 1 22 80 586/-) ON THE EXPENDITURE SIDE OF THE PROFI T & LOSS A/C WHICH SHOWS THAT IT IS A RECEIPT OR CRED IT ITEM IN FACT. IN OTHER WORDS THIS FIGURE HAS BEEN TAKEN AS INCOME WHILE CALCULATING NET PROFIT THOUGH THOUGH THE SAME FINDS ITS PLACE ON EXPENDITURE SIDE IN BRACKET . THIS FIGURE HAS BEEN ARRIVED AT BY FINDING THE DIFF ERENCE OF CLOSING STOCK ARRIVED AT RS. 11 48 56 346/- AND OPENING STOCK AS ON 1.4.2004 I.E. 10 25 75 759/- (WHICH WAS CLOSING STOCK AS ON 31.3.2003). IF WE DR AW THE TRADING A/C IN RESPECT OF PURCHASE AND SALE OF SHARE SEPARATELY I FIND THAT THERE IS PROFIT OF RS. 85 2 3 218/- (SALE OF SHARE RS. 6 31 50 792/- + INCREASE IN STOC K AT RS. 1 22 80 586/- PURCHASE AND SALE OF SHARE RS. 6 69 08 160/-) AS DRAWN IN PARA 8.5. ON THE OTHER HAND I FIND THAT THE ASSESSING OFFICER HAS DRAWN T HE TRADING A/C OF PURCHASE & SALE OF SHARE WRONGLY AS HE HAS TAKEN THE FIGURE OF OPENING STOCK & CLOSING STO CK WHICH ARE INCOMPARABLE IN TERM OF COMPARABILITY. IT MAY BE MENTIONED THAT THE ASSESSING OFFICER HAS TAKEN T HE OPENING STOCK RS. 10 25 75 760/- AFTER TAKING INTO ACCOUNT OF DIMINUTION OF STOCK AT RS. 3 57 53 239/- WHEREAS HE HAS TAKEN THE CLOSING STOCK AT RS. 14 72 66 249/- WITHOUT TAKING INTO ACCOUNT OF DIMINUTION OF SHARE STOCK WHICH HAS ARTIFICIALLY JA CKED UP THE PROFIT 4 09 33 112/- (WHICH HAS GOT NO ACCOUNTING LOGIC AT ALL). THIS APPEARS TO BE A MISADVENTURE MADE BY THE ASSESSING OFFICER TO DRAW A PROFIT & LOSS A/C ON TOTALLY ERRONEOUS FACT AND FIG URE WHICH CANNOT BE ACCEPTED AT ALL. FROM THE AUDITED P ROFIT & LOSS A/C THE FIRST PURE & SIMPLE INFERENCE IS TO BE DRAWN THAT THE APPELLANT HAS NOT INCURRED AY LOSS A S SUCH IN PURCHASE & SALE OF SHARES AND SECURITIES. I N FACT THE APPELLANT HAS SHOWN PROFIT OF 85 23 280/- ON THIS ACCOUNT WHICH IS A MATTER OF RECORD OF AUDITED PROFIT & LOSS A/C . THE ASSESSING OFFICER ON THE OTHER HAN D HAS SEGREGATED THE DIMINUTION IN STOCK AT RS. ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 12 OF 14 3 24 09 895/- AS SPECULATION LOSS WITHOUT ANY BAS IS WHEREAS THE FACT REMAINS THAT THE APPELLANT HAS NOT SHOWN ANY LOSS AS SUCH. THE ASSESSING OFFICER HAS ARTIFICIALLY SEGREGATED THE DIMINUTION IN SHARE AS SPECULATION LOSS WITHOUT THE PROPER UNDERSTANDING OF IMPLICATION OF ACCOUNTING ENTRIES. THE SO CALLED SPECULATION LOSS FOUND OUT BY THE ASSESSING OFFICER AT RS. 3 24 09 895/- IS IN FACT A BROUGHT FORWARD OF CUMULATIVE DIMINUTION OF STOCK FROM THE PRECEDING A Y . THIS SO CALLED SPECULATION LOSS ARRIVED BY THE ASSESSING OFFICER CANNOT BE A SPECULATION LOSS FO R THE AY 2040-05 BY ANY STRETCH OF ACCOUNTING LOGIC. THE ASSESSING OFFICER HAS TRIED TO CREATE A SPECULATION LOSS WHICH IS NOT IN FACT THERE IN THE ACCOUNTS. THE ASS ESSING OFFICER APPEARS TO HAVE PICKUP A PARTICULAR FIGURE FROM THE VALUATION OF CLOSING STOCK AS ON 31.3.2004 INDEPENDENTLY AND SEGREGATED THE SAME BY HIS IMAGINATION AS A SPECULATION LOSS WHICH IS NOT TE NABLE IN LAW. EVEN FOR THE SAKE OF ARGUMENT IF WE TAKE T HE EXPLANATION TO SECTION 73 IS APPLICABLE IN THE PRES ENT CASE IT WILL BE SPECULATION PROFIT ONLY TO THE E XTENT OF RS. 85 23 218/- ONLY WHICH WILL NOT HAVE ANY MATERI AL EFFECT ON THE COMPUTATION OF INCOME FOR THE AY 204 0-05. HENCE THE DISALLOWANCE MADE BY THE ASSESSING OFFICE R ON ACCOUNT OF SPECULATION LOSS AT RS. 3 24 09 895 /- IS TOTALLY UNFOUNDED AND NOT MATCHING WITH THE PROFIT DERIVED ON PURCHASE AND SALE OF SHARE IN THE AUDITE D ACCOUNT. HENCE THE SPECULATION LOSS DISALLOWED BY THE ASSESSING OFFICER AT RS. 3 24 09 895/- IS DELETED. 14. WE HAVE EXAMINED THE RECORD AND PURSUED THE ARGUMEN TS OF RIVAL COUNSELS. AS SEEN FROM THE PAPER BOOK PLACED ON RECORD ASSESSEE HAS NOT CLAIMED ANY DIMINUTION VALUE IN TH E YEAR WHEREAS IT IS A NEGATIVE DEBIT TO THE EXPENDITURE A/C THERE BY INCREASING THE PROFIT IN THE PROFIT & LOSS A/C. AS SEEN FROM THE D ETAILS ON RECORD THERE WAS A DIMINUTION OF VALUE IN EARLIER YEAR TO THE EXTENT OF RS. 3 57 53 239/- OUT OF THE GROSS VALUE IN THE BALANCE SHEET. THEREFORE THE NET VALUE SHOWN WAS AT RS. 10 25 75 759/-. THIS YEAR THERE IS DIMINUTION IN VALUE OF RS. 3 24 09 895/- WHICH IN F ACT REDUCES DIMINUTION BY AN AMOUNT OF RS. 33 43 344/-. IN PROF IT & LOSS A/C UNDER HEADING DECREASE OR (INCREASE) IN STOCK AS AGAINST RS. ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 13 OF 14 1 85 42 485/- DEBITED IN THE LAST YEAR THIS YEAR T HE AMOUNT IS (RS. 2 80 586). THIS FIGURE IN FACT INCREASES THE INCOME BY THAT AMOUNT BEING REDUCTION IN THE EXPENDITURE CLAIM. SCHEDULE M OF THE PROFIT & LOSS A/C GIVES THE DETAILS. THEREFORE THE CIT (A) WAS CORRECT IN DELETING THE AMOUNT AS ASSESSING OFFICER MISTOOK TH E AMOUNT WRONGLY AND DISALLOWED THE AMOUNT. WE ARE SURPRISED TO NOTE THAT REVENUE HAS COME IN APPEAL EVEN THOUGH THERE IS NO CASE IN MAKING ANY DISALLOWANCE ON THE GIVEN FACTS OF THE C ASE. CERTAINLY THIS SORT OF GROUND GIVES RISE TO THE IMPRESSION TH AT THERE IS NO APPLICATION OF MIND EITHER BY THE ASSESSING OFFICER OR BY THE LEARNED CIT WHILE PREFERRING 2 ND APPEAL. GROUND NO. IS REJECTED. 15. IN THE RESULT ASSESSEES APPEAL IS ALLOWED AND REV ENUES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH DECEMBER 2011. SD/- SD/- (V.DURGA RAO) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED 30 TH DECEMBER 2011. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR C BENCH ITAT MUMBAI BY ORDER ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 14 OF 14 ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES MUMBAI ITA NO.4267 AND 4808 OF 2008 OM MITRA SECURITIES LTD MUMBAI PAGE 15 OF 14 S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 27.12.11 SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 28.12.11 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 28.12.11 JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 29.12.11 AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS 29.12.11 SR. PS/PS 6 KEPT FOR PRONOUNCEMENT 30.12.11 SR. PS/PS 7 FILE SENT TO BENCH CLERK 30.12.11 SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER