M/s. NH SECURITIES LTD., MUMBAI v. ACIT CENT CIR. - 40, MUMBAI

ITA 6875/MUM/2008 | 2005-2006
Pronouncement Date: 23-12-2011 | Result: Partly Allowed

Appeal Details

RSA Number 687519914 RSA 2008
Assessee PAN AAACS7140Q
Bench Mumbai
Appeal Number ITA 6875/MUM/2008
Duration Of Justice 3 year(s) 21 day(s)
Appellant M/s. NH SECURITIES LTD., MUMBAI
Respondent ACIT CENT CIR. - 40, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 23-12-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted F
Tribunal Order Date 23-12-2011
Date Of Final Hearing 12-10-2011
Next Hearing Date 12-10-2011
Assessment Year 2005-2006
Appeal Filed On 02-12-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F MUMBAI BEFORE SHRI P.M. JAGTAP A.M. AND SHRI V. DURGA RAO J.M. ITA NO. 6875/MUM/2008 ASSESSMENT YEAR: 2005-06 N.H. SECURITIES LTD. APPELLANT BHUPEN CHAMBERS GROUND FLOOR 9 DALAL STREET FORT MUMBAI 400 023. (PAN AAACS7140Q) VS. ASSTT. COMMISSIONER OF INCOME-TAX RESPONDEN T CENTRAL CIRCLE 40 MUMBAI. APPELLANT BY : MR. RAJIV KHANDELWAL RESPONDENT BY : DR. P. DANIEL. ORDER PER V. DURGA RAO J.M.: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAI NST THE ORDER OF CIT(A)-24 CENTRAL-VII MUMBAI PASSED ON 05/09/200 8 FOR THE ASSESSMENT YEAR 2005-06. 2. GROUND NO. 1 RAISED BY THE ASSESSEE READS AS UND ER:- 1. THE CIT(A) ERRED IN ENHANCING THE INCOME OF THE APPELLANTS BY RS. 31 47 188/- BY NOT ALLOWING EXPENSES CLAIMED BY THE APPELLANTS ON THE GROUND THAT THE APPELLANTS HAVE N OT CARRIED OUT ANY BUSINESS ACTIVITY DURING THE YEAR UNDER REFEREN CE AND THEREBY NOT ALLOWING CARRY FORWARD OF LOSS OF RS. 3 1 47 188/-. THE APPELLANTS CONTEND THAT ON THE FACTS AND CIRCUM STANCES OF THE CASE AND IN LAW THE CIT(A) OUGHT NOT TO HAVE ENHAN CED THE INCOME OF THE APPELLANTS AND OUGHT TO HAVE ALLOWED THE CARRY FORWARD OF THE BUSINESS LOSS OF RS. 31 47 188/- INA SMUCH AS THE APPELLANTS HAVE CARRIED ON BUSINESS DURING THE YEAR . 3. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO TREATED THE BUSINESS OF RS. 31 47 188/- AS SPECULATION LOSS AND ALLOWED TO BE CARRIED FORWARD AS SPECULATION IN VIEW OF THE EXPLA NATION BELOW ITA NO. 6875/M/2008 NH SECURITIES LTD. 2 SECTION 73 OF THE ACT. NO SUCH SET-OFF WAS ALLOWED ON THE INCOME FROM OTHER SOURCES. DURING THE COURSE OF APPELLATE PROCE EDINGS THE LEARNED CIT(A) HAD OBSERVED THAT BUSINESS LOSS HAD BEEN DET ERMINED BY THE AO AT RS. 31 47 188/- WHICH HAD BEEN TREATED AS SP ECULATIVE LOSS AND HAD BEEN ALLOWED TO BE CARRIED FORWARD IN VIEW OF THE EXPLANATION BELOW TO SECTION. 73 OF THE ACT. HOWEVER IT WAS NO TICED FROM THE AUDITED ACCOUNTS THAT NO BUSINESS ACTIVITY WAS CARR IED OUT BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION AND A LOSS OF RS. 80 000/- WAS SHOWN UNDER THE HEAD SHARES AND SECUR ITIES ON ACCOUNT OF VALUATION OF CLOSING STOCK WHICH HAD BEE N TREATED AS NON- GENUINE BY THE AO. THE CIT(A) FURTHER OBSERVED THAT THE ASSESSEE HAS NOT CARRIED ANY BUSINESS ACTIVITY IN SHARES AND SEC URITIES FROM THE YEAR 2001 ON ACCOUNT OF CANCELLATION OF REGISTRATIO N AS SHARE BROKER LOSS ARISING FROM MERE VALUATION OF THE OPENING STO CK OF SHARES WOULD NOT LEAD TO THE CONCLUSION THAT THE ASSESSEE WAS CA RRYING ON ANY SUCH ACTIVITY. THE CIT(A) ALSO OBSERVED THAT THE WORD B USINESS CONNOTES SOME REAL SUBSTANTIAL AND SYSTEMATIC OR ORGANIZED COURSE OF ACTIVITY OR CONDUCT WITH A SET OF PURPOSES. THE CIT(A) HELD THAT FOR THE PURPOSE OF CLAIMING DEDUCTION U/S 37 OF THE ACT TH E EXPENDITURE MUST BE INCURRED FOR THE PURPOSES OF BUSINESS WHICH WAS IN EXISTENCE DURING THE YEAR AND THE PROFIT OF WHICH ARE UNDER A SSESSMENT AND IF DURING THE YEAR NO BUSINESS WAS IN EXISTENCE EITHER BECAUSE IT WAS DISCONTINUED OR FOR SOME OTHER REASON THE QUESTION OF COMPUTATION OF INCOME DOES NOT ARISE AT ALL. THE LEARNED CIT(A) RE LYING ON VARIOUS CASE LAWS DIRECTED THE AO TO WITHDRAW SUCH LOSS CA RRIED FORWARD TO SUBSEQUENT ASSESSMENT YEARS. HE ACCORDINGLY HELD THAT THERE WOULD BE ENHANCEMENT OF INCOME TO THE EXTENT OF RS. 31 47 188/- WHICH HAS BEEN WRONGLY ALLOWED TO BE CARRIED FORWARD BY THE A O. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL B EFORE US. 4. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE WAS IN THE BUSINESS OF SHARE TRADING A CTIVITY AND THE ASSESSEE WAS UNABLE TO CARRY FORWARD THE BUSINESS A CTIVITIES BECAUSE ITA NO. 6875/M/2008 NH SECURITIES LTD. 3 OF THE SEBI ORDER AND THE SAME WAS CHALLENGED BEFOR E THE HONBLE HIGH COURT AND ALSO BEFORE THE HONBLE SUPREME COUR T. STOPPAGE OF THE BUSINESS IS ONLY TEMPORARY AND NOT PERMANENT AN D EVEN THE ORDER PASSED BY THE SEBI IS ONLY A TEMPORARY ORDER THERE FORE IT CANNOT BE SAID THAT THE ASSESSEE IS NOT IN THE BUSINESS ACTIV ITY. THE LEARNED COUNSEL FURTHER SUBMITTED THAT SIMILAR ISSUE HAS BE EN CONSIDERED BY THE MUMBAI BENCH OF ITAT IN THE ASSESSEES SISTER C ONCERN CASE VIZ. KNP SECURITIES P. LTD. IN ITA NOS. 5008 & 5009/MUM/ 07 FOR AYS 2003-04 & 2004-05 VIDE ORDER DATED 29 TH MAY 2009. THE SAID DECISION WAS FOLLOWED BY THE ITAT MUMBAI BENCH IN ANOTHER SISTER CONCERN CASE OF THE ASSESSEE NAMELY TRIUMPH SECUR ITIES IN ITA NO. 1053 & 2111/MUM/08 FOR AY 2001-02 & 2002-03 ORDER DATED 31/12/2010. 5. ON THE OTHER HAND THE LEARNED DR SUBMITTED THAT FINALLY THE HONBLE HIGH COURT AND SUPREME COURT CONFIRMED THE ORDER PASSED BY THE SEBI AND HE SUPPORTED THE ORDER PASSED BY THE C IT(A) IN SUPPORT OF REVENUES CASE. 6. WE HAVE HEARD BOTH THE PARTIES PERUSED THE RECO RD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE CI T(A) PASSED ENHANCEMENT ORDER ON THE GROUND THAT THE ASSESSEE H AS NOT CARRIED OUT ANY BUSINESS DURING THE YEAR AND ALLOWABILITY O F BUSINESS EXPENSES U/S 37 THE ASSESSEE HAS TO CARRY OUT THE B USINESS ACTIVITY AND DIRECTED THE AO TO ENHANCE THE ASSESSMENT. UNDE R SIMILAR FACTS AND CIRCUMSTANCES THE ITAT IN THE CASE OF TRIUMPH SECURITIES (SUPRA) FOLLOWING THE DECISION IN THE CASE OF KNP SECURITIE S P. LTD. (SUPRA) HELD AS UNDER:- 17. AFTER HEARING BOTH THE PARTIES WE FIND IDENTI CAL ISSUE HAD COME UP BEFORE THE TRIBUNAL IN THE CASE OF KNP SECURITIE S P LTD (SUPRA) WHEREIN THE ASSESSING OFFICER HAD DISALLOWED VARIOU S EXPENSES CLAIMED BY THE ASSESSEE IN ITS P&L ACCOUNT ON THE G ROUND THAT THE ASSESSEE HAS NOT CARRIED OUT ANY BUSINESS ACTIVITY SINCE SEBI MADE RESTRICTION VIDE ORDER DATED 11.4.2001. IN APPEAL THE CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER AND ON FURTHER APPE AL THE TRIBUNAL VIDE ORDER DATED 29.5.2009 ALLOWED THE VARIOUS EXPENSES CLAIMED BY THE ITA NO. 6875/M/2008 NH SECURITIES LTD. 4 ASSESSEE. THE RELEVANT PORTION OF THE ORDER OF THE TRIBUNAL READS AS UNDER: 5 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDER ED THEM CAREFULLY. WE HAVE ALSO PERUSED THE MATERIAL ON REC ORD ALONG WITH VARIOUS CASE LAWS RELIED BY BOTH THE PARTIES. AFTER CONSIDERING THE RELEVANT MATERIAL IT IS SEEN THAT T HE ASSESSEE WAS DOING BUSINESS OF SHARE TRADING AND SECURITY ET C. VARIOUS BUSINESS EXPENSES INCURRED FOR THE PURPOSE OF ITS B USINESS ACTIVITIES WERE HELD AS ALLOWABLE IN PAST. IN THE Y EAR UNDER CONSIDERATION THE LD AO NEGATIVED THE CLAIM OF THE ASSESSEE FOR THE REASON THAT THERE IS NO BUSINESS ACTIVITY DURIN G THE YEAR UNDER CONSIDERATION AS SEBI HAS IMPOSED RESTRICTION VIDE ORDER DATED 11.4.2001. COPY OF THE ORDER ISSUED BY SEBI I S PLACED AT PAGES 82 TO 84 OF THE PAPER BOOK. IT IS MENTIONED I N THIS ORDER THAT THE ASSESSEE IS BARRED FROM UNDERTAKING ANY FR ESH BUSINESS AS STOCK BROKER TILL FURTHER ORDER AS ON ACCOUNT OF INDICATIONS OF THE PRIMA FACIE INVOLVEMENT OF MR KETAN PAREKH IN M ANIPULATING CERTAIN SCRIPS OF VARIOUS COMPANIES. IT HAS BEEN NO TICED THAT M/S V N PAREKH SECURITIES LTD AND M/S KNP SECURITIES LT D ARE ALSO THE ENTITIES CONTROLLED BY AND CONNECTED WITH MR KE TAN PAREKH OR MR KARTIK PAREKH. THEREFORE IN VIEW OF THE POWERS CONFERRED UNDER THE PROVISIONS OF SUB SECTION (3) OF SEC. 4 R.W.S 11 AND 11B OF THE SEBI ACT 1902 THE ASSESSEE WAS BARRED FROM UNDERTAKING ANY FRESH BUSINESS AS STOCK BROKERS TILL FURTHER ORDERS AS STATED ABOVE. THEREAFTER SEBI PA SSED ANOTHER ORDER ON 21ST JUNE 2001 STATING THAT IN VIEW OF THE ORDER OF SEBI DATED 4.4.2001 AND 10.4.2001 DEBARRING THEM FROM UN DERTAKING ANY FRESH BUSINESS AS A STOCK BROKER AND MERCHANT B ANKERS TILL FURTHER ORDERS SHOULD BE CONTINUED. THIS ACTION OF THE SEBI HAS BEEN CHALLENGED BY THE ASSESSEE BEFORE THE APPROPRI ATE AUTHORITIES. COPY OF THE PETITION FILED BEFORE THE SECURITIES APPELLATE TRIBUNAL IS PLACED AT PAGE 94 OF THE PAPE R BOOK. IN VIEW OF THESE FACTS AND CIRCUMSTANCES THE ASSESSEE WAS NOT ALLOWED TO DO ITS BUSINESS ACTIVITY IN SHARE ON THE STOCK EXCHANGE FLOOR. 5.1 NOT DOING BUSINESS ACTIVITY WAS NOT ON ACCOUNT OF ASSESSEES WILL BUT ON ACCOUNT OF FORCED CIRCUMSTANCES; THEREF ORE IT CANNOT BE SAID THAT THE ASSESSEE HAS CLOSED/DISCONTINUED I TS BUSINESS ACTIVITY ITS OWN. THE ESTABLISHMENTS OF THE ASSESSE E WERE INTACT AND THEY WERE TO BE MAINTAINED. STAFF MEMBERS WERE KEPT AND SALARIES WERE PAID TO THEM. LOANS TAKEN FROM VARIOU S BANKS AND OTHERS FOR THE PURPOSE OF BUSINESS ACTIVITY IN PAST WERE OUTSTANDING DURING THE YEAR UNDER CONSIDERATION; TH EREFORE ANY INTEREST ACCRUED WAS TO BE PAID DURING THE YEAR UND ER CONSIDERATION OR WAS PAYABLE. THE ASSESSEE IS HAVIN G VALID BSE CARD WHICH COULD NOT BE USED FOR THE REASON THAT SE BI HAS PASSED AN ORDER BARRING THE ASSESSEE NOT TO DO ANY BUSINESS ACTIVITY. THEREFORE IT ALSO CANNOT BE SAID THAT TH E ASSESSEE COULD NOT USE THE BSE CARD ITS OWN WHICH WAS READY TO USE. IN THESE CIRCUMSTANCES WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEES BUSINESS DOES NOT COME TO AN END OR DISC ONTINUED. 5.2 THE MEANING OF DISCONTINUATION IS EXPLAINED IN THE LAW LEXICON WHERE IT IMPLIES A VOLUNTARY ACT AND ABAND ONMENT OF ITA NO. 6875/M/2008 NH SECURITIES LTD. 5 POSSESSION FOLLOWED BY THE ACTUAL POSSESSION OF ANO THER IT IMPLIES THAT THE PERSON DISCONTINUING HAS GIVEN UP THE LEND AND LEFT IT TO THE POSSESSED BY ANYONE CHOOSING TO COME IN AS HELD IN THE CASE O F QADIR BUX VS RAMCHAND 1917 AIR 289 AT PAGE 295. IT IS FURTHER EXPLAINED AT THE SAME PAGE AT 563 OF THE LAW LEXICON THAT DI SCONTINUE; TO CAUSE TO CEASE OR TO PUT A STOP. 5.3 IN THE PRESENT CASE NEITHER THE BUSINESS IS DIS CONTINUED ON ACCOUNT OF VOLUNTARY ACT OF THE ASSESSEE NOR THE SA ME HAS PUT TO STOP ITS OWN. THE BUSINESS COULD NOT BE DONE FOR TH E REASON THAT SEBI HAS BARRED THE ASSESSEE NOT TO DO ANY BUSINESS ACTIVITY TILL FURTHER ORDERS. THE ASSESSEE WAS BARRED TILL FURTHE R ORDERS CLEARLY MEAN THAT THE ASSESSEE WAS NOT BARRED PERMA NENTLY. THE PERMANENT ORDER ISSUED IN THE YEAR 2007 AND FROM THE YEAR OF 2007 THE ASSESS EE CANNOT DO ANY BUSINESS ACTIVITY; THEREFORE AT THE MOST IT CAN BE SAID THAT NO XPENSES CAN BE ALLOWED FROM THAT YEAR. HOW EVER FOR THE EARLIER YEAR IN OUR CONSIDERED VIEW THE EXPENSES INCURRED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUSINESS ACTIVI TY ARE ALLOWABLE AS THE ESTABLISHMENT WAS NOT SCRAPED AND THE ASSESSEE WAS STILL HOPEFUL TO S TART ITS BUSINESS ACTIVITY. 6 IN THE CASE OF CIT VS VELLORE ELECTRIC CORPORATIO N LTD REPORTED IN 243 ITR 529 THE HONBLE MADRAS HIGH COURT HAS H ELD THAT: IT COULD NOT BE SAID THAT THERE WAS A PERMANENT CL OSURE AS THE VALIDITY OF THE ACT WAS YET TO BE FINALLY SE TTLED BY THE SUPREME COURT. IN THE EVENT OF THE ACT BEING ST RUCK DOWN THE ASSESSEE COULD RESUME BUSINESS. THE FACT THAT IT HAD CONTINUED TO MAINTAIN AN ESTABLISHMENT WAS INDICATION OF ITS INTENTION TO RESUME BUSINESS IF AN OPPORTUNITY FOR IT AROSE BY REASON OF THE SUPREME C OURT HOLDING IN ITS FAVOUR. THE EXPENSES INCURRED BY IT WHILE AWAITING THE DECISION OF THE SUPREME COURT COULD NO T ALTOGETHER BE REGARDED AS UNCONNECTED WITH THE BUSI NESS THAT IT HAD BEEN CARRYING ON BY SUPPLY OF ELECTRICI TY AND THAT BUSINESS WAS INTERRUPTED ONLY BY REASON OF THE ACT. THE POSSIBLE RESUMPTION OF THE BUSINESS WAS DEPENDE NT ON THE OUTCOME OF THE APPEALS PENDING BEFORE THE SU PREME COURT. THE AMOUNTS CLAIMED WERE ALSO NOT VERY SUBSTANTIAL. THE TRIBUNAL HAD TAKEN A BROAD VIEW OF THE MATTER AND HAD HELD IN FAVOUR OF THE ASSESSEE. THER E WAS NO GROUND TO DIFFER 6.1 THE FACTS BEFORE THE HONBLE HIGH COURT WERE TH AT THE ASSESSEE WAS A PRIVATE ELECTRIC COMPANY. ITS UNDERT AKING VESTED WITH THE STATE GOVERNMENT BY REASON OF THE ENACTMEN T OF THE TAMIL NADU ELECTRICITY SUPPLY UNDERTAKINGS (ACQUISI TION) ACT 1973. AFTER AN UNSUCCESSFUL ATTEMPT TO CHALLENGE TH E VALIDITY OF THAT ACT IN THE HIGH COURT THE ASSESSEE HAD FILED APPEALS BEFORE THE SUPREME COURT WHICH WERE PENDING DURING THE REL EVANT YEARS I.E. AYS 1975-76 TO 1979-80. THE AO HELD THAT THE A SSESSEE WAS NOT CARRYING ON ANY BUSINESS AND LIMITED THE SALARY PAID TO THE ITA NO. 6875/M/2008 NH SECURITIES LTD. 6 EMPLOYEES OF THE ASSESSEE TO 10% AND THE AUDIT FEE WAS LIMITED TO 15%. THAT WAS AFFIRMED BY THE FIRST APPELLATE AU THORITY. HOWEVER THE TRIBUNAL HELD THAT THE ASSESSEE WAS CA RRYING ON BUSINESS AND WAS ENTITLED TO THE DEDUCTIONS CLAIMED BY THE ASSESSEE. ON REFERENCE THE HONBLE MADRAS HIGH COU RT AFFIRMED THE VIEW TAKEN BY THE TRIBUNAL. 6.2 THE RATIO OF THE DECISION OF THE HONBLE MADRAS HIGH COURT IS SQUARELY APPLICABLE ON THE FACTS OF THE PRESENT CAS E AS IN THE PRESENT CASE ALSO THE ASSESSEE WAS RESTRICTED BY TH E ORDER OF THE SEBI NOT TO DO ANY BUSINESS ACTIVITY HOWEVER ESTA BLISHMENT OF THE ASSESSEE WAS MAINTAINED AND VARIOUS EXPENSES WE RE INCURRED WHICH WERE NECESSARY AND THEY WERE CONNECT ED WITH THE BUSINESS ACTIVITY OF THE ASSESSEE. 7. IN THE CASE OF SREE MEENAKSHI MILLS LTD IN 63 I TR 207 THE APEX COURT HAS ALLOWED VARIOUS EXPENSES ON ACCOUNT OF EXPENDITURE FOR PROSECUTING CIVIL PROCEEDINGS. IN T HIS CASE THE ASSESSEE COMPANY WHICH CARRIED ON THE BUSINESS OF C OTTON SPINNING AND WEAVING FINDING ITS OWN HANDLOOMS IN ITS FACTORY PREMISES INADEQUATE DISTRIBUTED YARN PRODUCED BY I T TO WEAVERS OUTSIDE THE FACTORY. UNDER CLAUSE 18B OF THE COTTON CLOTH AND YAN (CONTROL) ORDER 1945 THE TEXTILE COMMISSIONER WAS AUTHORISED TO DIRECT ANY MANUFACTURE OR DEALER OR A NY CLASS OF MANUFACTURERS OR DEALERS INTER-ALIA NOT TO SELL O R DELIVER ANY YARN OR CLOTH OF SPECIFIED DESCRIPTION EXCEPT TO SU CH PERSON OR PERSONS AND SUBJECT TO SUCH CONDITIONS AS HE MIGHT SPECIFY. ACCORDINGLY THE ORDER PASSED BY THE TEXTILE COMMIS SIONER DIRECTING THE COMPANY NOT TO SELL OR DELIVER YARN M ANUFACTURED BY IT EXCEPT TO SUCH PERSON OR PERSONS AS HE MIGHT SPECIFY. HOWEVER THE COMPANY CONTINUED TO DELIVER YARN TO W EAVERS OUTSIDE FACTORY. THE ACTION OF THE COMMISSIONER WAS CHALLENGED BEFORE THE APPELLATE AUTHORITY AND THE SAME WAS REJ ECTED BY THE HIGH COURT AS WELL AS THE SUPREME COURT. ON APPELLA TE PROCEEDINGS THE EXPENSES INCURRED BY THE ASSESSEE WERE CLAIMED AS BUSINESS EXPENDITURE AND THEY WERE NOT A LLOWED BY THE AO BY OBSERVING THAT THESE EXPENSES WERE NOT FO R THE PURPOSE OF BUSINESS AND WERE NOT INCURRED DURING TH E YEAR UNDER CONSIDERATION. MATTER REACHED UP TO THE STAGE OF THE HONBLE SUPREME COURT WHO HAS ALLOWED THE EXPENDITU RE INCURRED BY THE COMPANY AS BUSINESS EXPENDITURE BY HOLDING AS UNDER: THAT THE OBJECT OF THE PETITION WAS T SECURE A DEC LARATION THAT THE ORDER DATED FEB 20TH 1946 IN SO FAR AS I T SOUGHT TO PUT RESTRICTIONS UPON THE RIGHT OF THE COMPANY T O CARRY ON ITS BUSINESS IN THE MANNER IN WHICH IT WAS ACCUS TOMED TO DO WAS UNAUTHORISED AND TO PREVENT ENFORCEMENT OF THAT ORDER. THEREBY THE COMPANY WAS SEEKING TO OBT AIN AN ORDER FROM THE COURT ENABLING THE BUSINESS TO BE CARRIED ON WITHOUT INTERFERENCE. THE AMOUNTS EXPEND ED BY THE COMPANY ON THAT BEHALF WERE EXPENDITURE LAID OU T WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSIN ESS AND WERE DEDUCTIBLE U/S 10(2)(XV). IT WAS FURTHER HELD THAT; ITA NO. 6875/M/2008 NH SECURITIES LTD. 7 THE QUESTION OF ADMISSIBILITY U/S 10(2)(XV) HAD TO BE DECIDED NOT ON WHAT WAS FOUND OR OBSERVED BY THE HI GH COURT IN APPEAL FROM THE ORDER IN THE PROCEEDINGS U /S 45 OF THE SPECIFIC RELIEF ACT OR BY THE PRIVY COUNCIL BUT UPON THE FINDINGS OF FACT RECORDED BY THE TRIBUNAL. EXPE NDITURE INCURRED TO RESIST IN A CIVIL PROCEEDINGS THE ENFOR CEMENT OF A MEASURE LEGISLATIVE OR EXECUTIVE WHICH IMPOSES RESTRICTIONS ON THE CARRYING ON OF A BUSINESS OR T O OBTAIN A DECLARATION THAT THE MEASURE IS INVALID WOULD I F OTHER CONDITIONS ARE SATISFIED BE ADMISSIBLE AS A DEDUCT ION U/S 10(2)(XV) 7.1 THE RATIO OF THE DECISION OF THE APEX COURT ALS O GOES IN FAVOUR OF THE ASSESSEE AS THE LITIGATION EXPENSES I NCURRED IN RESPECT TO ITS BUSINESS WERE HELD AS BUSINESS EXPENDITURE. 7.2 IN THE PRESENT CASE ALSO ALL THE EXPENSES INCUR RED ARE CONNECTED WITH THE BUSINESS OF THE ASSESSEE ONLY; THEREFORE THE EXPENSES CLAIMED BY THE ASSESSEE ARE ALLOWABLE. 8. IN THE CASE OF M/S MARINE LABOUR SUPPLYING CO DECIDED IN ITA NO.6048 & 6049/MUM/07 VIDE ORDER DAT ED 2.12.2008 THE TRIBUNAL BY FOLLOWING THE DECISION I N THE CASE OF RUIA SHELTERS LTD IN 10 SOT 157 (MUM) AND IN THE CASE OF CHUNILAL &CO IN 4 SOT 309(MUM(TM) HELD THAT IF FOR THE REASON DUE TO LULLNESS OF BUSINESS NO BUSIN ESS CAN BE DONE FOR AYS 2002-03 TO 2005-06 THE ASSESSEE IS ENTITLED TO DEDUCTION IN RESPECT OF ADMINISTRATIVE AND OTHER EXPENSES WHICH ARE REQUIRED TO BE INCURRED FO R KEEPING THE BUSINESS ALIVE. 9. WE HAVE ALSO TAKEN INTO CONSIDERATION VARIOUS C ASE LAWS ON WHICH RELIANCE HAS BEEN PLACED BY THE LD DR AND FOUND THAT THEY ARE DISTINGUISHABLE ON FACTS. 10. IN THE CASE OF CHINAI AND CO P LTD IN 206 ITR 616 THE HONBLE BOMBAY HIGH COURT HAS HELD THAT THE ASSESSEE COMPANY COULD NOT BE ENTITLED FOR ANY DEDU CTION OF EXPENSES CLAIMED BY IT AS BUSINESS EXPENDITURE U /S 37 AS THE ASSESSEE COMPANY HAS STOPPED CARRYING ON ITS BUSINESS AT THE END OF DECEMBER 1969. THE MERE FAC T THAT IT CONTINUED TO HOLD ITS INVESTMENTS WOULD NOT BE S UFFICIENT FOR THE PURPOSE OF ESTABLISHING THAT IT CONTINUED T O CARRY ON BUSINESS. 10.1 IN THE PRESENT CASE THE ASSESSEE HAS NOT STOP PED THE BUSINESS ACTIVITY ITS OWN BUT IT WAS FORCED BY SEBI NOT TO DO ANY BUSINESS ACTIVITY. THEREFORE THE RAT IO OF THIS DECISION OF THE HONBLE BOMBAY HIGH COURT IS NOT APPLICABLE ON THE FACTS OF THE PRESENT CASE. ITA NO. 6875/M/2008 NH SECURITIES LTD. 8 11. SIMILARLY THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF NATHALAL ASHARAM IN 194 ITR 11 0 IS ALSO NOT APPLICABLE ON THE FACTS OF THE PRESENT CAS E AS THE COMPANY PAID COMPENSATION TO ITS EMPLOYEES UNDER TH E PROVISIONS OF SEC. 25 FFF OF INDUSTRIAL DISPUTES AC T 1947 ON ACCOUNT OF RETRENCHMENT WHICH WERE HELD AS NOT R ELATED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. 11.1 WE HAVE ALSO TAKEN INTO CONSIDERATION VARIOUS OTHER CASE LAWS RELIED UPON BY THE LD DR AND FOUND THAT T HEY ARE DISTINGUISHABLE ON FACTS. 12. IN THE PRESENT CASE NO SUCH FACTS ARE INVOLVE D AS ALL THE EXPENSES INCURRED WERE IN CONNECTION WITH T HE BUSINESS ACTIVITY ONLY AND FOR KEEPING THE BUSINESS ALIVE TO MAINTAIN ITS BUSINESS ESTABLISHMENT AND TO MEET THAT THE OBLIGATION OF INTEREST ON LOAN ETC TAKEN FOR IT S BUSINESS ACTIVITY; THEREFORE WE HOLD THAT VARIOUS EXPENSES INCURRED BY THE ASSESSEE ARE ALLOWABLE AS DEDUCTION. HOWEVER ADMISSIBILITY OF THE EXPENDITURE WAS NOT EXAMINED B Y THE AO FOR THE REASON THAT HE HAS DISALLOWED THE EXPEND ITURE ON THE GROUND THAT THEY ARE NOT ALLOWABLE AS THE AS SESSEE HAS NOT DONE ANY BUSINESS ACTIVITY. THEREFORE FOR THE PURPOSE OF EXAMINING THE ADMISSIBILITY/GENUINENESS OF THESE EXPENSES THE MATER IS SENT TO THE FILE OF TH E AO. THE ASSESSEE HAS CONTENDED THAT DEPRECIATION AND INTERE ST HAVE BEEN ALLOWED BY THE TRIBUNAL AS ALLOWABLE WHIL E PASSING ORDER FOR AY 2000-01. THE AO WILL TAKE INTO CONSIDER THE ORDER OF THE TRIBUNAL AND IF IT IS FOU ND THAT FACTS ARE SIMILAR THEN OF COURSE IN VIEW OF THE DE CISION OF THE TRIBUNAL THE CLAIM OF THE ASSESSEE ON ACCOUNT OF DEPRECIATION AND INTEREST HAS TO BE ALLOWED. 17.1 SINCE THE FACTS OF THE IMPUGNED APPEAL ARE IDE NTICAL TO THE FACTS IN THE CASE OF THE SISTER CONCERN OF THE ASSE SSEE I.E KNP SECURITIES P LTD ; THEREFORE RESPECTFULLY FOLLOWIN G THE DECISION OF THE TRIBUNAL WE HOLD THAT THE ASSESSEE IS ENTITLED TO CLAIM VARIOUS EXPENSES DEBITED IN THE P&L ACCOUNT. WE HOL D AND DIRECT ACCORDINGLY. THE GROUND RAISED BY THE ASSESSEE IS A CCORDINGLY ALLOWED. 7. SINCE THE ISSUE UNDER CONSIDERATION IS IDENTICAL TO THAT OF THE CASE DECIDED BY THE CO-ORDINATE IN THE CASE OF TRIUMP SE CURITIES LTD. (SUPRA) WE RESPECTFULLY FOLLOW THE SAME AND IN THE LIGHT OF TH AT THIS GROUND OF THE ASSESSEE IS ALLOWED. 8. GROUND NO. 2 READS AS UNDER:- THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO IN NOT ALLOWING BUSINESS LOSS OF RS. 80 000/- BEING LOSS ON ACCOUN T OF VALUATION OF SHARES ON THE GROUND THAT THE TRANSACTIONS ARE NOT GENUINE IN NATURE AND ALSO THAT THE APPELLANTS HAVE NOT CARRIED ON AN Y BUSINESS ACTIVITY DURING THE YEAR. ITA NO. 6875/M/2008 NH SECURITIES LTD. 9 THE APPELLANTS CONTEND THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE OBSERVATIONS OF THE CIT(A ) IN UPHOLDING THE ACTION OF THE AO IN NOT ALLOWING THE IMPUGNED LOSS ARISING ON TRANSACTIONS CARRIED OUT IN THE PURSUIT OF BUSINESS ARE ERRONEOUS BASELESS AND CONTRARY TO THE PROVISIONS OF LAW. THE CIT(A) OUGHT TO HAVE ALLOWED THE IMPUGNED LOSS AS CLAIMED BY THE AP PELLANTS. 9. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO ASKED THE ASSESSEE TO FURNISH THE DETAILS OF BUSINESS LOSS OF RS. 80 000/- VIDE ITS LETTER DATED 12/10/07. THE ASSESSEE HAD FURNISHED T HE DETAILS OF LOSS FROM SHARES ON SECURITIES AT RS. 80 000/- WHICH IS ON A CCOUNT OF VALUATION AT MARKET TO MARKET VALUATION OF STOCK HELD BY THE ASS ESSEE. THE SHARES HAD BEEN HELD BY THE COMPANY AS STOCK. AS SUCH IT WAS CLAIMED THAT THE LOSS ARISING IS ALLOWABLE AS BUSINESS LOSS. IT WAS FURTH ER STATED THAT THERE IS NO TRADING TRANSACTION IN SHARES ENTERED INTO BY THE C OMPANY. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE AO OBSERVED TH AT LOSS IS DUE TO VALUATION OF SHARES IN CERTAIN CASES VALUE IS TAKE N AS ZERO AND THE ZERO VALUATION IS TAKEN DUE TO NON-MARKETABILITY OF THE SHARES AND ALSO UNLISTING THEM FROM THE STOCK EXCHANGE. THE AO FURTHER OBSERV ED THAT THE SHARES HELD AS STOCK ARE THE SAME WHICH WERE PURCHASED BY THE ASSESSEE DURING THE SCAM PERIOD OF 2001 IN THE GROUP CASES OF KETAN V. PAREKH. HE ALSO HELD THAT IN THE ASSESSMENT ORDER PASSED FOR THE AY 2001 -02 2002-03 AND 2003- 04 THE LOSSES INCURRED WERE NOT GENUINE AND THE SAM E WAS DISALLOWED FOR THESE YEARS. SINCE THERE IS NO CHANGE IN THE FACTS AS NO FURTHER SHARES WERE PURCHASED THE AO DISALLOWED THE LOSS SHOWN BY THE ASSESSEE OF RS. 80 000/- TREATING AS NOT GENUINE. ON APPEAL THE CI T(A) HELD THAT THE ASSESSEE HAS NOT CARRIED OUT ANY BUSINESS ACTIVITY THEREFORE LOSS RESULTING ON ACCOUNT OF MERE VALUATION OF SUCH SHARES CANNOT BE CONSIDERED AS BUSINESS LOSS AND CONFIRMED THE ORDER OF THE AO. AG GRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. 10. BEFORE US THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS TAKEN MARKET VALUE AS NIL BECAUSE THE COMPANY WAS DE-LISTED AND IT WOULD NOT BE ABLE TO CARRY THE BUSINESS. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS TAKEN THE VALUE AT NIL BECAUSE OF THE COMPELLING CIRCUMSTANCES THEREFORE IT DOES NOT MEAN THAT THE RE IS NO SHARE VALUE. HE FINALLY SUBMITTED THAT THE MATTER MAY BE REMITTED B ACK TO THE FILE OF THE AO FOR DETERMINATION OF THE VALUE. ITA NO. 6875/M/2008 NH SECURITIES LTD. 10 11. ON THE OTHER HAND THE LEARNED DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 12. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. T HE LEARNED CIT(A) GAVE A SPECIFIC FINDING THAT THE CASE IN HAND IS SIMILAR T O THE LARGE NUMBER OF GROUP CASES PERTAINING TO THE ASSESSEE AND IN THOSE CASES LOSSES HAVE BEEN HELD AS NON-GENUINE. HE FURTHER SUBMITTED THAT THE LOSS RES ULTING ON ACCOUNT OF MERE VALUATION OF SHARES CANNOT BE CONSIDERED AS B USINESS LOSS IN ANY CASE. BEFORE US THE ASSESSEE HAS NOT BROUGHT ANYTH ING ON RECORD WITH REGARD TO OTHER GROUP CASES. IN VIEW OF THE SPECIFI C FINDING GIVEN BY THE CIT(A) WE DO NOT FIND ANY REASON TO INTERFERE IN T HE ORDER OF THE CIT(A) AND THEREFORE THE ORDER OF THE CIT(A) IS HEREBY UPHELD ON THIS ISSUE. ACCORDINGLY THIS GROUND OF APPEAL OF THE ASESSEE I S DISMISSED. 13. GROUND NO. 3 IS DIRECTED AGAINST THE ACTION OF THE CIT(A) IN UPHOLDING THE ACTION OF THE AO IN CONSIDERING INTEREST RECEIV ED ON FIXED DEPOSITS RS. 6 19 480/- AS INCOME FROM OTHER SOURCES INSTEAD O F BUSINESS INCOME. 14. THE AO TREATED THE BUSINESS LOSS IN SHARES ETC. AS SPECULATION LOSS IN VIEW OF THE EXPLANATION BELOW SECTION 73 SINCE THE ASSESSEE BEING A COMPANY WAS TRADING IN SHARES. THEREFORE THE AO TR EATED THE INTEREST ON FD AS INCOME FROM OTHER SOURCES. ON APPEAL AFTER CO NSIDERING THE SUBMISSIONS OF THE ASSESSEE THE CIT(A) HELD THAT I T IS AN UNDISPUTED FACT THAT THE ASSESSEE WAS ENGAGED IN SHARE TRADING SINC E LONG AND NOT ENGAGED IN ANY FINANCING ACTIVITY. SIMPLY FOR THE FACT THAT THE INTEREST WAS EARNED ON PLEDGED FIXED DEPOSITS IT DOES NOT LEAD TO THE CON CLUSION THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF EARNING INTEREST. HE THEREFORE HELD THAT THERE IS NO DIRECT NEXUS BETWEEN THE INTEREST AND T HE NORMAL BUSINESS ACTIVITY CARRIED ON BY THE ASSESSEE. HE ALSO HELD T HAT IT IS WORTH MENTIONING HERE THAT THE ASSESSEE IN COMPUTATION OF INCOME HAS ITSELF SHOWN THE INTEREST INCOME UNDER THE HEAD OTHER SOURCES. IN VIEW OF THE SAID FINDINGS THE CIT(A) CONFIRMED THE ACTION OF THE AO. AGGRIEVE D BY THE ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. 15. AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE CANVASSED THAT THE ISSUE UNDER CONSIDERATION IS COVERED BY TH E DECISION OF THE ITA NO. 6875/M/2008 NH SECURITIES LTD. 11 COORDINATE BENCH K MUMBAI IN THE CASE OF SISTER CONCERN OF THE ASSESSEE VIZ M/S CLASSIC SHARES & STOCK BROKING SERVICES LT D. IN ITA NOS. 191/M/08 & 1135/M/08 FOR AY 2002-03 AND 2003-04 VIDE ORDER DATED 19/11/10. THE LEARNED DR ON THE OTHER HAND RELIED UPON THE ORDE RS OF THE AUTHORITIES BELOW. 16. AFTER CONSIDERING THE RIVAL SUBMISSIONS PERUSI NG THE RECORD WE FIND THAT THE ISSUE UNDER CONSIDERATION IS COVERED BY TH E DECISION OF A CO- ORDINATE BENCH IN CASE OF ASSESSEES SISTER CONCERN NAMELY M/S CLASSIC SHARES & STOCK BROKING SERVICES LTD. (SUPRA) WHERE IN THE CO-ORDINATE BENCH HELD AS UNDER:- 4.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING NATURE OF INTER EST INCOME RECEIVED BY THE ASESSEE FROM THE FDRS PLEDGED WITH THE BANKS FOR ISSUE OF BANK GUARANTEE TO THE STOCK EXCHANGE IN CONNECTION WITH THE TRADING BUSINESS OF THE ASSESSEE. THE ASSESSEE HAD BEEN DEB ARRED BY SEBI FOR SHARE TRANSACTIONS BUSINESS IN 2001 DUE TO ALLEGATI ONS OF IRREGULARITIES AND MANIPULATIONS. THE CASE OF THE ASSESSEE IS THAT THE ORDER OF SEBI HAD BEEN CHALLENGED. THE LICENSE OF THE ASSESSEE HA D BEEN CANCELLED ONLY IN THE YEAR 2005 AND THE ORDER CANCELING THE L ICENSE HAD ALSO BEEN CHALLENGED BY THE ASSESSEE WHICH WAS DISMISSED BY SAT MUCH LATER AND THE ORDER OF SAT WAS ALSO CONFIRMED BY TH E HONBLE SUPREME COURT. BUT THESE WERE SUBSEQUENT ACTIVITIES AND IN THE YEAR UNDER CONSIDERATION THE BUSINESS OF THE ASSESSEE HAD NOT CLOSED AND IT WAS ONLY SUSPENDED IN VIEW OF THE ADVERSE ORDER BY SEBI . WE FIND SIMILR SITUATION HAD BEEN CONSIDERED BY THE TRIBUNAL IN T HE CASE OF KNP SECURITIES PVT. LTD. (SUPRA) ANOTHER CONCERN OF KET AN PAREKH GROUP IN WHICH SIMILAR CLAIM WAS MADE BY THE ASSESSEE THAT B USINESS WAS IN EXISTENCE AND NOT CLOSED. THE TRIBUNAL FOLLOWING TH E JUDGMENT OF HONBLE HIGH COURT OF MADRAS IN CASE OF CIT VS. VEL LORE ELECTRICAL CORPORATION LTD. (243 ITR 529) HELD THAT THE BUSINE SS HAD NOT CLOSED AND THE CLAIM OF EXPENDITURE HAD TO BE ALLOWED. RES PECTFULLY FOLLOWING THE SAID DECISION OF THE TRIBUNAL WE HOLD THAT THE BUSINESS OF THE ASSESSEE HAD NOT BEEN CLOSED IN THE RELEVANT YEAR A ND THEREFORE FDRS HAD TO BE TREATED AS PLEDGED IN CONNECTION WITH THE BUSINESS WHICH WAS IN EXISTENCE AND THEREFORE THE INTEREST INCOME HAD TO BE TREATED AS INCIDENTAL BUSINESS INCOME. WE ACCORDINGLY SET ASID E THE ORDER OF CIT(A) AND ALLOWED THE CLAIM OF THE ASSESSEE. 17. SINCE THE ISSUE UNDER CONSIDERATION IS IDENTICA L TO THAT OF THE CASE DECIDED BY THE CO-ORDINATE BENCH IN THE CASE OF ASS ESSEES SISTER CONCERN AS ABOVE WE RESPECTFULLY FOLLOW THE SAME AND IN THE L IGHT OF THAT WE SET ASIDE THE ORDER OF CIT(A) AND ALLOW THE CLAIM OF THE ASSE SSEE. ITA NO. 6875/M/2008 NH SECURITIES LTD. 12 18. GROUND NO. 4 IS DIRECTED AGAINST THE ACTION OF THE CIT(A) IN UPHOLDING THE ORDER OF THE AO IN DISALLOWING A SUM OF RS. 8 5 4 540/- BEING BAD DEBTS WRITTEN OFF. 19. THE AO NOTED THAT IN SCHEDULE 2 TO THE PROFIT A ND LOSS ACCOUNT SHOWN UNDER OPERATING AND ADMINISTRATIVE COSTS THE ASSES SEE CLAIMED VATAV EXPENSES OF RS. 8 54 540/-. ON SCRUTINY IT WAS REV EALED THAT THIS PARTY WAS CLIENT OF THE ASSESSEE PERTAINING TO THE YEAR 1997- 98 ON ACCOUNT OF SHARE BROKING. THE AMOUNTS WHICH WERE DUE TO THE ASSESSEE AS CLIENTS ACCOUNTS PERTAINING TO THE PERIOD FOR WHICH THE ASSESSEE COM PANY WAS DOING THE BUSINESS OF BROKERAGE DURING THE PERIOD 1997 AND 19 98 IN THE STOCK EXCHANGE WAS SHOWN AS THE BAD DEBTS. IT WAS OBSERVE D BY THE AO THAT IN THE PRESENT CASE THE COMPANY WAS DOING BUSINESS AS SHA RE BROKER AND THIS AMOUNT WAS DUE ON ACCOUNT OF CLIENT ACCOUNT. THIS A MOUNT WAS NOT ON ACCOUNT OF TRADING IN SALE OF SHARES DONE BY THE CO MPANY AND THE AMOUNT HAD NOT BEEN TAKEN INTO ACCOUNT AS A SALE DURING TH E TRANSACTION AS A SHARE BROKER. THE COMPANY WAS ONLY GETTING BROKERAGE AS A PERCENTAGE OF THE AMOUNT OF SHARES PURCHASED BY THE CLIENT. AT NO THI S DEBT WAS INCURRED ON REVENUE ACCOUNT AND THE AMOUNT HAS NOT BEEN TAKEN I N COMPUTING THE PROFIT. IT MAY BE THE CASE OF THE ASSESSEE THAT PAR T OF THE AMOUNT WRITTEN OFF ALSO REPRESENT THAT PORTION OF MONEY WHICH HAD BEEN ACCOUNTED AS BROKERAGE AND WHICH HAD BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE BUSINESS. HE WAS OF THE VIEW THAT MERE FACT THAT THE COMPANY LOST MONEY WAS NOT SUFFICIENT TO JUSTIFY DEDUCTION. IT C OULD BE A CAPITAL LOSS AND ALL DEBT DID NOT QUALITY FOR SUCH DEDUCTION. THE AO THEREFORE HELD THAT THE ASSESSEE COMPANY WAS NOT DOING ANY BUSINESS IN BANK ING OR MONEY LENDING SO THAT IT CAN CLAIM THE AMOUNT AS BAD DEBT U/S 36( 2). HE FURTHER HELD THAT THE AMOUNT DUE HAD NOT ACCRUED ON ACCOUNT OF SALE O F ANY GOODS WHICH HAD BEEN TAKEN INTO ACCOUNT IN COMPUTING INCOME OF THE ASESSSEE AS REQUIRED U/S 36(1)(VII). IT WAS FURTHER OBSERVED THAT DEBTS ARE PERTAINING TO THE TRANSACTION OF GROUP CONCERNS ASSOCIATE CONCERNS O F GROUP CONNECTED WITH SHRI KETAN PAREKH WHO WAS INVOLVED IN THE SECURITY SCAM OF 2001. THE AO WITH THE ABOVE OBSERVATIONS CONCLUDED THAT SINCE TH E CLAIM OF THE ASESSSEE IS NOT CONSIDERED AS DEBT DURING THE COURSE OF ASSE SSMENT PROCEEDINGS IT CANNOT BE ALLOWED AS BAD DEBT AT ALL THEREFORE TH E CLAIM OF THE ASSESSEE OF BAD DBT UNDER THE HEAD EXPENSES AND LOSSES WAS REJE CTED AND DISALLOWED THE SAME. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). ITA NO. 6875/M/2008 NH SECURITIES LTD. 13 20. BEFORE THE CIT(A) THE AR OF THE ASSESSEE CONTEN DED THAT THE DEBT WRITTEN-OFF IS OF MONTROSA INVESTMENTS PVT. LTD. WH ICH WAS NOT A GROUP CONCERN OR AN ASSOCIATE CONCERN AND HENCE THE REAS ONS RECORDED BY THE AO IN HIS ORDER ARE BASELESS AND ERRONEOUS. IT WAS FUR THER CONTENDED THAT THE DEBT HAD BEEN WRITTEN OFF IN THE ACCOUNTS BY TRANSF ERRING THE BALANCE IN THE DEBTORS ACCOUNT TO ANOTHER ACCOUNT CALLED VATAV AC COUNT. AS SUCH THE REQUIREMENT OF SECTION 36(1)(VII) TO WRITE OFF THE BAD DEBT AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE WAS FULFILLED. THE REA SONS FOR WRITING-OFF THE BAD DEBTS AMONG OTHERS ARE CONSTANT FOLLOW-UP WITH THE CLIENT BEARING NO RESULT AND THE AMOUNT OUTSTANDING SINCE LONG. THE A R OF THE ASSESSEE PLACED RELIANCE ON THE DECISIONS OF THE ITAT MUMBA I BENCHES WHICH WERE REPRODUCED BY THE CIT(A) IN HIS ORDER AT PAGE NO. 9 . AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE CIT(A) HELD AS UND ER:- 16. I HAVE CAREFULLY CONSIDERED THE ABOVE FACTS AND FIND THAT THE APPELLANT HAS NOT BEEN ABLE TO REBUT THE OBSERVATIO N AND THE FINDING OF THE AO REGARDING APPLICABILITY OF SECTION 36(2). NO THING HAS BEEN BROUGHT ON RECORD TO SHOW THAT THE DEBT WRITTEN OFF WAS EVER TAKEN INTO CONSIDERATION FOR ARRIVING AT THE INCOME IN THE PAS T OR NOT. THUS ONE OF THE MAJOR CONDITIONS FOR ALLOWING THE DEDUCTION HAS NOT BEEN FULFILLED BY THE APPELLANT. IT MAY ALSO BE STATED HERE THAT T HE ISSUE REQUIRES TO BE DECIDED IN THE LIGHT OF THE FACT THAT THE APPELL ANT WAS NOT CARRYING ON ANY BUSINESS ACTIVITY AS THE ONLY BUSINESS OF SH ARE TRADING HAS REMAINED BANNED BY THE ORDERS OF SEBI FROM APRIL 2 001. APPARENTLY NO BUSINESS ACTIVITY HAS BEEN CARRIED ON BY THE APP ELLANT AND IN SUCH A CIRCUMSTANCE THERE IS NO QUESTION OF ALLOWING AN Y DEDUCTION UNDER THE HEAD BUSINESS INCOME. THUS THE DISALLOWANCE MA DE BY THE AO IS ALSO FOUND TO BE CORRECT FROM SUCH A DIFFERENT PERS PECTIVE AS WELL. ACCORDINGLY THE ACTION OF THE AO IS FULLY JUSTIFIE D AND THE ADDITION MADE IS HEREBY UPHELD. 21. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. T HE ISSUE INVOLVED IN THIS GROUND IS WHETHER THE BAD DEBTS CLAIM OF THE ASESSE E IS ALLOWABLE OR NOT. THE AO HAD OBSERVED THAT THE ASSESSEE HAS NOT TAKEN INTO ACCOUNT THE BAD DEBTS CLAIM IN THE EARLIER YEARS. IT IS ALSO NOT CL EAR FROM THE ORDER OF THE AO THAT WHETHER THE ASSESSEE HAS TAKEN INTO CONSIDERAT ION THE AMOUNT OF BROKERAGE AND THE SAME HAS BEEN SHOWN IN P&L A/C OR NOT. THE CIT(A) SIMPLY CONFIRMED THE ORDER OF THE AO. IN THE CASE O F SHREYAS S. MORAKHIA 5 ITR 1 THE SPECIAL BENCH OF TRIBUNAL HELD THAT IF T HE BROKERAGE AMOUNT IS TAKEN IN THE ACCOUNT REMAINING AMOUNT HAS TO BE AL LOWED AS A BAD DEBT. THE DETAILED FINDINGS OF THE SPECIAL BENCH OF THE T RIBUNAL IN THE CASE OF SHREYAS S. MORAKHIA ARE EXTRACTED BELOW: ITA NO. 6875/M/2008 NH SECURITIES LTD. 14 29. AT THE TIME OF HEARING BEFORE US THE LD. COUNS EL FOR THE ASSESSEE HAS STRONGLY RELIED ON THE DECISIONS OF HO NBLE DELHI HIGH COURT IN THE CASE OF CIT VS. DB (INDIA) SECURI TIES LTD.(SUPRA) AND IN THE CASE OF CIT VS. BONANZA PORT FOLIO LTD. (SUPRA) STATING THAT THE SAME ARE DIRECTLY ON THE P OINT IN ISSUE AND THERE BEING NO CONTRARY DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT OR ANY OTHER HIGH COURTS THIS SPECIAL BENCH HAS TO FOLLOW THE SAME. WE HAVE CAREFULLY PER USED THE SAID DECISIONS OF THE HONBLE DELHI HIGH COURT. IN THE CASE OF DB (INDIA) SECURITIES LTD.(SUPRA) THE ASSESSEE WAS A MEMBER OF DELHI STOCK EXCHANGE AND WAS CARRYING ON THE BUSINE SS OF SHARES AND STOCK BROKING. THE ASSESSEE HAD PURCHAS ED SHARES ON BEHALF OF HIS CLIENT FOR THE TOTAL VALUE OF RS. 1.06 CRORES AT AN AVERAGE PRICE OF RS. 55 PER SHARE. THE SAID CLIENT MADE A PAYMENT TO THE EXTENT OF RS. 65 LACS ONLY TO THE AS SESSEE AND THE REMAINING AMOUNT OF RS. 41 LACS HAD REMAINED UN PAID. THE BROKERAGE INCOME EARNED BY THE ASSESSEE IN RESPECT OF THE SAID TRANSACTION OF PURCHASE OF SHARES WAS DULY DECLARED IN ITS RETURN OF INCOME AND WAS ASSESSED AS WELL IN THE EA RLIER YEAR. THE BALANCE AMOUNT OF RS. 41 LACS REMAINED UNPAID E VEN IN THE NEXT YEAR ALSO APPARENTLY BECAUSE OF THE REASON THA T THE PRICE OF SHARES FELL FROM RS. 55 TO RS. 5 PER SHARE. IN THE RETURN OF INCOME FILED FOR THE SAID YEAR THE ASSESSE CLAIMED DEDUCTION OF RS. 41 LACS AS BAD DEBTS U/S 36(1)(VII). THE A.O. DISALLOWED THE CLAIM OF THE ASSESSEE FOR THE SAID DEDUCTION WHICH WAS CONFIRMED BY THE LD. CIT(A). ON FURTHER APPEAL BY T HE ASSESSEE THE TRIBUNAL HOWEVER ALLOWED THE SAID DEDUCTION A ND WHEN THE MATTER REACHED TO THE HONBLE DELHI HIGH COURT IT WAS SOUGHT TO BE CANVASSED ON BEHALF OF THE REVENUE THAT THE AMOU NT RECEIVABLE BY THE ASSESSEE FROM ITS CLIENT AGAINST PURCHASE OF SHARES COULD NOT BE TREATED AS DEBT UNDER THE PRO VISIONS OF SECTION 36(2) AND THEREFORE THE QUESTION OF ALLOWI NG ANY DEDUCTION FOR THE SAID AMOUNT TREATING THE SAME AS BAD DEBT WOULD NOT ARISE. HONBLE DELHI HIGH COURT DID NOT F IND MERIT IN THIS CONTENTION RAISED ON BEHALF OF THE REVENUE HOL DING THAT THERE WAS A VALID TRANSACTION BETWEEN THE ASSESSEE AND HIS CLIENT AND SINCE THE ASSESSEE HAD TO MAKE PAYMENT O N BEHALF OF HIS CLIENT WHICH HE COULD NOT RECOVER TO THE EXTENT OF RS. 41 LACS THE SAID SUM HAS TO BE TREATED AS HIS DEBT. IT W AS ALSO HELD THAT THE BROKERAGE WHICH WAS RECEIVED FOR THE SAID TRANSACTION WAS SHOWN AS INCOME BY THE ASSESSEE IN THE EARLIER YEARS AND THE SAME WAS TAXED AS SUCH BY THE ASSESSING AUTHORI TY. IT WAS HELD THAT THE ASSESSEE THEREFORE WAS ENTITLED FOR D EDUCTION ON ACCOUNT OF BAD DEBT U/S 36(1)(VII) R.W.S. 36(2). A SIMILAR ISSUE AGAIN CAME UP FOR CONSIDERATION BEFORE THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. BONANZA PORTFOLIO LTD. (SUPRA) WHEREIN THE QUESTION OF LAW WHICH AROSE FOR CONSIDE RATION WAS WHETHER IN VIEW OF THE PROVISIONS OF SECTION 36(1)( VII) THE TOTAL DEBIT BALANCE INCLUDING THE CONSIDERATION COLLECTIB LE BY THE ASSESSEE COMPANY FOR THE SALE/PURCHASE OF SHARES CO ULD BE CLAIMED BY THE ASSESSEE AS BAD DEBTS WHEN IT HAD ON LY CREDITED BROKERAGE IN THE P&L ACCOUNT AND IT WAS HELD BY THE HONBLE DELHI HIGH COURT FOLLOWING INTER ALIA THE DECISI ON IN THE CASE OF CIT VS. DB (INDIA) SECURITIES LTD. THAT THE MONEY R ECEIVABLE BY ITA NO. 6875/M/2008 NH SECURITIES LTD. 15 THE ASSESSEE AS SHARE BROKER FROM HIS CLIENTS AGAIN ST PURCHASE OF SHARES MADE ON THEIR BEHALF HAS TO BE TREATED A S DEBT AND SINCE THE BROKERAGE PAYABLE BY THE CLIENT WAS A PAR T OF THAT DEBT AND THAT PART HAD BEEN TAKEN INTO ACCOUNT IN C OMPUTATION OF HIS INCOME THE CONDITIONS STIPULATED IN SECTION 36(1)(VII) AND 36(2) STOOD SATISFIED AND THE ASSESSEE WAS ENTITLED FOR DEDUCTION IN RESPECT OF THE SAID AMOUNT SINCE IT HA D BECOME BAD. IN OUR OPINION THE RATIO OF THESE DECISIONS OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. DB (INDIA) SECURITIES LTD.(SUPRA) AND IN THE CASE OF CIT VS. BONANZA PORT FOLIO LTD. (SUPRA) IS SQUARELY APPLICABLE TO THE ISSUE WHICH I S UNDER CONSIDERATION IN THE PRESENT CASE BEFORE THIS SPECI AL BENCH. 30. THE LEARNED D.R. HAS CONTENDED BEFORE US THAT T HE RULES AND REGULATIONS OF STOCK EXCHANGE GOVERNING RELATIO NS BETWEEN BROKER AND HIS CLIENTS AS WELL AS THE GUIDELINES IS SUED BY THE SEBI FROM TIME TO TIME PROTECTING THE INTEREST OF S HARE BROKER WERE NOT BROUGHT TO THE NOTICE OF THE HONBLE DELHI HIGH COURT IN THE CASES OF CIT VS. DB (INDIA) SECURITIES LTD.(SUP RA) AND CIT VS. BONANZA PORTFOLIO LTD. (SUPRA) AND THEIR LORDSHIPS THUS HAD NO OCCASION TO CONSIDER THE ISSUE IN THE LIGHT OF THE SAME. HOWEVER AS ALREADY HELD BY US THE SAID RULES AND REGULATIONS AS WELL AS GUIDELINES ARE NOT RELEVANT IN THE CONTE XT OF ISSUE REFERRED TO THIS SPECIAL BENCH WHICH RAISES A SPECI FIC QUESTION OF LAW. WE HAVE ALREADY NOTED THAT THE FACT WHICH IS NOT IN DISPUTE IS THAT THE ASSESSEE HAS ACTUALLY SUFFERED THE LOSS AS A RESULT OF THE AMOUNT IN QUESTION REPRESENTING DEBT BECOMING IRRECOVERABLE. IT IS THEREFORE NOT RELEVANT WHETHE R SUCH LOSS HAS BEEN INCURRED BY THE ASSESSEE AS A RESULT OF NOT FO LLOWING THE RELEVANT RULES AND REGULATIONS AND GUIDELINES OR EV EN AFTER FOLLOWING THE SAME. AS OBSERVED BY US THIS ASPECT MAY BE RELEVANT IN THE CONTEXT OF QUANTIFICATION OF SUCH L OSS. AS A MATTER OF FACT ONE OF THE ARGUMENTS RAISED ON BEHA LF OF THE REVENUE IN THE CASE OF DB (INDIA) SECURITIES LTD. (SUPRA) WAS THAT THE ASSESSEE HAVING NOT SOLD THE SHARES TO ANY BODY ELSE IN THE MARKET THE ASSESSEE COULD NOT CLAIM THE AMOUNT IN QUESTION AS BAD DEBT AND WHILE DEALING WITH THE SAME IT WAS HELD BY THE HONBLE DELHI HIGH COURT THAT THE SALE CONSIDERATIO N WHICH SUCH SHARES COULD FETCH IN THE MARKET NEEDS TO BE ADJUST ED AGAINST THE AMOUNT OF BAD DEBT CLAIMED BY THE ASSESSEE FOR ARRIVING AT THE ACTUAL FIGURE OF BAD DEBTS. 31. THE CONTENTION RAISED ON BEHALF OF THE REVENUE BASED ON THE SALE VALUE OF SHARES WHICH ARE BOUND TO REMAIN WITH THE ASSESSEE AND WHICH THE ASSESSEE IS ENTITLED TO SALE AND ADJUST THE SALE CONSIDERATION THEREOF AGAINST THE AMOUNT R ECEIVABLE FROM THE CLIENT SO AS TO ARRIVE AT THE ACTUAL AMOUN T OF BAD DEBT THUS IS RELEVANT FOR QUANTIFYING THE ACTUAL AMOUNT OF BAD DEBT AND IT IS AT LIBERTY TO RAISE THE SAME IF PERMISSI BLE BEFORE THE DIVISION BENCH DURING THE COURSE OF HEARING OF THE APPEAL. THE LD. D.R. HAS ALSO RAISED CERTAIN OTHER DOUBTS OR DI SPUTES IN THE WRITTEN SUBMISSIONS FILED BEFORE THIS SPECIAL BENCH RELATING TO CERTAIN FACTUAL ASPECTS OF THE CASE. ALTHOUGH NO S UCH DOUBTS OR DISPUTES APPEAR TO HAVE BEEN RAISED EVEN BY THE A.O . IN THE ASSESSMENT ORDER THE LD. COUNSEL FOR THE ASSESSEE HAS FAIRLY ITA NO. 6875/M/2008 NH SECURITIES LTD. 16 AGREED THAT IF IT IS SO FELT BY THE DIVISION BENCH AFTER CONSIDERING THE ARGUMENTS OF BOTH THE SIDES WHILE HEARING THE A PPEAL OF THE ASSESSEE THAT THESE ASPECTS NEED VERIFICATION THE ASSESSEE WILL HAVE NO OBJECTION FOR GETTING SUCH VERIFICATION DON E FROM THE A.O. 32. KEEPING IN VIEW ALL THE FACTS OF THE CASE AND T HE LEGAL POSITION EMANATING FROM THE VARIOUS JUDICIAL PRONOU NCEMENTS AS DISCUSSED ABOVE WE ARE OF THE VIEW THAT THE AMOUNT RECEIVABLE BY THE ASSESSEE WHO IS A SHARE BROKER FROM HIS CL IENTS AGAINST THE TRANSACTIONS OF PURCHASE OF SHARES ON THEIR BEH ALF CONSTITUTES DEBT WHICH IS A TRADING DEBT. THE BROKERAGE/COMMISSION INCOME ARISING FROM SUCH TRANS ACTIONS VERY MUCH FORMS PART OF THE SAID DEBT AND WHEN THE AMOUNT OF SUCH BROKERAGE/COMMISSION HAS BEEN TAKEN INTO ACCOU NT IN COMPUTATION OF INCOME OF THE ASSESSEE OF THE RELEVA NT PREVIOUS YEAR OR ANY EARLIER YEAR IT SATISFIES THE CONDITIO N STIPULATED IN SECTION 36(2)(I) AND THE ASSESSEE IS ENTITLED TO DE DUCTION U/S 36(1)(VII) BY WAY OF BAD DEBTS AFTER HAVING WRITTEN OF THE SAID DEBTS FROM HIS BOOKS OF ACCOUNT AS IRRECOVERABLE. WE THEREFORE ANSWER THE QUESTION REFERRED TO THIS SPECIAL BENCH IN THE AFFIRMATIVE THAT IS IN FAVOUR OF THE ASSESSEE. 22. IN VIEW OF THE SAID DECISION WE REMIT THE MATT ER BACK TO THE FILE OF THE AO WITH A DIRECTION TO DECIDE THE ISSUE FOLLOWING THE SAID SP ECIAL BENCH DECISION OF THE TRIBUNAL AND IN ACCORDANCE WITH LAW AFTER PROVIDING REASONABLE O PPORTUNITY OF HEARING TO THE ASSESSEE. 23. GROUND NO. 5 IS DIRECTED AGAINST THE ACTION OF THE CIT(A) IN NOT DECIDING ON THE ACTION OF THE AO IN TREATING BUSINE SS LOSS OF RS. 31 47 188/- AS SPECULATION LOSS BY INVOKING THE PROVISIONS OF E XPLANATION TO SECTION 73 AND THEREBY NOT ALLOWING SET-OFF OF THE LOSS AGAINS T INCOME COMPUTED UNDER THE HEAD INCOME FROM OTHER SOURCES RS. 6 19 480/- . 24. THE CIT(A) HAD DIRECTED THE AO TO VERIFY THE FA CTS AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW. AT THE TIME OF HEARIN G THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE BUSINESS INCOME OF THE ASSESSEE OF RS. 6 73 81 303/- CLAIMED U/S 41(1) OF THE ACT AND T HEREFORE EXPLANATION TO SECTION 73 IS NOT APPLICABLE TO THE CASE OF THE ASS ESSEE. THE ALTERNATE SUBMISSION OF THE LEARNED COUNSEL IS THAT IN ANY C ASE THE BUSINESS LOSS CLAIMED BY THE ASSESSEE IS LESS THAN THE BUSINESS I NCOME AND THEREFORE EXPLANATION TO SECTION 73 IS NOT APPLICABLE TO THE CASE OF THE ASESSEE. AFTER CAREFUL CONSIDERATION OF THE ORDERS OF THE AO AS WE LL AS CIT(A) WE FIND THAT THE REVENUE AUTHORITIES HAVE NOT DEALT THE ISSUE PR OPERLY AND THEREFORE WE REMIT THE ISSUE BACK TO THE FILE OF THE AO WITH A D IRECTION TO EXAMINE THE ISSUE IN DETAIL AND DECIDE AFRESH IN ACCORDANCE WIT H LAW AFTER PROVIDING ITA NO. 6875/M/2008 NH SECURITIES LTD. 17 REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. THUS THIS GROUND OF APPEAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOS ES. 25. GROUND NO. 6 IS DIRECTED AGAINST THE ACTION OF THE CIT(A) IN UPHOLDING THE ADDITION OF RS. 2 12 56 534/- BEING THE AMOUNT CREDITED TO CAPITAL RESERVE ON ACCOUNT OF WAIVER OF PRINCIPAL AMOUNT OF LOAN ALLOWED BY CENTURION BANK. 27. AS PER THE ASSESSMENT ORDER DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AR OF THE ASESSSEE WAS ASKED TO FU RNISH THE DETAILS ON INCREASE IN CAPITAL RESERVE DURING THE YEAR. THE AR OF THE ASSESSEE FILED THE COPY OF LEDGER OF CAPITAL RESERVE ACCOUNT AND STATE MENT OF ACCOUNTS WHICH WERE REPRODUCED BY THE CIT(A) AT PAGE 10 OF HIS ORD ER. BEFORE THE AO IT WAS CLAIMED THAT THE AMOUNT CREDITED TO THE CAPITAL RES ERVE WAS ON ACCOUNT OF WAIVER ALLOWED BY THE BANK ON PRINCIPAL AMOUNT AND HENCE CREDITED TO CAPITAL RESERVE. IT WAS SUBMITTED THAT THE EXTINGUI SHMENT WAS OF LIABILITY OF PRINCIPAL AMOUNT AND HENCE THE SAME IS NOT LIABLE T O BE TAXED UNDER THE ACT BEING ON CAPITAL ACCOUNT. THE AO REJECTED THE SUBMI SSION OF THE ASSESSEE ON THE GROUND THAT THE TOTAL AMOUNT PAYABLE TO CENTURI ON BANK AS ON 31/03/01 WAS RS. 10 99 64 081/- AND AFTER ADDITION IN RESPECT OF INTEREST AND OTHER CHARGES OF RS. 2 12 56 534/- TO TOTAL AMO UNT OF RS. 13 12 20 615/- WAS DUE ON 31/03/2002. THE AO NOTED THAT THE ASSESSEE WAS A DEFAULTER TO REPAY THE ABOVE AMOUNT IN TIME HENCE THE CENTURION BANK HAD FILED THE SUIT BEFORE DRT(2) MUMBAI. THE DRT PASSED INTERIM INJUNCTION ORDER DATED 4 TH JANUARY 2002 RESTRAINING INTER-ALIA THE COMPANY FROM TRANSFERRING SELLING CREATING ANY THIRD PART Y RIGHTS DISPOSING OF OR DEALING WITH ANY OF THE ASSETS OF THE COMPANY. THER EAFTER THE BANK INVOCATED SHARES PLEDGED BY THE COMPANY AND REDUCED THE LIABILITIES BY RS. 5 70 45 587/- AGAINST THE ORIGINAL DEMAND OF RS. 13 12 20 615/-. THE BALANCE AMOUNT OF RS. 7 41 61 301/- WAS SETTLED BY ORDER DATED 25 TH NOVEMBER 2004 PASSED BY THE DRT(2). THE AO FURTHER NOTICED THAT THE ASSESSEE PAID RS. 67 80 000/- AS AGAINST THE LIABIL ITY OF RS. 7 41 61 301/- AND THE REMAINING AMOUNT OF RS. 6 73 81 301/- WAS W RITTEN OFF. THE AO NOTED THAT THE ORDER OF THE DRT(2) HAD NOT CLEARLY SPECIFIED WHETHER THE WRITE-OFF AMOUNT IS A PRINCIPAL OR INTEREST AMOUNT. DUE TO HONBLE DRT(2) ORDER THE ASSESSEES LIABILITY OF RS. 6 73 81 303/ - WAS WRITTEN OFF WHICH INCLUDED PRINCIPAL AMOUNT OF RS. 4 61 24 769/- AND INTEREST AND OTHER ITA NO. 6875/M/2008 NH SECURITIES LTD. 18 CHARGES RE RS. 2 12 56 534/- THE AO FURTHER NOTED T HAT THE ASSESSEE HAD ALREADY BEEN DEBITED INTEREST AND OTHER CHARGES FRO M THE PROFIT AND LOSS ACCOUNT IN RELEVANT ASSESSMENT YEAR AND INCREASED T HE LIABILITY BY WAY OF ENHANCING THE SECURED LOAN IN THE BALANCE SHEET AND IT HAD BENEFITED BY WAY OF WRITTEN OFF INTEREST AND OTHER CHARGES OF RS. 2 12 56 534/- BY ORDER OF THE HONBLE DRT(2). THE AO THEREFORE NOTED THAT AS PE R SECTION 41(1) OF THE ACT ANY PERSON HAS OBTAINED SOME BENEFIT IN RESPE CT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF THE AMOUNT OBTAINED BY SUCH PERSON OR THE VALUE OF BENEFIT ACCRUING TO HIM SHALL BE DEEMED TO BE PROFIT OF BUSINESS AND ACCORDINGLY CHARGEABLE AS TH E INCOME OF THAT PREVIOUS YEAR. IN VIEW OF THE ABOVE FINDINGS THE AO HELD TH AT THE ABOVE LIABILITY REMITTED WAS NOW TREATED AS A BUSINESS INCOME OF TH E ASSESSEE AND THE SAME WAS ADDED TO THE TOTAL INCOME. HE FURTHER HELD THAT DUE TO HONBLE DRT(2) ORDER THE ASESSEES LIABILITY OF RS. 6 73 8 1 303/- WAS WRITTEN OFF WHICH INCLUDED PRINCIPAL AMOUNT OF RS. 4 61 24 769/ - AND THE ASSESSEE HAD TREATED THIS AMOUNT AS A CAPITAL RECEIPT AND TRANSF ERRED THE SAME AMOUNT IN CAPITAL RESERVE OF THE COMPANY IN THE CURRENT YEAR BALANCE SHEET. THE AO FINALLY HELD THAT DUE TO HONBLE DRT(2) ORDER THE A SSESSEE HAD BENEFITED BY WAY OF REMISSION OF PRINCIPLE AMOUNT OF RS. 6 73 90 591/- WHICH WAS ASSESSEES CAPITAL RECEIPT BUT BENEFIT AVAILED BY T HE ASSESSEE BY WAY OF REMISSION OR CESSATION SHOULD BE TREATED AS INCOME AND ADDED TO THE ASSESSEES TOTAL INCOME. ON APPEAL THE CIT(A) HELD AS UNDER:- 21. I HAVE CAREFULLY CONSIDERED THE ABOVE FACTS FRO M WHICH IT IS QUITE EVIDENT THAT A PART OF THE AMOUNT WAIVED PERTAINS T O PRINCIPAL AS ALSO OF INTEREST. IT IS CATEGORICALLY STATED BY THE AO T HAT OUT OF TOTAL AMOUNT WAIVED BY THE BANK AMOUNTING TO RS. 6 73 81 303/- RS. 4 61 24 769/- WAS PRINCIPLE WHILE THE BALANCE RS. 2 12 56 534/- W AS INTEREST PORTION. IN SO FAR AS THE INTEREST IS CONCERNED IT IS NOT D ISPUTED BY THE APPELLANT THAT THE SAME WAS DEBITED TO THE PROFIT A ND LOSS ACCOUNT OF THE PREVIOUS YEAR. AS SUCH ONCE THE LIABILITY ALLO WED AS DEDUCTION IN THE PAST HAS BEEN WAIVED IT IS A CASE OF CESSATION OF LIABILITY WHICH IS CLEARLY HIT BY THE PROVISIONS OF SECTION 41(1) OF T HE ACT. HOWEVER IN SO FAR AS THE PRINCIPLE PART IS CONCERNED THE AMOUNT BEING CAPITAL IN NATURE AND THERE BEING NOTHING ON RECORD TO SHOW TH AT THE SAME WAS ALLOWED AS DEDUCTION IN THE PAST THE AO HAS FAILED TO GIVE ANY COGENT ANY REASON FOR TAXING THE SUM. THE PROVISIONS OF SE CTION ARE 41(1) ARE NOT APPLICABLE TO SUCH A SUM. ACCORDINGLY THE ADDI TION IS RESTRICTED TO RS. 2 12 56 534/- AND THE BALANCE AMOUNT WOULD STAN D DELETED. 28. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSES SEE IS IN APPEAL BEFORE US. ITA NO. 6875/M/2008 NH SECURITIES LTD. 19 29. AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AMOUNT OF WAIVER OF RS. 6 73 81 303/- ALLO WED BY THE BANK WAS ON PRINCIPLE AMOUNT AND HENCE NOT LIABLE TO BE TAXED U/S 41(1) OF THE ACT. 30. THE LEARNED DR ON THE OTHER HAND PLACED RELIANC E ON THE ORDERS OF THE AUTHORITIES BELOW. 31. WE HAVE HEARD BOTH THE PARTIES PERUSED THE REC ORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE ISSUE INVO LVED IN THIS GROUND IS RELATING THE AMOUNT OF WAIVER OF LOAN OF RS. 6 73 8 1 303/- ALLOWED BY THE CENTURION BANK WAS ON PRINCIPLE AMOUNT OR ON REVENU E ACCOUNT. THE AO HELD THAT THE ENTIRE WAIVER AMOUNT WAS ON REVENUE A CCOUNT AND THEREFORE THE PROVISIONS OF SECTION 41(1) APPLIES TO FACTS OF THE CASE WHEREAS THE CIT(A) HELD THAT THE TOTAL AMOUNT WAIVED BY THE BAN K AMOUNTING TO RS. 6 73 81 303/- OUT OF WHICH RS. 4 61 24 769/- WAS P RINCIPLE AND THE REMAINING BALANCE OF RS. 2 12 56 534/- WAS INTEREST PORTION. AFTER CAREFUL CONSIDERATION OF THE ORDERS OF THE AUTHORITIES BELO W WE FIND THAT IT IS NOT CLEAR THAT EXACTLY WHAT AMOUNT WAIVED BY THE BANK R ELATING TO PRINCIPLE AMOUNT AND INTEREST AMOUNT. HOWEVER THE CIT(A) HAS ALLOWED THE AMOUNT OF RS. 4 61 24 769/- ON THE GROUND THAT THE ABOVE AMOU NT OF WAIVER WAS RELATING TO PRINCIPLE AND THEREFORE SECTION 41(1) HAS NO APPLICATION. AGAINST THIS FINDING OF THE CIT(A) NO APPEAL HAS B EEN PREFERRED BY THE REVENUE. THEREFORE THE ONLY DISPUTE IS THE AMOUNT OF WAIVER OF RS. 2 12 56 534/- WHETHER THE WAIVER IS RELATING PRINCI PLE OR INTEREST. IN SO FAR AS THE APPLICATION OF SECTION 41(1) IS CONCERNED I T IS A WELL SETTLED LAW THAT IF THE CESSATION IS GIVEN BY THE BANK ON ONE TIME S ETTLEMENT TOWARDS PRINCIPLE AMOUNT ONLY CANNOT BE TREATED AS CESSAT ION OF LIABILITY CHARGEABLE TO TAX U/S 41(1) OF THE ACT. THEREFORE AFTER CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE WE ARE OF THE VI EW THAT THE ISSUE NEEDS A DETAILED VERIFICATION OF FACTS AND THEREFORE IN T HE INTEREST OF JUSTICE WE RESTORE THE ISSUE TO THE FILE OF THE AO WITH A DIRE CTION TO EXAMINE THE ISSUE IN DETAIL AND DECIDE THE SAME AFRESH IN ACCORDANCE WITH LAW AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. THUS THIS GROUND OF APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED FOR ST ATISTICAL PURPOSES. ITA NO. 6875/M/2008 NH SECURITIES LTD. 20 31. IN THE RESULT APPEAL OF THE ASSESSEE IS TREATE D AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 23 RD DAY OF DECEMBER 2011. SD/- SD/- (P.M. JAGTAP) (V. DURGA RAO) ACCOUNTANT MEMBER JUDI CIAL MEMBER MUMBAI DATED: 23 RD DECEMBER 2011 KV COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE F BENCH I.T .A.T. MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR I.T.A.T. MUMBAI.