1. This appeal is preferred by the assessee against the order passed by the AO under Section 158BC r/w Section 143(3) of the IT Act. A search under Section 132 was carried out at the business premises of the appellant on 21st Nov., 1996. The appellant is one of the companies of Modi group where Hindustan Dev Corpn. is the flagship company. During the course of search, at the business premises of the assessee, books of account and documents were found and seized. The AO, therefore, issued a notice under Section 158BC, dt. 8th July, 1997, directed the assessee to file return of undisclosed income for the block period from 1st April, 1987, to 21st Nov., 1996. In compliance to this notice, assessee filed a return on 12th Sept., 1997, declaring nil undisclosed income. As against this, the AO completed undisclosed income of the block period at Rs. 1,67,24,889. Against this order of the AO, assessee has come in appeal before us taking 24 grounds of appeal. Out of these, 20 grounds deal with the disallowance of claim of capital loss amounting to Rs. 1,66,59,280 which relates to asst. yr. 1995-96 and another ground for the addition of Rs. 65,609 made by invoking the provisions of Section 69B of the IT Act for the asst. yr. 1996-97. The last ground taken by the assessee is against charging of surcharge @ 15 per cent of the tax as worked out under Section 113 of the IT Act.
2. At the very beginning, the learned Departmental Representative submitted that since the assessee has raised additional ground of appeal an interlocutory order is required to be passed as per the decision of the jurisdictional High Court in the case of Maruti Udyog Ltd. v. 1TAT and Ors. (2000) 244 ITR 303 (Del). In this connection, he also relied upon the decision cited at Dr. A.K. Bansal v. Asstt. CIT (2000) 67 TTJ (All) (TM) 721 : (2000) 73 ITD 49 (All) (TM) The learned authorised representative however, submitted that no additional ground of appeal has been taken by the appellant and hence there is no question of passing any interlocutory order and hence the reliance placed by the learned Departmental Representative is not applicable to the facts of this case. In his rejoinder, learned Departmental Representative submitted that by additional ground, he means the ground taken by the appellant which do not arise from the order of the AO, 3. After hearing the rival parties and perusing the material available on record, we are of the opinion that ratio of the decision in the case of Maruti Udyog Ltd. as well as Third Member case, are not applicable to the facts of this case because no additional ground of appeal has been taken by the appellant. Whatever grounds of appeal taken by the appellant or taken along with the appeal memo and hence we do not feel any necessity of passing interlocutory order. If any ground of appeal does not arise from the order of the AO, the same would be dealt in accordingly while dealing the particular ground.
4. The appellant-company is a ground company of R.P. Modi whose flagship company is Hindustan Dev. Corpn.. Most of these companies are having registered offices at Calcutta including the flagship company.
Two of the companies i.e., the appellant and M/s Jain Commercial Co.
Ltd. are having their registered office at 7th floor, Hansalaya, 15-Barakhamba Road, New Delhi. These companies are indulging in purchase and sale of shares of the flagship company. Search under Section 132 was carried out in the case of all these companies because they are suspected to be carrying out the activities to avoid tax or minimise the payment of tax by fraudulent means. These investments companies were bringing in substantial undisclosed profit in the garb of speculation to be set off against the interest outgo on account of loans taken for acquiring shares of Hindustan Dev, Corpn. During the accounting period relevant to the asst. yr. 1995-96, the appellant purchased 5,10,800 shares of Hindustan Dev. Corpn. for Rs. 4,97,62,136 out of which 4,84,000 shares were sold to another group company incurring a loss of Rs. 1,66,59,280. Simiarly, other group companies also indulged in the same practice. In all the group companies purchased 29,61,500 shares of M/s Hindustan Dev. Corpn. from M/s CRB Securities on 15th July, 1994, and according to the AO, M/s CRB Securities is a scam tainted company. The AO has not placed anything on record to prove that M/s CRB Securities is a scam-tainted company except that its director Shri C.R. Bansal admitted undisclosed income to the tune of Rs. 7,00,00,000 on account of certain bogus transactions. The details of the purchases of 29,61,500 shares of Hindustan Development Corporation by the group companies are as under : 5. The contract for purchase of shares was made on 15th July, 1994, and the bill was raised on 10th Aug., 1994. These shares were sold to M/s Kejriwal & Co. on 8th Aug., 1994. According to the AO, financial transactions like payments to M/s CRB Securities and receipts of the payments by the assessee were entered after the accommodation transactions were tied up. The sale of these 29,61,500 shares of the Hindustan Development Corporation were made as under : 6. The above three companies sold their shares to another sister concern M/s Jai Commercial Co. @ Rs. 63.15 incurring a total loss of Rs. 9,63,76,000 out of these appellant suffered a loss of RE.1,66,59,280, For purchasing these 28,00,000 shares from M/s Keiriwal & Co., a sum of Rs. 17,68,20,000 was paid by M/s Jai Commercial Co. after raising a loan of Rs. 13,47,000 from group companies including the appellant at an interest rate of 17.5 per cent. All these transactions were carried out through account payee cheques. From these transactions, AO concluded that all these are mere rotation of funds and are sham in nature. These transactions were carried out to offset the long-term profit earned by the appellant on sale of shares of M/s Ingersoll Rand India Ltd. and M/s ABB Ltd. where the appellant earned Rs. 10,42,11,675 as long-term capital gain. The AO also observed that out of the total shares purchased 4,84,000 shares were sold to M/s Kejriwal & Co. @ Rs, 63 per share on 8th Aug., 1994. M/s Kejriwal & Co.
sold these shares to M/s Jai Commercial Co. Ltd. (r) Rs. 63.15 per share. The appellant financed the purchase of shares by M/s Jai Commercial Co. Ltd. by advancing a loan of Rs. 4,62,00,000. According to the AO, the funds originated from the appellant-company and returned to the appellant-company through this arranged transactions of Hindustan Dev, Corpn, shares. Under these circumstances, AO issued a show-cause notice as to why the loss claimed on sale of Hindustan Dev.Corpn. shares should not be treated as a bogus loss. On receipt of reply from the appellant, the AO further carried out examination of the facts of this case including examination of M/s Kejriwal & Co.
enquiries from Kanpur Stock Exchange and other concerned parties and ultimately held that the aforesaid transactions is a colourable device set up by the assessee with assistance from M/s Kejriwal & Co. with a view to reduce its tax liability on the capital gains earned by it on sale of shares of M/s Ingersoll Rand India Ltd. and ABD Ltd. The losses are held to be bogus as these have origined from the scam and collusive transactions with a solitary motive to reduce its tax instances. He according disallowed this claim.
7. The other addition of Rs. 65,609 for asst. yi. 1996-97 was made by the AO which is under dispute as unexplained investment is on account of unexplained investment in renovation of residence of chairman of the Modi group Shri R.P. Modi, 6-Amrita Sher Gill Marg, New Delhi. This property belongs to the 8 joint owners which happens to be sister concerns. According to the appellant, total cost of renovation expenses was Rs. 23,70,405. The Valuation Officer, however, estimated the cost of investment at Rs. 29,82,600. This difference of Rs. 5,24,874 was divided between the co-owners and an addition of Rs. 65,609 was made under Section 69B of the IT Act. Against these accounts of the AO, assessee has come in appeal before us.
8. The learned authorised representative started his arguments by submitting that the appellant-company is a widely-held public limited company. The appellant is an investment company and derives income by way of dividend from the investment (mainly in shares, rental from properties, interest on loans as also by way of service charges). It was further submitted that the present assessment is beyona the pale of Chapter XIV-B of the Act. It was contended by the learned counsel that there is no justification to hold that there was any undisclosed income of the assessee as no incriminating document was found during the course of search either at the premises of M/s HDC Ltd or from the premises of the appellant. The documents referred by the AO in the impugned order and copies of which placed by the learned Departmental Representative in his paper book at pp 2 to 8 cannot be considered incriminating or the same has anything to do with the appellant-company as the same were not seized from the premises of the appellant. Nor it can be proved that these documents proved anything that the assessee has concealed any income. It was further submitted that the facts of this case are absolutely identical to the facts of the case of M/s Laxmangaih Estate and Trading Co. Ltd. decided by the Tribunal Calcutta Bench, Calcutta, in ITA No. 5314/Del/98, dt. 29th June, 1999, copy of which is placed on record. On the identical facts and circumstances of the case, the Calcutta Bench of the Tribunal held that the said transaction of purchase and sale of shares of M/s HDC Ltd. cannot be regarded to be the arranged transactions of shares and the loss suffered in the sale of shares was genuine loss and allowable against the profits earned by the assessee-company.
9. Learned authorised representative further contended that the observations made by the AO in his order in paras 5 and 7 clearly established that even on the basis of allegations made the various group companies were bringing in substantial undisclosed profit in the garb of speculation profit said to be set off against the interest outgo on account of loans taken for acquiring shares of M/s HDC which itself establishes that there was not even an allegations that the assessee suffered loss on account of arranged shares transactions and on the contrary it was bringing in substantial undisclosed profit in the garb of speculation profit and this was required to be set off the interest liability on the money borrowed for the investment made in shares of M/s HDC. It was further contended that the observations made by the learned Dy. CIT in the order that Shri Sisir Kejriwal who is son of the proprietor of M/s Kejriwal & Co had admitted that the profits had been arranged for the group companies against which cash was returned by them is factually incorrect. It was specifically brought to our notice that the statement which is heavily being relied upon by the Revenue and extracted as under to establish that the observations made in the order that profit had been arranged for the group companies is factually incorrect and is based on misreading of the statement of Shri Sisir Kejriwal : Q. 5 : For how long you have been associated with Hindustan Dev. Corpn.- and its associated ground companies Q. 2 : You have made dealings with M/s Ambika Corpn. & Industries (P) Ltd. and Mody Building Ltd. with respect to 7,25,000 shares of HDC who are the contract people in these two concerns A. 2 : For Ambika Corpn. & (P) Ltd. Mr, Sandeep and from Mody Buidling Ltd. Sh. A.M. Lodha Q. 6 : Please examine p. 58 of the seized bunch of documents notified "HDC-14". This paper is regarding delivery profit required to be earned by Calcutta Cos. from your concern Kejriwal & Co. It says that to set off the carried forward delivery losses of earlier years in 6 different heads you had been asked to give accommodation entries/delivery profits of Rs. 9,38,000 out of which you could provide them only with Rs. 2,59,625 for the years ending 31st March, 1996. The documents also talks of certain basis of terms agreed with you. Please explain A. 6 : Sometime we would have done these transactions which would have been done on terms of 0.50 per cent to 1.00 per cent commission. By this arrangement profits are given and they are returned in cash. The paper shown by you, profit was given to them by us and the money was returned to us in cash".
10. The learned authorised representative further contended that none of the documents was available on his record wish the learned Dy. CIT's tile who framed the assessment including the statement of Shri Sisir Kejriwal as is evident from p. 1 of the paper book filed by the Revenue. This clearly shows that these papers are brought on record of the AO only after 1st Dec., 1998, from the learned Dy. CIT. CC-XXV, Calcutta, after he had completed the block assessment on 28th Nov., 1997. The learned authorised representative in the course of the hearing of the appeal has thus contended that : (a) proceedings initiated under Chapter XIV-B of the Act are without jurisdiction and the assessment made was also without any material or valid basis; (b) there is no undisclosed income within the meaning of Chapter XIV-B of the IT Act.
(c) that the Dy. CIT has erred in concluding that the transaction of sale and purchase of shares of M/s HDC Ltd. were either sham or in the nature of arranged share transaction.
(d) that there was no alleged undisclosed investment made by the appellant in the renovation of the property at Amrita Sher Gill Marg, New Delhi; (e) that no surcharge is leviable in respect of the tax levied under Chapter XIV-B of the IT Act.
11. Learned counsel elaborated each of his submissions starting from the very initiation of proceedings for the undisclosed income Chapter XIV-B of the Act is wholly unwarranted and without jurisdiction. It was submitted that the appellant-company had regularly been filing its return of income before due dates along with its annual audited accounts and assessment for each of the years were regularly made on the return of income filed. It was submitted that search took place on 21st Nov., 1996. The returns of income due till the asst. yr. 1995-96 were all filed well within the time. Particular reference was made that the return of income for the asst. yr. 1995-96 was filed on 22nd Nov., 1995, along with annual audited account supported by computation of income and details of transactions of sale and purchase of shares are inter alia, disclosed net capital gain of Rs. 8,75,52,395 on the sale of shares after set off of the loss suffered on the sale of shares of M/s HDC Ltd. It was, therefore, argued that none of the conditions warranted an action under Section 132(1) of the Act since existed in the instant case, no proceedings under Section 158BC could be initiated against it. In this connection, learned authorised representative heavily relied upon observations made by the Hon'ble Delhi High Court in the case of Ajit Jain v. Union of India (2000) 242 ITR 302 (Del). On the question whether or not the proceedings of search were validly initiated.
12. The learned authorised representative also argued that during the course of search, no incriminating material whatsoever had been found as a result of search and the documents on the basis of which proceedings have been allegedly initiated cannot be regarded as incriminating character moreso when the said documents have not been found from the appellant's possession/custody/control or even from its premises and that there is absolutely no connection directly or indirectly with the assessee's transactions which are subject-matter of dispute. It was further submitted that all the transactions including for the asst. yr. 1995-96 of purchase and sale of shares were duly disclosed in the return of income along with all the material particulars and details both in the balance sheet and also in the tabular chart filed along with the return of income and said disputed transactions of purchase and sale were duly reflected in the books of account seized and as such there was no undisclosed income.
13. It was further submitted that there was no information available to establish or allege that the transactions of purchases of shares of M/s HDC Ltd. resulting into loss were non-genuine transactions or were made to reduce the capital gain earned by it or were arranged shares transaction only to reduce the incidence of tax. On the contrary, it was submitted that the information allegedly available and noted in the order of assessment was only that various assessees in the group were bringing in unaccounted income of M/s HDC Ltd. to set off the interest liability and not that there were no losses as has been referred by in para 2.3 of the order. The appellant's learned counsel in support of his submissions heavily relied upon the following orders of the Tribunal.
(i) Dr. A.K. Bansal v. Asstt. CIT (2000) 67 TTJ (All) (TM) 721 : (2000) 73 ITD 49 (All) (TM); 14. He further relied on the judgment of the jurisdictional High Court in the case of Ajit Jain v. Union of India (supra) and submitted that action being illegal and without jurisdiction assessment completed by the AO required to be quashed, 15. It was further submitted that the statement of Sh, Sisir Kejriwal as extracted above does not in any manner establish or show that it related to the assessee's-company and that the observations of the Dy.
CIT in his order in para 6 which is factually incorrect and in any case it only relates to bring in of speculation profit and not showing any loss i.e., of taking out profit.
16. It was further elaborated that the aforesaid transactions are duly recorded in the books of account and the details are duly recorded in the books of account and the details thereof had been filed along with return of income on 22nd Nov., 1995, which was much before the date of search i.e., 21st Nov., 1996.
17. Learned counsel for the assessee then relied upon the order of the Tribunal in the case of Kirloskar Investment & Finance Ltd. v. Asstt.
CIT (1998) 67 ITD 504 (Bang) that in such circumstances and within the meaning of Section 158B of the IT Act the aforesaid sum of loss cannot be regarded as undisclosed income and as such while computing the undisclosed income the losses suffered claimed and allowed in assessment is not an undisclosed income.
18. Learned counsel further submitted that even otherwise it will be apparent that the amount of Rs. 1,66,59,280 held as undisclosed income representing loss suffered on the sale of shares cannot be the subject-matter of assessment under Chapter XIV-B of the Act as it is not an undisclosed income within the meaning of Section 158B(b) as is apparent from the order of the assessment made in the identical circumstances in the case of M/s Orient Bonds & Stocks Ltd. (which incidently is the subject-matter of Departmental appeal before us and has been heard along with this appeal). It is submitted that assessment in the case of M/s Orient Bonds & Stocks Ltd. for the asst. yrs.
1995-96 was made under the Chapter XIV of the IT Act wherein the claim of the loss on sale of shares was disallowed by the Dy. CIT while framing the assessment under Section 143(3) of the IT Act and the provisions of Chapter XIV-B were not invoked in that case. It was also submitted that this itself shows that there is an apparent contradiction in the stand of the Revenue while in the case of the appellant-company, the loss suffered has been held as undisclosed income within the meaning of Section 158B(b) of the IT Act whereas in the case of M/s Orient Bonds & Stocks Ltd,, the loss suffered has been disallowed while making the assessment under Chapter XIV on the identical facts where too the loss suffered on the sale of shares were claimed in the return of income filed prior to share and seizure operation under Section 132 of the IT Act.
19. The appellant further submitted that the transactions pertaining to the shares on which the loss had been suffered since have duly been recorded in the books of account could not be taken as undisclosed income and in support he heavily relied on the various orders of the Tribunal more particularly of the Mumbai Bench in the case of Sunder Agencies v. Dy. CIT (1997) 59 TTJ (Mumbai) 610 : (1997) 63 ITD 245 (Mumbai).
20. Coming to the question on merits of the loss suffered by the appellant- company and as to the allowability of the loss, it was submitted that in the instant case, assessee-company on 15th July, 1994, purchased the shares of M/s HOC Ltd. aggregating 5,10,800 shares for a consideration of Rs. 4,97,62,136 which purchases of shares was made prior to making of sales of existing shares of M/s Ingersoll Rand and M/s ABB Ltd. from which it has made substantial profit subsequently. It was submitted that on the aforesaid date when the appellant had purchased the shares of HCD Ltd., it could not anticipate that the existing shares of M/s Ingersoll and M/s ABB Ltd. held by it would have to be sold to discharge the liability towards borrowed fund and that too it would result into substantial profit and that shares of M/s HDC Ltd. which it has acquired to be sold later and that too at a loss to arrest further losses, It was thus argued that why would the appellant purchase shares of M/s HDC Ltd. unless the assessee-company had rigged up the prices of the shares on the date of purchase of the shares if the purpose was to set off the loss from profit because the shares were purchased from the various shareholders scattered over all over the country and not from its so-called group companies.
21. Elaborating the submissions, it was argued that the entire purpose of purchase of shares of M/s HDC Ltd. was to make a profit because the aforesaid company was going for GFR issues and as such it was accepted that with the announcement of the issue, the market value of the aforesaid shares would go up. However, subsequently, the aforesaid issue fizzled out the assesses-company since had purchased the shares and it had to make payment for the purchases, had to offload its existing shareholding of M/s Ingersoll Rand and M/s ABB Ltd. which resulted into gain. It was, therefore, submitted that there can be no justification in the circumstances to hold that where it had to sell its existing shares in order to repay its debts, the transactions of sales of shares of M/s HDC Ltd. can be regarded in the nature of colourable device. It was also submitted that this aspect of the matter has been completely lost sight of by the AO and instead he drew an adverse inference against the assesses merely because the assessee-company was stated to be a group company or associated company was stated to be a group company or associated company of M/s HDC Ltd. and by misreading the statement of Shri Sisir Kejriwal and the documents found at the time of search, it was further submitted by him that the genuineness of purchase of shares has not been disputed and the shares of M/s HDC Ltd. has been purchased by its broker from numerous shareholders scattered all over the country of which it took physical delivery along with valid transfer deed and thereafter these shares were sold by it on 8th Aug., 1994, through broker which had been purchased by M/s Jai Commercial Co. Ltd. It was further submitted that such shares sold were physically delivered by it and were got registered by M/s Jal Commercial Co. Ltd. in its name which are being held by the aforesaid company till date and the dividend declared accruing and arising has duly been assessed as the income of M/s Jai Commercial Co. Ltd. by the AO. It was further contended that assessee-company had paid the consideration for purchase of shares by account payee cheque and when it sold the said shares it received the sales consideration by account payee demand draft from the broker which is duly reflected in its books of account. It was again re-emphasised that the shares were purchased and sold at the prevalent market rate and there is absolutely no dispute regarding the purchase and sale rates. In this background, it was contended that if the transaction was alleged to be non-genuine or bogus or arranged shares loss then obviously the dividend arising from the shares sold could not have been assessed as income of M/s Jai Commercial Co. Ltd. instead would have been assessed as income of the appellant-company. In respect of the allegations of alleged shares loss, it was contended that the loss suffered cannot be said to be arranged shares loss unless it was established that shares prices were rigged and purchase and sale of shares were not made at market price which in the case has not been alleged. It was, thus, submitted that in the absence of any such finding or even an allegations, the conclusion of the AO that the loss suffered was alleged cannot stand the test of judicial scrutiny.
22. Assessee's learned counsel also relied on several circumstances which has duly been examined by the Tribunal Calcutta Bench in the order in the case of M/s Laxmangarh Estate and the Trading Company wherein having regard to the cumulative effect of all the circumstances, it held that as there has been no dispute about the genuineness of purchase of the shares and the sale of shares sold through broker which had been purchased by the associated company at the market rate, the loss suffered was a genuine loss and was allowable as such while computing its total income and the transactions of purchase and sale of shares cannot be regarded as a colourable device.
23. Assessee's counsel further pointed out that it is not as if all the shares purchased by it were sold and on the contrary the appellant-company out of 5,10,800 shares purchased had retained 26,800 shares and, therefore, it is not a case of mere book entry but it is a case of loss which cannot be described as arranged shares loss genuinely suffered on the sale of shares purchased by it before the sale of shares on which it had earned profit.
24. Assessee's counsel further contended that even if for the sake of argument, it is held that the assessee's company did not sell the shares as alleged since the sale was made to a group company then too that the fact that the appellant was carrying on the business of purchase and sale of shares has not been disputed and, therefore, it was entitled to value its closing stock (arising out of purchase made during the year) either at cost or market price, whichever, is lower, and the market price being far lower on the closing date of the accounting year, it could have valued its closing stock at the market rate which would have resulted into higher claim of loss and would have set off from the gam arising in the sale of shares.
25. Learned authorised representative further submitted that the Tribunal Delhi Bench in the case of Jai Commercial Co. Ltd. also did not uphold the action of the CIT, Delhi-II, New Delhi for the asst. yr.
1995-96 wherein the CIT(A) had held that the interest paid for purchase of the shares of M/s HDC Ltd. and sold by the appellant-company and other group companies were not allowable, implying thereby the interest paid on the moneys borrowed for purchase of shares of M/s HDC Ltd. from the assessee was held as a valid allowance. The assessee's learned counsel also referred to the order of the Tribunal in the case of M/s Jai Commercial Co. Ltd. for the immediately succeeding assessment year i.e. asst. yr. 1996-97 where also the CIT(A) had upheld the disallowance of claim of interest, the same was deleted by the Tribunal vide its order dt. 26th July, 2000, which according to him established beyond doubt that the shares were genuinely sold by it and genuinely purchased by the aforesaid company M/s Jai Commercial Co. Ltd. 26. It was further pointed out that the interest paid by M/s Jai Commercial Co. Ltd. Rs. 43,75,815 to the appellant-company has also been assessed as the income of the appellant-company, this further establishes that the moneys were advanced by the appellant-company out of the funds available to it on the sale of shares. It was, thus, submitted that the stand of the Revenue that there was no transaction of purchase and sale of shares and the transactions were sham is totally unjustified and unsutainable because firstly the dividend on such shares has not been assessed as income of the appellant-company but has been assessed as income of M/s Jai Commercial Co. Ltd. and secondly interest has been allowed as a deduction in the case of M/s Jai Commercial Co, Ltd. and income from interest has been assessed as the income of the appellant-company. These factors alone establishes that the stand of the Revenue that it is a colourable device is contrary to its own finding . It was explained that the dividend from the said shares if the shares transaction was sham would not have been assessed as dividend income in the hands of M/s Jai Commercial Co. Ltd. The fact that the dividend has been treated to be the income of M/s Jai Commercial Co. Ltd. is according to him a sufficient proof which establishes that the sale of shares were made and it is not a case of arranged shares transactions, 27. As against this, learned senior Departmental Representative vehemently supported the orders of the Dy. CIT. The learned Senior Departmental Representative contended that the proceedings of search and seizure conducted under Section 132(1) of the IT Act are not justiciable. It was submitted that the Department cannot require to produce satisfaction note on the mere allegations by the appellant that there was no material to warrant a search. In this behalf he relied upon the Judgment of the apex Court in the case of Dr. Pratap Singh and ORS., V. Director Enforcement (1985) 155 ITR 166 (SC). He also relied upon the judgment of Hon'ble Allahabad High Court in the case of Shri Ram Jaiswal v. Union of India (1989) 176 ITR 260 (All) wherein it had been held that where the assessee contends that the DI had no valid information on the basis of which he could have issued warrant of search and the assessee does not support his contention with cogent material, the Department cannot be asked to produce the records to show information having been received on the basis of which search have been authorised. It was submitted that there has been no averment in the instant case by the assessee or his counsel that the Department was casual and has given go-by to the principles or exercise of this power without any thought or due to any mala fide or animosity against the assessee.
28. Learned Departmental Representative further referred the judgment in the case of Narain R. Bhandekar & Manda S. Bhandekar v. ITO and Ors.
(1989) 177 ITR 207 (Bom) wherein it had been held that exercise of powers under Section 132 is not judicial or quasi-judicial exercise and is merely an administrative jurisdiction. It was, thus, submitted that assessee has statutory remedy available under Section 253(1)(b) against order under Section 158BC and it has no statutory remedy against powers exercised under Section 132 of the IT Act. Hence, remedy lies only by filing a writ petition if it has material to challenge that power so exercise was improperly or invalidly exercised.
29. It was contended that the order cited by the appellant in the case of Dr. A.K. Bansal does not confer to such findings and Courts and finding given by the said Bench on p 71 ignores the acceptance of the principles that power to search is an exercise by senior authorities of the Department which has been recognised by the Hon'ble High Court reported at (1989) 176 ITR 260 (All) at p 265. It was also contended that no material has been brought on record by the assessee that exercise of powers by the DI was illegal and as such satisfaction note cannot be made part of scrutiny by the Bench. He went on to argue that even this ground does not arise from the assessment order and since this ground was not raised by the assessee before the AO, this should be treated as an additional ground of appeal and should not be admitted. He heavily relied upon the order of the Tribunal in the case of Virender Bhatia and Ors. v. Dy. CIT in ITA No. 5724/Del/96, dt. 18th Sept., 2000 [reported at (2002) 74 TTJ (Del) 60--Ed.]. The learned Departmental Representative thus contended that exercise of the powers of search and validity been exercised in the instant case and that the Tribunal is not competent to examine the validity of the search nor it could examine the satisfaction note to examine whether or not the preconditions envisaged under Section 132(1) was fulfilled as contended by the appellant-company. It was further contended that the appellant has filed no evidence or material to substantiate that there was no valid search and the mere fact that search has been conducted on the assessee under Section 132(1) is sufficient to clothe jurisdiction with the Dy. CIT to frame the assessment under Chapter XIV-B.30. On the merits of the addition made by way of undisclosed income under Chapter XIV-B of the Act, it was contended that the appellant's submissions that no incriminating material has been found as a result of search and seizure resulting into a claim that there is no undisclosed income is also unsustainable and is based on misconception.
He stated that searches were conducted in this case along with other cases of Modi group whose flagship company M/s HDC Ltd. and the assessee is one of the satellite companies of this group, He further submitted that the Department has got material in the form of certain papers and documents whose copies have been produced before us forming part of the paper book at pp 2 to 8. He further submitted that besides these documents, statement of Shri Sisir Kejriwal was also recorded and that on that basis and based upon the information available to the AO through the investigation wing, it was correctly held that assessee had undisclosed income when it claimed the loss on sale of shares. It was submitted that the books of account were seized and sent to the AO on 16th May, 1997 and the appraisal report was received from ADIT (Inv.), Calcutta on 6th Aug , 1997 and it was on this basis a notice under Section 158BC was issued to the assessee. He further argued that the appellant's contention that the documents referred at pp 2 to 8 of the paper book were received later to fmalisation of the assessment may not be sustained as a valid basis to hold that the AO did not apply his mind independently before making assessment on account of the fact that the Department had this information available through investigation wing and hence the same was correctly and validly utilised in finalisation of block assessment without waiting for them to be received directly from the Dy. CIT, Cen. Cir-XXV, Calcutta It was further contended that Department has not to establish incriminating nature of the documents and it is not the requirement of law to establish that they have to be necessarily incriminating in nature.
31. Learned Departmental Representative further stated that these documents were found from the premises of M/s HDC Ltd. but the transaction and mode of manipulation of account also involved the assessee-company as it was one of such companies which engaged itself in colourable transactions along with the other satellite companies of the group. It was contended that the said companies utilised the services of Shri Sisir Kejriwal who has given deposition in respect of manipulation being done in regard to such transactions. He submitted that the Department's paper book go independently to show that manipulation was being done by the group companies of the assessee. He thus strongly supported the conclusion of the Dy. CIT that no other conclusion can be drawn on the fact that the loss suffered by the assessee and claim has to be regarded as the undisclosed income within the meaning of Chapter XIV-B of the Act. As the assessee has claimed the loss without disclosing the income. He, therefore, strongly supported the conclusion drawn by the Dy. CIT and assessed under Chapter XIV-B of the IT Act.
32. Coming to the merits of the additions resulting from the disallowances of the loss suffered by the assessee and treating the same as undisclosed income, the learned Departmental Representative submitted that the order of the Tribunal in the case of Laxmangarh Estate & Trading Co. Ltd is perverse order as it relied in arriving at its conclusion on the order of the CIT(A) in the case of M/s Orient Bonds & Stocks Ltd. which was still the subject-matter of appeal before the Tribunal and did not independently record its finding and conclusions have thus not been validly arrived. It was finally contended by him that even if the transaction of purchase and sale of shares is held to be genuinely entered by the assessee still on the authority of the order of the Tribunal in the case of Colours & Automatics v. IAC (1986) 18 ITD 298 (Bom), it is liable to be held that the loss suffered cannot be set off from the profits or gains made on the sale of shares. He contended that the entire loss suffered is a result of tax avoidance scheme and was adopted to reduce the instance of tax and, therefore, a colourable device.
33. In the course of hearing of the appeal, learned Departmental Representative heavily relied upon the order of the CIT(A) in the case of M/s Jai Commercial Co. Ltd. for the asst. yr. 1996-97 wherein from paras. 4.1 to 4.8, he contended that the case of the Department is that it is a case of colourable device and is not a case of merely of non-genuine purchase and sale of shares of M/s HDC Ltd. It was also submitted that in the case of Satellite Company whose flagship company M/s HDC Ltd. is stated to be indulging in huge tax evasion and flow of funds are also arranged. It was submitted that the assessee has a complete connection with M/s HDC Ltd. and various other satellite companies and the contention of the assessee that it is an independent company may be true yet still it is positively an associated company of Modi group of companies.
34. He also submitted that the additions made in respect of unexplained expenditure on the renovation of the properties at Amrita Sher Gill Marg was perfectly correct for the reasons recorded by the AO in his order and supported the conclusion of the AO in levying surcharge which in his opinion was provided under the Finance Act.
35. We have heard the parties at length, gone through the paper books filed by the assessee and the Department. We have also gone through the synopsis, note on the paper book filed by the Dy. CIT and the rejoinder submitted and additional rejoinder filed by the assessee and also the written note filed by the senior Departmental Representative on the rejoined submissions filed by the appellant. At the outset, we find that in the instant case, the AO has held following sums as undisclosed income--(a) Rs. 1,66,59,280 representing the loss on sale of shares of M/s HDC Ltd., and (b) Rs. 65,609 stated to be undisclosed income up to 21st Nov., 1996 and held as unexplained investment under Section 69B of the IT Act for the asst. yrs. 1996-97 and 1997-98 36. So far as the amount relating to the claim of loss in respect of the shares, sold by the assessee on which it has suffered a loss of Rs. 1.66,59,280, we find that for the asst. yr. 1995-96 assessee-company had filed a return of income on 22nd Nov., 1995, along with the annual audited account and computation of total income and the return of income. Assessee had filed a statement giving full and complete details of capital gain/loss on sale of investment including the losses suffered on the sale of shares of M/s HDC Ltd. 37. From the aforesaid statement, we have observed that the assessee had declared a long-term capital gam on the sale of shares of M/s Ingersoll Rand aggregating to Rs. 8,47,90,134 and short-term capital gain of Rs. 1,94,21,541 in respect of sale of shares of M/s ABB Ltd. and a short-term capital loss of Rs. 1,66,59,280 on the sale of M/s HOC Ltd. The aforesaid copy of the statement furnished is as below/enclosed :-- 38. We also find that the learned Dy. CIT, Special Range-33, New Delhi had framed an assessment under Section 143(3) of the IT Act by an order dt. 17th Feb.,1997 and had examined the claim of the assessee in respect of the loss suffered by it on the sale of shares. In our opinion, thus, the aforesaid sum cannot be regarded as undisclosed income for the purposes of Section 158BB of the IT Act. In our considered opinion, if a transaction is duly recorded in the regularly maintained books of accounts the same would be outside the scope of provisions of Chapter XIV-B of the IT Act, unless as a result of search and seizure some direct evidence is found to establish that such income has not been disclosed or would not have been disclosed. So far the facts of the case in hand are concerned, it is more than evident that the assessee-company had duly disclosed all the transactions in its regularly maintained books of accounts which too had keen produced at the time of making assessment before search and seizure operations. Now the next question connected with the aforesaid issue arises is, whether any incriminating evidence was found as a result of search which established that the loss suffered on the sale of shares was either non-genuine, sham or arranged shares loss, we are afraid to accept the contention of the Revenue that the documents referred to by it in its paper book at pp 6 and 8 (pp 55 and 53 respectively of seized documents having identification mark HDC/14) in any manner directly or even remotely establishes so. Coming to statement of Shri Sisir Kejriwal, here again, we do not find any such adverse material or statement to conclude that the loss suffered could be regarded as non-genuine or as a result of arranged shares loss even if for the sake of arguments, the appellant's contention that it was not allowed to cross-examine Shri Sisir Kejriwal is to be rejected. In short, our considered opinion is that the aforesaid loss cannot be regarded to be undisclosed income and is thus outside the pale of Chapter XIV-B of the IT Act.
39. So far as documents referred to by the learned Departmental Representative are concerned, we have gone through very carefully each and every documents and in our considered opinion, the documents found from the premises of M/s HDC Ltd. have absolutely not connected or relevance directly or indirectly which in any manner establishes that such documents of purchase and sale of shares was part of a colourable device or represented arranged shares losses. We, thus, hold that the amount of loss and added as undisclosed income is totally outside the perview of Chapter XIV-B of the IT Act 40. Further also, we are of the opinion that the learned counsel for the assessee is correct in his contention that the said sum of loss cannot be regarded as the undisclosed income under Section 158B(b) of the IT Act, 1961 as has been held by the Bangalore Bench of the Tribunal reported at (1998,) 67 ITD 504 (Bang)(supra) 41. Further, in our considered view, the loss suffered on the sale of shares was a loss genuinely suffered by it and the transaction of purchase of shares of M/s HDC Ltd. cannot be held to be a colourable device and the loss was suffered was correctly set off from the gains of the instant assessment years. In arriving at the aforesaid conclusions, we have gone through very carefully the contentions of the parties and we find that there is no dispute in this case that the assessee had purchased the shares of M/s HDC Ltd. from the market and owned by various shareholders scattered all over the country prior to the sale of shares on which the capital gains either short-term or long-term arose. In our considered view, in such a situation to contend that the appellant had suffered the loss as a result of arranged shares loss does not stand to valid reason on the mere speculation that the assessee has since set off the losses against gain, the purpose to sell the shares even at the market rate was to set off the loss from the gain and thus on that basis the transaction can be regarded as a colourable device. It is significant to be noted that the shares purchased by the assessee were purchased through share broker and the entire consideration had been paid for the purchase of shares by account payee cheques. Such shares have also been delivered to the assesses and the assesses had sold the said shares after retaining some of the shares along with the valid transfer deed through broker at the market price which had been purchased by M/s Jai Commercial Co. Ltd. These shares were duly got registered after the purchase of shares from the assessee in its name and the Revenue itself brought to tax the dividend income in the hands of M/s Jai Commercial Co. Ltd. The aforesaid facts clearly bring out that there is no dispute that the shares sold by the assessee were purchased by M/s Jai Commercial Co.
Ltd. and were registered in its name.
42. In these circumstances, in our opinion, merely because the assessee had advanced the funds to M/s Jai Commercial Co. Ltd. on interest at market rates which was allegedly utilised by it as a part consideration for the purchase of shares cannot be said to be part of a colourable device. This fact coupled with the fact that Revenue has treated this interest income as the income of the assessee, in our opinion, would only result into allowing the Revenue to blow hot and cold simultaneously and law was to take a contradictory stand that the transaction was arranged shares loss, 43. Further, in our opinion, even the allegations against the group company was that it was introducing in the books of account in the garb of speculation profit, unaccounted income of M/s HDC Ltd. and not that it was bogus losses. In spite of the aforesaid facts, in our opinion, the transaction of purchase and sale of shares cannot be regarded as sham or bogus as there is absolutely no material and it is based on mere speculation surmises and conjuctures. In our opinion, the Hon'ble Supreme Court in the case McDowell & Co. Ltd. v. CTO (1955) 154 ITR 148 (SC) has not held that each and every transaction can be regarded as a colourable device if the transaction results into mere reduction of tax liability. In our opinion, the transaction must be such which the parties never intended to act upon but has been shown to have been merely executed on documents only can be regarded as a part of colourable device. In this case, we find that the transaction has been acted upon and the shares had been purchased by the assessee through broker from the open market and then sold at the prevailing market rates through broker though it has been purchased by associates company which is a separate entity and has its own separate existence and is public limited company, shares are held till date by the said company and is duly reflected in its balance sheet. The learned senior Departmental Representative relied heavily on the decision of the Tribunal reported in (1986) 18 ITD 298 (Bom) (supra). The facts of the aforesaid case have been gone through by us and we are of the opinion that the same are wholly distinguishable. In the instant case, assessee has been able to establish and show the circumstances under which it purchased and then sold the shares at quoted price on stock exchange and it was an existing investment company wherein it was purchased and selling shares in the normal course of its business activities and it was not a case of mere book entry. The purchase consideration was discharged by account payee cheques as is evident from the bank certificate.
44. In view thereof, in our opinion, the aforesaid judgment is not applicable. We also find that the reliance placed by the assessee on the judgment of the Hon'ble Supreme Court in CWT v. Arvind Narottam (1988) 173 ITR 479 (SC) also supports the case of the assessee and as such we hold that the AO was not right in holding that the loss suffered by the assessee as undisclosed income which has genuinely been suffered by the assessee and, therefore, we delete this addition.
45. Before concluding we hod that the Dy. CIT was wrong in making the addition as undisclosed income representing the loss suffered on the sale of shares, we would like to observe that the learned senior Departmental Representative was factually incorrect in contending that the Hon'ble Calcutta Bench of the Tribunal in the case of Laxmangarh Estate & Trdg. Ltd., (supra) has merely followed the order of the CIT(A) in the case of M/s Orient Bonds & Stocks Ltd. and as such the order of the Tribunal is perverse. The perusal of the aforesaid order, in our opinion shows that it had examined all the aspects of the case and came to its own conclusion that the loss was a genuine loss and was not a result of any colourable device. It was only after recording its finding, it noted that a similar view has also been expressed by the CIT(A) in the aforesaid noted case. In any case, we are of the considered opinion that the learned senior Departmental Representative exceeded in his comments to contend that the order of the Tribunal was perverse at least before us. In our opinion, he could have merely distinguished the said order on the facts of the case or should have otherwise respectfully followed it. This opinion of ours is based on the judgment of Hon'ble Supreme Court in the case of Union of India v.Kamalakshi Finance Corporation Ltd. 55 ELT 433 cited by the learned counsel before us. We, therefore, are unable to uphold such view convassed by the learned senior Departmental Representative.
46. Learned senior Departmental Representative in the course of his submissions also contended that the appellant is a part of group company of M/s HOC Ltd. which company had been manipulated shares transaction and was involved in a huge tax evasion. The assessee's counsel, however, in reply contended that the submissions of the learned senior Departmental Representative is based on complete misconception and is contrary to the material on record would be evident from the order of the block assessments made in the case of M/s HDC Ltd. as also the order of the Tribunal wherein almost all additions made were deleted and in the order of assessment that there was any bogus shares transactions. In our opinion, the aforesaid contention has no bearing on the issue involved before us and as such we do not consider it necessary and appropriate to deal with the same more than what has been stated above.
47. So far as the addition made as the alleged undisclosed income in respect of the investment made in the renovation of the property, we find that the assessee in the course of hearing vide its submission dt.
2.8th Nov., 1997, pp 280 and 281 of the paper book before the Dy. CIT wherein assessee has stated as under that no proper opportunity was provided to the assessee by the AO in as much as letter of dt. 27th Nov., 1997 along with the valuation report was served upon the assessee on 27th Nov., 1997 as 1550 hrs. and asked to explain by 1730 hrs. as the same date, Again in reply to the query by the Valuation Officer dt.
4th Nov., 1997, assesses replied on 7th Nov., 1997, that in addition the amount already disclosed a sum of Rs. 3,30,000 was also paid to sundry parties towards advance for carrying out the repairs. This, therefore, makes the total expenses to Rs. 28,41,405 (25,11,405 + 3,30,000). This reply of the assessee has not been properly appreciated by the valuation report and the AO.48. We have gone through the Dy. CIT's order along with the report of the Valuation Officer-V, dt. 26th Nov., 1997, which contends the technical analysis of the various items used in the renovation and quantification thereof on which, in our opinion, no adverse finding that the assessee-company had made an unexplained investment can be reached. The Dy. CIT has not made any specific addition in respect of an expenditure or investment allegedly made is not recorded in the books of account. Since the books of account maintained by the assessee in regard to expenditure incurred on the renovation of the building in question has not been rejected by the AO, we hold that following the decision of the Rajasthan High Court CIT v. Pratap Singh Amrosingh Rajendra Singh (1993) 200 ITR 788 (Raj) no addition can be made even on this account. We find otherwise to the difference between the estimate of expenditure incurred by the Valuation Officer and the amount debited in the books of account is marginal and that too is based on no valid material hence we do not find any justification in sustaining the addition made of Rs. 65,609 by the AO.49. In respect of the contention of the appellant about the charge of surcharge, we find that the subject matter is fully covered by the order of the Tribunal in the case of Microland Ltd. v. Asstt. CIT (1999) 63 TTJ (Bang) 701 : (1998) 67 ITD 446 (Bang) at p 503 wherein in para 38 it has been held as under: "The learned counsel for the assessee also objects to the levy of surcharge separately in addition to tax at the rate of 60 per cent on the undisclosed income. We agree with him that as per the provisions of Section 113, separate surcharge cannot be levied in respect of search and seizure assessment made under Chapter XIV-B of the IT Act. However, in view of the facts that we have held the entire assessment to be liable to cancellation, this particular ground becomes academic in nature." 50. We fully agree with the aforesaid observations of the Bangalore Bench of the Tribunal and hold that no surcharge was leviable. In any case, since the addition stands deleted as a whole otherwise, too there would remain no justification to levy any surcharge.
51. Now coming to the various legal issues raised by the assessee we do not consider appropriate any more to deal with them, as we have held that there was no undisclosed income and that, the loss suffered by the assessee was to be set off on the facts of the instant case from the profits earned on the long-term and short-term capital gains on the sale of shares.