| SooperKanoon Citation | sooperkanoon.com/72772 |
| Court | Income Tax Appellate Tribunal ITAT Chennai |
| Decided On | Sep-17-2003 |
| Judge | O Narayanan, N Vijayakumaran |
| Reported in | (2005)94TTJ(Chennai)184 |
| Appellant | Somayajulu and Co. |
| Respondent | Deputy Commissioner of Income Tax |
2. The assessee in this case is a registered firm carrying on the business of stock brokers. The assessee-firm also derived income from lease rentals and dividends. The assessee-firm returned an income of Rs. 31,64,416 for the impugned asst. yr. 1992-93. On filing of the return of income, the assessee-firm was requisitioned to get its accounts audited under Section 142(2A) of the IT Act. The requisition was complied with and a Special Audit Report was submitted. The assessment was completed on the basis of various observations made in the Special Audit Report. Finally, the income was determined at Rs. 2,67,77,870. The AO made about 16 additions to the income returned by the assessee-firm.
3. The assessment was taken in first appeal. The CIT(A) examined all the issues raised before him. While disposing of the first appeal, the CIT(A) remitted the case of two additions back to the AO for fresh consideration. The CIT(A) also confirmed an addition of Rs. 16,16,000.
It is against the above two specific issues that the assessee-firm has now come in second appeal before us.
4. When the matter was called on for hearing, Shri T. Banusekar, the learned chartered accountant, appearing for the assessee-firm, submitted that the two issues set aside by the CIT(A) have already been considered by the AO in the revised assessment and reliefs have already been granted to the assessee. The learned chartered accountant submitted that those two issues are not pressed any more, while prosecuting this appeal.
5. Therefore, as suggested by the learned chartered accountant, the two issues relating to the additions of Rs. 13,56,193 and Rs. 13,16,615, respectively, raised by the assessee-firm in this appeal, are hereby dismissed as not pressed.
6. Therefore, the only remaining issue to be adjudicated in this appeal is the justification of the addition of Rs. 16,16,000, confirmed by the CIT(A) in his order.
7. In the course of assessment proceedings, the AO found that the assessee had postponed the recognition of brokerage income to the extent of Rs. 16,16,000 to the succeeding asst. yr. 1993-94, thereby avoiding payment of tax on that income for the impugned asst. yr.
1992-93. The above finding of the AO was based on the observation available in the Special Audit Report. The said observation has been extracted by the AO in para 25 of the assessment order, which is reproduced below: Para 5.9.6. 'In security dealings, the delivery of physical stock/SGL/BR takes place every fortnight and the transactions are completed between buying and the selling bank only on the delivery of the physical stock/SGL/BR. The assessee receives cheques for brokerage only on the delivery of the physical stock/SGL/BR. It was noticed that though the normal delivery period is 15 days, there have been many transactions where the delivery has been effected in 1992-93 for contracts entered into in the accounting year 1991-92.
Because of such delay in delivery of the physical stock/SGL/BR, the brokerage receipts have also been postponed to the year 1992-93.
Since the assessee accounts the brokerage on receipt basis, all such receipts which should have been accounted in 1991-92 have been now accounted for only in 1992-93. A detailed list of all deliveries which have been effected beyond the normal period of 15 days has been enclosed. The brokerage postponed because of such delay amounts to Rs. 16,16,000 as indicated in Annex. 6.' Assessee was asked to explain the same vide questionnaire dt. 3rd Oct., 1994 and subsequently also in his reply the assessee submitted as follows : The normal delivery period is 15 days as stated in 5.9.6 of SAR. The delivery may, however, be extended by mutual consent of the banks/institutions. The transactions listed out in para 5.9.6 refer to deliveries beyond the normal period of 15 days, by mutual consent between the banks/institutions.' Again the assessee was asked vide order sheet entry dt. 27th March, 1995 as follows : 'Regarding para 5.9.6, you have submitted all these transactions were done by mutual consent between the banks/institutions resulting in postponement of brokerage to the tune of Rs. 16,16,000 as indicated in Annex, 6 of SAR. You are required to file any documentary evidence in support of your contention.' 'With reference to para 5.9.6, where security transactions have been extended by mutual consent, the same is done telephonically and no documentary evidence is available in respect of the same. Further, the banks have honoured their commitments which goes to show that the extension has actually taken place. Hence, there is no postponement in accounting the same'.
The assessee's contention cannot be accepted for want of documentary evidence in support of his contention. Accordingly, an addition of Rs. 16,16,000 is added back to the total income of the assessee." 8. In first appeal, the CIT(A) was of the view that it was a design drafted by the assessee-firm to defer the payment of tax on the income otherwise accrued for the impugned asst. yr. 1992-93. Therefore, the CIT(A) relied on the decision of the Hon'ble Supreme Court, rendered in McDowels & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) and confirmed the addition made by the AO.9. The grounds raised by the assessee-firm with reference to the issue agitated read as below: "a. The CIT(A) erred in confirming an addition of Rs. 16,16,000, being income accounted in the next year on security transactions where there was a delay.
b. The appellant submits that the cheques for these transactions were received only in the accounting year 1992-93 and were to be accounted only in that year, the appellant following the cash basis of accounting in respect of security transactions.
c. The appellant further submits that all these transactions were with large institutions and banks, and that the reliance by the CIT(A) on McDowels & Co. Ltd v. CTO (1985) 154 ITR 148 (SC) were misplaced as there was no specific design on the appellant's part to postpone income.
3. The appellant also submits that the transactions with the banks and institutions would not have been interested in postponing these transactions worth several crores of rupees merely for the purpose of postponing income of the appellant, more so when these transactions were at arm's length." 10. Shri T. Banusekar, the learned chartered accountant, argued the case at length. He submitted that the assessee was following cash system of accounting with reference to the accounting of brokerage on Government securities and was following accrual system of accounting for recognition of income arising out of remaining transactions. The learned chartered accountant pointed out that there is no dispute on this basic fact.
The learned chartered accountant submitted that the percentage of brokerage earned by the assessee in dealing in Government securities are so minimal that in order to earn a brokerage income of Rs. 16,16,000, the assessee had to deal in transactions of securities worth crores of rupees. The issue and subscription of these Government securities are managed by the bankers to the issue and the assessee had no role to influence those financial institutions and banks in delaying the delivery of the instruments, so that the assessee would be in a position to postpone the accrual of income to succeeding assessment years, The learned chartered accountant, submitted that the finding of the CIT(A) that it was a design drafted by the assessee-firm is only an exaggeration and does not have even an element of truth. The learned chartered accountant submitted that a design is even beyond the imagination of the assessee that the assessee as a broking firm could not have influenced the flow of such transaction handled by big banks and financial institutions. He, therefore, submitted that the income should have been rightly assessed for the asst, yr. 1993-94 and the CIT(A) has erred in preponing the assessment of the disputed income.
11. Shri C.R. Janardhan, the learned Departmental Representative, appeared and argued for the Revenue.
12. We considered the matter in detail. In the Special Audit Report itself, it has been clearly stated that the assessee was following cash system of accounting for the recognition of income by way of brokerage arising out of business in Government securities. It has also been clearly stated in the Special Audit Report that the brokerage was paid to the assessee only after the physical delivery of securities and instruments. It has been further stated in the Special Audit Report that the cheques pertaining to the amount of Rs. 16,16,000 were, in fact, delivered to the assessee-firm only during the financial year 1992-93, which is the previous year relevant to the asst, yr. 1993-94.
From these circumstances, it is to be seen that the assessee has rightly accounted for the income of Rs. 16,16,000 for the financial year 1992-93 pertaining to the asst. yr. 1993-94. If the transactions were settled within the usual period of 15 days, the income would have been accrued for the asst. yr. 1992-93. Now, the issue is whether the delay for delivery of the instruments and receipts of the cheques was, in fact, stage managed by the assessee-firm or not. The AO does not have any evidence before him to hold that the assessee had deliberately stage-managed the occurrence of delay in settling the disputed transactions after the normal period of 15 days. As a matter of fact, the AO has not made any enquiries in this direction, so as to confirm his suspicion with evidence. The AO has not made any enquiries with the banks and financial institutions, who were the manager of the issue.
The suspicion of the AO has been converted into a finding without any evidence or factual support. Even though the transactions are closed within a period of 15 days, it is not uncommon that transactions relating to substantial issue of securities would go beyond the rule of 15 days period on the basis of mutual consent, depending upon business exigencies. Any malpractice, alleged in such postponement or deferment need to be established by the AO on the basis of reasonable materials.
As far as this case is concerned, the action of the AO was mainly based only on suspicion. Another point to be considered in this context is that the Special Audit Report has not made any finding to the effect that the assessee had deliberately delayed the recognition of the income to the extent of Rs. 16,16,000 by way of brokerage. The Special Audit Report has only pointed out an exceptional circumstance, where the settlement period was extended beyond the normal period of 15 days.
The Special Audit Report did not cast any doubt beyond this. They were only stating the feature of a set of transactions. They have not imputed that the assessee had made any deliberate scheme to avoid the payment of tax during the relevant assessment year. It was for the AO to make useful enquiries on the basis of such observation available in the Special Audit Report and come to an acceptable finding, whether there was a design or not. In the present case, the AO has jumped into conclusion without making any such enquiries or without any evidence thereto.
13. The CIT(A) was also equally carried away by the suspicion transmitted from the assessment order. There is no basis in the present case to go to the extent of relying on the decision of the Hon'ble Supreme Court in McDowells v. CTO (supra). This is because the assessee-firm had already offered the said income of Rs. 16,16,000 for taxation for the succeeding asst. yr. 1993-94. The assessee-firm had already accounted for the said income in its books of accounts for the previous year 1992-93. So, there is no case of any evasion of tax, as feared by the CIT(A). We are afraid that the finding of the CIT(A) is exaggerated.
14. In the facts and circumstances of the case, we are of the considered view that the brokerage income of Rs. 16,16,000 need to be assessed for the asst. yr. 1993-94. Therefore, the said amount is deleted from the computation of income for the impugned asst. yr.
1992-93. The AO is directed to modify the assessment order on the above lines.
15. At the same time, the AO is directed to reopen the assessment for the asst. yr. 1993-94 so as to include the sum of Rs. 16,16,000 in the taxable income of the assessee-firm for that assessment year. The direction of the CIT(A) on this point is set aside.