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ACIT 4(3) 6th Floor, Room No.649 Aayakar Bhavan, MK Road Mumbai 400020 Vs Jayantilal Khandwala & Sons Pvt. Ltd, 201,Stock Exchange, Dalal Street. Fort, Mumbai 400023
June, 07th 2012
                           ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




              IN THE INCOME TAX APPELLATE TRIBUNAL
                         "J" Bench, Mumbai

      Before Shri B. Ramakotaiah, Accountant Member and
               Shri S.S. Godara, Judicial Member

                      ITA No. 3707/Mum/2011
                     (Assessment years: 2000-01)

ACIT 4(3)                                     Jayantilal Khandwala & Sons
6th Floor, Room No.649                        Pvt. Ltd, 201,Stock Exchange,
Aayakar Bhavan, MK Road              Vs       Dalal Street. Fort,
Mumbai 400020                                 Mumbai 400023
                                              PAN No. AACJ 9403 D
(Appellant)                                   (Respondent)


                     ITA No.4931/Mum/2007
                     (Assessment year: 2003-04)

Jayantilal Khandwala & Sons                   ACIT 4(3), 6th Floor
Private Limited                               Aayakar Bhavan, MK Road
201,Stock Exchange, Dalal Strt.      Vs       Mumbai 400020
Fort, Mumbai 400023
PAN No. AACJ 9403 D
(Appellant)                                   (Respondent)


                      ITA No.6044/Mum/2008
                     (Assessment year: 2003-04)

ACIT 4(3)                                     Jayantilal Khandwala & Sons
6th Floor, Room No.649                        Pvt. Ltd, 201,Stock Exchange,
Aayakar Bhavan, MK Road              Vs       Dalal Street. Fort,
Mumbai 400020                                 Mumbai 400023
                                              PAN No. AACJ 9403 D
(Appellant)                                   (Respondent)


                    Assessee by:   Shri D. Bhaskara Rao,
                    Department by: Shri D.S.Sunder Singh, DR



                    Date of Hearing:                      28/05/2012
                    Date of Pronouncement:                06/06/2012




                                  Page 1 of 25
                           ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




                              ORDER


Per B. Ramakotaiah, A.M.

      These are the cross appeals filed by both Revenue and
assessee on various grounds.
ITA No. 3707/Mum/2011 ­ A.Y 2000-01.

2.    This is a Revenue appeal against the orders of the CIT (A)-10
Mumbai dated 28.02.2011 for AY 2000-01. The Revenue has raised
the following four grounds for consideration:

      "1. On the facts and circumstances of the case and in
      law, the learned CIT (A) erred in deleting the
      disallowance of `.62,75,916/- on account of interest
      paid.
      2. On the facts and circumstances of the case and in
      law, the learned CIT (A) erred in deleting the
      disallowance towards finance brokerage and consulting
      charges of `.6,00,412/- made by AO.
       3. On the facts and circumstances of the case and in
      law, the learned CIT (A) erred in deleting the
      disallowance made by AO in respect of sub-brokerage
      paid to Shri Madhusudan Kela amounting to
      `.1,19,00,000/-.
      4. On the facts and circumstances of the case and in
      law, the learned CIT (A) erred in deleting the addition of
      service charges of `.1,83,750/-, made by AO".
3.    We have heard the learned DR and the learned Counsel for
assessee in detail. After considering the submissions and examining
the paper book placed on record, we decide the issues as under:

4.    Ground No.1 pertains to the issue of disallowance of interest
of `.62,75,916/-. AO disallowed the interest claim on the ground
that assessee borrowed interest bearing loans amounting to
`.6,89,16,040/- and advanced loans to the following concerns
without charging any interest.

      a) M/s Jayantilal Khandwala & Sons `.27,68,30,295/- (Peak
         debit balance as on 23-3-2002).



                                  Page 2 of 25
                           ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




      b) Triumph Securities Pvt. Ltd `.2,75,00,000/- (Peak debit
         balance) as on 22-3-2002.
5.    It was submitted before the CIT (A) that the accounts of the
above two concerns in assessee's books of account showed debit
balance as the two concerns are the constituents of assessee and
had running accounts with assessee. Both the concerns had share
transactions through assessee. Assessee therefore, claimed that it
did not charge any interest on the debit balances in the current
accounts. It was claimed that interest-bearing loans amounting to
`.6,89,16,040/- were taken by assessee for its business purposes
and the relevant amounts were also utilized in the business of
assessee. Without prejudice to the above, assessee claimed that
even if interest free loans were advanced, no disallowance of interest
can be made as assessee had own funds more than borrowals. On
this point, assessee relied upon the following decisions:

      (a) D&H Electronics Pvt. Ltd. vs. CIT (142 ITR 528) (MP)

      (b) CIT vs. H.P. Lohia (203 ITR 928) (Cal.)

6.    During the course of appellate proceedings before CIT(A)
assessee vide letter dated 21-05- 2009 has furnished details of
copy of ledger accounts as appearing in assessee's book
showing    the   payments      and        receipt        to     M/s.         Jayantilal
Khandwala & sons and Triumph Securities Pvt. Ltd. Therefore,
the then CIT(A)-XIV, Mumbai has called for remand report vide
letter dated 05-06-2009. In response to which the AO has
submitted his remand report vide letter dated 03-08-2009
and again remand report dated 11-02-2011 wherein the AO
stated that assessee has debit balance of `2,22,03,196/- as on
31-03-2000. It appears that the assessee has purchased and
sold shares on behalf of Jayantilal Khandwala & Sons and the
bills raised entered into ledger on debit and credit side. The
ledger also consisting of entry of payments made/received of
the amount credited and debited from Jayantilal Khandwala &






                                  Page 3 of 25
                               ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




Sons. The AO further stated that considering the transaction in
shares,   it    is   seen   that       assessee           has       sold       shares         of
`33,07,10,040/- and purchased shares of `.22,66,41,308/- on
behalf of Jayantilal Khandwala & Sons. On the other hand there
is a credit balance of Rs.l0,40,68,731/-. Therefore, it can be
concluded that assessee has not only paid this amount to
Jayantilal Khandwala & Sons but there is a payment over and
above the credit balance which has resulted in the overall debit
balance of `2,22,03,196/-. The payment made is excess which
has rightly been considered as loan advanced for non business
purpose. As regards Triumph Securities Pvt. Ltd., the AO stated
that there are five entries, two entries on credit side indicating
the bill raised amounting to `5,25,OO,OOO/-.The total entries
on debit side is `5,25,OO,OOO/-. Since the amounts are
squared up it cannot be said that there was any loan given for
non business purpose.

7.     In the rejoinder to the remand report, assessee vide letter
dated 28-02- 2011 submitted that M/s. Jayantilal Khandwala
& Sons is their client for which they purchased and sold shares
as directed by them which has been also admitted by the AO in
his remand report dated 11-02-2011. It was submitted that
assessee is following trading practice in the business that no
interest is charged in the balances in the account of sundry
debtors and similarly no interest is paid on the balances in the
account of sundry creditors. Therefore, following the business
practice, no interest was charged on the debit balance in its
account as on 31-03-2000. The AO assumed that assessee has
taken interest bearing loans which were advanced by assessee
for making interest free advances to Jayantilal Khandwala &
Sons       by        relying          on           the            observation                 of
the special auditor. However, the AO has failed to establish the
nexus between interest bearing loan taken and interest free



                                      Page 4 of 25
                              ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




advance given by assessee. It further placed reliance in the case
of CIT vs. Radico Khaitan Ltd. (274 Allahabad) wherein it was
held that if the assessee has sufficient funds on account of
share capital and share application money, reserves and
surplus to advance interest free loan, no disallowance could be
made on interest free loans. Similarly, it also relied in the case
of   CIT    Reliance    Utilities     &     Power         Ltd.      (313        ITR      340)
(Bom),wherein it was held that if interest free fund was
available to the assessee and at the same time the assessee has
raised a loan it can be presumed that investment is made out of
interest free funds available with assessee. It was contended
that the interest free fund is available with the assessee as on
31-03-2000 were amounted to `9,83,04,632/- as against the
debit balance of `2,17,41,681/-. Therefore, it will be presumed
that the interest free advances were given out of interest free
funds      available   with   assessee.          With       regard         to     Triumph
Securities Pvt. Ltd., it was submitted that assessee has only
three transactions with this concern and the accounts with the
concern is squared up during the year has also stated by the AO
in the remand report, therefore, no interest free loans were
advanced to this concern.

8.      Based on the predecessors' remand report vide letter dated
5.6.2009 and assessee's submissions and examining the facts and
after considering the rejoinder to the remand report, the CIT (A)
deleted the addition by stating as under:

        "2.3 I have considered the facts. I find from the
        details of accounts placed before me that the above
        two concerns had share transactions through the
        appellant. Therefore the appellant has maintained
        running accounts of these concerns. On some dates
        these current/running accounts showed debit
        balances. From the accounting details, I have also
        noted that the entire transactions are routine and
        day-to-day commercial transaction of purchase and




                                     Page 5 of 25
                          ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




      sale       of      shares.       The     AO        has
      not established any nexus between the interest -
      bearing loans amounting to `.6,89,16,040/- taken by
      the appellant and the debit balances in the name of
      above two accounts. It is also seen that the interest
      paid approximately by a sum of `3,30,OOO/- and the
      relevant borrowals made are reflected in the increase
      in volume of business and current assets. The AR
      relied in the case of Reliance Utility & Power Ltd
      (2009) 313 ITR 340(Bom), wherein it was held that if
      there are funds available both interest free and
      overdraft       or     loan      taken     then       a
      presumption would arise that investment would be
      out of interest free funds generated or available with
      the company, if the interest free funds were sufficient
      to meet the investment.

      2.3.1 I am, therefore, unable to hold that interest
      bearing loans taken by the appellant were utilized by
      it in advancing any interest free loans. Further the
      accounts maintained were running accounts and not
      represented loan transaction. In case of Triumph
      Securities, the AO has clearly stated in the remand
      report dated 11- 02-2011 that it cannot be said that
      thee was any loan given for non business purpose. In
      view of these, no disallowance of interest can be
      made. The decisions relied upon by the appellant are
      also supports its case. The AO was therefore, not
      correct in disallowing interest of `62,75,916/-. This
      disallowance is deleted. Accordingly this ground of
      appeal is allowed".


9.    The learned DR referring to the order of AO submitted that
large funds are diverted to the sister concern and accordingly AO
was correct in disallowing the interest claimed as interest on
borrowed funds but not utilized in assessee's business. It was the
submission of the learned AR for the assessee that the funds were
utilized on the business and those debit balances were trading
balances and accordingly supported the order of the CIT (A).

10.   We have considered the issue and examined the facts on
record. There is a finding by the CIT (A), which is not controverted
before us, that the debit balances with the two concerns are



                                 Page 6 of 25
                             ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




running accounts in the course of purchase and sale of shares and
are business transactions. Since there is no diversion of borrowed
funds for non business purposes, we have to hold that there is no
nexus between the interest bearing funds taken by assessee and the
debit balances in the name of two accounts which can be
considered as diversion of funds. Moreover, following the principles
laid down    by    the   Hon'ble     Supreme           Court        in    the     case       of
S A Builders and other Vs CIT 288 ITR 1, it is to be held that the
funds advanced are for business purposes. Accordingly there is no
need for disallowance of any interest. It is also seen that AO in the
assessment order compared the debit balance as on 22.03.2002
which does not pertain to the year under assessment. Therefore, his
comparison on facts is also not correct as he has taken the debit
balances of later year for disallowing the interest this year. These
aspects were examined by the CIT (A) on factual basis as well.
Hence, we uphold the order of the CIT (A) and dismiss Revenue
ground.

11.   Ground No.2 pertains to disallowance of finance brokerage
and   consulting   charges     of    `.6,00,412/-.            Consequent            to    the
disallowance of interest claim on borrowed funds, AO disallowed the
brokerage and consulting charges paid for obtaining the loans as
not for the purpose of business. The CIT (A) following his findings
that the borrowed funds are utilized for the purpose of business and
interest is allowable as deduction allowed the brokerage and
commission charges. Since there is no dispute with reference to the
genuineness of the payment made to the above three concerns, we
are of the view that the CIT (A) is correct in allowing the brokerage
and consulting charges claimed by assessee for obtaining various
loans. Therefore, the ground of Revenue is dismissed.

12.   Ground No.3 pertains to disallowance of sub-brokerage paid
to Shri Madhusudan Kela amounting to `.1,19,00,000/-. Assessee




                                    Page 7 of 25
                                 ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




claimed payment of `.1,19,00,000/- as brokerage paid to Shri
Madhusudan Kela. AO disallowed this expenditure on the ground
that this person was not produced personally for examination
though assessee was asked to do so. AO has also stated that the
details of services rendered by Shri Madhusudan Kela were not
furnished   to   AO.      It     was       submitted            before        CIT(A)         that
confirmation     letter        dated      27-03-2001              addressed            to     Sri
Madhusudan Kela and acknowledged by him was furnished to
the AO. During the course of hearing, it was explained, that the
services rendered by Sri Madhusudan Kela were mentioned to
the AO. In particular it was stated before the AO that this sub
broker   procured      business            from        NRI       clients        and         other
corporations like Can Bank Off Shore Mutual Fund, Alliance
Capital Mutual funds, Lloyd George Mutual Funds, M/s. FR -
Mann Ltd., Mr. Shyan Bhatia, Mr. Harshad Dhakkan and
several others. Sri Madhusudan Kela could not be personally
produced before the AO as the former was out of Mumbai at the
relevant time and the time allowed to assessee by AO for
producing this person was insufficient. The assessee however
submitted that the full address and the Income tax PAN were
furnished to the AO. The Bye-laws and Regulations of the
Bombay Stock Exchange lay down the maximum brokerage
payable to sub-brokers. All the relevant payment amounting to `
l,19,OO,OOO/-were paid by assessee by issuing account payee
cheques to this person. The names of clients introduced by this
sub broker were also mentioned to the AO in the course of
assessment proceedings. It was submitted that even the AO did
not make any enquiries or investigation before concluding that
the brokerage paid to Sri Madhusudan Kela appeared to be non-
genuine. It was submitted that Sri Madhusudan Kela is a well
known    fund    Manager          in     Mumbai,            and       he     is     presently
working as Fund Manager with Reliance Mutual Fund. It is



                                        Page 8 of 25
                           ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




stated that Sri Kela was ranked as No.1 fund manager by
'business standard' a daily paper.

13.   After considering the submissions, the CIT (A) deleted the
additions by stating as under:

      "4.3 I have considered the facts. On consideration of the
      facts, it is seen that the appellant has filed PAN,
      confirmation letter endorsing of receipt of letter and
      claimed that Shri Madhusudan Kela has procured NRI,
      Can bank, Mutual Funds like Can Bank Off Show Mutual
      Fund etc. I also find that the issue on this ground already
      decided by me predecessor CIT (A) while deciding original
      appeal. The findings of CIT (A) are as follows:
      "I find that during the course of assessment proceedings
      the appellant had furnished information of Shri
      Madhusudan Kela, though those were not treated
      sufficient by the AO to consider genuineness of the
      person as well as the payment of sub-brokerage.
      Though the appellant had furnished a letter of
      confirmation of this payment to the AO vide
      forwarding letter dated 8th September, 2004,
      materials on record did not suggest enough
      indication that such details like PAN / Address etc.
      were before the AO for proper verification. Under the
      circumstances, The AO is directed to verify from
      materials available and LT. Returns of Shri
      Madhusudan Kela, whether the alleged sub-
      brokerage was shown by Shri Madhusudan Kela in
      his     respective    LT.    Returns.    If  so,    then
      sub-brokerage paid by the appellant is to be allowed.
      With this direction, I dispose of this ground." Before
      me, also, the AR reiterated his original submission as
      made before my predecessor CIT(A). The AR further
      filed a copy of ledger account as appearing in his
      bank accounts and a copy of bank account
      evidencing payments made by cheques and
      encashed by Shri Madhusudan Kela. Therefore,
      considering the finding of my predecessor CIT(A), the
      AO is directed to verify the receipts of payments
      shown by Shri Madhusudan Kela, in his I T return
      and if found correct then allow the claim. This ground
      is therefore, treated as allowed subject to
      verification".




                                  Page 9 of 25
                            ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




14.      Even though the learned DR vehemently argued that assessee
has not filed any confirmation either during the special audit or
before AO, in view of the factual findings given by the CIT (A), we
have no other option than to accept his findings in the absence of
any contrary evidence placed by the Revenue. The Revenue has also
not raised any ground with reference to admission of any additional
evidence which indicate that the factual aspect that assessee filed
confirmation letters before AO in the course of the assessment
proceedings are to be accepted. It is also seen that the learned CIT
(A) directed to verify the receipt of payments given to Shri
Madhusudan Kela and after examination directed AO to allow the
claim. We do not see any reason to interfere with the findings of the
CIT (A) on this issue. It is for AO to examine the factual aspects and
allow the claim as the matter was restored to him by the CIT (A). In
our view the ground itself is infructuous. Accordingly the same is
rejected.

15.      Ground No.4 pertains to the issue of deletion of service
charges `.1,83,750/-, made by AO who disallowed this on the basis
that the same was debited twice to the profit and loss account. On
the other hand it was submitted before CIT(A) that service charges
were paid on the purchase of shares which were financed by Kotak
Mahindra Finance Ltd by assessee as investment and that this
service charge of `.1,83,750/- was also added to the cost of shares
purchased. It was further explained that there was no double debit
of this expenditure. Assessee filed copy of shares purchase account
of Polaris Software shares and claimed that there is no double
claim.

16.      The CIT (A) considered the above facts. It has been observed
by him that the service charges were debited to cost of shares, a
copy of investment in shares account has also filed. It was claimed
that the service charges was not shown in Profit & Loss A/c and in




                                   Page 10 of 25
                            ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




any other head. Therefore, the claim appears to be in order.
Accordingly the CIT (A) deleted the disallowance.

17.    Since these are factual aspects which were examined by the
CIT (A) and nothing contrary to the above were brought on record by
the Revenue, we do not see any reason to interfere with the orders
of the CIT (A). Therefore, the ground is rejected.

18.    In the result, the Revenue appeal is dismissed.

ITA No.4931/Mum/2007 ­ A.Y 2003-04

19.    This is an assessee's appeal against the orders of the CIT (A)-
14 Mumbai dated 04.05.2007. Assessee has raised five grounds on
various issues. We have heard the learned Counsel and the learned
DR in detail.

20.    Ground No.1 pertains to disallowance of `.90,64,896/- out of
`.95,23,575/- claimed on account of finance charges paid by
assessee on the reason that the borrowed funds are diverted. Briefly
stated the facts are that AO noticed that assessee had incurred
finance expenses of `.95,23,575/-. It was seen that it had advanced
loans to sister concerns to the tune of `.31,60,73,887/- as against
unsecured/secured loans outstanding at `.19,88,10,884/- as on
31-03-2003. AO held that assessee had diverted and utilized the
borrowed funds for non business purposes and therefore finance
expenses incurred at `.95,23,575/- were disallowed as having been
incurred for non business purposes.

21.    Before the CIT (A) it was contended that the following sister
concerns were having debit balances in the books of assessee as on
31-03-2003:

   1   M/s Khandwala Shares & Brokers Pvt Ltd                        `.2,50,01,566/-
   2   Nirjay Securities Pvt. Ltd                                   `.27,47,80,331/-
   3   M/s Jayantilal Khandwala & Sons                                `.1,62,91,990/-




                                   Page 11 of 25
                           ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




It was explained that all the accounts in the above cases were
running accounts; all the three concerns were constituents of
assessee and the debit balances had arisen in the course of the
business of assessee. It was further submitted that the debit
balance in the case of the third concern M/s Jayantilal Khandwala
& Sons had come down from `8,33,18,432/- as on 1-04-02 to
`1,62,91,990/- as on 31-03-03. It was stated that the interest
bearing loans taken by assessee were fully utilized in its business
and were not utilized for giving interest free advances. It was
submitted that the AO had not found that interest bearing loans
taken by the assessee were used as advances to the above three
concerns. It was argued that unless interest bearing loans were
found to have been advanced as interest free loans by assessee, no
interest claim could be disallowed by the AO. Reliance was placed
on the judgment in the case of D&H Electrodes Pvt Ltd. Vs. CIT, 142
ITR 528 (MP) and CIT vs. H.P. Lohia, 203 ITR 928 (CAL.). It was also
submitted that the CIT(A) had allowed the appeal of the assessee on
the similar point in A.Y. 2000-01.
22.   During the course of the appellate proceedings before CIT(A),
the AR was asked to explain the nature of entries in the three
accounts. It was submitted that in the case of the first two concerns
i.e. M/s Khandwala Shares & Brokers Pvt. Ltd. & M/s Nirjay
Shares Pvt. Ltd., the assessee had sold and purchased the shares
for them and these accounts represented a mixture of business
transactions as well as of loans and advances. With third concern
viz. Jayantilal Khandwala & Sons, no business was carried out
during the year and a major part of the amounts due from this
concern was realized. Consequently the debit balance due as on 31-
03-03 came down to `1,62,91,9901- only as against `8,33,18,432/-
due as on 01-04-02.




                                  Page 12 of 25
                            ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




23.   The CIT (A) after examining the issue upheld the disallowance
of finance expenses. Summary of his findings in Para No.6 are as
under:

      "6.............. Therefore, I hold that the appellant had
      diverted its funds to these two sister concerns for
      non business purposes. Even in the case of the third
      concern, namely Khandwala Shares & Stock
      Brokers Ltd., it was very abnormal and unusual
      that the appellant had allowed this concern to
      purchase shares without making any payment
      which is not a normal business policy with any of
      share broker. Thus, respectfully relying on the
      aforesaid judgment of Punjab & Haryana High
      Court, I hold that the borrowings made by the
      appellant at `.19,88,10,884/- were not required at
      all in case the appellant had not diverted its funds
      to its sister concerns namely M/s Jayantilal
      Khandwala & Sons and M/s Nirjay Securities Pvt.
      Ltd to the tune of `.29,10,72,321/-. In the
      circumstances, I hold that the interest and finance
      expenses at `.90,64,896/- (excluding bank charges
      and commission at `.4,58,829/-) were not allowable
      under section 36(1)(iii) for the reason that the
      borrowed funds were not used for purposes of
      business but diverted to the sister concerns. In view
      of the aforesaid discussion, the disallowance made
      at `.95,23,575/- is restricted to `.90,64,896/-.
      Accordingly this ground of appeal is partly
      allowed".


24.   Before us the learned Counsel submitted that these two
accounts are running trading accounts and in one account there
was reduction of old credit balances. It was submitted that
assessment year 2000-01 was relied by AO while disallowing the
amount, which were allowed by the CIT (A) in that year (which was
considered in the Revenue appeal at Ground No.1 in above appeal).
It was submitted that since assessee has utilized the funds in the
course of business, these amounts are allowable as business
expenditure. The learned DR however, relied on the orders of AO
and the CIT (A).




                                   Page 13 of 25
                           ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




25.    We have examined the issue and the paper book placed on
record with reference to this assessment year. In our opinion both
AO and the CIT (A) did not examine the issue on factual basis but
carried away by the findings in earlier years with reference to the
same issue. As seen from the balance sheet and the Profit & Loss
A/c particularly schedules placed in the paper book at page 34,
assessee had no secured loan as on 31-03-2002, but had a term
loan from Bank of India, Stock Exchange Branch to the tune of
`.2,07,38,318/- as on 31.3.2003. Since there are no secured loans
in earlier years, obtaining secured loan during the year should have
examined afresh by AO. With reference to the unsecured loan in
schedule 4, assessee had `.18.50 crores as inter corporate deposits
which was reduced to `.17.30 crores during the year. Further as
against `.82.97 lakhs of other unsecured loans, the year ending
unsecured loan under the head "others" was `.50.65 lakhs. As seen
from   the   finance   charges     in     schedule-13,             an     amount           of
`.18,14,291/- was paid as interest to others on unsecured loans. An
amount of `.27,82,939/-was paid to the Bank as interest and an
amount of `.44,67,666/- was paid as financial brokerage. When
inquired why so much financial brokerage was paid on inter
corporate deposit of `.17.30 crores available, which itself was
reduced when compared to earlier years, it was the submission that
this financial brokerage was paid for earning inter corporate
deposits. These aspects have not been examined by AO and the CIT
(A) at all. There is no dispute to the fact that the three accounts
which were maintained by assessee's sister concerns are for the
purpose of business and interest was allowed in assessment year
2000-01 on examination by the CIT (A) factually, the order of which
was confirmed in Ground No.1 above in that year. Since the facts
in this year are at variance more so with reference to financial
charges paid to Bank which is one of the major component and also
brokerage paid for arranging inter corporate deposits aspect of



                                  Page 14 of 25
                               ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




which were neither discussed nor verified, we are of the opinion that
the issue require fresh examination by AO keeping in view the above
observations. The issue in this ground is therefore, restored to the
file of AO to examine the nature of funds obtained by assessee and
its   utilization   afresh    without       getting        carried       away        by     the
observations in earlier years. It is also submission that in the
trading account no interest was charged or paid on the debit/credit
balance with the clients. Therefore, this aspect also has to be
considered by AO while considering the allowance of interest
claimed by assessee. The matter is accordingly restored to the file of
AO for fresh examination and decision. Ground is considered
allowed for statistical purposes.

26.    Ground No.2 pertains to issue of disallowance of depreciation
on BSE Membership Card. For clarity on the issue, the grounds
raised by assessee are extracted as under:

       "2(a) The CIT (A) erred in confirming disallowance of
       depreciation on the BSE Membership card owned by the
       appellant and utilized by it in its business.
       (b) The first appellate authority failed that the Registrar of
       Companies was informed by the appellant that BSE
       Member Ship Card was acquired from one of the Directors
       of the appellant for a sum of `.1,30,00,000/- by issuing
       13,00,000 equity shares of the appellant company at
       `.10/-per share. The audited statements of account
       furnished by the appellant to AO also confirm this
       position.
       (c) The CIT (A) erred in observing that the BSE Membership
       Card owned by the appellant was not used in the relevant
       accounting year in the appellant's business. This is
       perhaps based on the presumption that AO found that the
       Membership Card of the appellant was suspended. This is
       factually not correct as the appellant carried on business
       as a Member of the BSE in the year ended 31-3-2003 and
       earned substantial commission".
27.    Briefly   stated,     AO did       not     allow depreciation                 on     the
Membership Card on the reason that the Membership Card is not
an asset for the purpose of depreciation and also on the reason that



                                      Page 15 of 25
                           ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




assessee BSE Card has also been suspended and consequently no
business was carried out. On the above reasons, the claim of
depreciation of `.10,28,320/- on BSE Membership Card was
disallowed. The CIT (A) on noticing that the Card was earlier owned
by Shri Ashok Khandwala and it was transferred to assessee and
further on the reason that the basis of valuation of Membership
Card has not been explained and further the Membership Card has
not been used for the purpose of business, confirmed AO's order.

28.   It was the submission of the learned Counsel that there is no
suspension of Membership Card at any point of time and has
earned substantial profits by transacting in the stock exchange and
therefore, the findings of AO and the CIT (A) are not correct. It is
also submitted that this issue of depreciation is now decided in
favour of assessee by the Hon'ble Supreme Court in the case of
Technoshares & Stocks Ltd. and Others Vs CIT (327 ITR 323)
that the Membership Card is eligible for depreciation. Learned DR
however, relied on the facts as stated by AO and the CIT (A).

29.   We have considered the issue and examined the matter. Even
though on legal principles, the issue is in favour of assessee as
decided by the Hon'ble Supreme Court in the case of Technoshares
& Stocks Ltd. and Others Vs CIT (327 ITR 323) that Membership
Card is eligible for depreciation, We cannot allow the depreciation
per se on the reason that there was a finding that the Membership
Card has been suspended during the year. We did not find any
basis for giving this finding by AO and the CIT (A). As submitted,
assessee has earned substantial profits by doing transactions in the
stock exchange. Therefore it is a contradictory stand taken by AO
that while accepting assessee's income is from stock broking, he
also gives finding that the Membership Card of assessee was
suspended. In view of this, we restore this issue back to the file of
AO to examine whether the Membership Card was suspended







                                  Page 16 of 25
                            ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




during the year or not. In our view, confusion would have arisen
because of the certificate placed on record at Page No.118 of the
paper book issued by the Stock Exchange of India that M/s
Jayantilal Khandwala & Sons (P) Ltd will start doing the business in
the market w.e.f. 6.4.1998 and in the same day M/s Jayantilal
Khandwala & Sons will cease to do the business in the market on
6.4.1998. As per the above, the Stock Exchange has certified that
M/s Jayantilal Khandwala & Sons, a separate partnership concern
of assessee group ceased to do business w.e.f. 6.4.1998, whereas
business is continued in the name of Jayantilal Khandwala & Sons
(P) Ltd. However, this certificate was issued on 21st March 1998
w.e.f. 6.4.1998 i.e. assessment year 1999-2000. Except this
document which could have led to above finding, we do not find any
evidence on record to support the findings of AO that assessee's
Membership Card was suspended. Therefore, in the interest of
justice, we restore the issue to the file of AO to examine this aspect
and give a clear finding whether assessee's Membership Card was
suspended in the year under consideration. If the card is not used
for the purpose of business, the question of allowing depreciation
does not arise. However, if the Card is used for the purpose of
business, following the principles laid down by the Hon'ble Supreme
Court in the case of Technoshares & Stocks Ltd. and Others (327
ITR 323), assessee is eligible for depreciation. Moreover, the cost for
the purpose of valuation of Membership Card is to be examined
afresh by AO as CIT (A) has opined that assessee did not
substantiate the cost of acquisition. These aspects require fresh
examination by AO. Accordingly the issue in Ground No.2 with
reference to the claim of depreciation is restored to the file of AO for
fresh examination and decision. In case the Card was acquired in
an earlier year and assessee's cost was accepted as such, we also
make it clear that the issue of cost can not be examined in the year
of consequential claim of depreciation. With these observations and



                                   Page 17 of 25
                           ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




directions, the issue is restored to the file of AO for fresh
adjudication. Ground is considered allowed for statistical purposes.

30.   Ground no.3 pertains to the issue of disallowance of 20%
admissible depreciation on vehicle owned and used by assessee in
the business.

31.   AO following his order in assessment year 2000-01 and 2001-
02, disallowed 20% of the depreciation on Motor Car as the car was
registered in the name of one of the Directors. While admitting that
the car was registered in the name of the Director, it was submitted
that the funds for the purchase of the car was raised from the
assessee company and the vehicle was reflected in the balance
sheet of assessee as assessee is the beneficial owner and was used
for the purpose of assessee's business depreciation was allowable. It
was further submitted that the CIT (A) while deciding the appeal for
the assessment year 2000-01 has allowed depreciation to assessee
on identical facts.

32.   We have considered the issue and examined the facts. Since
the issue of depreciation was allowed in favour of assessee in
assessment year 2000-01 and the Revenue has not contested the
same as can be seen from the issues raised in other appeals (ITA
Nos.4162 & 6044/Mum/2008), we are of the view that there is no
need for disallowing 20% of the depreciation as was done by the CIT
(A). Since there is a finding that the cars are reflected in assessee's
balance sheet and are used for assessee's business, assessee is
entitled for depreciation as claimed. There is no need for disallowing
20% of the claim. AO is directed to allow the same.

33.   Ground No.4 pertain to restricting the disallownace made by
AO out of various expenditure claimed under eight heads of
expenses. It was fairly admitted that such disallowance in earlier
years was deleted by the CIT (A). Considering the facts of the case
and the arbitrary disallowance made by AO under various heads,



                                  Page 18 of 25
                          ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




we are of the opinion that there is no need for disallowing 20% of
the expenditure as was done by the CIT (A) under the heads
travelling, conveyance, staff welfare, miscellaneous expenditure etc.
We direct AO to allow the amount as claimed. Ground is accordingly
allowed.

34.   Ground    No.5   pertains     to    the      addition        of     `.25      lakhs
representing the amount received by assessee from Shri I.R.
Khandwala through Khandwala Securities Ltd. Briefly stated AO
observed that in the notes to the accounts, it was stated the
assessee company had accepted a fraudulent unconfirmed transfer
of `.25 lakhs which stood shown as sundry creditor. Since assessee
failed to explain this non existing liability, in the absence of any
explanation, the amount of `.25 lakhs was added by AO as
unexplained credit. It was contended before CIT(A) that assessee
was passing through a period of financial crises and was in need of
funds. It therefore, approached Shri I.R. Khandwala for a loan. Shri
I.R. Khandwala considered that if the loan was advanced to
assessee, there might be difficulty in recovering the same.
Therefore, he advanced a loan of `.25 lakhs to Khandwala Security
Ltd (formerly known as Khandwala Finance Ltd) a public limited
comopany and asked assessee to obtain the loan from the public
limited company. Accordingly, the loan of `.25 lakhs was advanced
by Shri I.R. Khandwala to Khandwala Securities Ltd which company
in its turn advanced the same in July 2001 to assessee. In the
books 'of account of assessee for the year ended 31-3-02, the sum
of R.25 lakhs was credited to the account of Khandwala Security
Ltd. and on 01-04-02 by a journal entry was passed in the books of
assessee transferring this sum of Rs.251akhs from the account of
Khandwala Security Ltd to the account of I.R. Khandwala. It was
submitted that later on Mr.I.R. Khandwala filed a Summary Suit
against Khandwala Security Ltd. and stated that the sum of
Rs.25lakhs was passed on by Khandwala and Security Ltd. to



                                  Page 19 of 25
                          ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




assessee. It was further submitted that later on this sum of `25
lakhs was repaid by the assessee to Shri I.R. Khandwala by issuing
cheques on various dates upto 12-12-06. The details furnished in
this regard were forwarded to the AO for his comments and
verification from Mr.I.R. Khandwala. The comments received from
the AO were forwarded to assessee for its comments. In reply it was
reiterated its stand that there was no fraud as mentioned by the
Statutory Auditors, all the relevant transactions were through the
cheques and stood duly entered in the books of accounts.

35.   The matter was further referred by CIY(A) to AO and his
comments were received which were as under:

            "As directed by the undersigned a summons
            dated 12-2-07 was issued on Shri I.R.
            Khandwala, requesting him to furnish loan
            confirmation and copies of the returns filed
            for A. Y 2003-04 and 20034-05 for the loan
            advanced to M/s. Jayantilal Khandwala &
            Sons P. Ltd. In response Shri I.R.
            Khandwala filed a letter dated 6th March,
            2007 stating that as per the instruction of
            Jayantilal Khanduiala & Sons Put. Ltd. a
            pay order favouring Khandwala Securities
            Ltd. was issued on 12-07-01 and further as
            M/s Jayantilal Khandwala & Sons Pvt. Ltd.
            did not take his consent or informed him in
            whose account the cheque should be
            debited. Further Shri I.R. Khandwala
            stated that though the cheque was issued
            to M/s. Khandwala Securities Ltd. the
            amount was received back from M/s
            Jayantilal Khandwala & Sons Pvt.Ltd.
            However, no loan confirmations were
            produced by Shri I.R. Khandwala inspite of
            several opportunities given to him.

            Shri LR. Khandwala was the Auditor of the
           company M/s Jayantilal        Khandwala &
           Sons Pvt. Ltd. The remark that 'the assessee
           company      had     accepted      fraudulent
           unconfirmed transfer of `.25,00,000/- which
           has been shown as sundry creditors' was



                                 Page 20 of 25
                       ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




        correctly mentioned by him and the same can
        be seen from the reply received from Shri I.R.
        Khandwala. As from the statement of affairs as
        on 31-3-2002 and 31-3-2004, it is seen that Shri
        I.R. Khandwala is showing an amount of
        `25,00,000/- as due from M/s Khandwala
        Securities Ltd and not M/s Jayantilal
        Khandwala & Sons Pvt. Ltd. A copy of the reply
        dated 6-3-2007 received from Shri I.R.
        Khandwala is enclosed herewith for necessary
        action at your end".

36.   The CIT (A) confirmed the same by stating as under:


   "30. On careful consideration of the relevant facts
  and submissions and AO's comments, it is clear that
  on 01-04-02, the appellant had shown the amount
  `25 lakhs as received from Mr.I.R.Khandwala through
  a journal entry. However this entry was not true as
  there was no basis for making such a transfer entry.
  Thus entry of the sum of Rs. 25 lakhs shown as
  having been received from Mr.I.R. Khandwala as on
  01-04-02 was not factually correct. Besides as
  observed by the AO, Mr. I.R.Khandwala was not
  showing a sum of Rs.25,00,OO/- as due from the
  appellant. The observations in the Notes to the
  Accounts contained .in Schedule 14 were very clear on
  the point that it was a fraudulent and unconfirmed
  transfer. Under the circumstances, the AO was
  justified to treat the sum of Rs.25,00,000/- as
  unexplained. The AR's contention that this issue was
  relevant for A.Y.2002-03 and not for A.Y. 2003-04 i.e.
  assessment year under appeal, and on the basis of
  mere book entries no addition under section 68could
  'be made, was not correct and cannot be accepted.
  The judgment relied upon by the AR was not
  applicable to the facts of the case. Once the amount of
  Rs.25,OO,000/-- stood credited in the name of I.R.
  Khandwala as on )1-04-02, it was very much relevant
  for the A.Y. 2003-04. Further as this was unconfirmed
  and fraudulent transfer as certified by the statutory
  auditors, AO was fully justified to treat it as
  unexplained. Accordingly, this ground of appeal is
  rejected and addition of RS.25 lakhs is hereby
  confirmed".




                              Page 21 of 25
                           ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




37.   It was submitted that initially Shri I.R. Khandwala who is
related to one of the Directors has advanced funds and these were
accounted for in earlier years as received from Khandwala
Securities Ltd. Subsequently the company passed journal entry in
this year reversing the earlier entries. The learned Counsel also
placed on record the fact of dispute between Shri I.R. Khandwala
and his petition filed before the Hon'ble Bombay High Court and
ultimately payment of the amount by way of cheques and ultimate
settlement dated 26th December, 2006 to submit that even though
the transactions happened between M/s Khandwala Securities Ltd
and Shri I.R. Khandwala finally assessee was the ultimate
beneficiary of the amount and since Shri I.R. Khandwala also
happens to be the Partner in the Chartered Accountant firm, a
statutory note was given in order to obtain from assessee company
certain benefits and ultimately as the matter was settled by paying
the amount, it can not be considered as unsecured loan. Moreover,
it was submitted that there is neither cash receipt, nor any credit to
the assessee company during the year and submitted on the facts of
the case, there is no need for making any addition under section 68
of the Act. Learned DR however, relied on the note of the statutory
auditor that there are fraudulent transactions and assessee has
bogus liability and therefore, the Revenue is correct in bringing the
amount to tax.

38.   We have considered the issue. We are unable to understand
how these transactions can be considered as unexplained cash
credit. First of all there is no dispute with reference to the advance
amount of `.25 lakhs to Khandwala Securities Ltd, a public limited
company, which in turn passed on the loan to the assessee
company. The entries in the earlier years in the books of account
are a credit in the name of Khandwala Securities Ltd. To that extent
the credit stands explained. Consequent to the dispute between the
parties on 1.4.2002, a journal entry was passed by crediting to the



                                  Page 22 of 25
                           ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




account of Shri I.R. Khandwala and debiting to the Khandwala
Securities Ltd. This journal entry was stated to be fraudulent entry
and on that basis the amount was taken as unsecured loan. There
is evidence on record that Shri I.R. Khandwala made a summary
civil case before the Hon'ble Bombay High Court and there is no
dispute with reference to the advancing the funds directly or
indirectly. There is also no dispute to the fact of the payment by the
assessee company to the said Shri I.R. Khandwala, evidence of
which was also placed before AO. Just because a journey entry was
passed reversing the earlier entry in the books of account, we are
unable to understand how this entry will become unexplained cash
credit. As far as the transactions to Shri I.R. Khandwala are
concerned, money was ultimately received and paid and there is
evidence on record that said transaction is a bonafide transaction. If
we were to consider Shri I.R. Khandwala has not advanced money
directly and the journal entry was passed without any basis, the
actual credit was from Khandwala Securities Ltd in earlier year
which was also not disputed by AO. Looking at either way, there is
no basis for making addition under section 68 as unexplained
income of assessee. Therefore, we have no hesitation in deleting the
said addition made by AO and confirmed by the CIT (A). Accordingly
Ground is allowed.

39.   In the result appeal is allowed for statistical purposes.

ITA No.6044/Mum/2008 ­ A.Y 2003-04.

40.   This is a Revenue appeal against the orders of the CIT (A)-14
Mumbai dated 21-07-2008 deleting the penalty under section
271(1)(c) for the assessment year 2003-04. The quantum appeal
was considered by us in the earlier appeal in ITA No 4931/Mum
/07. The issue in this appeal is levy of penalty with reference to
BSE Membership Card which is stated to have been suspended
during the year, claim of interest supposed to be on diversion of




                                  Page 23 of 25
                           ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




funds for non business purposes and addition made as unexplained
credit of `.25 lakhs. The CIT (A) deleted the penalties on the reason
that AO simply levied the penalty on the ground that additions/
disallowance made by him were stood confirmed by the CIT (A)
without appreciating that the assessment and penalty proceedings
were different and therefore, material good enough to justify the
addition may not justify the penalty. The Ld.CIT(A) has further given
a finding that there is no deliberate action on the part of assessee
and AO has not arrived at any finding that the explanation
furnished by assessee was false or bonafide or assessee has not
disclosed all the facts which were material for the computation of
income. He deleted penalty. Accordingly the Revenue is aggrieved.

41.   After considering the arguments of the learned DR and the
Authorized Representative, we are of the opinion that the CIT (A)
order per se cannot be faulted. However, as seen from the appeal for
the assessment year in quantum, the issue of BSE Membership and
interest claim of borrowed funds were restored to the file of AO for
fresh consideration. Therefore, to that extent levy or deletion of
penalty on the issue does not arise at this point of time as the
issues were already restored to the file of AO for fresh adjudication.
We set aside the orders of AO and the CIT (A) on the above two
issues and restore the penalty on the above issues to the file of AO
for fresh consideration, after finalizing the issue of claim of
depreciation on Membership Card and claim of interest on borrowed
funds. With reference to the penalty on unexplained cash credit of
`.25 lakhs, we agree with the findings of the CIT (A) in deleting the
penalty. Moreover, in assessee appeal for assessment year 2003-04,
we also deleted the addition so made under section 68 vide Para 38
above. Since the addition which is basis for the levy of penalty was
allowed in favour of assessee, question of confirming the penalty on
that does not arise. To that extent Ground No.3 raised by the
Revenue is to be dismissed. Accordingly Revenue appeal is partly



                                  Page 24 of 25
                               ITA Nos 4162 3707 4931 and 6044 Jayantilal Khandwala & Sons-J Bench




allowed to the extent of Ground No.1 & 2 on two issues for which
AO is to consider the levy of penalty under section 271(1)(c) afresh
after deciding the matters restored to the file of AO as directed. The
appeal is partly allowed.

42.     In    the   result,   appeal     filed      by     the      Revenue          in     ITA
No.3707/Mum/2011 is dismissed, while the appeal filed by
assessee in ITA No.4931/Mum/2007 is allowed for statistical
purposes and the Revenue appeal in ITA No.6044/Mum/2008 is
partly allowed.

        Order pronounced in the open court on 6th June, 2012.



               Sd/-                                         Sd/-
           (S.S.Godara)                               (B. Ramakotaiah)
         Judicial Member                             Accountant Member


Mumbai, dated 6th June, 2012.

Vnodan/sps

Copy to:

   1.   The   Appellant
   2.   The   Respondent
   3.   The   concerned CIT(A)
   4.   The   concerned CIT
   5.   The   DR, "J" Bench, ITAT, Mumbai

                                   By Order


                           Assistant Registrar
                      Income Tax Appellate Tribunal,
                        Mumbai Benches, MUMBAI




                                      Page 25 of 25
 
 
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