Harshad Mehta Scam: AO Can't Assess Additions Again If Deleted By CIT(A) In First Round Of Proceedings; Bombay High Court

The Bombay High Court in the Harshad Mehta Scam case, while upholding the ITAT's ruling, held that the Assessing Officer could not have assessed additions again since the CIT (A) had deleted the same in the first round of proceedings and the concerned matters have attained finality.

The bench of Justice K. R. Shriram and Justice Dr. Neela Gokhale has observed that various types of additions aggregating to the amount were made by the Assessing Officer in the original assessment proceedings, and in the appeal filed by the assessee, the CIT(A) deleted these additions. The Revenue did not prefer an appeal challenging the order of the CIT (A), and hence, the same has attained finality.

The respondent/assessee, an individual, was carrying on business as a sole proprietor in the name and style of M/s B.C. Devidas. The assessee, who was a registered broker on the Bombay Stock Exchange, was also engaged in trading in securities and shares. In addition to the profit, the assessee also received salary and commission from CIFCO Limited and Food and Inns Limited, of which he was a director.

Following the allegation of involvement in a multicrore securities transaction scam in the nineties, infamously known as the Harshad Mehta Scam, the assessee got labeled as a notified party on July 2, 1992, under the Special Court's (TORTS) Act, 1992. The assessee was investigated by the Central Bureau of Investigation in June 1992, followed by the search and seizure action conducted by the Income Tax Department on October 16, 1992.

The assessment was originally completed after the search operations. Both the assessee and the revenue filed appeals before the ITAT. The ITAT restored the matters to the file of the Assessing Officer for denovo assessments with the directions that, before passing any order, the assessee shall be provided all materials on which reliance was being placed to make the additions. Consequently, the assessment order was passed under Section 143(3) read with Section 254 of the Income Tax Act 1961, in which certain additions to the income were made.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals). The CIT (A) partly allowed the appeal. To the extent an appeal was allowed by the CIT (A), the department preferred an appeal before the ITAT, and to the extent it was not allowed by the CIT (A), the assessee preferred an appeal before the ITAT. By the impugned order, which is a common order for the three assessment years mentioned earlier, one could say that ITAT partly allowed the contentions of the assessee. So far as the order under consideration is concerned, i.e., AY-1989-1990, the contentions of the assessee were accepted and aggrieved by the same, and the present appeal has been filed by the Revenue under Section 260A. The appeals filed by the department for Assessment Years 1987–1988 and 1988–1989 under Section 260A have been dismissed.

The first issue relates to the disallowance of interest expenses incurred for non-business purposes. The Assessing Officer has disallowed interest of Rs. 12,19,181/- paid to banks and others on the ground that the assessee diverted interest-bearing funds for giving interest-free advances. During Assessment Year 1988–1989, the Assessing Officer also disallowed a sum of Rs. 8,99,443/- on the same grounds. T

The ITAT came to a factual finding that the assessee had huge interest-free debts with him, and the assessing officer has failed to recognize the same. The ITAT came to a finding, with which we agree, that when interest-free funds and interest-bearing funds are mixed together, they lose their respective identities, and hence, the presumption should be that the assessee has used interest-free funds to give interest-free advances.

The ITAT in the order has given a table of the position of funds and concluded that even for Assessment Year 1989–1990, interest-free funds available with the assessee were sufficient to take care of interest-free advances made.

The court held that the ITAT was justified in coming to the conclusion that the interest expenditure claimed by the assessee was allowable.

The final issue is in the appeal filed by the department before the ITAT that relates to the deletion of various additions aggregating to Rs. 10,89,30,545/-. It is noted by the ITAT that various types of additions aggregating to this amount were made by the Assessing Officer in the original assessment proceedings, and in the appeal filed by the assessee, the CIT(A) deleted these additions.

The department did not prefer an appeal challenging the order of the CIT (A), and hence, the same has attained finality. The ITAT has noted only the assessee went in appeal before the ITAT challenged the additions confirmed by the CIT(A), and the ITAT has also restored those additions, which were confirmed by the CIT(A), to the file of the Assessing Officer for fresh examination.

“We would, therefore, agree with the ITAT that the Assessing Officer could not have assessed these various additions aggregating to Rs. 10,89,30,545/- again since the CIT(A) had deleted the same in the first round of proceedings and the concerned matters have attained finality. We would also agree with the ITAT that the CIT (A) in the second round of proceedings correctly held that the Assessing Officer was not legally entitled to make these additions again in the second round of proceedings. Therefore, on this issue, no substantial question of law arises,” the court said.

Counsel For Petitioner: P. C. Chhotaray

Counsel For Respondent: Dinkle Hariya

Case Title: CCIT(OSD)/Pr. Commissioner of Income Tax, Central Versus Bhupendra Champaklal Dalal

Case No.: Income Tax Appeal No.1491 Of 2019

Click Here To Read The Order