Canbank Financial Services Ltd vs Abhay D. Narottam And Ors

By this Miscellaneous Application, the applicants seek scaling down the demands of the Income Tax Department-respondent no.3 prior to payment of taxes from the attached assets of the respondent no.1 notified party Abhay D. Narottam. Respondent no.1 was notified on 8th June, 1992. However, he expired on or about 16th July, 2012. The widow of the original respondent no.1 Aarti Abhay Narottam had also expired. His sole surviving legal heir is respondent no.1(a) who has since been brought on record. The Custodian filed Report no. 03 dated 7th March, 2007 seeking directions from this Court for distribution of assets. The report discloses the income tax liability of the respondent no.1 prior to the statutory period to be Rs.146.16 crores and the wealth tax liability to be Rs.30.26 crores. The attached assets are stated to be worth Rs.5 crores. However, a sum of Rs.71.76 crores was receivable towards principal sum from M/s. Dhanraj Mills Pvt. Ltd. (DMPL) who is also a notified party. Section 11(2)(a) of the Special Courts Act provides for payment of liability of notified parties for the statutory period in priority, apropos towards the dues payable to banks or financial institutions under Section 11(2)(b). The applicants claimed to be entitled to a sum of Rs.374,35,18,354/- being the decretal amounts due from the notified party-original respondent no.1 under three decrees.

The applicants had filed three suits for recovery of diverse sums of money from respondent no.1 and four other parties. These are Special Court Suit nos.7 of 1994, 8 of 1994 and 10 of 1994. In Suit no.7 of 1994, the claim was a sum of Rs.212,75,00,000/- in relation to purchase of 16 crore units of Unit Trust of India of face value of 160 crores. In Suit no.8 of 1994, the claim was for Rs.25,81,20,354.78 in relation to purchase of government securities being Government of India 11.5% central loan 2008 of a face value of Rs.25 crores and in Suit no.10 of 1994, the claim was for a sum of Rs.255,43,98,000/- arising out of transaction for purchase of Unit Trust of India of a face value of Rs.190 crores. These amounts represent the principal sums which were paid over by bankers cheques obtained by the applicants in favour of Bank of Karad (BOK). The particulars of these cheques are as follows:-

Bankers Cheque No.

Date

Amount

907578

06/04/1991

Rs.25,81,20,354.78

77387

22/07/1991

Rs.212,75,00,000/-

77750

31/07/1991

Rs.255,43,98,000/-

It is the applicant's case that the proceeds of the said cheques were credited to the account of respondent no.1 maintained with BOK (now under liquidation) without any instructions or authorization of the applicants. According to original respondent no.1 these were not his transactions and he had issued instructions to BOK under the instructions of other notified parties such as Hiten Dalal. The transfer of funds into the account of original respondent no.1- Narottam was alleged to be a result of fraud and collusion between the officers of BOK and some brokers like Hiten P. Dalal. In the said Suits, Narottam who was defendant no.4 had filed his written statement in which he admitted that proceeds of the three aforesaid cheques had been received by him and credited to his overdraft account no.201 with BOK. He did not claim any entitlement to the amount. On 11th March, 2004, Narottam consented to decrees being passed against him in the three Suits.

On 27th June, 2008 further affidavit of one Mr.K. Vijendra Rao of the applicants came to be filed once again complaining that the Commissioner of Income Tax - Respondent no.3 had not produced material documents relied upon while passing the order of assessment in respect of additions made. It was contended that the Appellate Authority in respect of A.Y. 1992-93 had treated Rs.333,23,13,172/- as income on account of unaccounted investment in oversold securities. That no corresponding purchases were reflected in the securities on account of respondent no.1 and that the auditors appointed by the Court had reported oversold position as liability. It was contended that the Assessing Officer in his report to the Appellate Authority had rejected the Auditor's statement of oversold position as liability on account that respondent no.1 and the auditors had not established, by producing evidence, that securities were not held, acquired or delivered at any point of time. The Appellate Authority upheld the report of the Assessing Officer observing that oversold position does not actually represent any liability as delivery has been made through unaccounted sources.

In a further affidavit dated 29th August 2008 is filed by Mr.K.Vijendra Rao on behalf of the applicants, it is contended that many of the documents sought from the third respondents were not legible. The copy of the security ledger provided was not legible and it is not possible to verify or reconcile the sum of Rs.333,23,30,172/- which is stated to have been computed on comparison of oversold stock position as on 31st March, 1991 and that on 31st March, 1992 the security ledger for F.Y. 1990-91 has not disclosed relevant facts and, therefore, an adverse inference is to be drawn against the Income Tax department. It is contended that entire amount representing oversold position cannot be treated as income of the assessee. The assessment was conducted on the basis of the assumption that normally the entire consideration for goods/service is received only against immediate delivery or delivery in the near future date, therefore, the assessee "must have" acquired the securities from unaccounted sources. The element of uncertainty in this behalf must be noted. It is also contended that the assumption that the oversold securities had been delivered could never have been established since the applicants have filed three suits in the Special Court. The oversold securities which finds reference in the audited report includes UTI Units of face value of Rs.70 crores and 11 ½ % Government of India bonds collectively valued at Rs.274,437,725/-. The Auditor's report had clearly disclosed oversold securities on the liability side coupled with explanation that it related to those transactions where sales were made to other parties and consideration was received but no securities were delivered at least upto 31st March, 1992. The explanation given by Narottam is that his account had been misused by DMPL, Bhupen Dalal, J.P. Gandhi, T.B.Ruia and Hiten Dalal. The funds borrowed by DMPL, from LIC and Allahabad Bank were repaid by misusing funds from his account apparently by the sale of securities which were not delivered. Reference was made to the observations in the Assessment Order dated 28th March, 1994 inter alia recording statement of the said Narottam and concluding that the banking system had lost money (through Bank of Karad, which was in liquidation) to the said Narottam who does not appear to be the real beneficiary. That the said, Narottam had not accepted the liability as his own. Observations are to the effect that the complex transactions are series of structured deals carried out by a coterie of brokers resulting into someone losing money but the gainers and losers cannot be directly co-related.

There was complete absence of enquiry about the books of accounts of Bank of Karad and it was therefore contended the addition of Rs.219 crores in the order passed by the Assessing Officer when contrasted with addition of Rs.333.23 crores in the order passed by the CIT (A) established that the Appellate Authority had made additions on the basis of the report of the Assessing Officer which had selectively picked up the oversold position and was unsustainable. Furthermore, additions made towards commission aggregating to Rs.3.50 crores was erroneously computed and unsustainable since the said Narottam had revealed that the commission payable was between quarter to half paise to Rs.100/-. It is therefore contended that addition of Rs.333.23 crores on account of oversold position and Rs.3.50 crores on account of commission and Rs.3.91 crores and Rs.3.83 crores respectively by way of interest from Uday Palani were not justified.

In A.Y. 1993-94, the interest accrued on loans to Uday Palani during 1992-93 and 1993-94 are considered as income of respondent no.1, although no such interest has been received and therefore the amount needs to be scaled down. Similarly an amount of Rs.3.91 crores and Rs.3.83 crores said to be interest earned from DMPL also needs to be scaled down since these amounts were not received. It is further submitted that in Miscellaneous Petition No.51 of 1998, a decree has been passed in favour of Abhay Narottam in a sum of Rs.71.76 crores with interest at 19% per annum. That vide order dated 11th April, 2008 while distributing assets of DMPL a sum of Rs.71.76 crores was directed to be paid towards principal sum, however, interest accrued has not been paid. That tax demand of Rs.12,91,64,588/- being a total of the amount of Rs.3,83,09,437 and Rs.3,91,73,135/- .

As far as unexplained investment is concerned, it is contended that an amount of Rs.34,10,827/- which has not been reflected in the A.Y. 1990-91 has been considered unexplained income in A.Y 1993-94. The CIT (A) should have revised the assessment since this amount which was sought to be taxed during the non statutory period and cannot form subject matter of priority under section 11(2)(a) of the Special Court Act. Furthermore, the Wealth Tax assessment of the said Narottam for the year 1992-93 sets out the Assessment Order and a demand in a sum of Rs.30,26,14,091/- which is based on assumption of total wealth of the assessee at more than Rs.1543 crores. The reasons for scaling down referred to above clearly apply to Wealth Tax assessments as well. Surprisingly the amount of oversold securities which auditors considered to be liability and which are presumed to have been delivered in the Assessment Orders are treated as wealth. Clearly this was unacceptable. That the Assessment Order includes a sum of Rs.1298 crores as wealth for A.Y. 1991-92 but the relevant assessment year has not been provided. It is also the grievance of the applicant that despite repeated demands, copies of documents and materials relied upon while passing Assessment Order in respect of the respondent no.1 running into 14 items have not been furnished. Thereafter two documents were received. Further disclosure was then made, yet again, the security ledger for 1991-92 was not forthcoming. The applicant has annexed statement of summary of scaling down in respect of A.Y. 1992-93.

That the Janakiraman Committee Report records, after scrutinizing records of banks and of the said Narottam had found that he had issued BRs and SGLs without any backing of securities and there could not be any purchase entry in the securities account. The Assessing Officer had also observed in paragraph 8 the Assessment Order that in some cases forged bank BRs without any backing of securities have been exchanged in its transactions. That the auditors had correctly shown securities amounting to Rs.729,38,53,583/- as a liability. In Special Case No.7 of 1993, it had been proved that securities worth Rs.374.35 crores were not delivered to the applicant though consideration was paid to Bank of Karad. This became evident from the consent decrees passed. For these reasons, it is further contended that factual position as reflected in the Auditors' report has been ignored by the Assessing Officer and Appellate Authority and therefore tax demand was required to be scaled down. Although the Income Tax department had relied upon Janakiraman Committee Report and JPC Report on same aspect, they had rejected the findings on other aspects. Moreover, although interest is shown as accruing on loan to Uday Palani group, no such interest has been received and therefore the excess amount had to be scaled down.

In respect of A.Y. 1993-94 amount of Rs.12.91 crores was considered as income without actual receipt. Amounts which were not reflected in A.Y. 1990-91 have been considered as unexplained income in A.Y. 1993-94. The applicant was not challenging tax demand but this Court was entitled to consider the application for scaling down since the applicants have lost approximately Rs.350 crores due to siphoning off funds by respondent no.1. A substantial part of the attached funds are in the hands of the Custodian.

In an affidavit in reply filed on 12th June, 2008, Mr.Amol Kirtane, Deputy Commissioner of Income Tax contended that the copies of Assessment Orders of respondent no.1 and orders passed by the CIT (A) had been provided to the applicant which confirmed the Assessment Order and enhanced the income so assessed. At that stage respondent no.1 had filed an appeal before the Income Tax Appellate Tribunal ("ITAT"). The contention of the applicant was that all records were required to be disclosed, however, the Income Tax department was of the view that further documents need not be provided and the applicant had no locus. It was contended that the Income Tax department had completed the assessment within the frame work of law and a parallel enquiry could not be conducted. In a further affidavit of the same officer also dated 12th June, 2008 is seen to have been filed in which the respondent no.3 sought to highlight the principles laid down by the Supreme Court in Harshad S. Mehta and Custodian and Others 1998 (5) SCC 1. The deponent contended that demands against the respondent no.1 as on that date was Rs.5,84,614.42 and that there has been no miscarriage of justice, fraud or collusion. The decision of the Income Tax department, it was contended was based on proper materials and once assessment was based on a proper materials and it relates to the statutory period, there was no question of reducing tax assessment made by the Revenue. It was reiterated that there was no miscarriage of justice, fraud or collusion in the instant case.

Paragraph 10 the affidavit sets out that respondent no.1 had failed to file his return of income despite repeated reminders and hence the assessment was completed under section 144 of the Income Tax Act on the basis of "best judgment". The Assessing Officer had taken into account all relevant material after hearing respondent no.1. Respondent no.1 had filed an appeal before the CIT (A) and during hearing of the appeal respondent no.1 had informed CIT(A) that the Special Court had vide order dated 4th December, 1996 ordered respondent no.1 to get accounts for the financial year 1990-91, 1991-92 and 1992-93 audited by a qualified auditor and the CIT (A) had set aside the order of the Assessing Officer asking him to re-frame the Assessment Order denovo. The deponent further states that there was no further material on record and accordingly the Assessment Order originally passed was reiterated but an addition of Rs.12,91,64,588/- was made on account of interest receivable from M/s. Dhanraj Mills Pvt. Ltd. This addition was made on the basis of similar addition made during the assessment proceedings for A.Y. 1993-94. During the appellate proceedings, the audit report was submitted and the CIT (A) remanded the matter to the Assessing Officer directing the Auditor's report to be considered. Accordingly, the Assessing Officer had made a Remand Report concluding that they were considering unaccounted investment in oversold securities reworked at Rs.3,33,23,30,172/- as against Rs.219 crores worked out earlier. Hence the proposal for enhancement of Rs.114,23,30,172/- was placed before the CIT (A) who upheld the additions thereby enhancing the income.

An amount of Rs.71,75,810/- was added on account of interest receivable from M/s. Dhanraj Mills Pvt. Ltd. which was computed at 18% as against 19%. Thus, the taxable income of Shri Narottam for A.Y. 1992-93 was ascertained as Rs.356,05,74,532/-. Additions were also made in respect of interest from Mr.Uday Palani. The additions are as under :

Sr.No.

Particulars

Amount Rs.

1

Interest from Uday Palani group

3,91,73,135/-

2

Income from share transactions

1,08,55,000/-

3

Commission on securities transactions

3,50,00,000/-

4

Interest on loans, fixed deposits, capital bonds, PDO account

7,70,305/-

5

Dividend

1,02,831/-

6

Interest receivable from Dhanraj Mills Pvt. Ltd.

13,63,40,398/-

7

Unaccounted investment in the oversold securities

333,23,30,172/-

The deponent has sought to justify these amounts by contending that even though the assessment is based on best judgment, it is framed on the basis of all relevant material and after giving an opportunity to the assessee of being heard. No specific addition is made on account of three cheques referred to by the applicant. For the year 1993-94 also the very same reasons are reiterated and the additions made are as follows :

Sr.No.

Particulars

Amount

1

Interest from Uday Palani group

3,83,09,437/-

2

Income from share market activity

18,00,000/-

3

Commission on security transactions

12,98,550/-

4

Unexplained investment in seized assets

3,71,700/-

5

Unexplained credit in seized books

7,78,14,935/-

6

Interest accrued from Dhanraj Mills Pvt. Ltd.

13,63,40,398/-

7

Unaccounted investment in shares seized by the CBI

34,10,847/-

8

Undisclosed investment in shares lying with stock exchange

16,73,889/-

These additions made are on identical basis except for addition of undisclosed amount of Rs.34,10,827/- said to have been made pursuant to a search by CBI which resulted in disclosure of share certificates of that face value. Vide order dated 5th December, 2006 the CIT (A) passed a common order in respect A.Y.1992-93 and 1993-94 assessing income at Rs.228,19,06,960/- and Rs.253,867,840/- respectively. Penalty/fine and interest were assessed at Rs.723,01,78,091/- and Rs.55,08,09,881/-respectively. The order of CIT (A) relies upon the report of the Assessing Officer for the two years in question and considers what was in opinion of the Authorities unusual transactions oversold position of stock. It deals with common grounds for A.Y 1992-93 and 1993-94. Ground-A to Ground-F urged in those orders are dealt with and eventually it holds that the CIT (A) was in agreement with the Assessing Officer and undisclosed investment in respect of oversold securities for A.Y 1992-93 was enhanced by Rs.114,23,30,1722/-. There was no enhancement for A.Y. 1993-94. A small reduction was also recorded for the year 1993-94 on account of oversold securities, save and except for enhancement as aforesaid, the appeal came to be dismissed and the order giving effect to the CIT(A) aforesaid decision was then issued on 13th February, 2007. Pursuant to revision and adding of some interest on the principal amounts said to be due from (DMPL) was computed at Rs.71,75,810/- leading to total of Rs.356,05,74,532/-. Similarly, for the A.Y. 1993-94, the Assessment Order was passed on 27th March, 1996 assessing total income at Rs.25,38,67,841/-. Subsequent order under section 144 read with section 250 of the Act was passed on 19th March, 2002 and a demand notice was issued in sum of Rs.55,08,09,881/-inclusive of interest under section 234A, 234B and 234C.

An additional affidavit of Mr.Amol Kirtane dated 11th September, 2008 has been filed in which it is contended that merits of assessment cannot be gone into under section 69 of the Income Tax Act and the value of investment made by assessee in financial year immediately preceding the assessment year is deemed to be income for such financial year. If the investments are not recorded in the books and the assessee offers no explanation, the deeming provisions of sections 69, 69A, 69B and 69C and judicial decisions establish that these sections are only clarificatory and, therefore, addition can be made towards income from undisclosed sources.

Submissions of Counsel

Mr. Sancheti, the learned Senior Counsel appearing on behalf of the applicants submitted that assets of the notified party as per the report submitted by the Custodian is approximately Rs.77.78 crores whereas the claim of the Income Tax Department for the statutory period is said to be about Rs.211.08 crores. This computation is based on income assessed for the year 1992-93 and assessment for the year 1993-94 at Rs.26.10 crores. Wealth tax dues are also claimed in the sum of Rs.30.26 crores. Mr. Sancheti submitted that the demands of the Income Tax Department are disproportionate to the assets. Moreover, if the wealth tax demand is Rs.30.26 crores the assets of Narottam amounted to Rs.1513 crores. He submitted that the assets position is not faithful to the real asset-liability position. In three suits, the decrees are for principal sums which are as follows :-

In Suit no.7 of 1994 - Rs. 93,10,00,000/-

In Suit no.8 of 1994 - Rs. 25,81,20,354/-

In Suit no.10 of 1994 - Rs. 255,43,98,000/-

----------------------

Total - Rs.374,35,80,354/-

As far as the various demands of the tax authorities are concerned, Mr. Sancheti submitted that in respect of A.Y. 1992-93 the Assessment Order came to be passed on 30th March, 1995. However, the Commissioner of Income Tax (Appeals)[ "CIT(A]" set aside the order by his order dated 24th February, 2000. The Assessment Order dated 19th March, 2002 assessed the income at Rs.241.10 crores. On 5th December, 2006, the CIT(A) passed an order assessing income at Rs.356.05 crores. The increase was to the extent of 114 crores on account of oversold securities. For the year 1992-93, it is contended that the demands of the tax department are required to be scaled down.

On the aspect of scaling down, Mr. Sancheti submitted that the provisions made for unaccounted investment in oversold securities has resulted in addition of Rs.333.23 crores. It is arrived at by adding Rs. 219 crores and a further sum of Rs.114 crores enhanced by the CIT (A). Against this, the commission sought Rs.3.50 crores and interest receivable from Dhanraj Mills Pvt. Ltd.(DMPL) and one Uday Palani were shown at Rs.12.91 crores and Rs.3.91 crores respectively. In respect of the A.Y. 1993-94 the Assessment Order dated 27th March, 1996 was set aside by the CIT (A). The Assessment Order dated 19th March, 2002 assessed income at Rs.25.38 crores. Yet another order passed by the CIT (A) on 5th December, 2006 assessed income at Rs.26.10 crores (an increase of about Rs.71.75 lakhs) in A.Y. 1993-94, as demands had arisen on account of additions which required scaling down.

In this respect, interest receivable from DMPL was Rs.13.63 crores and interest receivable from Uday Palani was Rs.3.83 crores. Mr. Sancheti submitted that the additions made were only on account of oversold securities where under the Income Tax Department claimed a sum of Rs.211 crores as tax and also claimed on interest receivable which the Custodian had not yet received. Mr. Sancheti submitted that the additions made to the income on account of oversold securities can also be subject matter of scaling down. In this respect, he referred to the orders of the Special Court dated 29th September, 2007 passed in the Custodian Report no.15 of 2006 along with Miscellaneous Application no. 210 of 2003 seeking distribution of assets. The State Bank of India and Standard Chartered Bank held decrees passed by the Special Court against late Harshad S. Mehta who had filed Miscellaneous Applications pursuant to orders of the Supreme Court in Harshad S. Mehta v/ s. Custodian and others [1998 (5) SCC 1] and in which the Supreme Court noted that under Section 11(2)(a) only the tax liability of the notified party for the statutory period can be paid. Considering the asset and liability position, after payment of the tax dues in full, banks and financial institutions who are entitled to payment of their dues under Section 11(2)(b) may not be able to get any amounts. The Supreme Court held that the Special Court was empowered to examine whether there is any fraud, collusion or miscarriage of justice in assessment proceedings and being so satisfied could scale down the tax liability to be paid by the Custodian under Section 11(2)(a).

It is submitted by Mr. Sancheti that in the instant case the tax demand could be scaled down. It is further submitted that in the instant case, as in the case of Harshad S. Mehta (supra) there is a large disparity in the assets liability status and the demands of the income tax authorities are disproportionate to the assets. Mr. Sancheti therefore submitted that in the present case there was sufficient ground for scaling down the demands particularly in relation to additions made on account of oversold securities and tax demanded on interest receivable by the Custodian in the account of the notified parties but which amount had not been received. He submitted that the payments due if any made to the income tax authorities in respect of these demands would in any case be subject matter of scaling down and payments released in favour of the income tax department were subject to an undertaking to bring back such amounts.

In the course of submissions, Mr. Sancheti invited my attention to the position as regards oversold securities and submitted without prejudice to each of his submissions that in the case of oversold securities, if it is believed or presumed that securities had been delivered, only the difference between the sale price and purchase price could be taxed. It is not entire sale proceeds that could be taxed. He relied upon an order dated 29th September, 2007, passed in Special Court Custodian Report no.15 of 2006 relating to Harshad Mehta's case. He submitted that if there is no delivery of securities there could be no profit since it continues to be a liability. Mr. Sancheti relies upon the report of the auditor appointed by this Court apropos the unaccounted investments taken into consideration. He submitted that no such investment was found in the books of account or document or in the hands of the Custodian nor was any such investment noticed by the auditor. For the A.Y. 1991-92 it was pleaded that oversold securities amounted to Rs.1042/-crores was treated as income on account of unaccounted investment and that if such investments are available in the earlier assessment year, Mr. Narottam could have delivered the securities by using these investments and hence it should not have been a case of unaccounted investment in the relevant A.Y. 1992-93. Mr. Sancheti submitted that funds of the applicants amounting to Rs.374 crores were received by Mr. Narottam during July-September 1991 and this aspect has not been disputed. Thus the basic transaction leading to the filing of the suits is not in dispute inasmuch as the encashment of the bankers cheques in the account of the said Narottam with the BOK is not in dispute. It is also not in dispute that the funds received from the applicants by Narottam had not been returned or repaid and these funds were available with Narottam to acquire and deliver securities in relation to the so called oversold securities and that these funds collected by Narottam could not be said to be unexplained since these were received by him in his bank account by encashing the bankers cheques issued by the Applicants.

On behalf of the applicants, it was submitted that the assets of the notified party with the Custodian amounts to about Rs.77.78 crores whereas the dues of the Income Tax department for the statutory period are about Rs.211.08 crores. The income for accounting year 1992-93 is assessed at Rs.365.05 crores and for accounting year 1993-94 the income is assessed at Rs.26.10 crores. In addition there is a Wealth Tax demand of Rs.30.26 crores. The Income Tax demands are therefore said to be disproportionate to the assets of the notified party and the Wealth Tax demand is assessed on the basis of wealth computed at Rs.1513 crores. Mr. Sancheti therefore submitted that there is a mismatch between the tax demands and the assets. He further submitted that under three decrees in Suit Nos.7/1994, 8/1994 and 10/1994 a cumulative amount of Rs.324,35,18,354/- is due, for A.Y.1992-93 the income assessed has been increased by Rs.114 crores and enhancement is on account of oversold securities.

Amongst grounds which Mr.Sancheti canvassed in support of his application for scaling down is that additions on account of oversold securities were largely on account of statutory dues claimed by the Income Tax department and interest receivable which amount were not received as evident from the Custodian Report. In support of his contention Mr.Sancheti relied upon the decision of the Special Court dated 29th September, 2007 in Report of Custodian No.15 of 2000 in Miscellaneous Application No.210 of 2003 with Miscellaneous Application No.51 of 2006 and the decision of the Supreme Court in Deputy Commissioner of Income Tax vs. State Bank of India and Others (2009) 2 SCC 451. He submitted that the order of the Special Court dated 11th April, 2008 in Report No.3 of 2007 is evidence of the fact that the amount released in favour of the Income Tax department would be subject to scaling down and the department giving an undertaking to bring back the amount. He therefore submitted that the application for scaling down should be considered in that light with particular reference to position of the oversold securities.

Mr.Sancheti in the alternative submitted that even if it is presumed that the securities were delivered, only the difference between sale and purchase price was liable to be taxed. The entire amount could not have been taxed in any year. He further submitted that this is borne out by the order of the Special Court in the order under Custodian Report No.15 of 2006 and in case of SBI(supra). Furthermore, since no delivery had been effected, there could have been no profit and, therefore, it would continue to be a liability. In this respect reliance was placed on the report of the auditor filed in the matter, the contention being that since amount is unaccounted investment and is basis of the Income Tax Assessment Orders, no such investment is found in the books of account nor its investment available with the Custodian. Even the Chartered Accountant has not found that such amount is invested.

Mr.Sancheti contended that in the appellate order dated 5th December, 2006 referred to above the amount of Rs.1042 crores was found in the assessment year immediately preceding the statutory period and that was treated as income on account of investment. If that be so, Mr.Sancheti submitted that said Narottam could deliver the securities using these investments and it would be assessed as unaccounted investment for the relevant assessment year. In the meantime, the applicant's funds amounting to Rs.374 crores was received by said Narottam from July to September 1991. This fact is not in dispute nor is it disputed that these amounts are not repaid. The liability of the applicant, therefore, continues to that extent since funds were available with said Narottam, he could have acquired and delivered securities. In relation to the said oversold securities transactions it was contended that funds were available with said Narottam and it could not be case for unexplained/unaccounted investment in relation to securities purchased and delivered during A.Y. 1992-93. He submitted that the Income Tax department had considered the Auditor's report as unreliable at the same time made selective use of the report to make addition for deemed income. This clearly resulted in miscarriage of justice, results being mismatch between assets and prior tax demands.

It was further submitted that the Assessment Order and the Remand Report admits that the additions are based on presumptions since proper accounts were not available and in absence of proper explanations from the assessee including statements made by him before the Income Tax department, and which were corroborated by the findings. The explanation has been ignored whereas in case of DMPL assessment, the Income Tax department had relied upon these very explanations of the assessee. Furthermore, particulars provided in the affidavit dated 11th September, 2008 of Dr.Kirtane in paragraph 4.5 were largely inaccurate when compared to the security ledger of Mr.Abhay Narottam. In that respect Mr.Sancheti relied upon the explanation provided in paragraph 5 of the affidavit dated 26th September, 2008 to the effect that oversold position is arrived at on the basis of opening position of the securities in the books of respondent no.2 in the year ended 1991 and 1992 as reported by the Assessing Officer dated 28th December, 2006. The department had not disclosed the record on the basis of which opening position was extracted in order to formulate the position of oversold securities.

Mr.Sancheti relied upon the analysis of table of 'oversold position' and incorporated in paragraph 4.5 of the said affidavit to explain how the securities ledger did not disclose the oversold position in case of 16 entries and how in the case of two entries the conclusions that there was over selling were incorrect. In three cases the figures did not match. Thus, to the extent of Rs.11,94,12,113/- there was either no over selling or the figures were not matching. Moreover, the securities ledger did not reveal entries in support of a value of Rs.176,96,74,652/-. He therefore submitted that the increase in the oversold position as projected by the Income Tax department cannot be sustained. In effect, it is submitted that in respect of interest addition on account of the Uday Palani group, no amount can be payable. Likewise in the case of unexplained credits in the books of account, and interest accrued on account of DMPL no amount is payable to the Income Tax department. The scaling down on these three counts was canvassed.

It was also contended that as against Rs.12,98,550/- claimed by the Income Tax department as commission on securities, only Rs.12,985/- will be found due upon scaling down. The bulk of amounts namely, Rs.383,09,437/- being interest from Uday Palani group, Rs.7,78,14,935/-on account of unexplained credits and Rs.13,63,40,398/- being interest from DMPL were required to be deleted and upon such scaling down the total income would be Rs.72,69,421/-. Income Tax at 40% would amount to Rs.29,07,768.40 and surcharge of Rs.3,48,932.20 in respect of tax demand for the priority period and for A.Y. 1992-93 the Income Tax would be Rs.60,39,068/- and surcharge Rs.7,24,688.16 thereby collectively amount to Rs.67,63,756.16. For the period 1993-94 the total tax including surcharge as above would be Rs.32,56,700.60 He contended that the tax rate applicable for the A.Y. 1992-93 was 50% and for the A.Y. 1993-94 was 40% with 12% surcharge. The total claim of the Income Tax department would therefore not exceed Rs.100,20,456.76.

Mr. Sancheti drew my attention to the observation of the Supreme Court in paragraph 44 of the SBI (supra) which lays emphasis on the fact that the transaction should be complete and in the present case he submitted that the transaction is not complete. The Auditor's report upon which reliance is placed also by the Income Tax department reveals that the amount is shown as a liability. SBI (supra) clearly holds that on account of oversold securities, if delivery has been given, the transaction was complete and then only the difference between payable and receivable will be taken into account and not the gross amount.

Mr. Sancheti submitted the point that in the present case, the gross amount was taken into consideration for purporting income that could not be permitted. He further submitted that there was no delivery in the instant case and no income was generated. According to Mr. Sancheti assuming there was additional income there would be decrease in the oversold securities that in the assessment year previous to the relevant assessment year Rs.1042 crores were available had stood reduced to Rs.719 crores. That the so called increase in oversold securities is a misnomer and actually it is a decrease.

Referring to the observations in the Appellate order Mr. Sancheti submitted that the appeal was filed against the re-assessment Order. The original order of assessment was dated 30th March, 1995. The assessing officer had made an addition of Rs.219 crores as unexplained income on account of oversold securities. Additions made in the A.Y. 1993-94 were set aside by the CIT(A). Assessment was to be carried out afresh after considering the audit report of the Auditors appointed by the Special Court. In the re-assessment proceeding the Assessing Officer retained the addition of Rs.219 crores and in appeal the assessee had not challenged this addition and that which has led to a presumption that the appellant accepts that in respect of oversold securities delivery had been made by buying these securities. It was also found that in the immediately preceding assessment year an addition of Rs.1042 crores had been upheld. The appellate order went on to hold that in the facts and circumstances of the case oversold position does not represent any liability as delivery had been made through unaccounted sources. There is absolutely no justification in having such a finding if there is no delivery at all.

Elsewhere in the Appellate order in the concluding portion reference was made by the CIT(A) to the Remand Report dated 29th November, 2006 it recorded that there was an increase in liability on account of oversold security from 31st March, 1991 to 31st March, 1992. He further submitted that the list annexed to the Remand Report is a selective list. That list does not reflect correct position. A reference to the list reveals that all securities are not taken into account. On the other hand in paragraph 45 of the Appellate order reliance is placed on the Remand Report which was admittedly based on the audit report prepared by the said Auditor. Although the audit report shows the aforesaid amount as a liability, the department does not treat it as one. He then submitted that admittedly the sum of Rs.1042 crores was shown as being available in the year previous to the assessment year. This amount would obviously have been utilised for the purpose of acquiring stocks. This aspect has been ignored while at the same time there was a reduction from Rs. 719,38,53,583/- as of 31st March 1992 and Rs.719,29,91,843/- as of 31st March, 1993. The reduction is obvious and therefore the concept of increase misconceived.

Mr. Sancheti pointed out that there were no new transactions and even the Remand Report observed that the securities have the same opening and closing balances except for one item where there has been a reduction. Thus it was contended there were no proper materials on which assessment could be made. Dealing with the contention on behalf of the department that the assessment was not a best judgment assessment, Mr. Sancheti contended that the deponent of the affidavit had repeatedly observed that the assessment was a best judgment assessment. He invited my attention to paragraph 10 of the affidavit dated 12th June, 2008 of Dr. Kirtane wherein the assessing officer admits of the best judgment assessment in the following words :

"Shri A. D. Narottam had failed to file the return of income in spite of repeated reminders for filing the same. Hence the assessment was first completed u/s. 144 of the Income Tax Act vide order dated 30/3/1995. It may be mentioned here that the assessing officer has been vested with power and authority to make an assessment to the best of his judgment under section 144 of the Income Tax Act., when an assessee commits any one of the defaults mentioned therein. The section enjoins that on any or more of these defaults happening the assessing officer after taking into account all the relevant material, which he might have gathered, shall, after giving the assessee an opportunity of being heard, make best judgment assessment. In this case too, the assessing officer, while framing the best judgment assessment, has kept the above legal provisions and judicial pronouncement on the subject as the guiding factor."

In the concluding portion, after dealing with the gist of the additions bulk of it being a sum of Rs.333 crores deponent states as follows ;

"The copy of the Assessment Orders dt. 30/3/1995, 19/3/2002, the order of CIT(A) dt. 5/12/2006 and the order giving effect to the order of CIT(A) dt 13/2/2007 is enclosed as Exhibits 'A', 'B', 'C' and 'D' respectively. It can be seen from these orders that the additions are made on the basis of facts on record and have stood the test of first appeal. It can be further seen that Audit report as ordered by the Honorable Special Court has also been considered during the remand proceedings. Thus even though the assessment is on best judgment basis, it has been framed after considering all the relevant material on record and after giving due opportunity to the assessee. It is also clearly seen that no specific addition has been made on account of three cheques mentioned by the applicant. The amount of the said cheques also does not match with any of the additions made."

Mr. Sancheti submitted that under the three decrees roughly Rs. 373 crores are recoverable from the assessee who had received cheque payments, the money has been utilised and is not available in the bank, books of account did not show any money as due, but the decrees are evidence of the fact that the monies are repayable to the plaintiff and therefore nexus is clearly established. Mr. Sancheti submitted that perusal of the Custodian report would show that no other bank claims monies from the assessee.

In support of his contentions Mr. Sancheti relied upon the following judgments :

(i) Harshad Shantilal Mehta vs. Custodian & Ors [(1998) 5 SCC 1].

(ii) Order dated 29th September, 2007 passed in SPCR/15/2006 a/w. SPMA/210/2003 a/w. SPMA/51/2006 a/w. SPMA/250/2003 a/w. SPMA/365/2003.

(iii) Order dated 11th April, 2008 in SPCR/3/2007.

(iv) Deputy Commissioner of Income Tax vs. State Bank of India and Ors. [(2009) 2 SCC 451).

(v) Rasila S. Mehta and Ors. vs. Custodian [(2011) 6 SCC 220].

(vi) State of Orissa vs. Maharaja Shri B. P. Singh Deo [AIR 1970 SC 670

On behalf of the Income Tax department Mr.Chatterji, learned Senior Counsel submitted that no case has been made out for scaling down. According to him the ratio laid down by the Supreme Court in HSM (supra) does not contemplate scaling down after an Appellate Order is passed. He also made reference to paragraph 25 to 36 of the said judgment wherein the Supreme Court had laid down the law on scaling down to the effect that if assessment is based on proper materials, disbursement must be made in full. The Supreme Court did not accept the bank's contention that the object of the Act is to pay Banks. The judgment according to Mr. Chatterji only refers to an Assessment Order and not the appellate order and, therefore, it was not necessary to scale down the amounts payable to the Income Tax department. He further submitted that the condition for scaling down, namely, fraud, collusion and miscarriage of justice has not been met because the transactions in oversold securities were required to be completed. He submitted that the applicant has not established that the transactions were complete and therefore, there would be no miscarriage of justice. In this behalf he referred to paragraph 44 of the judgment of the Supreme Court in DCIT vs. SBI (supra).

Mr.Chatterji further submitted that when the Assessment Order was carried in appeal, the Assessee had personally appeared before the CIT (A) and the assessment was completed on "best judgment" basis as contemplated in the decision of the Supreme Court in CIT vs. Amritlal Bhogilal & Co [AIR 1958 SC 868] and J.K. Synthetics Ltd. vs. Additional CIT [105 ITR 344 Allahabad.] Mr.Chatterji further submitted that unaccounted investment in oversold securities of Rs.219 crores on which tax would be around Rs.109.50 crores at the rate of 50% was accepted by the assessee in the appeal. In this behalf he invited my attention to the observations in the appellate order which reads as follows :

"The assessee must have acquired the said securities, which have admittedly sold, from unaccounted sources. It may be noted here that in the original assessment order the assessing officer made an addition of Rs.219 crores in respect of unaccounted investment in securities, which has been included in the assessed income in the reassessment order appealed against. However, in his grounds of appeal, the assessee has not disputed the said addition. In other words, the assessee has accepted that there was unaccounted investment in oversold securities. It may also be mentioned there that in earlier assessment year also addition has been made for unaccounted investment in oversold securities which has been sustained in first appeal."

It was further submitted that tax demand of Rs.109.50 crores for the A.Y. 1992-93 cannot be scaled down when only Rs.77 crores had been paid towards tax dues. That total liability for the A.Y. 1992-93 and 1993-94 is Rs.211.80 crores as seen from Report No.3 of 2007 filed by the Custodian. Mr.Chatterji then submitted that when only one fourth of the tax demand has been disbursed, the Special Court cannot carry out scaling down. In this behalf reliance was placed on the observations of the Supreme Court in paragraph 36 of the Harshad Mehta vs. Custodian (supra). He submitted that as per Assessment Order for the A.Y. 1992-93 total tax dues was Rs.199.38 crores and for the A.Y. 1993-94 total tax dues were Rs.11.69 crores. He submitted that the Assessing Officer is not bound to accept books of account and method of accounting by the assessee and since audit report was based on books of account prepared by the assessee, the Assessing Officer would not be bound by it. In this behalf he placed reliance upon the judgment of the Supreme Court in the CIT vs. MacMillan & Co. with specific reference to scaling down in the matter of unsold securities. Mr.Chatterji submitted that the Supreme Court in DCIT vs. SBI (supra) in paragraph 44 had specified how this aspect has to be looked at. The Court had made it clear that the difference between buying price and selling price should be added to income only if transaction is complete.

The applicant has not been able to show to the Court that purchase of oversold securities were made from its accounted money. In fact, according to them the applicant has not been able to show how the said Narottam could get hold of these shares. The CIT (A) in his order has accepted the Assessing Officer's report that full consideration is received only when delivery is made and therefore, in the case of oversold securities since consideration has been received, delivery must have been made In this behalf Mr.Chatterji submits that no suit has been filed claiming non-delivery of oversold securities and the assessee must have acquired securities from unaccounted sources and had sold the securities. It is contended that the applicant has not been able to prove these sources or legitimate purchase of these oversold securities.

Mr.Chatterji further submitted that the applicant could not show that transactions in unsold securities were complete. Unaccounted investment in securities were sought to be focused upon. My attention was invited to the observations in the appellate order of the CIT (A) dated 5th December, 2006 under the caption of enhancement of income wherein Mr.Chatterji invited my attention to the observations that enhancement of the income has been proposed on account of liability shown in the balance sheet on account of oversold securities that for the A.Y. 1992-93, the final report of the Assessing Officer dated 29th November, 2006 had made following observations :

"The Auditor was asked as to how such transactions have been taken in the Balance Sheet as liabilities. The Auditor has orally stated that such securities were not acquired or delivered by the assessee and only entries for bankbook and liability have been passed. It may be noted that the assessee has not established by producing any evidence that securities were not held/acquired and delivered at any point of time. The auditor has also not given any categorical remark in this regard. Normally, full consideration of any goods/services is received only against delivery immediate or in a near future date. Thus, the assessee's statement that the said securities (against which consideration has been received) were never delivered can not be accepted at face value. The assessee must have acquired the said securities, which have admittedly sold, from unaccounted sources. It may be noted here that in the original assessment order the assessing officer made an addition of Rs.219 crores in respect of unaccounted investment in securities, which has been included in the assessed income in the reassessment order appealed against. However, in his grounds of appeal, the assessee has not disputed the said addition. In other words, the assessee has accepted that there was unaccounted investment in oversold securities. It may also be mentioned there that in earlier assessment year also addition has been made for unaccounted investment in oversold securities which has been sustained in first appeal."

According to Mr. Chatterji the assessee has accepted the fact that there were unaccounted investments in oversold securities and the basic premise for arriving at this conclusion is the presumption that the assessee must have acquired securities which have been sold. Mr.Chatterji further submitted that under the Income Tax Act, accrued interest is always added to the income and, therefore, interest from Uday Palani group and DMPL were required to be added as income. In support of his contention, he relied upon ground no.(c) in the aforesaid appellate order which he submitted justifies addition of interest. While dealing with ground (c) in respect of A.Y. 1992-93 and 1993-94 the appellate order observed that said Narottam had advanced substantial amounts to the Palani group and during the search, amongst papers seized from premises of said Narottam, was a sheet showing calculations on accrual basis on such advance. It was contended by Mr.Narottam before the Assessing Officer that he was maintaining accounts on cash basis and interest on accrual basis cannot be taxed. This submission was rejected by the Assessing Officer on the ground that said Narottam was not maintaining regular books of accounts and therefore there was no consistent method of accounting. He further concluded that papers seized from the premises showed that he is calculating interest on accrual basis.

Mr. Chatterji then submitted that in respect of interest receivable from DMPL, the additions made was on the basis that Narottam has advanced a sum of Rs.71,85,81,040/- to DMPL and filed a petition before the Special Court for recovering of that amount for recovery at 18% per annum. The Special Court allowed the petition and decreed payment of interest at 19% per annum. In view of this order, accrual of interest cannot be doubted and the Assessing Officer has taxed accrued interest at 18% though the Court had awarded interest at 19%. In this behalf Mr.Chatterji relied upon decision of the Supreme Court in CIT vs. Shivaprakash Janakraj & Co. Pvt. Ltd. [222 ITR 583] which dealt with aspect of "real income". Mr.Chatterji further submitted that the Assessing Officer has correctly added brokerage of Rs.3.50 crores at 0.5 paise to Rs.100/- as has been discussed by the Assessing Officer and CIT (A) in first two paragraphs.

Mr. Chatterji relied upon a statement which sets out only the increase and submitted that it was only in case of four of the securities that there was an increase. Thus according to Mr. Chatterji, apart from these four securities there is no increase in the oversold position and the value of these four securities amounted to Rs.333,23,30,172/-. Mr. Chatterji contended that the Assessing Officer had in his Remand Report clarified that he had only considered securities which were found in the closing of balances as on 31st March, 1992 after adjusting opening balance as on 31st March, 1991. Therefore according to him, the contention of the applicant in paragraph 4 of his submission that oversold securities of Rs.1042 crores be treated as income on unaccounted investment in the previous year and given the fact that these investments were available in the account statement of the following year, Abhay Narottam could have delivered securities by way of investment, hence it was contended that there was no case of unaccounted investments for the relevant year. Mr. Chatterji submitted that the Assessing Officer had relied upon the very balance sheet prepared by the Special Auditor. He submitted that in taxing jurisprudence each year is separate year and principles of res judicata do not apply. According to Mr.Chatterji the applicants have not been able to demonstrate any nexus between the decretal amount and Assessment Order which was required to be shown as contemplated in the judgment of the Supreme Court in DCIT vs. SBI (supra) that since the applicant had sought scaling down and not for tracing of the accounts, this Court could not go into question whether the money belonged to someone else.

Mr Chatterji had stressed upon the fact that by virtue of section 69 of the Income Tax Act where in a financial year preceding assessment year an assessee had made an investment which was not recorded in the books of accounts, if any maintained by them and assessee offered no explanation of the nature and source of investment or if such an explanation is not satisfactory, the value of investment would be deemed to be income of the assessee for the financial year. Mr. Chatterji submitted that the assessee had appeared before the department but had not offered any explanation. The Assessing Officer had therefore proceeded to make additions by speaking orders in accordance with deeming provisions of section 69 to 69D and the onus was upon assessee to establish the source of funds. It was contended that introduction of the deeming provisions was to be considered in case of such eventuality and therefore this aspect must be borne in mind while determining whether or not scaling down was justified.

44 Mr Chatterji had also stressed upon the fact that there was no nexus between the three suits in which the applicant had obtained decrees and the amount ought to be treated as income. These suits were in relation to securities of the UTI and 11 Government of India bonds and were not included in the table contemplated in paragraph 4.5 of the appellate order and that included in the annexure to the Remand Report. It was therefore sought to be contended that the securities on the basis of which addition of income has been made were different from the income on the securities when the suit was filed and therefore there was no nexus. Interesting though this argument may be, it must be borne in mind that the suits for recovery of money and decrees on admission have been passed in the suits against the assessee Abhay Narottam. It is money that is subject matter of the suits and of scaling down. It is not the securities by themselves.

Mr. Chatterji stressed upon the submission that once Appellate Order is been passed that demand cannot be subject to scaling down, since according to him order was passed after the appellant appeared and therefore the order was no longer a best judgment assessment. Mr. Chatterji however had contended that since the monies had been paid out by the applicant but were not reflected in the list, the applicant could have filed a suit for tracing. It was reiterated that copies of the Assessment Orders had already been provided and there was no justification in seeking the entire record of the Income Tax department of the said Narottam, copies of the Assessment Orders dated 30th March, 1995 for the A.Y. 1992-93 the Assessment Order dated 31st March, 1992 under section 144 read with section 250 of the Act are annexed, the Assessment Order dated 5th December, 2006 for the A.Y. 1992-93 and 1993-94 was also annexed in support of the contention that there was no occasion for scaling down the order giving effect in respect of A.Y. 1992-93. Similarly, in case of A.Y. 1993-94 the Assessment Order dated 27th March, 1996 and the Assessment Order dated 19th March, 2002 under section 144 read with 250 of the Act are annexed.

Mr. Chatterji then submitted that every assessment year being separate, the amount of Rs.1042 crores was added to the income of the assessee for the A.Y. 1991-92 after considering the books of account of F.Y.1990-91. This would not prevent the Assessing Officer from making additions for A.Y.1992-93, if he finds an oversold position in the books of A.Y 1992-93 i.e. financial year 1991-92. He contended that since no oversold position was found in A.Y. 1993-94 no additions had been made. This he submitted was sufficient proof of the fact that the Assessing Officer had made a conscious effort not to duplicate income and this was done after scrutinising balance sheet prepared by the special Auditor appointed by the Court and after discussions with him. The contention of the appellant that income had been duplicated is not substantiated by documents and is only surmise. The securities in relation to income so added were based on those mentioned in order of the CIT (A). The order of the CIT (A) who is the Appellate Authority confirms that such additions based on cogent reasons and documents and not assumptions. The list of securities was also considered. He reiterated that the assessee had accepted that there was unaccounted investment in oversold securities.

Mr. Chatterji denied that the contentions of the revenue were an after thought as sought to be contended by Mr. Sancheti. Adverting to the contention of Mr.Sancheti that the oversold securities should be restricted to Rs.51 crores, Mr. Chatterji submitted that securities forming part of the addition of Rs.333 crores was differential amount between A.Y. 1991-92 and 1992-93 as reflected in the chart annexed to the Remand Report. Mr. Chatterji in the course of arguments clarified that the term "nexus" referred to in paragraph 44 of the judgment of the Supreme Court in SBI (supra) is in the context of paragraph 15 of that judgment which is quoted below for ease of reference :

15........."unless it was demonstrated and established by the banks that there is a nexus between the amounts which have been decreed in their favour and the amount which has been included in the income of the assessee/notified person for the statutory period, the said amount cannot be scaled down."

Mr. Chatterji further submitted that the decretal amounts did not find place in the oversold securities in the Remand Report either and the admission on the ground of oversold securities cannot be scaled down on a subsequent date. Mr. Chatterji submitted that the petitioner was not able to demonstrate that the decretal amounts mentioned in the suits finds place in the oversold securities referred to in the Assessment Order, the contention being that there was no nexus between the amounts that have been decreed and the amounts included in the income tax assessments. Mr. Chatterji submitted that the averments vide written submissions and in arguments the applicants had filed alternative submissions without prejudice to one another that these were based inter alia on the observations and conclusions in the aforesaid paragraph 44 in SBI (supra) and submitted that while dealing with nexus the applicant had relied only on paragraph 44 in isolation without considering the context in paragraph 15 and 39 of the judgment. He submitted that a consolidated reading of paragraph 14, 39 and 44 of SBI (supra) establishes that the nexus should be direct and only if the applicant could show that securities against which they had got decrees are included in the income then such nexus can be proved. The detailed list of securities is formed part of the income given in the Remand Report by the assessing officer and did not contain the securities against which decrees are obtained. On this basis it was contended by Mr. Chatterji that the demand is not required to be scaled down and the Income Tax authorities must be given priority especially considering huge amounts due from the said Narottam.

In the course of his submissions Mr. Chatterji relied upon the following judgments :

(i) Commissioner of Income Tax, Bombay vs. M/s. Amritlal Bhogilal and Co. [AIR 1958 SC 868 (V.45 C 118).

(ii) J.K. Synthetics Ltd. vs. Additional CIT [105 ITR 344 Allahabad.]

(iii) Commissioner of Income Tax vs. McMillan & Co. [1958 ITR 182 Vol XXXIII)

(iv) DCIT vs. State Bank of India and Others (2009) 2 SCC 451

(v) Smt Kamala Devi Jhawar vs. Commissioner of Income Tax, West Bengal III [1978 ITR 401 (Vol.115)]

(vi) Principal Commissioner of Income Tax vs. NRA Iron & Steel

(P) Ltd. [(2019)103 Taxmann.Com 48 (SC)].

(vii) Bharat Sanchar Nigam Ltd. Ors. vs. Union of India [AIR 2006 SC 1383 ]

(viii) CIT vs. Shivaprakash Janakraj & Co. Pvt. Ltd. [222 ITR 583]

Mr. Sancheti in rejoinder submitted that the revenue's contentions were based on the conclusion of the Supreme Court recorded in paragraph 44 of DCIT vs. SBI (supra). The revenue had dealt with only submissions made by the applicant in paragraph A(4) of the applicants written submission. The order of CIT being the final order in relation to additions for oversold securities inter alia records at page 124 as follows :

"The Appellate order passed by the CIT(A) at Pg. 103 (which is final order) in relation to the additions for the oversold securities in the previous 1991-92 assessment year, inter alia records at Pg. no. 124 that "it is also found that in the immediately preceding assessment year (F.Y. 1990-91 ; A.Y . 1991-92) addition to the tune of 1042 crores in this account has been upheld in the first Appeal"

Mr. Sancheti had submitted that the reference in this paragraph to the assessment years would be A.Y. 1991-92 and F.Y. 1990-91. The order also recorded that for A.Y. 1992-93 the position of oversold securities was Rs. 719 crores based on the balance sheet of the notified party. Reference was also made to the relevant balance sheet to submit that it shows a stock of Rs. 5 crores as cash-in-hand and there cannot be any cascading effect i.e. once Rs. 1042 crores is taxed it is available for all times. The record indicates that the position of oversold securities in the relevant year has come down from Rs.1042 crores to Rs.719 crores and had not increased. Once the revenue makes an addition on the basis that assets worth Rs.1042 crores were available in the hands of the assessee, there is no question of maintaining that such investment or amounts were not available with the assessee for its dealing in securities in the following year. He contended that the revenue has adopted an erroneous approach, of comparing individual securities but has not scrutinised the source of funds. The names of such securities are not relevant.

Mr. Sancheti had further submitted that the above contention of the department is an after thought, since the addition on account of oversold securities could not have exceeded Rs.51.14 crores and would not amount to Rs. 333 crores. One cannot look at the volume of the securities which could keep changing. Lastly it was contended that the Revenue's contention of there being no nexus is misconceived since money was fungible and it was Revenue's contention that none of the securities on which decrees were granted in favour of the applicant has been included in the income tax assessment. It was therefore obvious that the amounts paid over to the assessee Narottam and which was credited to his account would be available with him. The source of funds is clear and therefore nexus is clearly established.

CONCLUSIONS

I have heard the learned counsel for the parties at length and on account of the complex nature of the treatment of the transactions forming subject matter of the application both learned counsel have meticulously canvassed their respective cases. The concept of scaling down was introduced by the Supreme Court in the case of HSM (supra). The Court held in paragraph 33, 34 and 35 as follows :

Explaining this decision, this Court (a Bench of two Judges) in the case of CIT v. A. K. Menon held that the Special Court under the present Act has no power to sit in appeal over the orders of tax authorities, tribunals or courts. The claims relating to tax liabilities of a notified person are, along with revenues, cesses and rates, entitled to be paid first in the order of priority and in full as far as may be.

While we respectfully agree with the finding that the Special Court cannot sit in appeal over the assessment of taxes by the tax authorities, we would like to qualify the Court subsequent observations relating to payment in full of all assessed taxes under section 11(2)(a). There is undoubtedly no question of any reopening of tax assessments before the Special Court. There is also no provision under the Special Court Act for proof of debts as in insolvency. The provisions in the Special court Act for examination of claims are under Section 9-A. A claim in respect of tax assessed, therefore, cannot be reopened by the Special Court. The liability of the notified person to pay the tax will have to be determined under the machinery provided by the relevant tax law. The extent of liability, therefore, cannot be examined by the Special Court.

But the Special Court can decide how much of that liability will be discharged out of the funds in the hands of the Custodian. This is because the tax liability of a notified person having priority under section 11(2) (a) is only tax liability pertaining to the "statutory period". Secondly payment in full may or may not be made by the Special Court depending upon various circumstances. The Special Court can, for this purpose, examine whether there is any fraud, collusion or miscarriage of justice in assessment proceedings. The assessee who is before the Special Court, is a person liable to be charged with an offence relating to transactions in securities. He may not, in these circumstances, explain transaction before the Income Tax authorities, in case his position is prejudicially affected in defending criminal charges. Then, on account of his property being attached, he may not be in a position to deposit the tax assessed or file appeals or further proceedings under the relevant tax law which he could have otherwise done. Where the assessment is based on proper material and pertains to the "statutory period", the Special Court may not reduce the tax claimed and pay it out in full. But if the assessment is a "best judgment" assessment, the Special court may examine whether, for example, the income which is so assessed to tax bears comparison to the amounts attached by the Custodian, or whether the taxes so assessed are grossly disproportionate to the properties of the assessee in the hands of the Custodian, apply the Wednesbury Principle of Proportionality. The Special Court may in these cases, scale down the tax liability to be paid out of the funds in the hands of the Custodian.

In view of the aforesaid pronouncement there can be no quarrel about the fact that the Special Court cannot act as an Appellate Authority. The assessment of liability as framed by the Income Tax Authority will be final as far as the assessee is concerned unless modified in an appropriate tax proceeding. We are not concerned with that aspect of the matter. The Special Court is only concerned with discharging tax liability out of the funds available with the Custodian and that too only for a statutory period under section 11(2)(a). The judgment also holds that the payment for the tax authority may or may not be in full for that purpose this Court can examine whether there is a miscarriage of justice in the assessment proceedings

The other two aspects to be considered are whether there is fraud or collusion. I have not heard the applicants making any allegation of fraud or collusion, that leaves only miscarriage of justice in the assessment proceeding, if any, to be identified. In paragraph 26 of the judgment the Supreme Court holds that scaling down should only be done in serious case of miscarriage of justice or where tax assessed is so disproportionately high in relation to the funds in the hands of the Custodian so as to require scaling down in the interest of claims of banks.

The contention of the applicants in Miscellaneous Application is that Janakiraman Committee in its report covering the statutory period has observed that the account of the respondent no.1 was commonly used for siphoning funds, one of the methods being to enter into sale transactions in the name of Bank of Karad whereas the counter party purchasers would issue banker's cheque favouring Bank of Karad. The proceeds, however, would be credited to the account of respondent no.1 and utilised by the parties such as Hiten Dalal, T.B.Ruia and M/s.Dhanraj Mills Pvt. Ltd. for their own purpose. In this behalf, the applicants sought to rely upon the reports of the Janakiraman Committee appointed by the Reserve Bank of India. In particular Chapter XVI of the 5th Report, 6th Report and the final report.

It is contended that apart from sum of Rs.4.92 crores received in the account of respondent no.1, large amounts had been received in the account through cheques issued by Banks and Financial Institutions which amounts were not the property of respondent no.1 and, therefore, not his income but when the assessment was undertaken, the Income Tax department for want of proper explanation by respondent no.1 considered the same as income of the notified party. The applicant, therefore, enquired of the Income Tax department whether the assessment was based on "best judgment" or whether there was material on record. It was contended that the Income Tax department should disclose further proceedings adopted against Assessment Orders and the result of such proceedings. It is further contended that the tax assessed is grossly disproportionate to the assets. In these circumstances while assessing the liability of respondent no.1, it is contended that the Income Tax department might have treated the amounts credited in the account of respondent no.1 as his income. Respondent No.1 has not given any explanation for receipt of such large sums of money in his bank account. The applicant, therefore, contended that the demands of the Income Tax department must be scaled down so as to enable the applicant to recover monies that they have been deprived of and the Custodian must be directed to pay lesser amount and that no prejudice will be caused to the Income Tax department if a lesser amount is paid.

An affidavit was filed on behalf of the applicant wherein it is contended that by virtue of the decree passed in Suit Nos.7/1994, 8/1994 and 10/1994, the applicants are entitled to certain sums. While making a grievance that the Income tax department had not furnished copies of the Assessment Orders. It appears that there was some resistance on behalf of the Income Tax department in making a proper disclosure. Time and again the applicants have made grievance in this Court and correspondence ensued between them. The decision in DCIT vs State Bank of India (supra) reiterated the jurisdictional aspect decided in HSM (supra) viz the Special Court has no jurisdiction to sit in appeal over assessment of tax liability of a notified party and that a claim of tax assessed cannot be reopened by the Special Court and the extent of liability cannot be examined by the Special Court. It reiterated that "tax due" means "tax as finally assessed" and the tax liability can be properly construed as one arising out of transaction in securities during the statutory period i.e. form 1st April, 1991 to 6th June, 1992. Priority is given under section 11(2)(a) to such tax liability for the aforesaid statutory period but the Special Court can decide how much of the tax liability will be discharged from the monies in the hands of the Custodian. There is no material change in the legal position. SBI (supra) reiterates that if the assessment is based on "proper material" the Special Court may not reduce the tax claim and pay it out in full.

The Special Court may examine whether the taxes so assessed are grossly disproportionate to the properties of the assessee in the hands of the Custodian while applying of Wednesbury Principles of Proportionality and accordingly the Special Court may scale down the tax liability. Further it reiterates that the Special Court must have strong reasons for doing so. This is evident from paragraph 24 of the judgment. In paragraph 38 of HSM (supra) the Supreme Court held that if any amount was found due and payable by banks towards amount advanced by the banks as loan to Harshad S Mehta, the right of the bank to the extent of such amount must be held to be the existing right of the bank in the property which is attached and that the amount could not be assessed in the hands of the notified party as his income because the banks continued to have existing rights over the amount which is required to be released in terms of decrees obtained by the bank and that non release of the amount would amount to miscarriage of justice. In that case it was found that in order to establish the rights of the banks, the banks were required to show nexus between decreed amount and the amount which included as income of the notified party. This observation reiterated in paragraph 44 of the judgment which effectively remanded the matter to the Special Court for a finding on issues pertaining to whether banks had shown nexus between the decreed amount and the amount which is included in the income.

Secondly in that case the income tax department had raised issue of duplication of amounts by contending that two amounts had been considered in respect of oversold securities but in fact the amount was the same. Two amounts in question were Rs.1688 crores and Rs.1080 crores. No finding on the issue of nexus or duplication was arrived at by the Special Court. In the judgment these issues were not raised before the Special Court. These disputed questions have therefore been remanded. The Supreme Court observed that if nexus is shown by the banks between the amount for which decrees are obtained or which has become final and binding and full amount included is income in the hands of notified party, the same would have to be disbursed to the party by the Special Court. The Court held that on account of oversold securities if delivery has been given by the notified party and the transaction is complete only the difference will be payable and receivable will be taken and not the gross amount.

The Special Court in SBI (supra) was therefore entrusted with the task of ascertaining whether decrees were on account of oversold securities and if so there was any duplication or whether decrees are on account of siphoning of funds. In specific terms the special Court was directed to give finding on the following two issues;

Whether there is any nexus between the decretal amount and the income included in the assessment of the notified person for the statutory period ?

Whether the decrees are with regard to the oversold securities, and if so, whether there is any duplication of amount while scaling down the tax liability ?

The principles having been thus laid down in HSM (supra) and as specified in SBI (supra) when these instances are applied to the facts in the instant case, one has to consider whether the application for scaling down meets that requisite criteria.

➢ Firstly whether the assessment in question was a "best judgment" assessment.

➢ Secondly whether there has been fraud, collusion or miscarriage of justice in the assessment and generally.

➢ Thirdly whether the amount assessed is so highly disproportionate when compared to the amounts of the assessee in the hands of the Custodian

➢ Fourthly whether there is a nexus between the amounts advanced by the banks and the amounts assessed as income of the notified party and

➢ Lastly whether on account of oversold securities the transaction is complete and only difference could be difference between payable and receivable is taken into account and not the gross amount.

It is in this background that the present application has to be decided. I have no hesitation in holding that the judgment is a best judgment assessment. Reference to the replies filed by the Income Tax department in particular affidavit dated 12th August, 2008, 11th September, 2008 and 25th September, 2008 reveal that initially there was great resistance from the income tax department to part with the documents based on which the assessment was made or even disclose the relevant records. It is only after repeated orders were passed by the Court that access was given to the applicant. It is clear from the affidavit dated 12th June, 2008 which in no uncertain terms mentioned that the assessment by the assessing officer is one under section 144 of the Income Tax Act and therefore qualifies as a best judgment assessment. The assessment also took into account the different heads under which additions were made all of which was on the best judgment basis. This fact is reiterated in the appellate order passed on 5th December, 2006 which reveals that the order is passed under section 144 of the Income Tax Act. It was further observed by the Assessing Officer that the qualification seeks exclusions and limitation of information.

The final accounts shown in the auditors reports and the result of such accounts prepared under heavy qualifications cannot form basis of computed income of the assessee. Thus it becomes immediately evident that assessing the income in the instant case could only have been on the basis of best judgment assessment contrary to what the revenue has attempted to establish viz. that an appellate order ceases to be best judgment assessment. It further observed that the assessee had only one explanation to all queries that his account had been misused by certain parties and the assessee had no clue about correctness or genuineness of losses incurred in securities. Investment in oversold stock has also not been explained in the evidence. In the result, the assessee was not able to discharge his burden to prove and explain the facts. In view of these circumstances, losses shown in the profit and loss account by the Chartered Accountant was ignored by the Assessing Officer and the Assessment Order was not only upheld but was even enhanced by the amount of oversold securities.

The conclusions arrived at in the present case by the appellate authority are based on the Remand Report and on the previous record pertaining to the prior assessment year. In particular, the approach of the tax authorities in having made reference to the sum of Rs. 1042 crores. Assessed during the year 1991-92 and the conclusion that the entire amount of Rs.719,29,91,843/- being treated as income is obviously on the basis of best judgment but inherent in the process leading to the aforesaid conclusion, I am of the view that erroneous and questionable standards were adopted. On one hand the Special Court appointed Auditors report has been relied upon for some facts yet the conclusion of the auditor that the amounts reflected in the accounts pertain to liability has not been accepted /dealt with. The tax department was unable to accept the conclusion of the auditors, that the amount in the account of Abhay Narottam were only liabilities. There is no explanation forthcoming from the department nor has it has been urged by the revenue as to why the conclusion of the auditor is incorrect. The fact remains that the bank had advanced monies to the notified party and that money had not been repaid. These monies were therefore outstanding and repayable by the notified party. Even assuming that the assessment is not on the basis of best judgment, there is no explanation why the department has chosen to reject the conclusions drawn by the auditors classifying the amounts as a liability. Indeed nothing prevented Assessing Officer or the Appellate authority from taking its analysis of the auditors report to its logical conclusion. Thus to my mind there can be no doubt that what we are faced with is an assessment on best judgment basis. The first of these criteria are therefore clearly satisfied.

The second issue is whether there has been any fraud collusion or miscarriage of justice. To my mind there is neither any allegation, fraud or collusion but it seems to be a case of miscarriage of justice. The concept of miscarriage of justice as popularly referred to entails the criminal law aspect. However in the instant case we are not concerned with the aspect of criminal law. What needs to be ascertained is whether there is any material before me to conclude that the assessment has resulted in miscarriage of justice and inter alia whether the process of assessment was in any manner perverse or of a nature that is intrinsically resulting in the authority concerned coming to a conclusion which would have been different but for irrational procedure or adoption of facts which are in its nature uncertain and incapable of precise computation.

In the instant case the issues for consideration encompass the manner of assessment and when one considers these aspects I find that the Assessing Officer as well as Appellate Authority has placed great reliance on the Remand Report. The conclusion of the Assessing Officer while making the Remand Report and as incorporated in the order of the Commissioner of Income Tax (Appeal) is that income for A.Y. 1992-93 is being enhanced by Rs. 114,23,30,172/-. The appellate order takes into account the report for 1992-93, makes note of the observation of the Chartered Accountant appointed by the Special Court. It records that the report prepared by the auditor discloses a loss of Rs. 10,27,40,577/-. It considers abnormal losses although in paragraph 3.1 of the Assessing Officer's report for 1992-93 he accepts the fact that the auditor had reported that transactions were carried out by the same banks, same party on the same date in the same securities resulting in abnormal profit and losses. It also reports unusual transactions. In some cases there were very high fluctuation in the rates and securities which were sold without adequate purchases resulting in oversold position of stock. There were mismatches in dates between the financial transaction and entry appearing in the securities ledger maintained by the Bank of Karad for the assessee. According to the auditors the reason for mismatch of the date was because the bank wanted to avoid showing a negative stock position. With particular reference to the oversold position of stock, the auditor found that Rs.7,193,853,583/-was shown as current liability. This was an unusual item in the balance sheet, that the assessee had sold security without adequate opening stock and adequate purchases to effect the sale and security oversold appeared in the balance sheet may be arising due to not giving effect to free delivery of securities in the books of accounts. The auditors concluded that the result declared on the basis of oversold stock position does not indicate a fair business picture of the assessee and therefore the result reflected in the profit and loss account does not appear authentic. The Assessing Officer concluded that net loss of the profit and loss account does not indicate correct profitability.

Given the fact that this is undoubtedly a best judgment assessment and it overlooks the fact that a sum of Rs.1042 crores is already added in the previous year, in the year 1993-94 the state of affairs was same except that enhancement proposed was slightly lower at Rs.719,29,91,843/-. The apparent fact remained that even the appellate order records that no reliance can be placed on the auditor's report. On the other hand the Remand Report in no uncertain terms relied upon the balance sheet prepared and concludes that the assessee must have acquired securities which were sold from unaccounted sources. The Remand Report refers to the fact that neither the assessee nor the auditor have given any detailed trading account and it is not possible to work out the exact figure

In the course of further hearing I enquired of Mr. Chatterji representing the Income Tax department as to the effect of the department having taken into account a sum of Rs.1042 crores assessed in the hands of Abhay Narottam in the immediately preceding A.Y. 1991-92 and whether this amount of Rs.1042 crores was not considered in the A.Y. 1992-93. To this Mr. Chatterji submitted that the amount of Rs.1042 crores was not considered for the purposes of the current income and was assessed as income from unaccounted shares in the A.Y. 1991-92. He invited my attention to the averments in the affidavit in reply of Dr.Kirtane dated 11th September, 2008 and submitted that in paragraph 4.5 of that affidavit, the deponent had stated that the increase in the oversold position was on account of enhancement effected by the CIT (Appeals) on the basis of Remand Report made by the Assessing Officer on 28th November, 2006. The Remand Report was prepared after taking into consideration the audit report filed by the Auditor appointed by this Court. He invited my attention to the Remand Report annexed to the affidavit. Perusal of the Remand Report revealed that the Assessing Officer then observed upon perusal of the balance sheet prepared by the said Auditor appointed by the Court that there were oversold securities amounting to Rs.719,38,53,583/- as on 31st March, 1992 viz. in A.Y. 1992-93.

This matter was discussed with the Auditor who had explained to the Assessing Officer that the assessee was engaged in trading of Government securities, sometimes they were short sold i.e. sold in excess of what was physically held and later on the assessee acquired securities to square off the transaction but such oversold securities related to transactions where sales were made to parties and consideration received but no securities were delivered till 31st March, 1992 or even thereafter. The Auditor was apparently queried as to how such transactions had been accounted for in the final accounts and it was revealed that over sold securities were taken as liability in the balance sheet. The Auditor had stated that such acquired securities were not acquired nor delivered and only entries in the bank book were made. In the meanwhile the assessee did not produce any evidence that securities were held or acquired and delivered. The auditor had not made any categorical remark in this behalf and normally full consideration of any goods and services is received only against immediate delivery or delivery in the near future. The Remand Report concluded that the assessee's contention that the securities for which consideration was received which were not delivered cannot be accepted that the assessee must have acquired securities which have been sold, from unaccounted sources. The original assessment year made an addition to Rs. 219 crores and which has been included in the assessed income in the order under appeal.

It was further observed in the Remand Report that the grounds of appeal did not dispute the additions. It was further observed that the addition of Rs.219 crores was made in the original assessment year on account of unaccounted investments, but on perusal of the records, the figures does not seem to be correct since it was based on information received from the RBI which contained an extract of the security ledger of the assessee in the Bank of Karad. The peak investment it was observed worked out on the basis of single security viz. [11.50 Central 2009]/Sec 11.5 IDBI 2011 and that could not be taken as an indication of the correct amount of unaccounted investment. In all oversold securities the Assessing Officer therefore found that the amount had to be reworked and on this basis it was not possible to workout the exact figure of investment. The Remand Report enclosed a list of opening and closing balances in respect of oversold securities from which it could be seen that in a number of cases the oversold position had increased during the financial year which meant that during the previous year under consideration transactions took place under these securities. The Remand Report concludes that increase in liability on account of oversold position during the year is indicative of unaccounted investment in securities. On a summary of such unaccounted investments it reiterated that the total unaccounted investment was about Rs.333,23,30,172/- and that was required to be taxed. Thus the original assessment being for a sum of Rs.219 crores which had already been taxed. The difference of Rs.114,23,30,172/-was required to be taxed.

As far as A.Y. 1993-94 was concerned the closing balance as of 31st March, 1993 was found to be Rs.719,29,91,843/- whereas the balance as on 31st March, 1992 was Rs.719,38,53,583/-. It was also observed that perusal of the securities position reveals that opening and closing balances (except for one item) were the same. During that year there were no transactions as contemplated in the previous assessment year. Perusal of the tabulated annexure shows 34 securities, their oversold position as on 31st March, 1992 in terms of values,oversold security as of 31st February, 1991 and increase in oversold position. The increase was noted only in four cases that of Sec 11.5% IDBI 2011, Sec 6.75 any, Sec 7.5% IDBI 1997, Sec 6.75% ICICI 2000.

The Remand Report relies upon opening and closing balances of all oversold securities and finds that in a number of securities the oversold position has gone up during the financial year 1991-92 i.e. A.Y. 1992-93 and concludes that during the previous year under consideration, transactions of the aforesaid nature took place in these securities and therefore concludes that increase in liability on account of oversold position in these securities is indicative of The Remand Report relies substantially on the accounts of the auditor. This in my view cannot be overlooked. In the decision of Special Court dated 29th September, 2007 in Custodian Report no. 15 of 2006 the Special Court held that in support of the plea of miscarriage of justice five items were pointed out namely viz : Decrees have been passed in favour of the bank and these amounts are included as income of the notified party and assessed to tax. The decrees had established that monies belonging to the bank had been siphoned by the notified party and it is not his property or his income. That these amount when paid to the banks would be shown in their return and they would be liable to pay tax on the same. That certain amounts were added back to the income of the notified party and this could have been taken as income of the notified party. According to the Assessment Order oversold securities have been delivered by the notified party in that case and therefore what could have been taken into consideration is difference between purchase price and sale price. Miscarriage of justice had occurred by including certain amounts in the income of the notified party and in that case the Income Tax department had filed affidavit contending that when the assessment was made the decrees had not been passed by consent of parties.

Reliance was placed on the judgment of HSM(supra) to hold that if part of the assessment resulted in miscarriage of justice Special Court is empowered to scale down the taxes. Although in that order of the Special Court there is a reference to miscarriage of justice, what was in contemplation of the Supreme Court in HSM vs Custodian was miscarriage of justice in the assessment proceedings. In the Custodian Report 15 of 2006 the Court asked the counsel for the Income Tax department whether the department proposed to challenge the consent decree that has been passed in favour of the bank. However the department had no answer. In the present case as well there is no challenge to the decree and in my view given the fact that this is a best judgment assessment and the fact that the appellate order relying upon the Remand Report and the Remand Report partly relying upon the auditors report of the special auditor, it is clearly demonstrative of miscarriage of justice, especially in the light of the fact that there was an amount of Rs.1042 crores assessed in the year prior to the relevant assessment year and in the assessment years falling in the statutory period the amount assessed was actually lower at Rs. 719,29,91,843/- Moreover in view of the assessing officer concluding that it was not possible to work out the exact figure of investment in my view, the second test of miscarriage of justice is satisfied, more so because if there is no delivery pursuant to sale transaction there could be no profit and it would be a liability. Although this aspect is emphasized by the auditors, this has not been accepted by the Income Tax department. Analysis of the auditors report and as interpreted by the Assessing Officer makes it evident that there is nothing to show that delivery had been effected or that securities had been purchased, as otherwise this would be attached assets in the hands of the Custodian. In this light of the matter since no investment have been found in the books of account or documents no such investment are presently with the Custodian nor were any found by the special auditor read with the fact that in the prior year Rs.1042 crores was stated as income on account of unaccounted investment, the Assessment Orders clearly are questionable and in any event does not pass the test of an assessment based on proper materials. Miscarriage of justice in my view is clearly evident.

As far as the third question whether the amount assessed is disproportionate to the amounts of the assessee in the hands of the Custodian is concerned for the reasons recorded above and the fact that the assessments is not on the basis of books but merely on probability, I have no hesitation in holding that the amount assessed is highly disproportionate when compared to the amounts of the assessee in the hands of the Custodian, most of which have been conditionally paid over to the department, that scaling down is justified.

Mr. Chatterji had submitted that there was no nexus between the securities and the decrees that were obtained by the applicant and which had been included in the Income Tax assessment for the A.Y. 1992-93 and 1993-94. He invited my attention to the fact that in paragraph 44 of the decision in State Bank of India (supra) the Supreme Court had clearly held that if there was a nexus shown by the banks between the amounts for which decrees had been obtained and these decrees have become final and binding and the amount in the hands of Harshad S. Mehta which amount will have to be disbursed to the banks by this Court. In this respect Mr. Chatterji submitted that the applicants had not proved any such nexus. Mr. Chatterji sought to rely upon decision in Bharat Sanchar Nigam Ltd and Ors. vs. Union of India (UOI) and Ors. [AIR 2006 SC 1383] In my view this decision will have no bearing on the case and the controversy.

Apropos Mr. Chatterji's reliance upon Principal Commissioner of Income Tax vs NRA Iron and Steel Pvt Ltd. [2019] 103 taxmann.com 48 (SC) the Supreme Court had in that case observed that the assessee is under a legal obligation to prove receipt of share capital / premium to the satisfaction of the Assessing Officer failing which it will justify the addition of the said amount to income. This decision has no relevance whatever in the case at hand. The Supreme Court was seized of an appeal from the judgment and order of the Division Bench of the Delhi High Court from Income Tax appeal and in a case where share capital premium was credited to the books of account of the assessee and where the onus of proving that credit-worthiness of the investors and the genuineness of proving the transaction was upon the assessee. It was held that assessee -company had failed to discharge the onus under section 68 of the Income Tax Act, the amounts were added back to the Income of the assessee whereby the Income of the assessee was found to be justified. It is in this context that the Supreme Court observed that the assessee is under legal obligation to prove receipt of share capital premium to the satisfaction of the Assessing Officer and it would justify addition of the amounts to the Income of the assessee. In my view the ratio of this judgment bears no relevance to the facts at hands. We are concerned with treatment of monies in the hands of the notified parties who is a broker dealing with shares and securities. There was no question of any share capital or premium on share capital being involved.

Mr. Chatterji has submitted that in paragraph 39 of DCIT vs. SBI (supra) the Supreme Court had observed that banks have a right to attach property as on date of notification and for which decrees have been obtained and if the banks claim that the amount claimed is wrongly included in income, the banks are required to shows nexus between decreed amount and amount which is included in the income of the notified parties. In the present case it was submitted by Mr. Chatterji that there was no nexus. I am of the view that submission on behalf of the department has proceeded on the incorrect presumption that nexus should be established between the "amounts advanced" by the applicants and "the securities". The submission on behalf of revenue that securities on basis of which addition to the income of Shri A. D. Narottam were made are different from the securities in respect of which suits were filed probably overlooks the fact that it was monies that were advanced and if these monies are repayable, the questions that would arise is whether the oversold securities included the securities proposed to be purchased and in respect of which monies had been advanced. Although prima facie units of UTI did not find place in the annexure to the Remand Report, it is effectively a summary of securities. The words used in the Remand Report are as follows :

"Considering the above discussion, addition on account of unaccounted investment in oversold securities is required to be reworked. The assessee or the auditor has not given any detailed trading account for the said transaction securities. Therefore, it is not possible to work out the exact figure of investment. However, list (copy enclosed) containing opening and closing balance in respect of all oversold securities is available on records. From the same, it can be seen that in case of a number of securities oversold position has gone up during the F.Y. 1991-

This means that during the previous year under consideration, transactions of aforesaid nature took place in these securities. In my opinion, the increase in liability on account of oversold position in these securities during the year is indicative of unaccounted investment in the respective securities. A summary of such securities and unaccounted investment therein has been prepared as per annexure. Total of unaccounted investment in various securities work out to be Rs. 333,23,30,172/- and the same is required to be taxed. However, as mentioned above, in the original Assessment Order, an amount of Rs.219 crores has already been taxed and the same amount has also been included in the total income assessed in the order passed u/s/ 143 (3) r.w.s. 250. The addition on account of oversold securities should be Rs. 333,23,30,172/- as against the figure of rs. 219 crore taken in the Assessment Order. You are therefore requested to kindly enhance the income for the year accordingly, i.e. by the difference of Rs. 114,23,30,172/-"

It is seen from the aforesaid that DCIT has come to the conclusion only on the basis of probability since the above quoted paragraph reveals that assessee or Auditor had not given any detailed trading account for the securities and therefore it was not possible to workout the exact figure of investment. The conclusion however is that the difference between opening and closing balance would mean that during the previous year under consideration transactions took place in those securities and in the opinion of the DCIT the increase in liability is "indicative of unaccounted investment in the respective securities". A summary is then provided. The basis of taxation is premised on the securities said to have been oversold which itself has been arrived at without reference to a trading account. No assistance has been derived from the Auditor's report for the revenue to work out these details. In the light of the aforesaid I am inclined to accept the submission on behalf of the applicant that the disclosure made is selective and the annexure to the Remand Report cannot be said to be final one on the subject besides the application of the amount under Suit no. 8 being 25.81 crores related to 11.5% GOI 2008. The basis of listing out the securities in the annexure is therefore not final. The Remand Report dated 28th November, 2006 also reveals that the Auditor had orally stated that securities were not acquired or delivered, that only entries in the bank book and liability has been passed when the assessee had not established it by producing evidence that securities "were not held/ acquired and delivered at any point of time."

The Remand Report in turn admits that the Auditor has not given any categorical remark in this report / record and the assessee's statement that securities against which consideration has been received were not delivered cannot be accepted at face value. It proceeds to hold "assessee must have acquired the said securities which *have admittedly sold from unaccounted source" (*sic) and that in the grounds of appeal assessee had not disputed the admission. The order therefore proceeds on the basis of an implied admission for want of rebuttal. In my view the question to be considered is whether the amount of banks claim has been wrongly included in the income of the notified party is established and whether that would entail scaling down of the demand. Mr. Chatterji further submitted that the securities on the basis of which additions were made were different from the securities in respect of which the suits were filed. The other submission is to the effect that the list was the specific reference to the submission of the applicant that the respondent had dealt with in the Appellate Court order dated 5th December, 2006. In relation to addition of oversold securities in the previous year 1991-92 and inter alia records that "it was also found that in the immediately preceding assessment year addition to the tune of 1042 crores in this account had been upheld in first appeal.". In this respect it was contended that the order also records that for the A.Y. 1992-93, the position of oversold securities was Rs.7,19,38,53,583/- based on the balance sheet of the notified party. Reference was made to the balance sheet which forms part of the record at page 303 to contend that the position of oversold securities in the relevant year had decreased from Rs. 1042 crores to Rs.719 and had not gone up. Once revenue had made an addition on the basis that additional securities worth Rs.1042 crores were available, there is no question of maintaining that such investment were not available in the next year for dealing with securities. Mr. Chatterji's submission proceeded on the basis of comparison of each individual security but that overlooks the obvious. It is well known that securities can be sold on day today basis and what is relevant is the source availability of funds and not the name of the securities.

The entire case of the applicant in the case was that securities were not delivered. This aspect has already been dealt with in the judgment of this Court in Suit nos. 7, 8 and 10 of 1994 and it is evident that there was no occasion for the applicant to identify the securities in respect of which such nexus is to be established. The Revenue's submission that the nexus contemplated should be directly between the funds advanced and specific securities inter alia relying upon the Remand Report suffers from an inherent fallacy inasmuch as this submission proceeds on the basis that funds in question were utilised for purchase of securities. The entire case of the applicant and in the suits on the basis of which decrees were obtained on admission is that amounts were advanced but securities were not purchased or delivered. In the present case there is no question of the applicants therefore establishing a nexus between funds advanced and the securities listed in the Remand Report. The case of the applicant is that amounts were advanced specifically for purchase of UTI Units and 11.5 % GOI 2008. If this had been acquired there was no question of any amounts being paid into the decrees since it would be question of delivery of these securities. In my view there is a clear nexus between the funds received by Abhay Narottam for the applicant and the amount assessed since money is fungible and cannot be identified as a specific security. Money paid by the applicant to the original respondent no. 1 it was received by him.

Monies of the applicant bank which have been received in the account of the notified party in the Bank of Karad. Once having collected this amount in the bank it forms part of the common pool of funds. In the facts of the case at hand the funds cannot be linked to "securities" for reasons set out above. Money being fungible nexus between the monies paid into the notified party's bank account and the amounts assessed as income liable to be taxed is therefore obvious since it is not the case of either side that the securities which were expected to be acquired for the applicant had been so acquired. Nexus to the funds is established and there has been no challenge to the decrees on admission which have attained finality. The fourth criteria is therefore clearly satisfied.

The fifth criteria whether on account of oversold securities the transaction is complete and only difference could be difference between payable and receivable is taken into account and not the gross amount will strictly speaking not arise in the present case where money being fungible, the amounts have been mixed in the common pool of funds in the Bank of Karad account of the notified party and hence is the occasion to tag it to securities will not arise as set out above and hence the question of completion of the transaction does not arise in the facts of this case.

Although Mr. Chatterji had contended that the principle of scaling down cannot be exercise once an appellate order is passed, I am unable to find merit in that submission. The discretionary nature of the order determining tax has not undergone any change and hence merely because the assessee "may" have accepted unaccounted investment in oversold securities, the basic premise that the asssessee "must have acquired securities" is in the realm of probability. Having considered all the aspects canvassed before me, I have no doubt that the demand of the Income Tax department is required to be scaled down on account of the fact that there has been miscarriage of justice in the assessment proceeding and the tax assessed is disproportionately high in relation to the funds available and to that extent it is necessary to scale down liability to be paid in priority following the principles laid down in HSM (supra) and SBI (supra). The applicable tests laid down in the judgment of HSM (supra) and SBI (supra) in my view have been satisfied. It is obvious that this Court cannot examine the extent of liability to tax but considering that the decrees have been based on admission and an admission in law is best evidence of the debt I am of the view that the banks must receive funds towards the decree from the notified party.

I now proceed on the basis of the ruling in HSM (Supra) that while scaling down, the principle of proportionality be employed. de Smith, Woolf & Jowell on Judicial Review of Administrative Action 1995, observes that the principle of proportionality considers whether the measure in question adopted inflicted an unnecessary burden on affected persons. This essentially would be the test of proportionality to be applied. In the Indian context in Chairman and Managing Director, Coal India Limited and Anr. vs. Mukul Kumar Choudhuri and Ors [(2009) 15 SCC 620] the Supreme Court has observed that the doctrine of proportionality is well recognised in Indian jurisprudence. Discretionary power is exposed to judicial intervention when it has been exercised out of proportion to the fault. Most of the cases in the Indian jurisprudence are in the realm of service law. So was the decision in Coal India Ltd (supra), the respondent was employee who had absented himself and was removed from services but that will not affect the power oft this court to scale down the demand as contemplated HSM and SBI (supra).

The Supreme Court has in other cases also considered, elaborately, the principle of proportionality in England and in India. In Union of India Ganayutham [1997 7 SCC 463] while considering the Wednesbury [1948 1 KB 223] the Supreme Court quotes Lord Diplock from R vs. Goldstein [1983 (1) WLR 151 (157)] thus: "This would indeed be using a sledge-hammer to crack a nut.....". Sir John Laws (Judge of the Q.B. Division) has described 'proportionality' as a principle where the Court is "concerned with the way in which the decision-maker has ordered his priorities; the very essence of decision making consists surely, in the attribution of relative importance to the factors in the case, and here is my point: This is precisely what proportionality is about".

In Coimbatore District Central Co-operative Bank Ltd. vs Employees [(2007) 4 SCC 669] the Supreme Court observed thus :

"17. So far as the doctrine of proportionality is concerned, there is no gainsaying that the said doctrine has not only arrived in our legal system but has come to stay. With the rapid growth of administrative law and the need and necessity to control possible abuse of discretionary powers by various administrative authorities, certain principles have been evolved by courts. If an action taken by any authority is contrary to law, improper, irrational or otherwise unreasonable, a court of law can interfere with such action by exercising power of judicial review. One of such modes of exercising power, known to law is the ―doctrine of proportionality.

―Proportionality is a principle where the court is concerned with the process, method or manner in which the decision-maker has ordered his priorities, reached a conclusion or arrived at a decision.

The very essence of decision-making consists in the attribution of relative importance to the factors and considerations in the case. The doctrine of proportionality thus steps in focus true nature of exercise - the elaboration of a rule of permissible priorities."

De Smith states that ―proportionality involves ―balancing test and ―necessity test. Whereas the former (balancing test) permits scrutiny of excessive onerous penalties or infringement of rights or I nterests and a manifest imbalance of relevant considerations, the latter (necessity test) requires infringement of human rights to the least restrictive alternative."

Although the decisions have their genesis in the field of administrative law, proportionality principle can be applied in the instant case as recognised by the Supreme Court in HSM (supra). Judicial intervention in a discretionary decision would be justified. In the present case applying that principle one has to consider whether this Court would be seen as over stepping its powers in embarking upon scaling down of the demand. In my view the facts of the case justifies intervention to scale down the demand since the decision of the tax authorities is clearly on a discretionary assessment. In the case at hand we are concerned with arriving at a suitable formula for scaling down the demand of the income tax department based on best judgment assessment and as against decrees passed by this Court and in my view it would not be appropriate that the extent of scaling down should take into consideration the demand of the revenue and the distinct payments made by the Custodian.

The applicants have analysed scaling down on the basis of their computation based on the affidavit in reply dated 11th September, 2008 and levying a tax rate @ 40% and surcharge @ 12% in respect of each of the items. The following table provides full details :

Sr. No

Particulars

Amount in Rs. As given by the I.T. Dept

Upon Scaling down (Amt. In Rs)

1

Interest from Uday Palani Group

3,83,09,437/-

NIL

2

Income from share market activity

18,00,000/-

18,00,000/-

3

Commission on security transactions

12,98,550/-

12,985/-

4

Unexplained investment in seized assets

3,71,700/-

3,71,700/-

5

Unexplained Credits in seized books

7,78,14,935/-

NIL

6

Interest accrued from Dhanraj Mills Pvt. Ltd.

13,63,40,398/-

NIL

7

Undisclosed investments in shares seized by the CBI

34,10,847/-

34,10,847/-

8

Undisclosed investment in shares lying with stock exchange

16,73,889/-

16,73,889/-

Total additions

26,10,43,650/-

72,69,421.00

Total Income

26,10,43,650/-

72,69,421.00

Income tax @ 40%

10,43,96,860/-

29,07,768.40

Surcharge @ 12%

1,25,27,623/-

3,48,932.20

Tax demand for priority period

Assessment Year 1992-93

Income Tax

60,39,068.00

Surcharge

7,24,688.16

Total

67,63,756.16

Assessment Year 1993-94

Income Tax

29,07,768.40

Surcharge

3,48,932.20

Total

32,56,700.60

The computation relied upon by the applicant and reproduced above would require this court to enter upon merits of the assessment. This in my view would be inappropriate since scaling down has to be done on a proportional basis. In my view scaling down should be on the following basis : The dues of the tax authorities are said to be Rs.199,38,96,650/- for assessment year 1992-93 and Rs.11,69,24,483/- for assessment year 1993-94. In that view of the matter I find that the total amount claimed towards tax for the assessment year 1992-93 and 1993-94 is Rs.211,08,21,133/-. As against this the decretal amount is Rs.374,35,18,354/- On the basis of the 36:64 ratio between the two amounts scaling down should be restricted to 64% of the amount that has been paid over to the Income Tax department pursuant to various orders on various dates commencing from 18th June, 1996 till 26th March, 2013. A total of Rs.77,15,19,522.71 has been disbursed in five installments as per the table set out in Exhibit "C" to the Custodian report contents of which are set out below;

Statement of Amounts distributed till date

Sr No

Released to IT Under Section 11(2)(a)

Order Date

Date of Release

Amount (Rs)

1

12.12.1995

42,71,575.71

2

13.02.2002

10.08.2002

15,064.00

3

21.01.2004

25.03.2004

22,32,883.00

4

04/11/08

11.06.2008

75,00,00,000.00

5

30.09.2011

26.03.2012

1,50,00,000.00

Total

77,15,19,522.71

There is no dispute of the fact that the total amount paid over 77,15,19,52,217/- and in my view the applicant would be entitled to receive 64% of the said amount viz, Rs.49,37,72,492/-. Upon rounding of it is computed at Rs.49,38,00,000/-. The income tax department by virtue of their various undertakings including those of Ms.Vineeta Rai, Secy Government of India dated 31st January 2004 (Rs.29.42 lakhs), Mr. Jaswant Singh CIT Central II dated 7th May 2008 (Rs.75 Crores) and Mr. Kiran Oberoi Vasudev, Chief CIT dated 5th May 2008 (Rs. 1.5. Crores) is bound to pay over to the Custodian such amounts as may be ordered by this court along with interest at such rate that this court specifies within four weeks of such direction.

For all the above reasons, I pass the following order :

(i) The Income tax department shall pay over a sum of Rs. 49,38,00,000/-(Rupees Forty nine crores thirty eight lakhs only) to the Custodian towards amount payable upon scaling down of the tax demands and which shall be paid to the Custodian along with interest @ 6% per annum from 11th June, 2008 when the bulk of the amount of Rs. 75,00,00,000/- (Rupees Seventy five crores) was paid over to the tax department. Revenue to comply within a period of twelve weeks from today.

(ii) Liberty reserved to the Applicants to apply after the tax department deposits the amount specified in (i) above.

(iii) Mr. Daruwalla on behalf of the Custodian states that in view of this order he is not pressing Custodian Report no. 18 of 2016. Accordingly, Custodian Report no. 18 of 2016 is disposed. Liberty to apply.

(iv) No orders as to costs.