ITAT Mumbai on Interest Expenditure, Unexplained Investments and Deposits in Case of Notified Person

1. Background of the Dispute

The Income Tax Appellate Tribunal, Mumbai Bench, in DCIT Vs Hitesh S. Mehta (ITAT Mumbai) examined cross-appeals filed by both the assessee and the Revenue for Assessment Year 1992-93. The assessee was a notified person under the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992, pursuant to which all his assets and bank accounts stood attached and vested in the Custodian.

The assessment for this year had already undergone multiple rounds of scrutiny:

  • Original assessment completed on 28.02.1995 under Section 144 at a total income of Rs. 20,38,95,716/-, in the absence of books of account and due to non-compliance with notices under Section 142(1).
  • The CIT(A) confirmed this order.
  • The Tribunal, by order dated 31.08.2005, set aside the assessment and directed a fresh assessment after affording adequate opportunity.
  • Pursuant thereto, an order under Section 144 r.w.s. 254 was passed on 22.12.2006, determining total income at Rs. 22,59,48,341/- with various additions.
  • The CIT(A) partly reduced the additions by order dated 30.12.2011.
  • On further appeal, the Tribunal by order dated 01.05.2013 again restored the matter to the Assessing Officer (AO) for a de novo exercise.

In the third round:

  • The AO issued notice under Section 143(2) on 08.11.2013.

  • The assessment was again framed under Section 144 r.w.s. 254 on 30.03.2015, computing total income at Rs. 3,62,50,724/- after making, inter alia, the following additions:

    S. No. Particulars Amount (Rs.)
    1 Unexplained investment 1,16,51,516
    2 Unexplained receipts 1,62,327
    3 Profit from Sunrise Enterprises 2,52,075
    4 Dividend and interest income 60,61,163
    5 Share trading profit 1,56,96,071
    6 Long Term Capital Gain 23,61,869
    7 Salary Income 65,703

The assessee appealed, and the CIT(A) granted partial relief. Both sides approached the Tribunal—ITA No. 5190/Mum/2017 by the assessee and ITA No. 6026/Mum/2017 by the Revenue.

The assessee’s grounds included challenges to:

  • Taxability of income from attached assets,
  • Rejection of books of account,
  • Addition of Rs. 38,08,416/- as unexplained investment,
  • Addition of Rs. 85,225/- as unexplained bank deposits,
  • Addition of Rs. 2,52,075/- as share of profit from M/s. Sunrise Enterprises,
  • Disallowance of interest expenditure of Rs. 2,76,76,843/-,
  • Non-grant of deduction under Section 80L of Rs. 12,000/-,
  • Levy of interest under Sections 234A, 234B and 234C.

The Tribunal disposed of each issue as under.

2. Ground on Taxability of Income from Attached Assets

The ground challenging taxability of income arising from attached assets of the notified person was not pressed during hearing. The Tribunal, therefore, treated it as withdrawn and decided it against the assessee and in favour of the Revenue.

3. Rejection of Books of Account

3.1 History of the Books Rejection

  • In the original assessment under Section 144 on 28.02.1995, the AO rejected the assessee’s books of account.
  • The CIT(A) upheld this decision on 28.02.2003.
  • The Tribunal, by order dated 20.10.2005, remanded the issue with directions to re-examine the matter.
  • Following the remand, the AO again rejected the books in the order dated 22.12.2006 under Section 144 r.w.s. 254.
  • The CIT(A) confirmed this on 30.12.2011.
  • On further appeal (ITA No. 538/Mum/2012), the Tribunal again sent the matter back to the AO by order dated 01.05.2013 with specific guidelines.
  • After this, the AO repeated the rejection in the assessment dated 30.03.2015, and the CIT(A) again confirmed it.

3.2 Assessee’s Contentions Before the Tribunal

The assessee argued that:

  • The AO and CIT(A) had effectively rejected his books by simply borrowing observations made in the case of Late Shri Harshad Mehta, who was a broker, without independently appreciating the different factual matrix in the present case.
  • A detailed explanation responding to each objection had been filed before the AO through a letter dated 20.02.2015 (pages 248–263 of the paper book), but the AO did not deal with these submissions.
  • Contrary to the observation of the CIT(A) that books were not filed, the assessee had indeed produced books of account (pages 264–265 and pages 136–242 of the paper book and before the Tribunal).

The assessee’s letter explained, point by point, why the books should be accepted, including:

  • Bank statements had been earlier obtained by the AO directly from RBI during the original assessment.
  • Adverse remarks in the special audit report dated 06.02.2002 were only due to non-availability of documents at that time (immediately after the demise of Late Shri Harshad Mehta on 31.12.2001); complete books and explanations were later submitted in 2006.
  • Issues regarding stamp duty on contract notes were matters concerning the brokers and did not affect the authenticity of the assessee’s books.
  • Share transactions were routed through family brokerage concerns—M/s. Ashwin Mehta, M/s. Harshad Mehta and `M/s.