Commissioner Of Income Tax vs Betterways Finance & Leasing Pvt. ...
2011 Latest Caselaw 2776 Del

*             IN THE HIGH COURT OF DELHI AT NEW DELHI

+                           ITA No.995/2009

%
                     Date of Decision: 24.05.2011

COMMISSIONER OF INCOME TAX                  .... APPELLANT
            Through: Ms.Prem Lata Bansal, Sr. Advocate with
                     Mr,Deepak Anand, Advocate

                                Versus

BETTERWAYS FINANCE & LEASING                .... RESPONDENT
PVT. LTD.
             Through: Mr.M.S. Syali, Sr. Advocate with Mr.V.P.
                      Gupta and Mr.Basant Kumar and
                      Ms.Husnali Syali, Advocates for the
                      respondent

CORAM:
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA


1.    Whether reporters of Local papers be                YES
      allowed to see the judgment?
2.    To be referred to the reporter or not?              YES

3.    Whether the judgment         should    be           YES
      reported in the Digest?


A.K. SIKRI, J. (Oral)

*

1. For the assessment year 2001-2002, the respondent/assessee

filed its return declaring income of `3,67,26,812/-. While making

the assessment, the Assessing Officer noticed that the assessee

had taken a loan of `4.00 crores from M/s.Enam Securities Pvt.

Ltd and loan of `1.00 crore from M/s.Stratcap Investments Pvt.

Ltd. vide agreements dated 14.04.2000 and 25.04.2000

respectively. As per these agreements, the assessee had also

pledged 1,00,000 shares of M/s.DCM Asic Technology Limited

with M/s.Enam Securities Pvt. Ltd. and 25,000 shares with

M/s.Stratcap Investments Pvt. Ltd. Both the agreements, which

were on identical terms, provided that in case of failure on part

of the assessee to repay the loan along with 13.5% interest, the

lenders were entitled to forfeit the shares pledged with them and

on such forfeiture the entire loan amount along with interest was

to be treated as repaid. The Assessing Officer found that in

addition to the aforesaid one lakh and 25,000 shares pledged

with the aforesaid two lenders respectively, additional shares to

the tune of 50,000 and 12,500 shares of M/s.DCM Asic

Technology Limited were also pledged with M/s.Enam Securities

Pvt. Ltd. and M/s.Stratcap Investments Pvt. Ltd. on 01.10.2000.

The explanation of the assessee was that as the value of the

shares pledged with these lenders had fallen, the lenders had

asked for further securities, which were accordingly given. The

Assessing Officer, however, did not accept the aforesaid

explanation of the assessee. He was of the view that when the

original agreement clearly stipulated the pledge of one lakh and

25,000 shares, which meant that shares were valued at `400/-

per share, and the clauses in the agreements also stipulated

forfeiture of these shares in the event assessee had failed to

discharge the liability by repaying the loan, there was no

occasion to given any pledge in further shares with the lenders.

After rejecting the explanation, the Assessing officer formed the

opinion that the assessee company had given 50,000 and 12,500

shares to the said two lenders in excess of its liability. On this

premise and taking the value of each share at `400/-, he treated

sum of `2.5 crores (62,500 x 400) as the income on account of

long-term capital gain and added the same and made an

addition of `2,50,01,273/- as long-term capital gain not offered

for taxation. Against the order of the Assessing Officer, the

assessee preferred appeal before the CIT(A). Along with the

appeal, the assessee also filed application under Section 46(A) of

the Income Tax Rules for admission of certain additional

documents. The explanation given in this application was that

these documents could not be submitted before the Assessing

Officer as proper opportunities had not been given. To put it

precisely, the case of the assessee was that when the

justification for giving additional security was asked for by the

Assessing Officer, the assessee had explained the same vide

letters dated 10th December, 2003 and 19th February, 2004, but

the Assessing Officer, thereafter, did not raise any further

queries. On this premise, plea was taken by the assessee that

the assessee could not furnish the said correspondence which

was exchanged between the assessee and the two lender

companies as per which further security was agreed to be given.

The CIT(A) called for the remand report. The remand report

dated 08.09.2004 was furnished by the AO to the CIT(A). In this

report, the AO stated that he had gone through the additional

documents, however, the admissibility thereof was questioned

by the Assessing officer on the ground that the original

agreements dated 14.04.2000 and 25.04.2000 entered into

between the assessee and two lenders respectively did not

provide for giving additional security at subsequent dates and,

therefore, reliance on the subsequent correspondence between

the lender and the borrower could not be placed by the

assessee. Significantly, the Assessing Officer did not challenge

the veracity of these documents but questioned the admissibility

thereof on the aforesaid terms. The CIT(A) after hearing the

parties admitted the additional documents inter alia observing as

under:

"7. ... The appellant company vide application filed under Rule 46A had submitted that in response to query of the A.O. it had filed letter dated 10.12.2003 and 19.02.2004. The AO had required no further explanation/documents in regard to the transaction. Therefore, the

appellant company could not submit full correspondence to him. The AO in his report has made no comments regarding the above claim of the appellant company. Since the AO was making substantial addition, he ought to have raised specific queries to the appellant company. In my opinion, therefore, the appellant company is entitled to submit additional documents as evidence. Accordingly, additional evidence is hereby admitted in the interest of justice."

2. Thereafter the CIT(A) discussed these documents. It observed

that the Assessing Officer had not made any comments on

merits in his remand report. Thus proceeding on this basis that

the authenticity of these documents were not challenged, on the

basis of these documents, he came to conclusion that the

original documents entered into between the parties had been

modified by these documents, whereby the assessee had agreed

to pledge further shares by way of security. We may point out

in this connection that within three days of the agreement

entered into between the parties, the lender had written letter

dated 17th April, 2000 mentioning therein that the security of one

lakh shares was accepted by the lenders keeping in view the

future growth plans of M/s.DCM Asic Technology Limited (the

company of which shares were pledged) and it was clarified in

this letter that if there is no fall in the performance of the said

company vis-à-vis the business plan growth opportunities as

shown to the lenders, then the lenders would be free to ask for

additional shares as additional security as per the said

arrangement. The assessee had replied the same vide letter

dated 19th April, 2000 confirming and undertaking that in case

additional security is required in the circumstances narrated by

the lenders, the assessee shall provide the same. Thereafter

vide letter dated 1st October, 2000, the lenders had written to the

assessee that the performance of the M/s.DCM Asic Technology

Limited was not improving and in fact there were wide gap

between provisional six monthly figures and projected estimates,

because of this reason the lenders asked for additional security

of 50,000 and 12,500 equity shares respectively of M/s.DCM Asic

Technology Limited. It was on the basis of this correspondence

exchanged between the parties whereby the assessee had

agreed to provide additional security that ultimately the

assessee pledged further shares with the two lender companies.

Based on this correspondence exchanged between the parties,

the CIT(A) came to the conclusion that the original agreement

was mutually novated/modified by the lenders and the assessee

and there was sufficient reason to believe the contentions of the

assessee in this behalf. On this basis, the CIT(A) accepted the

justification given by the assessee in giving the additional

security. It is a matter of record that the assessee had pledged

to pay the loan amount along with interest, in liquidation of

which both the lenders had forfeited the security which was now

to the tune of 1,50,000 and 37,500 shares respectively and

appropriated those shares by transferring the same in their

respective names. In the process, CIT(A) relied upon the

judgment of the Supreme Court in K.P. Varghese v. Income

Tax Officer, Ernakulam and Anr., 131 ITR 597. This led to the

deletion of the addition made by the Assessing Officer.

3. The Revenue challenged this decision of the CIT(Appeal) before

the Income Tax Appellate Tribunal. The said appeal has been

dismissed by the ITAT holding that the CIT(Appeal) was justified

in admitting the additional evidence and was also right in

deleting the addition in view of the fact that the original

agreement had been modified by the parties.

4. It is this order of the ITAT which is challenged by the Revenue in

the instant appeal filed under Section 260A of the Income Tax

Act. The Revenue has challenged the admission of additional

documents produced by the assessee under Rule 46A of the

Income Tax Rules before the CIT(A) as well as decision of the

authorities below on merits deleting the additions made by the

Assessing officer on account of long-term capital gain.

5. Coming to the issue of admitting the additional documents from

the narration of events disclosed above, we are of the view that

no fault can be found in the approach of the CIT(A) or the ITAT in

this behalf. No doubt, the Assessing Officer had asked the

assessee to justify the pledge of additional 50,000 and 12,500

shares with the two lenders respectively. The assessee had

stated in detail in its statement as to in what circumstances on

1st October, 2000, the assessee was made to give the additional

security. Thereafter, no further queries were raised by the

Assessing officer. No doubt, while giving its explanation vide

letter dated 10th December, 2003 and 19th February, 2004, the

assessee could have taken care to annex these documents as

well. However, when specific averments were made in the

aforesaid explanation, at that time even the Assessing Officer

should have enquired the matter further. However, the mistake

which was committed by the Assessing Officer was that in view

of the clauses contained in the original agreements, there was no

scope and/or reason to provide additional security. Probably

because of this reason, he did not enquire into the matter further

and concluded that there was no room for providing additional

security. It is trite law that the terms of contract entered into

between the parties can be changed, altered, modified and even

rescinded by further mutual agreements. Such a novation is

permissible as per Section 62 of the Contract Act. The

CIT(Appeal) has also found justification in such a step taken by

the parties. It is inter alia observed that during that period the

value of shares of IT companies had suffered substantially and

data of CNX IT index showed that fall in the value of IT

companies was almost 50%. Even if we take the value of the

share pledged at `400 at the time of entering into the original

agreements, if it was fallen by 50%, in October 2000, the value

would be `200/-. In these circumstances, even by giving

additional security of 50000/12500 additional shares, it was a

prudent act on the part of the assessee to ensure liquidation of

the entire liability of `4.00 crores/`1.00 crore along with interest

which had accrued thereupon.

6. This Court in CIT v. Hewlett Packard India (P) Ltd., 314 ITR

55 (Del.) has held that admissibility of additional evidence by

CIT(A) would not give rise to any substantial question of law,

provided the CIT(A) or the Tribunal had not acted on any wrong

principle.

7. Thus, insofar as admission of additional evidence is concerned, it

was within the discretion of the CIT(A) to admit the said evidence

and we find that in the instant case, the said discretion has not

been exercised improperly or against the provisions of law.

8. Once we hold that the additional evidence given in the form of

correspondence provided by the assessee was duly and properly

admitted by the CIT(A), the question on merits as decided by the

two authorities below does not pose any problem. It is stated at

the cost of repetition that in the remand report, the Assessing

Officer had not questioned the genuineness and veracity of the

documents. Though he had specifically mentioned that the

additional documents had been gone through and perused by

him, he had only questioned the admission of these documents

in view of Rule 46A of the Income Tax Act that too on the ground

that the original agreements entered into between the assessee

and the lenders did not provide for giving additional security on

subsequent dates and for this reason alone, he contended that

the assessee could not place reliance on subsequent

correspondence. Therefore, CIT(Appeal) was right in proceeding

on the premise that such a correspondence was in fact genuine

and exchanged between the parties. Once this position is

accepted coupled with the fact that the parties to the contract

have agreed to change the terms thereof and it was actually

done in the instant case, the furnishing of additional security

became justified and there was no reason to treat the same as

long-term capital gain, authorities below in this behalf have

rightly referred to the judgment of K.P. Verghese (supra) in

arriving at this decision.

9. We are of the opinion that no question of law arises and the

appeal is dismissed accordingly.

A.K. SIKRI, J.

MAY 24, 2011                                        M.L. MEHTA, J.
Dev