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2004 (12) TMI 626 - AT - Income TaxDisallowance u/s 40A(2) for payment to sister concern - professional charges - interest to clients on Government securities - brokerage paid to a sister concern - losses claimed against income from Government securities. HELD THAT - The CIT(A) has also dealt with the matter at an equally superficial level by only modifying the quantum and without giving any cogent finding about the conditions of applicability of section 40A(2) being satisfied. Unless there is a clear finding that the market value of the services taken from the sister concern is less than the price at which the services are obtained there cannot be an occasion to apply the disabling provisions of section 40A(2). This exercise therefore necessitates a finding about the fair market value of such services. For this reason alone the disallowance u/s 40A(2) is inherently unsustainable in law on the facts of this case. It is also noteworthy that the services in question are essentially of such a nature that there cannot even be any generalizations about as to what should be the fair market value. The charges of professional advice of X lawyer may not necessarily comparable with the charges of Y lawyer and same should be the case of investment consultants. The factum of expenditure as also the expenditure being in the nature of business expenses is not in doubt. There is no material to even suggest leave aside establish that the expenditure incurred by the assessee is excessive vis-a-vis the fair market value of such services. We are therefore of the considered view that it was not a fit case for invoking the provisions of section 40A(2) on the facts of the case. The CIT(A) should have deleted the entire disallowance. On this issue therefore we uphold the contention of the assessee and reject the contention of the revenue. The entire disallowance is to be deleted. Ground No. 3 in revenue s appeal is dismissed and ground No. 3 in assessee s appeal is allowed. Interest to clients on Government securities - loss incurred for unauthorised use of public money is not be allowed as a deduction in business expenditure - HELD THAT - As a matter of fact use of public funds through such transactions for financing own business was common enough for the brokers to be termed as a normal financing mode. The very funding of the working capital in the cases of some brokers may be through unscrupulous means but as long as the interest is paid for using the funds which are employed in business interest continues to be an allowable deduction. The use of fraudulent means to raise the funds by itself does not make the interest non-deductible more so when interest is beyond doubt or dispute compensatory in nature. The payment of interest in such cases cannot be said to be public policy either. In view of these discussions we approve the conclusions arrived at by the CIT(A). No interference. Ground No. 4 is dismissed. Brokerage payment - There is enough material to demonstrate the factum of services having been rendered by the N.M. Murarka Co. Once again the disabling provisions of section 40A(2) are invoked but the conditions precedent for invoking the said section are again not satisfied. There are no findings about the fair market place of the services being less than the payments made by the assessee for the same. An expenditure being excessive cannot be inferred based on some subjective perceptions of the authority dealing with the same; it has to be based on cogent material on record. That is not the case there. Thus we are of the view that the CIT(A) ought to have deleted the entire disallowance. We therefore reject revenue s grievance on this issue and uphold the assessee s grievance on the same. Accordingly ground No. 5 is revenue s appeal is dismissed and ground No. 4 in assessee s appeal is allowed. Income from Government securities - Since the exercise of examination of details involves going through voluminous evidence we consider it appropriate not to do it first time at the Tribunal level but to remit the matter regarding claim for all these losses to the file of the Assessing Officer for examination de novo by way of a speaking order in accordance with the law and after giving a fair and meaningful opportunity of hearing to the assessee. We have also noted that in some cases the CIT(A) has deleted the disallowance of losses only because the Assessing Officer had accepted the same in the remand report proceedings. Once the Assessing Officer himself accepts that it is certainly not open to him to backtrack now and demand re-verification of claim. Barring this rider the Assessing Officer shall examine all the claims for losses afresh in accordance with the above directions. Ground No. 7 in revenue s appeal and ground Nos. 8 to 18 in assessee s appeal are thus allowed for statistical purposes. The appeal filed by the revenue is therefore partly allowed.
Issues Involved:
1. Disallowance of personal expenses. 2. Disallowance of guest house expenses. 3. Disallowance u/s 40A(2) for payment to sister concern. 4. Disallowance of interest to clients on Government securities. 5. Disallowance of brokerage paid to a sister concern. 6. Disallowance of various losses claimed against income from Government securities. 7. Disallowance of business promotion expenses. 8. Disallowance of repairs and maintenance expenses as capital expenditure. Summary: Issue 1: Disallowance of Personal Expenses The revenue contended that the CIT(A) erred in deleting the disallowance of Rs. 15,209 under the head 'personal expenses' for the assessee's client's travel expenses. The Tribunal upheld the CIT(A)'s decision, stating that the Assessing Officer (AO) should not question the business expediency of such expenses if they are incurred for legitimate business interests. Issue 2: Disallowance of Guest House Expenses The revenue's appeal on the disallowance of Rs. 20,736 for guest house expenses was allowed. The Tribunal cited the Special Bench decision in Eicher Tractors Ltd. v. Dy. CIT, which favored the revenue. Issue 3: Disallowance u/s 40A(2) for Payment to Sister Concern The AO disallowed Rs. 8,70,000 out of Rs. 9,70,000 paid to Circon Research & Consultancy Services Pvt. Ltd. The CIT(A) reduced the disallowance to 50%. The Tribunal found that the AO's approach was flawed as it focused on the cost rather than the fair market value of services. The Tribunal deleted the entire disallowance, upholding the assessee's contention and rejecting the revenue's. Issue 4: Disallowance of Interest to Clients on Government Securities The AO disallowed Rs. 10,74,758 as interest paid to clients, terming it as fraudulent use of public funds. The CIT(A) reversed this decision. The Tribunal agreed with the CIT(A), stating that interest paid for using funds in business is allowable, even if the means to raise funds were unscrupulous. Issue 5: Disallowance of Brokerage Paid to Sister Concern The AO disallowed Rs. 5,13,000 paid to N.M. Murarka & Co., a sister concern, citing lack of transaction details. The CIT(A) allowed Rs. 2,00,000. The Tribunal found sufficient evidence of services rendered and deleted the entire disallowance, rejecting the revenue's grievance and upholding the assessee's. Issue 6: Disallowance of Various Losses Claimed Against Income from Government Securities The CIT(A) had deleted disallowances aggregating to Rs. 69,73,557. The Tribunal noted that detailed reasonings were not provided and remitted the matter back to the AO for a fresh examination with a speaking order, except where the AO had accepted claims in remand report proceedings. Issue 7: Disallowance of Business Promotion Expenses The CIT(A) sustained the disallowance of Rs. 1,00,863 for business promotion expenses due to lack of details. The Tribunal upheld this decision, agreeing that the necessary facts to substantiate the business purpose were not on record. Issue 8: Disallowance of Repairs and Maintenance Expenses as Capital Expenditure The CIT(A) confirmed the disallowance of Rs. 4,59,214 as capital expenditure. The Tribunal upheld the disallowance for telephone equipment and air conditioners but directed the AO to delete the disallowance for other repairs and maintenance expenses, noting that the relevant Explanation to section 30 was effective from assessment year 2004-05 and not applicable for the assessment year 1994-95. Conclusion: Both the appeals by the revenue and the assessee were partly allowed.
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