2012 (1) TMI 250 - AT - Income Tax

Disallowance of commission paid to employees, representatives and/or agents of customers - Held that - By taking into consideration the circumstances in which the commission was paid, the commission paid for earlier assessment years and the commission paid by similar companies in similar circumstances and reasonableness of the payment, in our opinion, we can definitely quantify the excessive payment of commission at 15% of the total commission paid by the assessee for these assessments years under consideration before us. This disallowance at 15% of total commission paid by the assessee would meet the ends of justice. Accordingly, we direct the assessing officer to disallow only 15% commission paid the assessee as excessive in these assessment years as inadmissible. Disallowance of interest on borrowed funds on notional basis - Held that - There is no dispute regarding fact that the assessee has advanced the money for the purpose of acquiring office premises from TCI Industries Ltd and entered into MOU on 15th March 1999 and total amount advanced was at ₹ 2,20,00,000/- and not ₹ 3,00,00,000/-. It was provided in the said MOU that the possession of the premises would be given to the assessee company on or before 31st October 2001; and if the delivery cannot be given by the aforesaid date M/S TCI Industries Ltd; the owner would be entitled to reasonable extension of time. The purpose of advance of the for the purpose of business and that is for the purpose of acquiring a business premise in course of business activity and being so, even the interest paid on borrowed funds is allowable and there cannot be any disallowance on notional basis. We confirm the order of CIT(A) on this issue. Grounds of the Revenue on this issue are rejected. Treatment of loss arising on sale of shares, alleged to be speculative loss, under Explanation to S.73 of the Act - Held that - Loss has to be treated as capital loss and accordingly we confirm the order of CIT(A) and same is confirmed. Grounds of the Revenue on this issue are rejected. Disallowance of bad debt - Held that - There is no dispute regarding writing off the debts in the books of accounts of the assessee. After the amendment of the section 36(1)(vii) of the Income Tax Act by Direct Laws (Amendment) Act, 1987 w.e.f. 1-4-1989, it is not necessary for the assessee to prove that the debt has actually become bad. The only requirement is to write off of the debt in the books of accounts of the assessee. In this case the assessee actually written off of the debt in its books of accounts and corresponding entry is also appearing the Profit & Loss account prepared for the year ending on 31-03-2001. Being so, the claim of assessee is in order and it is to allowed. Computing the long term capital gains on sale of three immovable properties, sold by the assessee at ₹ 3,43,58,163 as against assessable loss of ₹ 18,21,092 computed by the assessee - Held that - The assets of Transport Division was transferred to the assessee company at book value. Though shares were allotted to the shareholders of the parent company, we have to see what was the cost of acquisition of the property sold by the assessee. The book value as on 1-4-1996 could be considered as cost of acquisition for the purpose of computing capital gain. As per provisions of section 49 of the income Tax act, there is no special provision for computation of cost in respect of property vest with the company by way of scheme of arrangement approved by the competent court of law. The assessee got the property as successor by a scheme approved by High Court. Therefore, the value as appeared in the audited books of the transferor company would be the cost of acquisition for the assessee company. In view of this, we do not find any infirmity in the order of CIT(A) in taking the cost of value at the respective figure appearing in the audited books of account of the transferor in pursuance to the scheme sanctioned by the High Court. Grounds of the Revenue on this issue are rejected. Reopening of assessment - disallowance of commission - Held that - the order of assessing officer is merged with the order of CIT(A). Once the order of the assessing officer is merged with order of CIT(A), the assessing officer cannot exercise his power u/s 147 of the Income Tax Act to reopen the issue was decided by higher forum in the guise of income assessable to tax has escaped from assessment. There is no further question of any escapement of income from assessment when the CIT(A) considered the very same issue of payment of commission in the course of appellate proceedings before him under section 250 of the Act. The assessing officer could exercise the power of reopening of assessment on any issue if it is not subject matter of appeal before CIT (A) and it is before the CIT(A) for his consideration or if he has considered the same issue, in that circumstances, the AO is precluded from considering same for reopening of assessment in guise of bringing into tax the escaped income. The only remedy available to assessing officer is to prefer appeal before higher forum and not to reopen the same assessment. In view of this, without going into merit of the issue, we cancel the order of the lower authorities and the ground taken by the assessee on reopening is allowed. Addition by way of long term capital gains by applying the provisions of S.50C - Held that - In the present case, the assessee not discharged the burden cast on it. The assessee having not availed of the opportunity provided under sub-sections (2) and (3) of s 50C to object to the value adopted by the stamp valuation authorities, in our opinion, the AO justified in treating the value adopted by the said authorities as the deemed sale consideration received/ accruing as a result of transfer. This ground of the assessee is dismissed. Denial of relief under S.80M - Held that - This section was deleted by Finance Act, 2003 w.e.f. 01-04- 2004. In this case, since the dividend received by the assessee does not exceed the amount of dividend distributed on or before due date, the said dividend received shall be allowed as deduction u/s 80M of the Act. The assessee has received only ₹ 4,500 and it has distributed ₹ 1,89,00,000 by way of dividend. Hence, we do not find any justification for disallowing the claim of the assessee. As such, the orders of lower authorities are set aside and the claim of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of commission paid to employees, representatives, and/or agents of customers.
2. Disallowance of interest on borrowed funds on a notional basis.
3. Treatment of loss arising on the sale of shares as speculative loss under Explanation to Section 73.
4. Disallowance of bad debt claimed by the assessee.
5. Computation of long-term capital gains on the sale of immovable properties.
6. Validity of re-assessment proceedings under Section 147/148.
7. Application of Section 50C regarding the deemed sale consideration of immovable property.
8. Denial of relief under Section 80M.
9. Admission of additional evidence in violation of Rule 46A.

Detailed Analysis:

1. Disallowance of Commission Paid:
The assessee claimed commission payments as business expenses, which were disallowed by the Assessing Officer (AO) for various reasons, including lack of proper documentation and genuineness. The AO disallowed different percentages of the claimed amounts across the assessment years. The CIT(A) provided partial relief by reducing the disallowance percentages in some years. Upon appeal, the Tribunal found that the assessee had provided sufficient evidence, including affidavits and vouchers, to substantiate the commission payments. The Tribunal concluded that disallowing 15% of the total commission paid would be reasonable, considering the nature of the business and industry practices.

2. Disallowance of Interest on Borrowed Funds:
The AO disallowed interest on borrowed funds, assuming that the funds were diverted to a group concern for acquiring a capital asset. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, noting that the funds advanced for acquiring office premises were for business purposes and there was no direct nexus between borrowed funds and the advance.

3. Treatment of Loss on Sale of Shares:
The AO treated the losses on the sale of shares as speculative losses under Explanation to Section 73. The CIT(A) reversed this decision, and the Tribunal upheld the CIT(A)'s order, stating that the assessee held the shares as investments, not as stock-in-trade, and thus the losses should be treated as capital losses.

4. Disallowance of Bad Debt:
The AO disallowed the bad debt claim, citing lack of evidence. The CIT(A) allowed the claim, and the Tribunal upheld this, referencing the Supreme Court's decisions that writing off the debt in the books is sufficient for claiming bad debt under Section 36(1)(vii).

5. Computation of Long-Term Capital Gains:
The AO computed long-term capital gains on the sale of immovable properties by taking the cost of acquisition as NIL. The CIT(A) directed the AO to accept the cost as per the audited books of the transferor company, and the Tribunal upheld this decision, noting that the properties vested in the assessee due to a High Court-approved scheme.

6. Validity of Re-assessment Proceedings:
The AO initiated re-assessment proceedings after four years, citing under-assessment of income. The Tribunal found that the AO had already considered the relevant facts and the High Court's decision during the original assessment. Thus, the re-assessment was based on a mere change of opinion, which is not permissible, and the Tribunal canceled the re-assessment.

7. Application of Section 50C:
The AO invoked Section 50C to deem the sale consideration of land at the stamp duty value, resulting in additional capital gains. The Tribunal upheld this application, noting that the assessee did not object to the valuation under sub-sections (2) and (3) of Section 50C.

8. Denial of Relief under Section 80M:
The AO denied relief under Section 80M for dividends received. The Tribunal allowed the relief, noting that the assessee had distributed dividends far exceeding the amount received, satisfying the conditions of Section 80M.

9. Admission of Additional Evidence:
The Revenue contended that the CIT(A) admitted additional evidence in violation of Rule 46A. The Tribunal found no merit in this contention, as it had already decided on the disallowance of commission payments on merits.

Conclusion:
The Tribunal provided a detailed analysis and rulings on each issue, balancing the evidence provided by the assessee and the AO's contentions, ultimately allowing partial relief to the assessee in most cases while upholding some of the AO's decisions.