2012 (10) TMI 131 - HC - Income Tax

Disallowance of overseas travel and educational expenditure - Held that - The principal business of the company was manufacturing and supplying of packets/pouches to oil manufactures for filling and packaging their products. It was only in the assessment year 1992-93 the company made necessary amendments in its memorandum to enable it to enter the business of computer operation and data processing while the decision to send the trainee abroad for computer education was in 04.06.1990. Therefore, it cannot be said that the sponsoring of the trainee for overseas computer education was for the business of the company at the time when such decision was taken on 04.06.1990. Furthermore, the trainee had already secured admission for such course in the foreign University and applied for release of foreign exchange with regard thereto five weeks prior to his appointment. Hence, the finding of the tribunal that the sponsorship of the trainee was colourable in nature and not for the purpose of business of the company is wholly justified and borne out from the materials on record - against assessee. Disallowance of commission paid to M/s. Telecom Ancillaries Pvt. Ltd. - Held that - The tribunal held that the nature of such expertise in preparation of tender documents and follow up action for obtaining such tender has not been clearly spelt out. When the commission payments had been made in for purposes which are prima facie impermissible in law the question of permitting such expenses on the anvil of commercial expediency does not arise at all. The issue of payment of 12 lakh for ensuring non-participation of M/s. Telecom Ancillaries Pvt. Ltd. in the tender and also for follow up action to procure such tender in favour of the opposite party also smacks of creating a cartel in the matter of public tender which equally impermissible in law. Also that such agreement does not shut out other companies from contesting the tender also a justifiable ground for such disallowance - against assessee. Disallowance of short term capital loss - Held that - The condition precedent for attracting provision of Section 73 is that a part of the business of the company must relate to purchase and sale of shares. Merely indulging in purchase and sale of shares for investment is not business activity in sale and purchase of share of other companies for the purpose of this section. Thus precondition necessary for attracting the explanation to Section 73 is absent in the instant case and the disallowance of this loss treating the same being speculation one is wholly unwarranted. The conduct of the company in selling the shares in questions soon after taking delivery of the shares when it is found that the value of such shares were rapidly decreasing cannot be said to be unjustified or imprudent - in favour of assessee.

Issues Involved:
1. Disallowance of overseas travel and educational expenditure.
2. Disallowance of commission paid to M/s. Telecom Ancillaries Pvt. Ltd.
3. Disallowance of short-term capital loss on the purchase and sale of shares.

Issue-wise Detailed Analysis:

1. Disallowance of Overseas Travel and Educational Expenditure:
The appeals in I.T.A. No. 98 of 2003 and I.T.A. No. 265 of 2003 concern the disallowance of overseas travel and educational expenses incurred by the appellant company for its trainee, Saumya Meattle. The appellant company sponsored Saumya Meattle for advanced studies in Computer Science and later for a Master's Degree in Accounting at the University of South California. The Assessing Officer disallowed these expenses, which were upheld by the Commissioner of Income Tax (Appeals) and the tribunal.

The appellant argued that the sponsorship was a business expenditure as the trainee was bound by a contract to serve the company for seven years post-education. The tribunal, however, found the sponsorship to be a colorable device, noting that the company did not assess the trainee's competence and the decision was made shortly after his appointment. The tribunal also highlighted that the company's principal business at the time did not involve computer science or software development.

The court agreed with the tribunal, stating that the sponsorship was not for the business of the company at the time the decision was made. The court noted that the company's principal business was manufacturing and supplying plastic pouches, and it only entered the computer business in the assessment year 1992-93, after the decision to sponsor the trainee. The court concluded that the sponsorship was not a business expenditure and upheld the disallowance.

2. Disallowance of Commission Paid to M/s. Telecom Ancillaries Pvt. Ltd.:
The appeals in I.T.A. No. 98 of 2003 and I.T.A. No. 99 of 2003 involve the disallowance of commission paid by the appellant company to M/s. Telecom Ancillaries Pvt. Ltd. The appellant paid Rs. 1,66,660 in the assessment year 1991-92 for expertise in applying for tenders and Rs. 12,00,000 in the assessment year 1992-93 for restraining M/s. Telecom Ancillaries from participating in tenders and for follow-up action.

The appellant argued that the agreements were standard practice and commercially expedient. The tribunal, however, found the agreements vague and impermissible, noting that the payments were for purposes that transcended lawful limits of participation in public tenders.

The court agreed with the tribunal, stating that the agreements were not clearly spelt out and involved impermissible activities. The court held that the payments were not justified as business expenditures and upheld the disallowance.

3. Disallowance of Short-Term Capital Loss on Purchase and Sale of Shares:
The appeal in I.T.A. No. 98 of 2003 also concerns the disallowance of short-term capital loss of Rs. 4,17,550 incurred by the appellant company in the purchase and sale of shares of M/s. Reliance Industries Ltd. and M/s. JCT Ltd. The tribunal disallowed the loss, treating it as a speculation loss under the explanation to Section 73 of the Income Tax Act.

The appellant argued that it was not in the business of purchase and sale of shares and that the loss should not be treated as speculation loss. The court noted that the tribunal and CIT (Appeals) had factually concluded that the appellant was not involved in the business of sale and purchase of shares. The court held that the precondition for attracting the explanation to Section 73 was absent and that the disallowance of the loss as speculation loss was unwarranted.

The court set aside the disallowance of the short-term capital loss, holding that the loss was not a speculation loss and should be allowed as a deduction.

Conclusion:
I.T.A. No. 98 of 2003 is allowed in part, with the disallowance of the short-term capital loss set aside. I.T.A. No. 99 of 2003 and I.T.A. No. 265 of 2003 are dismissed, upholding the disallowance of overseas travel and educational expenses and commission payments. The Assessing Officer is directed to recompute the total income and tax payable by the appellant company for the assessment year 1991-92 in accordance with the court's findings.

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