2010 (1) TMI 1307 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of interest on delayed payment of service tax.
2. Computation and allowance of long term capital loss.
3. Disallowance of expenses related to rent, water charges, and property tax.
4. Disallowance of retainership fee.
5. Disallowance of short term capital loss.

Summary:

1. Disallowance of Interest on Delayed Payment of Service Tax:
The first issue in the Revenue's appeal is whether interest paid on delayed payment of service tax is penal in nature or not. The AO disallowed the amount of interest paid on delayed payment of service tax, on the ground that it is penal in nature. The first appellate authority held that the said interest was only compensatory in nature and as it is not levied for violation of a statute, no disallowance can be made. The Tribunal agreed with these findings, noting that interest on delayed payment of service tax is levied u/s 75 of the Service Tax Act and is compensatory, not penal. Thus, the Tribunal upheld the findings of the first appellate authority and dismissed this ground of the Revenue.

2. Computation and Allowance of Long Term Capital Loss:
The assessee held shares in M/s Polychem Ltd., which were reduced due to an order by BIFR. The AO rejected the claim of the assessee for long term capital loss, stating that reduction in share capital does not result in transfer of shares. The first appellate authority, however, held that the reduction in share capital results in a transfer as defined in section 2(47) of the Act. The Tribunal, after considering various case laws, agreed with the first appellate authority that there is a transfer u/s 2(47) of the Act, entitling the assessee to claim long term capital loss. Thus, the Tribunal dismissed ground Nos. 2 and 3 of the Revenue.

3. Disallowance of Expenses Related to Rent, Water Charges, and Property Tax:
The assessee claimed expenses relating to rent, water charges, and property tax. The AO disallowed these expenses, stating that there was no agreement between the assessee and the lessor. The Tribunal, however, found that the liability for these expenses was not disputed by the assessee and that the liability had crystallized. Therefore, the Tribunal allowed this ground of the assessee.

4. Disallowance of Retainership Fee:
The assessee claimed a retainership fee of Rs.57,000/-. The first appellate authority dismissed this ground as the claim was not supported by any documentary evidence. The Tribunal upheld the finding of the first appellate authority due to the lack of documentary evidence.

5. Disallowance of Short Term Capital Loss:
The assessee claimed short term capital loss on shares purchased in M/s Polychem Ltd. The AO and the first appellate authority disallowed this claim, stating that the transaction was a colourable device to book short term capital loss, as the assessee knew about the impending reduction in share capital. The Tribunal agreed with this view, noting that the purchase of shares at an inflated rate despite knowing the reduction in capital was a make-belief transaction. Thus, the Tribunal upheld the findings of the first appellate authority and dismissed this ground of the assessee.

Conclusion:
The appeal of the assessee was allowed in part, and the appeal of the Revenue was dismissed.