2018 (8) TMI 344 - AT - Income Tax

Disallowance of expenditure u/s. 37(1) - allowable busniss expenditure - Held that - AO cannot step into the shoes of assessee to re-fix the amount that should have been paid. There is no dispute that the amount was paid for the purpose of business, as AO has allowed the amount partly. Since the provisions of Section 37(1) does not have any restriction to allow the amount partly, so long as the expenditure was incurred for the purpose of the business wholly and exclusively, the same has to be allowed. The restrictions placed in other provisions like that 36(1)(iii) for the purpose of interest, u/s. 40A (expenses or payment not deductible in certain circumstances) and also restrictions placed u/s. 30 and 31 does not apply to the facts of the case. AO has wrongly considered the claim. There is no power to AO to reduce the claim, whereas he can examine whether the amount can be allowed or not in full. In view of that, since the restrictions u/s. 37(1) are not applicable, the whole of the amount claimed is to be allowed as the expenditure is not proved to be personal or capital in nature, as provided in the section itself. Enhancement of amount by way of loss claimed on valuation of certain shares by the Ld.CIT(A) - Held that - CIT(A) has jurisdiction to consider the loss claimed of the assessee, which AO has not examined, as he has powers to enhance also given to him u/s. 251. The provisions of Section 251(1)(a) empowers the CIT in an appeal against an order of assessment to confirm, reduce, enhance or annul the assessment. Thus, since the CIT(A) has not unearthed a new source of income, but only has gone by the annual report/ statements enclosed to the return in which assessee has claimed trading loss to set-off to other incomes, we are of the opinion that CIT(A) has power to enhance and accordingly the contentions of assessee on this issue are rejected. Coming to the merits of addition i.e., disallowance of loss claimed, it is to be noted that assessee having purchased shares of ₹ 155/- per share has valued the same at ₹ 10/- as on 31-03-2002, so as to claim a notional loss in the transaction of purchase of shares. As pointed out by Ld.CIT(A) in the order, there is no fall in the value of the share and the said company (DQ) has issued further shares to others at ₹ 167/- as on 30-11-2001 to ₹ 290/- on 16-07-2004 (as stated in pg.18 of the order). It is also to be noted that in the course of argument also, Ld. Counsel fairly admitted that the intrinsic value of the share is around ₹ 23.52 and therefore valuation of share at ₹ 10/- is certainly without any basis. We agree with the Ld.CIT(A) that the valuation of shares at a lesser price than the cost was resorted to only to claim notional loss. Since we are affirming the order of the CIT(A) on this issue, the question of consideration of loss whether it is speculation or not under the provisions of Section 73 Explanation does not arise. In view of that, we reject the contentions raised by assessee and grounds on this issue are rejected. - Appeal of assessee is partly allowed.

Summary

Issues Involved:
1. Disallowance of expenditure under Section 37(1) of the Income Tax Act.
2. Enhancement of amount by way of loss claimed on valuation of certain shares by the Commissioner of Income Tax (Appeals) [CIT(A)].

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure under Section 37(1):

The assessee-company, an investment company, filed its return of income admitting a total loss of ?31,81,280/-. The Assessing Officer (AO) noticed that the company claimed ?10.20 Lakhs as service charges paid to SRSR Advisory Services Pvt. Ltd. (SRSR) for various services. The AO found that the services provided were disproportionate to the service charges paid and disallowed ?7.20 Lakhs under Section 37(1) of the Income Tax Act, allowing only ?3 Lakhs as reasonable expenditure.

Before the CIT(A), the assessee argued that the expenditure was wholly and exclusively for business purposes and that Section 40A(2) was not applicable as there were no common directors in both companies. CIT(A) confirmed the disallowance under Section 37(1), noting that the major part of the company's income was from interest and dividends, which did not require services from SRSR. The CIT(A) also pointed out that the nature and quantum of the business did not justify the payment of ?10.20 Lakhs to SRSR, especially when other professional charges and audit fees were separately incurred.

Upon appeal, it was argued that the AO cannot disallow part of the expenditure under Section 37(1) as it is a business decision, and the entire amount should be allowed if it is for the purpose of business. The ITAT held that the AO cannot step into the shoes of the assessee to decide the reasonableness of the expenditure. The ITAT directed the AO to allow the entire claim of ?10.20 Lakhs as the expenditure was wholly and exclusively for business purposes.

2. Enhancement of Amount by Way of Loss Claimed on Valuation of Shares:

The assessee purchased unquoted shares of M/s. Dataquest Management and Communications Ltd. (DQ) at a premium and valued them at face value in the closing stock, creating a loss of ?58,46,780/-. The CIT(A) issued a show cause notice and concluded that the shares were acquired as an investment and not stock in trade, and thus should not affect the business profits. The CIT(A) also noted that the shares could not be valued at face value as the net realizable value was higher and deemed the loss as speculation loss under the explanation to Section 73, disallowing the loss and enhancing the assessed income by ?58,46,780/-.

Upon appeal, the assessee argued that the CIT(A) had no jurisdiction to enhance the assessment by discovering a new source of income. However, the ITAT held that the CIT(A) has the power to enhance the assessment based on the trading account filed with the return and not by discovering a new source of income. The ITAT affirmed the CIT(A)'s order, noting that the valuation of shares at ?10/- was without basis and was done to claim a notional loss. The ITAT upheld the disallowance of the loss claimed and rejected the assessee's contentions.

In conclusion, the appeal was partly allowed, with the ITAT directing the AO to allow the entire claim of ?10.20 Lakhs under Section 37(1) and upholding the CIT(A)'s enhancement of the assessed income by disallowing the loss claimed on the valuation of shares.