2024 (3) TMI 31 - AT - Income Tax

Non-genuine Long term capital loss - attempt by assessee to somehow reduce tax liability by taking advantage of setting off of capital loss - no apparent commercial expediency in selling the shares incurring capital loss on these shares - HELD THAT - We note that AO has not made proper enquiry in this regard. Similarly, the buyer has not been examined by the Revenue authorities. As submission of assessee that the value of shares of subsidiaries is not correct and that the value has been arrived at without giving assessee an opportunity to rebut. CIT (A) has passed an order in which he has tried to verify cursorily the claim of the assessee that the NAV of the shares of these companies has become negative. CIT (A) has embarked upon the valuation which the assessee contended that it is not based upon full details and assessee was not confronted also. In this view of the matter, in our considered view, there are shortcomings in the assessment order as well as in the order of ld. CIT (A) which need to be examined afresh. We refer to the decision of Kapurchand Shrimal 1981 (8) TMI 2 - SUPREME COURT wherein it is held that it is the duty of the appellate authority to correct the lacunae in the orders of the authority below and remit the matter with or without direction unless prohibited by law. In the present case, as already noted that there are shortcomings and lack of proper enquiry by the AO and the assessee has further contended that ld. CIT (A) has arrived at the valuation of the shares without giving the assessee an opportunity in this regard and the documents relied upon by the ld. CIT (A) are incomplete. In such circumstances, we deem it proper to remit the issue to the file of AO. AO shall consider the issue afresh. Disallowance of prior period expenses - CIT (A) elaborately considered the issue. He noted that on the issue of disallowance the same has already been found to be double addition and in the order passed u/s 154, the AO has deleted the addition. As regards, previous year expenditure we note that ld. CIT (A) has examined in detailed the nature of expenditure and his reasoning for classifying it as prior period expenditure is credible. Expenditure on Gifts and presents - We find that this addition has been made on ad hoc basis without bringing out necessary details. Hence, in our considered view, orders of authorities below on this issue are liable to be reversed. Accordingly, we hold that entire expenditure in this regard is allowable. Misc. expenses - CIT (A) on this issue examined the details and gave a finding that none of the expenditure could be said as not pertaining to the purpose of business of the assessee. He also noted that AO has not made out any case by brining any evidence whatsoever on record to show that some or any of the expenditure was not for the purpose of the business. Hence, in absence of any material brought on record by the AO, ld. CIT (A) directed to delete the addition in this regard. Disallowance of advisory fee paid - As per provisions of Section 48 of the Act, expenditure incurred wholly and exclusively in connection with transfer has to be deducted from the full value of consideration received or accruing as a result of such transfer of the capital asset. Thus, the action of A.O. in disallowing entire payment made by the appellant to JMMS cannot be justified by any standard even if he feels that the same is not incurred wholly and exclusively in connection with this transfer - As entire payment is wholly and exclusively in connection with the transfer under reference of shares of the appellant in EHIRCL and therefore AO was not justified in making even part disallowance. Disallowance of upfront fee paid - CIT (A) correctly held that the expenditure is allowable as revenue expenditure. Addition on account of royalty payment - CIT(A) correctly deleted addition as it is a clear cut case of revenue expenditure. Not only that, it has been allowed in earlier years also by the AO in full as revenue expenditure. Therefore, royalty payment is directed to be allowed in full.

Issues Involved:
1. Addition of Rs. 441.87 crores on account of capital gain on sale of shares.
2. Disallowance of long term capital loss of Rs. 96.81 crores.
3. Disallowance of Rs. 7,00,11,165/- on account of prior period expenses.
4. Disallowance of Rs. 10.00 lacs on account of expenses claimed towards gifts and presents.
5. Deletion of Rs. 24,50,000/- on account of previous year expenses.
6. Deletion of Rs. 10 lacs on account of gifts and presents.
7. Deletion of Rs. 15 lacs on account of Misc. expenses.
8. Deletion of Rs. 12,89,34,000/- on account of advisory fee paid.
9. Deletion of Rs. 6,60,66,800/- on account of upfront fee paid.
10. Deletion of disallowance of Royalty payment.

Summary:

1. Addition of Rs. 441.87 crores on account of capital gain on sale of shares:
The ground was dismissed as not pressed by the assessee.

2. Disallowance of long term capital loss of Rs. 96.81 crores:
The AO disallowed the loss, considering it non-genuine due to reasons including the paltry sale consideration and the timing of the consideration received. The CIT(A) upheld the AO's decision but noted that the AO could not establish the transaction as sham. The Tribunal found shortcomings in the assessment and CIT(A)'s order, noting a lack of proper enquiry and incomplete valuation. The matter was remitted to the AO for fresh examination.

3. Disallowance of Rs. 7,00,11,165/- on account of prior period expenses:
The AO disallowed the expenses, noting they pertained to earlier years. The CIT(A) provided detailed reasoning, allowing Rs. 24,50,000/- and upholding Rs. 6,75,61,165/-. The Tribunal affirmed the CIT(A)'s detailed examination and speaking order, dismissing the cross appeals on this issue.

4. Disallowance of Rs. 10.00 lacs on account of expenses claimed towards gifts and presents:
The AO made an ad hoc disallowance of Rs. 10,00,000/-. The CIT(A) upheld 10% disallowance amounting to Rs. 5,64,850/- and directed relief of Rs. 4,35,150/-. The Tribunal found the addition ad hoc and reversed the orders, allowing the entire expenditure.

5. Deletion of Rs. 24,50,000/- on account of previous year expenses:
The CIT(A) allowed Rs. 24,50,000/- of the disallowed Rs. 7,00,11,165/- prior period expenses. The Tribunal affirmed the CIT(A)'s detailed examination and reasoning, dismissing the cross appeals on this issue.

6. Deletion of Rs. 10 lacs on account of gifts and presents:
The CIT(A) directed relief of Rs. 4,35,150/- out of the Rs. 10,00,000/- disallowed by the AO. The Tribunal found the addition ad hoc and reversed the orders, allowing the entire expenditure.

7. Deletion of Rs. 15 lacs on account of Misc. expenses:
The AO disallowed Rs. 15,00,000/- on estimate basis due to lack of details. The CIT(A) found the expenses for business purposes and deleted the addition. The Tribunal affirmed the CIT(A)'s well-reasoned order.

8. Deletion of Rs. 12,89,34,000/- on account of advisory fee paid:
The AO disallowed the fee, noting it wasn't exclusively for the assessee's share transfer. The CIT(A) found the fee wholly and exclusively for the transfer and deleted the disallowance. The Tribunal affirmed the CIT(A)'s well-reasoned order.

9. Deletion of Rs. 6,60,66,800/- on account of upfront fee paid:
The AO disallowed the fee, considering it capital in nature. The CIT(A) referred to the ITAT's earlier decision allowing the expense as revenue expenditure. The Tribunal agreed with the CIT(A)'s reasoning and affirmed the order.

10. Deletion of disallowance of Royalty payment:
The AO disallowed 25% of the royalty payment as capital in nature. The CIT(A) found the payment for the use of the "Escorts" name, not for technical knowledge, and allowed the full amount. The Tribunal affirmed the CIT(A)'s well-reasoned order.

Conclusion:
The assessee's appeal was partly allowed for statistical purposes, and the Revenue's appeal was dismissed.

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