2015 (11) TMI 177 - AT - Income Tax

Considering business loss as Speculation loss - Held that - The facts in the said decision in the case of Eastern Aviation & Industries Ltd Vs CIT 1993 (7) TMI 41 - CALCUTTA High Court are identical to the assessee s case and as a result the income of the assessee from share trading is speculative in nature. - Decided against assessee. Disallowance of sub-brokerage - assessee had not explained the nature and genuineness of the brokerage, not produced evidences with respect to the services rendered and also not furnished the confirmations of the parties - Held that - We note that confirmations from two parties namely Jaswant Shah and Ramco Financial Services were filed before the ld CIT(A) and also before us . We also note that sub-brokerage of ₹ 82,27,229/- payable to C.S. Boston (Hong Kong) Ltd has been taxed in the A.Y. 1999-00 on being offered to tax by the assessee suo motto upon denial of permission to remit the payment by the Reserve Bank of India on 20th November, 1997 . As the assessee had filed confirmations from two parties exhibited and also proved the payments having been made to the parties for services rendered by them. Likewise wise the sub-brokerage to JMSSB was paid for primary market transactions. In view of these facts and observations , we are of the view that the disallowances of ₹ 1,05,000 paid to Jaswant Shah, ₹ 1,07,125/- paid to Ramco Financial Services, ₹ 82,27,229/- C.S. Boston (Hong Kong) Ltd and ₹ 91,839/for primary market transactions paid to JMSSB were not justified as these expenses were incurred by the assessee for the purpose of business as assessee required the services of sub-brokers to carry out business in stock market Mumbai and also activities in the primary markets on behalf of its clients and thus these disallowances are hereby deleted. - Decided in favour of assessee in part. Disallowance u/s. 40A(2)(b) - Held that - We note that the provisions of section 40A(1) begins with non abstante clause & (2) provides that where the assessee has incurred any expenditure by making the payment to any person as referred to clause( b) which is excessive , unreasonable having regard to the fair market value of that expenditure or services or goods, then so much of the expenditure as is considered excessive and unreasonable shall be disallowed by the assessing officer. In this case Rs. ₹ 86,08,898/- were paid as sub-brokerage to the persons covered by the clause (b) of section 40A(2). We further note that the assessing officer no where observed these expenses were either excessive or unreasonable and disallowed and proceeded to make the disallowance and thus the pre-conditions for disallowance u/s 40A(2b) were not satisfied. It is nowhere pointed out by both the authorities that payment is excessive or unreasonable from prevalent market rates for such services. We also note that 50% disallowance was made on purely adhoc basis which is not permissible under law by disregarding the fact that similar expenses were allowed in the earlier years. We are, therefore, of the considered view that the said disallowance /addition is not justified and therefore the same is ordered to be deleted - Decided in favour of assessee Disallowance on a/c of interest on the ground that assessee paid interest but did not charge from its director and their family members - Held that - the net worth of the company was ₹ 4,96,56,180/-, whereas, the purchases on behalf of the related parties were worth ₹ 1,56,44,818/- which proves that assessee had sufficient and adequate own funds to finance the purchases so made for related parties. In the case of CIT Vs. Reliance Utilities and Power Ltd. (2009 (1) TMI 4 - HIGH COURT BOMBAY) the Honble jurisdictional High Court has held that in case the assessee has own funds besides having borrowed funds , the presumption as to the money advanced to sister concern was that the assessee has advanced out of own funds and not out borrowed funds. We, therefore,decide this issue in favour of the assessee.

Summary

Issues Involved:
1. Treatment of business loss as speculation loss.
2. Disallowance of sub-brokerage.
3. Disallowance under section 40A(2)(b).
4. Disallowance of interest.

Issue-wise Detailed Analysis:

1. Treatment of Business Loss as Speculation Loss:
The primary issue was whether the business loss of Rs. 1,46,03,171 should be considered as speculation loss under the provisions of Explanation to section 73. The assessee, a public limited company engaged in share and stock brokering, argued against this classification. However, the Tribunal upheld the CIT(A)'s decision, referencing the Hon'ble High Court of Calcutta's judgment in Eastern Aviation & Industries Ltd Vs CIT (1994) 208 ITR 1023, which had similar facts. Thus, the business loss was treated as speculative in nature, and the ground was dismissed.

2. Disallowance of Sub-brokerage:
The assessee challenged the disallowance of Rs. 89,32,288 paid as sub-brokerage, arguing that the services were genuine and necessary for conducting business. The AO had disallowed these expenses due to lack of evidence and confirmations. The Tribunal noted that confirmations from some parties were provided, and sub-brokerage payable to C.S. Boston (Hong Kong) Ltd was reversed and taxed in a subsequent year due to RBI's denial of remittance permission. Given these facts, the Tribunal found the disallowances unjustified and allowed the expenses, thereby partly allowing this ground.

3. Disallowance under Section 40A(2)(b):
The assessee contested the disallowance of Rs. 43,04,449 paid to related parties, arguing that the payments were for genuine services and not excessive. The AO had disallowed 50% of the total payment on an ad-hoc basis. The Tribunal observed that there was no evidence suggesting the payments were excessive or unreasonable compared to market rates, and similar expenses were allowed in previous years. Hence, the Tribunal found the disallowance unwarranted and deleted it, deciding this ground in favor of the assessee.

4. Disallowance of Interest:
For the assessment year 1998-99, the issue was the disallowance of Rs. 23,46,450 on interest, as the AO claimed that the assessee paid interest on borrowed funds but did not charge interest from directors and their family members. The Tribunal noted that the transactions were part of the ordinary course of business, and the amounts were shown as receivables under "Sundry Debtors." Moreover, the assessee had sufficient own funds to cover these transactions. Citing the Bombay High Court's decision in CIT Vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340, the Tribunal held that the presumption is that advances are made from own funds if both own and borrowed funds exist. Thus, the Tribunal decided this issue in favor of the assessee.

Conclusion:
The appeals were partly allowed, with the Tribunal providing detailed reasoning for each issue, ensuring that the legal principles and factual contexts were thoroughly considered. The Tribunal's order was pronounced on September 30, 2015.