2018 (8) TMI 342 - 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 the amount by way of loss claimed on the valuation of certain shares for AY 2002-03.

Issue-wise Detailed Analysis:

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

The assessee, an investment company, filed appeals against the disallowance of expenditure under Section 37(1) for AYs 2002-03 to 2005-06. The primary contention was the disallowance of service charges paid to M/s. SRSR Advisory Services Pvt. Ltd. The AO found the service charges of ?18 Lakhs disproportionate to the services rendered and allowed only ?3 Lakhs, disallowing ?15 Lakhs under Section 37(1).

The CIT(A) upheld the AO's decision, noting that the major part of the assessee's income was from interest and dividends, which did not require services from SRSR. Additionally, the assessee incurred other professional charges and audit fees, making the ?18 Lakhs service charge unreasonable.

The Tribunal considered the principles laid down by the Supreme Court regarding Section 37(1), emphasizing that the AO cannot step into the shoes of the businessman to decide the reasonableness of the expenditure. The Tribunal concluded that since the expenditure was incurred wholly and exclusively for business purposes, the entire amount should be allowed. Thus, the Tribunal directed the AO to allow the full claim of ?18 Lakhs for AY 2002-03 and similarly for AYs 2003-04, 2004-05, and 2005-06.

2. Enhancement of Amount by Way of Loss Claimed on Valuation of Shares for AY 2002-03:

For AY 2002-03, the CIT(A) enhanced the income by disallowing a loss of ?58,46,780/- claimed on the valuation of unquoted shares of M/s. Dataquest Management and Communications Ltd. The assessee valued these shares at face value (?10 per share) instead of the purchase price (?155 per share), creating a trading loss set off against interest income.

The CIT(A) issued a show-cause notice and concluded that the shares were acquired as an investment, not stock-in-trade, and should be shown in the balance sheet under long-term investments. The CIT(A) also noted that the net realizable value of the shares was higher than the cost price, and the loss was deemed speculative under the Explanation to Section 73, which cannot be set off against interest income.

The Tribunal upheld the CIT(A)'s enhancement, stating that the CIT(A) has the jurisdiction to enhance the assessment based on the trading account filed with the return. The Tribunal agreed that the valuation of shares at ?10 was without basis and intended to claim a notional loss. The Tribunal affirmed the CIT(A)'s decision to disallow the loss and enhance the income by ?58,46,780/-.

Conclusion:

The Tribunal allowed the assessee's appeals for AYs 2003-04, 2004-05, and 2005-06 regarding the disallowance of service charges, directing the AO to allow the full claim. For AY 2002-03, the Tribunal partly allowed the appeal, affirming the enhancement of income by disallowing the loss claimed on the valuation of shares while allowing the full claim of service charges. The Tribunal's decision emphasized the principles of commercial expediency and the limitations on the AO's power to re-evaluate business expenditures.