2018 (8) TMI 376 - AT - Income Tax

Disallowance of expenditure u/s. 37(1) - Held that - 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. 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. AO is directed to allow the claim in full. To that extent, the orders of AO and CIT(A) are modified. Thus, the grounds on this issue are allowed. Enhancement of amount by way of loss claimed on valuation of certain shares - CIT(A) has jurisdiction to consider the loss claimed of the assessee - Held that - 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 made by CIT(A) 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 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. Affirming the order of the CIT(A) in which he has discussed in detail the legal provisions and factual aspects, we agree with the 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. Disallowance of service charges paid to M/s. SRSR by restricting the amount paid to ₹ 25,000/- p.m., except that AO in AY.2004-05 calculated the amount to be allowed at ₹ 40,000/- p.m., but allowed only ₹ 3 Lakhs in the computation. However, in AY. 2005-06, AO allowed an amount of ₹ 4,80,000/- increasing the amount from ₹ 3 Lakhs. Ld.CIT(A) has not adjudicated the ground raised in AY. 2004-05 about calculation mistake. However, the claim of service charges was decided in AY. 2002-03 vide para 10 above. The facts are similar to the facts in AY. 2002-03, consequently, following the decision stated above on the issue, we direct the AO to allow the amount in full as claimed.

Summary

Issues Involved:
1. Disallowance of expenditure under Section 37(1) of the Income Tax Act.
2. Enhancement of income by disallowing loss claimed on the valuation of certain shares for AY 2002-03.

Detailed Analysis:

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

Background:
The assessee, an investment company, claimed service charges of ?18 lakhs paid to SRSR Advisory Services Pvt. Ltd. (SRSR) under 'Administrative and other expenses.' The Assessing Officer (AO) disallowed ?15 lakhs of this amount, deeming it disproportionate to the services rendered and not wholly and exclusively for business purposes. The AO allowed only ?3 lakhs as reasonable expenditure.

Assessee's Argument:
The assessee contended that the expenditure was wholly and exclusively for business purposes and that Section 40A(2) was not applicable as there were no common directors between the companies. The assessee relied on various case laws to support their claim.

CIT(A)'s Findings:
The CIT(A) upheld the AO's disallowance, noting that:
- The major part of the income was from interest and dividend, which did not require services from SRSR.
- The transactions involving the purchase and sale of shares did not necessitate SRSR's services.
- The nature and quantum of business did not justify the payment of ?18 lakhs per annum to SRSR, especially when other professional charges and audit fees were already incurred.

Tribunal's Decision:
The Tribunal held that the AO cannot step into the shoes of the assessee to determine the reasonableness of the expenditure under Section 37(1). It emphasized that the expenditure should be allowed in full if it is wholly and exclusively for business purposes. The Tribunal directed the AO to allow the entire claim of ?18 lakhs, modifying the orders of the AO and CIT(A).

2. Enhancement of Income by Disallowing Loss on Valuation of Shares:

Background:
For AY 2002-03, the assessee purchased unquoted shares of Dataquest Management and Communications Ltd. (DQ) at a premium and valued them at face value in the closing stock, resulting in a loss of ?58,46,780. The CIT(A) issued a show cause notice and subsequently disallowed this loss, enhancing the income.

Assessee's Argument:
The assessee argued that the shares were held as stock in trade and valued at cost or market value, whichever was lower, as per accounting standards. The assessee contended that the loss was not speculative and should be set off against other income. They relied on several case laws and argued that the CIT(A) had overstepped his jurisdiction by enhancing the income.

CIT(A)'s Findings:
The CIT(A) concluded that:
- The shares were acquired as an investment, not stock in trade.
- The shares could not be valued at face value as their net realizable value was higher.
- The loss was deemed speculative under the Explanation to Section 73 and could not be set off against interest income.
- The method adopted by the assessee was a tax avoidance strategy.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s jurisdiction to enhance the income, noting that the CIT(A) had not discovered a new source of income but had re-evaluated the existing claim based on the return filed. On the merits, the Tribunal agreed with the CIT(A) that the valuation of shares at ?10 was without basis and aimed at claiming a notional loss. The Tribunal affirmed the CIT(A)'s disallowance of the loss and rejected the assessee's contentions.

Conclusion:
The Tribunal allowed the entire claim of service charges under Section 37(1) for all assessment years, modifying the AO and CIT(A)'s orders. However, it upheld the CIT(A)'s enhancement of income for AY 2002-03 by disallowing the loss claimed on the valuation of shares. The appeals for AYs 2003-04, 2004-05, and 2005-06 were allowed, while the appeal for AY 2002-03 was partly allowed.