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2018 (8) TMI 380 - AT - Income TaxDisallowance of expenditure u/s. 37(1) - claim of professional charges paid and services received - The issue is about the quantum of allowance as there is no dispute about services being rendered - 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.
Issues Involved:
1. Disallowance of expenditure under Section 37(1) of the Income Tax Act. 2. Enhancement of income by disallowing loss claimed on valuation of shares. Issue-Wise Detailed Analysis: 1. Disallowance of Expenditure under Section 37(1): Facts and Arguments: - The assessee, an investment company, claimed service charges of ?18 Lakhs paid to M/s. SRSR Advisory Services Pvt. Ltd. (SRSR) for various business-related services. - The Assessing Officer (AO) found the service charges disproportionate to the services received and allowed only ?3 Lakhs, disallowing ?15 Lakhs under Section 37(1) of the Income Tax Act. - The Commissioner of Income Tax (Appeals) [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. Legal Principles and Judgment: - Section 37(1) allows deductions for expenses incurred wholly and exclusively for business purposes. - The Tribunal emphasized that the AO cannot step into the shoes of the businessman to decide the reasonability of an expenditure. - The Tribunal cited various legal precedents, including the Supreme Court's rulings, which state that business expenses should be judged from the point of view of the businessman and not the revenue. - The Tribunal concluded that since the expenditure was incurred for business purposes and was not personal or capital in nature, the entire amount claimed should be allowed. - The Tribunal directed the AO to allow the full claim of ?18 Lakhs. 2. Enhancement of Income by Disallowing Loss Claimed on Valuation of Shares: Facts and Arguments: - The assessee purchased unquoted shares of M/s. Dataquest Management and Communications Ltd. 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 subsequently disallowed the loss, enhancing the total income by the same amount. - The CIT(A) argued that the shares were acquired as an investment and should not be valued at face value, and that the loss was deemed to be from speculation business under the Explanation to Section 73. Legal Principles and Judgment: - The Tribunal examined whether the CIT(A) had the jurisdiction to enhance the assessment by disallowing the loss. - It was noted that the CIT(A) relied on the trading account filed with the return, and thus, it was not a new source of income. - The Tribunal referenced the Supreme Court's ruling in CIT Vs. Nirbheram Deluram, which upheld that the appellate authority's power is co-terminous with the AO and can consider additional grounds. - On the merits, the Tribunal found that the valuation of shares at ?10 was without basis, especially since the intrinsic value was around ?23.52 and the company had issued shares at higher prices later. - The Tribunal affirmed the CIT(A)'s decision that the valuation was done to claim a notional loss and upheld the disallowance of the loss. Conclusion: - The Tribunal allowed the assessee's appeal regarding the disallowance of service charges, directing the AO to allow the full amount claimed. - The Tribunal dismissed the appeal concerning the enhancement of income by disallowing the loss on share valuation, upholding the CIT(A)'s decision. Final Order: - The appeal for AY 2002-03 was partly allowed. - The appeals for AYs 2003-04, 2004-05, and 2005-06 were allowed in full regarding the disallowance of service charges.
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