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TMI Blog2014 (1) TMI 1412X X X X Extracts X X X X X X X X Extracts X X X X ..... st under section 14A of the Act. This issue is dealt with in paragraph 1 of the assessment order and paragraphs 1 to 5 of the order of the CIT(A). The assessee itself disallowed interest of Rs. 3,40,56,528/- under section 14A of the Act. In calculating the disallowance, the assessee reduced the interest received from the interest paid and the disallowance was also worked out on net basis. The Assessing Officer took objection to this. He also found that while calculating the disallowance the assessee has worked out the average funds available as on 31.03.2000 and 31.03.2001 and computed the disallowance accordingly. The Assessing Officer also took objection to this method of calculating the disallowable interest. He took the view that the averaging of the available funds on these two dates was not proper and proceeded to calculate the average cost of capital with reference to the total assets as on 31.03.2001, which was the last date for the assessment year under consideration. Accordingly the disallowable interest came to Rs. 3,90,21,257/-. On appeal, the CIT(A) upheld the method adopted by the Assessing Officer. 5. The contention of the assessee in the further appeal before us is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... called for. The ground is thus allowed. 8. The second ground relates to the adhoc disallowance of administrative and other expenses amounting to Rs. 2,00,000/- under section 14A of the Act. This ground is dismissed as not pressed. 9. The third ground relates to the disallowance of professional fees. This issue is discussed in paragraph 2 of the assessment order and in paragraphs 9 to 14 of the impugned order of the CIT(A). The assessee paid Rs. 34,00,000/- to Ms Naina Lal Kidwai and claimed the same as deduction as professional fees paid for the purpose of the business. The Assessing Officer called for the details of the professional services offered by Ms Naina Lal Kidwai but the assessee was unable to furnish the details. Accordingly the amount was added back to the assessee's income. Before the CIT(A) it was submitted that the fees was paid to provide the assessee with support, advice and consultation in connection with its business activities in India and to keep the assessee appraised of any events, developments and other matters relevant to the business in India. A copy of the agreement for payment of the professional fees was also filed before the CIT(A). It was again subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve in nature and were mostly rendered personally over the phone is not acceptable since the burden is on the assessee to reveal what information was given to it by Ms Naina Lal Kidwai, which would facilitate its business operations in India. The reliance placed by the CIT(A) on the judgment of the Supreme Court in the case of Lachminarayan Madan Lal vs. CIT (1972) 86 ITR 439 (SC) is apposite and in this case it has been held that the mere existence of an agreement between the parties is not conclusive or decisive of the question whether the payment of commission or professional fees is allowable or not and it is for the assessee to prove that the commission or fees was paid for services which were connected to the assessee's business and which were actually rendered. In the absence of any such evidence in the present case we are in agreement with the view taken by the departmental authorities that the assessee failed to discharge its burden. We accordingly uphold the disallowance and dismiss the ground. 12. Ground No: 4 relates to the deduction allowable under section 80HHE of the Act. It is contended by the assessee that the CIT(A) erred in confirming the action of the Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... head "Profits and gains of business or profession" as reduced by 90% of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. He accordingly submitted that the Assessing Officer had rightly taken the figure of profits at Rs. 15,42,52,035/- and he was also right in deducting the interest on fixed deposits, commission, brokerage, etc., to the extent of 90%, which left a negative figure of business profits of Rs. 1,16,14,062/-, which did not permit any deduction to be computed under section 80HHE of the Act. 14. The learned CIT DR also referred to sub-section (5) of section 80-IA, which provided that the profits and gains of an eligible business shall be computed as if the eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year for which the determination is to be made and submitted that there was no similar provision in section 80HHE in order to justify the assessee's claim that under sub-section (3) of section 80HHE only the profits of the export of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing. The first is that the assessee has taken the total turnover of the business as representing the turnover of only the back office support services. The second feature noticed by the Assessing Officer is that the assessee's figure of profit of Rs. 80,46,765/- is the profit of only the business of back office support services. After noticing these two features the Assessing Officer has commented that "the assessee believes that since it is engaged in different lines of business, which are not eligible to a deduction under section 80HHE of the Income Tax Act, 1961, the total profit and the total turnover for the purpose of deduction should be restricted to the eligible business i.e. the back office support services in view of the following judicial pronouncements: (i) CIT vs. K K Doshi, 245 ITR 849 (Bom) (ii) ACIT vs. Smt Subhadra Ravi Karunakaran, 66 ITD 53 (Coch)". Thereafter the Assessing Officer has proceeded to observe that the profits of the business have to be worked out on the basis of Explanation (d) below section 80HHE and in this view of the matter has proceeded to take the figure of profits of all the businesses carried on by the assessee, which has been explained e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Under the Income Tax Act, having regard to the provisions of Chapter IV read with section 70 and section 71, it seems to us that in the case of an assessee carrying on more than one business, each business is considered as a separate source falling under the head "Profits and gains of business". The net result of the computation in respect of any source of business, if it is a loss, can be adjusted against the income from any other business as provided in section 70(1). Therefore, when Explanation (d) provides that the expression "profits of the business" means the profits of the business as computed under the head "Profits and gains of business", it means the profits of the eligible business as computed under the aforesaid head. In other words, Explanation (d) does not expand the meaning of the expression "profits of the business" to include profits of all the businesses carried on by the assessee. Having said in sub-section (3) that the profits of the business means the profits of the eligible business referred to in sub-section (1), it is inconceivable that by Explanation (d) the expression "profits of the business" would have been defined to include the profits of all the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of the assessee on this ground." In coming to the above conclusion the Tribunal has referred to two judgments of the Madras High Court, in the case of CIT vs. Rathore Brothers (2002) 254 ITR 656 (Mad) and in the case of CIT vs. Madras Motors / M M Forgings Ltd. (2002) 257 ITR 60 (Mad). These two judgments were concerned with section 80HHC of the Act. However, there was similarity between section 80HHC and section 80HHE in the sense that while working out the eligible profits on the basis of the ratio between the export turnover and the total turnover, it was held by the Madras High Court that it is only the profits of the export business that have to be so apportioned and the profits of businesses which did not qualify for the deduction, which were also carried on by the assessee, cannot be held eligible for the deduction. The ratio laid down in these judgments was considered applicable to the provisions of section 80HHE also. 19. The result of the above discussion is that the departmental authorities were not correct in taking the profits of the eligible business at Rs. 15,42,52,035/-. They ought to have taken the figure at Rs. 80,46,765/- as contended for by the assessee, whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not generate the expected rate of return and in order to make good the deficit the assessee was obliged to pay Rs. 8,14,330/- to the Provident Fund. 23. The Assessing Officer called upon the assessee to explain as to why the aforesaid two items of expenses should not be disallowed because they related to the stock broking activities carried on by the assessee till 31.03.1999 only and not during the relevant accounting year. The assessee admitted that the stock broking activity was discontinued after the above date but pointed out that the activities of rendering back office support services, rendering support services to group entities and providing business premises along with facilities to group entities were carried on during the relevant year and the expenses / write off claimed by the assessee should be allowed against the profits from the aforesaid businesses. The Assessing Officer was however of the view that since the business of stock broking, with reference to which the bad debts and payment to Provident Fund were incurred, had been stopped, those expenses cannot be allowed against the profits of the other businesses carried on in the relevant accounting year. The view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g business in the relevant year. He has also observed in paragraph 25 of his order that the assessee was not responsible for the loss of the shares while dealing with the clients and that the cost of replacing the shares to the clients would represent capital expenditure. We are unable to agree with this part of his decision because either the assessee could compensate the client for the loss or could procure the shares. Whichever way it is done, it cannot be said to be capital expenditure because the loss arises in the course of the carrying on of the business. The CIT(A) has also held that there was no agreement between the assessee and the clients that the assessee was responsible for such losses. It may be true that there may not have been a written agreement but so long as the assessee has undertaken to compensate the client for the loss of the shares, the bona fide and the genuineness of the claim cannot be doubted. In fact it was not doubted by the Assessing Officer. We are unable to accept as correct the conclusion of the CIT(A) in this regard. The assessee has recovered some brokerage in the relevant accounting year as part of the amount of Rs. 41,41,726/- credited in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d returns to the employees, in the absence of any agreement, it is not the obligation of the assessee to make good the difference. There is no evidence of any business considerations involved in the act of the assessee. We are in agreement with the conclusion of the CIT(A) on this point in paragraph 25.1 of the impugned order. This is apart from the reasoning that no expenditure can be claimed against receipts assessed as profits of the business under section 41(1)(a) of the Act. We therefore uphold the disallowance of the claim of bad debts of Rs. 8,40,920/- and payment of Rs. 8,14,330/- to the Provident Fund. The ground is dismissed. 27. The seventh and last ground for this year relates to the disallowance of depreciation of Rs. 31,350/- on purchase of Figutsu scanner. The evidence for purchase of the scanner was not furnished before the Assessing Officer but was furnished before the CIT(A). The CIT(A) in paragraph 33 of his order has not admitted the evidence on the ground that the Assessing Officer had given ample opportunity to the assessee to prove his claim. Having regard to this finding, we uphold the disallowance and dismiss the ground. 28. In the result, the appeal is p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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