Mahaveer Steel Industries Ltd., Pune V. Addl.CIT,Range-9, Pune, Pune

ITA 1512/PUN/2008

• Counselvise Citation: 151224514 RSA 2008
• Duration Of Justice: 2 year(s) 6 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 30-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 20-11-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: H C LEUVA
• Assessee Lawyers: R G NAHAR
• Keywords: Depreciation; Business expenditure; Earning of tax free income; Corroborative evidences; Revenue expenditure; Capital expenditure
• Section: 143(3); 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER I.T.A. NO. 1512/PN/08 & 1222/PN/10 (ASSTT. YEARS: 2005-06 & 2006-07) MAHAVIR STEEL INDUSTRIES, .. APPELLANT E-24, MIDC, BHOSARI PUNE. PAN AABCM 1744K VS. ASSTT. COMMISSIONER OF INCOME-TAX RANGE-9, PUNE .. RESPONDENT APPELLANT BY: SHRI R G NAHAR RESPONDENT BY: SHRI H.C. LEUVA ORDER PER G.S. PANNU, AM BOTH THE CAPTIONED APPEALS RELATE TO THE SAME ASSES SEE INVOLVING COMMON ISSUES, THEREFORE, WE FIND IT EXPE DIENT TO PASS A COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVIT Y. 2. WE SHALL FIRST TAKE UP ASSESSEES APPEAL IN ITA NO 1512/PN/08 PERTAINING TO THE ASSESSMENT YEAR 2005-06. THIS APP EAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMI SSIONER OF INCOME-TAX (APPEALS)-III, PUNE DATED 18.9.2008 WHIC H, IN TURN, HAS ARISEN FROM AN ORDER DATED 27.12.2007 PASSED BY THE ASSESSING OFFICER UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT) 3. THE GROUND NO. 1 RAISED IN THIS APPEAL RELATES T O THE DISALLOWANCE OF RS 5,00,000/- MADE BY THE ASSESSING OFFICER OUT OF SO FTWARE IMPROVEMENT EXPENSES. THE FACTS, IN BRIEF, ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD CLAIMED AN AMOUNT OF RS 5,00,0000/- AS REVENUE EXPENDITURE UND ER THE HEAD SOFTWARE ITA NOS 1512/PN/08, 1222/PN/10 MAHAVIR STEEL INDS.LTD., PU NE 2 IMPROVEMENT EXPENSES FOR SOFTWARE PURCHASED FROM M/ S GLOBAL WARE SYSTEMS & SOFTWARE SOLUTIONS. BEFORE THE ASSESSING OFFICER IT WAS STATED THE IMPUGNED EXPENDITURE WAS CLAIMED AS REVENUE EXPENDITURE BECA USE THE SOFTWARE BECAME OBSOLETE VERY SOON DUE TO RAPID CHANGES IN TECHNOLO GY, AND THE ADVANTAGES DERIVED FROM SOFTWARE, THEREFORE, COULD NOT BE SAI D TO BE GIVING AN ENDURING BENEFIT. THE ASSESSING OFFICER REJECTED THE ABOVE E XPLANATION OF THE ASSESSEE AS ACCORDING TO HIM AS PER THE PROVISIONS OF THE ACT R EAD WITH RELEVANT INCOME-TAX RULES COMPUTER INCLUDING COMPUTER SOFTWARE WAS CL ASSIFIED AS AN ASSET WHICH WAS ENTITLED TO CLAIM DEPRECIATION @ 60%. IN THIS V IEW OF THE MATTER, THE ASSESSING OFFICER TREATED THE IMPUGNED EXPENDITURE OF RS 5,00,000/- INCURRED BY THE ASSESSEE FOR ACQUISITION OF SOFTWARE AS CAPITAL IN NATURE AND ACCORDINGLY DISALLOWED THE SAME, SIMULTANEOUSLY ALLOWING DEPREC IATION @ 60%. AGGRIEVED BY THIS, ASSESSEE TOOK UP THE MATTER IN APPEAL BEFORE THE COMMISSIONER OF INCOME- TAX (APPEALS). 4. BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS), THE ASSESSEE SUBMITTED THAT THE SOFTWARE OBTAINED WAS RELATED TO STREAMLINE ALL THE AREAS OF DAY TO DAY OPERATIONS OF THE ASSESSEE, VIZ. ACCOUNT S, PURCHASE, SALES AND PRODUCTION OPERATIONS AND THEREFORE THE ADVANTAGES DERIVED CANNOT BE CALLED AS AN ENDURING BENEFIT IN ANY CAPITAL FIELD AND THAT I S THE REASON WHY THE SAME HAS BEEN CLAIMED AS REVENUE EXPENDITURE. IT WAS CONTEND ED THAT IT DID NOT BRING INTO EXISTENCE ANY NEW ASSET. RELIANCE WAS PLACED ON THE FOLLOWING DECISIONS: A. MADRAS AUTO SERVICES P. LTD. 233 ITR 469, B. GOOD YEAR INDIA LTD V ITO 73 ITD 189, C. BUSINESS INFORMATION PROCESSING SERVICES V ACIT 73 ITD 304, D. INDIAN GINNING & PRESSING CO. LTD. V. CIT 252 IT R 577. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE COMMISSIONER OF INCOME- TAX (APPEALS) JUSTIFIED THE ORDER OF THE ASSESSING OFFICER OBSERVING THUS: THE SUBMISSION IS CONSIDERED. IT IS EVIDENT FROM T HE SUBMISSION OF THE APPELLANT THAT THE AMOUNT OF RS 5,00,000/- HAS NOT BEEN SPENT IN RESPE CT OF MINOR MODIFICATION OF THE EXISTING SOFTWARE, RATHER THE EXPENDITURE HAS BEEN SPENT FOR COMPLETE REPLACEMENT OF THE EXISTING SOFTWARE BY A NEW SOFTWARE AND THE EXPENDI TURE SO INCURRED IS GOING TO GIVE THE ASSESSEE NOT ONLY EXTRA BENEFITS BUT THE BENEFITS S O OBTAINED ARE ALSO OF ENDURING NATURE. FURTHER, THE INCLUSION OF THE SOFTWARE IN THE LIST OF ITEMS ON WHICH DEPRECIATION IS ALLOWABLE AS PER I.T RULES SHOWS THAT EXPENDITURE ON PURCHASE OF SOFTWARE HAS TO BE TREATED AS CAPITAL EXPENDITURE. ACCORDINGLY, THE AO IS HELD TO BE JUSTIFIED IN TREATING THE AMOUNT OF ITA NOS 1512/PN/08, 1222/PN/10 MAHAVIR STEEL INDS.LTD., PU NE 3 RS 5,00,000/- AS CAPITAL EXPENDITURE AND MAKING NET ADDITION OF RS 2,00,000/- AFTER ALLOWING DEPRECIATION. HIS ACTION IN DOING SO IS UP HELD. STILL AGGRIEVED, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 5. BEFORE US, LEARNED COUNSEL FOR THE ASSESSEE, AT THE OUTSET, SUBMITTED THAT THE IMPUGNED EXPENDITURE WAS NOT ALLOWED AS A REVEN UE EXPENDITURE, BUT THE ASSESSEE HAS BEEN ALLOWED DEPRECIATION AT THE PRESC RIBED RATE AND ULTIMATELY ASSESSEE WOULD BE ENTITLED TO WRITE-OFF THE EXPENDI TURE OVER A PERIOD OF TIME. THEREFORE, WITHOUT CONCEDING ON THE ISSUE OF LEGAL PROPOSITION, THE SAID GROUND WAS NOT SERIOUSLY PRESSED FOR PROSECUTION. AS A RES ULT THEREOF, WE HAVE DEEMED IT FIT AND PROPER TO UPHOLD THE ACTION OF THE COMMI SSIONER OF INCOME-TAX (APPEALS) AND ACCORDINGLY, ASSESSEE FAILS ON THIS G ROUND. 6. THE NEXT GROUND RELATES TO DISALLOWANCE OF RS 4, 01,890/- UNDER SECTION 14A OF THE ACT. ON A SCRUTINY OF PROFIT & LOSS ACCO UNT, THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAD CLAIMED EXPENDITURE ON AC COUNT OF INTEREST FOR AN AMOUNT OF RS1,6,34,509/-. THE ASSESSING OFFICER FUR THER OBSERVED THAT ASSESSEE HAD MADE LONG TERM INVESTMENT IN SHARES FOR RS 98,0 4,444/- WITH THE INTENTION OF EARNING EXEMPT DIVIDEND INCOME. ON BEING REQUIRED B Y THE ASSESSING OFFICER AS TO WHY THE INTEREST ATTRIBUTABLE TO EARNING OF THE EXEMPT DIVIDEND INCOME BE NOT DISALLOWED IN PROPORTION TO THE LONG TERM INVESTMEN TS MADE, IT WAS SUBMITTED BY ASSESSEE THAT THE ADDITIONAL LONG TERM INVESTMENT I N SHARES MADE DURING THE RELEVANT YEAR WAS OF ONLY RS 25,00,000/- AND THE FU NDS FOR THIS WERE GENERATED FROM THE DIVIDEND, PROFIT ON SALES OF INVESTMENT AN D ALSO OUT OF ITS BUSINESS PROFITS. REFERRING TO SECTION 14A OF THE ACT, THE A SSESSING OFFICER OBSERVED THAT THE EXPENDITURE INCURRED FOR THE PURPOSE OF EARNING AN INCOME WHICH IS EXEMPT IS NOT TO BE ALLOWED. THE ASSESSING OFFICER WAS OF THE VIEW THAT SINCE ASSESSEE HAD NOT MAINTAINED SEPARATE POOL OF FUNDS FOR ITS A CTIVITY RELATED TO LONG TERM INVESTMENT IN SHARES ON WHICH IT WAS EARNING EXEMPT DIVIDEND INCOME, IT COULD NOT BE SAID THAT THE BORROWED FUNDS HAVE NOT BEEN U TILIZED FOR MAKING THE INVESTMENTS. HE WORKED OUT THE AVERAGE OF INTEREST PER ANNUM ON THE TOTAL FUNDS ITA NOS 1512/PN/08, 1222/PN/10 MAHAVIR STEEL INDS.LTD., PU NE 4 AT THE DISPOSAL OF THE ASSESSEE AT 3.59% AND APPLYI NG THIS RATE TO THE AMOUNT OF TOTAL LONG TERM INVESTMENT OF RS 98,04,444/-, INTER EST ATTRIBUTABLE TO LONG TERM INVESTMENT WAS ESTIMATED AT RS 3,51,980/-. FURTHER, THE ADMINISTRATIVE EXPENSES INCURRED BY ASSESSEE IN EARNING THE ABOVE MENTIONED EXEMPT DIVIDEND INCOME WAS ESTIMATED BY THE ASSESSING OFFICER AT RS 50,000 /-. ACCORDINGLY, A TOTAL OF RS 4,01,980/- WAS DISALLOWED BY THE ASSESSING OFFICER BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. 7. IN APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS) IT WAS CONTENDED THAT THE TOTAL INVESTMENT BY WAY OF LONG TERM INVESTMENT IN SHARES WAS RS 98,04,444/-; THAT TOTAL INTEREST FREE FUNDS AVAILABLE WAS RS 22,72,39,937/- (COMPRISED OF SHARE CAPITAL OF RS 1,46,25,000/-, RE SERVES AND SURPLUS OF RS 21,26,14,931/-; AND THE PROFITS EARNED OF RS 17,56 ,67,037/-) WHICH SHOWED THAT ENOUGH INTEREST FREE FUNDS WERE AVAILABLE FOR INVES TMENT IN SHARES. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE CO MMISSIONER OF INCOME-TAX (APPEALS) CONFIRMED THE DISALLOWANCE OF RS 4,01,980 /- MADE BY THE ASSESSING OFFICER UNDER SECTION 14A OF THE ACT, OBSERVING THU S: AFTER CAREFUL CONSIDERATION, I AM NOT INCLINED TO ACCEPT THE CONTENTION OF THE APPELLANT. ALTHOUGH THE APPELLANT HAS CONTENDED THA T NO BORROWED FUNDS HAVE BEEN UTILISED FOR MAKING INVESTMENTS IN THE SHARES THE F ACT THAT ALL THE FUNDS OF THE APPELLANT ARE KEPT IN A COMMON HOTCH-POTCH GOES AGAINST THE C LAIM OF THE APPELLANT. IN ABSENCE OF ANY SEGREGATION OF THE FUNDS AND ON ACCOUNT OF APPE LLANTS FAILURE TO BRING ANY MATERIAL ON RECORD IN ORDER TO SUBSTANTIATE ITS CLAIM, I HOL D THAT THE AO IS JUSTIFIED IN WORKING OUT INTEREST EXPENDITURE ATTRIBUTABLE TO THE EARNING OF DIVIDENDS BY APPLYING THE AVERAGE RATE OF INTEREST AND DISALLOWING THE SAME U/S 14A OF THE I T ACT. AS REGARDS ESTIMATION OF ADMINISTRATIVE EXPENSES OF RS 50,000/- INCURRED FOR THE PURPOSE OF EARNING DIVIDENDS, I FIND THAT THE ESTIMATION IS IN TUNE WITH THE INVEST MENTS MADE AND THEREFORE, THE SAME IS HELD TO BE REASONABLE. IN VIEW OF THE AFORESAID, I SEE NO REASON TO MAKE ANY INTERFERENCE IN THE ACTION OF THE AO IN MAKING DISALLOWANCE OF RS 4,01,980/- U/S 14A. HIS ACTION IN DOING SO IS UPHELD AND THE DISALLOWANCE IS CONFIRMED. NOT BEING SATISFIED WITH THIS ORDER OF THE COMMISSI ONER OF INCOME-TAX (APPEALS), ASSESSEE IS IN APPEAL BEFORE US. 8. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE LOWER AUTHORITIES HAVE ERRED IN MAKING THE DISALLOW ANCE SINCE THERE IS NO MATERIAL TO SUGGEST THAT ANY INTEREST BEARING FUNDS HAVE BEE N UTILIZED FOR THE PURPOSES OF MAKING LONG TERM INVESTMENT IN SHARES. IT IS FURTHE R POINTED OUT THAT SIMILAR DISALLOWANCE MADE BY THE ASSESSING OFFICER IN THE A SSESSMENT YEAR 2006-07 HAS ITA NOS 1512/PN/08, 1222/PN/10 MAHAVIR STEEL INDS.LTD., PU NE 5 BEEN DELETED BY THE COMMISSIONER OF INCOME-TAX (APP EALS) FOLLOWING THE RATIO OF A JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V RELIANCE UTILITIES & POWER LTD. 313 ITR 340 (BOM). IT HAD BE EN CONTENDED THAT THE MATERIAL ON RECORD SHOWS THAT THERE ARE SUFFICIENT INTEREST- FREE FUNDS AVAILABLE AND IN ANY CASE, ASSESSEE HAS BOTH INTEREST-FREE AND INTEREST BEARING FUNDS, BUT SINCE THE INTEREST-FREE FUNDS ARE ENOUGH TO COVER THE LONG-TE RM INVESTMENT IN SHARES, AS PER THE HONBLE HIGH COURT, A PRESUMPTION WOULD ARI SE THAT SUCH LONG TERM INVESTMENT IN SHARES HAS BEEN MADE OUT OF INTEREST- FREE FUNDS AVAILABLE WITH THE ASSESSEE. FOLLOWING SUCH REASONING LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT, THE IMPUGNED ADDITION SUSTAINED BY THE COMMI SSIONER OF INCOME-TAX (APPEALS) IS UNSUSTAINABLE, AS IT CANNOT BE DEDUCED THAT ANY INTEREST BEARING FUNDS HAVE BEEN UTILIZED FOR THE INVESTMENT IN SHAR ES. 9. ON THE OTHER HAND, THE LD DEPARTMENTAL REPRESENT ATIVE, APPEARING FOR THE REVENUE, DEFENDED THE ORDERS OF THE AUTHORITIES BEL OW BY PLACING RELIANCE ON THE SAME IN SUPPORT OF THE CASE OF THE REVENUE. 10. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. IN THIS CASE, BOTH THE AUTHORITIES BELOW HAVE CONCLUDED THAT THE ENTIRE FU NDS OF THE ASSESSEE ARE IN A COMMON HOTCHPOTCH AND THERE IS NO SEGREGATION OF FU NDS OF THE ASSESSEE FOR ITS ACTIVITY RELATED TO THE LONG TERM INVESTMENTS. THE ASSESSEE DOES NOT MAINTAIN A SEPARATE POOL OF FUNDS FOR ITS ACTIVITIES RELATED T O LONG TERM INVESTMENTS AND ITS NORMAL BUSINESS ACTIVITIES. UNDER THESE CIRCUMSTANC ES, THE POINT THAT IS REQUIRED TO BE ASCERTAINED IS AS TO WHETHER IT CAN BE SAID T HAT THE ASSESSEE HAS INCURRED ANY EXPENDITURE ON ACCOUNT OF INTEREST FOR THE PURP OSE OF EARNING EXEMPT INCOME REPRESENTED BY THE DIVIDEND ON THE LONG TERM INVEST MENT IN SHARES, SO AS TO INVITE THE DISALLOWANCE UNDER SECTION 14A OF THE ACT. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD. (SUP RA) HELD THAT IF THERE WERE FUNDS AVAILABLE BOTH INTEREST-FREE AND INTEREST BEARING, THEN A PRESUMPTION WOULD ARISE THAT THE INVESTMENTS MADE ARE OUT OF INTEREST-FREE FUNDS GENERATED OR AVAILABLE WITH THE ASSESSEE, PROVIDED INTEREST-FREE FUNDS WER E SUFFICIENT TO COVER THE ITA NOS 1512/PN/08, 1222/PN/10 MAHAVIR STEEL INDS.LTD., PU NE 6 INVESTMENTS. IN THE PRESENT CASE, IT IS CLEARLY EST ABLISHED THAT THE TOTAL INVESTMENT BY WAY OF LONG TERM INVESTMENT IN SHARES OF RS 98,0 4,444/- IS COVERED WITHIN THE LEVEL OF INTEREST-FREE FUNDS AVAILABLE WITH THE ASS ESSEE COMPRISING OF THE SHARE CAPITAL OF RS 1,46,25,000/-, RESERVES AND SURPLUS O F RS 21,26,14,931/- AS ALSO PROFITS GENERATED FOR THE YEAR OF RS 17,56,67,037/- . UNDER THESE CIRCUMSTANCES, THE ASSESSEE IS JUSTIFIED IN CLAIMING A PRESUMPTION THAT THE INVESTMENTS IN QUESTION ARE OUT OF INTEREST-FREE FUNDS GENERATED O R AVAILABLE WITH IT AND, THEREFORE, NO PART OF INTEREST EXPENDITURE CAN BE S AID TO HAVE BEEN INCURRED FOR THE PURPOSES OF EARNING EXEMPT DIVIDEND INCOME, FOL LOWING THE REASONING LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE O F RELIANCE UTILITIES & POWER LTD. (SUPRA). AS A RESULT THEREOF, WE FIND NO JUSTIFICATION FOR UPHOLDING THE DISALLOWANCE OF RS 4,01,890/- MADE BY THE ASSESSING OFFICER INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT. AS A RESULT T HEREOF, WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS 4,01,890/-. THUS, ON THI S GROUND THE ASSESSEE SUCCEEDS. 11. THE NEXT GROUND RELATES TO DISALLOWANCE OF RS 1 4,92,750/- OUT OF BROKERAGE EXPENSES. THE ASSESSEE HAD CLAIMED EXPEND ITURE OF RS 78,14,622/- ON ACCOUNT OF BROKERAGE WHICH INCLUDED AN AMOUNT OF RS 14,92,750/- CLAIMED TO HAVE BEEN PAID TO SHRI B. D. GAVI IN CONNECTION WIT H THE CONTRACT OF MSEB. ENQUIRIES MADE BY THE ASSESSING OFFICER REVEALED TH AT SHRI B D GAVI WAS RENDERING SOME GENERAL NATURE OF LIASIONING SERVICE S FOR ITS BUSINESS WITH MSEB ETC. AND THE EXPENSES INCURRED BY MR B D GAVI WERE OF THE NATURE OF SPEED MONEY WHICH, AS PER THE ASSESSING OFFICER, WAS PROH IBITED BY LAW AND THEREFORE DISALLOWABLE AS PER EXPLANATION TO SECTION 37(1) OF THE ACT. IT WAS SUBMITTED BY THE ASSESSEE THAT THERE WAS A DIRECT NEXUS BETWEEN THE BUSINESS OF THE ASSESSEE COMPANY AND THE AMOUNT PAID FOR THE SERVIC ES BEING RENDERED BY MR B D GAVI AND THEREFORE THE AMOUNT PAID TO HIM AS BROK ERAGE QUALIFIED AS BUSINESS EXPENDITURE. AFTER CONSIDERING THE SUBMISSIONS OF T HE ASSESSEE, THE ASSESSING ITA NOS 1512/PN/08, 1222/PN/10 MAHAVIR STEEL INDS.LTD., PU NE 7 OFFICER OBSERVED THAT THERE WAS NO WRITTEN AGREEMEN T ENTERED INTO BY THE ASSESSEE WITH SHRI B D GAVI AND THEREFORE, IT WAS N OT CLEAR AS TO WHAT WAS THE EXACT NATURE OF SERVICES SHRI GAVI WAS REQUIRED TO RENDER TO THE ASSESSEE; THAT SHRI GAVI FAILED TO FURNISH EVIDENCE IN SUPPORT OF HIS CLAIM THAT HE HIRED EMPLOYEES FROM TIME TO TIME AS PER THE REQUIREMENT; THAT SHRI GAVI CLAIMED EXPENSES ON CONSULTANCY CHARGES OF RS 6,60,220/- OU T OF GROSS COMMISSION RECEIPTS OF RS 14,92,750/- AND CREDITED ONLY NET CO MMISSION RECEIPTS OF RS 8,32,530/- TO HIS PROFIT & LOSS ACCOUNT FOR WHICH S HRI GAVI COULD NOT FURNISH ANY DETAIL OR EVIDENCE; THAT SHRI GAVI WAS NOT IN POSSE SSION OF ANY SUPPORTING EVIDENCE FOR HIS CLAIM OF EXPENSES, RATHER IN HIS S TATEMENT RECORDED ON OATH, HE STATED THAT CONSIDERING THE CUT-THROAT COMPETITION IN LIASONING BUSINESS, HE WAS REQUIRED TO INCUR THE EXPENSE FOR WHICH IT WAS NOT POSSIBLE TO MAINTAIN BILLS/VOUCHERS. BASED ON THESE FACTUAL ASPECTS, THE ASSESSING OFFICER HELD THAT AS PER PROVISIONS OF EXPLANATION TO SECTION 37(1) OF T HE ACT, EXPENSES INCURRED IN CONNECTION WITH SERVICES PROHIBITED BY LAW CANNOT B E ALLOWED AS DEDUCTION AND ACCORDINGLY, HE DISALLOWED THE AMOUNT OF RS 14,92,7 90/- BEING BROKERAGE CHARGES PAID TO SHRI B D GAVI AND ADDED TO THE INCO ME OF THE ASSESSEE. 12. IN APPEAL BEFORE THE COMMISSIONER OF INCOME-TAX (APPEALS), THE ASSESSEE REITERATED THE SUBMISSIONS AS MADE BEFORE THE ASSES SING OFFICER IN SUPPORT OF ITS CLAIM OF BROKERAGE EXPENSES OF RS 14,92,790/-. AFTE R CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, THE COMMISSIONER OF IN COME-TAX (APPEALS) PERUSED THE LIST OF COMMISSION PAYMENTS MADE TO 98 COMMISSION AGENTS TOTALING TO RS 78,14,622/-, AND NOTED THAT IN MOST OF THE CA SES, COMMISSION WAS PAID AT THE RATE OF RS 100 / MT WHILE IN RESPECT OF SHRI B D GAVI SUCH COMMISSION WAS PAID AT THE RATE OF RS 700 / MT. ON BEING REQUIRED TO EXPLAIN THIS DISPARITY IN COMMISSION PAYMENT TO SHRI G D GAVI ASSESSEE EXPLAI NED THAT THE RATE OF BROKERAGE AND COMMISSION DEPENDED UPON THE NATURE O F SERVICES AVAILED FROM A PARTICULAR BROKER. HOWEVER, THE ASSESSEE WAS NOT AB LE TO EXPLAIN AS TO WHAT DISTINCT SERVICE WAS OBTAINED FROM SHRI GAVI SO AS TO JUSTIFY HIGHER PAYMENT OF ITA NOS 1512/PN/08, 1222/PN/10 MAHAVIR STEEL INDS.LTD., PU NE 8 BROKERAGE TO HIM. AS PER THE COMMISSIONER OF INCOME -TAX (APPEALS), IT WAS ALSO ADMITTED BY THE ASSESSEE THAT THE TERMS AND CONDITI ONS FOR PAYMENT OF COMMISSION WERE NOT SUPPORTED BY ANY WRITTEN AGREEM ENT. ON THE BASIS OF THESE FACTS, THE COMMISSIONER OF INCOME-TAX (APPEALS) HEL D THAT THE ASSESSEE HAS NOT BEEN ABLE TO ESTABLISH THE REASONABLENESS AND GENUI NENESS OF THE PAYMENT OF RS 14,92,750/- MADE TO SHRI B D GAVI AS BROKERAGE. THE COMMISSIONER OF INCOME-TAX (APPEALS) FURTHER HELD THAT THE FAILURE OF THE ASSESSEE TO ESTABLISH THE REASONABLENESS OF PAYMENT OF BROKERAGE AT HIGHER RA TE TO SHRI B. D GAVI COUPLED WITH THE FAILURE OF SHRI GAVI TO SUBSTANTIA TE THE EXPENSES INCURREDFOR EARNING CONSULTANCY CHARGES AS WELL AS HIS ADMISSIO N THAT IN LIASONING BUSINESS, HE IS REQUIRED TO INCUR CERTAIN EXPENSES FOR WHICH IT IS NOT POSSIBLE TO MAINTAIN BILLS/VOUCHERS, JUSTIFIED THE ACTION OF THE ASSESSI NG OFFICER IN DISALLOWING THE EXPENDITURE. HOWEVER, LOOKING TO THE FACT THAT ASSE SSEE HAS OBTAINED SERVICES OF SHRI B D GAVI, THE COMMISSIONER OF INCOME-TAX (APPE ALS) FINALLY HELD THAT IT WOULD BE REASONABLE TO ALLOW BROKERAGE AT THE RATE AT WHICH COMMISSION WAS PAID BY ASSESSEE TO OTHER BROKERS. ACCORDINGLY, BRO KERAGE OF RS 2,13,250/- WAS DIRECTED TO BE ALLOWED AT THE RATE OF RS 100 /MT WH ICH RESULTED IN SUSTENANCE OF DISALLOWANCE AT RS 12,79,500/- AGAINST WHICH ASSES SEE IS IN APPEAL BEFORE US. 13. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE VEHEMENTLY ARGUED THAT THERE WAS NO JUSTIFICATION ON THE PART OF THE COMMI SSIONER OF INCOME-TAX (APPEALS) TO HAVE PARTLY SUSTAINED THE DISALLOWANCE OUT OF BROKERAGE/COMMISSION. IT HAS BEEN POINTED OUT THAT PART ALLOWANCE OF THE CLAIM BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ITSELF SHOWS THAT HE WAS SATISFIED THAT SERVICES HAVE BEEN RENDERED BY THE RECIPIENT A ND, THEREFORE, PART DISALLOWANCE IS UNSUSTAINABLE. IT HAS ALSO BEEN POI NTED OUT THAT THE ASSESSEE HAS PAID BROKERAGE TO AS MANY AS 98 DIFFERENT PART IES AS PER THE DETAILS PLACED AT PAGES 46 TO 48 OF THE PAPER BOOK AND TO SOME OF THE PARTIES THE RATE OF BROKERAGE IS EVEN HIGHER THAN THAT PAID TO THE DISP UTED PARTY, NAMELY, SHRI B D GAVI. IT WAS ALSO CONTENDED THAT IN THE IMMEDIATELY PAST ASSESSMENT YEAR 2004- ITA NOS 1512/PN/08, 1222/PN/10 MAHAVIR STEEL INDS.LTD., PU NE 9 05 THE ASSESSEE HAS PAID BROKERAGE/COMMISSION TO SH RI B D GAVI AS PER DETAILS PLACED AT PAGE 46 OF THE PAPER BOOK AND THE SAME HA S BEEN ALLOWED AS SUCH BY THE ASSESSING OFFICER IN THE ASSESSMENT FINALIZED U NDER SECTION 143(3) OF THE ACT. THEREFORE, FOR THE YEAR UNDER CONSIDERATION, THE AS SESSING OFFICER IS NOT JUSTIFIED IN HOLD THAT THE CLAIM WAS NOT ALLOWABLE. THE LEARN ED COUNSEL REFERRED TO INVOKING OF EXPLANATION TO SECTION 37(1) OF THE ACT BY THE ASSESSING OFFICER AND SUBMITTED THAT THERE WAS NO MATERIAL TO HOLD THAT T HE EXPENSES CLAIMED TO HAVE BEEN INCURRED BY B D GAVI IN DISCHARGE OF SERVICES TO THE ASSESSEE WAS IN ANY MANNER PROHIBITED BY LAW. IT WAS POINTED OUT THAT S HRI B D GAVI WAS EXAMINED BY THE DEPARTMENT AND MERELY BECAUSE HE COULD NOT EXPL AIN CERTAIN DETAILS OF THE EXPENSES IN RELATION TO THE JOB ENTRUSTED BY THE AS SESSEE, IT CANNOT BE INFERRED THAT HE INCURRED EXPENDITURE ON AN ACTIVITY NOT PER MISSIBLE IN LAW. THE GROSS COMMISSION PAID BY THE ASSESSEE TO SHRI B D GAVI WA S RS 14,13,754/- AND THE EXAMINATION OF THE SAID PERSON REVEALED THAT HE HAD CLAIMED EXPENSES AGAINST SUCH INCOME OF RS 6,60,220/- WHILE COMPUTING HIS TO TAL INCOME. THE FACTUM OF SHRI B D GAVI NOT PROPERLY EXPLAINING SOME OF THE E XPENSES CLAIMED BY HIM, CANNOT BE INTERPRETED TO MEAN THAT ANY EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE WHICH IS IMPERMISSIBLE IN LAW SO AS TO INV ITE THE DISALLOWANCE AS PER EXPLANATION TO SECTION 37(1) OF THE ACT. 14. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE, APPEARING FOR THE REVENUE, HAS DEFENDED THE ORDER OF THE COMM ISSIONER OF INCOME-TAX (APPEALS) IN SUPPORT OF THE CASE OF THE REVENUE. AC CORDING TO THE LEARNED DEPARTMENTAL REPRESENTATIVE, THE ASSESSING OFFICER RIGHTLY DISALLOWED THE EXPENDITURE SINCE THE ASSESSEE COULD NOT ESTABLISH THE REASONABLENESS AND GENUINENESS OF THE PAYMENT OF BROKERAGE TO SHRI B D GAVI AT A HIGHER RATE. MOREOVER, THE FAILURE OF SHRI B D GAVI TO EXPLAIN T HE NATURE OF EXPENDITURE INCURRED WHILE PERFORMING THE SERVICES TO THE ASSES SEE, CREATES A DOUBT THAT THE SAID PERSON HAS SPENT MONEY AN ACTIVITY PROHIBITED IN LAW SO AS TO JUSTIFY THE DISALLOWANCE IN TERMS OF EXPLANATION TO SECTION 37( 1) OF THE ACT. ITA NOS 1512/PN/08, 1222/PN/10 MAHAVIR STEEL INDS.LTD., PU NE 10 15. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. IN THIS CASE, THE ASSESSEE IS STATED TO BE IN THE BUSINESS OF MANUFAC TURE OF ROLLED STRUCTURAL STEEL PRODUCTS ETC. FOR THE PURPOSES OF EFFECTING SALES, THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF BROKERAGE/COMMISSION TO VARIO US PARTIES. THE CLAIM MADE OUT BY THE ASSESSEE IS THAT SUCH PARTIES HAVE RENDE RED SERVICES FOR EFFECTUATING SALES OF THE ASSESSEE. THE TOTAL EXPENDITURE CLAIME D ON ACCOUNT OF BROKERAGE WAS RS 78,14,622/- WHICH INCLUDED AN AMOUNT OF RS 1 4,92,750/- PAID TO ONE SHRI B D GAVI. THE EXPENDITURE BY WAY OF PAYMENT TO SHRI B D GAVI HAS BEEN DISALLOWED ON THE GROUND THAT RECIPIENT HAS INCURRE D EXPENSES AND/OR RENDERED SERVICES TO THE ASSESSEE, WHICH ARE PROHIBITED BY L AW AND THUS, INVOKING THE PROVISIONS OF EXPLANATION TO SECTION 37(1) OF THE A CT, AN AMOUNT OF RS 14,92,750/- HAS BEEN DISALLOWED. AS PER THE ASSESSI NG OFFICER, THERE WAS NO WRITTEN AGREEMENT WITH SHRI B D GAVI AND IN ABSENCE OF THE SAME, IT WAS NOT CLEAR AS TO WHAT NATURE OF SERVICES WERE RENDERED. HOWEVER, WE FIND THAT THE SAID SHRI B D GAVI HAS BEEN EXAMINED BY THE DEPARTMENT A ND HE HAS EXPLAINED THE SERVICES RENDERED. THE ASASSESSING OFFICER WAS NOT SATISFIED WITH HIS EXPLANATION ON THE GROUND THAT SHRI B D GAVI COULD NOT PRODUCE EVIDENCE OF CERTAIN EXPENSES CLAIMED TO HAVE BEEN INCURRED BY H IM FOR THE PURPOSE OF RENDERING SERVICES TO THE ASSESSEE. IT WAS EXPLAINE D THAT SHRI B D GAVI HAS RENDERED SERVICES IN RELATION TO THE SALES EFFECTED TO MSEB. THE SAID SHRI B D GAVI ALSO CONFIRMED RENDERING OF SERVICE TO THE ASS ESSEE IN THIS REGARD AND IN FACT AS PER THE WRITTEN SUBMISSIONS OF THE ASSESSEE WHICH HAVE BEEN REPRODUCED IN PARA 6.2 OF THE ASSESSMENT ORDER, IT WAS EXPLAIN ED THAT SHRI B D GAVI WAS LIASONING WITH MSEB ON BEHALF OF THE ASSESSEE AND T HE SAID PARTY, I.E. MSEB HAD ISSUED AN IDENTITY CARD AS THE AUTHORIZED PERSON OF THE ASSESSEE COMPANY FOR ENTERING THE MSEB PREMISES FROM TIME TO TIME. ON CO NSIDERATION OF THE AFORESAID FACTORS AS ALSO THE ULTIMATE CONCLUSION OF THE COMM ISSIONER OF INCOME-TAX (APPEALS) THAT THERE WAS NO DENIAL OF THE FACT THAT THE APPELLANT HAS OBTAIN ED SERVICES OF SHRI B D GAVI , WE FIND IT FAIR AND PROPER TO INFER THAT INDEED SERVICES ITA NOS 1512/PN/08, 1222/PN/10 MAHAVIR STEEL INDS.LTD., PU NE 11 WERE RENDERED BY SHRI B D GAVI TO THE ASSESSEE. IN FACT THE PAYMENT TO SHRI B D GAVI IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR 2 004-05 WAS ALSO A SUBJECT MATTER OF SCRUTINY ASSESSMENT UNDER SECTION 143(3) OF THE ACT WITHOUT ANY ADVERSE COMMENTS. UNDER THESE CIRCUMSTANCES, THE PL EA OF THE ASSESSING OFFICER THAT NO SERVICES HAD BEEN RENDERED BY SHRI B D GAVI IS UNTENABLE. IN SO FAR AS THE ARGUMENT THAT SHRI B D GAVI HAS INCURRED EXPENSES/RENDERED SERVICES WHICH ARE PROHIBITED BY LAW IS CONCERNED, WE FIND T HAT THE SAME IS BASED ON MERE SURMISES AND CONJECTURES. IN FACT, SAID ARGUME NT OF THE ASSESSING OFFICER HAS BEEN NEGATIVED BY THE COMMISSIONER OF INCOME-TA X (APPEALS), BECAUSE HE HAS PARTLY ALLOWED THE EXPENDITURE AT A RATE WHICH HAS BEEN NORMALLY PAID BY THE ASSESSEE TO OTHER BROKERS. IN ANY CASE, THE CASE MA DE OUT BY THE ASSESSING OFFICER TO INVOKE EXPLANATION TO SECTION 37(1) OF T HE ACT, IN OUR VIEW, IS DEVOID OF ANY FACTUAL SUPPORT AND IS THEREFORE UNTENABLE. 16. IN SO FAR AS THE PART SUSTENANCE OF ADDITION BY THE COMMISSIONER OF INCOME-TAX (APPEALS) IS CONCERNED, ON THIS ASPECT A LSO WE FIND NO JUSTIFICATION FOR HIS ACTION. WE HAVE PERUSED THE DETAIL OF BROKERAGE /COMMISSION PAID TO OTHER PARTIES PLACED AT PAGES 43 TO 45 OF THE PAPER BOOK AND FIND THAT IN CERTAIN CASES THE RATE OF BROKERAGE IS EVEN HIGHER THAN THAT PAID TO SHRI B D GAVI. THE PART DISALLOWANCE SUSTAINED BY THE COMMISSIONER OF INCOM E-TAX (APPEALS), IN OUR VIEW, IS MISCONCEIVED AND IS ON MERE SURMISES AND I S, THEREFORE, UNSUSTAINABLE. IN THIS VIEW OF THE MATTER, WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME- TAX (APPEALS) AND DIRECT THE ASSESSING OFFICER TO A LLOW THE ENTIRE CLAIM OF RS 14,92,750/-. THUS, ASSESSEE SUCCEEDS ON THIS GROUND . 17. IN THIS MANNER, APPEAL OF THE ASSESSEE FOR ASSE SSMENT YEAR 2005-06 IS PARTLY ALLOWED. 18. WE NOW TAKE UP ITA NO 1222/PN/2010 PERTAINING T O THE ASSESSMENT YEAR 2006-07. GROUND NO. 1 RAISED IN THIS APPEAL ALSO RE LATES TO THE DISALLOWANCE OF RS 63,500/- MADE BY THE ASSESSING OFFICER OUT OF SO FTWARE IMPROVEMENT EXPENSE. WE HAVE DEALT WITH SIMILAR GROUND IN THE A SSESSEES APPEAL FOR THE ITA NOS 1512/PN/08, 1222/PN/10 MAHAVIR STEEL INDS.LTD., PU NE 12 ASSESSMENT YEAR 2005-06, WHERE THE ASSESSEE HAS NOT SERIOUSLY DISPUTED THE SAID GROUND. ACCORDINGLY ON THE PARITY OF REASONING GIVEN IN THIS ORDER, WE DISMISS THIS GROUND OF THE ASSESSEE. 19. THE NEXT ISSUE AGITATED BY THE ASSESSEE IN THIS APPEAL RELATES TO THE DISALLOWANCE OUT OF BROKERAGE EXPENSES. WE FIND THA T SIMILAR GROUND HAS BEEN RAISED BY THE ASSESSEE FOR THE ASSESSMENT YEAR 2005 -06 WHERE WE HAVE DISCUSSED THIS ISSUE IN DETAIL. ON SIMILAR PARITY O F REASONING, WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) A ND DIRECT THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE OF RS10,80,000/- . THE ASSESSEE SUCCEEDS ON THE GROUND. 20. IN THE RESULT, BOTH THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED. DECISION PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF MAY 2011. SD/- SD/- (SHAILENDRA KUMAR YADAV) JUDICIAL MEMBER (G.S. PANNU) ACCOUNTANT MEMBER PUNE: DATED: 31 ST MAY, 2011 B COPY OF THE ORDER IS FORWARDED TO : 1. MAHAVIR STEEL INDUSTRIES LTD., PUNE 2. THE ACIT R-9, PUNE 3. THE CIT(A)-III, PUNE 4. THE CIT-V PUNE 5. THE D.R, B BENCH, PUNE TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT, PUNE BENCHES, PUNE PUNE