SISTAS P.LTD, MUMBAI V. ITO 2(3)(2), MUMBAI

ITA 1913/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54888 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2005-2006
• Appeal Filed On: 10-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business expenditure; Retrospective amendment; Sham transactions
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, D BENCH, MUMBAI. BEFORE SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A NO.1913/ MUM/2010 ASSESSMENT YEAR: 2005-06 SISTAS PRIVATE LIMITED .. APPELLANT 101, M.G.ROAD, 3 RD FLOOR, SHETTY HOUSE, MUMBAI-400 023 PA NO.AAACS 5758 E VS INCOME TAX OFFICER2(3)(2) ,. RESPONDEN T AAYAKAR BHAVAN, M.K. ROAD, MUMBAI. APPEARANCES: DEVDATTA MAINKAR, F OR THE APPELLANT G.K.NAIR, FOR THE RESPONDENT DATE OF HEARING : 16-06-2011 DATE OF PRONOUNCEMENT : 12 -08-2011 O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSEE APPELLANT HA S CHALLENGED CORRECTNESS OF CIT(A)S ORDER DATED 16 TH DECEMBER, 2009, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESS MENT YEAR 2005-06. 2. IN THE FIRST GROUND OF APPEAL, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: I.T.A NO.1913/ MUM/2010 ASSESSMENT YEAR: 2005-06 2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF SHORT TE RM CAPITAL LOSS ON SALE OF MUTUAL FUND UNITS U/S.94(7) IN THE AMOUNT O F ` .64,13,137 WITHOUT APPRECIATING THE FACT THAT THE IMPUGNED LOS S WAS INCURRED IN RESPECT OF TRANSACTIONS CONCLUDED BEFORE ENACTMENT OF THE FINANCE ACT, 2004, WHICH BROUGHT AMENDMENT TO SEC.94(7) SO AS TO EXTEND PERIOD OF HOLDING OF MUTUAL FUND UNITS TO NINE MONT HS AS AGAINST EARLIER PERIOD OF ONLY THREE MONTHS. 3. BRIEFLY STATED THE RELEVANT MATERIAL FACTS ARE L IKE THIS. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS PURCHASED THE UNITS OF MUTUAL FUND AND SOLD THEM AT A LOSS WITHIN A VERY SHORT PERIOD FOR REALIZING DIVIDEND. THESE TRANSACTIONS WERE IN THE NATURE OF DIVIDEND STRIPPING. THERE IS NO DISPUTE THAT THESE TRANSACT IONS WERE ALSO COVERED BY SECTION 94(7) AS IT IS STOOD AMENDED W.E.F. 1.4.2005. HOWE VER, THE CASE OF THE ASSESSEE WAS THAT SINCE THE TRANSACTIONS WERE COMPLETED BEFORE T HE AMENDMENT IN SECTION COULD BE EFFECTED IN STATUTE, THE AMENDMENT WILL NOT APPL Y TO THE ASSESSEES CASE. EVEN AS THE ASSESSEE DID SO, THE ASSESSEE FAIRLY ACCEPTED T HAT THE AMENDMENT WAS RETROSPECTIVE IN EFFECT AND ITS CONTENTION WAS CO NFINED TO THE ARGUMENTS THAT THE LAW AS IT IS STOOD AT THE POINT OF TIME, WHEN THE T RANSACTION WAS COMPLETED, IS TO BE APPLIED AND NOT THE LAW AS SUBSEQUENTLY AMENDED EVE N THOUGH RETROSPECTIVE IN NATURE. THIS ARGUMENT WAS REJECTED BY THE ASSESSIN G OFFICER ON THE GROUND THAT THE AMENDMENT IN LAW IS W.E.F. 1.4.2005 AND THE AMENDME NT APPLIED TO WHOLE OF THE YEAR. IN ADDITION TO THIS, THE ASSESSING OFFICER A LSO HELD THAT THESE TRANSACTIONS ARE SHAM TRANSACTIONS AND PURELY TAX AVOIDANCE TRANSACT IONS BUT THEN THIS ASPECT OF THE MATTER IS NOT REALLY NECESSARY BECAUSE WE HAVE TO H OLD THAT RETROSPECTIVE AMENDMENT IN LAW WAS TO BE APPLIED ON THE FACTS OF THIS CASE IRRESPECTIVE WHETHER THE TRANSACTION IS SHAM TRANSACTION OR A GENUINE TR ANSACTION, RESULTANT LOSS HAS TO BE DISREGARDED. COMING BACK TO THE QUESTION AS TO WHE THER OR NOT THE PROVISION OF SECTION 94(7) COULD BE APPLIED ON THE FACTS OF THIS CASE, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A). ONCE AGAIN IT WAS CONTENDED BY THE ASSESSEE THAT GENERALLY RETROSPECTIVE PROVISION AMENDMENT IS MADE WITH A VIEW TO OVERRIDE AN EXISTING PROVISION OF LAW, WHICH IS INTERPRETED BY THE COURTS IN A MANNER CONTRARY I.T.A NO.1913/ MUM/2010 ASSESSMENT YEAR: 2005-06 3 TO LEGISLATIVE INTEND, BUT THAT WAS NOT THE CASE WI TH PROVISION OF SECTION 94(7), WHICH WAS INTRODUCED TO PLUG TAX AVOIDANCE. IT WAS CONTE NDED THAT THE AMENDMENT SO MADE WAS NOT A ROUTINE AMENDMENT BUT AN AMENDMENT W HICH WAS BROUGHT ABOUT TO PLUG TAX AVOIDANCE SCHEME AND MUST THEREFORE BE INT ERPRETED STRICTLY. IT WAS FURTHER CLAIMED THAT IN THE PRESENT CASE, THE APPELLANT COU LD NOT BE DENIED DEDUCTION OF LOSS WHICH WAS ALLOWABLE IN TERMS OF THE LAW AS IT IS ST OOD ON THE DATE OF TRANSACTION. IN ESSENCE THUS IT WAS CONTENDED THAT THE LEGAL POSITI ON AS IT IS STOOD ON THE DATE ON WHICH TRANSACTIONS WERE COMPLETED MUST BE APPLIED T O THE PRESENT CASE. THE CIT(A) WAS NOT IMPRESSED WITH THESE ARGUMENTS AND REJECTED THE SAME BY OBSERVING, INTER ALIA , AS UNDER: I HAVE CONSIDERED THE FACTS OF THE ISSUE AND THE SU BMISSIONS MADE BY THE AR BUT DO NOT FIND MERIT IN THEM. IT IS AN ADMITTED FA CT THAT THE PROVISIONS OF CLAUSE (B) (II) OF SUB-SECTION (7) OF SECTION 94 WE RE AMENDED BY THE FINANCE (NO.2) ACT, 2004 WITH EFFECT FROM 1.4.2005. THIS F ACT IS ALSO NOT DISPUTED BY THE APPELLANT. BY THIS AMENDMENT THE REQUISITE PERIOD OF HOLDING AFTER THE RECORD DATE WAS INCREASED FROM THREE MONTHS TO NINE MONTHS . SUCH AN AMENDMENT HAVING BEEN BROUGHT ON THE STATUTE WITH EFFECT FROM 1.4.2005, THE AO WAS PERFECTLY RIGHT IN DISALLOWING SHORT TERM CAPITAL L OSS ON SALE OF MUTUAL FUND UNITS U/S.94(7) SINCE THE REVISED EXTENDED PERIOD O F NINE MONTHS WAS VERY MUCH APPLICABLE TO TRANSACTIONS CONCLUDED WITH EFFECT FR OM 1.4.2005. THIS GROUND OF APPEAL IS, THEREFORE, DISMISSED. 4. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 5. WE FIND THAT THE AMENDMENT IN LAW IS RETROSPECTI VE IN NATURE AND THERE IS NO AMBIGUITY ON THAT ASPECT OF THE MATTER. WHETHER AN AMENDMENT IN LAW CAN ADVERSELY AFFECT THE TRANSACTIONS ALREADY CONCLUDED , AS THE ASSESSEE IS AGGRIEVED OF, IS CERTAINLY NOT FOR THIS FORUM TO ADJUDICATE AND T HE SCOPE OF OUR POWERS IS CONFINED TO DECIDE THE MATTER IN ACCORDANCE WITH LAW, AS IT EXISTS. WE, THEREFORE, SEE NO MERITS IN THE GRIEVANCE OF THE ASSESSEE, AND REJECT THE SAME. 6. GROUND NO.1 IS THUS DISMISSED. 7. IN GROUND NO.2, THE ASSESSEE HAS RAISED THE FOLL OWING GRIEVANCE: I.T.A NO.1913/ MUM/2010 ASSESSMENT YEAR: 2005-06 4 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) ERRED IN CONFIRMING DISALLOWANCE OF FOLLOWING EXPEN SES, WHICH WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS CARRIED ON BY THE APPELLANT DURING THE YEAR UNDER APPEAL: A. TRAVELING EXPENSES ` .20,10,331 B. ENTERTAINMENT ` . 1,12,196 C. MAINTENANCE CHARGES ` . 2,9,699 D. LEGAL AND PROFESSIONAL FEES: ` . 9,82,533 E. MISC. EXPENSES ` . 2,62,655. 8. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E ASSESSING OFFICER NOTICED THAT WHILE ASSESSEE ONLY HAS PASSIVE INCOMES LIKE R ENT, INVESTMENT, DIVIDENDS ETC, THE ASSESSEE HAS CLAIMED VARIOUS EXPENSES LIKE SALA RIES, STAFF WELFARE, RENT, REPAIRS, TRAVELLING, CONVEYANCE, ENTERTAINMENT, PROFESSIONAL AND LEGAL CHARGES ETC. IN RESPONSE TO ASSESSING OFFICERS REQUISITION TO SHOW CAUSE AS TO WHY THESE EXPENSES NOT BE DISALLOWED, IT WAS SUBMITTED BY THE ASSESSE E THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CORPORATE COMMUNICATIONS CONSULTANT S, ENTREPRENEURSHIP PROMOTION AND SUCH OTHER INNOVATIVE AREAS. IT WAS A LSO SUBMITTED THAT THE ASSESSEE WAS ABLE TO GET A PRESTIGIOUS ASSIGNMENT FROM TATA GROUP, TO PRODUCE THE PICTORIAL DIARY ON THE OCCASION OF BIRTH CENTENARY OF JAMSHE DJI TATA, AND, ENCOURAGED BY THIS, THE ASSESSEE IS EXPLORING POSSIBILITIES OF SUCH SIM ILAR THEME DIARIES ON OTHER NATIONAL AND CORPORATE LEADERS. IT WAS ALSO SUBMIT TED THAT ONE OF IMPORT PROJECTS THAT THE COMPANY IS WORKING ON IS THE THEME DIARY O N MAHATMA GANDHI THE APOSTLE OF PEACE AND NON-VIOLENCE. THEREFORE, THE COMPANY HAS TO MAKE EXTRA EFFORTS TO SELL ITS IDEAS AND ITS SERVICE. WITH RE GARD TO TRAVELING EXPENSES, IT WAS POINTED OUT THAT THE EXPENDITURE IS INCURRED IN CON NECTION WITH BUSINESS MEETINGS AT PLACES SUCH AS BANGALORE, DELHI, HYDERABAD, ETC. THE OTHER EXPENDITURES ARE INCURRED FOR THE PURPOSE OF BUSINESS. THE EXPLANAT ION OF THE ASSESSEE DID NOT FIND FAVOUR BY THE ASSESSING OFFICER. THE AO WAS OF THE VIEW THAT AS PER THE RECORDS I.T.A NO.1913/ MUM/2010 ASSESSMENT YEAR: 2005-06 5 MADE AVAILABLE THERE WERE NO EXITING CLIENTS AND TH E DETAILS OF SO-CALLED PROSPECTIVE CLIENTS WERE NOT SUBMITTED. FURTHER IN REGARD TO FOREIGN VISIT TO THE USA AND MALAYSIS, NO DETAILS WERE FURNISHED. REGARDING PROF ESSIONAL SERVICES, NO DETAILS WERE FURNISHED THAT THE PROFESSIONAL SERVICES WERE RENDE RED BUT THEN, THE PAYMENTS WERE MADE TO THE DIRECTOR AND RELATIVES. IT WAS IN THIS BACKDROP THAT THE ASSESSING OFFICER DISALLOWED THE ABOVE EXPENDITURE CLAIMED BY THE ASS ESSEE. 9. THE ASSESSEE IS NOT SATISFIED AND CARRIED THE MA TTER IN APPEAL BEFORE THE CIT(A). THE CIT(A) AFTER CONSIDERING THE DETAILS S UBMISSIONS MADE BY THE ASSESSEE BEFORE HIM, CONFIRMED THE STAND TAKEN BY THE ASSESS ING OFFICER, INTER ALIA, OBSERVING AS FOLLOWS: I HAVE CONSIDERED THE FACTS OF THE ISSUE AND THE SU BMISSIONS MADE BY THE AR. THE AR HAS HIMSELF ADMITTED THAT BUSINESS WAS DIFFICULT TO COME BY. IN FACT DURING THE YEAR, THERE HAS BEEN NO INDICATION O F ANY BUSINESS ACTIVITY NOR HAS THE AR BROUGHT ON RECORD ANY FACT TO ESTABLISH TH E GENUINENESS OF THE EXPENDITURE OR ITS CONNECTION WITH THE BUSINESS REQ UIREMENT TO BE ABLE TO ALLOW THE SAME. THE AO HAS GIVEN DETAILED REASON FOR DIS ALLOWING THE IMPUGNED EXPENSES. MOST OF THE AVERMENTS MADE BY THE AO DUR ING APPELLATE PROCEEDINGS HAVE ALREADY BEEN CONSIDERED AND DEALT WITH BY THE A O. THE AO HAS CLEARLY NOTED THAT THE STATED DIARY ON MAHATMA GANDHI HAS N OT SEEN THE LIGHT OF THE DAY EVEN TILL JULY, 2007. NO DETAILS WERE FILED EI THER BEFORE THE AO OR BEFORE THIS OFFICE REGARDING THE WORK ON THE SPECIAL DIARY. HE NCE, THE AO AHS RIGHTLY HELD THAT THE APPELLANT HAVING EARNED INCOME ONLY FROM S ALE OF INVESTMENTS AND RENTAL INCOME, THE IMPUGNED EXPENSES COULD NOT BE AL LOWED AS BUSINESS EXPENSES. THE AR HAS HIMSELF ADMITTED THAT NO INDE PENDENT THIRD PARTY EVIDENCE REGARDING THE INCURRING OF EXPENSES COULD BE FURNISHED AND THAT IT WAS IMPOSSIBLE TO DEMONSTRATE THE BUSINESS NECESSITY OF PROFESSIONAL EXPENSES CLAIMED AS DEDUCTION. THE AO HAS GIVEN A CLEAR FIN DING THAT NO EVIDENCE COULD BE FILED REGARDING SUBSTANTIATION OR JUSTIFICATION O F DOMESTIC OR FOREIGN TRAVEL EXPENSES. SIMILARLY IN RESPECT OF PROFESSIONAL EX PENSES, THE AO HAS FULLY EXPLAINED THAT THE AR COULD NOT FURNISH THE EXACT N ATURE OF PROFESSIONAL SERVICES RENDERED BY THESE PERSONS ESPECIALLY WHEN THE SAID PAYMENTS WERE MADE TO THE DIRECTOR AND RELATIVES. ALSO THE MAINTENANCE, MISC ELLANEOUS AND ENTERTAINMENT EXPENSES HAVE BEEN RIGHTLY DISALLOWED BY THE AO. HO WEVER, SOME STATUTORY EXPENDITURE WHICH IS ESSENTIAL FOR THE EXISTENCE OF THE COMPANY LIKE AUDIT FEES, FILING FEES PAID TO THE REGISTRAR OF COMPANIES ETC WOULD NEED TO BE INCURRED. SUCH EXPENDITURE HAS TO BE ALLOWED TO THE APPELLANT FROM THE RENTAL INCOME. I.T.A NO.1913/ MUM/2010 ASSESSMENT YEAR: 2005-06 6 10. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING P ERUSED THE MATERIAL ON RECORD, WE FIND THAT THE MATTER IS REQUIRED TO BE RECONSIDERED BY THE ASSESSING OFFICER IN THE LIGHT OF SPECIFIC DETAILS OF EXPENSE S AND JUSTIFICATION FOR TRAVEL AND OTHER EXPENSES AS PLACED ON RECORD COPIES OF WHICH HAVE BEEN PLACED BEFORE US AT PAGES 28 TO 64 OF THE PAPER BOOK. THE MERE FACT TH AT THE ASSESSEES BUSINESS PROJECT HAS NOT SEEN LIGHT OF THE DAY CANNOT JUSTIFY DISALL OWANCE OF EXPENSES. WE HAVE NOTED THAT THE AUTHORITIES BELOW HAVE OBSERVED THAT REQUI SITE DETAILS OF EXPENSES OR JUSTIFICATION OF EXPENSES WERE NOT AVAILABLE BEFORE THEM. HOWEVER, LEARNED COUNSEL HAS FILED COPIES OF LETTERS AND SUBMISSIONS FILED B EFORE THE AUTHORITIES BELOW WHICH IS SPECIFICALLY SET OUT DETAILS AND JUSTIFICATION F OR EXPENSES. WE, THEREFORE, DEEM IT FIT AND PROPER TO REMIT THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER FOR ADJUDICATION DENOVO IN THE LIGHT OF THESE DETAILS A ND JUSTIFICATIONS. WE DIRECT THE ASSESSEE TO PLACE ALL THESE MATERIALS BEFORE THE AS SESSING OFFICER ONCE AGAIN, AND WE ALSO DIRECT THE AO TO REDECIDE THE MATTER IN ACCORD ANCE WITH LAW. 11. GROUND NO.2 IS THUS TREATED AS ALLOWED FOR STAT ISTICAL PURPOSES. 12. IN THE RESULT, APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON 12 TH AUGUST, 2011 SD/- (V. DURGA RAO) JUDICIAL MEMBER SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER MUMBAI, DATED 12 TH AUGUST, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),, MUMBAI 4. COMMISSIONER OF INCOME TAX, , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH D, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI