THE ACIT 12(1), MUMBAI V. M/S. H.B. IRANI (BOND), MUMBAI

ITA 3640/MUM/2007

• Counselvise Citation: 364019914 RSA 2007
• Duration Of Justice: 3 year(s) 11 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 20-04-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 10-05-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: RK GUPTA
• Assessee Lawyers: VIJAY KOTHARI
• Keywords: Depreciation; Business expenditure; Proportionate interest; Cost of acquisition
• Section: 40A(3); 143(3); 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H MUMBAI BEFORE SHRI BEFORE SHRI BEFORE SHRI BEFORE SHRI R.S. SYAL R.S. SYAL R.S. SYAL R.S. SYAL (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) (AM) AND SMT. ASHA VIJAYARAGHAVAN (JM) ITA NO.3640/MUM/2007 ASSESSMENT YEAR-2004-05 THE ACIT - 12(1), MUMBAI VS. H.B. IRANI (BOND), 579, M.J. PHULE MARKET, MUMBAI-400 001 PAN-AABFH 9126R (APPELLANT) (RESPONDENT) ITA NO.3284/MUM/2007 ASSESSMENT YEAR-2004-05 H.B. IRANI (BOND), 579, M.J. PHULE MARKET, MUMBAI-400 001 PAN-AABFH 9126R VS. THE ACIT - 12(1), MUMBAI (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI VIJAY KOTHARI DEPARTMENT BY: SHRI R.K. GUPTA O R D E R O R D E R O R D E R O R D E R PER ASHA VIJAYARAGHAVAN (JM) PER ASHA VIJAYARAGHAVAN (JM) PER ASHA VIJAYARAGHAVAN (JM) PER ASHA VIJAYARAGHAVAN (JM) THESE TWO APPEALS ONE FILED BY THE ASSESSEE AND THE OT HER FILED BY THE REVENUE ARE DIRECTED AGAINST THE ORDERS DATED 27.2.2007 PASSED BY THE LD. CIT(A)-XII FOR THE ASSESSMENT YEAR 2004 -05. ITA NO. 3640/M/07 ITA NO. 3640/M/07 ITA NO. 3640/M/07 ITA NO. 3640/M/07- -- - REVENUES APPEAL REVENUES APPEAL REVENUES APPEAL REVENUES APPEAL 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DIRECT IMPORT ERS, EXPORTERS, BONDED STORES AND SHIPCHANDLERS. THE RETUR N OF INCOME WAS PROCESS U/S. 143(1) ACCEPTING THE RETURNED INCOME ON 2 3.2.2005. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY. IN R ESPONSE TO THE ITA NOS. 3640 & 3284/M/07 2 NOTICES ISSUED U/S. 143(2) AND 142(1), THE ASSESSEE FILED V ARIOUS DETAILS. THE ASSESSING OFFICER COMPLETED THE ASSESSMENT U/ S. 143(3) AND WHILE COMPLETING THE ASSESSMENT THE ASSESSING OFFICER M ADE SOME DISALLOWANCES ON WHICH THE ASSESSEE WAS AGGRIEVED. 3. THE ASSESSING OFFICER DISALLOWED 100% OF THE DEVANNIN G AND DETENTION CHARGES OF `. 6,48,665/-. HE NOTED THAT THESE EXPENSES WERE PENAL IN NATURE AND INCURRED FOR INFRACTION O F LAW AND THEREFORE NOT ALLOWABLE AS A BUSINESS EXPENDITURE. HOWEVER, THE ASSESSEE CLAIMED THAT THESE ARE ALL NORMAL EXPENSES INCURRED DU RING CLEARANCE OF THE IMPORT CARGO. THESE EXPENSES ARE INCURRED UNDE R VARIOUS HEADS LIKE DOCUMENTATION, CONSOLIDATION, TERMINAL HANDLING , DELIVERY ORDER, ADMINISTRATIVE AND COLLECTION CHARGES, STAMP DUTY, SER VICE TAX ENDORSEMENT ETC. ALL THE PAYMENTS WERE SUPPORTED 100 % WITH BILLS AND VOUCHERS AND ENTIRE EXPENSES WERE INCURRED ONLY BY CHEQUE PAYMENTS. NO CASH PAYMENT WAS MADE UNDER THIS HEAD AS T HEY WERE ALL NORMAL BUSINESS EXPENSES. IT WAS ALSO CLAIMED THAT NO CHARGES WERE PENAL IN NATURE AND NO EXPENSE WAS INCURRED FOR ANY BREACH OF LAW. 4. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, ASSE SSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A). 5. THE LD. CIT(A) HELD AS FOLLOWS: IT IS NOTED THAT THE ASSESSING OFFICER HAS NOT BROUGHT OUT ANY CASE TO SUGGEST THAT THESE WERE NOT NORMAL BUSINESS EXPENSES AND THEREFORE THESE ARE TREATED AS ALLOWABLE. 6. AGGRIEVED, REVENUE IS IN APPEAL BEFORE US AND HAS R AISED THE FOLLOWING GROUND: ITA NOS. 3640 & 3284/M/07 3 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF DEV ANNING AND DETENTION CHARGES OF `. 6,48,665/- AS THESE CHARGE S WERE LEVIED WHICH ARE NOTHING BUT PENAL IN NATURE. 7. THE LD. COUNSEL FOR THE ASSESSEE SHRI VIJAY KOTHARI B ROUGHT TO OUR NOTICE THAT THE LEDGER ACCOUNT AT PAGE 18 AND 2 2 OF THE PAPER BOOK AND ALSO POINTED OUT AT PAGE 23 TO 108 WHICH WERE TH E COPIES OF THE BILLS AND VOUCHERS. HE SUBMITTED THAT THE ENTIRE EXPE NSES WERE INCURRED BY CHEQUE PAYMENTS AND THAT NO CHARGES WERE PENAL IN NATURE AND NO EXPENSE WERE INCURRED FOR ANY BREACH O F LAW. 8. WE HAVE HEARD THE PARTIES AND PERUSED THE MATERIAL S BEFORE US. WE FIND THAT THE EXPENSES ARE NORMAL BUSINESS EXPENSES WHI CH ARE ALLOWABLE AND MADE BY CHEQUE PAYMENTS THEREFORE WE C ONFIRM THE ORDER OF THE LD. CIT(A) AND DISMISS THE REVENUES APPE AL. THIS GROUND RAISED BY THE REVENUE IS DISMISSED. 9. THE SECOND GROUND RAISED BY THE REVENUE READS AS FOL LOWS: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING TO REDUCE THE DISALLOW ANCE FROM 25% TO 10% OF THE TOTAL CLAIM OF ` 21,54,434/- ON ACCOU NT OF CLEARING AND FORWARDING EXPENSES WITHOUT ANY BASIS. 10. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD MADE THE INVESTMENT IN THE MUTUAL FUNDS, ETC. OF `. 1,80,06,28 6/- ON WHICH THE DIVIDEND OF `. 41,38,964/- WAS EARNED, WHICH WAS CLAI MED AS EXEMPT U/S. 10(33) OF THE I.T. ACT. FURTHER THE ASSESSEE CLAIM ED THAT THE INTEREST EXPENDITURE ON LOAN OF `. 2,70,000/- AND AL SO ON THE PARTNERS CAPITAL OF `. 27,80,800/-. 11. THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLANATIO N OFFERED BY THE ASSESSEE BECAUSE : ITA NOS. 3640 & 3284/M/07 4 I) FIRSTLY, IT WAS ADMITTED FACT THAT THE INVESTMENT IN MUTUAL FUND OF `. 1,80,06,286/- WAS MADE OUT OF THE PARTNERS CAPITAL ACCOUNT OF `. 3,13,96,650/- AND TH E LOAN CREDITORS OF `. 22,50,000/- AS EVIDENCED FROM THE BALANCE SHEET FILED BY THE APPELLANT. II) SECONDLY, IT WAS ALSO ADMITTED BY THE APPELLANT IN THE AFORESAID LETTER THAT SOURCE OF INVESTMENT IN MUTUAL FUND IS PARTNERS OWN CAPITAL ON WHICH WE HAVE GIVEN INTEREST. THUS IT WAS CLEAR THAT THE ASSESSEE HAD MADE THE INVESTMENT IN MUTUAL FUNDS OUT OF THE PARTNERS CAPITAL ACCOUNTS ON WHICH INTEREST WAS PAID BY THE APPELLANT. CONSIDERING THE ABOVE FACTS, IT WAS VERY CLEAR THAT OUT OF THE BORROWED FUND/PARTNERS CAPITAL ACCOUNT O F `. 3,36,46,650/-, THE APPELLANT HAD INVESTED IN MUT UAL FUND OF `. 1,80,06,286/-. THE APPELLANT HAD CLAIME D INTEREST OF `. 30,56,800/- ON BORROWED FUND. SINCE THE APPELLANT HAD CLAIMED DIVIDEND INCOME AS EXEMPT U/S. 10(33), THE PROPORTIONATE INTEREST WORKED OUT AT `. 16,36,000/- (3M36M46M650/1,80,06,286X30,56,800/-) WHICH WAS DISALLOWED U/S. 14A OF THE I.T. ACT AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 12. THE ASSESSEE FURTHER SUBMITTED THAT THE INTEREST PAYM ENT WAS IN ACCORDANCE WITH THE PROVISIONS OF SEC. 40(B) OF THE I .T. ACT AND SUCH INTEREST INCOME BY THE PARTNERS HAVE BEEN OFFERED IN THEIR INDIVIDUAL RETURNS FOR TAXATION THEREFORE THE PROVISIONS OF SEC. 14A WILL NOT BE APPLICABLE IN SUCH CASE. 13. AGGRIEVED, ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) HELD AS FOLLOWS: THE UNDERSIGNED HAS CAREFULLY GONE THROUGH RIVAL CONTENTIONS. HOWEVER, IT IS NOTED THAT THE ASSESSING OFFICER HAS GIVEN STRONG REASONING BEFORE INVOKING THE PROVISIONS OF SEC. 14A IN SUCH CASE. IN FACT HE WAS MOST ITA NOS. 3640 & 3284/M/07 5 REASONABLE IN DISALLOWING ONLY THE PROPORTIONATE INTE REST COMPUTED AT `. 16,36,000/- U/S. 14A OF THE I.T. ACT. 14. AGGRIEVED REVENUE IS IN APPEAL BEFORE US. WE FIN D THAT THE DECISION OF SPECIAL BENCH IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD HAS BEEN SET ASIDE BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD V DCIT (2010 TIOL-564-HC- MUM-IT). IN THE CIRCUMSTANCES, WE SET ASIDE THE ORDER OF AO AND CIT(A) ON THIS ISSUE AND REMIT THE MATTER BACK TO THE FILES OF AO TO DECI DE THE ISSUE AFRESH IN LINE WITH THE RATIO OF THE DECISION OF THE JURISDI CTIONAL HIGH COURT. 15. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 3284/M/2007 ITA NO. 3284/M/2007 ITA NO. 3284/M/2007 ITA NO. 3284/M/2007 ASSESSEES APPEAL ASSESSEES APPEAL ASSESSEES APPEAL ASSESSEES APPEAL 16. GROUND NO. 1 RAISED BY THE ASSESSEE READS AS FOLLOWS: THE LD. CIT(A) ERRED IN DISALLOWING `. 2,15,443/- B EING 10% OF THE CLEARING & FORWARDING EXPENSES INCURRED BY TH E APPELLANT IN CASH OF `. 21,54,434/- AND WHILE DOING SO HE AMONGST OTHERS FAILED TO APPRECIATE THAT: A) THE EXPENSES INCURRED WERE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSES OF BUSINESS B) THE EXPENSES DEBITED TO PROFIT & LOSS ACCOUNT ON ACCOUNT OF CLEARING & FORWARDING CHARGES WERE DULY SUPPORTED BY EVIDENCES AND DOCUMENTS. C) THE QUANTUM OF EXPENSES ON ACCOUNT OF CLEARING & FORWARDING CHARGES INCURRED WERE COMPARABLE TO THE EXPENSES INCURRED IN PRIOR AND SUBSEQUENT YEARS. 17. THE ASSESSING OFFICER DISALLOWED THE SAME ON THE GRO UND THAT THESE EXPENSES WERE INCURRED ONLY IN CASH ALTHOUGH NO INDIVIDUAL EXPENSE WAS ALLOWED TO EXCEED THE LIMIT OF `. 20,000/ - IN ORDER TO ITA NOS. 3640 & 3284/M/07 6 ESCAPE THE PROVISIONS OF SEC. 40A(3) OF THE ACT. THE PAYMENTS WERE SUPPORTED WITH SELF MADE VOUCHERS MOSTLY. IN VIEW OF T HE ABOVE THE AO DISALLOWED 25% OF THE TOTAL CLAIM. 18. BEFORE THE LD. CIT(A) THE AR SUBMITTED THAT ALL THE EXPENSES INCURRED WERE WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPO SES AND THE AO HAS NOWHERE PIN-POINTED EVEN A SINGLE EXPENDITURE INC URRED UNDER THIS HEAD TO SHOW THAT THE SAME WAS INCURRED FOR NON-BUSINES S PURPOSES. HE FURTHER CLAIMED THAT THE NATURE OF THE BUSINESS WER E SUCH THAT THE ASSESSEE WAS BOUND TO INCUR THE SAME IN CASH. SINCE THE I NDIVIDUAL PAYMENTS ARE LESS THAN `. 20,000/- EACH, THERE WAS NO Q UESTION OF DISALLOWING A PART OF THE CASH EXPENSES WITHOUT PROVING THAT THE SAME WERE NOT FOR BUSINESS PURPOSES. HE ALSO CLAIMED THAT EVE N IF SUCH CASH EXPENSES WOULD HAVE BEEN OF MORE THAN `. 20,000/- EAC H, EVEN IN SUCH A SITUATION U/S. 40A(3) THE DISALLOWANCE COULD HAVE BE EN ONLY 20% AND NOT 25%. HE ALSO DISTINGUISHED THE CASE LAWS RELIED U PON BY THE AO. 19. THE LD. CIT(A) HELD AS UNDER: THE UNDERSIGNED HAS GONE THROUGH THE RIVAL CONTENTIO NS. IT IS NOTED THAT THE AO HAS NOT CITED EVEN A FEW SPECI FIC VOUCHERS TO SHOW THAT THEY WERE NOT GENUINE OR THEY WERE NOT FOR BUSINESS PURPOSES. THE ASSESSEE SUBMITTED THAT EVEN OTHERWISE THE DISALLOWANCE WAS EXCESSIVE AND IN VIEW OF THESE FACTS, TH EREFORE LOOKING INTO THE NATURE OF BUSINESS, THE AO IS DIRECTED TO REDUCE THE DISALLOWANCE FROM 25% TO 10% OF THE TOTAL CLAIM AND THUS THE APPELLANT GETS PART RELIEF. 20. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. THE LD. C OUNSEL FOR THE ASSESSEE SHRI VIJAY KOTHARI SUBMITTED THAT THE EXPEN SES INCURRED WERE WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS AND WERE DULY SUPPORTED BY EVIDENCES AND DOCUMENTS. FURTH ER THE QUANTUM OF EXPENSES ON ACCOUNT OF CLEARING & FORWARDI NG CHARGES INCURRED WERE COMPARABLE TO THE EXPENSES INCURRED IN PRIOR AND ITA NOS. 3640 & 3284/M/07 7 SUBSEQUENT YEARS. THE LD. COUNSEL RELIED ON THE ORDER OF THE ITAT MUMBAI E BENCH IN THE CASE OF APL (INDIA) (P) LTD. VS DCIT AND POINTED OUT THE RELEVANT PORTION WHICH IS AS FOLLOWS: HOWEVER, AS MENTIONED ABOVE 5% HAS BEEN ADDED AND ` . 500 HAVE BEEN FURTHER ADDED IN RESPECT OF EACH SHIFT. THE ASSESSEE APPARENTLY, IS NOT IN A POSITION TO ESTABLISH THAT ACTUALLY THE PAYMENT HAS BEEN MADE TO THE EXTENT INDICATED IN THESE VOUCHERS. CONSIDERING THE TOTALITY OF FACTS AND CIRCU MSTANCES AND THE VARIOUS CASES CITED BEFORE US AND ALSO THE ITAT S DECISION IN THE CASE OF NDSTC (SUPRA) IN OUR VIEW, IT WOULD BE FAIR AND REASONABLE TO DISALLOW, ON ESTIMATE BASIS, 25% OF T HE EXPENDITURE INCURRED BY WAY OF PAYMENT OF SPEED MO NEY. IT IS ASSUMED THAT TO THAT EXTENT, THE PAYMENT WAS NOT MADE AND THIS AMOUNT WAS APPROPRIATED BY THE ASSESSEE COMPANY FOR ITS O WN PURPOSES. 21. THE LD. COUNSEL FOR THE ASSESSEE THEREFORE SUBMITTED AS FOLLOWS: IN CASE OF THE APPELLANT THE CLEARING CHARGES ARE 1. 3% OF THE TOTAL PURCHASES COST AND THE FORWARDING CHARGES A RE 1.79% OF THE SALES VALUE. IN CASE OF APL (INDIA), THE AVERAGE CHARGES WERE 5% + `. 500 PER EVERY SHIFT. IN CASE 25% OF EXPENSES INCURRED BY APL (INDIA) LTD. ARE DISALLOWED, THE EXPENSES ALLOWED WOULD BE 3.75% OF THE CARGO VALUE. THE NECESSITY OF INCURRING OF THESE EXPENSES FOR THE PURPOSES OF CARRYING ON THE BUSINESS HAS BEEN ACCEPTED BY THE HONBLE ITAT. THE PREVALENT PRACTICE OF PAYING MONEY FOR CLEARING & FORWARDING TO THE DOCK WORKERS SO THAT THE WORK OF STEVEDORING IS CONDUCTED WITH EFFICIENCY AND WITHOUT DELAY HAS BEEN RECOGNIZED BY HONBLE ITAT. HAVING REGARD TO THE FACT OF BUSINESS NECESSITY OF MAKIN G THE PAYMENTS AND THE FACT THAT THE EXPENSES INCURRED ARE REASONABLE AS COMPARED TO OTHER CLEARING & FORWARDING AGENTS, IT IS SUBMITTED THAT THE DISALLOWANCE MADE BY T HE ITA NOS. 3640 & 3284/M/07 8 AO @ 25% OF THE CASH EXPENSES IS UNCALLED FOR AND DESERVES TO BE DELETED. 22. WE FIND THAT THE CLEARING CHARGES ARE ONLY 1.3% OF THE TOTAL PURCHASE COST AND FORWARDING CHARGES ARE 1.79% OF TH E SALES VALUE. FURTHER THE SAME ARE SUPPORTED BY VOUCHERS AND RECORDS. CONSIDERING THE NATURE OF BUSINESS, THESE EXPENSES ARE NECESSARY FOR TH E PURPOSE OF CARRYING ON BUSINESS AND WHEN COMPARED TO OTHER CLE ARING AGENT, WHERE THE EXPENSES WERE ABOUT 5% `. 500/- PER EVERY SH IFT, THE EXPENSES OF CLEARING CHARGES AT 1.3% BY THE ASSESSEE IS REA SONABLE AND HENCE TO BE DELETED. 23. THE FORWARDING CHARGES ARE ALSO NECESSARY FOR THE P URPOSE OF BUSINESS AND THE NATURE OF BUSINESS IS SUCH THAT THE EXPEN SES HAVE TO BE INCURRED IN CASH AND THE AO HAS ERRED IN DISALLOWIN G A PART OF CASH EXPENSES WITHOUT PROVING THE SAME WERE NOT FOR THE PUR POSE OF BUSINESS. THIS GROUND RAISED BY THE ASSESSEE IS ALLOWED. 24. THE SECOND GROUND RAISED BY THE ASSESSEE READS AS FOLL OWS: THE LD. CIT(A) ERRED IN DISALLOWING U/S. 14A OF THE I.T. ACT AN AMOUNT OF `. 16,36,000/- OUT OF THE INTEREST PAID TO PARTNERS AND ON OTHER BORROWINGS BY TREATING IT TO BE AN EXPENDITURE INCURRED FOR EARNING DIVIDEND INCOME. 25. WE FIND THAT THE DECISION OF SPECIAL BENCH IN TH E CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD HAS BEEN SET ASIDE BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG CO LTD V DCIT (2010 TIOL-564-HC-MUM-IT). IN THE CIRCUMSTANCES, WE SET ASIDE THE ORDER OF AO AND CIT(A) ON THIS ISSUE AND REMIT THE MATTER BACK TO THE FILES OF AO TO DECIDE THE ISSUE AFRESH IN LINE WITH THE RATIO OF T HE DECISION OF THE JURISDICTIONAL HIGH COURT. ITA NOS. 3640 & 3284/M/07 9 26. THE 3 RD AND 4 TH GROUND RAISED BY THE ASSESSEE READ AS FOLLOWS: 3. THE LD. CIT(A) ERRED IN DISALLOWING 10% OF CONVEYANCE EXPENSES EVEN THOUGH THE ENTIRE AMOUNT OF `. 74,500/- DEBITED UNDER THE HEAD CONVEYANCE EXPENSES IN THE PROFIT & LOSS ACCOUNT WAS WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSES OF BUSINESS. 4. THE LD. CIT(A) ERRED IN DISALLOWING 20% OF VEHICLE EXPENSES EVEN THOUGH THE ENTIRE AMOUNT OF `. 1,46,629 /- DEBITED UNDER THE HEAD VEHICLE EXPENSES IN THE PROF IT & LOSS ACCOUNT WAS WHOLLY AND EXCLUSIVELY INCURRED FOR TH E PURPOSES OF BUSINESS. 27. THE AO DISALLOWANCE OF 10% OF THE CONVEYANCE EXP ENSES AND 20% OF THE VEHICLE EXPENSES AND DEPRECIATION THEREUP ON ON THE GROUND OF PERSONAL USER. 28. THE LD. CIT(A) HELD THAT THE ASSESSEE DOES NOT MAINT AIN ANY LOG BOOK AND THEREFORE IT CANNOT BE RULED OUT THAT THER E WERE NO PERSONAL USES OF THE VEHICLES. THE LD. CIT(A) OBSERVED THAT 100 % OF THE CONVEYANCE EXPENSES ARE ALSO NOT FULLY VERIFIABLE AND THEREFORE THE AOS ACTION OF DISALLOWING A PART OF THE EXPENSES BY I NVOKING THE PROVISIONS OF SEC. 37(1) AND U/S. 38(2) ARE REASONABLE AND THEREFORE THE SAME ARE SUSTAINED. 29. AGGRIEVED ASSESSEE IS IN APPEAL BEFORE US. WE FIND THAT WITH RESPECT TO CONVEYANCE EXPENSES, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN THE EARLIER AND LATER YEARS NO SUCH DISALLOWANCES WERE MADE. HE ALSO SUBMITTED THAT THE EXPENSES HAVE BE EN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF ASSESSEES BUSINE SS AND DISALLOWANCE OF 10% OF EXPENSES IS ON ADHOC BASIS. 30. WE HAVE PERUSED THE ORDERS FOR ASSESSMENT YEARS 2005-0 6 AND 2006-07 AND WE FIND THAT THE CONVEYANCE EXPENSES ARE ALLOWED IN ITA NOS. 3640 & 3284/M/07 10 THESE YEARS AS ALSO FOR THE ASSESSMENT YEAR 2001-02. WE TH EREFORE DELETE THE SAME. 31. WITH RESPECT TO DISALLOWANCE OF 20% OF VEHICLE EX PENSES, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THESE EXPENSES HAVE BEEN WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSES OF A SSESSEES BUSINESS. HE FURTHER SUBMITTED THAT OUT OF THE AMOUNT OF `. 1,46,629/- AN AMOUNT OF `. 39,261/- HAS BEEN SPENT ON PETROL ALL OWANCE GIVEN TO THE SALESMEN TOWARDS REIMBURSEMENT OF THEIR MOTORBIKE E XPENSES. THE BALANCE AMOUNT OF `. 1,07,368/- IS THE EXPENDITU RE INCURRED ON MOTORCAR AND MOTOR JEEP. THE MOTORCAR IS USED FOR TR ANSPORTING THE CUSTOMS/ESCORT OFFICIALS, STAFF AND LABOUR. THE MOTOR J EEP IS A PRIVATE GOODS CARRIER USED FOR CLEARING AND FORWARDING SUPPLI ES. THE PARTNERS OR THEIR FAMILY MEMBERS HAVE NOT USED THESE VEHICLES. 32. WE FIND THAT THE VEHICLES ARE NOT USED FOR THE FA MILY MEMBERS. THE ELEMENT OF PERSONAL USE CAN BE RULED OUT AND THER EFORE WE ALLOW THE SAME. 33. THE 5 TH GROUND RAISED BY THE ASSESSEE READS AS FOLLOWS: THE LD. CIT(A) ERRED IN DISALLOWING 20% OF DEPRECIA TION ON VEHICLES EVEN THOUGH THE VEHICLES WERE USED ONLY FOR THE PURPOSES OF BUSINESS 34. THIS GROUND IS CONSEQUENTIAL TO GROUND NO. 4 AND THEREFORE WE ALLOW 20% DEPRECIATION ON VEHICLE USED FOR THE PURPO SE OF BUSINESS. 35. THE LAST GROUND RAISED BY THE ASSESSEE READS AS FOLLOW S: THE LD. CIT(A) ERRED IN DISALLOWING THE LOSS ARISING O N SALE OF UNITS OF MUTUAL FUNDS OF `. 8,90,326 U/S. 94(7) OF THE I.T. ACT WITHOUT APPRECIATING THAT THE SHORT TERM LOSS ARISI NG ON PURCHASE AND SALE OF VARIOUS UNITS OF MUTUAL FUNDS WAS ONLY `. 68,522/-. ITA NOS. 3640 & 3284/M/07 11 36. THIS GROUND IS AGAINST THE DISALLOWANCE OF THE LOSS A RISING ON SALE OF UNITS OF MUTUAL FUNDS AMOUNTING `. 36,36,048/- U/S . 94(7) OF THE I.T. ACT. THE AO DISCUSSED THIS ISSUE IN DETAIL IN HIS ASSESSMENT ORDER FROM PAGE NO. 6 TO PAGE NO. 13. 37. BEFORE THE LD. CIT(A), THE LD. AR SUBMITTED AS F OLLOWS: I) WHETHER THE ASSESSEE HAS PURCHASED SECURITIES/UNITS WITHIN A PERIOD OF THREE MONTHS PRIOR TO RECORD DATE . II) THE ASSESSEE HAS SOLD OR TRANSFERRED SUCH SECURITIES WITHIN A PERIOD OF THREE MONTHS AFTER SUCH RECORD DATE. III) THE ASSESSEE HAS RECEIVED DIVIDEND ON SECURITIES/UNITS. IN CASE THE AFORESAID CONDITIONS ARE SATISFIED THEN THE LOSS ARISING ON ACCOUNT OF SALE AND PURCHASE OF SECURITIES/UNITS, TO THE EXTENT SUCH LOSS DOES NOT EXCEED THE AMOUNT OF DIVIDEND SHALL B E IGNORED FOR COMPUTING THE INCOME CHARGEABLE TO TAX. 38. THE LD. AR FURTHER EXPLAINED AS UNDER: THE AO HAS DISALLOWED THE ENTIRE LOSS OF `. 36,36,048/ -. UNLESS 94(7) ONLY LOSS ARISING ON RECEIPT OF DIVIDEND WH EN UNITS SOLD WITHIN 90 DAYS FROM RECORD DATE OF DIVIDEND SHOULD BE DISALLOWED. HENCE ACCORDINGLY FROM THE ORIGINAL SCHEDULE WE HAVE PREPARED A REVISED SCHEDULE SHOWING THE TOTAL DISALLOWANCE U/S. 94(7) AS `. 8,90,326.62. 39. THE LD. CIT(A) HELD AS FOLLOWS: THE UNDERSIGNED HAS CAREFULLY PERUSED THROUGH THE DET AILS OF PURCHASES AND SALES AS WELL AS DIVIDEND RECEIVED ON M UTUAL FUNDS. IT IS NOTED THAT THE NORMAL LOSS IN SALE AND PU RCHASE OF UNITS WHERE NO DIVIDEND HAS BEEN RECEIVED, IS ALLOWABL E AS SHORT TERM CAPITAL LOSS AND THEN ON THEM THE PROVISIONS OF SE C. 94(7) ITA NOS. 3640 & 3284/M/07 12 WERE NOT APPLICABLE ON THEM. SIMILARLY THE UNITS WH ICH WERE PURCHASED BEYOND THE PERIOD OF 3 MONTHS, WILL ALSO ESCA PE THE PROVISIONS OF SEC. 94(7). ON A CAREFUL CALCULATION IT IS SEEN THAT THE PROVISION S OF SEC. 94(7) WILL BE VERY MUCH APPLICABLE IN THE APPE LLANTS CASE BUT THE LOSS TO BE DISALLOWED WILL ONLY BE `. 8,90,326 /- AS AGAINST THAT DISALLOWED BY THE AO OF `. 36,36,048/-. IN VIEW OF THE ABOVE MENTIONED OBSERVATIONS AND FINDI NGS THE AO IS DIRECTED TO REDUCE THE DISALLOWANCE U/S. 94 (7) TO `. 8,90,326/- ONLY AND THEREFORE TO THIS EXTENT THE GRO UND IS TREATED AS PARTLY ALLOWED. HOWEVER, THE APPELLANT IS DIRECTE D TO PRODUCE A COPY OF THE COMPUTATION CHART PREPARED BY HIM, BE FORE THE AO ALSO FOR VERIFICATION OF THE APPELLANTS CALCULATION BY THE AO. THEREFORE THIS GROUND IS PARTLY ALLOWED. 40. AGGRIEVED, THE ASSESSEE HAS PREFERRED AN APPEAL BEFO RE US . 40.1 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. THE DECISION OF BOMBAY HIGH COURT IN THE CASE OF CIT VS. SMT. ALKA BHOSLE 325 ITR 550(BOMBAY) HAS HE LD AS FOLLOWS. THE ASSESSEE PURCHASED CERTAIN UNITS WITHIN A PERIOD OF LESS THAN THREE MONTHS FROM THE RECORD DATE, BUT ADMITTE DLY, THE UNITS WERE SOLD BEYOND A PERIOD OF THREE MONTHS FROM T HE RECORD DATE. THE CONTENTION OF THE REVENUE WAS THAT THOUGH THE UNITS WERE SOLD BEYOND A PERIOD OF THREE MONTHS OF THE RECO RD DATE, THE PROVISIONS OF SECTION 94(7) OF THE INCOME-TAX ACT , 1961 WOULD APPLY SINCE THEY WERE ACQUIRED WITHIN A PERIOD OF TH REE MONTHS OF THE RECORD DATE. ON APPEAL _ HELD, _ DISMISSING THE APPEAL, THAT SUB-SECTION (7) OF SECTION 94 SPELT OUT THREE REQUIREMENTS; (I) THE PURCHASE OR ACQU ISITION OF ANY OF THE SECURITIES OR UNITS SHOULD TAKE PLACE WITHIN A PERIOD OF THREE MONTHS PRIOR TO THE RECORD DATE; (II) THE SALE OR TRANSFER SHOULD TAKE PLACE WITHIN A PERIOD OF THREE MONTHS AF TER THE RECORD DATE ; AND (III) THE DIVIDEND OR INCOME RECE IVED OR RECEIVABLE SHOULD BE EXEMPT. IN THE EVENT THAT THESE THREE CONDITIONS WERE FULFILLED, THE LOSS, IF ANY, ARISING FR OM THE PURCHASE OR SALE OF SECURITIES OR UNITS, HAD TO BE IGNOR ED FOR THE PURPOSE OF COMPUTING THE INCOME CHARGEABLE TO TAX, T O THE EXTENT SUCH LOSS DID NOT EXCEED THE AMOUNT OF DIVIDEND OR INCOME RECEIVED OR RECEIVABLE. THE SALE OF THE UNITS HAD TAKEN ITA NOS. 3640 & 3284/M/07 13 PLACE AFTER THE EXPIRY OF A PERIOD OF THREE MONTHS F ROM THE RECORD DATE. HENCE, THE SECOND CONDITION SPELT OUT F OR THE APPLICABILITY OF SUB-SECTION 7 WOULD NOT COME INTO F ORCE. THE CONDITIONS PRESCRIBED IN CLAUSES (A), (B) AND (C) OF SU B-SECTION 7 WERE CUMULATIVE IN NATURE THUS, SECTION 94(7) WOULD N OT BE APPLICABLE. 41. WE FIND THAT THE DECISION IN THE CASE OF CIT VS AL KA BHOSLE (SUPRA) IS AGAINST THE ASSESSEE HENCE WE DISMISS THIS GROUND OF APPEAL. 42. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THIS 29 TH DAY OF APRIL, 2011 SD/- SD/- (R.S. SYAL) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 29 TH APRIL, 2011 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR H BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NOS. 3640 & 3284/M/07 14 DATE INITIALS 1 DRAFT DICTATED ON: 2 7 .0 4. 2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 2 7 .0 4 .2011 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK: DATE ON WHICH FILE GOES TO AR _________ ______ 10. DATE OF DISPATCH OF ORDER: _________ ______