M/s Vecyes Investement Pvt Ltd., Hyderabad V. ACIT, Hyderabad

ITA 588/HYD/2006

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 4608 (ITAT-HYDERABAD)
• Duration Of Justice: 12 year(s) 2 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 26-11-2018
• Assessment Year: 2002-2003
• Appeal Filed On: 29-05-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUMAN MALIK
• Keywords: Source of fund; Cost of acquisition; Speculation loss; Commercial expediency; Capital expenditure
• Section: 37(1); 37; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER I.T.A. NO. 588/HYD/2006 ASSESSMENT YEAR: 2002-03 M/S. VEEYES INVESTMENTS PVT. LTD., HYDERABAD [PAN: AABCV6591K] VS ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1, HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI K.C. DEVDAS, AR FOR REVENUE : SMT. SUMAN MALIK, DR DATE OF HEARING : 13-07-2018 DATE OF PRONOUNCEMENT : 03-08-2018 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF TH E COMMISSIONER OF INCOME TAX (APPEALS)-1, HYDERABAD, DATED 31-03-2006. ORIGINALLY, THIS APPEAL WAS DISPOSED OF BY AN EX- PARTE ORDER AS ASSESSEE HAS NOT APPEARED AND LATER BY WAY O F MISCELLANEOUS APPLICATION, THE APPEAL HAS BEEN RECA LLED. THE ISSUES IN THIS APPEAL ARE WITH REFERENCE TO DISALLOWA NCE OF EXPENDITURE U/S. 37(1) OF THE INCOME TAX ACT [ACT] AND ITA NO. 588/HYD/2006 :- 2 - : ENHANCEMENT OF AMOUNT BY WAY OF LOSS CLAIMED ON VALU ATION OF CERTAIN SHARES BY THE LD.CIT(A). 2. BRIEFLY STATED, ASSESSEE-COMPANY IS AN INVESTMENT COMPANY AND FILED ITS RETURN OF INCOME ON 31-10-2002 ADMITTING TOTAL INCOME AT A LOSS OF RS. 31,81,280/-. ON VERIFICATION OF THE EXPENSES UNDER THE HEAD ADMINISTRA TIVE AND OTHER EXPENSES, AO HAS NOTICED THAT A SUM OF RS. 10.2 0 LAKHS WAS CLAIMED TOWARDS SERVICE CHARGES PAID TO M/S. SRSR ADVISORY SERVICES PVT. LTD., [SRSR]. IT WAS EXPLAINED BY ASSESSEE THAT THE SAID SERVICE CHARGES WERE PAID FOR TH E SERVICES LIKE ADVISORY SERVICES IN ITS BUSINESS AREA , ACCOUNTING SERVICES, COLLECTION OF INTEREST AND DIVIDEND, TAXATION, ROC RELATED MATTERS AND MAINTENANCE OF ITS LAND PROPERTIES ETC. IT WAS ALSO MENTIONED THAT THE RECIPIENT COMPANY, SRSR WAS ASSESSED TO TAX WHERE ALL THE RECEIPTS WERE DECLARED AS THEIR INCOME. AO FOUND THAT ASSESSEE EARNED INTEREST ON DIV IDEND INCOME, PURCHASED SHARES OF TWO CONCERNS AND SOLD S HARES OF ANOTHER COMPANY IN TWO TRANSACTIONS. AO ALSO NOTICED T HAT THE DIVIDEND INCOME HAD BEEN CLAIMED EXEMPT. EVEN THOUGH ASSESSEE OWNS SOME AGRICULTURAL LANDS, NO AGRICULTUR AL INCOME WAS DECLARED, COMING TO A CONCLUSION THAT NO AGRICULTU RAL OPERATIONS WERE CONDUCTED BY ASSESSEE. AO ALSO WAS OF THE OPINION THAT THE DIRECTORS OF SRSR ARE RELATED PERSON S TO THE DIRECTIONS OF ASSESSEE-COMPANY. CONSIDERING ALL THESE FACTS AND CIRCUMSTANCES OF THE CASE, AO HELD THAT THE SERVICE CHARGES PAID WERE DIS-PROPORTIONATE TO THE SERVICES RE CEIVED AND THEREFORE, ENTIRE EXPENDITURE OF RS. 10.20 LAKHS COULD NOT ITA NO. 588/HYD/2006 :- 3 - : BE SAID TO HAVE BEEN EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS IN TERMS OF SECTION 37(1) OF THE A CT. AO ESTIMATED SUM OF RS. 3 LAKHS AT RS. 25,000/- P.M. AS REASONABLE EXPENDITURE CONSIDERING THE NATURE AND VOL UME OF BUSINESS OF ASSESSEE-COMPANY AND THE NATURE OF SERVIC ES RENDERED BY SRSR. THE BALANCE OF RS. 7.20 LAKHS WAS DISALLOWED U/S. 37(1) OF THE ACT. 3. BEFORE THE LD.CIT(A), ASSESSEE FILED COPY OF THE AGREEMENT AND GAVE SUBMISSIONS THAT EXPENDITURE WAS PA ID WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IT WAS ALSO CONTENDED THAT THE PROVISIONS OF SECTION 40A(2) ARE NOT APPLICABLE AS THERE ARE NO COMMON DIRECTORS IN BOTH THE COMPANIES AND THE PROVISIONS OF SECTION 40A(2) CANNOT BE INVOKED. ASSESSEE RELIED ON VARIOUS CASE LAW FOR THE PROPOSITION THAT PAYMENT COULD NOT BE DISALLOWED, AS W AS DONE BY AO. 4. LD.CIT(A), HOWEVER, WHILE AGREEING THAT AO HAS NO T INVOKED THE PROVISIONS OF SECTION 40A(2) AS THEY ARE NOT APPLICABLE TO THE FACTS OF THE CASE, HOWEVER, CONFIRMED THAT THE DISALLOWANCE OF EXPENSES HAVE BEEN MADE U/S. 37(1) ONLY. LD.CIT(A) ALSO NOTED THAT ASSESSEE HAD FURTHER INCURRE D EXPENSES OF RS. 72,000/- ON ACCOUNT OF PROFESSIONAL CHARGES AND RS. 26,250/- ON ACCOUNT OF AUDIT FEE, WHICH HAVE BEEN ALLOWED IN TOTO BY AO. IT IS ALSO NOTICED THAT ASSESSEE IS MAINTAINING BOOKS OF ACCOUNT ON COMPUTERS AND FORM 3CD ITA NO. 588/HYD/2006 :- 4 - : HAS BEEN FILED. HE HAS CONFIRMED THE DISALLOWANCE BY STATING AS UNDER: 06. FOLLOWING FACTS CLEARLY EMERGED FROM THE ABOVE DISCUSSION (I) THE MAJOR PART OF INCOME OF THE APPELLANT COMPANY I S INTEREST AND DIVIDEND INCOME WHICH DOES NOT REQUIRE ANY SERV ICE FROM SRSR. (II) WHILE THE SINGLE TRANSACTION OF PURCHASE OF SHARES IS MADE IN THE PRIVATE DEAL, THERE IS NO TRANSACTION OF SALE D URING THE YEAR. THERE IS NO EVIDENCE ON RECORD THAT THE SAID PURCHA SE TRANSACTION OF SHARES WAS MADE THROUGH SRSR. (III) THE NATURE AND QUANTUM OF BUSINESS OF THE APPELLANT COMPANY DO NOT JUSTIFY THE PAYMENT OF SERVICE CHARGES OF RS . 10.20 LAKHS PER ANNUM TO SRSR ESPECIALLY WHEN THE APPELLANT IS SEPARATELY INCURRING EXPENSES OF RS. 72,000/- ON ACCOUNT OF PR OFESSIONAL CHARGES AND RS.26,250/- ON ACCOUNT OF AUDIT FEES. (IV) THE DIRECTORS OF THE PAYER AND PAYEE COMPANIES ARE RELATED TO EACH OTHER. 07. IN VIEW OF THESE FACTS AND CIRCUMSTANCES OF THE CASE, I AGREE WITH THE ASSESSING OFFICER THAT THE AMOUNT OF SERVICE CH ARGES PAID WAS NOT NECESSITATED BY THE BUSINESS NEEDS OF THE APPELLANT COMPANY AND THE SAME WAS DISPROPORTIONATE TO THE SERVICES, IF ANY, RENDERED BY SRSR. HENCE, THE ENTIRE EXPENDITURE OF RS.10.20 LAKHS CAN NOT BE SAID TO HAVE BEEN EXPENDED WHOLLY AND EXCLUSIVELY FOR THE P URPOSE OF BUSINESS OF THE APPELLANT COMPANY. THE ASSESSING OF FICER HAS RIGHTLY ESTIMATED THE ALLOWABLE EXPENSES AT RS.3 LAKHS AFTE R CONSIDERING THE NATURE AND VOLUME OF THE BUSINESS OF THE APPELLANT COMPANY AND NATURE OF SERVICES TO BE RENDERED BY SRSR. THE SAME IS, THEREFORE, UPHELD. IT IS PERTINENT TO MENTION HERE THAT ON EXA CTLY SIMILAR FACTS DISALLOWANCE OF SERVICE CHARGES WAS ALSO UPHELD IN THE APPELLATE ORDERS OF EVEN DATE IN THE CASE OF OTHER GROUP CONC ERNS M/S. ELEM INVESTMENTS (P) LTD., M/S. HIGHGRACE INVESTMENTS (P ) LTD & M/S. FINCITY INVESTMENTS (P) LTD. ITA NO. 588/HYD/2006 :- 5 - : 5. IN THE COURSE OF APPELLATE PROCEEDINGS, LD.CIT(A ) NOTED THAT ASSESSEE-COMPANY HAS PURCHASED RS. 40,323/- UNQUOTED SHARES OF M/S. DATAQUEST MANAGEMENT AND COMMUNICATIONS LTD., (DQ) WITH A PREMIUM OF RS. 145/- PER SHARE ON 14-07-2001. THE SAME WAS VALUED IN THE CL OSING STOCK AS ON 31-03-2002 AT THE FACE VALUE OF RS. 10/- P ER SHARE. THESE SHARES WERE SHOWN AS STOCK IN TRADE OF THE BUSI NESS OF PURCHASE AND SALE OF SHARES. LD.CIT(A) WAS OF THE OPINION THAT ASSESSEE HAS CREATED A LOSS OF RS. 58,46,780/- IN TH E SHARE TRADING ACCOUNT WHICH WAS SET-OFF AGAINST INTEREST INCO ME SHOWN UNDER THE HEAD BUSINESS. IT WAS ALSO FURTHER NOTED THAT SIMILAR MODUS OPERANDI WAS ALSO ADOPTED BY THE OTHER GROUP CONCERNS IN AY. 2002-03. HE WAS OF THE OPINION THAT METHOD ADOPTED BY ASSESSEE WAS PRIMA-FACIE NOT TENABLE IN LAW. ACCORDINGLY, HE ISSUED SHOW CAUSE NOTICE DT. 3 0-01-2006 WITH A PROPOSAL TO DISALLOW THE LOSS OF RS. 58,46,780 /- SHOWN IN THE TRADING A/C. LD.CIT(A) EXTRACTED THE SHOW CAUSE NOTICE IN PARA 10 OF THE ORDER. IN RESPONSE TO THE NOTICE, AS SESSEE FILED REPLY ON 23-02-2006 STATING THAT ASSESSEE IS AN INVESTMENT COMPANY AND ALSO IN THE BUSINESS OF PURCHAS E AND SALE OF SHARES AND IN THE COURSE OF BUSINESS OPERATI ONS, PURCHASED 40,322 SHARES IN DQ FOR AN AMOUNT OF RS. 62,50,000/- I.E., AT RS. 155/- PER SHARE [PREMIUM O F RS. 145/- PER SHARE] ON A PRIVATE PLACEMENT BASIS. THE SHARES WERE TRADABLE BUT NOT THROUGH STOCK EXCHANGE AS THE DQ IS A L IMITED COMPANY. THE VALUATION OF SHARES FORMING PART OF THE STOCK IN TRADE HAS TO BE MADE NECESSARILY AT COST OR MARKET VALU E, WHICHEVER IS LOWER AS PER THE ACCOUNTING STANDARD NO. 2 OF THE ITA NO. 588/HYD/2006 :- 6 - : ICAI WHICH WAS FOLLOWED. SINCE THE SHARES ARE NOT QU OTED, THE SHARES OF DQ ARE VALUED AT FACE VALUE IN THE CLOSING STOCK AS THE INTRINSIC VALUE WAS BELOW THE COST AND NET REALISAB LE VALUE WAS ESTIMATED AT RS. 10/-. IT WAS STATED THAT EXPLANATION TO SECTION 73 CANNOT BE INVOKED AS ASSESSEE HAS EARNED I NTEREST INCOME AND DIVIDEND INCOME AND IS CARRYING ON BUSIN ESS OF DEALING IN SHARES. ASSESSEE OBJECTED TO INVOKING THE EXPLANATION TO SECTION 73 AND ALSO CONTESTED THAT THE TRANSACTION IS NOT SPECULATION AS DEFINED U/S. 43(5). IT WAS SUBMITTED THAT ASSESSEE IS ENTITLED TO SET-OFF THE BUSINESS LOSS AGAINST ITS INCOME FROM OTHER SOURCES VIZ., INTEREST AND DIVIDEND INCOME. ASSESSEE RELIED ON THE DECISION OF RAJAN ENTERPRISES PVT. LTD., [41 ITD 469] (BOM), CONCORD COM MERCIAL PVT. LTD., [95 ITD 117] (MUM.)(SB) AND GODAVARI CAPIT AL LTD., [91 ITD 274] (HYD). 5.1. LD.CIT(A), HOWEVER, DID NOT AGREE AND AFTER ANALYZING THE AGREEMENT ENTERED INTO ON 16-08-2001 WITH THE PROMOTERS OF DQ AND THE CASE LAW ON THE SUBJECT AND AL SO THE FACT THAT THE SAID COMPANY HAS ALLOTTED SHARES SUBSEQUEN TLY TO VARIOUS PERSONS AT HIGHER PRICE THAN THE PURCHASE COST , AS LISTED OUT IN PARA 13, PG.18 OF THE ORDER AND ALSO ANA LYZING THE PROVISIONS OF SECTION 73, THE EXPLANATION, CAME TO TH E CONCLUSION THAT ASSESSEE HAS ADOPTED MODUS OPERANDI OBVIOUSLY TO EVADE TAX. VIDE PARA 16 ONWARDS, HE ALS O EXAMINED THE VARIOUS CONTENTIONS RAISED BY ASSESSEE IN DETAIL AND AT THE END, HE HAS CONCLUDED AS UNDER: ITA NO. 588/HYD/2006 :- 7 - : 17. AFTER CONSIDERING THE ENTIRE CONSPECTUS OF THE ISSUE, I HAVE COME TO THE FOLLOWING FINDINGS - I) THE APPELLANT COMPANY HAD ACQUIRED THE SHARES OF DQ AS AN 'INVESTMENT' AND NOT AS 'STOCK IN TRADE'. THESE SHA RES WERE, THEREFORE, NOT TO BE TAKEN INTO SHARE TRADING ACCOU NT BUT HAVE TO BE SHOWN IN THE BALANCE SHEET UNDER THE HEAD 'LONG -TERM INVESTMENT'. THE VALUATION OF THESE SHARES IN THE C LOSING STOCK WOULD NOT AFFECT THE BUSINESS PROFITS OF THE APPELL ANT ASSESSABLE TO TAX. II) WITHOUT, PREJUDICE TO THE ABOVE, THE DQ SHARES CANN OT BE VALUED IN THE CLOSING STOCK AT FACE VALUE SINCE THE NET RE ALIZABLE VALUE OF THESE SHARES WAS MORE THAN THE COST PRICE. III) WITHOUT PREJUDICE TO THE ABOVE, THE LOSS SHOWN IN T HE SHARE TRADING ACCOUNT WAS DEEMED TO BE A LOSS FROM SPECUL ATION BUSINESS IN TERMS OF 'EXPLANATION' TO SECTION 73 OF THE ACT. SUCH LOSS CANNOT BE SET OFF AGAINST INTEREST INCOME SHOW N UNDER THE HEAD 'BUSINESS'. IV) THE TECHNIQUE ADOPTED BY THE APPELLANT AND OTHER GR OUP CONCERNS IN THIS YEAR AND EARLIER YEAR BY SHOWING THE 'INVES TMENT' AS 'STOCK IN TRADE' AND THEREAFTER VALUING THE SAME IN CLOSIN G STOCK BELOW THE COST PRICE OR THE NET REALIZABLE VALUE, WAS A T AX PLANNING WITH AN INTENTION TO EVADE TAX. V) THE LOSS OF RS.58,46,780/- CLAIMED IN THE SHARE TRA DING ACCOUNT IS DISALLOWED AND ASSESSED INCOME IS ENHANCED TO THAT EXTENT. IN VIEW OF THE ABOVE FINDINGS, PENALTY PROCEEDINGS U/S 271(1)(C) OF THE I.T.ACT, 1961 IS ALSO INITIATED AGAINST THE APPELLA NT FOR FURNISHING INACCURATE PARTICULARS OF HIS INCOME. 18. IN THE RESULT, THE APPEAL IS DISMISSED AND THE ASSESSED INCOME IS ENHANCED TO THE EXTENT OF RS. 58,46,780/-. SHOW CAU SE NOTICE U/S 274 R.W.S. 271(1)(C) IS ISSUED FOR THE REASONS RECO RDED ABOVE. 5.2. THUS, HE HAS ENHANCED THE TOTAL INCOME BY DIRECTING THE AO TO DISALLOW THE LOSS CLAIMED IN THE T RADING ACCOUNT AS DIRECTED ABOVE. ITA NO. 588/HYD/2006 :- 8 - : 6. ASSESSEE IS AGGRIEVED AND RAISED VARIOUS GROUND S ON THE ABOVE TWO ISSUES. 7. LD. COUNSEL REFERRING TO THE ISSUE OF CLAIM OF SE RVICE CHARGES, SUBMITTED THAT AO CANNOT DISALLOW THE EXPEND ITURE U/S. 37(1) AS IT IS A BUSINESS DECISION AND THE PROV ISIONS OF SECTION 37(1) PERMITS EITHER ALLOWANCE OF THE ENTIRE CLA IM OR DISALLOWANCE OF THE ENTIRE CLAIM BUT NOT A PARTIAL CLAIM . IT WAS SUBMITTED THAT AO CANNOT STEP INTO THE SHOES OF THE BUSINESSMEN TO DECIDE THE REASONABILITY OF AN EXPENDI TURE AND ONCE A CLAIM IS MADE, THE ENTIRE AMOUNT IS TO BE ALLOW ED. HE ALSO POINTED OUT THE FINDING OF LD.CIT(A) THAT THE PR OVISIONS OF SECTION 40A(2) ARE NOT INVOKED AND SUBMITTED THAT AO CA NNOT RESTRICT THE AMOUNT CLAIMED U/S. 37(1) AS THERE IS NO FINDING THAT EXPENDITURE IS PERSONAL IN NATURE OR FOR NON-BUSI NESS PURPOSES. THEREFORE, THE CLAIM AS MADE BY ASSESSEE IS ALLOWABLE IN FULL. AFTER REFERRING TO VARIOUS PRINCI PLES ON THE CLAIM U/S. 37(1), LD. COUNSEL RELIED ON THE DECISION OF THE ITAT, PUNE BENCH IN THE CASE OF COCA COLA INDIA (P) LTD., VS. DCIT [116 TTJ 880], [ITAT (PUNE)] TO SUBMIT THAT THE CO - ORDINATE BENCH HAS SUMMARIZED THE PRINCIPLES, ACCORD ING TO WHICH AO HAS TO ALLOW THE AMOUNT IN FULL, ONCE IT IS IDENTIFIED THAT EXPENDITURE IS FOR THE PURPOSE OF BUSINESS. 7.1. COMING TO THE ISSUE OF ENHANCEMENT, LD. COUNSE L SUBMITTED THAT LD.CIT(A) HAS TRAVELLED BEYOND THE SCOPE OF APPEAL AND RELIED ON THE PRINCIPLES LAID DOWN BY THE HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. SARDARI LAL A ND CO. ITA NO. 588/HYD/2006 :- 9 - : [251 ITR 864] (DEL) TO SUBMIT THAT WHENEVER THE QUESTIO N OF TAXABILITY OF INCOME FROM A NEW SOURCE WHICH HAD NOT BEEN CONSIDERED BY THE AO IS CONCERNED, THE JURISDICTION T O DEAL WITH THE SAME IN APPROPRIATE CASES MAY BE DEALT WITH U/ S. 147/148 OF THE ACT AND SECTION 263 OF THE ACT IF REQUIS ITE CONDITIONS ARE FULFILLED. IN THE PRESENCE OF SUCH SP ECIFIC PROVISIONS A SIMILAR POWER IS NOT AVAILABLE TO THE FI RST APPELLATE AUTHORITY. LD. COUNSEL ALSO REFERRED TO THE PRINCIPLE S LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. RAI BAHADUR HARDUTROY MOTILAL CHAMARIA [66 ITR 443] (SC) AND CIT VS. SHAPOORJI PALLONJI MISTRY [44 ITR 891] (SC) WHICH SUPPORT THE PROPOSITION THAT AAC HAS NO POWER TO ENHANCE THE ASSESSMENT BY DISCOVERING THE NEW SOURCE OF INCOME. 7.2. COMING TO THE MERITS OF THE ISSUE, LD.COUNSEL SUBMITTED THAT ASSESSEE HAS ADOPTED RS. 10/- AS THE COST PRICE AS THE SHARES ARE HELD BY THE COMPANY AS STOCK IN TRAD E AND THERE WAS NO MARKET AT THE END OF THE YEAR. HOWEVER, I T WAS FAIRLY ADMITTED THAT WHILE ARRIVING AT THE COST PRICE, THE COMPANY HAS NOT TAKEN THE SHARE PREMIUM AMOUNT INTO CONSIDERATION AND IF THAT WAS TAKEN INTO CONSIDERATION, THE VALUATION OF THE SHARES WOULD BE AROUND RS. 23.52. 7.3. FURTHER REFERRING TO THE AMENDMENT BROUGHT TO EXPLANATION TO SECTION 73 BY THE FINANCE ACT, 2014 W.E .F. 01-04-2015, IT WAS THE SUBMISSION THAT THE LOSS WILL NO T BECOME SPECULATION LOSS AS THE PRINCIPAL BUSINESS O F THE COMPANY IS TRADING IN SHARES AND AMENDMENT BROUGHT ITA NO. 588/HYD/2006 :- 10 -: SUBSEQUENTLY HAS TO BE CONSIDERED RETROSPECTIVE IN NATU RE AND RELIED ON THE PRINCIPLES LAID DOWN BY THE HON'BLE SUP REME COURT IN THE CASE OF CIT VS. VATIKA TOWNSHIP P. LTD., [367 ITR 466] (SC) TO SUBMIT THAT WHERE BENEFIT IS CONFERRED BY A LEGISLATION, THE RULE AGAINST RETROSPECTIVE CONSTRUCTION IS DIFFERENT. WHERE A LAW IS ENACTED FOR THE BENEFIT OF COMMUNITY AS A WHOLE, EVEN IN THE ABSENCE OF A PROVISIONS, THE STATUE MAY BE HELD TO BE RETROSPECTIVE IN NATURE. IT WAS THE SUBMISS ION THAT THE PROVISIONS OF SECTION 73 EXPLANATION DOES NOT APPLY, IN VIEW OF THE SUBSEQUENT AMENDMENT BROUGHT FOR THE B ENEFIT OF THE COMPANIES INVOLVED IN SHARE TRADING. 8. LD.DR, HOWEVER, IN REPLY SUBMITTED THAT THERE IS NO NEW SOURCE OF INCOME AND CIT(A) HAS EXAMINED THE ANN UAL REPORTS AND STATEMENTS FILED ALONG WITH RETURN OF INCOME AND NOTICED THAT ASSESSEE HAS WRONGLY VALUED THE CLOSING S TOCK. IT WAS SUBMITTED THAT THE POWER OF AAC IS NOT CONFINED TO THE MATTER WHICH HAD BEEN CONSIDERED BY THE ITO AND APPEL LATE AUTHORITY CAN CONSIDER ANY OTHER ISSUE ALSO, AS THE HO N'BLE SUPREME COURT IN THE CASE OF CIT VS. NIRBHERAM DELURA M [224 ITR 610] (SC) HAS UPHELD THAT SCOPE OF THE POWER OF THE APPELLATE AUTHORITY IS CO-TERMINUS WITH THE AO. HE CA N DO WHAT THE AO CAN DO AND ALSO DIRECT HIM TO DO WHAT HE HAS FAILED TO DO. 8.1. COMING TO THE MERITS OF THE ACTION TAKEN BY THE CIT(A), IT WAS SUBMITTED THAT ASSESSEE HAS PURPOSELY VAL UED THE STOCK AT PRICE OF RS. 10/- WHEN IT WAS PURCHASED AT A COST ITA NO. 588/HYD/2006 :- 11 -: OF RS. 155/- AND LD.CIT(A) ALSO NOTED THAT THE SAID CO MPANY HAD ISSUED FURTHER SHARES IN LATER YEAR AT A HIGHER CO ST. THEREFORE, VALUATION OF SHARE AT RS. 10/- IS A METHODO LOGY ADOPTED FOR REDUCING THE TAXABLE INCOME. HE SUPPORTED THE DETAILED ORDERS OF THE LD.CIT(A). HE SUPPORTED THE ORD ER OF AO AND CIT(A) ON THE ISSUE OF CLAIM U/S 37(1). 9. IN REPLY, LD. COUNSEL SUBMITTED THAT THE DECISION RELIED UPON BY THE LD.DR IN THE CASE OF CIT VS. NIRB HERAM DELURAM [224 ITR 610] (SC) WAS CONSIDERED BY THE HON 'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. SARDARI LAL A ND CO. [251 ITR 864] (DEL) AND SO THE PRINCIPLES ARE ALREAD Y CLEAR THAT CIT(A) CANNOT TRAVERSE BEYOND THE ISSUE BEFORE HIM. 10. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE ORDERS OF THE AUTHORITIES. AS FAR AS THE I SSUE OF CLAIM OF PROFESSIONAL CHARGES TO SRSR IS CONCERNED, AO ACCEPTS THAT THERE WERE CERTAIN SERVICES RENDERED BY SRS R TO ASSESSEE-COMPANY. HE HAS ALLOWED AN AMOUNT OF RS. 2 5,000/- P.M. AS AGAINST THE CLAIM OF ASSESSEE. THUS, THERE IS NO DISPUTE BETWEEN THE PARTIES THAT SRSR HAS RENDERED SOME SERVICES FOR WHICH PAYMENT WAS BORN BY ASSESSEE. TH E ISSUE IS ABOUT THE QUANTUM OF ALLOWANCE AS THERE IS NO DISPUTE ABOUT SERVICES BEING RENDERED. ACCORDING TO SECTION 37(1) O F THE INCOME TAX ACT, 1961, ANY EXPENDITURE (NOT BEING EXPEN DITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEI NG IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIV ELY FOR THE ITA NO. 588/HYD/2006 :- 12 -: PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLO WED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION. THE APEX COURT IN CIT VS. BHARAT CARBON & RIBBON MFG. CO. (P) LTD., 1999 XII SI TC 218 HAS OBSERVED THAT WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISIO N OF LAW RELATING THERETO AND NOT ON THE VIEW WHICH THE ASSESSEE MIGHT TAKE OF HIS RIGHTS NOR CAN THE EXISTENCE OR ABSENCE O F ENTRIES IN THE BOOKS OF ACCOUNTS BE DECISIVE OR CONCLUSIVE IN TH E MATTER. THE EXPRESSION 'WHOLLY' IN SECTION 37(1) HAS BEEN USE D WITH REFERENCE TO THE QUANTUM, WHILE THE EXPRESSION 'EXCLUS IVELY' REFERS TO THE NATURE OR THE PURPOSE OF THE ACTIVITY IN WH ICH THE EXPENDITURE IS INCURRED. IN OTHER WORDS, THE WHOLE OF THE EXPENDITURE MUST HAVE BEEN SOLELY AND EXCLUSIVELY INC URRED FOR BUSINESS PURPOSES, IN ORDER TO QUALIFY FOR ALLOWANCE UNDER SECTION 37(1) OF THE ACT. THE EXPRESSION 'WHOLLY & EX CLUSIVELY' USED IN SECTION 37(1) OF THE INCOME-TAX ACT, 1961 DOES NOT MEAN 'NECESSARY'. ORDINARILY, IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRED IN THE COU RSE OF HIS OR ITS BUSINESS. SUCH EXPENDITURE MAY BE INCURRE D VOLUNTARILY AND WITHOUT ANY NECESSITY AND IF IT IS INC URRED FOR PROMOTING THE BUSINESS AND TO EARN PROFITS ASSESSEE C AN CLAIM DEDUCTION EVEN THOUGH THERE WAS NO COMPELLING NECESSI TY TO INCUR SUCH EXPENDITURE. (SASSON J. DAVID & CO. (P) LTD. VS. CIT (1979) 118 ITR 261 (SC)). THOUGH THE MAIN OBJECTS OF BUSINESS IS TO EARN PROFITS, BUSINESS PURPOSES ARE WIDER THAN PROFIT-MAKING PURPOSES. BUSINESS EXPEDIENCY DOES NO T REQUIRE THAT EXPENSES SHOULD BE INCURRED ONLY FOR EARNING IMM EDIATE ITA NO. 588/HYD/2006 :- 13 -: PROFITS. EXPENSES INCURRED THOUGH NOT DIRECTLY RELATED TO EARNING TO INCOME, MAY BE ALLOWABLE DEDUCTIONS IF THEY ARE RELATED TO THE CARRYING ON OF THE BUSINESS VIDE BIRLA COTTON SPINNING & WEAVING MILLS LTD. VS. CIT (1967) 64 ITR 568 (CAL)). IT IS FOR THE ASSESSEE TO DECIDE HOW BEST TO PRO TECT ITS OWN INTEREST. IT IS NOT OPEN TO AO TO PRESCRIBE WHAT EXPENDITURE AN ASSESSEE SHOULD INCUR AND IN WHAT CIRCUMSTANCES HE SHOULD INCUR THAT EXPENDITURE (CIT VS . DHANRAJGIRI RAJA NARASINGIRI (1973) 91 ITR 544 (SC) ). EXPRESSION 'COMMERCIAL EXPEDIENCY' IS NOT A TERM OF AR T. IT MEAN EVERYTHING THAT SERVES TO PROMOTE COMMERCE AND INCLUDES EVERY MEANS SUITABLE TO THAT END. IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR TH E PURPOSES OF THE BUSINESS, REASONABLENESS OF THE EXPEN DITURE HAS TO BE ADJUDGED FROM THE POINT OF VIEW OF THE BUSINE SSMAN AND NOT OF THE REVENUE (JAMSHEDPUR MOTOR ACCESSORIES STORES VS. CIT (1974) 95 ITR 664 (PAT); J.K. WOOLLEN MANUF ACTURERS VS CIT (1969) 72 ITR 612 (SC). IN CIT VS. CHANDULA L KESHAVLAL & CO. (1960) 38 ITR 601 (SC), IT WAS HELD BY THE SC THAT IN DECIDING WHETHER A PAYMENT OF MONEY IS A DEDUCT IBLE EXPENDITURE, ONE HAS TO TAKE INTO CONSIDERATION QUESTIO NS OF COMMERCIAL EXPEDIENCY AND THE PRINCIPLES OF ORDINARY COMMERCIAL TRADING. ITA NO. 588/HYD/2006 :- 14 -: 10.1. THE CO-ORDINATE BENCH IN THE CASE OF COCA COLA INDIA (P) LTD., VS. DCIT [116 TTJ 880], [ITAT (PUNE) ] HAS CONSIDERED THE PROVISIONS OF SECTION 37(1) AND LAID D OWN THE FOLLOWING PRINCIPLES: 18.8 THE POSITION IN LAW, IN RELATION TO S. 37(1) OF THE ACT, AS EMERGING FROM THE DECISIONS OF THE SUPREME COURT, D ISCUSSED IN THE ABOVE PARAS, CAN BE SUMMARIZED AS UNDER: (I) THE EXPENSES INCURRED SHOULD BE 'INCIDENTAL' TO THE CARRYING ON OF THE BUSINESS OF THE ASSESSEE. (II) THE EXPRESSION 'WHOLLY AND EXCLUSIVELY' USED IN S. 37(1) OF THE IT ACT, 1961, DOES NOT MEAN 'NECESSARILY'. (III) AN EXPENDITURE INCURRED 'VOLUNTARILY' WITHOUT ANY ' NECESSITY', WOULD BE PERMISSIBLE FOR DEDUCTION UNDER S. 37(1) I F IT WAS INCURRED FOR PROMOTING THE ASSESSEE'S BUSINESS. (IV) THE FACT THAT SOMEBODY OTHER THAN THE ASSESSEE WAS ALSO BENEFITED BY THE EXPENDITURE, SHOULD NOT COME IN TH E WAY OF AN EXPENDITURE BEING ALLOWED FOR DEDUCTION UNDER S. 37 (1). (V) THE AO CANNOT JUSTIFIABLY CLAIM TO PUT HIMSELF IN T HE ARMCHAIR OF THE BUSINESSMAN TO DECIDE WHETHER TO INCUR AN EXPEN DITURE AND HOW MUCH TO INCUR. (VI) THE REQUIREMENT OF 'COMMERCIAL EXPEDIENCY' HAS TO B E DETERMINED FROM THE POINT OF VIEW OF A PRUDENT BUSI NESSMAN AND NOT FROM THE POINT OF VIEW OF THE AO. (VII) THE TEST IS : EXISTENCE OF A 'NEXUS' BETWEEN THE EX PENDITURE AND THE 'PURPOSE OF BUSINESS'. 10.2. KEEPING IN MIND THE ABOVE PROVISIONS AND THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COURT O N THE ISSUE, WE ARE OF THE OPINION THAT AO CANNOT STEP INTO T HE SHOES OF ASSESSEE TO RE-FIX THE AMOUNT THAT SHOULD HAVE BEE N PAID. ITA NO. 588/HYD/2006 :- 15 -: THERE IS NO DISPUTE THAT THE AMOUNT WAS PAID FOR THE P URPOSE OF BUSINESS, AS AO HAS ALLOWED THE AMOUNT PARTLY. SIN CE THE PROVISIONS OF SECTION 37(1) DOES NOT HAVE ANY RESTRIC TION TO ALLOW THE AMOUNT PARTLY, SO LONG AS THE EXPENDITURE WA S INCURRED FOR THE PURPOSE OF THE BUSINESS WHOLLY AND EXCLUSIVELY, THE SAME HAS TO BE ALLOWED. THE RESTRIC TIONS 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. IN VIE W OF THAT, WE ARE OF THE OPINION THAT AO HAS WRONGLY CONSIDERED T HE CLAIM. THERE IS NO POWER TO AO TO REDUCE THE CLAIM, W HEREAS HE CAN EXAMINE WHETHER THE AMOUNT CAN BE ALLOWED OR N OT IN FULL. IN VIEW OF THAT, SINCE THE RESTRICTIONS U/S. 37( 1) ARE NOT APPLICABLE, THE WHOLE OF THE AMOUNT CLAIMED IS TO BE AL LOWED AS THE EXPENDITURE IS NOT PROVED TO BE PERSONAL OR CAPITAL IN NATURE, AS PROVIDED IN THE SECTION ITSELF. AO IS DIREC TED 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. 11. COMING TO THE ISSUE OF ENHANCEMENT UNDERTAKEN BY THE AO, THE RELIANCE ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS. SARDARI LAL AND CO. [25 1 ITR 864] (DEL) WILL APPLY ONLY IN THE CASE WHERE THE CIT(A) HA S TRAVERSED AND FOUND A NEW SOURCE OF INCOME. HOWEVER, IN THIS CASE AS RIGHTLY HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. SHAPOORJI PALLONJI MISTRY [44 ITR 891] (SC), THE APPELLATE ITA NO. 588/HYD/2006 :- 16 -: AUTHORITY HAS NO POWER TO ENHANCE THE ASSESSMENT BY DISCOVERING THE NEW SOURCES OF INCOME NOT MENTIONED I N THE RETURN OF ASSESSEE OR CONSIDERED BY THE ITO. IT IS TO BE NOTED THAT LD.CIT(A) RELIED ON THE TRADING ACCOUNT OF ASSESSEE FILED ALONG WITH RETURN. THEREFORE, IN OUR VIEW, IT IS NOT A NEW SOURCE OF INCOME NOT MENTIONED IN THE RETURN OF ASSESSEE. THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. NIRBHERAM DELURA M [224 ITR 610] (SC) HAS HELD AS UNDER: THE SUPREME COURT HAS HELD IN JUTE CORPN. OF INDIA LTD. V. CIT [1991] 187 ITR 688 THAT THE DECLARATION OF LAW IS C LEAR THAT THE POWER OF THE AAC IS COTERMINOUS WITH THAT OF THE ITO AND IF THAT IS SO, THERE APPEARS TO BE NO REASON AS TO WHY THE APPELLATE AUT HORITY CANNOT MODIFY THE ASSESSMENT ORDER ON AN ADDITIONAL GROUND EVEN IF NOT RAISED BEFORE THE ITO, THE SCOPE OF HIS POWER IS CO TERMINOUS WITH THE ITO, HE CAN DO WHAT THE ITO CAN DO AND ALSO DIRECT HIM TO DO WHAT HE HAS FAILED TO DO. HAVING REGARD TO THE AFORESAID DECISION IT MUST BE HELD THAT THE HIGH COURT WAS IN ERROR IN HOLDING THAT THE APPELLATE PO WER CONFERRED ON THE AAC UNDER SECTION 251 WAS CONFINED TO THE MATTE R WHICH HAD BEEN CONSIDERED BY THE ITO AND THAT THE AAC EXCEEDE D HIS JURISDICTION IN MAKING AN ADDITION OF RS. 2,30,000 ON THE BASIS OF THE OTHER 10 ITEMS OF HUNDIES WHICH HAD NOT BEEN EXPLAI NED BY THE ASSESSEE. THEREFORE, EVEN IF IT WAS NOT HELD THAT T HE SUM OF RS. 2,30,000 WAS ADDED BY THE AAC AS NEW SOURCES OF INC OME, NOT CONSIDERED BY THE ITO FROM THE POINT OF VIEW OF ASS ESSABILITY, THE AAC HAD JURISDICTION OR POWER TO ADD THE SUM OF RS. 2,3 0,000 IN THE FACTS AND CIRCUMSTANCES IN WHICH HE HAD ADDED THE SAME. A CCORDINGLY, THE APPEAL WAS TO BE ALLOWED. 11.1. RESPECTFULLY FOLLOWING THE SAME, WE ARE OF THE OPINION THAT LD.CIT(A) HAS JURISDICTION TO CONSIDER THE LOSS CLAIMED OF THE ASSESSEE, WHICH AO HAS NOT EXAMINED, A S HE HAS POWERS TO ENHANCE ALSO GIVEN TO HIM U/S. 251. THE ITA NO. 588/HYD/2006 :- 17 -: PROVISIONS OF SECTION 251(1)(A) EMPOWERS THE CIT IN AN APPEAL AGAINST AN ORDER OF ASSESSMENT TO CONFIRM, REDUCE, ENH ANCE OR ANNUL THE ASSESSMENT. THUS, SINCE THE CIT(A) HAS NOT UN- EARTHED A NEW SOURCE OF INCOME, BUT ONLY HAS GONE BY THE ANNUAL REPORT/ STATEMENTS ENCLOSED TO THE RETURN IN WHI CH 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 A RE REJECTED. 12. COMING TO THE MERITS OF ADDITION MADE BY LD.CIT(A ) I.E., DISALLOWANCE OF LOSS CLAIMED, IT IS TO BE NOTED THAT ASSESSEE HAVING PURCHASED SHARES OF RS. 155/- PER S HARE HAS VALUED THE SAME AT RS. 10/- AS ON 31-03-2002, SO AS T O CLAIM A NOTIONAL LOSS IN THE TRANSACTION OF PURCHASE OF SHARE S. AS POINTED OUT BY LD.CIT(A) IN THE ORDER, THERE IS NO FALL IN THE VALUE OF THE SHARE AND THE SAID COMPANY (DQ) HAS ISS UED FURTHER SHARES TO OTHERS AT RS. 167/- AS ON 30-11-2001 TO RS. 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 SH ARE IS AROUND RS. 23.52 AND THEREFORE VALUATION OF SHARE AT RS. 10/- IS CERTAINLY WITHOUT ANY BASIS. AFFIRMING THE ORDER OF THE CIT(A) IN WHICH HE HAS DISCUSSED IN DETAIL THE LEGAL PROVISI ONS AND FACTUAL ASPECTS, WE AGREE WITH THE LD.CIT(A) THAT THE VA LUATION OF SHARES AT A LESSER PRICE THAN THE COST WAS RESORTED TO ONLY TO CLAIM NOTIONAL LOSS. SINCE WE ARE AFFIRMING THE ORDE R OF THE CIT(A) ON THIS ISSUE, THE QUESTION OF CONSIDERATION OF LOSS ITA NO. 588/HYD/2006 :- 18 -: WHETHER IT IS SPECULATION OR NOT UNDER THE PROVISIONS OF SECTION 73 EXPLANATION DOES NOT ARISE. IN VIEW OF THA T, WE REJECT THE CONTENTIONS RAISED BY ASSESSEE AND GROUNDS O N THIS ISSUE ARE REJECTED. 13. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALL OWED. ORDER PRONOUNCED IN THE OPEN COURT ON 3 RD AUGUST, 2018 SD/- SD/- (P. MADHAVI DEVI) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 3 RD AUGUST, 2018 TNMM ITA NO. 588/HYD/2006 :- 19 -: COPY TO : 1. M/S. VEEYES INVESTMENTS PVT. LTD., FORTUNE MONAR CH MALL, 3 RD FLOOR, # 306, PLOT NO. 707-709, ROAD # 36, JUBILEE HILLS, HYDERABAD. 2. ASST. COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE -1, HYDERABAD. 3. CIT(APPEALS)-1, HYDERABAD. 4. CIT(CENTRAL)-HYDERABAD. 5. D.R. ITAT, HYDERABAD. 6. GUARD FILE.