RAJESH R KARNANI, MUMBAI V. ACIT 12(1), MUMBAI

ITA 6571/MUM/2009

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 5721 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 01-08-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 24-12-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: R K SAHU
• Assessee Lawyers: HIRO RAJ
• Keywords: Business income; Depreciation; Business expenditure; Rule of consistency; Onus to prove; Capital expenditure
• Section: 234B; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUM BAI . . , , BEFORE SHRI B. R. MITTAL, JM AND SHRI SANJAY ARORA , AM ./ I.T.A. NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 ( / ASSESSMENT YEARS: 2006-07, 2007-08 & 2008-09) RAJESH R. KARNANI C/O. SARASWATI CLEARING AGENCY, 305, EMCA HOUSE, 3 RD FLOOR, 289 SBS MARG, FORT, MUMBAI-400 001 / VS. ASST. CIT 12(1) AAYKAR BHAVAN, MAHARSHI KARVE MARG, MUMBAI-400 020 ! ./' ./PAN/GIR NO. AACPK 2400 L ( !# /APPELLANT ) : ( $!# / RESPONDENT ) !# % / APPELLANT BY : SHRI HIRO RAJ $!# & % / RESPONDENT BY : SHRI R. K. SAHU ' ()* & + / DATE OF HEARING : 20.11.2013 ,-. & + / DATE OF PRONOUNCEMENT : 31.01.2014 / / O R D E R PER SANJAY ARORA, A. M.: THIS IS A SET OF THREE APPEALS BY THE ASSESSEE DIRE CTED AGAINST THE ORDERS BY THE COMMISSIONER OF INCOME TAX (APPEALS)-23, MUMBAI (C IT(A) FOR SHORT), DISMISSING THE ASSESSEES APPEALS CONTESTING ITS ASSESSMENTS U/S.1 43(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THREE CONSECUTIVE ASSES SMENT YEARS (A.YS.), BEING AY 2006-07 TO 2008-09. THE APPEALS RAISING COMMON ISSUES, WERE HEARD TOGETHER, AND ARE ACCORDINGLY BEING DISPOSED OF VIDE A COMMON, CONSOLIDATED ORDER . 2 ITA NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 (A.YS. 2006-07 TO2008-09) RAJESH R. KARNANI VS. ASST. CIT 2. THE FIRST ISSUE, RAISED PER GROUND NO. 1 FOR ALL THE YEARS, IS THE DISALLOWANCE OF UNVERIFIABLE CASH EXPENSES AT 25% OF SUCH EXPENSES. THE ASSESSEE, A CUSTOM HOUSE AGENT (CHA), PROVIDING CLEARING AND FORWARDING SERV ICES TO HIS CLIENTS, WAS FOUND DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS TO HAVE CL AIMED EXPENSES IN CASH, I.E., APART FROM THOSE SUPPORTED BY THIRD PARTY VOUCHERS, PER S ELF-MADE VOUCHERS (AT RS.43,26,193/-). BEING, THUS, UNSUBSTANTIATED BY EVIDENCE, THE REVEN UE, RELYING ON DECISIONS BY THE TRIBUNAL, DISALLOWED 25% OF SUCH EXPENSES, I.E., AT RS.10,81,548/- (THE REFERENCE TO THE FIGURES IN THIS ORDER, WHICH IS ONLY INSTRUCTIVE, W OULD BE FOR AY 2006-07). AGGRIEVED, THE ASSESSEE IS IN APPEAL. 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE BASIS OF THE DISALLOWANCE IS THAT THE RELEVANT EXPENDITURE IS UN -VOUCHED, I.E., UNSUBSTANTIATED AND, THEREFORE, UNVERIFIABLE AND UNRELIABLE. FOLLOWING T HE DECISIONS BY THE TRIBUNAL, AS UNDER, THE DISALLOWANCE TO ACCOUNT FOR THE LEAKAGE OF REVE NUE AND THE INFLATION ATTENDING THE CLAIM, HAS BEEN MADE AT 25%: I. A.P.L. (INDIA) (P.) LTD. VS. DY. CIT [2005] 96 ITD 227 (MUM); II. CORROSION ROADLINES VS. DY. CIT [2005] 92 TTJ 631 (PUN) (TM); AND III. ACIT VS. KAMATH & CO. (IN ITA NO.7453/MUM/2002 DATED 21.02.2006) NO IMPROVEMENT IN ITS CASE BEING MADE BEFORE THE FI RST APPELLATE AUTHORITY, THE SAME STOOD CONFIRMED, AND WHICH POSITION CONTINUES TO OBTAIN EVEN BEFORE US. THAT THE ONUS TO PROVE ITS RETURN AND THE CLAIMS PREFERRED T HEREBY IS ONLY ON THE ASSESSE, IS TRITE LAW (REFER: CIT V. CALCUTTA AGENCY LTD . [1951] 19 ITR 191 (SC)), SO THAT THE DISALLOWANCE IS UNDER THE CIRCUMSTANCES NOT UNMERITED. AS REGARDS ITS QUANTUM, THE REVENUE HAS PLACED RELI ANCE ON THREE DECISIONS BY THE TRIBUNAL, WHICH CAN ONLY BE INSTRUCTIVE INASMUCH AS THE MATTER IS PURELY FACTUAL, AND TOWARD WHICH THE ASSESSEE HAS NOT FURNISHED ANY MAT ERIAL, SO THAT THE REVENUES RELIANCE ON THE PRECEDENTS CANNOT BE FAULTED WITH, THE SAME BEING IN FACT IN LINE WITH THE DISALLOWANCE AS BEING CONFIRMED BY THE TRIBUNAL UND ER SIMILAR CIRCUMSTANCES FOR THE SAME/ALLIED TRADE, AS FOR EXAMPLE IN THE CASE OF DY. CIT VS. N. JAMNADAS & CO. (IN ITA NO. 5317/MUM/2011 DATED 27.02.2013) AND J. M. BAXI & CO . (IN ITA NOS. 5606 & 3 ITA NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 (A.YS. 2006-07 TO2008-09) RAJESH R. KARNANI VS. ASST. CIT 5316/MUM/2011 DATED 11.07.2012). FURTHER, THE ASSES SEES CLAIM THAT A PROFIT TO THAT EXTENT (25%) COULD NOT BE POSSIBLE IN THE CLAIM MAD E BY IT ON ITS CUSTOMERS, WHO REIMBURSE THE SAID EXPENSES, IS AGAIN UNSUBSTANTIAT ED AND MISCONCEIVED. THIS IS FOR THE SIMPLE REASON THAT ALL THE RECEIPTS, INCLUDING THOS E CLAIMED TO BE BY WAY OF REIMBURSEMENT, FORM PART OF THE ASSESSEES GROSS RE CEIPTS. ACCORDINGLY, ALL THE EXPENSES INCURRED BY THE ASSESSEE TOWARD THE SAME, WHETHER R EIMBURSED SEPARATELY BY HIS CLIENTS OR NOT, WOULD BE ELIGIBLE FOR DEDUCTION U/S. 37(1) OR ANY OTHER SPECIFIC PROVISION OF THE ACT IN THE COMPUTATION OF THE BUSINESS INCOME U/S.28. T HERE IS AS SUCH NO MERIT IN THE CONTENTION THAT THESE ARE NOT THE ASSESSEES EXPENS ES, OR STAND NOT CLAIMED BY HIM. FURTHER, THERE IS NO QUESTION OF ANY PROFIT ELEMENT BEING ALLOWED BY THE CLIENTS AND, CONSEQUENTLY, OF ASSESSMENT THEREOF BY THE REVENUE, WHICH ONLY SEEKS TO, RATHER THAN DISALLOWING THE ENTIRE SUCH EXPENDITURE, ALLOWING B ENEFIT OF DOUBT TO THE ASSESSEE INASMUCH AS THIRD PARTY VOUCHERS MAY NOT BE AVAILAB LE FOR ALL THE EXPENSES (WHICH THOUGH WOULD NEED TO BE SPECIFIED, AND A FINDING IN THEIR RESPECT RENDERED), REASONABLY ESTIMATED A SUM THAT COULD BE SAID TO HAVE NOT TO BE INCURRED FOR THE PURPOSES OF BUSINESS (ALSO REFER: RAMANAND SAGAR VS. DY. CIT [2002] 256 ITR 134 (BOM)). APART FROM THE DECISIONS AFORE-CITED, THIS IS THE NORMAL RATE OF D ISALLOWANCE BEING CONFIRMED BY THE MUMBAI BENCHES OF THE TRIBUNAL IN SUCH CASES. WE, ACCORDINGLY, FIND LITTLE MERIT IN THE ASSESSEE S CLAIM OF DISALLOWANCE BEING NOT WARRANTED AND, IN ANY CASE, EXCESSIVE, BEING ONLY I N THE NATURE OF BALD CLAIMS. THE ASSESSEE HAS SOUGHT TO ADVANCE ITS CASE BY PLACING RELIANCE ON THE DECISION IN THE CASE OF M/S. PAREKH CORPORATION (IN ITA NOS. 3293, 3939, 3294 & 3910/M/2008 DATED 30.05.2012). THE TRIBUNAL IN THAT CASE, ON THE BAS IS OF THE MATERIAL ON RECORD, FOUND THAT THE ASSESSEE HAD ESTABLISHED THAT NO EXPENDITURE HA D IN FACT BEEN CLAIMED BY IT AND, THEREFORE, WAS OF THE VIEW THAT NO DISALLOWANCE WHA TSOEVER COULD BE MADE. HOW, WE WONDER, THE SAID DECISION, RENDERED IN THE FACTS OF THAT CASE, SHALL BE OF ASSISTANCE TO THE ASSESSEE, WITH WE BEING UNABLE TO RENDER ANY SUCH F INDING IN THE FACTS AND CIRCUMSTANCES OF THE CASE ? THIS DECIDES THE SAID GD. 1 FOR ALL THE YEARS. 4 ITA NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 (A.YS. 2006-07 TO2008-09) RAJESH R. KARNANI VS. ASST. CIT 4. THE SECOND ISSUE ARISING IN THIS APPEAL IS THE D ISALLOWANCE (OF RS.6.50 LACS) CLAIMED AS COMPENSATION PAID TO SHRI DEEPAK KARNANI , THE ASSESSEES YOUNGER BROTHER. THE FIRM, M/S. SARASWATI CLEARING AGENCY, UNDER WHI CH TRADE NAME THE CHA BUSINESS IS BEING RUN BY THE ASSESSEE AS ITS PROPRIETOR, BELONG ING TO HIS FATHER, SHRI RAM NATHUMAL KARNANI, THE SAID BUSINESS WAS BEQUEATHED BY HIM TO HIS ELDER SON, SHRI RAJESH R. KARNANI, THE ASSESSEE, VIDE HIS WILL DATED 30.08.19 92 (PB PGS. 1-18). IN THE EVENT OF HIS YOUNGER SON, SHRI DEEPAK KARNANI, WHO WAS AT THE RE LEVANT TIME PURSUING STUDY IN ENGINEERING, PASSING THE CUSTOM CATEGORY I EXAMIN ATION AND JOINING BUSINESS (BEFORE 31.12.1999), HE WAS TO HAVE AN EQUAL SHARE WITH HIS BROTHER, THE ASSESSEE, IN THE SAID BUSINESS. HOWEVER, IN THE EVENT OF HIS FAILING TO C LEAR THE SAID EXAMINATION, OR OTHERWISE UNWILLING TO JOIN THE SAID BUSINESS, HE WAS TO BE P AID RS.60,000/- P.A. OR 25% OF THE PROFIT AS COMPUTED UNDER THE ACT, WHICHEVER IS HIGHER (CLA USE 7(II)). THE PAYMENT WAS TO BE A CHARGE ON THE PROFITS OF THE FIRM. 5.1 IT MAY BE RELEVANT TO, BEFORE WE PROCEED TO ADJ UDICATE, DISCUSS THE LAW IN THE MATTER; THE ASSESSEE HAVING RELIED ON A NUMBER OF P RECEDENTS, VIZ. CIT VS. SITALDAS TIRATHDAS [1961] 41 ITR 367 (SC); CIT VS. C.N. PATUCK [1969] 71 ITR 713 (BOM); CIT VS. INCOME-TAX VS. NARIMAN B. BHARUCHA & SONS [1981] 130 ITR 863 (BOM); CIT VS. MULLA & MULLA & CRAIGIE BLUNT & CAROE [1991] 190 ITR 198 (BOM); AND KHUDI RAM LAHA VS. CIT [1968] 67 ITR 364 (ALL.). THE LAW IN THE MATTER CAN BE SAID TO BE WELL SETTLED; THE APEX COURT AS FAR BACK AS IN SITALDAS TIRATHDAS (SUPRA) LAYING DOWN THE LEGAL PRINCIPLES WHICH OUGHT TO GUIDE ONE IN THE MATTER, AND WHICH DECISION CONTINUES TO HOLD THE FIELD, BEING FOLLOWED BY HONBLE HIGH COURTS AC ROSS THE COUNTRY, INCLUDING BY THE JURISDICTIONAL HIGH COURT, AS IN THE CASE OF CIT VS. MULLA & MULLA & CRAIGIE BLUNT & CAROE (SUPRA): THE TRUE TEST FOR THE APPLICATION OF THE RULE OF DI VERSION OF INCOME BY AN OVERRIDING CHARGE, IS WHETHER THE AMOUNT SOUGHT TO BE DEDUCTED, IN TRUTH, NEVER REACHED THE ASSESSEE AS HIS INCOME. OBLIGATIO NS, NO DOUBT, THERE ARE IN EVERY CASE, BUT IT IS THE NATURE OF THE OBLIGATI ON WHICH IS THE DECISIVE FACT. THERE IS A DIFFERENCE BETWEEN AN AMOUNT WHICH A PER SON IS OBLIGED TO APPLY 5 ITA NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 (A.YS. 2006-07 TO2008-09) RAJESH R. KARNANI VS. ASST. CIT OUT OF HIS INCOME AND AN AMOUNT WHICH BY THE NATURE OF THE OBLIGATION CANNOT BE SAID TO BE A PART OF THE INCOME OF THE AS SESSEE. WHERE BY THE OBLIGATION INCOME IS DIVERTED BEFORE IT REACHES THE ASSESSEE, IT IS DEDUCTIBLE; BUT WHERE THE INCOME IS REQUIRED TO BE APPLIED TO DISCHARGE AN OBLIGATION AFTER SUCH INCOME REACHES THE ASSESSEE, THE SAME CONSEQUENCE, IN LAW, DOES NOT FOLLOW. IT IS THE FIRST KIND OF PA YMENT WHICH CAN TRULY BE EXCUSED AND NOT THE SECOND. THE SECOND PAYMENT IS M ERELY AN OBLIGATION TO PAY ANOTHER A PORTION OF ONE'S OWN INCOME, WHICH HA S BEEN RECEIVED AND IS SINCE APPLIED . WHAT, THEREFORE, IS TO BE SEEN IS IF THE LEGAL CHAR GE OR OBLIGATION IS TO APPLY THE INCOME WHICH HAS ACCRUED OR ARISEN IN THE FACTS AND CIRCUMSTANCES OF THE CASE A MATTER OF FACT, IN WHICH CASE IT WOULD AN APPLICATION OF I NCOME AND NOT ITS DIVERSION, OR NOT (ALSO REFER CIT VS. BOMBAY OILSEEDS & OIL EXCHANGE LTD . [1993] 202 ITR 198 (BOM) [113 CTR 404]. 5.2 IN THE FACTS OF THE PRESENT CASE, IT IS APPAREN T THAT THE FATHER WANTED BOTH HIS SONS TO JOIN HIS BUSINESS, AND WORK TOGETHER. HOWEVER, BEIN G NOT CERTAIN IF THE SAME WOULD INTEREST HIS YOUNGER SON, DEEPAK KARNANI, OR THAT H E WOULD BE ELIGIBLE TO DO SO, HE ENJOINED ON HIS ELDER SON, THE ASSESSEE, TO PAY HIS YOUNGER BROTHER COMPENSATION LINKED TO PROFIT, ALSO STIPULATING A MINIMUM AMOUNT. WHAT, TH EREFORE, IS MADE INCUMBENT ON THE ASSESSEE AS AN ELDER BROTHER IS TO PART WITH A SHAR E OF ITS PROFITS IN THE EVENT OF HIS YOUNGER BROTHER NOT JOINING THE BUSINESS AS A FULL-FLEDGED PARTNER. NOTHING MORE AND, OF COURSE, NOTHING LESS. THE TWO EVENTUALITIES ARE THUS AT PAR, OR HAVE TO B E CONSIDERED AS IN PARITY, REPRESENTING ONLY THE DIFFERENT OUTCOMES OF THE SAM E INTENT, AS COULD BE FORESEEN BY THE PARENT AS ARISING UNDER THE CIRCUMSTANCES IN FUTURE IN THE NORMAL COURSE OF EVENTS . THE CHOICE AS WELL AS THE RESPONSIBILITY FOR JOINING TH E BUSINESS IS GIVEN TO THE YOUNGER SON, SO THAT THERE IS NO CASE OF INHERITANCE OR HIS HAVING ANY PROPRIETARY OR OWNERSHIP INTEREST IN THE SAID BUSINESS. AS IT TRANSPIRED, HE DID NOT, AS CLARIFIED BY THE LD. AR ON ENQUIRY BY US, QUALIFY THE RELEVANT PROFESSIONAL EXAMINATION, SO T HAT HE COULD NOT JOIN THE BUSINESS. FURTHER, THE BUSINESS, PARTICULARLY AS THE ONE UNDE R REFERENCE, WHICH IS SERVICE ORIENTED, WOULD NOT YIELD PROFITS OF ITS OWN, AND N EEDS TO BE UNDERTAKEN AT THE COST OF TIME AND EFFORT. COULD, THEREFORE, A BUSINESS OR UNDERTA KING, WHICH REQUIRES ACTIVE 6 ITA NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 (A.YS. 2006-07 TO2008-09) RAJESH R. KARNANI VS. ASST. CIT PARTICIPATION AND INVOLVEMENT, APART FROM QUALIFICA TION, TIME AND RESOURCES FOR ITS SUSTENANCE, BE SAID TO BE THE SUBJECT TO OR BE A SU BJECT MATTER OF BEQUEATHMENT? THE OFFICE PREMISES OF THE BUSINESS, AGAIN A PRINCIPLE ASSET OF THE FATHERS PROPRIETARY BUSINESS, STANDS BEQUEATHED TO HIS TWO SONS SEPARAT ELY IN EQUAL PROPORTION (CLAUSE (7)(I) OF THE WILL). COULD, THEREFORE, THE BUSINESS AS SUCH FORM PART OF HIS ESTATE ? SUCH QUESTIONS ARISE. THE PROFITS WOULD, IN ANY CASE, AR ISE ONLY ON THE DEPLOYMENT OF TIME AND RESOURCES, AS WE SHALL PRESENTLY SEE, BY THE SAID B ROTHER HIMSELF, AND NOT BY ITSELF OR ITS OWN, SO AS TO BE CONSIDERED AS ARISING OUT OF THE P ROPERTY. WHAT, THEREFORE, IN OUR VIEW, STANDS BEQUEATHED IS THE RIGHT TO A DEFINED, SUBJECT TO A MINIMUM, SHARE IN THE PROFITS OF THE ASSESSEES B USINESS . THAT IS, THE NATURE OF THE OBLIGATION CAST ON THE ASSESSEE IS TO SHARE A PART OF HIS PROFITS WITH HIS YOUNGER BROTHER. 5.3 THE ASSESSEE HAS ALSO ARGUED WITHOUT SUBSTANTI ATION THOUGH, OF THE PAYEE, SHRI DEEPAK KARNANI, AS HAVING RETURNED THE COMPENSATION AS HIS INCOME. THE SAME IS OF NO MOMENT INASMUCH AS THAT INCOME IS TO BE BROUGHT TO TAX IN THE HANDS OF THE RIGHT PERSON ALONE, AND MERELY BECAUSE A WRONG PERSON IS TAXED W ITH RESPECT TO A PARTICULAR INCOME, THE ASSESSING OFFICER IS NOT PRECLUDED FROM TAXING THE RIGHT PERSON WITH RESPECT TO THAT INCOME (REFER: ITO V. CH. ATCHAIAH [1996] 218 ITR 239 (SC)). 5.4 THE ASSESSE, AS AFORE-NOTED, HAS RELIED UPON CA SE LAW. THE PROPOSITIONS LAID DOWN ARE TRITE AND UNDISPUTABLE. WHAT IS THEREFORE ESSEN TIALLY REQUIRED IS THE APPLICATION OF THOSE PRINCIPLES IN THE FACTS AND CIRCUMSTANCES OF THE CASE, OBLIGATIONS, AS EXPLAINED BY THE APEX COURT IN SITALDAS TIRATHDAS (SUPRA), BEING THERE IN EVERY CASE. WE HAVE ALREADY NOTED THAT THE BUSINESS UNDER REFERENCE REQUIRES, T O BEGIN WITH, QUALIFICATION. THE YOUNGER BROTHER COULD NOT CLEAR THE PROFESSIONAL QUALIFYING EXAMINATION, SO THAT HE COULD, EVEN IF HE WAS OTHERWISE WILLING TO JOIN HIS BROTHER AS A P ARTNER, NOT DO SO. THE BUSINESS REQUIRES LICENSE FROM THE CUSTOMS DEPARTMENT, AND EVEN THE A SSESSEE, BUT FOR ACQUIRING THE NECESSARY QUALIFICATION, COULD NOT, DESPITE HIS PAR ENTS WILL AND INTENTION, CONDUCT THE SAID BUSINESS. THE YOUNGER BROTHER HAS, IN OUR VIEW, BEE N APPOINTED AS A DE FACTO PARTNER, ALBEIT WITH THE LESSER SHARE. ONE MAY NOT DWELL ON THE OTHER ASPECTS OF THE PRESENT CASE, AS 7 ITA NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 (A.YS. 2006-07 TO2008-09) RAJESH R. KARNANI VS. ASST. CIT SOUGHT TO BE INDICATED ABOVE; SUFFICE TO ADD THAT T HE PROFITS IN THE SERVICE INDUSTRY ARISE PRINCIPALLY DUE TO THE DELIVERY AND ON A CONTINUI NG BASIS, OF THE SERVICES RENDERED, INCLUDING THEIR QUALITY. THE PROFIT, LEAVE ALONE IT S QUANTUM, IS ITSELF NOT CERTAIN. THE SAME CANNOT BE, IN ANY CASE, CONSIDERED AT PAR WITH A PR OPERTY, AS SHARES OR A HOUSE PROPERTY, YIELDING INCOME MERELY PRIMARILY ON ACCOUNT OF OWNE RSHIP. THE PRESENT CASE, IN OUR VIEW, IS A CASE TO WHICH THE DECISIONS IN THE CASE OF CIT VS. SITALDAS TIRATHDAS [1961] 41 ITR 367 (SC); PROVAT KUMAR MITTER VS. CIT [1961] 41 ITR 624 (SC) AND TRUSTEES OF CHATURBHUJ RAGHAVJI TRUST VS. CIT [1963] 50 ITR 693 (BOM) APPLY. OUR DECISION, THUS, BASED ON THE FACTS OF THE PRESENT CASE, APPLYING WE LL SETTLED LEGAL PRINCIPLE/S, THE DECISIONS RELIED UPON, WHICH WE HAVE PERUSED, RENDERED IN THE FACTS OF THOSE CASES, ARE OF LITTLE ASSISTANCE. 5.5 IN VIEW OF THE FOREGOING, THE PRESENT CASE, TO OUR MIND, IS A CLEAR CASE OF THE APPLICATION OF INCOME THAT STOOD ENJOINED ON THE AS SESSEE BY HIS FATHER THROUGH A TESTAMENTARY DOCUMENT. ACCORDINGLY, THERE IS NO SCO PE FOR CLAIMING THE SAME EITHER AS A BUSINESS DEDUCTION U/S. 37(1) OR U/S.28, AND THE SA ME STANDS RIGHTLY DISALLOWED. WE DECIDE ACCORDINGLY, DISMISSING THE ASSESSEES SECON D GROUND FOR THE FIRST TWO YEARS. 6. VIDE HIS THIRD GROUND FOR AYS 2006-07 & 2007-08, THE ASSESSEE IMPUGNS THE DISALLOWANCE U/S. 40A(2)(A) ON ACCOUNT OF KEYMAN IN SURANCE POLICY TAKEN ON THE LIFE OF HIS BROTHER, SHRI DEEPAK KARNANI. ON THE BASIS OF T HE DETAILS OF THE SALARY PAID, IT WAS FOUND THAT HE WAS, AT RS.3.96 LACS (FOR A.Y. 2006-0 7), PAID SALARY IN THE SAME RANGE AS THAT TO ANOTHER, SHRI S. R. KARNANI, AT RS.3.03 LAC S. NO POLICY WAS SIMILARLY (OR EVEN FOR A LESSER SUM) TAKEN ON THE LIFE OF THE LATTER PERSON, AND NO BASIS FOR ACCORDING A SPECIAL TREATMENT TO SHRI DEEPAK KARNANI WAS STATED. ACCORD INGLY, IT WAS INFERRED BY THE A.O. THAT THE SAID POLICY HAD BEEN TAKEN NOT FOR BUSINES S, BUT ON PERSONAL CONSIDERATIONS. THE SAME WAS DISALLOWED FOLLOWING THE DECISION IN THE C ASE OF CIT VS. CAMA MOTORS [1998] 147 ITR 361 (GUJ.). THE SAME STOOD CONFIRMED IN VIE W OF THE ASSESSEE FAILING TO ESTABLISH BEFORE THE LD. CIT(A) OF THE INSURED BEING THE KEY PERSON OF THE ASSESSEES BUSINESS. 8 ITA NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 (A.YS. 2006-07 TO2008-09) RAJESH R. KARNANI VS. ASST. CIT 7. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD, AND GIVEN OUR CAREFUL CONSIDERATION TO THE MATTER. 7.1 THE ASSESSEE HAS BEFORE THE REVENUE AUTHORITIES SOUGHT TO EMPHASIZE THAT SHRI DEEPAK KARNANI IS A KEY MAN OF ITS BUSINESS INASMUC H AS HIS SERVICES ARE INVALUABLE FOR THE FIRM. THERE COULD, IN FACT, BE NO TWO VIEWS ABO UT IT INASMUCH AS NEITHER COULD THE ASSESSEES JUDGMENT AND WISDOM AS A BUSINESSMAN BE DOUBTED NOR EVEN THE EXTENT OF THE EXPENDITURE INCURRED, INASMUCH AS THE SAME IS SUBJE CT TO VALIDATION AND ASSESSMENT BY THE INSURER, A THIRD PERSON, AND A PROFESSIONAL AT THAT . KEYMAN, AS ANY OTHER INSURANCE, IS ONLY TO SAFEGUARD AGAINST A DEFINED LOSS THAT COULD ARIS E IN THE COURSE OF CARRYING ON THE BUSINESS AND, THEREFORE, WHERE IN RELATION TO AN AS SET OF THE TRADE, A DEDUCTIBLE EXPENSE. EXPENSE ON PRESERVATION OF A PROFIT EARNING ASSET, IT IS TRITE, IS A DEDUCTIBLE BUSINESS EXPENSE (REFER: CIT VS. DELHI SAFE DEPOSIT CO. LTD. [1982] 133 ITR 756 (SC)). THE QUESTION OF THE APPLICABILITY OF SECTION 40A(2)(A) SHOULD NOT THEREFORE ORDINARILY ARISE UNDER SUCH CIRCUMSTANCES. 7.2 AT THE SAME TIME, HOWEVER, WE OBSERVE A COMPLET E LACK OF EVIDENCE BEING LED BY THE ASSESSEE IN PURSUANCE OF HIS CASE, AND ARE AS S UCH AT LOSS TO UNDERSTAND THE SAME. EVEN THOUGH THE INCURRING OF THE EXPENDITURE IS NOT IN D OUBT, IT HAS NOT PLACED ANY MATERIAL ON RECORD TO SUBSTANTIATE THE VALUE OF THE CAPITAL ASS ET - IN THE FORM OF ITS PRIME HUMAN RESOURCE, WHICH IT HAS SOUGHT TO INSURE. THE BASIS OF THE SAID VALUATION, WHICH IS FUNDAMENTAL TO AN INSURANCE CONTRACT, PREMIUM TO KE EP IN FORCE WHICH IS BEING CLAIMED AS INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOS ES, BEING OSTENSIBLY ONLY THE LOSS THAT WOULD ARISE ON HIS SERVICES BEING NOT AVAILABLE, HA S NOT BEEN CLARIFIED AT ANY STAGE. THE REVENUE IS FULLY WITHIN ITS COMPETENCE TO BE SATISF IED WITH THE SAME INASMUCH AS IT IS CLAIMED AS HAVING BEEN INCURRED WHOLLY AND EXCLUSIV ELY FOR BUSINESS PURPOSES, AND WHICH (CLAIM) IS SUBJECT TO VERIFICATION. IT IS THIS THAT PRESUMABLY UNDERLIES INVOCATION OF S. 40A(2)(A). THE QUESTION IS NOT OF DOUBTING THE EXPE NDITURE PER SE , BUT OF ESTABLISHING OF IT AS HAVING BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS, THE ONUS FOR WHICH IS ON THE ASSESSEE; IT BEING TRITE THAT WHILE THE WORD WHOLLY IN THE PROVISION REFERS 9 ITA NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 (A.YS. 2006-07 TO2008-09) RAJESH R. KARNANI VS. ASST. CIT TO QUANTUM, THE WORD `EXCLUSIVELY OCCURRING IN THE QUALIFYING CONDITION OF S. 37(1) REFERS TO THE MOTIVE FOR INCURRING THE EXPENDITURE. THE AP EX COURT, AS FAR BACK IN THE LIQUIDATORS OF PURSA LTD. VS. CIT [1954] 25 ITR 265 (SC), EXPLAINED THAT THE WORDS FOR THE PURPOSES OF THE BUSINESS ONLY MEANT IT TO BE FOR THE PURPOSE OF ENABLING T HE CARRYING ON THE BUSINESS AND TO EARN PROFITS THEREIN. REFERE NCE IN THIS REGARD MAY ALSO BE MADE TO THE DECISION BY THE HONBLE JURISDICTIONAL HIGH COU RT IN RAMANAND SAGAR (SUPRA), HOLDING THAT THE A.O. IS DUTY BOUND TO CONSIDER THE REASONA BLENESS OF THE EXPENDITURE INCLUDING THE BONA FIDE NATURE OF ANY ITEM OF EXPENDITURE AND/OR ITS QUANT UM TO THE EXTENT IT MAY THROW LIGHT ON THE BONA FIDE NATURE. CONTINUING FURTHER, IT HAS NOT EVEN AS MUCH AS ENTERED INTO A LONG TER M CONTRACT WITH THE INSURED, SEEKING TO RETAIN HIM, A VALUABLE RESOURCE, INASMUCH AS THERE IS NO CONTENTION, MUCH LESS MATERIAL, TOWARD THE SAME ? WHILE AN UNFORTUNATE DEMISE, HOWSOEVER UNLIKELY, IS A CONTINGENCY THAT COULD ARI SE AT ANY TIME, CATCHING ONE UNAWARES, EFFORTS (AT RETENTION) IS A PRE-REQUISITE THAT WOUL D ESTABLISH THE BONA FIDES OF THE ASSESSEES CASE AS BEING QUA A GENUINE BUSINESS EXPENSE. THE SAME, IN FACT, REQU IRES NO SEPARATE COST. FURTHER, ONLY A LONG TERM SERVICE CONTRACT OR ENGAGEMENT UNDERSTANDING WOULD, APART FROM RETAINING THE RESOURCE, PROVIDE IT WITH SECURITY OF AN ASSURED SOURCE OF INCOME AND, THUS, CERTAINTY AND STABILITY, SO ESSENTIAL FO R RETENTION. IT NEEDS TO BE APPRECIATED THAT INSURANCE CAN BE TAKEN ONLY OF/ QUA AN ASSET WHICH, OR THE BENEFICIAL INTEREST IN WHIC H, BELONGS TO THE POLICY HOLDER, SO THAT HE CAN BE SAI D TO HAVE AN INSURABLE INTEREST THEREIN. WHAT VALUE THE INSURANCE TO THE ASSESSEE IF THE EMP LOYEE WERE TO LEAVE AT ANY TIME? THIS SHALL EMPHASIZE THE CRUCIAL AND CRITICAL SIGNIFICAN CE OF RETENTION IN THE CASE OF KEYMAN INSURANCE PLAN . FURTHER ON, HOW WOULD, ONE MAY ASK, THE ASSESSEE AS A BUSINESSMAN ENSURE THAT THE EMPLOYEE, SHRI DEEPAK KARNANI, CONT INUES TO WORK FOR THE SAME REMUNERATION (OR EVEN WITH A MODERATE INCREASE), WH ICH AT RS.4 LACS P.A. IS MEAGER COMPARED TO THE INSURANCE PREMIUM OF ABOUT RS.30 LA CS P.A.? HE MAY, AT ANY TIME, ASK FOR A HUGE HIKE, EVEN AS A LESSER ONE WOULD CAUSE TO GR OSSLY DISTURB THE ASSESSEES WORKING OF HIS VALUE TO ITS BUSINESS, TO SECURE WHICH ONLY THE INSURANCE CONTRACT HAS BEEN ENTERED INTO . 10 ITA NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 (A.YS. 2006-07 TO2008-09) RAJESH R. KARNANI VS. ASST. CIT FURTHER STILL, THERE BEING NO DISALLOWANCE FOR THE THIRD YEAR (A.Y. 2008-09), IT WAS ON ENQUIRY CONFIRMED BY THE LD. AR THAT THE POLICY STANDS SINCE ASSIGNED TO THE INSURED, SO THAT THE ASSESSEE IS NO LONGER LIABLE FOR PAYMEN T OF THE PREMIUM, WHICH, THEREFORE, IS NOT CLAIMED AND, RESULTANTLY, NO DISALLOWANCE FOR T HAT YEAR. THIS IS ALL THE MORE PERPLEXING. THERE IS NO EXPLANATION ON RECORD FOR THIS VOLTE FA CE . WHILE IT MAY BE ARGUED THAT NO EXPENDITURE HAS, THEREFORE, BEEN CLAIMED FO R THE THIRD YEAR, THE SAME MISSES THE POINT COMPLETELY. THE WHOLE AND THE VERY BASIS FOR THE EXPENDITURE AND, THEREFORE, THE CLAIM IN ITS RESPECT, IS TO INSURE THE BUSINESS AGA INST THE LOSS THAT MAY ARISE IN THE UNLIKELY EVENT OF THE DEMISE OF THE INSURED, A VALUABLE RESO URCE OF THE BUSINESS, OR ON HIS SERVICES BEING OTHERWISE NOT AVAILABLE TO THE BUSINESS. NOTHING TOWARD SECURING HIS CONTINUITY IN THE BUSINESS HAS BEEN BROUGHT ON RECORD . THAT APART, AS IT TRANSPIRES, WITHIN A FEW MONTHS OF ENTERING THE CONTRACT, THE SAME, AND THUS THE BE NEFITS THEREUNDER, ARE ASSIGNED TO THE EMPLOYEE (AND WHICH COULD BE FOR THAT MATTER TO ANO THER) AND, AS FAR AS WE SEE, WITHOUT CONSIDERATION. THIS IS, AGAIN, SANS ANY EXPLANATION. NOT ONLY DOES A HUMAN RESOURCE GR OW IN VALUE IN TIME, IN THE PRESENT CASE THE ASSESSEE HAS ALSO MADE A FINANCIAL INVESTMENT TOWARD THE SAME. THE SAME, COUPLED WITH THE FACT TH AT NEITHER THE ASSESSEE HAS MADE ANY ARRANGEMENT TOWARD RETENTION NOR EVEN SECURED ITS I NTEREST BY WAY OF AN EXIT OPTION, PLACES THE ENTIRE TRANSACTION AND THE CLAIM QUA THE AMOUNT MADE UNDER THE ARRANGEMENT UNDER SERIOUS DOUBT AS TO ITS GENUINENESS AND BONA FIDES INASMUCH AS THERE IS NO BASIS OR EXPLANATION, FIRSTLY, FOR ITS INCURRENCE AND, SECON DLY, TOWARD ITS REVERSAL, AND AT ANY STAGE, INCLUDING BEFORE US. WHY, THE ASSESSEE, UPON ASSIGN MENT DOES NOT SO MUCH AS EVEN RECOVER THE INVESTMENT, WHICH THUS STANDS PASSED ON TO THE ASSIGNEE. THE EXPENDITURE, OSTENSIBLY INCURRED FOR THE PURPOSES OF THE BUSINES S INASMUCH AS THE BENEFICIAL INTEREST THEREIN WAS OF THE ASSESSEE HIMSELF, EVEN AS EXPLAI NED BY HIM TO THE A.O. (VIDE LETTER DATED 22.11.2008/PB PGS. 19-20), GETS THUS TRANSLAT ED INTO A SUM ALLOWED TO AN EMPLOYEE. THE SAME WOULD WITHOUT DOUBT ATTRACT S. 40A(2)(A). WE SAY SO AS THE ENTIRE EDIFICE ON WHICH THE CLAIM FOR THE IMPUGNED EXPENDITURE RESTED IS LOST. WHILE APPLICATION OF S. 40A(2)(A) WOULD NORMALLY REQUIRE A COMPARISON OF TH E VALUE OF THE BENEFIT ARISING ON EXPENDITURE, OR THAT OF THE GOODS AND SERVICES PURC HASED THEREBY, WITH THE FAIR MARKET 11 ITA NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 (A.YS. 2006-07 TO2008-09) RAJESH R. KARNANI VS. ASST. CIT VALUE THEREOF, IN THE INSTANT CASE, THERE IS CLEARL Y NO BENEFIT ARISING INASMUCH AS WHILE THE EXPENDITURE WAS INCURRED ONLY TO SECURE ONESELF AGA INST A POSSIBLE LOSS, NO BENEFIT THEREUNDER IS RETAINED BY THE ASSESSEE. THERE IS NO EXPLANATION FOR THE SAME. IN FACT, THE NEXUS OF THE EXPENDITURE WITH THE BUSINESS ITSELF IS IN VIEW THEREOF NOT ESTABLISHED. FURTHER ON, SAVE THE MORTALITY PREMIUM, WHICH CAN O NLY BE SAID TO BE THE EXPENDITURE INCURRED IN RELATION TO THE RISK, ACTUARIALLY VALUE D, THE BALANCE AMOUNT ONLY REPRESENTS AN ASSET. LIFE INSURANCE POLICIES ARE, BESIDES INSURAN CE COVERS, INVESTMENT PLANS IN THE MAIN, INVESTING THE ENTIRE EXCESS IN AVENUES SO AS TO ENS URE A REASONABLE RETURN ON MATURITY. A POLICY WITHOUT SUCH INVESTMENT PORTFOLIO WOULD YIEL D NIL VALUE ON MATURITY. 7.3 UNDER THE CIRCUMSTANCES, THE INFERENCE DRAWN BY THE REVENUE OF THE EXPENSE HAVING BEEN INCURRED FOR PERSONAL CONSIDERATIONS, S O THAT IT IS NOT ALLOWABLE, IS THE ONLY REASONABLE INFERENCE ONE CAN DRAW UNDER THE CIRCUMS TANCES. IN ANY CASE OF THE MATTER, THE ASSESSEE CANNOT BE SAID TO HAVE DISCHARGED THE ONUS ON IT TO ESTABLISH THAT THE EXPENDITURE HAS BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR THE PU RPOSES OF HIS BUSINESS. IT COULD, EVEN ASSUMING THE SAME TO BE FOR BUSINESS, BE IN FACT VA LIDLY CONSIDERED AS CAPITAL EXPENDITURE OR A CAPITAL LOSS INASMUCH AS, AS AFORE-NOTED, THE DOMINANT PART OF THE INSURANCE PREMIUM IS TOWARD FINANCIAL INVESTMENT. EITHER WAY, NO DEDU CTION U/S.37(1) IS ADMISSIBLE IN VIEW OF NON SATISFACTION OF ITS MANDATE, AND FOR WHICH W E MAY ADVERT TO THE DECISION IN THE CASE OF DELHI SAFE DEPOSIT CO. LTD. (SUPRA) RELIED UPON BY THE ASSESSEE, HOLDING AS UND ER: THE TRUE TEST OF AN EXPENDITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF TRADE OR BUSINESS IS THAT IT IS INCURRE D BY THE ASSESSEE AS INCIDENTAL TO HIS TRADE FOR THE PURPOSE OF KEEPING THE TRADE GOING AND OF MAKING IT PAY AND NOT IN ANY OTHER CAPACITY THAN TH AT OF A TRADER. 7.4 THE ASSESSEE HAS RELIED ON THE DECISION IN THE CASE OF CIT VS. RAJAN NANDA [2012] 349 ITR 8 (DEL). WE HAVE PERUSED THE SAID DECISION, TO FIND IT CLEARLY INAPPLICABLE IN THE FACTS OF THE INSTANT CASE. IN THAT CASE THE INSURAN CE POLICY WAS TAKEN BY THE ASSESSEES EMPLOYER ON IT RIGHT FROM AY 1991-92 . THE SAME STOOD ALLOWED BY THE REVENUE AS EXPENDITURE, EXCEPT FOR SOME EXCEPTIONS, EVEN AS LA TE AS UP TO AY 2002-03 . IT WAS UNDER THESE CIRCUMSTANCES THAT IT WAS HELD BY THE HONBLE COURT THAT THE PRINCIPLE OF CONSISTENCY 12 ITA NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 (A.YS. 2006-07 TO2008-09) RAJESH R. KARNANI VS. ASST. CIT WOULD HOLD, AND THAT THE SUBSEQUENT ASSIGNMENT WH ICH WAS AT SURRENDER VALUE, WOULD NOT BY ITSELF LEAD TO THE INFERENCE OF THE BUSINESS EXPENDITURE ALLOWED EARLIER BEING NOT SO. THE FACTS OF THE INSTANT CASE, AS WOULD BE APPARENT FROM THE FOREGOING, ARE COMPLETELY DIFFERENT. THERE HAS BEEN NO ALLOWANCE OF THE EXPEN DITURE BY THE REVENUE FROM THE VERY FIRST YEAR ONWARDS, WITH THE ASSESSEE COMPLETELY FA ILING TO DISCHARGE THE BURDEN OF PROOF ON IT TOWARD IT BEING INCURRED WHOLLY AND EXCLUSIVE LY FOR BUSINESS PURPOSES, WITH IN FACT WE FINDING THAT IN THE FACTS AND CIRCUMSTANCES OF T HE CASE, EVEN THE BONA FIDES AND THE GENUINENESS OF THE EXPENDITURE ITSELF ARE IN SERIOU S DOUBT. THE ASSESSEE, BESIDES FAILING TO EXHIBIT THE SAME AS INCURRED IN THE CAPACITY OF A T RADER, ALSO LIKEWISE FAILS TO EXPLAIN THE ASSIGNMENT WITHIN A SHORT SPAN OF TIME IN TERMS OF A BUSINESS DECISION, WHICH ALSO CHANGES THE CHARACTER OF THE EXPENDITURE INCURRED F ROM THAT ON INSURANCE OF A BUSINESS ASSET TO THAT OF SALARY TO A RELATED PERSON, SPECIF IED U/S. 40A(2)(B), IN A SUM FAR BEYOND HIS ANNUAL SALARY, CLEARLY ATTRACTING S.40A(2)(A), BESI DES RENDERING IT LIABLE TO BE CONSIDERED AS A CAPITAL EXPENDITURE. 7.5 WE, THEREFORE, HAVE NO HESITATION IN CONFIRMING THE IMPUGNED DISALLOWANCE. THE RELEVANT SUM IS NOT DEDUCTIBLE U/S. 37(1) AND, IN A NY CASE OF THE MATTER, U/S. 40A(2)(A). THIS DECIDES GROUND NO. 3 FOR THE FIRST TWO YEARS. 8. GROUND NO. 4 FOR THE SAID YEARS, WHICH IS AGAIN COMMON, ASSAILS THE DISALLOWANCE OF 20% OF THE DEPRECIATION ON MOTOR CARS TOWARD PER SONAL EXPENDITURE. THE EXPENDITURE, IN PRINCIPLE, CANNOT BE DISPUTABLE, BEING LEGALLY M ANDATED PER S. 38(2). THE ASSESSEE HAVING SUO MOTU DISALLOWED 20% OF THE EXPENDITURE ON THE RUNNING A ND MAINTENANCE OF MOTOR CARS, A CORRESPONDING DISALLOWANCE OF DEPRECI ATION WOULD ONLY BE CONSISTENT THEREWITH. IN FACT, NO CASE TOWARD THE SAME WAS MAD E OUT BEFORE US, I.E., EITHER ON PRINCIPLE OR ON QUANTUM. WE ACCORDINGLY UPHOLD THE SAME. 9. THIS LEAVES US WITH ASSESSEES GROUND # 2 FOR AY 2008-09, CHALLENGING THE LEVY OF INTEREST U/SS. 234B & 234C. THE SAME IS ONLY IN TER MS OF THE ASSESSED AND RETURNED INCOME RESPECTIVELY AND, FURTHER, COMPENSATORY IN N ATURE. NO BASIS FOR GRIEVANCE WAS 13 ITA NOS. 6571/M/2009, 8007/M/2010 & 783/M/2012 (A.YS. 2006-07 TO2008-09) RAJESH R. KARNANI VS. ASST. CIT EVEN OTHERWISE PLEADED BEFORE US NOR, AS IT APPEARS , BEFORE THE FIRST APPELLATE AUTHORITY. THE SAME IS ACCORDINGLY DISMISSED. 10. IN THE RESULT, THE ASSESSEES APPEALS ARE DISMI SSED. 0. 1 (230 & 4 0 & 56 ORDER PRONOUNCED IN THE OPEN COURT ON JANUARY 31, 2 014 SD/- SD/- (B. R. MITTAL) (SANJAY AR ORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER ' * MUMBAI; 7( DATED : 31.01.2014 ).(../ ROSHANI , SR. PS !' # $%&' (!'% / COPY OF THE ORDER FORWARDED TO : 1. !# / THE APPELLANT 2. $!# / THE RESPONDENT 3. ' 8 ( ) / THE CIT(A) 4. ' 8 / CIT CONCERNED 5. ;)<= $ (>2 , + >2. , ' * / DR, ITAT, MUMBAI 6. =?3 @* / GUARD FILE !' ) / BY ORDER, */)+ , (DY./ASSTT. REGISTRAR) , ' * / ITAT, MUMBAI