DCIT CIR 7(1), MUMBAI V. PAVILLE FASHIONS P. LTD, MUMBAI

ITA 7337/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1320 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 21-04-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 30-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIRENDRA OJHA
• Assessee Lawyers: FIROZE B ANDHDYANUJIA
• Keywords: Business income; Business expenditure; Fair market value; Bad and doubtful debts; Commercial expediency
• Section: 10

Judgement Text

ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 1 OF 18 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI C BENCH, MUMBAI BEFORE SHRI D.K. AGRAWAL, (JUDICIAL MEMBER) AND SHRI PRAMOD KUMAR (ACCOUNTANT MEMBER) ITA NO. 7337/MUM/2008 ASSESSMENT YEAR 2004-05 DATE OF HEARING : 3.6.2010 DY. COMMISSIONER OF INCOME TAX ...... APP ELLANT CIRCLE 7(1), R.NO.622 AAYAKAR BHAVAN, M.K. MARG MUMBAI 400 020 VS. M/S. PAVILLE FASHION PVT. LTD. .. RESPO NDENT PAVILLEE HOUSE, 5 TH FLOOR, OFF VEER SAVARKAR MARG PRABHADEVI, MUMBAI 400 025 ITA NO. 7087/MUM/2008 ASSESSMENT YEAR 2004-05 M/S. PAVILLE FASHION PVT. LTD. .. AP PELLANT PAVILLEE HOUSE, 5 TH FLOOR, OFF VEER SAVARKAR MARG PRABHADEVI, MUMBAI 400 025 VS. DY. COMMISSIONER OF INCOME TAX ... RESP ONDENT CIRCLE 7(1), R.NO.622 AAYAKAR BHAVAN, M.K. MARG MUMBAI 400 020 APPELLANT BY : SHRI VIRENDRA OJHA RESPONDENT BY : SHRI FIROZE B. ANDHDYANUJIA ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 2 OF 18 O R D E R PER PRAMOD KUMAR: 1. THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORD ER DATED 27 TH OCTOBER 2008, PASSED BY THE LD. CIT(A) VII, MUMBA I, FOR ASSESSMENT YEAR 2004-05. SINCE THE ASSESSEE BEING SAME IN BOTH THE APPEALS, THEREFORE, THESE APPEALS WERE HEARD TOGETHER AND AR E BEING DISPOSED OFF BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONV ENIENCE. 2. FIRST, WE TAKE UP APPEAL FILED BY THE ASSESSING OFFICER IN ITA NO.7337/MUM./2008. 3. GRIEVANCE, AS SET OUT IN GROUND NO.1, IS AS FOL LOWS:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO TAKE THE MARKET RATE OF INTEREST AT 8% AND RESTRICT THE DISALLOWANCE U/S 40A(2)(B) OF THE ACT INSTEAD OF 6% MADE BY THE ASSESSING OFFICER GIVING RELIEF OF 2% WHICH WORKS OUT TO RS.9,76,772/- WITHOUT ASSIGNING ANY SPECIFIC REA SON. 4. IN A CONNECTED GROUND OF APPEAL, WHICH IS GROUND OF APPEAL NO. 1 IN ASSESSEES APPEAL, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN DETERMINING THE MARKET RATE OF INTEREST @ 8% FOR INTEREST PAID TO DIRECTORS AND TH EIR FAMILY MEMBERS AS AGAINST THE APPELLANTS CLAIM FOR 12% RA TE OF INTEREST WITHOUT SUBSTANTIATING THE SAME. ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 3 OF 18 5. AS BOTH THE GRIEVANCES ARE INTERCONNECTED, ARISI NG OUT OF THE SAME SET OF FACTS, THESE ARE REQUIRED TON BE TAKEN UP TOGETHER. BRIEFLY STATED THE MATERIAL FACTS, INSOFAR AS THE ABOVE GRO UNDS OF APPEAL ARE CONCERNED, ARE LIKE THIS. DURING THE ASSESSMENT PRO CEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD SHO WN UNSECURED LOANS OF RS.4,61,92,290 FROM THE DIRECTORS AND FAMILY MEM BERS AND INTEREST WAS PAID @ 12% ON SUCH LOANS. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE INTEREST PAID TO THE DIRECTORS AND FAMILY MEMBERS AS HIGHER THAN THE MARKET RATE OF INTEREST AND, ACCORDINGLY, HE DISALLOWED 50% OF THE INTEREST EXPENSES U/S 40A(2)(B) BY ADOPTING 6% AS THE MARKET RATE OF INTEREST. THERE WAS NO MENTION, HOWEVER, AS TO WHAT WAS THE BASIS OF ADOPTING 6% BENCHMARK FOR THE MARKET RATE OF INTEREST. ACCORDINGLY, THE AMOUNT OF RS.29,30,315/- WAS DISAL LOWED. 6. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN AP PEAL BEFORE THE LD. CIT(A) BUT WITHOUT COMPLETE SUCCESS. THE LD. CI T(A) UPHELD THE DISALLOWANCE IN PRINCIPLE BUT RESTRICTED THE DISALL OWANCE TO 4% BY ADOPTING THE MARKET VALUE OF INTEREST @ 8%. ONCE AG AIN, THERE WAS NO DISCUSSION ABOUT THE BASIS ON WHICH THE CIT(A) HAS ADOPTED THE 8% BENCHMARK EITHER. THE DISALLOWANCE WAS THUS PARTIAL LY CONFIRMED. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 7. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CA SE AS ALSO THE APPLICABLE LEGAL POSITION. 8. AS A PLAIN READING OF THE STATUTORY PROVISION IN DICATES, THE DISALLOWANCE OF AN EXPENDITURE UNDER SECTION 40A(2) (B) COMES INTO ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 4 OF 18 PLAY ONLY WHEN THE ASSESSING OFFICER IS OF THE OPIN ION THAT, INTER-ALIA, SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVIN G REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILIT IES FOR WHICH THE PAYMENT IS MADE. IT IS, THUS, CLEAR THAT IN ORDER T O MAKE DISALLOWANCE UNDER SECTION 40A(2), THE FIRST STEP IS TO ASCERTAI N THE MARKET VALUE OF GOODS, SERVICES OR FACILITIES, ETC., IN RESPECT OF WHICH PAYMENT IS MADE. IN OUR CONSIDERED VIEW, THIS FINDING ABOUT THE MARK ET VALUE HAS TO BE ON THE BASIS OF LEGALLY SUSTAINABLE BASIS AND COGEN T MATERIAL, RATHER THAN ON THE BASIS OF MERE PERCEPTIONS AND SUBJECTIV E ASSESSMENT. ACCORDINGLY, IN THE PRESENT CASE, THE ASSESSING OFF ICER OUGHT TO HAVE ASCERTAINED THE MARKET RATE OF INTEREST ON THE BASI S OF COGENT MATERIAL AND ONLY THEN THE DISALLOWANCE U/S 40A(2) COULD HAV E BEEN MADE. HOWEVER, AS EVIDENT FROM THE PLAIN READING OF THE O RDERS OF THE AUTHORITIES BELOW, THERE IS NO CATEGORICAL FINDING ABOUT THE MARKET RATE OF INTEREST AND THE BASIS ON WHICH SUCH MARKET RATE HAS BEEN ARRIVED AT. IT IS ALSO ELEMENTARY THAT THE RATE OF INTEREST VARIES ON A NUMBER OF FACTORS INCLUDING THE CREDIT RATING OF BO RROWERS. THERE IS NO MATERIAL WHATSOEVER TO SUGGEST THE PREVAILING MARKE T INTEREST, AND NO EFFORTS HAVE BEEN MADE BY THE ASSESSING OFFICER TO EVEN ASCERTAIN THE MARKET RATE OF INTEREST FOR THE ASSESSEE. IT IS SUB MITTED BY THE DEPARTMENTAL REPRESENTATIVE THAT THIS IS BASED ON T HE MARKET RATE OF INTEREST BEING OFFERED BY THE BANKS, BUT THEN NEITH ER THERE IS ANYTHING ON RECORD TO SUBSTANTIATE THE FACTUAL ELEMENTS EMBE DDED IN THE SAID CONTENTION, NOR THE ASSESSEE BEFORE US CANNOT BE EQ UATED WITH A BANK OR A FINANCIAL INSTITUTION AND, THEREFORE, EVEN IF THE BANKS OR FINANCIAL INSTITUTIONS WERE ACCEPTING THE DEPOSITS AT A RATE WHICH IS LESS THAN 12%, BY ITSELF, WOULD NOT LEAD TO THE CONCLUSION TH AT THE PAYMENT OF INTEREST BY THE ASSESSEE WAS EXCESSIVE OR UNREASONA BLE VIS--VIS THE MARKET RATE OF INTEREST. WE ARE OF THE CONSIDERED V IEW THAT IN THE ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 5 OF 18 ABSENCE OF ANY COGENT MATERIAL TO SUBSTANTIATE THE BENCHMARK MARKET RATE ADOPTED, A DISALLOWANCE UNDER SECTION 40 A(2) CANNOT BE RESORTED TO. THERE IS NO MATERIAL WHATSOEVER TO SUPPORT THE BENCHMARK MARKET RATE OF 8% AS ADOPTED BY THE CIT(A) EITHER. IT IS E NTIRELY BASED ON THE UNFETTERED PERCEPTIONS AND ADHOC ESTIMATIONS BY THE OFFICERS CONCERNED SOMETHING WHICH IS NOT PERMISSIBLE UNDE R THE SCHEME OF DISALLOWANCE UNDER SECTION 40A(2). KEEPING THIS IN VIEW, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESS ING OFFICER TO DELETE THE DISALLOWANCE UNDER SECTION 40(A)(2)(B) IN ENTIR ETY. IN THE CASE BEFORE US, AS WE HAVE NOTED ABOVE THAT THERE IS NO MATERIAL OR CATEGORICAL FINDING ABOUT THE BASIS ON WHICH THE MA RKET RATE OF INTEREST HAS BEEN ARRIVED AT, IN THE ABSENCE OF THE SAME, THE DISALLOWANCE U/S 40A(2) CANNOT BE RESORTED TO. WE, THEREFORE, UPHOLD THE GRIEVANCE OF THE ASSESSEE AND REJECT THE GRIEVA NCE RAISED BY THE ASSESSING OFFICER. IN OUR CONSIDERED VIEW, THE IMPU GNED DISALLOWANCE IS TO BE DELETED IN ENTIRETY. 9. GROUND NO. 1 IN ASSESSING OFFICERS APPEAL IS TH US DISMISSED, WHILE GROUND NO. 1 IN ASSESSEES APPEAL IS ALLOWED. 10. IN GROUND NO.2, THE ASSESSING OFFICER HAS RAISE D THE FOLLOWING GRIEVANCE:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN DIRECTING THE ASSES SING OFFICER TO DELETE THE DISALLOWANCE OF BAD DEBTS WRITTEN OFF OF RS.20,79,981/- WITHOUT APPRECIATING THE FACT THAT E VEN DURING THE APPELLATE PROCEEDINGS, THE ASSESSEE COUL D NOT FURNISH DETAILS SUCH AS NAME WITH FULL ADDRESS OF T HE PARTIES, DATE AND MODE OF PAYMENT OF THE AMOUNT ADVANCED AS TO HOW THESE DEBTS TURNED TO BE BAD, A FACT WHICH HAS ALSO BEEN ADMITTED BY THE CIT(A). ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 6 OF 18 11. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF B AD DEBT FOR THE REASON THAT THE ASSESSEE COULD NOT FURNISH ANY DETA ILS AS TO HOW THE ADVANCES MADE BY THE ASSESSEE TURNED TO BE BAD. THE ASSESSING OFFICER ALSO RELIED ON THE DECISION OF THE HONBLE MADRAS H IGH COURT IN THE CASE OF SOUTH INDIA SURGICAL CO. LTD. VS ACIT (287 ITR 62). AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE TH E LEARNED CIT(A) WHO NOTED THAT THE ASSESSEE HAD WRITTEN OFF THE DEB T IN THE BOOKS OF ACCOUNTS, AND IN THE LIGHT OF THE SPECIAL BENCH DEC ISION OF THIS TRIBUNAL IN THE CASE OF OMAN INTERNATIONAL BANK SAO G VS DCIT, [2006] 100 ITD 285 (SB) (MUM.), SUCH A WRITE OFF WAS SUFFI CIENT COMPLIANCE TO THE REQUIREMENTS OF SECTION 36(1)(VII). THE CIT(A), ACCORDINGLY, DIRECTED THE ASSESSING OFFICER TO DELETE THE IMPUGN ED DISALLOWANCE. 12. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING P ERUSED THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT THE ISSU E OF ALLOWANCE OF BAD DEBTS CLAIMED BY THE ASSESSEE IS COVERED IN FAVOUR OF THE ASSESSEE BY HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF TRF LIMITED VS CIT, 35 DTR 156, WHEREIN THEIR LORDSHIPS HAVE APPROVED T HE PROPOSITION THAT MERE WRITING OFF A DEBT IN THE BOOKS OF ACCOUN TS WOULD BE SUFFICIENT COMPLIANCE FOR CLAIMING DEDUCTION UNDER SECTION 36(1)(VII). IN THIS VIEW OF THE MATTER, LEARNED CIT(A) WAS IND EED CORRECT IN DIRECTING THE ASSESSING OFFICER TO DELETE THE DISAL LOWANCE MADE BY THE ASSESSING OFFICER. HIS ORDER IS, ACCORDINGLY, UPHEL D. NO INTERFERENCE IS THUS CALLED FOR. 13. GROUND NO. 2 IS ALSO, THEREFORE, DISMISSED. 14. IN THE RESULT, APPEAL FILED BY THE ASSESSING OF FICER IS DISMISSED. ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 7 OF 18 15. NOW WE TAKE UP ASSESSEES APPEAL IN ITA NO.7087 /MUM./2008. 16. AS REGARDS THE FIRST GROUND OF APPEAL IN ASSESS EES APPEAL, THE SAME HAS BEEN DISPOSED OF AS ABOVE, WHILE DEALING W ITH THE ASSESSING OFFICERS APPEAL, IN FAVOUR OF THE ASSESSEE. WE HAV E UPHELD THE GRIEVANCE OF THE ASSESSEE. 17. GROUND NO. 1 IS THUS ALLOWED. 18. IN GROUND NO.2, THE ASSESSEE HAS RAISED FOLLOWI NG GRIEVANCE:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN CONFIRMING DISALLOWANCES OF INTEREST WITH RESPECT TO INTEREST FREE LOAN TO DIRECTOR. 19. THE RELEVANT MATERIAL FACTS ARE LIKE THIS. IN T HE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER DISAL LOWED RS 7,20,000 BY OBSERVING THAT THE ASSESSEE HAD ADVANCED INTERES T FREE LOAN OF RS 60 LAKHS TO MOHAN DALAL, DIRECTOR, FOR PURCHASE OF FLAT, WHEREAS THE ASSESSEE HAD BORROWED FUNDS FROM DIRECTORS AND FAMI LY MEMBERS AND ALSO FROM OUTSIDERS IN INTEREST RATE OF 12% P.A.. THE ASSESSING OFFICER THUS JUSTIFIED PROPORTIONATE DISALLOWANCE OF INTERE ST PAID. IN APPEAL, THE CIT(A) NOTED THAT THE LOAN GIVEN WAS AN OLD ONE AND THE OUTSTANDING AMOUNT WAS ONLY RS 22,90,000 AS ON 31 ST MARCH 2004. HE ALSO TOOK NOTE OF THE ASSESSEES CLAIM THAT LOAN WA S GIVEN OUT OF HIS OWN FUNDS, BUT REJECTED THE SAME AS BASELESS AS THE ASSESSEE HAS FAILED TO PROVE THAT ALL BORROWED FUNDS HAVE BEEN U SED IN OWN ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 8 OF 18 BUSINESS AND ALL INTEREST FREE LOANS HAVE BEEN ADVA NCED OUT OF OWN RESOURCES. HE THUS UPHELD THE DISALLOWANCE IN PRIN CIPLE BUT DIRECTED THE ASSESSING OFFICER TO VERIFY THE OUTSTANDING BAL ANCE OF LOAN AND REDUCE THE DISALLOWANCE ACCORDINGLY. THE ASSESSEE I S NOT SATISFIED WITH THE PARTIAL RELIEF SO GRANTED BY THE ASSESSEE AND I S IN FURTHER APPEAL BEFORE US. 20. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CA SE AS ALSO THE APPLICABLE LEGAL POSITION. 21. WE FIND THAT, AS EVIDENT FROM MOHAN DALALS EMP LOYMENT CONTRACT DATED 31 ST JANUARY 1996 A COPY OF WHICH IS PLACED AT PAGES 25-26 OF THE PAPER BOOK FILED BEFORE US, THE ASSES SEE WAS UNDER AN OBLIGATION TO PROVIDE UNFURNISHED RESIDENTIAL ACCOM MODATION TO MOHAN DALAL. THE RELATIONSHIP BETWEEN MOHAN DALAL A ND THE ASSESSEE COMPANY IS IN THE NATURE OF EMPLOYEE EMPLOYER. IT I S IN THIS BACKDROP, AND DULY AUTHORISED BY THE RESOLUTION PASSED IN THE BOARD OF DIRECTORS MEETING DATED 23 RD JULY 1997, THAT MOHAN DALAL WAS GRANTED AN INTEREST FREE LOAN OF RS 60 LAKHS TO PURCHASE TH E RESIDENTIAL FLAT. BY NO STRETCH OF LOGIC, SUCH AN ADVANCE TO AN EMPLOYEE CAN BE CONSIDERED TO BE DIVERSION OF INTEREST BEARING FUNDS FOR NON B USINESS PURPOSES. EVEN IF ASSESSEE BORROWS FUNDS TO GRANT SUCH AN INT EREST FREE LOAN, INTEREST PAID ON SUCH BORROWINGS WILL STILL BE FOR THE PURPOSES OF BUSINESS BECAUSE SUCH AN INTEREST FREE LOAN CAN BE FULLY JUSTIFIED ON ACCOUNT OF COMMERCIAL EXPEDIENCY. THAT APART, THERE IS NOTHING ON RECORD TO EVEN REMOTELY SUGGEST THAT THIS INTEREST FREE LOAN HAS BEEN GIVEN OUT OF BORROWED FUNDS. THIS IS AN OLD LOAN, A ND NO SIMILAR ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 9 OF 18 DISALLOWANCE HAS BEEN MADE IN ANY OF THE PRECEDING ASSESSMENT YEAR. THERE IS NOTHING TO WARRANT ANY DEPARTURE FROM THE SETTLED POSITION IN THIS ASSESSMENT YEAR EITHER. IN ANY EVENT, A DISAL LOWANCE OF INTEREST CAN ONLY BE MADE WHEN IT IS ESTABLISHED THAT THE BO RROWED FUNDS HAVE NOT BEEN USED FOR THE PURPOSES OF BUSINESS. AS WE H AVE OBSERVED EARLIER, EVEN IF IT IS ASSUMED, THOUGH THERE IS NO MATERIAL FOR THIS ASSUMPTION, THAT BORROWED FUNDS WERE INDEED TO BE U SED FOR GRANTING THIS INTEREST FREE HOUSING LOAN OF RS 60 LAKHS TO M OHAN DALAL, SUCH A USE OF BORROWED FUNDS CANNOT BE SAID TO BE NON BUSI NESS USE. IN VIEW OF ALL THESE DISCUSSIONS, AND BEARING IN MIND ENTIR ETY OF THE CASE, WE UPHOLD THE GRIEVANCE OF THE ASSESSEE, AND DIRECT TH E ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE OF INTEREST IN ENTIRETY. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 22. GROUND NO. 2 IS THUS ALLOWED. 23. IN GROUND NO.3, THE ASSESSEE HAS RAISED FOLLOWI NG GRIEVANCE:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLO WANCES FOR FOREIGN TRAVELLING EXPENSES AIR TICKETS WITHOUT N OTICING THE WIFE OF THE CHAIRMAN IS ALSO ONE OF THE DIRECTO RS OF THE COMPANY AND FULL TIME EMPLOYED WITH THE COMPANY. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE LD. CIT(A) ERRED IN RESTRICTING THE ALLOWANCES TO THE EXTENT OF 20% OF THE FOREIGN TRAVELLING EXPENSES FOREIGN EXCHANGE PURCHASE, AGAINST THE APPELLANTS CLAIM FO R 50% AS PER PREVIOUS ORDER ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 10 OF 18 24. SO FAR AS THESE GRIEVANCES OF THE ASSESSEE ARE CONCERNED, THE RELEVANT MATERIAL FACTS ARE AS FOLLOWS. IN THE COUR SE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT WHI LE IN THE BOOKS OF ACCOUNTS, THE ASSESSEE HAS DEBITED IN A SUM OF RS 6 1,97,379 IN RESPECT OF FOREIGN TRAVEL EXPENSES, THE ASSESSEE HAS, ON HI S OWN, DISALLOWED 50% OF THE COST OF FOREIGN CURRENCY PURCHASED, INCL UDED IN THE ABOVE EXPENSES, FOR WANT OF DETAILS OF EXPENSES. THE ASSE SSEE DID NOT FURNISH ANY DETAILS OF EXPENSES OF FOREIGN TRAVEL, BUSINESS EXPEDIENCY FOR THE SAME, HOTEL AND OTHER EXPENSES ETC. IT WAS IN THIS BACKDROP THAT THE ASSESSING OFFICER DISALLOWED THE ENTIRE FOREIGN TRA VEL EXPENSES FOR WANT OF DETAILS. AGGRIEVED, THE ASSESSEE CARRIED TH E MATTER IN BEFORE THE LD. CIT(A) BUT WITHOUT COMPLETE SUCCESS. IT WAS CONTENDED THAT CHAIRMAN OF THE APPELLANT COMPANY AND HIS WIFE HAD TRAVELLED TO LONDON, LOS ANGELES AND NEW YORK, THAT THE FOREIGN TRAVEL WAS FOR THE PURPOSES OF BUSINESS, THAT CHAIRMANS WIFE WAS RESP ONSIBLE FOR ASSESSEES BUSINESS ACTIVITIES IN LOS ANGELES, THAT RS 14,79,606 WERE SPENT ON AIR TICKETS AND RS 47,17,773 WERE SPENT FO R PURCHASE OF FOREIGN CURRENCY, AND THAT, IN ACCORDANCE WITH THE ACCEPTED PAST HISTORY OF THE CASE, THE ASSESSEE HAD HIMSELF DISAL LOWED 50% OF THE COST OF FOREIGN EXCHANGE PURCHASE FOR WANT OF DETAI LS OF EXPENDITURE. IN A CIT(A), SAID TO BE KEEPING IN VIEW THE PAST HI STORY OF THE ASSESSEE THOUGH WITHOUT ASSIGNING ANY SPECIFIC REASON, DIREC TED THE ASSESSING OFFICER TO ALLOW 100% OF AIR TICKET EXPENSES FOR TH E CHAIRMAN OF THE COMPANY ONLY AND DISALLOW THE AIR TICKET EXPENSES I N RESPECT OF CHAIRMANS WIFE AND ALSO 20% TOWARDS FOREIGN EXCHAN GE OF RS.47,17,773 AS BUSINESS EXPENDITURE. EVEN THIS DI D NOT SATISFY THE ASSESSEE, AND THE ASSESSEE IS IN SECOND APPEAL BEFO RE US. ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 11 OF 18 25. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CA SE AS ALSO THE APPLICABLE LEGAL POSITION. 26. WE HAVE NOTED THAT SO FAR AS FOREIGN EXCHANGE P URCHASE IS CONCERNED, THE ASSESSEE HAS NOT GIVEN ANY SPECIFIC DETAILS OF HOW THIS FOREIGN EXCHANGE IS SPENT FOR THE PURPOSES OF BUSIN ESS. WE HAVE ALSO PERUSED THE DETAILS OF FOREIGN TRAVEL AS FILED BEFO RE US. ALL THAT THESE DETAILS INDICATE THAT FIVE TRIPS, RANGING FROM A PE RIOD OF 39 TO 61 DAYS, HAVE BEEN MADE ON MUMBAI-LONDON-LOS ANGELES-NEW YOR K-MUMBAI SECTORS. THESE ARE LONG DURATION TRIPS AND THERE IS NOTING TO EVEN SHOW THAT ALL THESE LONG TRIPS WERE MADE FOR THE BUSINES S PURPOSES. THESE DETAILS ALSO SHOW THAT THE ASSESSEE PURCHASED FOREI GN EXCHANGE WORTH INR 47,17,773 BUT THERE IS NO MENTION ABOUT WHAT US E THIS FOREIGN EXCHANGE WAS PUT TO. IT IS ONLY ELEMENTARY THAT WH EN AN ASSESSEE CLAIMS A DEDUCTION FOR EXPENSE, THE ONUS IS ON THE ASSESSEE NOT ONLY TO ESTABLISH BUSINESS EXPEDIENCY OF THE EXPENSE BUT AL SO FACT OF EXPENSE HAVING BEEN INCURRED. PURCHASE OF FOREIGN CURRENCY IS NOT AN EXPENSE, IT IS MERELY A CONVERSION OF ONE CURRENCY INTO ANOT HER. THERE HAS TO BE SOMETHING TO SHOW THAT THE FOREIGN CURRENCY SO OBTA INED WAS ACTUALLY SPENT. SUCH A FOREIGN CURRENCY HAVING BEEN SPENT CA NNOT BE INFERRED, JUST AS MUCH AN ATM WITHDRAWAL CANNOT BE REASON ENO UGH TO INFER THAT THE MONEY SO WITHDRAWN IS SPENT. THE ASSESSEE HAS CLEARLY FAILED TO DISCHARGE THE ONUS CAST UPON HIM FOR CLAIMING THE D EDUCTION. EVEN THE BASIC DETAILS AS TO THE BROAD HEADS OF EXPENDITURE, THE NUMBER OF DAYS SPENT IN A CITY, AND PURPOSE OF STAY AT THAT PLACE HAVE NOT BEEN FILED. AS REGARDS THE ACCEPTED PAST HISTORY OF THE CASE, THE ASSESSEE HAS RELIED UPON CERTAIN ORDERS PASSED BY THE CIT(A) WHI CH ARE SAID TO HAVE BEEN ACCEPTED BY THE ASSESSING OFFICER. WE HAVE PER USED THESE ORDERS, ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 12 OF 18 AND WE HAVE NOTED THAT THESE CASES PERTAIN TO THE P ERIOD WHEN ASSESSEE WAS UNDER AN OBLIGATION TO FILE EXPENSE RE PORT TO THE RESERVE BANK OF INDIA AND THESE WERE THE CASES IN WHICH, TO QUOTE THE WORDS OF THE CIT(A), FULL AND COMPLETE DETAILS RELATING TO FOREIGN TRAVEL EXPENSES AND PARTICULARS OF THE ORDERS PROCURED DUR ING THE VISITS WERE PRODUCED BEFORE THE ASSESSING OFFICER AND IT COUL D BE VERIFIED FROM THE BREAKUP OF EXPENSES THE DETAILS SUCH AS PLACES VISITED, NUMBER OF DAYS INVOLVED IN EACH VISIT. THAT IS NOT THE SIT UATION BEFORE US. THE TRIPS UNDERTAKEN BY THE ASSESSEE ARE AS LONG AS TWO MONTHS AND THERE IS NO JUSTIFICATION WHATSOEVER FOR SUCH LONG BUSINESS TRIPS AND WHAT PRECISELY WAS THE ASSESSEE DOING IN SUCH A LON G PERIOD. THERE ARE NO DETAILS OF EXPENSES OF ANY KIND WHATSOEVER. THE ONLY EVIDENCE OF EXPENSES HAVING BEEN INCURRED IS THE PURCHASE OF FO REIGN CURRENCY, WHICH, IN OUR CONSIDERED VIEW, CANNOT BE TREATED AS EVIDENCE OF EXPENDITURE HAVING BEEN INCURRED. YET, THE CIT(A) H AS PERMITTED DEDUCTION TO THE EXTENT OF 20% OF FOREIGN CURRENCY PURCHASED, AND THE REVENUE IS NOT IN APPEAL AGAINST THE SAME. WE SEE N O GOOD REASONS TO DISTURB THESE CONCLUSIONS ARRIVED AT BY THE CIT(A), AT THE INSTANCE OF THE ASSESSEE. TO THAT EXTENT, WE APPROVE THE CONCL USIONS ARRIVED AT BY THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. HOWEVER, WE HAVE NOTED THAT THE CIT(A) HAS ALSO UPHELD DISALLOWANCE OF EXPENSES ON AIR TICKET OF CHAIRMANS OFFICE, NOT REALIZING THAT SHE WAS ALSO A DIRECTOR OF THE ASSESSEE COMPANY AND FULLY INVOLVED IN DAY T O DAY FUNCTIONING OF THE WORK. THERE WAS NO GOOD REASON FOR NOT ALLOW ING EXPENSES ON HER AIR TICKET. WE, THEREFORE, DIRECT THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE SO FAR AS EXPENSES ON PURCHASE OF HER TICKET IS CONCERNED. AS FAR AS HER OTHER TRAVELLING COSTS ARE CONCERNED, WE HAVE NOTED THAT THE ASSESSEE HAS NOT PARTED WITH ANY DET AILS SAVE AND EXCEPT FOR PURCHASE OF FOREIGN CURRENCY, AND, ON TH AT BASIS, THE CIT(A) ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 13 OF 18 HAS ALLOWED DEDUCTION @ 20% OF SUCH FOREIGN CURRENC Y PURCHASES ON ADHOC BASIS. WE ARE UNABLE TO ALLOW ANY FURTHER DED UCTION IN THE ABSENCE OF EVEN BASIC DETAILS OF THE EXPENDITURE. G RIEVANCE OF THE ASSESSEE IS THUS PARTLY UPHELD IN THE TERMS INDICAT ED ABOVE. 27. GROUND NO. 3 IS THUS PARTLY ALLOWED IN THE TERM S INDICATED ABOVE. 28. IN GROUND NO.4, THE GRIEVANCE OF THE ASSESSEE I S AS FOLLOWS:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLO WANCE WITH RESPECT TO 50% OF THE EMPLOYEE EXPENSES ATTRIB UTING TO INCOME FROM HOUSE PROPERTY WITHOUT GIVING ANY FINDI NG TO THE EFFECT. 29. IT WAS NOTICED BY THE ASSESSING OFFICER THAT TH E ASSESSEE HAS RECEIVED RS.1.57 CRORES AS SALES TURNOVER AND RS.1. 63 CRORES AS TOTAL RENT RECEIPTS. HE, THEREFORE, WAS OF THE VIEW THAT THE TOTAL EMPLOYEE EXPENSES OF RS.49,41,103 HAD TO BE ALLOCATED APPROX IMATELY 50% EACH AND HE, THUS, DISALLOWED RS.24,73,601 SINCE CONSIDE RED AS INCURRED FOR DERIVING HOUSE PROPERTY INCOME. WHEN THE MATTER WAS CARRIED IN SECOND APPEAL, THE CIT(A), WITHOUT GIVING ANY COGEN T REASON, CONFIRMED THE ACTION OF THE ASSESSING OFFICER. BEIN G AGGRIEVED, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 30. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING P ERUSED THE MATERIAL AVAILABLE ON RECORD, WE FIND THAT THE ASSE SSING OFFICER MADE DISALLOWANCE TO THE EXTENT OF 50% WITHOUT ANY COGEN T MATERIAL ON RECORD AND THE SAME WAS CONFIRMED BY THE CIT(A). T HERE IS NO BASIS ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 14 OF 18 WHATSOEVER FOR THE ACTION OF THE ASSESSING OFFICER, NOR CAN SUCH A DISALLOWANCE HAVE ANY RATIONALE BASIS. A RENTAL INC OME IS AN INHERENTLY PASSIVE INCOME, WHICH DOES NOT REQUIRE T HE KIND OF, AND SCALE OF, EXPENSES THAT A BUSINESS INCOME MAY NECES SITATE. THAT APART, THE RENTAL INCOME IS TO COMPUTED UNDER THE HEAD IN COME FROM HOUSE PROPERTY IN ACCORDANCE WITH THE PROVISIONS OF THE ACT IN THIS REGARD. TO ASSUME THAT A PART OF EXPENSES MUST HAVE BEEN IN CURRED FOR THE PURPOSE OF EARNING RENTAL INCOME, AND ALLOCATE THE SAME ON THE BASIS OF QUANTUM OF RENTAL RECEIPTS VIS--VIS BUSINESS TU RNOVER, IS DEVOID OF ANY RATIONALE OR LOGIC. THE CIT(A) OUGHT TO HAVE DE LETED THE DISALLOWANCE SO MADE, IN ITS ENTIRETY. CONSEQUENTLY , WE HOLD THAT THE AUTHORITIES BELOW WERE NOT JUSTIFIED DISALLOWANCE O F ANY PART OF TOTAL EMPLOYEES EXPENSES ON AD-HOC BASIS THAT TOO WITHOUT ANY COGENT REASON. WE VACATE THE DISALLOWANCE SUSTAINED BY TH E CIT(A). THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 31. GROUND NO. 4 IS THUS ALLOWED. 32. IN GROUND NO.5, THE ASSESSEE HAS RAISED FOLLOWI NG GRIEVANCE:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN CONFIRMING THE DISALLO WANCE OF LOSS SUFFERED ON SALE OF THE STOCK OF FURNITURE LYI NG IN THE SHOT AT LOS ANGELES. 33. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS , THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD AN OPENING STOC K OF FURNITURE OF RS 30,76,037 AT LOS ANGELES BRANCH, BUT THE SAID STOCK WAS SOLD OFF FOR RS 8,37,651 IN THE CURRENT YEAR. ACCORDING TO THE ASSE SSING OFFICER, SINCE ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 15 OF 18 THE ASSESSEE COULD NOT ADDUCE ANY EXPLANATION FOR I NCURRING SUCH LOSS, THE CLAIM SO MADE BY THE ASSESSEE WAS TO BE DISALLO WED. IT WAS THESE RATHER CRYPTIC OBSERVATIONS THAT THE LOSS ON SALE O F FURNITURE WAS DISALLOWED. DURING THE FIRST APPELLATE PROCEEDINGS, THE CIT(A) CONFIRMED THE ACTION OF THE ASSESSING OFFICER. THE CIT(A) OBSERVED THAT THE ASSESSEE HAS FAILED TO ESTABLISH THE LOSS WITH DIRECT EVIDENCE, THAT THE ASSESSEE HAS NOT ESTABLISHED THAT THE LOSS WAS A REVENUE LOSS, AND THAT THE ASSESSEE HAS NOT EXPLAINED WHY THIS LO SS SHOULD NOT BE TREATED AS CAPITAL LOSS, AND THAT THE CORRESPONDE NCE FILED BY THE ASSESSEE IS NOT A TWO WAY CORRESPONDENCE. THE CIT( A) THUS REJECTED THE GRIEVANCE OF THE ASSESSEE BY CONCLUDING THAT F ULL DETAILS WERE NOT GIVEN BEFORE THE AO NOR DURING THE APPEAL PROCEEDIN GS. THE ASSESSEE IS NOT SATISFIED AND IS IN APPEAL BEFORE US. 34. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CA SE AS ALSO THE APPLICABLE LEGAL POSITION. 35. IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD A SH OP IN LOS ANGELES WHICH HAD TO BE CLOSED DOWN, DURING THE RELEVANT PR EVIOUS YEAR, DUE TO COMMERCIAL REASONS. THE ASSESSEE HAS DULY SUBMIT TED THE CLOSURE REPORT ETC TO THE RESERVE BANK OF INDIA, AND A COPY OF THE SAID REPORT HAS ALSO BEEN PLACED BEFORE US IN THE PAPER BOOK. T HE LOSS ON SALE OF STOCK HAS OCCURRED BECAUSE THE FURNITURE IN THE SHO P HAD TO BE SOLD, AS A PART OF WINDING UP OPERATIONS, THROUGH A JOBBER, AND THE PRICE SO REALIZED WAS MUCH LESS THAN THE VALUE OF STOCK. WE HAVE PERUSED THE MATERIAL ON RECORD WHICH SHOWS THAT THE REALISATION ON SALE OF THE SAID STOCK WAS LESS THAN THE VALUE OF STOCK. THE ACCOUNT S OF LOS ANGELES ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 16 OF 18 SHOP, WHICH ARE DULY AUDITED BY A CERTIFIED PUBLIC ACCOUNTANT, ALSO EVIDENCE THE SAID LOSS. TAKING ALL THESE FACTORS IN TO ACCOUNT, WE ARE OF THE CONSIDERED VIEW THAT THE LOSS ON SALE OF STOCK HAS INDEED OCCURRED. AS REGARDS THE STAND OF THE AUTHORITIES BELOW TO TH E EFFECT THAT THE LOSS WAS A CAPITAL LOSS IN NATURE, EVEN A PLAIN READING OF THE CPAS STATEMENTS AND OTHER DOCUMENTS ON RECORD WOULD SHOW THAT LOSS WAS ON ACCOUNT OF SALE OF GOODS HELD AS INVENTORY OR ST OCKS. ANY LOSS ON SUCH A REALIZATION IS INHERENTLY IN THE NATURE OF R EVENUE LOSS. IN ANY EVENT, THERE IS NO MATERIAL ON THE RECORD TO EVEN S UGGEST THAT THE IMPUGNED LOSS IS ON CAPITAL ACCOUNT. WE THUS SEE NO REASONS TO UPHOLD THE OBJECTIONS RAISED BY THE AUTHORITIES BEL OW, AND DIRECT THE ASSESSING OFFICER TO DELETE THIS DISALLOWANCE OF LO SS ON SALE OF STOCK. 36. GROUND NO. 5 IS THUS ALLOWED 37. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED IN THE TERMS INDICATED ABOVE. 38. TO SUM UP, WHILE THE APPEAL FILED BY THE ASSESS ING OFFICER IS DISMISSED, AND THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON THIS 25 TH DAY OF JUNE 2010. SD/XX SD/XX (D.K. AGRAWAL) (PRAMOD KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI; 25 TH DAY OF JUNE 2010. ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 17 OF 18 COPY FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT , MUMBAI 4. COMMISSIONER (APPEALS) , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, C BENCH, ITAT, MUMB AI 6. GUARD FILE TRUE COPY BY ORDER ASSISTANT REGISTRAR PRADEEP J. CHOWDHURY INCOME TAX APPELLATE TRIBUNAL SR. PRIVATE SECRETARY MUMBAI BENCHES, MUMBAI ITA NO. 7337 AND 7087 /MUM/2008 ASSESSMENT YEAR : 2004-05 PAGE 18 OF 18 DATE INITIAL 1. DRAFT DICTATED ON 16.6.2010 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 21.6.2010 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 21.6.2010 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 21.6.2010 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 21.6.2010 SR.PS/PS 6. DATE OF PRONOUNCEMENT 25.6.2010 SR.PS 7. FILE SENT TO THE BENCH CLERK 28.6.2010 SR.PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER