Kasat Securities Pvt. Ltd., Pune V. ACIT, Range-11, Pune

ITA 922/PUN/2011

• Counselvise Citation: 92224514 RSA 2011
• Duration Of Justice: 1 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 10-10-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 29-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANN KAPTHUAMA
• Assessee Lawyers: SUNIL PATHAK
• Keywords: Business income; Business expenditure; Salary income; Opportunity of being heard; Earning of tax free income; Additional evidence; Fair market value; Speculation loss; Onus to prove
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV JUDICIAL MEMBER AND SHRI R.K. PANDA ACCOUNTANT MEMBER ITA NO. 922/PN/2011 (ASSESSMENT YEAR 2006-07) KASAT SECURITIES PVT. LTD., 636, ABHINANDAN PLAZA, DECCAN GYMKHANA, PUNE-411004. PAN NO. AAACK 6999H .. APPELLANT VS. ACIT, RANGE-11, PUNE .. RESPONDENT APPELLANT BY : SHRI SUNIL PATHAK RESPONDENT BY : MS. ANN KAPTHUAMA DATE OF HEARING : 19-06-2013 DATE OF PRONOUNCEMENT : 25-06-2013 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 23-12-2010 OF THE CIT(A)-I, PUNE RELATING TO ASSESS MENT YEAR 2006-07. 2. THE FIRST ISSUE RAISED BY THE ASSESSEE IN THE GR OUNDS OF APPEAL RELATES TO DISALLOWANCE OF PENALTY OF RS.67,531/-. 2.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASS ESSEE COMPANY HAS DEBITED AN AMOUNT OF RS.3,81,782/- AS PENALTY AND AUCTION DIFFERENCE CHARGES. ON BEING ASKED BY THE ASSESSING OFFICER TO EXPLAIN THE REASON OF ALLOWABILITY OF THIS AMOUNT AS IT WAS PENAL IN N ATURE THE ASSESSEE GAVE DETAILS OF PENALTY AND AUCTION DIFFERENCE CHARGES. HOWEVER, NO EXPLANATION WAS GIVEN BY THE ASSESSEE COMPANY REGAR DING ALLOWABILITY OF 2 THESE EXPENSES. FROM THE DETAILS FURNISHED BY THE ASSESSEE THE ASSESSING OFFICER NOTED THAT THERE ARE MANY CHARGES LIKE AUCT ION DIFFERENCE CHARGES, NSCCL CHARGES, NON-SETTLEMENT CHARGES ETC WHICH ACCORDING TO HIM ARE ALLOWABLE AS BUSINESS EXPENDITURE. HOWEVER , THE PENALTY CHARGES AMOUNTING TO RS.67,531/- WAS DISALLOWED BY THE ASSESSING OFFICER. IN APPEAL THE LD. CIT(A) UPHELD THE ACTIO N OF THE ASSESSING OFFICER ON THE GROUND THAT NSE IS A PUBLIC BODY WHI CH IS REGULATED BY SEBI AND THE RULES FRAMED FOR THE FUNCTIONING AND G OVERNANCE ARE APPROVED BY SEBI AND THE VIOLATION OF ANY SUCH RULE HAS TO BE TREATED AS COVERED UNDER EXPLANATION TO SECTION 37. 2.2 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 2.3 AFTER HEARING BOTH THE SIDES WE FIND THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONB LE DELHI HIGH COURT IN THE CASE OF CIT VS. PRASAD AND COMPANY 341 ITR 140 WHEREIN THE HONBLE HIGH COURT HAS UPHELD THE ORDER OF THE TRIB UNAL HOLDING THAT SUCH PENALTY PAID TO THE STOCK EXCHANGE WERE DEDUCT IBLE AS BUSINESS EXPENDITURE, SUCH PAYMENT HAS BEEN MADE DURING THE COURSE OF BUSINESS AND THERE WAS NO INFRACTION OF LAW. RESPECTFULLY F OLLOWING THE ABOVE DECISION, WE SET-ASIDE THE ORDER OF THE LD. CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION ON ACCOUNT OF PENALTY PAID TO THE STOCK EXCHANGE. THIS GROUND BY THE ASSESSEE IS ACC ORDINGLY ALLOWED. 3 3. THE SECOND ISSUE RAISED BY THE ASSESSEE IN THE G ROUNDS OF APPEAL RELATES TO ADDITION ON ACCOUNT OF DISCOUNT OF RS.2, 05,230/- BY THE ASSESSING OFFICER AND UPHELD BY THE CIT(A). 3.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE COMPANY HAD SHOWN BROKERAGE AND COMMISSION RECEIPT OF RS.1,45,4 4,658/-. ON BEING ASKED BY THE ASSESSING OFFICER TO GIVE PARTY-WISE D ETAILS OF THE ABOVE RECEIPT THE ASSESSEE SUBMITTED CLIENT-WISE DETAILS OF BROKERAGE AND COMMISSION RECEIVED. FROM THE DETAILS FURNISHED BY THE ASSESSEE THE ASSESSING OFFICER NOTED THAT THE ASSESSEE COMPANY H AS RECEIVED TOTAL BROKERAGE OF RS.1,47,49,888/-. THEREFORE, HE OBSER VED THAT THERE WAS EXCESS BROKERAGE RECEIPT OF RS.2,05,230/-. THE ASS ESSING OFFICER THEREFORE ASKED THE ASSESSEE TO EXPLAIN AS TO WHY T HE ABOVE AMOUNT OF RS.2,05,230/- WHICH IS THE EXCESS BROKERAGE RECEIVE D BY IT SHOULD NOT BE ADDED TO ITS TOTAL INCOME. IT WAS EXPLAINED BY THE ASSESSEE THAT IT CHARGES BROKERAGE AT HIGHER RATES TO SOME OF THE CLIENTS BU T LATER ON TRANSACTIONS WITH THESE CLIENTS INCREASED SUBSTANTIALLY FOR WHIC H THE COMPANY DECIDED TO CHARGE THEM AT LOWER RATE AND GIVE THEM SOME CON CESSION. ACCORDINGLY, THE COMPANY GAVE BACK EXCESS BROKERAGE CHARGED TO THE CLIENTS PREVIOUSLY. IT WAS ACCORDINGLY CONTENDED T HAT AMOUNT OF RS.2,05,230/- HAD BEEN REFUNDED TO THE CLIENTS. 3.2 HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE ON THE GROUND THA T IT IS ONLY A GENERAL EXPLANATION WITHOUT GIVING ANY SPECIFIC DETAILS OF THE CLIENTS TO WHOM THE ABOVE STATED EXCESS BROKERAGE HAS BEEN REFUNDED. N O NAMES AND ADDRESSES OF SUCH CLIENTS HAVE BEEN GIVEN DESPITE G IVEN NUMBER OF 4 OPPORTUNITIES TO THE ASSESSEE COMPANY. EVEN COPIES OF CREDIT NOTES, IF ANY, ISSUED BY THE ASSESSEE HAVE NOT BEEN GIVEN. T HEREFORE, THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT ASSES SEE WAS UNABLE TO SUBSTANTIATE ITS CLAIM OF GIVING BACK EXCESS BROKER AGE TO THE CLIENTS. IN ABSENCE OF DETAILS OR EVIDENCE TO SUBSTANTIATE ITS CLAIM OF REFUNDING THE EXCESS BROKERAGE THE ASSESSING OFFICER DISALLOWED A N AMOUNT OF RS.2,05,230/- ON THE GROUND THAT THE ASSESSEE HAS S UPPRESSED ITS BROKERAGE RECEIPT. 3.3 IN APPEAL THE LD. CIT(A) UPHELD THE ACTION OF T HE ASSESSING OFFICER. WHILE DOING SO, HE OBTAINED A REMAND REP ORT FROM THE ASSESSING OFFICER AFTER CONFIRMATION LETTERS WERE F ILED BEFORE HIM GIVING THE NAMES OF THE PARTIES AND AMOUNT OF COMMISSION. THE ASSESSING OFFICER IN THE REMAND REPORT HAD OBJECTED FOR ADMIS SION OF THE SAME ON THE GROUND THAT SUCH EXTRACTS WERE NOT SUBMITTED BE FORE HIM AND IT IS NOT KNOWN WHETHER THE PERSONS TO WHOM SUCH DISCOUNT HAS BEEN GIVEN HAS AT ALL SHOWN THE SAME IN THEIR RETURN OF INCOME. ACCO RDING TO THE LD. CIT(A) FOR CHARGING BROKERAGE FROM THE CLIENTS SEBI ONLY PRESCRIBES UPPER LIMITS WHICH IS PEGGED AT 2%. THE BROKER IS FREE TO DECIDE THE RATE WITHIN THE GIVEN UPPER LIMIT. FURTHER, IN THIS KIN D OF BUSINESS BROKERS CHARGE LOWER RATES OF BROKERAGE IN RESPECT OF CLIEN TS WHO HAVE LARGE VOLUMES OF BUSINESS. THEREFORE, THE SUBMISSION OF THE ASSESSEE THAT IT HAS REFUNDED HIGHER BROKERAGE CHARGED EARLIER ON EN HANCEMENT OF VOLUME LOOKS IN AGREEMENT TO THE MARKET PRICE. HOWE VER, ACCORDING TO HIM IT IS NOT CLEAR WHY THE ASSESSEE HAS CHOSEN TO PASS ENTRY IN A MANNER SO THAT THE NETTING OFF IS HIDDEN. IT IS NOT UNDER STOOD ESPECIALLY WHEN THE 5 SAME IS CLAIMED TO BE GENUINE AND TRANSPARENT. HE FURTHER OBSERVED THAT DESPITE BEING GIVEN NUMBER OF OPPORTUNITIES THE ASS ESSEE DID NOT FURNISH THE DETAILS BEFORE THE ASSESSING OFFICER. FURTHER, THE ASSESSEE HAS NOT SUBMITTED ANY REASON FOR ADMISSION OF ADDITIONAL EV IDENCE DURING THE APPEAL PROCEEDINGS. THE LD. CIT(A) DID NOT ADMIT T HE ADDITIONAL EVIDENCE IN VIEW OF PROVISIONS CONTAINED IN RULE 46 A. SINCE HE DID NOT ADMIT THE ADDITIONAL EVIDENCES FILED BEFORE HIM HE HELD THAT THE ACTION OF THE ASSESSING OFFICER IS JUSTIFIED. HE ACCORDINGLY REJECTED THE GROUND RAISED BEFORE HIM. 3.4 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 3.5 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. ADMITT EDLY, THE ASSESSEE DID NOT FILE THE NECESSARY DETAILS GIVING PARTY-WISE DE TAILS OF DISCOUNT FOR WHICH THE ASSESSING OFFICER DISALLOWED THE CLAIM OF DISCOUNT OF RS.2,05,230/-. IN APPEAL THE LD. CIT(A) DID NOT AC CEPT THE CONFIRMATIONS FILED BEFORE HIM ON THE GROUND THAT THESE ARE ADDIT IONAL EVIDENCES AND THE ASSESSEE DID NOT SUBMIT ANY REASON FOR ADMISSIO N OF ADDITIONAL EVIDENCES AS PER PROVISIONS OF RULE 46A. 3.6 THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSES SEE THAT THE DISCOUNT IN THE ENTIRE YEAR AT RS.2,05,229/- IS .01 4% OF GROSS COMMISSION OF RS.1,47,49,888/- AND THE PARTIES ARE INCOME TAX PAYERS AND THEIR PAN NUMBERS ARE ALSO GIVEN IN THE CONFIRMATIONS CANNOT BE A GROUND TO ALLOW 6 THE EXPENDITURE ESPECIALLY WHEN NO DETAILS WERE FUR NISHED BEFORE THE ASSESSING OFFICER AND THE ADDITIONAL EVIDENCES WERE NOT ADMITTED BY THE LD. CIT(A). IN THIS VIEW OF THE MATTER, WE SET-ASI DE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO GIVE O NE MORE OPPORTUNITY TO THE ASSESSEE TO SUBSTANTIATE WITH EVIDENCE TO HIS S ATISFACTION REGARDING THE ALLOWABILITY OF THE CLAIM OF RS.2,05,229/- ON A CCOUNT OF EXCESS BROKERAGE. THE ASSESSING OFFICER SHALL DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THIS GROUND IS ACCORDINGLY ALLOWED FOR S TATISTICAL PURPOSES. 4. THE THIRD GROUND RAISED BY THE ASSESSEE RELATES TO DISALLOWANCE OF RS.16,67,343/- U/S.14A ON THE GROUND THAT THE ASSES SEE HAS EARNED DIVIDEND ON THE SHARES PURCHASED IN THE REGULAR COU RSE OF BUSINESS. 4.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSE SSEE IS IN THE BUSINESS OF SHARE TRADING AND EARNED DIVIDEND OF RS.32,92,18 3/- WHICH IT CLAIMED AS EXEMPT. DURING THE COURSE OF ASSESSMENT PROCEED INGS THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY 7.4 % OF THE TOTAL ADMINISTRATIVE EXPENSES OF RS.2,68,45,147/- AMOUNTI NG TO RS.19,86,467/- SHOULD NOT BE DISALLOWED U/S.14A(1) OF THE I.T. ACT SINCE THE DIVIDEND IS APPROXIMATELY 7.4% OF TOTAL INCOME. IN ABSENCE OF ANY SATISFACTORY EXPLANATION GIVEN BY THE ASSESSEE THE ASSESSING OFF ICER APPLIED THE RATIO OF DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO VS. M/S. DAGA CAPITAL MANAGEMENT PVT. LTD. AND DISALLOW ED AN AMOUNT OF RS.16,67,340/- HOLDING THE SAME TO BE EXPENDITURE R ELATED TO EARNING EXEMPT INCOME. IN APPEAL THE LD. CIT(A) DIRECTED T HE ASSESSING OFFICER TO COMPUTE THE DISALLOWANCE U/S.14A AFTER BIFURCATI NG THE DIRECT AND 7 INDIRECT EXPENSES TO THE 2 DIFFERENT STREAMS OF BUS INESS ACTIVITIES, I.E. AGENCY BUSINESS AND OWN TRADING AND THEREAFTER ALLO CATE THE DIRECT AND INDIRECT EXPENSES OF OWN TRADING BUSINESS TO THE D IVIDEND INCOME IN THE RATIO OF DIVIDEND INCOME TO THE TRADING INCOME INCL UDING THE DIVIDEND INCOME. 4.2 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SHARES ARE HELD AS STOCK IN TRADE AND THE DIVIDEND RECEIVED IS AN I NCIDENTAL INCOME. REFERRING TO THE DECISION OF PUNE BENCH OF THE TRIB UNAL IN THE CASE OF SMT. APOORVA PATNI AND OTHERS VIDE ITA NO.239, 193, 192, 273 TO 276/PN/2011 ORDER DATED 21-06-2012 FOR A.Y. 2006-07 HE SUBMITTED THAT DISALLOWANCE U/S.14A CANNOT BE MADE IN RESPECT OF E XPENSES INCURRED IN RELATION TO THE DIVIDEND INCOME IF THE SHARES ARE H ELD AS STOCK IN TRADE. HE SUBMITTED THAT THE TRIBUNAL WHILE DECIDING THE I SSUE HAS FOLLOWED THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CAS E OF C.C.I. LTD. HE ACCORDINGLY SUBMITTED THAT THE ADDITION MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE CIT(A) SHOULD BE DELETED. 4.3 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND HEAVILY RELIED ON THE ORDER OF THE ASSESSING OFFICER AND TH E CIT(A). 4.4 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAV E ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DIS PUTE TO THE FACT THAT THE ASSESSEE IS IN THE BUSINESS OF SHARE TRADING AND BR OKERAGE. THERE IS ALSO NO DISPUTE TO THE FACT THAT THE ASSESSEE HAS RECEIV ED DIVIDEND OF 8 RS.32,92,183/- DURING THE IMPUGNED ASSESSMENT YEAR WHICH IT CLAIMED AS EXEMPT INCOME U/S.10(34) OF THE INCOME TAX ACT. AC CORDING TO THE ASSESSING OFFICER SUCH EXEMPT INCOME IS APPROXIMATE LY 7.4% OF THE TOTAL INCOME FOR WHICH HE DISALLOWED AN AMOUNT OF R S.19,86,467/- BEING 7.4% OF THE TOTAL ADMINISTRATIVE EXPENSES. IN APPE AL THE LD. CIT(A) DIRECTED THE ASSESSING OFFICER TO BIFURCATE THE DIR ECT AND INDIRECT EXPENSES TO THE 2 DIFFERENT STREAMS OF BUSINESS ACT IVITY, I.E. AGENCY BUSINESS AND OWN TRADING BUSINESS TO THE DIVIDEND I NCOME IN THE RATIO OF DIVIDEND INCOME TO THE TRADING INCOME INCLUDING THE DIVIDEND INCOME AND ACCORDINGLY TO RE-COMPUTE THE DISALLOWANCE U/S. 14A. 4.5 WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE C ASE OF SMT. APOORVA PATNI AND OTHERS (SUPRA) FOLLOWING THE DECI SION OF HONBLE KARNATAKA HIGH COURT HAS HELD THAT WHERE NO EXPENDI TURE IS CANVASSED TO HAVE BEEN INCURRED BY THE ASSESSEE IN EARNING DIVID END INCOME, NO NOTIONAL EXPENDITURE CAN BE DEDUCTED BY INVOKING SE CTION 14A OF THE ACT. IT HAS FURTHER BEEN HELD THAT IN A CASE WHEN ASSESSEE HAS NOT RETAINED SHARES WITH AN INTENTION OF EARNING DIVIDE ND AND DIVIDEND INCOME IS INCIDENTAL TO THE BUSINESS OF SALE OF SHA RES, IT CANNOT BE SAID THAT THE EXPENDITURE INCURRED IN ACQUIRING SHARES H AS TO BE APPORTIONED TO THE EXTENT OF DIVIDEND INCOME SO AS TO BE DISALLOWE D. ACCORDINGLY, THE TRIBUNAL HAS SET-ASIDE THE ORDER OF THE CIT(A) AND DIRECTED TO DELETE THE DISALLOWANCE MADE U/S.14A OF THE I.T. ACT. 4.6 RESPECTFULLY FOLLOWING THE DECISION OF THE COOR DINATE BENCH OF THE TRIBUNAL IN THE CASE OF SMT. APOORVA PATNI AND OTHERS (SUPRA) AND FURTHER CONSIDERING THE FACT THAT THE SHARES ARE HE LD AS STOCK IN TRADE AND 9 THE DIVIDEND RECEIVED IS AN INCIDENTAL INCOME, WE H OLD THAT NO DISALLOWANCE U/S.14A IS WARRANTED UNDER THE FACTS A ND CIRCUMSTANCES OF THE CASE. WE ACCORDINGLY SET-ASIDE THE ORDER OF TH E CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION. 5. IN GROUND OF APPEAL NO.4 THE ASSESSEE HAS CHALLE NGED THE ORDER OF THE CIT(A) IN CONFIRMING THE ADDITION OF RS.53,00,6 31/- U/S.40(A)(IA) ON THE GROUND THAT THE ASSESSEE HAD NOT PAID THE TDS O N THE VARIOUS PAYMENTS. 5.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SING OFFICER DISALLOWED AN AMOUNT OF RS.53,00,631/- U/S.40(A)(IA ) ON THE GROUND THAT THE ASSESSEE COMPANY FAILED TO PAY TDS ON THE CHARG ES PAYABLE TO THE NSE BEFORE THE END OF THE YEAR. IN APPEAL BEFORE T HE LD. CIT(A) THE ASSESSEE GAVE BIFURCATION OF SUCH DETAILS WHICH ARE AS UNDER : CM TRANSACTION CHARGES RS. 1,85,463/- EXPENSES RECOVERY-VSAT RS. 82,574/- CM ANNUAL SUBSCRIPTION RS. 1,27,425/- F& O TRANSACTION CHARGES RS.48,05,169/- ADVANCE F & O TRANSACTION CHARGES RS. 1,00,000/- TOTAL RS.53,00,631/- 5.2 IT WAS SUBMITTED THAT THE ABOVE-MENTIONED CHARG ES ARE NOT SUBJECT TO TDS AND THERE IS NO SUCH REQUIREMENT. IT WAS SU BMITTED THAT THE ASSESSEE HAS DEBITED THE MONTHLY AMOUNT AS PROFESSI ONAL CHARGES IN HIS BOOKS AND USED TO DEDUCT TAX @5% EVERY MONTH WITHOU T UNDERSTANDING OR KNOWING WHETHER TDS PROVISIONS ARE REALLY APPLIC ABLE OR NOT. BEING IN DOUBT THE ASSESSEE WITHHELD THE PAYMENT OF TDS T ILL THE YEAR END AND FINALLY PAID TO GOVERNMENT TREASURY ON 05-05-2006. IT WAS SUBMITTED THAT THE ASSESSING OFFICER, CONSIDERED THE CHARGES AS PROFESSIONAL 10 CHARGES JUST BECAUSE THE ASSESSEE BOOKED THE ABOVE EXPENSES UNDER THE HEAD PROFESSIONAL CHARGES. IT WAS SUBMITTED THA T OUT OF THE TOTAL SUM OF RS.53 LAKHS AN AMOUNT OF RS.50,90,632/- IS TOWAR DS TRANSACTION CHARGES PAID TO STOCK EXCHANGES. REFERRING TO THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF KOTAK SECURITI ES LTD. REPORTED IN 20 SOT 440 IT WAS SUBMITTED THAT TRANSACTION CHARGES A RE NOT FALLING WITHIN THE PURVIEW OF SECTION 194J. HOWEVER, THE LD. CIT( A) WAS NOT CONVINCED WITH THE EXPLANATION GIVEN BY THE ASSESSE E AND UPHELD THE ADDITION MADE BY THE ASSESSING OFFICER. 5.3 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 5.4 THE LD. COUNSEL FOR THE ASSESSEE AT THE OUTSET SUBMITTED THAT THE ASSESSEE COMPANY HAS PAID THE TDS TO THE GOVERNMENT ACCOUNT ON 05- 05-2006, I.E. BEFORE THE DUE DATE OF FILING OF RETU RN FOR THIS YEAR. RELYING ON THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN TH E CASE OF H.A. DEVELOPERS VS. ACIT AND VICE VERSA VIDE ITA NO.611/ PN/2009 AND 373/PN/2009 FOR A.Y. 2005-06 ORDER DATED 27-04-2012 HE SUBMITTED THAT WHEN THE TDS WAS DEPOSITED TO THE CREDIT OF THE GOV ERNMENT ACCOUNT BEFORE THE DUE DATE OF FILING OF THE RETURN, THE DI SALLOWANCE U/S.40(A)(IA) IS NOT WARRANTED. HE ACCORDINGLY SUBMITTED THAT TH E DISALLOWANCE MADE BY THE ASSESSING OFFICER AND UPHELD BY THE CIT(A) S HOULD BE DELETED. 5.5 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 11 5.6 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAV E ALSO CONSIDERED THE DECISION RELIED ON BY THE LD. COUNSEL FOR THE ASSES SEE. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE IN THE INSTAN T CASE HAS DEPOSITED THE TAX SO DEDUCTED AT SOURCE TO THE GOVERNMENT ACCOUNT ON 05-05-2006, I.E. BEFORE THE DUE DATE OF FILING OF THE RETURN, A FACT STATED BEFORE THE LD. CIT(A) AND NOT CONTROVERTED BY THE LD. DEPARTMENTAL REPRESENTATIVE. WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF H.A. DEVELOPERS (SUPRA) WHILE DECIDING THE ISSUE HAS OBSERVED A UND ER : 5. AFTER HEARING BOTH THE SIDES AND PERUSING THE M ATERIAL ON RECORD, WE FIND THE ISSUE RAISED BY THE REVENUE IN ITS APPEAL IS NOW COVERED BY THE JUDGMENT OF CALCUTTA HIGH COURT IN THE CASE OF CIT VS. VIRGIN CREATIONS IN ITAT NO.302 OF 2011 GA 3200 OF 2011 DATED 23-11-201 1, WHEREIN IT HAS BEEN HELD AS UNDER : WE HAVE HEARD MR. NIZAMUDDIN AND GONE THROUGH THE IMPUGNED JUDGMENT AND ORDER. WE HAVE ALSO EXAMINED THE POIN T FORMULATED FOR WHICH THE PRESENT APPEAL IS SOUGHT TO BE ADMITTED. IT IS ARGUED BY MR. NIZAMUDDIN THAT THIS COURT NEEDS TO TAKE DECISION A S TO WHETHER SECTION 40(A)(IA) IS HAVING RETROSPECTIVE OPERATION OR NOT. THE LEARNED TRIBUNAL ON FACT FOUND THAT THE ASSESSE E HAD DEDUCTED TAX AT SOURCE FROM THE PAID CHARGES BETWEEN THE PERIOD APRIL 1, 2005 AND APRIL 28,2006 AND THE SAME WERE PAID BY THE ASSESSE E IN JULY AND AUGUST 2006, I.E. WELL BEFORE THE DUE DATE OF FILIN G OF THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION. THIS FACT UAL POSITION WAS UNDISPUTED. MOREOVER, THE SUPREME COURT, AS HAS BE EN RECORDED BY THE LEARNED TRIBUNAL, IN THE CASE OF ALLIED MOTORS PVT. LTD., AND ALSO IN THE CASE OF RETROSPECTIVE APPLICATION. AGAIN, I N THE CASE REPORTED IN 82 ITR 570, THE SUPREME COURT HELD THAT THE PROVISI ON, WHICH HAS INSERTED THE REMEDY TO MAKE THE PROVISION WORKABLE, REQUIRES TO BE TREATED WITH RETROSPECTIVE OPERATION SO THAT REASON ABLE DEDUCTION CAN BE GIVEN TO THE SECTION AS WELL IN VIEW OF THE AUTH ORITATIVE PRONOUNCEMENT OF THE SUPREME COURT, THIS COURT CANN OT DECIDE OTHERWISE. HENCE, WE DISMISS THE APPEAL WITHOUT AN Y ORDER AS TO COSTS. 6. IN VIEW OF THE ABOVE, FOLLOWING THE JUDGMENT OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF VIRGIN CREATIONS (SUPRA) WE HOLD THAT AMENDMENT TO THE PROVISIONS OF SEC.40(A)(IA) OF THE ACT BY TH E FINANCE ACT, 2010 IS RETROSPECTIVE FROM 01-04-2005. CONSEQUENTLY, ANY P AYMENT OF TAX DEDUCTED AT SOURCE DURING PREVIOUS YEAR RELEVANT TO AND FROM A.Y. 2005-06 CAN BE MADE TO THE GOVERNMENT ON OR BEFORE THE DUE DATE FO R FILING OF INCOME U/S.139(1) OF THE ACT. IF THE PAYMENTS ARE MADE AS AFORESAID, THEN NO DISALLOWANCE U/S.40(A)(IA) OF THE ACT CAN BE MADE. ADMITTEDLY, IN THE PRESENT CASE THE ASSESSEE HAD DEPOSITED THE TAX DEDUCTED AT SOURCE ON OR BEFORE THE 12 DUE DATE FOR FILING RETURN OF INCOME U/S.139(1) OF THE ACT AND THEREFORE, WE HOLD THAT THE CIT(A) WAS JUSTIFIED IN DELETING THE DISALLOWANCE MADE U/S.40(A)(IA) OF THE ACT. ACCORDINGLY, WE UPHOLD T HE ORDER OF THE CIT(A) ON THIS ISSUE. 7. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED WHILE THE APPEAL OF THE ASSESSEE IS ALLOWED. 5.7 SINCE THE ASSESSEE HAS DEPOSITED THE TDS TO THE CREDIT OF THE CENTRAL GOVERNMENT BEFORE THE DUE DATE OF FILING OF THE RETURN, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE COORDINA TE BENCH OF THE TRIBUNAL IN THE CASE OF H.A. DEVELOPERS (SUPRA) WE HOLD THAT NO DISALLOWANCE U/S.40(A)(IA) IS CALLED FOR. THIS GRO UND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 6. THE FIFTH GROUND RAISED BY THE ASSESSEE RELATES TO THE ORDER OF THE CIT(A) IN DISALLOWING PAYMENT OF RS.35 LAKHS MADE T O SRI RAJESH KASAT AS EXCESSIVE U/S.40A(2). 6.1 FACTS OF THE CASE, IN BRIEF ARE THAT THE ASSESS ING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED THAT THE A SSESSEE HAS MADE PAYMENTS TO PERSONS COVERED U/S.40A(2)(B) AMOUNTING TO RS.37,40,000/-. FROM THE DETAILS FURNISHED BY THE ASSESSEE HE NOTED THAT THE ASSESSEE HAS PAID REGULAR REMUNERATION OF RS.20,000/- PER MONTH TO ITS DIRECTOR SRI RAJESH KASAT FROM APRIL 2005 TO FEBRUARY 2006. HOW EVER, IN THE MONTH OF MARCH 2006, THE ASSESSEE SUDDENLY HAS PAID SALAR Y OF RS.35,20,000/- TO MR. RAJESH KASAT. THE ASSESSING OFFICER THEREFO RE ASKED THE ASSESSEE TO JUSTIFY THE PAYMENT OF SUCH HUGE AMOUNT OF SRI K ASAT IN THE MONTH OF MARCH 2006 WHICH IS UNREASONABLE AND FOR WHICH THE PROVISIONS OF SECTION 40A(2) ARE ATTRACTED. THE ASSESSEE SUBMITT ED THAT SRI KASAT WHO IS A GRADUATE IN COMMERCE AND HAS ALSO COMPLETED HI S MBA, IS THE 13 MANAGING DIRECTOR OF THE COMPANY. HIS SUBSTANTIAL K NOWLEDGE HAS BENEFITTED THE ASSESSEE COMPANY FOR SO MANY YEARS. IT WAS FURTHER SUBMITTED THAT THE NET PROFIT OF RS.42,60,818/- DUR ING F.Y. 2004-05 HAS GONE UPTO PROFIT BEFORE TAXATION AT RS.3,78,16,080/ - FOR THE F.Y. 2005-06. THEREFORE, THE INCREASE IN PROFIT IS CLEARLY ATTRIB UTABLE TO MANAGEMENT OF SRI RAJESH KASAT. 6.2 HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE. HE OBSERVED THA T THE EDUCATIONAL QUALIFICATION OF SRI RAJESH KASAT WAS SIMILAR IN EA RLIER YEARS AND HIS KNOWLEDGE AND EXPERTISE WAS USED BY THE COMPANY IN THE PAST SO MANY YEARS. THEREFORE, THE SUDDEN INCREASE IN REMUNERAT ION IS NOT JUSTIFIED. IT IS ONLY WHEN THERE WAS AN INCREASE IN NET PROFIT TH AT THE ASSESSEE COMPANY SUDDENLY INCREASED THE PAYMENT OF REMUNERAT ION TO SRI RAJESH KASAT TO LOWER ITS OWN TAX LIABILITY. FROM THE FUR THER DETAILS FURNISHED BY THE ASSESSEE THE ASSESSING OFFICER NOTED THAT APART FROM RECEIVING SALARY INCOME SRI KSAT HAS ALSO EARNED INCOME OF RS.50,87, 801/- AS PROPRIETOR OF M/S. RAJESH KASAT & CO., PROFESSIONAL FEE OF RS. 2,70,000/- FROM KAYNET CAPITAL LTD. AS A DIRECTOR, EARNED SHORT TER M CAPITAL GAIN OF RS.52,36,070/- AND ALSO EARNED INCOME FROM OTHER SO URCES AT RS. 40,067/-. THE ASSESSING OFFICER, THEREFORE, CA ME TO THE CONCLUSION THAT SRI KASAT HAS NOT MUCH TIME AT HIS DISPOSAL TO DEVOTE TO THE BUSINESS ACTIVITIES OF THE ASSESSEE COMPANY. HE OBSERVED TH AT WHEN MR.KASAT RECEIVED FEE OF RS.2,70,000/- FROM ANOTHER COMPANY NAMED KAYNET CAPITAL LTD. IN WHICH HE IS A DIRECTOR AND SINCE FR OM A.Y. 2005-06 HE HAS RECEIVED SALARY OF RS.2,40,000/- FROM THE ASSES SEE COMPANY, 14 THEREFORE, THE SUDDEN INCREASE OF RS.35 LAKHS DURIN G THE MONTH OF MARCH 2006 IS NOT AT ALL JUSTIFIABLE OR REASONABLE FROM A NY ANGLE. RELYING ON VARIOUS DECISIONS AND IN ABSENCE OF ANY SUITABLE EX PLANATION GIVEN BY THE ASSESSEE TO PROVE THE REASONABILITY OF SUDDEN HIKE IN THE SALARY THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF RS.35 LAK HS U/S.40A(2)(B) OF THE I.T. ACT. 6.3 IN APPEAL, THE LD. CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER ON THE GROUND THAT SUCH INCREASE IN SALARY WAS VERY HIGH AS COMPARED TO THE EARLIER YEARS. WHILE DOING SO, HE RELIED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. SHATRUNJAY DIAMONDS REPORTED IN 261 ITR 258 WHEREIN IT HAS BEE N HELD THAT IN CASES FALLING U/S.40A(2)(B) THE BURDEN OF PROOF SHIFTS TO THE ASSESSEE AND IN SUCH CASES IT IS THE DUTY OF THE ASSESSEE TO PROVE AND DISCHARGE THE BURDEN BY LEADING PROPER EVIDENCE ABOUT REASONABLEN ESS. HE ALSO RELIED ON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL I N THE CASE OF ACIT VS. C.G. NEWAGE ELECTRICALS LTD. HE OBSERVED THAT THE ASSESSEE UNDOUBTEDLY HAS FAILED TO DISCHARGE THE ONUS CAST O N IT U/S.40A(2)(B). THERE IS NO APPARENT REASON FOR INCREASING THE SALA RY IN THE MONTH OF MARCH 2006 BY RS.35 LAKHS ESPECIALLY WHEN MR. KASAT WAS ENGAGED IN HIS OWN ACTIVITIES AS WELL AS ACTIVITY OF OWN COMPA NY IN A SUBSTANTIAL MANNER. DISTINGUISHING THE VARIOUS DECISION CITED BEFORE HIM THE LD. CIT(A) UPHELD THE ACTION OF THE ASSESSING OFFICER. 6.4 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 15 6.5 THE LD. COUNSEL FOR THE ASSESSEE STRONGLY OPPOS ED THE ACTION OF THE ASSESSING OFFICER. HE SUBMITTED THAT MR. RAJES H KASAT, DIRECTOR OF THE COMPANY, IS THE ONLY SENIOR PERSON BY EXPERIENC E, COMPETENCE AND KNOWLEDGE IN THE FIELD OF STOCK MARKET WITH THE ASS ESSEE COMPANY AND OTHERS ARE JUNIOR EMPLOYEES. HE SUBMITTED THAT THE PROFIT OF THE ASSESSEE COMPANY JUSTIFIES THE ABOVE SALARY. FURTHER, MR. K ASAT HAS PAID THE TAX ON THE ABOVE AMOUNT (A COPY OF HIS RETURN FILED IS PLACED AT PAPER BOOK PAGE 151 TO 161). REFERRING TO THE DECISION OF HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. INDO SAUDI SERVICES (T RAVEL) PVT. LTD. REPORTED IN 310 ITR 306 HE SUBMITTED THAT WHEN THE PERSON HAD PAID THE TAX ON THE AMOUNT RECEIVED AND THERE IS NO TAX SAVI NG AND IT IS NOT A CASE OF EVASION OF TAX NO DISALLOWANCE U/S.40A(2)(B) CAN BE MADE. 6.6 SO FAR AS THE DECISION OF THE LD. CIT(A) IN CON FIRMING THE DISALLOWANCE ON THE GROUND THAT THE INCREASE IN SAL ARY WAS VERY HIGH AS COMPARED TO THE EARLIER YEARS HE SUBMITTED THAT THI S REASON IS NOT SUFFICIENT FOR DISALLOWING SALARY U/S.40A(2). FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF THE TRIBUNAL (THIRD MEMBE R) IN THE CASE OF JAGDAMBA ROLLERS FLOUR MILLS REPORTED IN 117 ITD 26 0. SO FAR AS THE DECISION RELIED ON BY THE LD. CIT(A) HE SUBMITTED T HAT THE SAME IS DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. HE SUBMITTED THAT IN THE CASE OF SHATRUNJAY DIAMONDS ( SUPRA) THE ASSESSEE HAD IMPORTED ROUGH DIAMONDS FROM A CONCERN SITUATED AT NEW YORK WHICH WAS A SUBSTANTIALLY INTERESTED PARTY WITHIN T HE MEANING OF SECTION 40A(2)(B) OF THE I.T. ACT. THE ASSESSING OFFICER C OMPARED THE PRICE OF THE ROUGH DIAMOND IMPORTED BY THE ASSESSEE WITH THE PRICE OF THE ROUGH 16 DIAMOND IMPORTED BY THE ASSESSEE FROM OTHER SOURCES AND CAME TO THE CONCLUSION THAT ASSESSEE HAD PAID EXCESS PRICE TO T HE EXTENT OF RS.12,50,000/- TO THE RELATED PARTY. ACCORDINGLY, THE ADDITION WAS MADE U/S.40A(2)(B) WHICH WAS DELETED BY THE CIT(A) AND W HICH WAS UPHELD BY THE TRIBUNAL. ON FURTHER APPEAL IT WAS HELD BY THE HONBLE HIGH COURT THAT THE AVERAGE COST OF PURCHASE OF ROUGH DI AMOND FROM THE RELATED PARTY WAS RS.1223.98 WHEREAS THE AVERAGE CO ST OF PURCHASE OF ROUGH DIAMONDS FROM LOCAL PARTY WAS RS.1123.90. TH E HONBLE HIGH COURT REMITTED THE MATTER BACK TO THE FILE OF THE A SSESSING OFFICER WITH A DIRECTION TO PASS APPROPRIATE ASSESSMENT ORDER WITH CERTAIN DIRECTIONS. THEREFORE, THE SAID DECISION IS NOT APPLICABLE TO T HE FACTS OF THE PRESENT CASE. HE ACCORDINGLY SUBMITTED THAT THE ORDER OF T HE CIT(A) BE SET-ASIDE AND IN VIEW OF THE DECISION OF THE JURISDICTIONAL H IGH COURT IN THE CASE OF INDO SAUDI SERVICES (TRAVEL) PVT. LTD (SUPRA) THE R EMUNERATION PAID BE ALLOWED IN FULL. 6.7 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). SHE SUBMITTED T HAT THE ASSESSEE IN THE MONTH OF MARCH 2006 HAS PAID THE EXCESS AMOUNT OF R S.35 LAKHS AS REMUNERATION WITHOUT ANY JUSTIFICATION. SHE SUBMIT TED THAT FOR ALLOWING THE EXCESS REMUNERATION THE ASSESSEE HAS TO ESTABLI SH THE FAIR MARKET VALUE OF THE SERVICES RENDERED, THE LEGITIMATE NEED OF THE SAME FOR ASSESSEES BUSINESS AND THE BENEFIT DERIVED BY THE ASSESSEE. HOWEVER, ALL THESE FACTORS ARE MISSING IN THE INSTANT CASE. SO FAR AS THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF INDO SAUDI SERVICES (TRAVEL) PVT. LTD (SUPRA) RELIED ON BY THE LD. COUNSEL FOR T HE ASSESSEE SHE 17 SUBMITTED THAT IN THAT CASE REVENUE HAD ALLOWED SIM ILAR RATE IN EARLIER YEARS PAID TO THE SISTER CONCERN AND THE SISTER CON CERN HAD PAID TAX ON HIGHER RATE FOR WHICH THE HONBLE HIGH COURT HELD T HAT IT IS NOT A CASE OF EVASION OF TAX AND DEDUCTION WAS ALLOWED BY DELETIN G THE ADDITION MADE U/S.40A(2)(B). HOWEVER, IN THE INSTANT CASE, NO SU CH EXPENDITURE WAS ALLOWED IN THE PAST. THEREFORE, THE SAID DECISION IS NOT AT ALL APPLICABLE TO THE FACTS OF THE PRESENT CASE. 6.8 THE LD. COUNSEL FOR THE ASSESSEE IN HIS REJOIND ER SUBMITTED THAT HAD IT BEEN A PARTNERSHIP FIRM THE ASSESSEE COULD H AVE GOT MORE REMUNERATION. HE FURTHER SUBMITTED THAT BECAUSE OF THE ACTIVE INVOLVEMENT OF THE MANAGING DIRECTOR THE PROFIT OF THE COMPANY HAS JUMPED FROM 42.61 LAKHS IN F.Y. 2004-05 TO RS.378.1 6 LAKHS IN F.Y. 2005-06. THEREFORE, THE PAYMENT IS NOT AT ALL EXCE SSIVE. HE SUBMITTED THAT SRI RAJESH KASAT HAS PAID TAX AT THE MAXIMUM M ARGINAL RATE. THEREFORE, THERE IS NO QUESTION OF ANY TAX EVASION AS ALLEGED BY THE ASSESSING OFFICER. HE ACCORDINGLY SUBMITTED THAT T HE ADDITION MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE CIT(A) B E DELETED. 6.9 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HA VE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DIS PUTE TO THE FACT THAT THE ASSESSEE WAS PAYING REMUNERATION OF RS.20,000/- PER MONTH TO SRI RAJESH KASAT, MANAGING DIRECTOR OF THE ASSESSEE COM PANY FROM APRIL 2005 TO FEBRUARY 2006. HOWEVER, IN THE MONTH OF MA RCH 2006 THE ASSESSEE HAS PAID REMUNERATION OF RS.35,20,000/-. WE FIND THE 18 ASSESSING OFFICER APPLYING THE PROVISIONS OF SECTIO N 40A(2)(B) DISALLOWED AN AMOUNT OF RS.35 LAKHS BEING EXCESS PA YMENT OF SALARY/INCENTIVE TO THE MANAGING DIRECTOR WHICH WAS UPHELD BY THE LD. CIT(A). IT IS THE CASE OF THE LD. COUNSEL FOR THE ASSESSEE THAT SUCH PAYMENT IS JUSTIFIED IN VIEW OF THE HUGE INCOME EAR NED BY THE ASSESSEE COMPANY IN THE IMPUGNED ASSESSMENT YEAR AS COMPARED TO THE PRECEDING ASSESSMENT YEAR. THERE IS NO TAX EVASION OR AVOIDA NCE SINCE MR. KASAT AND THE ASSESSEE COMPANY ARE PAYING TAX AT THE MAXI MUM MARGINAL RATE AND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF INDO SAUDI SERVICES (TRAVEL) PVT. LTD. (SUPRA). IN THAT CASE THE DISALLOWANCE MADE U/S.40A(2)(B) WAS FOR EXCESSIVE AND UNREASONABLE IN CENTIVE COMMISSION PAID TO THE SISTER CONCERN WHICH WAS CONFIRMED BY T HE LD. CIT(A). THE TRIBUNAL DELETED THE ADDITION. ON FURTHER APPEAL B Y THE REVENUE THE HONBLE HIGH COURT HELD THAT (A) THE ASSESSEE APART FROM PAYING HANDLING CHARGES @ 9.5% TO ITS SISTER CONCERN HAS PAID HANDL ING CHARGES AT THE SAME RATES TO THE OTHER AGENTS (B) IN THE PRECEDING ASSESSMENT YEARS THE ASSESSEE HAD PAID THE HANDLING CHARGES @10% TO THE SISTER CONCERN OF THE ASSESSEE AND SUCH CHARGES PAID WERE CONSIDERED TO B E REASONABLE BY THE REVENUE. HOWEVER, IN THE INSTANT CASE THE ASSESSEE WAS PAYING REMUNERATION OF RS.20,000/- PER MONTH TO THE MANAGI NG DIRECTOR MR. KASAT. ONLY IN THE MONTH OF MARCH 2006 IT HAS PAID AN AMOUNT OF RS.35,20,000/- AS INCENTIVE/REMUNERATION. THE LD. COUNSEL FOR THE ASSESSEE COULD NOT ESTABLISH AS TO WHETHER SIMILAR REMUNERATION HAS BEEN PAID OR NOT IN THE SUBSEQUENT ASSESSMENT YEARS AND IF SO WHAT IS THE FATE OF THE SAME. THEREFORE, THE DECISIONS RELIED ON BY THE LD. COUNSEL FOR 19 THE ASSESSEE ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. HOWEVER, CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE, WE DEEM IT PROPER TO RESTORE THE ISSUE TO THE FILE OF THE ASSESSING OFFI CER WITH A DIRECTION TO GIVE ONE MORE OPPORTUNITY TO THE ASSESSEE TO SUBSTA NTIATE WITH EVIDENCE TO HIS SATISFACTION REGARDING THE REASONABLENESS OF THE PAYMENT. THE ASSESSING OFFICER SHALL VERIFY FROM THE RECORDS OF THE DEPARTMENT OR OBTAIN THE SAME FROM THE ASSESSEE REGARDING THE INC ENTIVE COMMISSION GIVEN TO MR. KASAT IN SUBSEQUENT YEARS AND IF SO TH E FATE OF THE SAME. THE ASSESSING OFFICER SHALL DECIDE THE ISSUE AFRESH AND IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEAR D TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. THIS GROUND BY THE AS SESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 7. GROUND OF APPEAL NO.6 BY THE ASSESSEE RELATES TO DISALLOWANCE OF FOREIGN TRAVEL EXPENSES OF SRI RAJESH KASAT. 7.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE COMPANY CLAIMED TRAVELLING AND CONVEYANCE EXPENSES OF RS.2,40,490/- . FROM THE DETAILS FURNISHED BY THE ASSESSEE THE ASSESSING OFFICER NOT ED THAT SUCH TRAVELLING EXPENSES INCLUDE AN AMOUNT OF RS.1,33,526/- TOWARDS FOREIGN TRAVELLING. IN ABSENCE OF ANY EXPLANATION GIVEN BY THE ASSESSEE REGARDING THE DETAILS OF SUCH FOREIGN TRAVELLING EXPENSES AND NECESSITY O F THE SAME FOR THE PURPOSE OF BUSINESS THE ASSESSING OFFICER DISALLOWE D THE ENTIRE AMOUNT. IN APPEAL, IN ABSENCE OF ANY EVIDENCE BEFORE HIM TO SUBSTANTIATE THAT THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS THE LD. CIT(A) UPHELD THE DISALLOWANCE. 20 7.2 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 7.3 WE HAVE HEARD THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES. ADMITTEDLY, THE ASSESSEE DID NOT PRODUCE THE DETAIL S OF THE FOREIGN EXPENSES NOR FURNISHED THE DETAILS REGARDING THE BU SINESS NECESSITY OF SUCH FOREIGN TRAVELS BEFORE THE ASSESSING OFFICER O R BEFORE THE CIT(A). EVEN BEFORE US ALSO NOTHING WAS PRODUCED TO SUBSTAN TIATE THE NECESSITY OF SUCH EXPENSES FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE COMPANY. UNDER THESE CIRCUMSTANCES, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A) UPHOLDING THE DISALLOWANCE OF FOREIGN TRAVEL LING EXPENSES AMOUNTING TO RS.1,33,526/- GROUND RAISED BY THE AS SESSEE IS ACCORDINGLY DISMISSED. 8. GROUND NO. 7 BY THE ASSESSEE RELATES TO THE ORDE R OF THE CIT(A) IN CONFIRMING THE ADDITION OF RS.10,57,000/- ON ACCOUN T OF UNDER VALUATION OF CLOSING STOCK. 8.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE COMPANY IS A DEALER IN SHARES AND THE CLOSING STOCK OF SHARES AS PER RETURN OF INCOME WAS RS.5,99,86,611/- . THE ASSESSING OFFICER ASKED THE ASSESSEE TO GIVE THE DETAILS OF THE CLOSING STOCK AND THE BASIS OF V ALUATION OF THE SAME. FROM THE DETAILS FURNISHED BY THE ASSESSEE THE ASSE SSING OFFICER NOTED THAT ASSESSEE HAS VALUED THE CLOSING STOCK AT WEIGH TED AVERAGE COST OR MARKET VALUE WHICHEVER IS LOWER. HE, THEREFORE, AS KED THE ASSESSEE TO GIVE THE VALUATION OF INVENTORY, I.E. CLOSING STOCK IF FIFO METHOD IS ADOPTED. FROM THE VALUATION GIVEN BY THE ASSESSEE AS PER FIFO METHOD 21 THE ASSESSING OFFICER NOTED THAT THERE IS A DIFFERE NCE OF RS.11,26,375/- IF FIFO METHOD IS ADOPTED. HE THEREFORE ASKED THE ASS ESSEE TO EXPLAIN AS TO WHY THE UNDERVALUATION OF CLOSING STOCK BY RS.11 ,26,375/- SHOULD NOT BE ADDED TO THE TOTAL INCOME OF THE ASSESSEE. IT W AS SUBMITTED BY THE ASSESSEE THAT IT IS CONSISTENTLY FOLLOWING THE AVER AGE COST OR MARKET PRICE WHICHEVER IS LOWER FOR VALUATION OF CLOSING STOCK O F SHARES AND THIS METHOD IS ALSO RECOMMENDED BY THE ACCOUNTING STANDA RD-2 FOR VALUATION OF INVENTORIES. IT WAS FURTHER SUBMITTED THAT IN C ASE THE VALUATION OF CLOSING STOCK IS CHANGED THEN CONSEQUENTLY THE CHAN GE OF THE VALUE OF CLOSING STOCK OF EARLIER YEAR HAS ALSO TO BE MADE. IT WAS FURTHER STATED THAT THE ASSESSEE HAS A CHOICE OF ADOPTING EITHER F IFO OR WEIGHTED AVERAGE COST METHOD. 8.2 HOWEVER, THE ASSESSING OFFICER WAS NOT CONVINCE D WITH THE EXPLANATION GIVEN BY THE ASSESSEE. RELYING ON VARI OUS DECISIONS AND CONSIDERING THE FACT OF NON-CO-OPERATIONAL ATTITUDE BY THE ASSESSEE IN FURNISHING THE VALUATION OF CLOSING STOCK ON FIFO B ASIS FOR ALL THE SCRIPS THE ASSESSING OFFICER MADE ADDITION OF RS.10,57,000 /- TO THE TOTAL INCOME OF THE ASSESSEE ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK. 8.3 IN APPEAL THE LD. CIT(A) UPHELD THE ACTION OF T HE ASSESSING OFFICER. WHILE DOING SO, HE OBSERVED THAT THE OBJE CTIVE OF VALUING THE CLOSING STOCK IS TO ARRIVE AT REAL PROFIT. THEREFO RE, THE ADOPTION OF FIGURE AT COST OR MARKET PRICE WHICHEVER IS LOWER IS BASED ON THE PRINCIPLE OF NOT RECOGNISING THE PROFIT ON THE UNSOLD STOCK BUT TAKING THE LOSS INTO CONSIDERATION. HE OBSERVED THAT THE ASSESSEE, BY A DOPTING THE METHOD OF AVERAGE COST METHOD, IS MANIPULATING THE SYSTEM WIT HOUT ANY SPECIFIC 22 REQUIREMENT OF BUSINESS AND THEREFORE THE SAME CANN OT BE ALLOWED. ACCORDING TO HIM, AVERAGE COST METHOD HAS BEEN ACCE PTED IN THE ACCOUNTING STANDARD TO TAKE CARE OF CERTAIN SPECIFI C BUSINESS REQUIREMENTS AND THE SAME ARE NOT SEEN TO BE EXISTI NG IN THE PRESENT CASE. HE ALSO REJECTED THE CLAIM OF THE ASSESSEE THAT AFT ER DEMATERIALISATION OF THE SHARES IDENTITY OF THE INDEPENDENT SHARES EARLI ER AVAILABLE AS DISTINCTIVE NUMBERS HAS BEEN LOST AND THEREFORE FIF O METHOD CANNOT BE APPLIED. HE OBSERVED THAT DEMATERIALISATION CANNOT BE SEEN TO HAVE ANY IMPACT OR IMPEDIMENTS ON THE APPLICATION OF FIFO ME THOD. ACCORDING TO THE LD. CIT(A), MOST OF THE SHARE TRADERS USE FI FO METHOD FOR VALUING THEIR STOCK AS IT GIVES MOST APPROPRIATE RESULTS OF PROFIT. HE ACCORDINGLY UPHELD THE ACTION OF THE ASSESSING OFFICER. 8.4 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 8.5 THE LD. COUNSEL FOR THE ASSESSEE STRONGLY CHALL ENGED THE ORDER OF THE CIT(A). HE SUBMITTED THAT THE ASSESSEE HAS BEE N VALUING THE STOCK AS PER AVERAGE COST METHOD FOR THE LAST NUMBER OF YEAR S WHICH HAS BEEN ACCEPTED BY THE DEPARTMENT. FURTHER, THE METHOD IS A RECOGNISED METHOD. HE SUBMITTED THAT IF THE ASSESSING OFFICER DESIRES TO ADOPT A DIFFERENT METHOD FOR VALUING THE CLOSING STOCK THE SAME SHOUL D HAVE BEEN ADOPTED FOR OPENING STOCK ALSO. FOR THIS PROPOSITION, HE R ELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF MAHALAXMI G LASS WORKS REPORTED IN 318 ITR 116. REFERRING TO THE DECISION OF PUNE BENCH OF THE TRIBUNAL IN THE CASE OF HIRLEKAR PRECISION ENGG. PV T. LTD. VS. DCIT IN ITA NO.387/PN/1992 ORDER DATED 04-02-2000 HE SUBMIT TED THAT SIMILAR 23 VIEW HAS BEEN TAKEN BY THE TRIBUNAL. HE SUBMITTED THAT IF THE METHOD IS CHANGED FOR VALUATION OF OPENING STOCK IT WOULD RES ULT IN RELIEF FOR THE ASSESSEE. HE SUBMITTED THAT EITHER THE METHOD FOLL OWED BY THE ASSESSEE BE ADOPTED AND IN CASE THE FIFO METHOD AS ADOPTED B Y THE ASSESSING OFFICER IS ACCEPTED FOR THE CLOSING STOCK THEN SIMI LAR VALUATION SHOULD BE MADE FOR THE OPENING STOCK ALSO. 8.6 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTH ER HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 8.7 WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAV E ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DIS PUTE TO THE FACT THAT THE ASSESSEE, WHO IS A DEALER IN SHARES VALUED ITS CLOS ING STOCK OF SHARES ON WEIGHTED AVERAGE COST METHOD OR MARKET VALUE WHICHE VER IS LOWER. THERE IS ALSO NO DISPUTE TO THE FACT THAT THE ASSES SEE IS FOLLOWING THE SAME METHOD FOR VALUATION OF ITS CLOSING STOCK SIN CE LAST SO MANY YEARS WHICH HAS BEEN ACCEPTED BY THE DEPARTMENT. WE FIND FOR THE IMPUGNED ASSESSMENT YEAR THE ASSESSING OFFICER DEVIATED FROM THE SAME AND ADOPTED FIFO METHOD FOR WHICH HE CAME TO THE CONCLU SION THAT THE SHARES WERE UNDERVALUED BY RS.10,57,000/- AND MADE ADDITION TO THE TOTAL INCOME OF THE ASSESSEE. IT IS THE SUBMISSIO N OF THE LD. COUNSEL FOR THE ASSESSEE THAT SINCE THE ASSESSEE IS FOLLOWING W EIGHTED AVERAGE COST OR MARKET VALUE WHICHEVER IS LOWER SINCE LAST SO MANY YEARS WHICH IS A RECOGNISED METHOD AND WHICH HAS BEEN ACCEPTED BY TH E DEPARTMENT, THEREFORE, THERE SHOULD NOT BE ANY DEVIATION. IT I S THE ALTERNATE CONTENTION 24 OF THE LD. COUNSEL FOR THE ASSESSEE THAT IF FIFO ME THOD IS APPLIED FOR VALUATION OF CLOSING STOCK THEN SIMILAR METHOD SHOU LD BE ADOPTED FOR VALUATION OF THE OPENING STOCK ALSO WHICH WILL GIVE SOME RELIEF TO THE ASSESSEE. 8.8 WE FIND SOME MERIT IN THE ABOVE SUBMISSION OF T HE LD. COUNSEL FOR THE ASSESSEE. WE FIND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF MAHALAXMI GLASS WORKS HAS FOLLOWED THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. MAHAVIR ALLUMINIU M LTD. REPORTED IN 297 ITR 77 ACCORDING TO WHICH TO GIVE EFFECT TO SEC TION 145A, IF THERE IS ANY CHANGE IN THE METHOD OF VALUING CLOSING STOCK A T THE END OF THE YEAR THEN THERE MUST NECESSARILY BE A CORRESPONDING ADJU STMENT MADE IN THE OPENING STOCK OF THAT YEAR. IT HAS BEEN HELD THAT THIS WOULD NOT AMOUNT TO GIVING DOUBLE BENEFIT TO THE ASSESSEE AND WOULD BE NECESSARY TO COMPUTE THE TRUE AND CORRECT PROFIT FOR THE PURPOSE OF ASSESSMENT. SINCE THE ASSESSEE IS CONSISTENTLY ADOPTING THE VALUATION OF SHARES ON WEIGHTED AVERAGE COST METHOD OR MARKET VALUE WHICHEVER IS LO WER WHICH HAS BEEN ACCEPTED BY THE DEPARTMENT AND WHICH IS A RECOGNISE D METHOD, THEREFORE, WE AGREE WITH THE LD. COUNSEL FOR THE ASSESSEE THAT THERE SHOULD NOT BE ANY DEVIATION FROM THE CONSISTENT METHOD FOLLOWED B Y IT. FURTHER, IF THE ASSESSING OFFICER ADOPTS THE FIFO METHOD FOR VALUA TION OF CLOSING STOCK THEN IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF MAHALAXMI GLASS WORKS (SUPRA) THE OPENING STOCK ALSO SHOULD HAVE BEEN VALUED ON THE SAME BASIS WHICH HAS NOT BEEN DO NE IN THE PRESENT CASE. CONSIDERING THE TOTALITY OF THE FACTS AND C ONSIDERING THE FACT THAT THE ASSESSEE IS CONSISTENTLY FOLLOWING THE VALUATIO N OF SHARES ON WEIGHTED 25 AVERAGE COST METHOD OR MARKET VALUE WHICHEVER IS LO WER WHICH HAS BEEN ACCEPTED BY THE DEPARTMENT AND SINCE THE ABOVE METH OD IS ALSO A RECOGNISED METHOD, THEREFORE, WE FIND MERIT IN THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT NO DEVIATION SHOULD H AVE BEEN MADE. WE ACCORDINGLY SET-ASIDE THE ORDER OF THE CIT(A) AND D IRECT THE ASSESSING OFFICER TO DELETE THE ADDITION. THE GROUND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 9. GROUND OF APPEAL NO.8 BY THE ASSESSEE RELATES TO THE ORDER OF THE CIT(A) IN NOT ALLOWING THE SET OFF OF THE CARRY FOR WARD LOSS OF RS.3,71,640/-. 9.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SING OFFICER IN PARA 11 OF THE ASSESSMENT ORDER HAS STATED THAT SPECULATION LOSS IN RESPECT OF A.Y. 2004-05 AMOUNTING TO RS.3,71,600/- IS ALLOWED TO BE CARRIED FORWARD AS PER SECTION 73 OF THE I.T. ACT. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE ASSESSEE IS IN BUSINESS OF SALE & PURCHASE OF S HARES FOR LAST MANY YEARS, INFACT SINCE INCEPTION OF THE COMPANY. DURI NG ONE SUCH YEAR (I.E. A.Y. 2004-05) THE ASSESSING OFFICER ERRONEOUSLY TRE ATED THE LOSS AS SPECULATION. THE ASSESSING OFFICER REFUSED TO SET IT OFF AGAINST INCOME OF THIS YEAR. 9.2 HOWEVER, THE LD. CIT(A) WAS NOT SATISFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE AND DISMISSED THE GROUND RAIS ED BEFORE HIM BY HOLDING AS UNDER : 26 11.3 AFTER CAREFULLY CONSIDERING THE SUBMISSION O F THE APPELLANT, I FIND THAT THE GROUND RAISED LACKS LEGAL SUPPORT. S PECULATIVE LOSS CAN ONLY BE SET OFF AGAINST SPECULATION INCOME AND AS THERE IS NO SPECULATION INCOME DETERMINED IN THIS ASSESSMENT YEAR, THE ASSESSING O FFICER WAS RIGHT IN ALLOWING THE SAME TO BE CARRIED FORWARD WITHOUT BEI NG SET OFF AGAINST THE BUSINESS INCOME OF THIS YEAR. I FIND NO INFIRMITY IN THE ORDER. GROUND NO.9 IS TREATED AS DISMISSED. 9.3 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASS ESSEE IS IN APPEAL BEFORE US. 9.4 THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE COMPANY HAD THE ABOVE LOSS CARRIED FORWARD FROM THE EARLIER YEAR ON ACCOUNT OF THE TRANSACTIONS OF DERIVATIVES. IT WAS TREATED AS A SPECULATION LOSS IN THE EARLIER YEAR. IN THIS YEAR, BECAUSE OF THE AMENDMENT IN SECTION 43(5), THE LOSS FROM DERIVATIVES IS NOT CONSIDERED AS A SPECULATION LOSS. ACCORDINGLY, THE ASSESSING OFFICER REJECTED THE SET OFF OF THE ABOVE SPECULATION LOSS CARRIED FORWARD IN THIS YEAR. HE FURTHER SUBMITTED THAT THE DERIVATIVE TRANSACTIONS HAVE LED TO PROFIT IN T HE HANDS OF THE ASSESSEE. THEY ARE TREATED AS NORMAL BUSINESS PROFITS BECAUSE OF THE AMENDMENT IN LAW BUT IN NATURE THEY ARE SAME AS THOSE IN THE EAR LIER YEAR. REFERRING TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF GAJENDRA KUMAR AGARWAL HE SUBMITTED THAT THE TRIBUN AL HAS ALLOWED THE SET OFF ON SIMILAR FACTS. 9.5 THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHE R HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 9.6 WE HAVE HEARD THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAV E ALSO CONSIDERED THE 27 DECISION CITED BEFORE US. WE FIND THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF GAJENDRA KUMAR T. AGARWAL VS. ITO VIDE ITA NO. 1798/MUM/2010 ORDER DATED 31-05-2011 HAS HELD THAT THE ASSESSEE CAN BE GRANTED SET OFF OF BROUGHT FORWARD LOSS FROM BUS INESS DEALING IN DERIVATIVES, INCURRED IN ASSESSMENT YEARS PRIOR TO ASSESSMENT YEAR 2006- 07 AGAINST THE PROFITS OF THE SAME BUSINESS IN A.Y. 2006-07 AND SUBSEQUENT ASSESSMENT YEARS. RESPECTFULLY FOLLOWIN G THE ABOVE DECISION AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE WE ALLOW THE GROUND RAISED BY THE ASSESSEE. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS THE 25 TH DAY OF JUNE 2013 SD/- SD/- (SHAILENDRA KUMAR YADAV) (R.K. PANDA ) JUDICIAL MEMBER ACCOUNT ANT MEMBER PUNE DATED: 25 TH JUNE 2013 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. CIT(A)-I, PUNE 4 CIT-I, PUNE 5. THE D.R, A PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY ITAT, PUNE BENCHES, PUNE