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of <h1>Tribunal Partially Allows Appeal, Remands Expense Disallowance for Further Verification</h1> <h3>Enam Financial Consultants (P.) Ltd. Versus Assistant Commissioner of Income-tax, Spl. Rg. 22</h3> Enam Financial Consultants (P.) Ltd. Versus Assistant Commissioner of Income-tax, Spl. Rg. 22 - [2006] 6 SOT 312 (MUM.) Issues Involved:1. Claim for damages paid for breach of underwriting arrangement.2. Devolvement loss.3. Disallowance of certain expenses on an ad hoc basis.Issue-wise Detailed Analysis:1. Claim for damages paid for breach of underwriting arrangement:The assessee, a category 1 Merchant Banker, claimed a loss of Rs. 36,60,000 paid to M/s. Niwas Spinning Mills Ltd. (NSML) as damages for breach of an underwriting agreement. The Assessing Officer disallowed this claim, treating the payment as speculative under section 43(5) of the Income-tax Act, 1961, due to the non-actual delivery of debentures. The CIT(A) upheld this disallowance, citing that the payment was for an illegal conduct prohibited by SEBI Regulations, thus attracting the Explanation to section 37(1).The Tribunal analyzed the nature of the transaction and concluded that the payment was a settlement of a dispute arising from a breach of contract, not a speculative transaction. The Tribunal referenced the Supreme Court's decision in CIT v. Shantilal (P.) Ltd. [1983] 144 ITR 57, which distinguished between settling a contract and settling a dispute from a breach of contract. The Tribunal held that the damages paid were incidental to the assessee's trade and allowable as a business loss. The Tribunal also rejected the application of section 73, as the underwriting activity involved debentures, not shares.2. Devolvement loss:The assessee claimed a loss of Rs. 1,04,000 due to the depreciation in the value of devolved securities. The Assessing Officer treated this as a speculative loss under section 73 of the Act, which was upheld by the CIT(A). The Tribunal, however, noted that the loss was a notional loss due to accounting principles and not an actual trading transaction. Since it was a book entry without any actual sale or purchase, the Tribunal held that the loss was not allowable as such, and the question of applying section 73 did not arise.3. Disallowance of certain expenses on an ad hoc basis:The assessee challenged the ad hoc disallowance of Rs. 1,00,000 out of miscellaneous expenses, staff welfare expenses, and conveyance expenses. The CIT(A) confirmed the disallowance, stating that the assessee failed to prove the expenses were incurred wholly and exclusively for business purposes. The Tribunal restored this issue to the Assessing Officer for a fresh adjudication, directing the assessee to produce necessary evidence to support its claim. If the assessee fails to do so, the disallowance will stand.Conclusion:The Tribunal partly allowed the appeal, reversing the CIT(A)'s order on the claim for damages and the devolvement loss, while remanding the issue of ad hoc disallowance of expenses for further verification.
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