2012 (1) TMI 250 - AT - Income Tax

Tribunal grants partial relief to assessee in key tax issues, overturns AO decisions

The Tribunal allowed partial relief to the assessee in various issues, including commission payments disallowance, interest on borrowed funds, treatment ... Deductibility of business expenditure under section 37(1) - secret/undisclosed commission paid to agents/representatives - Burden of proof on assessee to establish genuineness of payments - Evidentiary value of affidavits and self made vouchers in tax proceedings - Public policy and Explanation to section 37(1) - payments which are offence or prohibited by law - Quantification of excessive/unreasonable expenditure - permissible estimation - Validity of reassessment - limitation, change of opinion and scope of section 147/148 - Deemed consideration under section 50C - stamp duty valuation as deemed sale consideration - Explanation to section 73 - deeming of share dealing as speculation business - Allowability of interest on borrowed funds where advances are for acquisition of business premises - Deduction for bad debts on write off in books of account - Deduction under section 80M - inter corporate dividend set off against dividend distributedDeductibility of business expenditure under section 37(1) - secret/undisclosed commission paid to agents/representatives - Burden of proof on assessee to establish genuineness of payments - Evidentiary value of affidavits and self made vouchers in tax proceedings - Public policy and Explanation to section 37(1) - payments which are offence or prohibited by law - Quantification of excessive/unreasonable expenditure - permissible estimation - Allowability of commission payments made to employees/agents/representatives of customers and extent of disallowance for assessment years 2000-01 to 2005-06 - HELD THAT: - Tribunal examined whether the assessee discharged the initial burden of proving that commission payments were genuinely made and wholly and exclusively for business. It accepted that the assessee produced audited books, payment vouchers (with consignment notes and payee signatures) and numerous affidavits of regional/operational heads and that these materials established the payments and the trade practice of such payments in the transport business. The Tribunal held that affidavits cannot be rejected merely as self serving unless deponents are called for cross examination; authorities and precedents permit tribunals to decide on documentary and affidavit evidence. The Tribunal distinguished the jurisdictional High Court's earlier adverse decision on facts (1981 82 to 1984 85) and concluded those earlier years were materially different. It also considered whether payments fell within the Explanation to section 37(1) as payments for an offence or prohibited by law and held that payments to private sector employees/agents were not shown to be unlawful or opposed to public policy. Nevertheless, on comparability and reasonableness of the amounts, after surveying past disallowances in earlier years and commission rates of comparable transport operators, the Tribunal found that a uniform portion of the commission payments was excessive. For the years under appeal it quantified the excess at 15% of the total commission paid and directed the assessing officer to disallow 15% as inadmissible.Genuineness of commission payments established; not hit by Explanation to section 37(1); but 15% of total commission paid held excessive and disallowed for AYs 2000-01 to 2005-06.Allowability of interest on borrowed funds where advances are for acquisition of business premises - Notional disallowance on account of diversion of borrowed funds - Validity of notional disallowance of interest on borrowed funds attributable to advances to group concern for booking/acquisition of office premises (AY 2000-01 and 2001-02) - HELD THAT: - Assessing officer treated advances to a group concern for booking office space as application of borrowed funds and disallowed notional interest. Tribunal examined the MOU, purpose of advance (acquisition of business premises), audited balance sheets and held the aggregate advance was insignificant relative to assessee's own funds; there was no material to link the advances to specific borrowed funds so as to make interest disallowable on a notional basis. The Tribunal applied precedents holding that interest on monies borrowed for acquiring premises intended for business may be allowable and that mere diversion plea without nexus is not sustainable.Disallowance of notional interest deleted; CIT(A) order deleting the addition confirmed.Explanation to section 73 - deeming of share dealing as speculation business - Whether losses on sale of certain shares and UTI units are to be treated as speculative (Explanation to s.73) or as capital losses (AYs 2000-01 and 2003-04) - HELD THAT: - Tribunal considered the Explanation to section 73 which applies when part of a company's business consists in purchase and sale of shares. The assessee consistently classified the securities as 'investments' in its balance sheets and did not carry on a business of dealing in shares. The mere existence of a power in the memorandum of association was held insufficient to treat the transactions as trading in shares. Citing relevant precedent and Special Bench authority, the Tribunal held the deeming fiction under section 73 did not apply and the losses were correctly treated as capital losses.Explanation to section 73 not applicable; losses on sale of shares/units treated as capital losses and CIT(A) order confirmed.Deduction for bad debts on write off in books of account - Allowability of deduction for debts written off in books as bad debts (AY 2001-02) - HELD THAT: - Tribunal noted statutory position after amendment to section 36(1)(vii) that write off in the books is the decisive act for claim of bad debt deduction; assessee produced evidence of write offs and corresponding entries in Profit & Loss account and supporting correspondence showing procedure followed prior to write off. On that basis, and relying on Supreme Court authority, the Tribunal found no requirement to prove actual irrecoverability beyond the book write off.Addition disallowing bad debt deleted; deduction for bad debts written off in books allowed.Cost of acquisition for capital gains where properties vest pursuant to scheme of arrangement approved by court - Computation of capital gains on sale of immovable properties vested under a court sanctioned scheme - whether cost is the book value in transferor's accounts (AY 2001-02) - HELD THAT: - Assets vested in the assessee pursuant to High Court sanctioned scheme. Tribunal applied section 49 principles and held there is no special provision altering cost where property vests by virtue of a court approved scheme; the book values as recorded in the transferor's audited accounts represent the assessee's cost of acquisition. Accordingly the assessing officer was not justified in taking cost as nil.CIT(A)'s direction to accept indexed cost as per books of transferor upheld; addition reversed.Validity of reassessment - limitation, change of opinion and scope of section 147/148 - Validity of reopening assessment under section 147/148 for AY 2001-02 on ground that income escaped assessment in view of a jurisdictional High Court decision - HELD THAT: - Assessing officer reopened assessment more than four years after end of the year relying on the jurisdictional High Court's earlier judgment; but that judgment had been available and considered at the time of original assessment and the assessing officer had already taken a view (15% disallowance) which was modified by CIT(A) (5%). Tribunal emphasised that reopening cannot be resorted to for mere change of opinion where the issue was considered and decided in the original assessment/appellate proceedings; once the matter was subject of appellate consideration (merged in CIT(A)'s order), reopening on the same issue amounted to impermissible change of opinion. The proper remedy would have been appeal, not reopening.Reopening under section 147/148 for AY 2001-02 set aside; reassessment held invalid.Deemed consideration under section 50C - stamp duty valuation as deemed sale consideration - Application of section 50C where stamp valuation exceeds declared sale consideration (AY 2003-04) - HELD THAT: - Assessing officer invoked section 50C because the stamp valuation (value adopted for registration) exceeded the consideration recorded in the sale deed. Tribunal noted assessees may object under subsections (2) and (3) of s.50C by producing evidence, but the assessee in this case did not avail the statutory opportunity to challenge the stamp authority valuation. In absence of such objection/evidence, the AO was justified in treating the higher stamp valuation as the deemed consideration for capital gains purposes.Addition under section 50C sustained; assessee's ground on this issue dismissed.Deduction under section 80M - inter corporate dividend set off against dividend distributed - Entitlement to deduction under section 80M for inter corporate dividend where dividend distributed by assessee exceeds dividend received (AY 2003-04) - HELD THAT: - Section 80M permits deduction in computing a domestic company's income to the extent the dividend received does not exceed dividend distributed on or before the due date. The assessee received a small domestic dividend and distributed aggregate dividends in excess thereof before the due date for return; the statutory conditions were met.Assessee entitled to deduction under section 80M; assessing officer's disallowance set aside.Final Conclusion: The Tribunal allowed the assessee's claims on the genuineness of commission payments but, on a reasonableness comparability exercise, held 15% of the commission paid for AYs 2000 01 to 2005 06 to be excessive and disallowed that portion; it deleted notional interest disallowances in respect of advances for office premises, treated specified securities losses as capital losses (not speculative), allowed bad debt write offs, accepted book value cost for properties vested under a court scheme, struck down an invalid reassessment under section 147 for AY 2001 02, sustained an addition under section 50C where stamp valuation exceeded declared consideration (in absence of statutory challenge), and allowed deduction under section 80M for inter corporate dividend where conditions were satisfied. Issues Involved:1. Disallowance of commission paid to employees, representatives, and/or agents of customers.2. Disallowance of interest on borrowed funds on a notional basis.3. Treatment of loss arising on the sale of shares as speculative loss under Explanation to Section 73.4. Disallowance of bad debt claimed by the assessee.5. Computation of long-term capital gains on the sale of immovable properties.6. Validity of re-assessment proceedings under Section 147/148.7. Application of Section 50C regarding the deemed sale consideration of immovable property.8. Denial of relief under Section 80M.9. Admission of additional evidence in violation of Rule 46A.Detailed Analysis:1. Disallowance of Commission Paid:The assessee claimed commission payments as business expenses, which were disallowed by the Assessing Officer (AO) for various reasons, including lack of proper documentation and genuineness. The AO disallowed different percentages of the claimed amounts across the assessment years. The CIT(A) provided partial relief by reducing the disallowance percentages in some years. Upon appeal, the Tribunal found that the assessee had provided sufficient evidence, including affidavits and vouchers, to substantiate the commission payments. The Tribunal concluded that disallowing 15% of the total commission paid would be reasonable, considering the nature of the business and industry practices.2. Disallowance of Interest on Borrowed Funds:The AO disallowed interest on borrowed funds, assuming that the funds were diverted to a group concern for acquiring a capital asset. The CIT(A) deleted the disallowance, and the Tribunal upheld this decision, noting that the funds advanced for acquiring office premises were for business purposes and there was no direct nexus between borrowed funds and the advance.3. Treatment of Loss on Sale of Shares:The AO treated the losses on the sale of shares as speculative losses under Explanation to Section 73. The CIT(A) reversed this decision, and the Tribunal upheld the CIT(A)'s order, stating that the assessee held the shares as investments, not as stock-in-trade, and thus the losses should be treated as capital losses.4. Disallowance of Bad Debt:The AO disallowed the bad debt claim, citing lack of evidence. The CIT(A) allowed the claim, and the Tribunal upheld this, referencing the Supreme Court's decisions that writing off the debt in the books is sufficient for claiming bad debt under Section 36(1)(vii).5. Computation of Long-Term Capital Gains:The AO computed long-term capital gains on the sale of immovable properties by taking the cost of acquisition as NIL. The CIT(A) directed the AO to accept the cost as per the audited books of the transferor company, and the Tribunal upheld this decision, noting that the properties vested in the assessee due to a High Court-approved scheme.6. Validity of Re-assessment Proceedings:The AO initiated re-assessment proceedings after four years, citing under-assessment of income. The Tribunal found that the AO had already considered the relevant facts and the High Court's decision during the original assessment. Thus, the re-assessment was based on a mere change of opinion, which is not permissible, and the Tribunal canceled the re-assessment.7. Application of Section 50C:The AO invoked Section 50C to deem the sale consideration of land at the stamp duty value, resulting in additional capital gains. The Tribunal upheld this application, noting that the assessee did not object to the valuation under sub-sections (2) and (3) of Section 50C.8. Denial of Relief under Section 80M:The AO denied relief under Section 80M for dividends received. The Tribunal allowed the relief, noting that the assessee had distributed dividends far exceeding the amount received, satisfying the conditions of Section 80M.9. Admission of Additional Evidence:The Revenue contended that the CIT(A) admitted additional evidence in violation of Rule 46A. The Tribunal found no merit in this contention, as it had already decided on the disallowance of commission payments on merits.Conclusion:The Tribunal provided a detailed analysis and rulings on each issue, balancing the evidence provided by the assessee and the AO's contentions, ultimately allowing partial relief to the assessee in most cases while upholding some of the AO's decisions.