2012 (10) TMI 131 - HC - Income Tax

Court allows short-term capital loss, dismisses overseas travel expenses, educational expenses, and commission payments.

The court partially allowed I.T.A. No. 98 of 2003 by setting aside the disallowance of the short-term capital loss. However, I.T.A. No. 99 of 2003 and ... Deductibility of business expenditure under Section 37(1) - colourable device/colourable transaction - ratification of contract by a minor on attaining majority - commercial expediency - impermissible cartel/anti competitive arrangement in public tender - deeming provision of the Explanation to Section 73 - speculation businessDeductibility of business expenditure under Section 37(1) - colourable device/colourable transaction - ratification of contract by a minor on attaining majority - Whether overseas educational and foreign travel expenses incurred for the trainee Saumya Meattle were deductible as business expenditure or were colourable and rightly disallowed - HELD THAT: - The Court found that although the trainee's appointment was initially made when he was a minor, he ratified the contract on attaining majority, so the contract could not be held void merely on that ground. However, the determinative question was whether the sponsorship and travel were incurred wholly and exclusively for the company's business. The Board resolution to sponsor computer education was taken on 04.06.1990 when the company's principal business did not include computer/data processing activities; the memorandum was amended only in assessment year 1992-93. The trainee had already secured admission and applied for foreign exchange before his appointment, and the company had not adopted such sponsorship as a regular practice. These facts support the conclusion that the sponsorship was not motivated by bona fide business exigency but was a colourable device; later marginal engagement in computer activity or subsequent employment of the trainee did not validate the expenditure at the time it was incurred.Disallowance of the overseas educational and foreign travel expenses upheld; finding for the revenue and against the assessee.Commercial expediency - impermissible cartel/anti competitive arrangement in public tender - Whether commission payments to M/s. Telecom Ancillaries Pvt. Ltd. were allowable as business expenditure or rightly disallowed as being for impermissible purposes - HELD THAT: - The Court accepted that the agreement related to preparation and follow up of tenders for public sector contracts and that its scope was not clearly defined. Payments included sums to ensure non participation of the alleged contractor and to procure the tender for the appellant, conduct which prima facie transcends lawful participation in public tenders and smacks of creating a cartel. Where the expenditure is for purposes impermissible in law, the question of commercial expediency does not arise. The tribunal's factual findings that the arrangement was entered into at the fag end of the year and that the nature and scope of services were vague were held to be justified.Disallowance of the commission payments confirmed; finding for the revenue and against the assessee.Deeming provision of the Explanation to Section 73 - speculation business - Whether short term capital loss on sale of quoted shares was to be treated as a speculation loss under the Explanation to Section 73 - HELD THAT: - The Explanation to Section 73 applies only where a part of the company's business consists in the purchase and sale of shares; mere occasional purchase and sale of shares for investment does not convert the company into carrying on speculation business. Both the Commissioner (Appeals) and the tribunal had found on facts that the appellant was not in the business of trading in shares. Sale of shares soon after acquisition to avoid further diminution in value was not shown to be an imprudent act amounting to speculation. Hence the precondition for invoking the deeming provision was absent and the loss could not be disallowed as a speculation loss.Disallowance of the short term capital loss as a speculation loss set aside; finding for the assessee and against the revenue.Deductibility of business expenditure under Section 37(1) - Direction for recomputation of total income and tax in respect of assessment year 1991-92 in terms of the Court's findings - HELD THAT: - In consequence of allowing the challenge to the treatment of the short term capital loss and answering other questions as recorded, the Court directed the Assessing Officer to recompute total income and tax for assessment year 1991-92 in accordance with the judgment. This is a computation remand limited to applying the Court's determinations to arrive at the correct tax liability.Assessing Officer directed to recompute total income and tax for AY 1991-92 in accordance with the judgment.Final Conclusion: I.T.A. No. 98 of 2003 (AY 1991-92) allowed in part by setting aside the treatment of the short term capital loss and directing recomputation; I.T.A. No. 99 of 2003 (AY 1993-94) and I.T.A. No. 265 of 2003 (AY 1996-97) dismissed, with disallowances of the overseas sponsorship/travel and commission payments upheld as recorded. Issues Involved:1. Disallowance of overseas travel and educational expenditure.2. Disallowance of commission paid to M/s. Telecom Ancillaries Pvt. Ltd.3. Disallowance of short-term capital loss on the purchase and sale of shares.Issue-wise Detailed Analysis:1. Disallowance of Overseas Travel and Educational Expenditure:The appeals in I.T.A. No. 98 of 2003 and I.T.A. No. 265 of 2003 concern the disallowance of overseas travel and educational expenses incurred by the appellant company for its trainee, Saumya Meattle. The appellant company sponsored Saumya Meattle for advanced studies in Computer Science and later for a Master's Degree in Accounting at the University of South California. The Assessing Officer disallowed these expenses, which were upheld by the Commissioner of Income Tax (Appeals) and the tribunal.The appellant argued that the sponsorship was a business expenditure as the trainee was bound by a contract to serve the company for seven years post-education. The tribunal, however, found the sponsorship to be a colorable device, noting that the company did not assess the trainee's competence and the decision was made shortly after his appointment. The tribunal also highlighted that the company's principal business at the time did not involve computer science or software development.The court agreed with the tribunal, stating that the sponsorship was not for the business of the company at the time the decision was made. The court noted that the company's principal business was manufacturing and supplying plastic pouches, and it only entered the computer business in the assessment year 1992-93, after the decision to sponsor the trainee. The court concluded that the sponsorship was not a business expenditure and upheld the disallowance.2. Disallowance of Commission Paid to M/s. Telecom Ancillaries Pvt. Ltd.:The appeals in I.T.A. No. 98 of 2003 and I.T.A. No. 99 of 2003 involve the disallowance of commission paid by the appellant company to M/s. Telecom Ancillaries Pvt. Ltd. The appellant paid Rs. 1,66,660 in the assessment year 1991-92 for expertise in applying for tenders and Rs. 12,00,000 in the assessment year 1992-93 for restraining M/s. Telecom Ancillaries from participating in tenders and for follow-up action.The appellant argued that the agreements were standard practice and commercially expedient. The tribunal, however, found the agreements vague and impermissible, noting that the payments were for purposes that transcended lawful limits of participation in public tenders.The court agreed with the tribunal, stating that the agreements were not clearly spelt out and involved impermissible activities. The court held that the payments were not justified as business expenditures and upheld the disallowance.3. Disallowance of Short-Term Capital Loss on Purchase and Sale of Shares:The appeal in I.T.A. No. 98 of 2003 also concerns the disallowance of short-term capital loss of Rs. 4,17,550 incurred by the appellant company in the purchase and sale of shares of M/s. Reliance Industries Ltd. and M/s. JCT Ltd. The tribunal disallowed the loss, treating it as a speculation loss under the explanation to Section 73 of the Income Tax Act.The appellant argued that it was not in the business of purchase and sale of shares and that the loss should not be treated as speculation loss. The court noted that the tribunal and CIT (Appeals) had factually concluded that the appellant was not involved in the business of sale and purchase of shares. The court held that the precondition for attracting the explanation to Section 73 was absent and that the disallowance of the loss as speculation loss was unwarranted.The court set aside the disallowance of the short-term capital loss, holding that the loss was not a speculation loss and should be allowed as a deduction.Conclusion:I.T.A. No. 98 of 2003 is allowed in part, with the disallowance of the short-term capital loss set aside. I.T.A. No. 99 of 2003 and I.T.A. No. 265 of 2003 are dismissed, upholding the disallowance of overseas travel and educational expenses and commission payments. The Assessing Officer is directed to recompute the total income and tax payable by the appellant company for the assessment year 1991-92 in accordance with the court's findings.