Judgment:
1. Grounds No. 1 and 17 in this appeal filed by the assessee are of general nature and hence they do not deserve any specific adjudication.
2. Grounds No. 2, 3, 4 and 5 relate to the question of taxability of the sale considerations in respect of shares on the investment portfolio. The assessee has claimed that in view of there being no cost of acquisition for the bonus shares and no cost of improvement in respect of the original shares (which had certainly been acquired by the assessee by incurring certain monetary costs), there would be no case for charging the profits/gains arising out of the transfer of both the types of shares to capital gains tax.
This issue has been discussed in great detail in our order dt. 29th March, 2000, in the case of Shekhawati Rajputana Trading Co. (P) Ltd. (ITA No. 2934/Cal/1995 : Asst. yr. 1992-93). The facts of the present case are exactly similar to this in the said case. Arguments have also been put forward by the representatives of both the sides in the same line and the same judgments of different Courts as well as of Tribunal have been relied upon. On a consideration of the legal aspect including the judgments of different Courts and Tribunal, we have already come to the decision in the case of Shekhawati Rajputana Trading Co. (P) Ltd. (supra) that so far as the bonus shares are concerned, on the ground of lack of any cost of acquisition thereof, no capital gains tax would be leviable in respect of sale consideration of the bonus shares. So far as, however, the original shares are concerned, we have held, mainly by following the judgments of the Supreme Court in the case of Escorts Farms (Ramgarh) Ltd. v. CIT (1996) 222 ITR 509 (SC) and of the Calcutta High Court in the case of Goodrick Group Ltd. v. CIT (1993) 201 ITR 266 (Cal) and also taking into consideration the definition of "cost of improvement" as appearing in Section 55(2)(ii) that the cost of acquisition of the original shares will have to be taken on the basis of the aforesaid two decisions.
In that view, so far as the bonus shares are concerned, we reverse the orders of the lower' authorities and direct that capital gains tax would not be leviable in respect of bonus shares, while as regards the original shares, we uphold the orders of the lower authorities.
3. Ground No. 6 relates to the disallowance of service charges claimed to have been paid by the assessee in tandem with other four parties including M/s Shekhawati Rajputana Trading Co. (P) Ltd. and Smt. Veena Kanoria to S/Shree Sanjiv Taneja and Vijay Kumar Surana. The facts of the case are exactly the same as in the case of Shekhawati Rajputana Trading Co. (P) Ltd. (supra). Following our discussions made and decision taken in the said order, so far as this case is also concerned, we reverse the orders of the lower authorities and direct that the service charges paid to S/Shree Sanjiv Taneja and Vijay Kumar Surana be allowed.
4. Ground No. 7 relates to disallowance of travelling expenses. The AO discusses in the assessment order that total amount debited under this head being Rs. 1,65,369 includes payments for travelling of Shri Vijay Kumar Surana and Shri Sanjiv Taneja aggregating to Rs. 1,40,295. He furthermore discusses that disallowances under Rule 6D in respect of these two persons can be worked out at Rs. 59,318 and Rs. 1,950.
Further disallowances under the same rule in respect of the other persons has again been computed by the AO at Rs. 1,950. Ultimately, however, in view of the disbelief on the part of the AO regarding the services rendered by Shri Vijay Kumar Surana and Shri Sanjiv Taneja, even the travelling expenses in respect of their tours have also been disallowed and a total disallowance of Rs. 1,42,245 has been made in this regard. For the same reasons as considered by the AO the disallowance has been upheld by the CIT(A).
Since we have already held that Shri Surana and Shri Taneja can be considered to have rendered services to the assessee-company, travelling expenses in connection with their tours to various places have got to be considered as allowable. We, therefore, reverse the orders of the lower authorities and direct the AO to allow the travelling expenses in respect of Shri Vijay Kumar Surana and Shri Sanjiv Taneja subject, however, to the disallowances to be made even in respect of their tours in accordance with the provisions of Rule 6D. "For that learned CIT(A) was wrong in disallowing legal expenses incurred to protect business assets in form of shares and share transfer expenses which are normal business expenses".
"For that learned CIT(A) was wrong in directing the AO to withdraw deduction allowed by him on account of legal expenses and share transfer expenses against capital gains".
It is thus clear that the abovementioned two grounds are related to each other.
6. The facts of the case are that the assessee claimed legal expenses of Rs. 26,632 which include payment of Rs. 4,905 to P.D. Himmatsingkha for conducting the case of Jokai India Ltd. shares and Rs. 21,727 to Khaitan for the same reasons. The AO has disallowed these claims by considering them to be for acquiring the shares of Jokai India Ltd. under the investment portfolio. At the same time again, he stated that the expenses may be considered in the share investment account.
Similarly, the amount paid for share transfer at Rs. 41,084 has also been considered by the AO to be on investment account and has been disallowed by him towards trading expenses.
In the first appeal, the CIT(A), after acknowledging that legal expenses had to be incurred for reducing mismanagement in the companies, held the expenses to be on capital account. Similar decision was also taken by him in respect of the share transfer expenses. At the same time again, he did not see any reason as to how the sums of Rs. 13,316 and Rs. 41,087 could be adjusted against capital gains, inasmuch as, there was no acquisition or sale of any capital asset involved therein. Hence, he gave a separate direction to the AO to modify the assessment order by deleting the adjustments of Rs. 13,316 and Rs. 41,087.
So far as the legal expenses are concerned, they have evidently been incurred for the purpose of maintaining the shares of the assessee, which are nothing but its business assets, though under the investment portfolio. Any expense incurred by an assessee towards maintenance of its fixed assets even, is allowable as revenue expense. In that way, we reverse the orders of the lower authorities and direct that the amount of Rs. 26,632 being legal expenses incurred by the assessee be allowed as revenue expenses.
So far as, however, the share transfer expenses are concerned, they are directly linked up with the acquisition of the shares on the investment portfolio. Hence, such expenses should go to add up to the cost of the shares under consideration. Hence, the orders of the lower authorities in disallowing the amount of Rs. 41,087 against revenue account and confirmation of the same by the CIT(A) are being upheld. At the same time again, we do not find any force in the argument of the CIT(A) that the amount under consideration should also not be considered against the investment account, especially when we have already held that the share transfer expenses are nothing but a part of the cost of the acquisition of the shares. We, therefore, expunge this portion of the order of the learned CIT(A) directing the AO to delete the adjustment of Rs. 41,087 against the investment account.
"(9) For that learned CIT(A) was wrong in considering business transactions in the course of financing, money-lending, promotion of projects, rehabilitation of projects, etc. entered into with M/s Papyrus Papers Ltd. and Minoo Biscuits (P) Ltd. as joint venture on capital account and not in the course of business of company.
(10) For that learned CIT(A) was wrong in holding that irrecoverable money from Papyrus Papers Ltd., actually written off was not a business loss but a capital loss not which can be allowed either in computation of income under heads business income or capital gains.
(11) For that learned CIT(A) was wrong in holding that compensation paid to M/s Minoo Biscuits (P) Ltd. on termination of financing agreement was a capital loss not allowable in computation of income under heads business income or capital gains.
(12) For that learned CIT(A) was wrong in directing the AO to withdraw deductions made by him in computation of capital gains on account of unrecoverable amounts written off and compensation paid to M/s Papyrus Papers Ltd. and Minoo Biscuits (P) Ltd." The facts of the case as discussed by the AO in the assessment order are that the assessee-company entered into a joint venture agreement for the rehabilitation of Minoo Biscuits (P) Ltd. It was decided that a sum of Rs. 85,00,000 would be contributed by the assessee-company towards the financing of Minoo Biscuits (P) Ltd. in which the assessee would not only participate in the acquiring of shares but also to have management of the said company. For this purpose, an amount of Rs. 12,00,000 was paid in four instalments of Rs. 3,00,000 each. The AO discusses that subsequently, the matter did not materialise and the agreement thus fell through. He states that Minoo Biscuits claimed the compensation for violation of the agreement and on the other hand, the assessee-company claimed refund of the money already advanced by it.
Ultimately, however, the matter was referred to the arbitrator, who opined that a compensation of Rs. 17,00,000 be paid by the assessee.
The amount of Rs. 12,00,000 already paid by the assessee was adjusted against the compensation and a further amount of Rs. 5,00,000 was held to be payable and the said amount was also actually paid in the next year. The AO states that he made enquiries through his Inspector, who found out that the factory of Minoo Biscuits Co. (P) Ltd. had been remaining idle/closed from November, 1990 due to labour trouble and furthermore that huge amounts of loans, interest and sales-tax liabilities, etc. were outstanding against the said company. The payment of Rs. 17,00,000 was found to be recorded in the books of Minoo Biscuits (P) Ltd. The AO, however, discusses that the matter was settled very fast and that the assessee agreed to make the payment without any objection. Finally, however, the AO held that the payment was of capital nature, inasmuch as the investment of Rs. 12,00,000 was for capital participation in Minoo Biscuits Co. (P) Ltd. and that the balance amount of Rs. 5,00,000 being also for the same purpose was not allowable as revenue expenditure. The entire claim of the assessee towards allowability of the amount of Rs. 17,00,000 was thus disallowed by the AO.9. Before the CIT(A), the assessee-company submitted that as per its memorandum of association, its business included "financing, money-lending, company/project promotion, etc." and that the joint venture of the agreement was nothing but a segment of such business and hence, the loss of Rs. 17,00,000 should be allowed as a business loss and should not be treated as a capital loss. The CIT(A) noted that rehabilitating companies/projects was actually a part of the business activity of the assessee. The assessee claimed before him that the amount of Rs. 12,00,000 was not towards participation in capital but had merely been given as a loan. It was furthermore stated that so far as participation in the capital of Minoo Biscuits Co. (P) Ltd. is concerned, nothing had been paid till then and that the participation in the capital would have taken place in due course only after further sizeable amounts had been disbursed as per the contract. The CIT(A), thereafter, however, stated that in the proposed joint venture, there were more than mere financing or rehabilitation and that the scheme could not be described as a company/project promotion, pure and simple, either. He concluded that the venture amounted to acquisition of a capital asset in the rehabilitated business of Minoo Biscuits Co. (P) Ltd. with financial and managerial control in it. This being so, the CIT(A) held that all costs incurred in connection with the joint venture agreement and its termination were nothing but capital costs in the hands of the assessee-company. He thus held that the AO was right in considering the loss of Rs. 17,00,000 as capital loss. He furthermore directed that the above capital loss should not be considered to be a loss under the head "capital gains" inasmuch as no acquisition or transfer of any capital asset was involved therein.
Before us, the learned counsel for the assessee has strongly contended that the amount of Rs. 12,00,000 which represented nothing but loan given by the assessee to the Minoo Biscuits Co. (P) Ltd. in terms of its money--lending activities as per the object clause of its memorandum of association and, inasmuch as the said loan had become barred and also written off in the books of the assessee, the assessee should be entitled to that claim. The other amount of Rs. 5,00,000 has also been claimed by the learned counsel for the assessee as having been incurred as per the award of the arbitrator in connection with regular business activities. Alternatively, it is also claimed that, inasmuch as company/project promotion was a part of the business activities of the assessee, the expense in that connection should be allowable as regular business loss as per the judgment of the Calcutta High Court in the case of CIT v. Rajeeva Lochan Kanoria (1994) 208 ITR 616 (Cal).
On the other hand, the learned Departmental Representative takes us through the terms and conditions of the aforesaid joint venture agreement and argues that the attempt of the assessee was to acquire the controlling interest in and the management of the affairs of Minoo Biscuits Co. (P) Ltd. and hence the amount expended in that connection should be considered as expenses incurred towards acquiring a capital asset and the loss in that regard should be disallowed as a capital loss. In support of his contention in this regard, the learned Departmental Representative has relied on the judgment of the Supreme Court in the case of A.V. Thomas & Co. Ltd. v. CIT (1963) 48 ITR 67 (SC). In that particular case, the Supreme Court noted that company was neither a banker nor a money-lender and that the advances paid by that company to the other private company to purchase the shares could not be said to be incidental to the trading activities of that assessee and hence the amount due from the private company could not be described as a bad debt.
10. On an examination of the facts of the case, it cannot be dented that the ultimate intention of the assessee was to acquire the shares as well as the controlling interest of Minoo Biscuits Co. (P) Ltd. However, till date, no such acquisition had taken place, which has been acknowledged even by the CIT(A) by opining that the loss under consideration had not been incurred towards acquisition of any capital asset at all and hence the said loss was not allowable as a loss under the head "capital gains". Till the end of the relevant accounting year, the assessee had merely lent money to the extent of Rs. 12,00,000 to Minoo Biscuits Co. (P) Ltd. whatever may be the purpose for such lending. The discussions made by the AO himself stating the results of his enquiry made through his Inspector clearly show that Minoo Biscuits Co. (P) Ltd. had come under severe financial constraints and it would, therefore, be proper to consider the loan given by the assessee to that concern as having gone bad. Even the arbitrators also decided against the recoverability of the loan amount. Hence, the claim of the assesses towards the bad debt of Rs. 12,00,000 during the course of its money-lending business can be considered to be allowable.
Alternatively, the entire payment of Rs. 17,00,000 can be considered to have been reguired under the award of the arbitrator in order to maintain proper business relations and to avoid possible litigations and bad name in the market it was necessary for the assessee to abide by the instruction of the arbitrator. Thus, the payment of Rs. 17,00,000 which arose to the assessee as a result of the award of the arbitrator during the year under consideration, can be considered to be intimately connected with the regular business of the assessee.
Inasmuch as the assessee had not actually come up to the stage of acquiring any capital asset, it would not be proper to ascribe the loss incurred by the assessee in the process to any particular capital project. On the other hand, the entire amount seems to be allowable as revenue expense pertaining to the regular business of the assessee towards financing other concerns by way of loans and advances and/or in promoting companies/projects. We, therefore, reverse the orders of the lower authorities and direct that the claim of the assessee towards the loss of Rs. 17,00,000 in the process be allowed.
11. It is also discussed by the AO that the assessee had granted loan of Rs. 19.50 lakhs to M/s Papyrus Paper Ltd. during the period from 22nd Sept., 1983 to 24th Jan., 1984, i.e., in some earlier year. The AO discusses in this connection that the assessee claimed that amounts had been invested as an investor and was an adventure in the nature of trade. The assessee contended that inasmuch as a part of the business of the asses see-company was to advance loan, the aforesaid loan had been granted in the ordinary course of the business of the assessee.
The amount was not realisable and accordingly the same was written off as bad debt, in the accounts for this year. The AO discusses in this connection that the past records show that the Papyrus Paper Ltd. is a sister concern of the group and controlled and managed by the Kanoria families and that advance had been made to acquire shares and it had been decided that if the other company would fail to issue shares, interest shall be charged after certain period. The AO noted that no interest had actually been clerged till date. The AO thus held that whatever money had been advanced was towards acquiring controlling interest in the other company and hence, it was of the nature of capital expenditure. The AO discusses in this connection that the assessee-company did not make any initiative to realise the advance on the ground that the other company had gone under BIFR. The AO disallowed the claim of the assessee in respect of the amount of Rs. 19,50,000 on the ground that the amount had never been credited to the P&L a/c of the assessee and hence, the claim of the bad debts under Section 36(1)(vii) r/w Section 36(2)(t) was not allowable. Ultimately, the claim of the assessee towards this amount was disallowed.
In the first appeal also, the CIT(A) agreed with the AO that the object behind making the advance was to acquire substantial interest in M/s Papyrus Paper Ltd. The CIT(A) furthermore states that this advance was again not a part of any financing, money-lending, company/project promotion or rehabilitation pure and simple, Accordingly, he upheld the order of the AO in considering the loss to be on capital account.
So far as this issue is also concerned, we find that till the end of the accounting year under consideration, the amounts stood as loan advanced to M/s. Papyrus Paper Ltd. whatever might have been the ultimate intention behind the loan. There was also some prospect of deriving interest on the said loan. Till date, the loan amount had not been converted into acquisition of any capital asset. There is no doubt about the fact that money-lending is a part of the business of the assessee and the loan can be considered to have been given by the assessee in the course of the said regular business proceedings. Since Papyrus Paper Ltd. had already gone under BIFR, the loan must be considered as having become unrealisable. Furthermore, the assessee wrote this loan off in its account for the year under consideration and hence, in accordance with the amended provisions of Section 36(2)(i), the amount will have to be allowed as bad debt. Since again, the bad-debt pertains to a loan given in the course of the money-lending business, the question of the amount having ever been credited to the P&L a/c of the assessee would not arise. Therefore, so far as this amount of Rs. 19,50,000 is also concerned, we are inclined to accept the claim of the assessee. We, therefore, reverse the orders of the lower authorities and direct the AO to allow the claim of the bad debt in this regard in respect of the amount of Rs. 19,50,000.
12. Ground No, 14 relating to loss on sale of shares has not been pressed by the learned counsel for the assessee, at the time of the hearing of the appeal. Hence, this ground is being dismissed.
"For that learned CIT(A) was wrong in not allowing as business expenses, the amount of Rs. 1,17,982 incurred in course of and for the purpose of business though described as to charity and donations which were paid on request of business associates to maintain goodwill and to carry on business".
14. The AO discusses in this regard that the assessee had claimed a total amount of Rs. 1,17,982 under the head "charity and donations".
This included an amount of Rs. 6,00,000 paid to M/s Kothari Institute of Medical Sciences. The AO allowed the same under Section 35(1). The AO, however, noted that the balance donations were disallowable but that deduction under Section 80G will be considered in respect of eligible amount.
Before the CIT(A), it was tried to be argued that the donations represented costs for certain obligations to society and were prompted by requests from business associates and made for the purpose of retaining goodwill. The CIT(A), however, held that even then, the expenses retained the intrinsic character as donation. He, therefore, sustained the disallowance of Rs. 1,17,982.
Before us also, the learned counsel for the assessee has made the same argument as before the CIT(A), However, neither any evidence in support of the claim that the expenses had to be met on requests of business associates nor even any details of the said donations have been filed before us. Therefore, we are in agreement with the orders of the lower authorities that the claim of the assessee is not substantiated and hence the amounts represented nothing but charity and donations simplicitor. The appellate ground is thus being dismissed.
15. In ground No. 16, it is contended that the CIT(A) erred in not directing the assessee not to charge interests under Sections -234B and 234C. It has not at all been explained before us as to why the interests under Sections 234B and 234C need not be charged. Hence, we are dismissing this particular appellate ground, 16. In the result, the appeal filed by the assessee is partially allowed to the abovementioned extent.
1. I have perused the order written by my learned Brother the AM. I agree with his findings with regard to ground Nos. 2 to 5 relating to taxability of profits and gains derived by the assessee on sale of shares raised before the Tribunal. Although I agree on principle but I have passed separate order for the same in the case of Veena Kanotia in ITA No. 1829/Cal/1997 for the asst. yr. 1992-93. Hence, I do not think it proper to repeat the same again. So far as ground Nos. 6 and 7 are concerned, I beg to differ from my learned Brother for the following reasonings : 2. Ground No. 6 relates to the disallowance of service charges. I could not persuade myself to agree with the view taken by my learned Brother because no documentary evidence could be furnished at the assessment stage by the assessee relating to services rendered by the two persons, namely, Sri Vijay Kumar and Sri Sanjiv Taneja.
3. Regarding ground No. 7, i.e., the disallowance of travelling expenses, despite the queries made by the AO at the assessment stage, the assessee utterly failed to furnish the details of the travelling expenses relating to foreign travels for which the AO did not consider the same to be a tour for the business purposes. Hence, I think it proper to agree with the view taken by the learned CIT(A) and, therefore, uphold the order of the CIT(A) on these two points, i.e., ground Nos. 6 and 7.
1. On hearing of this appeal by the Division Bench of the Tribunal, "E"-Bench, Calcutta, the Members constituting the Bench agreed on all the issues, excepting ground Nos. 6 and 7, raised by the assessee before the Bench. In respect of the said grounds viz., ground Nos. 6 and 7, the Members have difference of opinion on the following points : "Whether, on the facts and in the circumstances of the case, the payment of service charges of Rs. 10,48,895 to Shri Sanjiv Taneja and Shri Vijay Kumar Surana, and the travelling expenses of Rs. 1,65,369 including those related to the travel of Shri Vijay Kumar Surana and Shri Sanjiv Taneja of the amount of Rs. 1,40,295 should be allowed as deductions ?" 2. Therefore, by virtue of the provisions of Section 255(4), we refer to the above points of difference to the Hon'ble President of the Tribunal for necessary action.
1. The appeal of the assessee for the asst. yr. 1992-93 had come up for hearing before the "E" Bench of the Tribunal. Since there was a difference of opinion amongst the Members constituting the Bench in regard to the following issues. I was nominated as Third Member by the Hon'ble President under Section 255(4) of the IT Act, 1961 : "Whether, on the facts and in the circumstances of the case, the payment of service charges of Rs. 10,48,895 to Shri Sanjiv Taneja and Shri Vijay Kumar Surana, and the travelling expenses of Rs. 1,65,369 including those related to the travel of Shri Vijay Kumar Surana and Shri Sanjiv Taneja of the amount of Rs. 1,40,295 should be allowed as deduction ?" 2. Parties have been heard and records perused. Though the facts have been stated in the base order, I consider it appropriate to reiterate the same in my own words for the sake of ready reference.
3. The appellant is a company and in the previous year relevant to the assessment year under appeal, it has derived income on sale of shares, profit on sale of investments, dividends, interest on loans and miscellaneous income. The assessment under Section 143(3) was made vide order dt. 31st March, 1995, by the AO. The assessee had claimed a sum of Rs. 10,48,595 as service charges. On scrutiny it was found by the AO that the assessee had debited the following amounts in the names of Shri Sanjiv Taneja and Shri Vijaya Kr. Surana : Against these payments, the assessee had adjusted recoveries from sister concerns as under : The assesses had claimed the difference between the payments and recoveries, i.e., Rs. 10,48,895 as a deduction under the head "service charges". It was claimed that the service charges were paid to Sri Sanjiv Taneja and Sri Vijay Kr. Surana of 20A. Waterloo Street, Kolkata-700 069, for the professional services rendered by them.
According to the assessee the aforementioned persons were experts in the field of financing money-lending, investment, leasing, hire-purchase, trading, consultancy agency, broking, etc. The AO made local enquiries through the Inspector of the IT Department but the abovementioned parties could not be traced. The assessee was informed about the outcome of the enquiry and had been asked to produce them for examination. The assessee could not produce the parties. It was claimed by the assessee that two letters were sent to these persons, copies of which were provided to the AO, but the aforementioned persons did not respond. The assessee did not confirm as to whether the letter sent by them to the aforementioned persons were served upon them or not. The assessee vide letter dt. 20th Jan., 1995, informed the AO that they had no contact with the two parties mentioned above and that the contract with them was for a limited period of one year and their whereabouts were unknown. It was, however, claimed that they had rendered services and helped the company in raising funds, deploying funds, buying and selling shares, contacting with various parties, mutual funds for buying and selling the shares in block. It was further claimed that their role of consultancy had benefited the company.
4. The AO disallowed the claim for service charges on the following grounds : (a) That the assessee could not produce any evidence in support of the claim of rendering services; (b) That the assessee-company had suffered losses in all the share transactions entered into by the company and, therefore, the claim that the company was benefited by the advice of so-called experts was unreliable.
(c) That the assessee-company paid money to these persons in the month of September, 1991, although the share transactions continued till the end of March, 1992.
(d) That there is no evidence to establish that the two persons have helped the company in procuring any fund for the company.
(e) That the assessee had sold shares of Russel Industries Ltd. and collected sum of Rs. 5,24,29,500 in September, 1991 and had, therefore, no scarcity of funds. That the assessee-company had made agreement with Minoo Biscuit (P) Ltd. for investment of Rs. 85 lacs, but the company had to retreat by paying a compensation of Rs. 17 lacs. That this proposal was mooted by one Shri P.K. Nahata, chartered accountant, and not by these two persons referred to above.
(g) That the assessee failed to establish that S/Sri Sanjiv Taneja and Vijay Kr. Surana were experts in the field in which the advice is claimed to have been given to the assessee and that the fact of the assessee having suffered losses proves otherwise.
(h) That mere payment by cheque does not establish the rendering of services for business considerations.
5. That the claim made by the assessee in regard to the travelling expenses also was not supported by any evidence. Air tickets in respect of Sri Sanjiv Taneja and Sri Vijay Kr. Surana could not be produced.
The bills in respect of which deduction is claimed by the assessee were in the name of M/s General Fibres Dealers (P) Ltd. the holding company of the assessee. The AO, accordingly, disallowed the claim of Rs. 10,48,895. Besides, out of the travelling expenses of Rs. 1,65,369, a sum of Rs. 1,40,295 was claimed to be in respect of Sri Sanjiv Taneja and Sri Vijay Kumar Surana. The AO made the disallowance of Rs. 1,42,245 which includes a disallowance of Rs. 1,950 under Rule 6D in respect of other persons.
7. On appeal to the Tribunal, the learned AM proposed to delete the disallowance of Rs. 10,48,895 for the reasons given by him in the proposed order in the case of sister concern of the assessee, viz., Shekhawati Rajputana Trading Co. (P) Ltd. It has been pointed out by the learned AM that it is very difficult to collect concrete evidence in respect of rendering of services of consultancy nature. According to the learned AM, in the light of the agreement between the parties and the payments having been made by the assessee, the deduction is permissible to the assessee. The learned AM has thus concluded. "Taking into consideration the overall view of the matters, therefore, we are of the opinion that there is no point in considering that the services were not actually rendered by the consultants and in that way in disallowing the payments made to them." 8. The learned JM, on the other hand, was unable to persuade himself to agree with the view expressed by the learned AM. According to the learned JM, the AO has a right to satisfy himself about the genuineness of the claim and since on being given opportunity the assessee having failed to establish the rendering of the services to the satisfaction of the AO, the disallowance, according to him, is justified, 9. Whereas the learned counsel for the assessee sought to support the order proposed by the learned AM, the learned Departmental Representative sought to support the order of the learned JM. The learned counsel for the assessee contended that there was an agreement between the appellant and Sri Sanjiv Taneja and Sri Vijay Kr. Surana.
The payments to the parties have not been doubted. The appellant had received their advice in conducting the business from time to time and the mere fact that the parties were not traced should not cloud the genuineness of the claim. According to the learned counsel, the aforementioned persons had undertaken the travelling also from time to time for the benefit of the assessee and, accordingly, the Revenue authorities were not justified in disallowing the claim. It was, accordingly, pleaded that the view expressed by the learned AM may be adopted and the issue regarding service charges be decided in favour of the assessee. When asked as to how the service charges have been apportioned amongst the sister concerns, the learned counsel replied that the total payments made to Sri Taneja and Sri Surana have been apportioned amongst the sister concerns in proportion of their share-holdings in Russel Industries (P) Ltd. The learned counsel also claimed that Sri Taneja and Sri Surana had advised the appellant not to sell the shares of Russel Industries (P) Ltd., but the company did not pay any heed to their advice and, accordingly, suffered losses.
10. In regard to the travelling expenses also, the claim, according to the learned counsel for the assessee, has wrongly been disallowed by the AO merely on the basis of travelling bills being in the name of General Fibres Dealers (P) Ltd. 11. On the other hand, it was pointed out by the Departmental Representative that all the three cases of the group with similar facts were decided by three different AOs and appeals were decided by three different CIT(A)'s. That all the AOs and all the CIT(A)'s have taken identical view that claim of the assessee was not allowable. It was further pointed out that there was no formal agreement between the parties for payment of commission. A letter had been written by Parasmani Investment Co. (P) Ltd. addressed to Sri Sanjiv Taneja and Sri Vijay Kr. Surana indicating the terms and conditions for the services to be rendered by them. The other sister concerns have signed the same letter binding themselves for payment of commission to the parties. It was further 'contended that the primary onus to establish that the services had been rendered by the parties was on the assessee which has not been discharged. In this connection, reliance has been placed on the decision of the jurisdictional High Court of Calcutta in the case of Vishnu Agencies (P) Ltd. v. CIT (1979) 117 ITR 754 (Cal).
According to the learned Departmental Representative, the assessee did not even produce circumstantial evidence much less direct evidence in support of the claim. Paries were not found at the address given by the assessee. It was further pointed out that two persons were claimed to be experts in the field of rendering services for advising in investments, etc. The company itself is in business for a long time and well experienced in the field. The company is having assistance in the form of trained employees and infrastructure for running the business.
It is strange that the assessee with vast experience in business required the services of the so-called experts only for one year. It was further pointed out that the period of 1991-92, i.e., the relevant previous year, was a boom year for share trading. Therefore, there was no advice required for trading in shares for experienced concerns. It was also pointed out that the company had sold the shares mainly of Russel Industries Ltd. which was a sister concern of the assessee. The assessee, according to the learned Departmental Representative was well-equipped to know the strength of the company and accordingly to deal with the shares of that company. It was further contended that Sri Taneja and Sri Surana were experts in the field, but in that case these persons should have been well-known as such. The learned Departmental Representative further pointed out that how the assessee has fixed the remuneration of Rs. 15,25,000 to each of the two persons before the rendering of services is not explained. Relying upon the decision of the Supreme Court in the case of Sumati Dayal v. CIT (1995) 214 ITR 801 (SC) it was contended that the AO is entitled to take into consideration the surrounding circumstances and human probability in appreciating and analysing the evidence produced in support of the claim. Since apart from purported agreement no other evidence either direct or circumstantial was produced, it was pleaded that the disallowance made by the AO may be confirmed.
12. I have given my careful consideration to the rival contentions. It is well established principle of law that the burden is upon the assessee to establish that any expenditure claimed as deduction was laid out or incurred for the purposes of business. In respect of the claim of payment of commission for services rendered, the burden is upon the assessee to establish that the services were rendered for which payment was made. Their Lordships of the Calcutta High Court in the case of Vishnu Agencies (P) Ltd. v. CIT (supra) held that the onus was on the assessee to establish that there were facts in existence which entitled it to a deduction and it was for the assessee to adduce evidence to show that services, if any, were rendered by the sole selling agents. In that case the AO had disallowed the claim on the ground that the assessee could not furnish evidence to prove that the agents had rendered any service to the assessee and that the services of the agents were necessary for entering into contracts with the Government departments. On further appeal to the Tribunal, the assessee contended that it should reconsider its decision in earlier years in so far as the sole selling agent had been assessed to tax on the receipt of the commission from the assessee and that the agreement between the assessee and its selling agent was a legally binding contract. The Tribunal held that the aforementioned factors were hardly material for the determination of the controversy, the issue being whether the selling agents had rendered any service to the assessee or were required to render any service and, accordingly, dismissed the appeal of the assessee. On these facts, their Lordships of the Calcutta High Court held that it cannot be said that the Tribunal had misdirected itself or omitted to consider any evidence or had relied on any irrelevant material in arriving at its conclusion. The earlier decision of the High Court in the case of Vishnu Agencies (P) Ltd. v. CIT (supra) was referred to and followed by the Hon'ble High Court, 13. Similar view has been taken by their Lordships of the Gauhati High Court in the case of Assam Pesticides & Agro Chemicals v. CIT (1997) 227 ITR 846 (Gau). Their Lordships held "Mere payment by itself would not entitle an assessee for deduction of the said expenditure unless the same was proved to be paid for commercial considerations. The onus of proof at all relevant times rests upon the assessee. The law does not prescribe any quantitative test to find out whether the onus in a particular case has been duly discharged. It all depends on the facts and situations of the case." 14. The view expressed by their Lordships of the Calcutta High Court and that of the Gauhati High Court referred to above, is supported by the view of their Lordships of the Supreme Court in the case of Lachminarayan Madanlal v. CIT (1972) 86 ITR 439 (SC). Their Lordships have held as under : "The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the ITO to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the ITO to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under Section 37 of the Act." 15. In the light of the above well-settled judicial principles of law, let me proceed to consider as to whether in this case the assessee can be said to have discharged the onus for establishing the claim of the payment having been made for the services allegedly rendered by Sri Sanjiv Taneja and Sri Vijay Kr. Surana. The assessee has claimed that there was an agreement between the appellant and S/Sri Sanjiv Taneja and Vijay Kr. Surana. Copy of the same is placed in the paper book. A perusal of the same reveals that it is a letter on the letter-head of Parasmani Investment Co. (P) Ltd. i.e., the appellants, dt. 15th April, 1991, addressed to Sri Vijay Kr. Surana and Sri Sanjiv Taneja of 20A.Waterloo Street, Kolkatta 700069. The subject-matter of the letter reads as under : "Agreement for availing your expertise and professional services in connection with our business and business of our associates." A further perusal of the aforementioned letter reveals that the appellant-company has mentioned the services to be rendered by the recipient of commission and also reference has been made of the associate concerns of Parasmani Investment Co. (P) Ltd. to whom, as per the letter, the services were also to be provided. This letter is purported to have been signed by Sri Vijay Kr. Surana and Sri Sanjiv Taneja with the words "we agree with the above terms". It is interesting to note that there is no reference of the business name of Sri Taneja and Sri Surana, if any, or their parentage, etc. whatsoever in the purported agreement. The parties were not traceable at the given address. Apart from the above letter, no evidence was produced before the AO. Moreover, the surrounding circumstances and human probabilities also do not inspire confidence about the genuineness of the claim. The assessee has claimed to have paid a sum of Rs. 30 lacs (Rs. 15 lacs each) to Sri Sanjiv Taneja and Sri Vijay Kr. Surana and Rs. 25,000 each for expenses. This amount has been apportioned amongst the various associates not on the basis of any services rendered but on the basis of shareholdings of various concerns in Russel Industries Ltd. Corresponding deductions have been claimed in respective assessments.
It was claimed that the aforementioned persons were experts in the field of financing, money-lending, investment, leasing, hire-purchases, trading, consultancy agency, broking, etc. The AO made local enquiries through the Inspector of the IT Department, but the parties could not be traced. The assessee was informed about the outcome of the enquiry and had been asked to produce them for examination. The assessee could not produce the parties. It was claimed by the assessee that two letters were sent to these persons, copies of which were provided to the AO, but the aforementioned persons did not respond. The assessee did not confirm as to whether the letters sent by them to the aforementioned persons were served upon them or not. The assessee vide letter dt. 20th Jan., 1995, informed the AO that they had no contact with the two parties mentioned above as the contract was for a limited period of one year and their whereabouts were unknown. It was, however, claimed that they had rendered services and helped the company in raising funds, deploying funds, buying and selling shares, contacting with various parties, mutual fund for sale in block of shares and buying shares in block. It was further claimed that their role of consultancy had benefited the company.
16. The facts on record, however, suggest to the contrary, The assessee-company had suffered losses in all the share transactions entered into by them. The assessee-company paid money to the two named persons in the months of September, 1991 although the share transactions continued till the end of the March, 1992. That goes against the claim that the payment was made for services rendered.
There is no evidence on record to establish that they have helped the company in procuring any fund for the company. The assessee had sold shares of Russel Industries Ltd. and collected sum of Rs. 5,24,29,500 somewhere in September, 1991 and had, therefore, no scarcity of funds.
With regard to the investment with others, the assessee-company had made agreement with Minoo Biscuits (P) Ltd. for investment of Rs. 85 lacs, but the company had to retreat by paying a compensation of Rs. 17 lacs. The proposal for the above deal was mooted by one Sri P.K.Nahata, Chartered Accountant and not by these two persons referred to above, as pointed out by the AO. The assessee failed to establish that S/Sri Sanjiv Taneja and Vijay Kr. Surana were experts in the field in which the advice is claimed to have been given to the assessee. The fact that the assessee had suffered losses proves otherwise. As pointed out elsewhere in the order, it is well-settled that mere payment by cheque does not establish the rendering of services for business considerations. In regard to the travelling expenses also, the AO has pointed out that the claim made by the assessee is not supported by any evidence. Air tickets in respect of Sri Sanjiv Taneja and Sri Vijay Kr.
Surana could not be produced. The bills in respect of which deduction is claimed by the assessee were in the name of M/s General Fibres Dealers (P) Ltd. the holding company of the assessee and not in the name of the appellant-company.
17. At this stage I consider it relevant to refer to the observations of the learned AM in his order that it is very difficult to furnish evidence for the actual rendering of services by the consultants. One may not possibly have any quarrel with the proposition that in certain circumstances it may not be easy to furnish direct evidence for rendering of consultancy services. However, there should not be any difficulty for the assessee for producing circumstantial evidence in support of the claim. For example, if payment is made to a doctor by a patient it would be tersonable to presume that the doctor has provided his services to patient. What is required to be established is that there was a patient who availed the services of the doctor. Similarly, if there is a legal problem one might take the services of the lawyer.
In respect of payments to the lawyer, it would be sufficient to establish that there was a problem that was attended to by the lawyer.
In the aforementioned cases, two things are of importance. One is that payment is made to professionals and secondly the rendering of services by such professionals once established, it will not be necessary to prove the exact nature of advice given by the professionals. In the present case it has neither been established that the payment has been made to any professionals nor has the necessity of engaging them been established. Firstly, the assessee could have established that the parties to whom the commission is claimed to have been paid are experts in the field of financial consultants. Secondly, had they been assessed to tax, it would not have been difficult for the assessee to establish that the payments made had been reflected by the recipients in their taxable receipts. Thirdly, their antecedents and any correspondence with them could have been produced. Fourthly, the necessity of engaging them could also be established. In this case, even the identity of the recipients has not been established. There is not iota of evidence on record to establish that the recipients are experts in the field as financial consultants. There is no evidence on record to establish that they are assessed to tax. No basis is forthcoming for fixation of the guantum of commission. It is not explained as to why the assessee required the services of experts for the year under appeal. Neither such services were required in the past nor in the subsequent assessment years.
18. In my considered view, the AO was justified in disallowing the claim insofar as firstly the assessee failed to establish the genuineness of the claim of rendering of services and secondly the AO on his own could also not make enquiries for the reasons that the parties were not found at the given address. The assessee had been given sufficient opportunity to establish the genuineness of the claim of rendering of services by Sri Taneja and Sri Surana. All these factors taken together do not leave any doubt in my mind that the assessee has miserably failed to discharge the onus which, according to Hon'ble High Court of Calcutta in the case of Vishnu Agencies (P) Ltd. (supra) and their Lordships of the Supreme Court in the case of Sumati Dayal (supra) is upon the assessee, I, therefore, agree with the conclusion of the learned JM and hold that the AO was justified in disallowing the claim relating to service charges.
19. Similarly, the travelling expenses claimed in respect of Sri Taneja and Sri Surana were also disallowed by the AO for lack of evidence to establish that the expenses were incurred for purposes of business. The facts and circumstances described by the AO do not inspire confidence in support of the genuineness of the claim. I, therefore, agree with the conclusion of the learned JM in regard to the claim of service charges to Sri Sanjiv Taneja and Sri Vijay Kr. Surana as also the travelling expenses claimed in respect of the said persons.
19. The orders passed in this case may be placed before the Bench for passing consequential order in accordance with majority view.
1. On a difference of opinion between the members originally constituting this Bench, then point of difference of opinion was referred to Hon'ble Vice President (Kolkata Zone) as Third Member under Section 255(4) of the IT Act.
2. In accordance with the majority view after duly taking into account the opinion expressed by the learned Third Member, we hold that the payment of service charges of Rs. 10,48,895 to Shri Sanjiv Taneja and Shri Vijay Kumar Surana, and the travelling expenses of Rs. 1,65,369, including those related to the travel of Shri Sanjiv Taneja and Shri Vijay Kumar Surana amounting to Rs. 1,30,295, should not be allowed as a deduction to the assessee. Grounds No. 6 and 7 are, accordingly, dismissed.