Income Tax Appellate Tribunal - Mumbai
Enam Financial Consultants (P) Ltd. vs Asstt. Cit on 28 November, 2005
ORDER
V.K. Gupta, A.M.
1. This appeal filed by the assessee is directed against the order of Commissioner (Appeals)-II dated 3-12-2001 at Mumbai for the assessment year 1998-99.
2. The assessee has raised following grounds of appeal:
A. Claim for damages paid of Rs. 36,60,000 for breach of underwriting arrangement:
(1) On the facts, in the circumstances of the case and in laws, the learned Commissioner (Appeals) failed to appreciate that:
(a) In terms of MODEL underwriting agreement as per the SEBI Regulations and also the actual underwriting agreement entered into between the appellant as an underwriter and the Issuer Company M/s. Niwas Spinning Mills Ltd.:
(i) failure on the part of an underwriter to honour its obligation to subscribe to devolved securities and
(ii) the resultant claim for damages.
Are integral part of normal underwriting business:
(b) For the reasons stated, there was a genuine dispute between the Issuer Company M/s. Niwas Spinning Mills Ltd. and the appellant as an underwriter.
(c) In terms of legal provisions, particularly Section 73 of the Indian Contract Act, payment of compensation for loss or damage caused by breach of contract is wholly legal and permissible and therefore, neither prohibited by law nor an offence.
(2) On the facts, in the circumstances of the case and in law, the learned Commissioner (Appeals)-II, Mumbai erred in holding that:
(a) Not subscribing to devolved security is not normal activity of underwriting business:
(b) The payment of Rs. 36,60,000 by the appellant to the Issuer Company M/s. Niwas Spinning Mills Ltd. was a payment which is prohibited by law and accordingly, in invoking Explanation to Section 37(1).
(c) The damages of Rs. 36,60,000 paid as above in terms of the underwriting agreement as well as statutory legal provisions was not a loss arising in the normal course of underwriting business and hence, not allowable under Section 29 of the Income-Tax Act, 1961.
B. Devolvement loss of Rs. 1,04,000
1. On facts, in the circumstances of the case and in law, the learned Commissioner (Appeals)-II, Mumbai erred in holding that the said loss of Rs. 1,04,000 arising on account of marking devolved securities to market price is disallowable by invoking Explanation to Section 73 of the Act.
C. Disallowances of certain expenses by the learned assessing officer on ad hoc basis:
1. On facts, in the circumstances of the case and in law, the learned Commissioner (Appeals)-II, Mumbai erred in confirming ad hoc disallowances of Rs. 50,000 out of General Expenses Rs. 20,000 out of staff welfare expenses and Rs. 30,000 out of Conveyance Expenses."
3. We have heard both the parties, perused the records and other applicable legal position.
3.1 Briefly stated, facts of the case are that the assessee filed return of income on 26-11-1998 declaring a loss of Rs. 3,61,169. The case was selected for scrutiny and the assessment was completed determining total income of the assessee at Rs. 35,02,830. The major disallowance was made of Rs. 36,60,000 being loss on account damages paid for breach of underwriting agreement.
4. The assessee a category 1 Merchant Banker, is engaged in financial consultancy, investment advisory services and managing new issues of shares, debentures and other capital market, market investments both for public and private sector. During the year under consideration, the assessee claimed loss of Rs. 36,60,000 paid to M/s. Niwas Spinning Mills Ltd. (hereinafter referred to as NSML) on account of devolvement of issue of FCDs by NSML. The assessee had entered into an underwriting agreement on 6-2-1995 with NSML in the matter of public issue of Rs. 54,46,875 zero interest fully convertible debentures (a) Rs. 80 each for cash at par aggregating to Rs, 43,575 crores, wherein the amount payable on application was Rs. 20 per FCD. The issue opened for subscription on May 2, 1995 and closed on May 12, 1995. However, the public issue was under- subscribed to the extent that issue received approximately 4 per cent response from the investing public. In terms of the underwriting agreement, the assessee had agreed to underwrite /procure subscription of 1,87,500 FCDs amounting to Rs. 1,50,00,000 and the amount devolved on the assessee was for Rs. 1,86,350 FCDs amounting to Rs. 1,49,08,000. The NSML issued development notice to all the underwriters associated with the public issue including the assessee. As no mutually agreeable decision was arrived at between the assessee and NSML, NSML referred the matter to the Arbitration committee of BSE by invoking Clause 20 of the underwriting agreement. Further, NSML issued several letters to SEBI and various stock exchanges requesting them to initiate appropriate action against all the underwriters including the assessee, who had failed to fulfil its underwriting obligations in respect of the said public issue. A total claim for Rs. 1,96,80,060 was made by NSML against the assessee which included the amount of interest @ 32 per cent for one year on the amount of devolved FCDs and other miscellaneous expenses and it was also mentioned that further interest would be charged on the above from the assessee till the date of actual payment. The assessee-company, pending arbitration proceedings and other legal actions taken by the NSML, entered into a mutual settlement with NSML whereby the assessee paid Rs. 36,60,000 to the NSML as damages and NSML withdrew all proceedings against the assessee. This amount has been claimed as business loss against the income from underwriting commission. The assessing officer enquired regarding this loss. The assessing officer, based upon the submissions made by the assessee reached to the conclusion that the FCDs were commodities within the meaning of Section 43(5) and since there was no actual delivery of the debentures, the transaction had to be treated as speculative within the meaning of Section 43(5) of the Act and, therefore, the aforesaid payment was not allowable against its regular business income. The assessee carried the matter in appeal before the learned Commissioner (Appeals) who was of the opinion that the assessee was under statutory obligation to underwrite the FCDs and by not fulfilling such obligations it violated the relevant Regulations which attracted penalty though not necessarily in the monetary form but which could have caused other major disadvantages to the assessee and in this background, the assessee rushed to settle the matter to avoid the penalty. Thus, the learned Commissioner (Appeals) held that the expenditure incurred by assessee come within the ambit of the Explanation below Section 37(1) which provide for disallowance of any expenditure incurred for any purpose which was an offence or prohibitive by law. Accordingly, the learned Commissioner (Appeals) sustained the disallowance and recorded his findings as under:
It would be seen that the impugned loss did not arise on account of devolvement of debentures which event never took place as the appellant refused to subscribe its quota of debentures under the underwriting arrangement. The normal risk involved in the underwriting business is by way of compulsion to subscribe to unprofitable shares. But flouting of obligation is not normal activity of underwriting business. The Supreme Court decision in the case of CIT v. U.P. State Industrial Development Corporation 225 ITR 703, cited by the appellant is of no avail because it did not deal with a situation arising from the flouting of underwriting agreement. The payment had to be made by the appellant for not fulfilling its underwriting obligation which impaired the interest of the company as well as general money market and therefore, it could not be said to represent a loss arising in the normal course of underwriting business. Besides breach of underwriting contract with the company, it also involved violation of regulations under the SEBI Act and it is this latter aspect that compelled the appellant to make the payment and settle the matter with the company. It was therefore, an expenditure for an illegal conduct of not honouring underwriting contract and thus not observing monetary disciple. Hence, it was for a purpose prohibited by the SEBI regulations issued under the authority of the SEBI Act. The amount was therefore, not allowable as deduction by virtue of Explanation below Section 37(1). In any case, it was not a loss arising in the normal course of business and hence not allowable under Section 29 of the Act. As a corollary, it was not eligible for carry forward and set off against the speculation profit of the future years. This may technically involve enhancement. Hence, an opportunity was given to the appellant vide order sheet entry dated 15-11-2001 to show cause as to why the loss should not be treated as disallowable outright and not as a speculation loss. The reply of the appellant dated 26-11-2001 was duly considered. It is not acceptable for the reasons mentioned above.
In view of the above finding that the amount was not allowable by virtue of Explanation below Section 37(1) or not allowable under Section 29 as a loss arising in the normal course of business, it is not necessary to go into the controversy whether it was a loss from purchase and sale of shares of other companies within the meaning of the Explanation below Section 73 which deems business of companies consisting in the purchase and sale of shares as speculation business for the purpose of set off loss from speculation business under Section 73 of the Act."
5. The learned Counsel for the assessee contended that the assessee claimed loss of Rs. 36,60,000 paid as damages /compensation for breach of underwriting arrangement under Section 37(1) of the Act against the regular business income. The assessing officer disallowed the above stated claim by invoking Section 43(5) of the Act. He submitted that the assessee was category-1 Merchant Banker and was engaged in the activities of Issue Management, Advisor, Consultant, Manager, Underwriter, Port Folio Manager in accordance with the provisions of SEBI (Merchant Bankers) Regulations, 1992. He further drew our attention to Regulation 36 which provides for suspension/ cancellation of the licence of the Merchant Banker if Merchant Banker fails to carry out its obligations. He further drew our attention to Clause 6(b) Schedule III of the Code of Conduct (Page 36 PB II) which restricts Merchant Banker from dealing in the Securities of the Client in routine manner. The learned Counsel further stated that the underwriting of shares, debentures etc. is the assessees business and drew our attention to the Clause 11(b) of the Underwriting Agreement between assessee and the NSML placed at pages 15 to 17 of paper Book - 1 outlining the legal rights available to NSML for the failure of the assessee to perform its obligations and also Clause 20 of the same Agreement at page 16 of the Paper Book - I which provided for mechanism of resolution of dispute between both the parties. He also drew our attention to the SEBI approved model underwriting agreement and contended that the Underwriting Agreement between the assessee and the NSML was wholly based on model agreement so devised by SEBI. The learned Counsel contended that even the SEBI approved model underwriting agreement contained the provisions for settlement of disputes which could arise between underwriter and the issuer company. He also drew our attention to the relevant provisions of Securities Exchange Board of India (Underwriters) Rules, 1993 which provided for the general obligations and responsibilities and procedure for action in case of default committed by the underwriter. On the basis of the above provisions, the learned Counsel contended that it was simply a case of breach of commercial obligation arising under a contract and, therefore, no violation of public policy or any law was involved. It was further pointed out that in the impugned transaction, it was not only the assessee but all the underwriters did not discharge their commitments. The learned Counsel further contended that the issue under dispute was squarely covered in favour of the assessee by the decision of the Honble Supreme Court in the case of CIT v. Shantilal (P) Ltd. , wherein it was held that award by an arbitrator on a dispute between parties was allowable as business loss. It was further contended that in the present case there was no award by an arbitrator but there was a mutual settlement between parties in the dispute even then the impugned loss was allowable as damages in view of the decision of the Honble jurisdictional High Court in the case of CIT v. Asian Chemical Co. . It was further contended that it was a case of payment of compensation for breach of contract, hence it was not a speculative transaction within the meaning of Section 43(5) of the Act and for this proposition, reliance was placed on the decision of Honble jurisdictional High Court in the case of CIT v. Jaydwar Textiles .
6. The learned departmental Representative initiated the discussion by stating that debentures were commodities and, therefore, they were covered by provisions of Section 43(5) of the Act and for this proposition, he relied on the decision of A Bench, Delhi of the Tribunal in the case of ANZ Grindlays Bank v. Dy. CIT (2004) 88 ITD 53. It was contended that the assessee did not perform its obligation accordingly, the loss arising as a result of such non-performance could not be called a business loss. The learned Departmental Representative further referred the provisions of Companies Act relating to underwriting commission wherein the term underwriting has been stated by commission of enquiry as follows:-
The word "underwriting" means that a person agrees to take up shares specified in the underwriting agreement if the public or other persons fail to subscribe for them. Consideration for this contract takes the form of payment of commission whether or not the underwriters are called upon to take up any shares. Underwriters are thus paid for the risk they expose themselves to in the placing of shares before the public."
On the basis of above, the learned Departmental Representative contended that the underwriters are paid underwriting commission for the risk they take in placing of shares before public which may result into purchasing of securities themselves if the public does not subscribe and Underwriting activity inherently involves speculation, therefore, settlement of Underwriting obligations without taking delivery was essentially of speculative nature and the loss arising on this account was speculation loss and for this proposition, he relied on the decision of Tribunal in the case of Comfund Financial Services (I) Ltd. v. Dy. CIT (1998) 67 ITD 304. The learned Departmental Representative further contended that the case of Shantilal (P) Ltd. (supra) was not applicable to the facts of the case because there was no award by Arbitration in the present case. It was also contended that the conduct of the assessee was against public policy because assessee was under statutory obligation to take subscribe for purchase of FCDs underwritten by the assessee. In the rejoinder, the learned Counsel submitted that the amount was paid in June, 1997 to resolve the dispute much after the close of public issue of FCDs and it was settlement of dispute and not of the contract and, therefore, it could not be construed as the transaction of speculative nature within the meaning of Section 43(5) of the Act and referred to the decision of the Tribunal in the case of ANZ Grindlays Bank cited supra. It was further contended that breach of contractual obligation was not against public policy in the sense that the decision to not to subscribe was a commercial decision based on business realities and it was permissible as per provisions of underwriting agreement subject to right of the client to claim damages for any loss suffered by him. Finally, it was contended that the penalty was leviable under SEBI Regulation and which was not imposed mainly because of mutual settlement between the assessee and the NSML, therefore, Explanation to Section 37(1) was attracted.
7. We have considered the submissions made by both parties, material on record, orders of authorities below and also applicable legal provisions. Admittedly the assessee is engaged in the field of Securities Market and is a category-I merchant banker entitled to work as an underwriter. As per Clause 2(f) of Securities and Exchange Board of India (Underwriters) Rules, 1993 "underwriter" means a person, who engage in the business of underwriting of an issue of securities of a body corporate. Clause 2(g) of the same Rules defines "underwriting" as an agreement with or without conditions to subscribe to the securities of a body corporate when the existing shareholders of such body corporate or the public do not subscribe to the securities offered to them. As per Clause 15(3) of the Securities & Exchange Board of India (Underwriters) Regulations, 1993, underwriter in the event of being called upon to subscribe for securities of a body corporate pursuant to an agreement referred to in clause (b) of Rule 4 shall subscribe to such securities within 45 days of receipt of such intimation from such body corporate. The issue was opened on 2-5-1995 and was closed on 12-5-1995. The issue was devolved and pre-intimation was given to the assessee by NSML on 13-5-1995. A final development notice was duly served on the assessee, by the auditors of NSML and statement of underwriting obligation was served on 7-6-1995 asking the assessee to subscribe or procure the application for 1,86,350 FCDs devolved on the assessee before 10-7-1995. The assessee did not discharge their obligation. Finally a copy of notice dated 15-7-1996 referring the dispute to the arbitration committee of BSE was served by NSML through their advocates making a claim of Rs. 1,96,80,060. NSML also lodged a complaint with SEBI on 6-5-1997 to take appropriate action against all the underwriters including the assessee who had failed to fulfil their devolvement liability in respect of public issue. In the meanwhile a negotiated settlement was arrived between the parties whereby the assessee paid Rs. 36,60,000 to NSML and on 27-6-1997, NSML issued a certificate wherein it was mentioned that the disputed matter of devolvement liabilities in respect of public issue of FCDs had been settled and the assessee stood fully discharged from their underwriting obligation. Copy of the same certificate was sent to the Stock Exchanges at Mumbai, Baroda and Bangalore and the same was also submitted to SEBI who passed an order dated 8-5-1998, wherein the penalty recommended by the enquiry officer was set aside.
In this background the question before us is whether it was a settlement of contract or a settlement of dispute arising out of breach of contract between the parties. If it is a case of settlement of dispute between the parties then it would not amount to speculative transaction but if it is a settlement of contract and then it would be speculative transaction. Before dwelling upon this issue we would like to mention that FCDs are commodities within the meaning of Section 43(5) of the Act", and therefore, the contention of the assessee that FCDs are not commodities stands rejected. Once it is held that FCDs are commodities then the nature of transaction requires determination. The revenue has placed reliance on the decision of Comfund Financial Services (I) Ltd. in support of its contention that compensation paid for breach of the contract is speculative loss. We are afraid that this proposition is not applicable to the case on hand because in the case relied by the revenue these observations were made with reference to the termination of transactions on the due date by way of settlement of contract and making payments of the difference amount by the assessee and there was no actual breach of contract. However, the present case is of non-performance of the contractual obligation resulting into breach of contract and the settlement of the dispute relating to the same much after the last date specified for the actual performance. As pointed out by the learned Counsel appearing on behalf of the assessee, the Tribunal in this case in respective of other transaction which was settled after the due date of performance of the contract that the same was breach of contract and hence not covered as speculative transaction within the meaning of Section 43(5) of the Act and which supports the case of the assessee.
Section 43(5) refers to "contract settled". The assessee has relied upon the decision of Honble Apex Court in the case of Shantilal (P) Ltd. (supra), wherein the court held that in a case of breach of contract and dispute between the parties if the damages are awarded as compensation by arbitration award then it would amount to the settlement of dispute between the parties whereas Section 43(5) speaks of settlement of contract and therefore, in case of breach of contract provisions of Section 43(5) will not come into play. In this case, the Honble Supreme Court settled the controversy which arose due to divergent opinions of the Honble Calcutta High Court in the case of CIT v. Pioneer Trading Co. (P) Ltd. (1968) 70 ITR 347 and the Honble Madras High Court in the case of R. Chinnaswamy Chettiar v. CIT . The Honble Calcutta High Court in the aforesaid case of Pioneer Trading Co. Ltd. had held that "contract settled" means "contract settled before breach". After breach of contract the cause of action is no longer based on the contract it self but on its breach. This decision of the Honble Calcutta High Court was followed by Honble Mysore High Court in the case of Bhandari Rajmal Kushalraj v. CIT . However, the Honble Madras High Court took a contrary view on the point and held that the word "settled" was used in Section 43(5) without any restriction as to whether it was before or after the breach of contract and for the purpose of applicability of Section 43(5) what was material was whether there was actual delivery or transfer of commodity when the contract was settled. The Honble Apex Court in the case of Shantilal (P) Ltd. (supra) relied by the assessee upheld the decision of Honble Calcutta High Court in the case of Pioneer Trading Co. (P) Ltd. (supra). In the instant case undisputedly there is non-performance by the assessee which resulted into dispute between the two parties and subsequently it was settled mutually although the arbitration proceedings had also been initiated by the aggrieved party, (NSML).
The learned Departmental Representative had contended that in this case there was no award by an Arbitration Tribunal, therefore, the decision of the Honble Apex Court in the case of Shantilal (P) Ltd. (supra) was not applicable, while the learned Counsel appearing on behalf of the assessee relied on the two decisions of the Honble jurisdictional High Court in the cases of Asian Chemical Co. (supra) and Jaydwar Textiles (supra), wherein the compensation paid for settlement of breach of contract was held as the transaction of nonspeculative character. In our considered opinion the Honble Apex Court on the facts of the case referred to arbitration award and did not restrict the deductibility of claim of damages only to such cases for the reason that the Honble Apex Court approved the decision of Honble Calcutta High Court in the case of Pioneer Trading Co. (P) Ltd. (supra) and also the decision of Mysore High Court wherein the compensation was not paid as a consequence of arbitration award. This aspect is further settled by the decision of Honble jurisdictional High Court in the case of Asian Chemical Co. (supra) relied on by the assessee wherein the Honble Court, after considering the decision of Honble Supreme Court in the case of Shantilal (P) Ltd. (supra) held that loss on account of settlement following breach of contract was not speculative loss. In a recent decision the Honble Delhi High Court in the case of CIT v. Hans Machoo & Co. , has also held as under:
Section 43(5), however, speaks of a settlement of the contract and a contract is settled when it is either performed or the promise dispenses with or remits, wholly or in part, the performance of the promise made to him or accepts, instead of it, any satisfaction which he thinks fit. A contract can be said to be settled if instead of effecting the delivery or transfer of the commodity envisaged by the contract, the promise, in terms of Section 63 of the Indian Contract Act, 1872, accepts any satisfaction which he thinks fit. It is quite another matter when instead of such acceptance the parties raise a dispute and no agreement can be reached for a discharge of the contract. There is a breach of the contract and by virtue of Section 73 of the Indian Contract Act, 1872, the party suffering by such breach becomes entitled to receive from the party who broke the contract compensation for any loss or damage caused to him thereby. The award of damages for breach of a contract is not the same thing as a party to the contract accepting satisfaction of the contract otherwise than in accordance with the original terms thereof. What is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties.
The word "settled" or "settlement" in connection with the contract has not been defined in the Income Tax Act or in the Contract Act or in the Sale of Goods Act, or in any other statute. The proper meaning to be given to the words "contract settled" in the definition clause would be "a contract determined or concluded or disposed of". By the use of the expression "settled" what is intended to be dealt with is a case of performance of contract and not non-performance:
Held that, in the instant case, there was breach of contract and, therefore, damages had to be paid. When a contract is broken there can be no cause of action founded on a contract itself which can be said to be capable of settlement. Hence, the Tribunal was correct in allowing the deductions in the computation of the assessees income from business."
Thus on the basis of above discussion it emerges that there is clear distinction between the "settlement of contract" and "settlement of dispute arising out of contract" and non-performance cannot be termed as settlement of contract and present case is of non-performance, therefore it is a case of settlement of dispute arising as consequence of breach of contract and accordingly, the loss arising on account of settlement of dispute is allowable as business loss.
Before parting with the issue we would like to deal with the contention of the revenue that underwriting activity was more or less that of a speculator, therefore, the underwriting business was speculation business and any loss arising there from was to be treated as speculation loss within the meaning of Explanation to Section 73 of the Act. This contention also does not hold water because in the present case, we are concerned with the FCDs which are not shares until they are converted into shares and Section 73 applies only to sale and purchase of shares. The assessee is undisputedly engaged in the business of merchant banker as authorized by SEBI, therefore, the activities of underwriting of shares carried on by the assessee are its normal business activities even Clause 2(f) defines mentioned earlier SEBI underwriter as a person who is engaged in the business of underwriting. Once it is established that the assessee is engaged in the business of underwriting then any loss arising out of an agreement executed by the assessee in the course of its activities is the in substance business loss and is thus allowable. The term business inherently involves risk and there is always some element of risk in all businesses. Therefore, merely on the ground that assessee takes a risk of subscription to shares as part of underwriting obligation, the underwriting business as a whole cannot be termed as speculation business. What is relevant is the nature of activity and resultant earnings. Underwriting activity is a professional service in the capital market which is rendered to earn commission and is not under taken to earn profits by way of speculation in share trading, Further, the present dispute is connected with the settlement of dispute of breach of contract and not with the loss on purchase/sale of shares, therefore, provisions of Section 73 of the Act are not applicable at the very outset.
Learned Commissioner (Appeals) disallowed the loss on the ground that the assessee settled the dispute that had arisen on account of violation of the SEBI Regulations and therefore, Explanation below Section 37(1) inserted by Finance Act with retrospective effect from 1-4-1962 was attracted. The learned Commissioner (Appeals) held that the said Explanation covered all payments for the purpose which are prohibited by law irrespective of the fact that whether they are made to the Government or to any other party. According to the learned Commissioner (Appeals) in essence breach of underwriting contract also involved violation of SEBI Regulations which compelled the assessee to make the payment and settle the matter. Therefore, it was for a purpose prohibited under SEBI Regulations. In this regard learned Counsel appearing on behalf of the assessee drew our attention to the model underwriting agreement devised by SEBI which envisages a situation of failure on the part of the underwriter and contended that the agreement between the assessee and NSML was based upon the same and therefore, the breach of contract by way of failure on the part of the underwriter to subscribe to the devolved FCDs could not be termed as an act prohibited under the law. The consequence which the assessee, at the most could have been burdened with was in the form of cancellation /suspension of the licence to act as an underwriter and that too would have happened only if the assessee would have been found guilty in accordance with the SEBI Regulations. We are of the considered opinion that the non-performance of commercial agreement cannot be termed as an act prohibited under any law particularly in view of the provisions of Indian Contract Act, 1872 which deals such situations. Even if it is assumed that it was a dishonest breach of contract by the assessee even then it would make no difference so long it is established that the damages paid by the assessee were incidental to the assessees trade. The conduct of the assessee based upon business realities may be unethical but is not illegal. The assessee has paid compensation to the aggrieved party as a consequence of mutual settlement and not any penalty to the Government, therefore, the penal consequence, if any, which could have flown from the violation of SEBI Regulations are not relevant as far as the allowability of this amount is concerned. In view of the above discussion, we hold that the learned Commissioner (Appeals)s order is not in accordance with law, therefore, we reverse the same. Thus, this ground of the assessee is accepted.
8. The issue raised in ground No. 2 is regarding the disallowance of Rs. 1,04,000 on account of depreciation in the value of devolved securities. In the course of assessment proceedings, the assessing officer noted that the assessee had claimed the loss in Profit & Loss account on account of depreciation in value of stock carried forward by the assessee from the earlier years though there was no actual sale and purchase. The assessing officer relying on the decision of Honble Calcutta High Court in the case of CIT v. Sun Distributors & Mining Co. Ltd. (1993) 68 Taxman 223, treated loss as pertaining to speculation business carried on by the assessee within the meaning of provisions of Section 73 of the Income Tax Act. The assessee in appeal before the learned Commissioner (Appeals) and reiterated the submissions made before the assessing officer. It was also contended that the assessee was a Merchant Banker and was seddled with such securities as devolved stock in the course of carrying of underwriting activities. The learned Commissioner (Appeals) after considering the submissions of the assessee was of the opinion that the loss claimed by assessee fell within the ambit of Section 73 of the Act and accordingly, confirmed the action of the assessing officer.
9. The learned Counsel appearing on behalf of the assessee besides reiterating the submissions made before the learned Commissioner (Appeals) contended that there was no intention on the part of the assessee for acquiring/purchasing the securities, with a view to earn profits. Thus, the activity of acquiring devolved stock and disposing of the same in due course of time, cannot be termed as to hold that any part of the business of the assessee consists of dealing in the purchase and sale of shares of other companies and accordingly, Section 73 of the Act is not applicable. It was further contended that this section is applicable to dealing in the purchase and sale of shares and not on debentures and in support of his contention, relied on the decision of the Honble Supreme Court in the matter of Appollo Tyres Ltd. v. CIT , wherein the Honble Apex Court held that "Units of UTI were not shares" within the meaning Explanation to Section 73 of the Act.
10. The learned departmental Representative, on the other hand, strongly supported the order of learned Commissioner (Appeals).
11. We have considered the submissions made by both sides, material on record, orders of the authorities below and also applicable legal provisions. Admittedly, the loss of Rs. 1,04,000 is on account of diminution in value of stock of shares resulting from the valuation of the same on the basis of cost or market price which ever is lower. It is also an admitted fact that the assessee has not purchased or sold shares during the year. This is a notional loss which has been provided in the books of account on the basis of accounting principles/policy. To put it differently it is only a book entry. There is no trading transaction, because there is no transfer to any third party and it is also a settled proposition that no one can trade with one-self. The diminution in the value of asset is not allowable as loss/expenditure under the Act save as specifically provided for, e.g., depreciation on assets or bad debt. Since it is only a notional loss and being so is not allowable as such, therefore, the question for applicability of Explanation to Section 73 of the Income Tax Act, 1961 does not arise. In view of the above discussions, we are of the considered opinion that loss on account of diminution in the value of devolved shares is not allowable and accordingly, this ground of the assessee is rejected.
12. The third ground of appeal is in relation to disallowance of Rs. 1 lakh out of miscellaneous expenses, staff welfare expenses and conveyance expenses on ad hoc basis for want of bills and vouchers. The learned Commissioner (Appeals) also confirmed the action of assessing officer on the ground that the burden of proving that the expenses were incurred wholly and exclusively for the purposes of business was on the assessee and the appellant failed to discharge this onus and also the quantum of disallowance was reasonable. The learned Counsel contended that the assessee was maintaining regular books of account which were duly audited and the same were produced before the assessing officer. The assessing officer disallowed the expenses without pointing out the specific defaults/requirement and the same was confirmed by the learned Commissioner (Appeals) for failure of the assessee to discharge its onus. Therefore, in the circumstances, he submitted that the matter may be restored back to the file of assessing officer for verification of evidences/vouchers as may be required to allow the claim of the assessee.
13. The learned departmental Representative, on the other hand, relied on the order of Revenue Authorities.
14. We have considered the submissions made by both sides, orders of authorities below and material on record. Admittedly, the assessee is a Company which is required to get its accounts audited as per the provisions of Companies Act, 1956. Therefore, the maintenance of regular books of account is imperative. From the perusal of the orders of authorities below, it appears that they have made the disallowance on ad hoc basis without pointing out the specific failures and, therefore, deem it fit and proper to restore this issue back to the file of assessing officer for adjudication de novo after giving an adequate opportunity of being heard to the assessee who shall produce necessary evidences in support of its claim and failing which the disallowance made by the assessing officer shall stand. Thus, this ground of the assessee is allowed for statistical purposes.
15. In the result, appeal is partly allowed.