Income Tax Appellate Tribunal - Hyderabad
Sri Ram Chits Pvt.Ltd.,, Hyderabad vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH ' B ', HYDERABAD
BEFORE SHRI G.C. GUPTA, VICE PRESIDENT AND
SHRI CHANDRA POOJARI ACCOUNTANT MEMBER
ITA No: 152/Hyd/2007 Assessment . Year 2003-04
ITA No.153/Hyd/2007 2002-03
The Dy. CIT, Circle 3(1) VS M/s Sri Ram Chits (P) Ltd.
Hyderabad Hyderabad
(PAN AAFCS 4916 D/SH-15)
(Appellant) (Respondent)
ITA No.154/Hyd/2007 Assessment. Year: 2003-04
ITA Nos.155/Hyd/2007 2002-03
M/s Sri Ram Chits (P) Ltd. VS The Dy. CIT, Circle 3(1)
Hyderabad Hyderabad
(PAN AAFCS 4916 D/SH-15)
(Appellant) (Respondent)
ITA No.630/Hyd/2008 Assessment Year : 2004-05
M/s Sri Ram Chits (P) Ltd. The Dy. CIT, Circle 3(1)
Hyderabad Hyderabad
(PAN AAFCS 4916 D/SH-15)
(Appellant) (Respondent)
ITA No.852/Hyd/2008 Assessment Year :2004-05
The ACIT, Circle 3 (1), Hyderabad M/s Sri Ram Chits (P) Ltd.
Hyderabad
(PAN AAFCS 4916 D/SH-15)
(Appellant) (Respondent)
ITA No.927/Hyd/2008 Assessment. Year : 2005-06
M/s Sri Ram Chits (P) Ltd. The ACIT, Range 3, Hyderabad
Hyderabad
(PAN AAFCS 4916 D/SH-15)
(Appellant) (Respondent)
2
ITA No.1117/Hyd/2008 Assessment. Year : 2005-06
The ACIT, Range 3, Hyderabad M/s Sri Ram Chits (P) Ltd.
Hyderabad
(PAN AAFCS 4916 D/SH-15)
(Appellant) (Respondent)
ITA No.541/Hyd/2009 Assessment. Year : 2006-07
M/s Sri Ram Chits (P) Ltd. The ACIT, Range 3, Hyderabad
Hyderabad
(PAN AAFCS 4916 D/SH-15)
(Appellant) (Respondent)
ITA No.655/Hyd/2009 Assessment. Year : 2006-07
The Dy.CIT, Circle 3(1), M/s Sri Ram Chits (P) Ltd.
Hyderabad Hyderabad
(PAN AAFCS 4916 D/SH-15)
(Appellant) (Respondent)
Appellant by : Smt. Vasundhara Sinha, DR
Respondent by : Shri K.C. Devadas
ORDER
Per Shri Chandra Poojari, Accountant Member:
These 10 appeals preferred by the assessee as well as the Revenue are directed against the different orders passed by the CIT(A), Hyderabad and pertains to the assessment years 2002-03, 2003-04, 2004-05, 2005-06 and 2006-07. Since common issues are involved in all these appeals, they are clubbed together, heard together and disposed off vide this common order for the sake of convenience.
2. The first common grounds in the assessee as well as in the Revenue appeals i.e. assessee appeals in ITA No.154/, 155/07, 630/Hyd/2008, 927/Hyd/2008 and 541/Hyd/2009 and Revenue appeals in ITA Nos.153/152/852/1117/655/Hyd/2007 are relating to allowability of bad debts.
2 33. We have heard both the parties and perused the material on record. At the time of hearing the Authorized Representative of assessee not seriously pressed the grounds in these appeals before us. Accordingly, the grounds taken by the assessee in the above said appeals are dismissed as not pressed.
4. Coming to the grounds in the Revenue appeals, these issues are squarely covered by the order of this Tribunal 'B' Bench dated 26.7.2004 in ITA Nos.500, 506/Hyd/1999, ITA Nos.294, 327/Hyd/2001 and ITA Nos.471/Hyd/ and 1049/Hyd/2002 for the assessment years 1995-96, 1997-98, 1998-99 and 1999-2000 and wherein it was held at Page No.51 of the order as follows:
6.6(xxi): We have to mention that this issue has not come up during the course of arguments of the case. If the assessee has made the claim as indicated, no prejudice would be caused to him by setting aside the matter.
Similarly no prejudice would be caused to revenue on this count as it can examine the claim afresh. To allow the claim to the extent indicated above fresh collection of facts and figures are required and thus we set aside the issue to the file of the assessing officer for considering the claim afresh in the light of this order. Thus the appeal of the assessee for the assessment years 1998-99 and 1999-2000 on this ground of allowability of bad debt is allowed for statistical purposes.
Accordingly, we do not find any infirmity in the order of the CIT(A) and therefore, the assessing officer is directed to recomputed the bad debts relatable to running chits as per the directions of the ITAT in its order cited supra as in the earlier years. Accordingly, the ground raised by the assessee as well as Revenue is dismissed.
5. Coming to the next common ground in all assessee's appeal relating to the disallowance of foreman dividend. This issue also already decided by the Tribunal in assessee's own case against the assessee in its order cited supra wherein the Tribunal followed its earlier order in 3 4 assessee's own case reported in 83 ITD 792. Respectfully, following the same ratio laid down by the Tribunal in its order in assessee's own case, we dismiss the ground taken by the assessee.
6. The next common grounds by the assessee are relating disallowance of financial charges. The assessing officer noticed that the assessee company as paid interest at 25% to the following three companies:
1. Rajani Investments (P) Ltd., Chennai
2. Hymavathi Enterprises, (P) Ltd., Chennai
3. Billahari Investments, (P) Ltd., Chennai 6.1. Since the assessee has paid an interest of 28% per annum when compared to the rate of interest i.e. at 12.77% received from various other companies to whom the assessee advanced money, the assessing officer held that it is an excess payment. The plea of the assessee is that it was paid such high rate of interest on account of business expediency and the expenditure was incurred wholly and exclusively for the purpose of business. Further, the contention of the assessee's counsel is that the assessee advanced the money to sister concern to reduce interest burden thereby the assessee enjoyed the benefit of reduction of interest liability. Had the assessee not advanced the money to sister concern, interest burden would have been more since fund would have been remained with the assessee as idle fund.
Further, he submitted that the sister concern filed confirmation letter for advancing the money to them. The assessing officer wanted the cash flow statement from the sister concern regarding the utilisation by the sister concern. He submitted that fund was used by the sister concern for business purpose only and the ratio laid down by the Supreme Court in the case of M/s S.A. Builders Ltd. Vs. CIT & Others (288 ITR 1) (SC) 4 5 fully satisfied. Further, he submitted that the Chartered Accountant has also given certificate regarding utilisation of fund by the sister concern. Hence, he submitted that the addition to be deleted.
7. On the other hand the Departmental Representative submitted that major shareholders of the above companies are either Associate Companies of Sriram Group or the partners of the Associate Firms of Sriram Group. Thus, the companies are cleverly floated in such a way, none of the directors of the assessee company or the relatives, share holders are directors in the above said companies so as to avoid the provisions of section 40A(2) (b) of the IT Act. He submitted that there was no reason to pay such high rate of interest to those companies. He submitted that interest paid on security deposits and utilising these amounts diverting to sister concern as advances. He supported the order of the lower authorities.
8. We have heard both the parties on this issue. In these cases, the assessee paid heavy interest on security deposits and it is excess over the interest received from the sister concerns. The assessee taken a plea that the interest was paid for the purpose of commercial expediency and the assessee was forced to pay the interest to various companies which were subscribing its chits and they are subscribing these vacant chits where the assessee cannot subscribe its own chit more than one time and also these companies are contributed huge amount as security deposit against due payments for future subscription. These facts are required to be verified from the financial statements of those companies and cash flow statements. The purpose for which these funds is advanced, why the interests were paid at such high rate were to be examined by the assessing officer. The assessee required to demonstrate the usage of the funds by the sister concern for business purpose. If the assessee diverted its interest bearing funds to 5 6 the sister concern for any purpose other than business purpose, then this impugned interest to be disallowed. In other words, if the assessee used the sister concern as a conduit to divert interest bearing funds to the personal advantage any director or relative of directors of the assessee company, then this interest to be disallowed. The burden is on the assessee to prove that the payment of interest is genuine. Further, once it is borne out of the record that assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest or less interest without any business purpose, the interest to that extent advance had been made without carrying any interest is to be disallowed u/s 36(1) (iii) of the Act. Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, assessee will not be entitled to claim deduction of interest on the borrowings to the extent those are diverted to sister concerns or other persons without interest. The establishment of nexus of funds borrowed vis.a.vis the funds diverted towards sister concerns on interest free basis is concerned, in our view, that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sister concern without interest is on the assessee . Sec.36(1) (iii) of the Act provides for deduction of interest on the loans raised for business purposes. Once the assessee claims any such deduction the books of account, the onus will be on the assessee to satisfy the assessing officer that whatever loans were raised by the assessee, the same were used for business purpose. If in the process examination of genuineness of such deduction, it transpires that the assessee advanced certain funds to its sister concern at very low interest, there would be a very heavy onus on the assessee to be discharged before the assessing officer to effect that in spite of heavy interest payable on fresh borrowings and pending loans on which 6 7 assessee incurring interest liability, still there is a justification to advance loans to sister concerns for non business purpose and accordingly, such interest payment cannot be allowed as a deduction. More so, when the interest paid is in excess of what is received from sister concern is towards due payment of future instalments, such excess interest cannot be allowed and assessee is not bound to pay any interest on security deposit as same is only towards due payment of future instalments. With this direction, we set aside the issue to the file of assessing officer for fresh consideration.
9. The next ground in assessee appeal in ITA No.630/Hyd/2008 for assessment years 2004-05, this is with reference to disallowance of consumer durable loss. According to the assessee company, it has entered into business of consumer durable finance by entering into MoU with the Sriram City Union Finance Ltd (SCUF). Under this MoU, the assessee recommends customer who are desirous to purchase consumer durable articles from SCUF for loans. Under the MoU, the assessee was required to identify the customers, recommended them to SCUF 9.1 The contention of the assessee counsel is that the losses claimed as per the MoU. Loss arising on account of a default of the customer, the assessee made to pay putting the same to SCUF and the loss was arising in the course of carrying on business. He drew our attention to the clause No.4.5 of the Agreement dated 2.4.2003 with MoU.
10. The Departmental Representative relied on the order of the CIT(A).
11. We have heard both the parties and perused the material on record. We have gone through the MoU dated 2.4.2003 placed at paper book No.59-60.
7 8The clause 4 and 5 of the said MOU reads as follows:
4. Obligations of SCI:
4.1. SCI shall identify prospective persons requiring financial assistance and shall ascertain their credit worthiness. SCI shall recommend such persons to SCUF for direct landing by SCUF.
4.2. SCI shall arrange the execution of all necessary documents regarding the loan by the customer as per requirements of SCUF and shall also furnish a photograph of the customer and a copy of the ration card/driving license of the customer to SCUF. SCI will also give letter certifying the bona fides of the customer, his repayment capacity and that the particulars given in the loan documents are true to the best of their knowledge.
4.3. Wherever applicable, SCI shall ensure that the endorsement in the RC Book in favour of SCUF is made and a copy of the RC Book with the endorsement is delivered to the SCUF within 3 months from the date of advance SCI will also deliver the original invoice, copy of the RC Book with the lien noted insurance policy, copy of the permit if any and letter of possession to SCUF within 3 months from the date of advance.
4.4. SCI shall periodically collect the instalments from the customer and remit the same to SCUF as per the due dates in the agreement entered into between SCUF and the customer.
4.5. In the event of the customer defaulting in any installment SCI shall make good the default by paying the same to SCUF.
5. PROFIT SHARING:
5.1. In consideration of SCI agreeting to provide the services mentioned above to SCUF, SCUF agrees to share the profits it obtains from this business with SCI as detailed below:
i) in case of Income of Securitization 70% to SCI and 30% to SCUF.
ii) In case of Finance charges received on the securitized contracts up to the date of securitization i.e., the date of first PDC securitized 8 9 SCUF will retain the income at the cost of 3% of IRR and the balance will be shared to SCI.
iii) In case of Finance charges received on non securitized contracts, SCUF will retain the income at the cost of 3% of IRR and the balance will be shared to SCI.
iv) It is mutually agreed that the income will be recognized based on effective IRR which is arrived after considering PROCESSING FEE, FINANCE CHARGES, DEALER DISCOUNT AND MANUFACTURER DISCOUNT ETC.
v) All expenses incurred by SCI at their branches/HO in providing services under this agreement such as Bank charges, brokerage (including paid by SCUF on behalf of SCI) would have to be borne by SCI.
vi) All expenses incurred by SCUF in arranging the money for business such as bank charges, interest cost etc. are to the account of SCUF.
As seen from the above, the clause 4.5. of the MoU, in the event of the customer defaulting in any installment, the assessee has to make good the default by paying same to the SCU. However, it is seen that the said clause appears below clause, 4.4. which speaks of the obligation of the assessee to periodically collect the installment from the customers and remit the same to SCUF as per due dates in the Agreement entered into between SCUF and the customer. As such the liabilities specific in clause 4.5 is limited to making good of the default in a particular installment on a due date so as to maintain the fund flow regularly and does not in any way cast any obligation on the part of the assessee to bear the entire loss in respect of the transaction. On the other hand, it was rightly observed by the CIT(A) that the assessee has been showing only 70% of the income in respect of these transactions therefore should bear only 70% of the losses of this transactions. The disallowance on this issue justified and the CIT(A) order is confirmed. Accordingly, the ground taken by the assessee is dismissed.
9 1013. The next common grounds in assessee appeals in ITA Nos.630/08, 927/08, 541/Hyd/2009 for the assessment years 2004-05, 2005-06 and 2006-07 is that CIT(A) erred in directing the assessing officer to verify the contention of the assessee that the interest on IT refund was not taxable and while on the contrary, the final assessment resulted in huge demand and payment of interest u/s 234D of the IT Act.
14. We have heard both the parties and perused the material available on record. The CIT(A) has given direction to assessing officer to verify the contention of the assessee regarding interest on refund and work out the interest liability as per law while passing give effect order We do not find any infirmity in this direction of the CIT(A) since the interest u/ s 234B and 234D is mandatory and consequential in nature and the same is confirmed. Accordingly, this ground by the assessee is dismissed.
15. The next ground in ITA No.927/Hyd/2008 for the assessment year 2005-06 relating to disallowance u/s 40(a) (ia). In the course of hearing the assessee counsel not pressed this ground. Accordingly, this ground is dismissed as not pressed.
16. The next ground in ITA Nos.630/08, 927/08, 541/Hyd/2009 for the assessment years 2004-05, 2005-06 and 2006-07 is relating to denial of interest u/s 234D. This ground does not emanate from the order of the CIT(A). Moreover, the CIT(A) has given direction to verify the contention of the assessee regarding interest on refund and work out liability as per law while giving effect to his order and compute the interest liability u/s 243B and 243D. In this observation of the CIT(A) we do not find any infirmity in the order of the CIT(A) and accordingly the grounds in these appeals taken by the assessee are dismissed.
10 1117. The next ground in assessee appeal in ITA No. 541/Hyd/2009 for the assessment 2006-07 is relating to disallowance of legal charges. During the course of hearing the Authorised Representative not pressed this ground and accordingly this ground is dismissed as not pressed.
18. The next ground in Revenue appeal in ITA Nos.153/Hyd/07, ITA.152/Hyd/0, 852/Hyd/08, 1117/HYd/08 and 655/Hyd/09 are relating to allowing the commission on cancelled chits. The assessing officer is of the opinion that the assessee is entitled to receive the said amount as commission at 5% from the removed subscribers in respect of chit series.
19. After hearing both the parties we are of the opinion that this issue was covered by the order of this Tribunal 'B' Bench dated 26.7.2004 in ITA Nos.500, 506/Hyd/1999, ITA Nos.294, 327/Hyd/2001 and ITA Nos.471/Hyd/ and 1049/Hyd/2002 for the assessment years 1995-96, 1997-98, 1998-99 and 1999-2000 and wherein it was held as follows:
6.3: Time of recognition of income from commission on cancelled chits:
This issue is involved in the assessee's appeals for assessment years 1998- 99 and 1999-2000. The dispute is about time of accrual of non prized subscribers who are removed from the chit and in whose place we find that from out of the amount that is payable to the defaulting subscriber consequent to his replacement by another person the company is entitled to deduct 5% as commission. This has nothing to do with the regular commission income of the assessee. Thus the stand of the assessee that the commission income accrues when the accounts have been finally settled to the defaulting non subscriber to our mind appears to be the correct position.
Otherwise in case of a non prized subscriber the amount of 5% would be deducted from the amounts due to him much before the settlement of his account and recognized as income by way of transfer from current liabilities to profit and loss account. Reliance was placed by the Revenue on the Special Bench decision of the Tribunal in the case of Shriram Chits & Investment (P) Ltd., Chennai Vs. ACIT (263 ITR (AT) 65). This decision is not applicable to the facts of this case. The commission remuneration to the Foreman in that case was sought to be recognized on the completion of chit method and had 11 12 nothing to do with the type of additional commission receivable in case of substitution of a subscriber as in this case. The nature of income in both these cases are different. The further commission of 5% receivable from a defaulting subscriber consequent to his removal and subscriber account is recognized as income on the finalization of the issues. This is not an unacceptable proposition. We agree with the submissions of the learned counsel for the assessee, which are at Para 4.1.1 of this order. In the result, this ground of the appeal of the assessee is allowed.
Respectfully following the above ratio laid down by above order of the Tribunal, we inclined to dismiss this ground taken Revenue.
20. The next common grounds in Revenue appeal in ITA Nos.153/Hyd/02, 152/07, 852/08, 1117/09, and 655/Hyd/09 are relating to allowability of Royalty. This issue also covered in favour of the assessee by the order of the Tribunal covered by the order of this Tribunal 'B' Bench dated 26.7.2004 in ITA Nos.500, 506/Hyd/1999, ITA Nos.294, 327/Hyd/2001 and ITA Nos.471/Hyd/ and 1049/Hyd/2002 for the assessment years 1995-96, 1997-98, 1998-99 and 1999-2000 and wherein it was held as follows:
6.7(iv): We are convinced with the arguments of the learned counsel for the assessee. The Bangalore Bench of the Tribunal in ITA No.751, 750, 749 & 748/(Bang.)/1998 in the case of M/s Sriram Chits (Bangalore) Ltd. Vs. DCIT (assistant) Special Range, Bangalore held as follows:
" 29. We have carefully gone through the records and consideration the rival contentions. M/s Sriram Chits & Investment (P) Ltd. having registered office at Madras was the absolute owner of the copy right relating to existing artistic work "Sriram Chits" logo registered as such under the provisions of the Copy Right Act, 1957 with the Registrar of Copyrights bearing registration No.A/49890/88 dated 7.7.1988. The assessee entered into an agreement with the holding company for exclusive use of the logo of the holding company in the course of soliciting its business amongst potential investors. The conditions of the agreement provided that the assessee shall pay royalty of 0.5% on the annual auction turnover of the assessee determined on the basis of value of auctions fixed during the year. In fact, the assessee has used the logo to the best advantage of business. The assessee was to carry on the business of chit fund in the state of Karnatka and the holding company gradually stopped floating new (grounds as it did in 1984) allowing subsidiary company to expand itself. The growth of business of the assessee over the years of the order of the CIT(A) is very much relevant. The relevant portion reads:
1. Sriram Chits & Investments (P) Ltd. commenced operations in Karnataka in the year 1984. The business of the company in 12 13 Karnataka increased over the years upto 1990-91 when the auction turnover touched Rs.80.39 lakhs.
2. Sriram Chits and Investments (P) Ltd. decided to expland its business in Karnataka by forming a subsidiary company Sriram Chits (Bangalore) (P) Ltd.
3. In the year 1990, Sriram Chits (Bangalore) (P) Ltd. was formed and was carrying on the business of Chit Funds in the State of Karnataka and Sriram Chits and Investments (P) Ltd. gradually stopped floating new groups allowing the subsidiary company to expand.
4. Sriram Chits (Bangalore) (P) Ltd. since inception continued to book new business by using the logo of its Holding Company.
5. The business growth of Sriram Chits (Bangalore) (P) Ltd. over the years can be inferred from the following figures:
FY 1990- 1991- 1992- 1993- 1994- 1995- 1996-
91 92 93 94 95 96 97
No.of 4 6 7 9 11 19 19
Branches
Business 29.49 66.41 105 81.26 184.01 260.05 359.05
(in
lakhs)
Auction 29.49 95.9 181.15 225.69 348.29 542.28 753.23
turnover
6. The right to use the logo from the Holding Company Sriram Chits and Investments (P) Ltd. was formally given to Sriram Chits (Bangalore) (P) Ltd. the subsidiary company in the year 1994 vide an agreement entered into, which provided for the payment of certain % of the Auction turnover as royalty to Sriram Chits and Investments (P) Ltd.
7. By the agreement, Sriram Chits and Investments (P) Ltd., has formally committed itself to the growth and development of Sriram Chits (Bangalore) (P) Ltd. for a further period of 7 years.
8. The duty of Sriram Chiuts and Investments (P) Ltd. does not end with merely transferring the right to sue its logo to its subsidiary company. It also assumes the responsibility to ensure that the name which it has built up over the years is maintained by Sriram Chits (Bangalore) (P) Ltd. Towards thi, Sriram Chits and Investments (P) Ltd. has provided financial assistance time and again to Sriram Chits (Bangalore) (P) Ltd. to help its working capital requirements.
9. When Sriram Chits (Bangalore) (P) Ltd. commenced operations, all its employees were from Sriram Chits & Investments (P) Ltd. who had prior experience in this line. Even now, Sriram Chits (Bangalore) (P) Ltd. looks for managerial support from Sriram Chits and Investments (P) Ltd. which is being provided. In addition to this, the entire software package of Sriram Chits and Investments (P) Ltd.
which was being used by it for its operations was transferred to Sriram Chits (Bangalore) (P) Ltd. for carrying out its day to day routines. The Holding company also holds periodical meetings with the executives of the subsidiary Company in order to monitor its activities.
10. The reasonability of 0.5% royal. The use of logo is enhancing the growth of Sriram Chits (Bangalore) (P) Ltd. cannot be under estimated."
13 1430. The record also shows that holding company was providing financial assistance time and again to the assessee to help in its working capital requirements. The record further shows that when the assessee commenced its operation, alls its emoployees were from holding company who had prior experience in this line. It is claimed that even the assessee looks for managerial support, from its holding company which is again provided. The holding company is also stated to have conducted periodical meetings with the executives of the assessee in order to monitor its meetings. All these and the table extracted above shows that there has been a substantial increase in the new business as also auction turnover from what was only 29.49 lakhs in assessment 1990-91 to Rs.225.69 lakhs in the assessment year 1994-95 and Rs.348.29 lakhs in the assessment year 1995-96 and the business has been substantially growing from year to year. The financing business and conducting of the chit business is not that easy unless it is backed by the promoters who have highest integrity and trustworthiness. M/s Sriram Chits and Investments (P) Ltd. Madras (holding company has been in the names for itself with the investors in the south. We are, therefore, of the considered opinion that the payment of royalty at 0.5% of having regard to the business requirements of the assessee. In our view, the payment is for legitimate benefit taken in the course of business and from any standard, it cannot be said that payment of Rs.1 lakh as royalty is sufficient to produce the business of the magnitude procured by the assessee over the years. The holding company has entered into similar agreements with other subsidiary companies and the CIT(A) has considered the same to be reasonable business outflow property under a specific agreement executed by the parties is very much reasonable and should have been accepted as a business expenditure allowable as deduction. We, therefore, delete the disallowance for these two years. The disallowance has been primarily based on a suspicion and incorrect appreciation of ahrd realities of the business by the revenue authorities. The disallowance is accordingly deleted.
Respectfully following the same and for the reasons given above by us we allow this ground of the assessee and delete the disallowance made on this account by the assessing officer. We direct the assessing officer to allow the claim of the assessee.
Respectfully following the same ratio laid down by the above order of this Tribunal, the ground taken by is Revenue dismissed.
21. The next ground taken by the Revenue in ITA No.852/Hyd/08 and 1117/Hyd/08 are relating to allowability of legal charges. The contention of the Departmental Representative that the assessee had earned dividend and earned certain other exempt income from investments. It had also incurred certain expenditure for making such investments which are included in the legal charges. The 14 15 expenditure in respect of such investments were not to be allowed as income resulting there from had been claimed as exempt since the legal charges so incurred for making the impugned assessments could not be bifurcated on estimate basis 5% of the total legal charges were disallowed on estimate basis. However, CIT(A) placed reliance on the order of the Tribunal, Hyderabad 'B' Bench dated 16.11.2007 in the case Spectra Shares and Securities for the assessment years 2002-03 in ITA No.504/505 and allowed the appeal of the assessee. As such, he submitted that the findings of the CIT(A) to be reversed.
22. We have heard both the parties on this issue. Admittedly, the assessee is having two kinds of income one is exempted income and the other one is taxable income. The legal charges incurred are attributable to earn both the income. In our opinion, it is fair to apportion the legal charges on income basis proportionately. Accordingly, the total legal charges to be segregated into two i.e. one is attributable to taxable income and the other one is attributable to exempted income on proportionate basis. As such, instead of estimated disallowance, we direct the assessing officer to disallow the same on proportionate basis attributable to exempted income. This ground taken by the Revenue is partly allowed.
23. In the result, the assessee as well as Revenue appeals are partly allowed.
Order pronounced in the Court: 30.4.2010
Sd/- sd/-
G.C. GUPTA CHANDRA POOJARI
VICE PRESIDENT ACCOUNTANT MEMBER
Dated the 30th April, 2010
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Copy forwarded to:
1. M/s Sriram Chits (P) Ltd. 3-6-478, III Floor, Anand Estate, Opp. Indian Bank, Liberty Road, Himayatnagar, Hyderabad-
29.
2. DCIT, Circle 3, (1), Hyderabad, Addl.CIT, Range 3, Hyderabad
3. CIT(A)-IV Hyderabad.
4. CIT , Hyderabad
5. The D.R., ITAT, Hyderabad.
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