Unreported Decisions – October 2019

By Ajay R. Singh

1. S. 40A(2) : Expenses or payments not deductible – Excessive or unreasonable – Disallowance cannot be made in respect of interest payment made to related parties as interest rate is not in excess of the prevailing interest rate in the market. [S. 40A(2)(a)]

The assessee being resident individual stated to be dealing in gold ornaments and coins under proprietorship concern namely M/s. Shelaji Asaji & Co. During assessment proceedings, it transpired that the assessee paid interest on loans to certain persons as specified u/s. 40A(2)(b) at the rate of 18% as against the rate of 12% paid to other parties. Consequently, invoking the provisions of Section 40A, the AO disallowed differential interest of 6% which gave rise to addition of ₹ 8.41 Lakh in the hands of the assessee.

The ITAT held that as per the provisions of Section 40A(2)(a), any expenditure would not be allowable as deduction, if the same, in the opinion of Ld. AO, was excessive or unreasonable having regard to the fair market value of goods / services for which the payment was made by the assessee. Upon perusal of rate of interest chart as placed before us, it is seen that the assessee has paid interest at the rates ranging between 15% to 18% to unrelated parties whereas it has paid interest of 18% to related parties. Therefore, this being the case, the interest paid to related parties could not be said to be excessive or unreasonable. Nothing has been brought on record by lower authorities to demonstrate that the said rate was excessive or unreasonable, in any manner, having regard to the market rates. Therefore, the assessee appeal was allowed.

Surendrakumar P. Jain vs. ACIT-17(3), ITA NO.: 4993/M/2018, Bench : SMC; AY 2013-14; dated: 11/09/2019 (Mum.)(Trib.)

Surendrakumar P. Jain

2. S. 28(i) : Business loss – Embezzlement – Loss due to misappropriation of funds by the ex-director of the company has to be allowed in the year of detection. [S. 37(1)]

The assessee company was owned and managed by Advani group. In 2004, the assessee company was taken over by Centrum group and name was changed to Centrum Broking Pvt. Ltd. However, Mr. Advani continued as a director of the assessee company till June, 2005. In 2005, due to differences and disputes between Mr. Advani and the Centrum group, Mr. Advani was removed as a director of the company. After the exit of Mr. Advani, the assessee company on perusal of its books of account realised that a sum of ₹ 95,44,693/- was misappropriated by Mr. Advani by debiting the assessee company’s accounts on account of his various personal expenses or non-business expenses. The assessee company recovered a sum of ₹ 40,26,087/- and the balance amount of ₹ 55,18,606/- was written off and claimed as business loss. The A. O. has disallowed the same on the ground that these are personal expenses of the director and hence not allowable. By the impugned order, the LD. CIT(A) has confirmed the action of the A. O.

The assessee in arbitration proceedings initiated by Advani group before NSE made a claim of the said amount as evident from the said Award dated 13th December 2011. However, the Tribunal held that since the assessee company has not made a counter claim or filed a separate arbitration for the said amount no relief was granted to the assessee company. The said order became final on 28th August, 2012 whereby consent terms were agreed between the Advani group and the assessee company. As per material placed on record, we found that the claim is made on account of misappropriation of funds by the ex-director of the company. The said director misused his authority while holding the position and incurred various expenses from the company’s funds which were of personal in nature. The fact that out of ₹ 95.44 lakhs, the assessee company is claiming only ₹ 55.18 lakh proves the bonafideness of the assessee in recovering part of the money and writing off the balance.

The Tribunal found that the aforesaid loss has incurred in the course of business of the company and therefore should be allowed as a business loss. Reliance is placed on following decisions: Sassoon J. David & Co. Pvt Ltd. – 98 ITR 50 (Bom), Badridas Daga – 34 ITR 10 (SC). , Harshad Choksi – 349 ITR 250 (Bom), Boots Piramal Health Care Ltd – 3213/ Mum/2009 (now known as M/s Nicholas Piramal Consumer Products Pvt. Ltd). The Hon’ble Supreme Court in the case of Associated Banking Corporation of India Limited vs. CIT reported in 56 ITR 1(SC) has held that “the loss by embezzlement must be deemed to have occurred when the assessee came to know about the embezzlement and realised that the amount embezzled could not be recovered”. In view of the above discussion, the claim was allowed as business loss.

Centrum Broking Ltd DCIT-4(1)(1), ITA No. 4120/Mum/2018, Bench : C; AY 2013-14; DOH: 06/09/2019 (Mum.)(Trib.)

Centrum Broking Ltd.

3. S.147: Reassessment–After the expiry of four years –Reopening of assessment was based on re-appreciation of material already available on record at time of scrutiny assessment which amounted to mere change of opinion hence bad in law.

The assessee company is engaged in providing Engineering and related services. The assessment has been completed u/s. 143(3) of the Act, vide order dated 29/12/2008. Thereafter, the assessment has been reopened u/s. 147 of the Act and the assessment have been completed by making additions towards disallowance on warranty expenses on the ground that warranty provisions has been created on estimation basis, rather than on any scientific basis.

The Ld. CIT(A), observed that in the reasons for reopening, the Ld. AO has mentioned that on review of the assessment, it is observed that there is under assessment of income. This statement shows that after reviewing the case records, he found that certain income had escaped assessment. But, fact of the matter is that the assesee has submitted a letter dated 13/12/2018, during the course of assessment proceedings u/s 143(3), where the issue on which the AO has reopened was already discussed and all the details were submitted before the AO. Therefore, he opined that it is a case of change of opinion, which is not permissible u/s. 147 of the Act. In so far as, second arguments of the assessee, in light of proviso to section 147 of the Act, the Ld. CIT(A) observed that on examination of reasons recorded, it is seen that nowhere, the Ld. AO had stated that there was failure on the part of assessee to disclose fully and truly, all the material facts necessary for reopening assessment. Accordingly, held that reopening of assessment u/s. 147 is invalid.

On appeal by the Revenue, the Tribunal held that the original assessment has been completed u/s. 143(3) of the Act, on 29/12/2018 and the assessment has been reopened after four years from the end of relevant assessment years without making any allegation as to failure on the part of assessee to disclose fully and truly all material facts necessary for assessment. Therefore, reopening of assessment, in this case was made on change of opinion without there being any tangible material in the position of the AO, which suggest escapement of income and also without making any allegation as to failure on the part of assessee to disclose fully and truly all the material facts necessary for assessment. In this view of the matter the Ld. CIT(A) has rightly quashed reassessment proceedings. The appeal filed by the revenue was dismissed.

DCIT-2(2)(1) vs. M/s. Larsen & Toubro Ltd., ITA No. 262/ Mum/2016, AY 2005-06; Bench : A; dated: 06/09/2019 (Mum.) (Trib.)

M/s. Larsen & Toubro Ltd.