SMT. SWETALBEN R.VORA,BHAVNAGAR vs. THE DY.CIT.,CIRCLE-1,, BHAVNAGAR

The assessee has raised following grounds of appeal:- “1. The Id. CIT(A) has erred both in law and on the facts of the case in upholding the disallowance of Rs.7,26,151/- being 75% of total disallowance of brokerage and commission expenditure of Rs.9,68,201/- made by ld. AO.

The Id. CIT(A) has erred both in law and on the facts of the case in upholding the disallowance of brokerage / commission of I.T.A No. 1969/Ahd/2012 A.Y. 2008-09 Page No 2 Rs.9,35,000/- paid to Smt. Padmaben M. Vora made by ld. AO.

Both the lower authorities have failed to appreciate that the entire brokerage and commission expenditure has been incurred out of commercial expediency and was commensurate with the nature of business of the Appellant and therefore the same ought to have been allowed as business expenditure as claimed by the Appellant.

The Id. CIT(A) has further erred in law and on the facts of the ace in confirming the action of Id. AO in disallowing salary expenditure of Rs.8,00,000/-.

The Id. CIT(A) has erred both in law and on the facts of the case in not appreciating the facts that the Appellant is an investor and not a trader in shares and therefore capital gain claimed by the Appellant cannot be treated as business income.

The Id. CIT(A) has accordingly erred in law in holding that the gain arising from sale of shares held for less than thirty days be treated as business income and not as capital gain.

Both the lower authorities have passed the orders without properly appreciating the fact and that they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed.

The learned C1T(A) has erred in law and on facts of the case in confirming action of the Id. AO in levying interest u/s 234A/B/C/D of the Act.

The learned CIT(A) has erred in law and on facts of the case in confirming action of the Id. AO in initiating penalty u/s 271(l)(c) of the Act.”

The fact in brief is that return of income declaring income of Rs. 5,01,080/- was filed on 29th Sep, 2008. The case of the assessee was subject to scrutiny assessment and notice u/s. 143(2) of the act was issued on 31st August, 2001. The assessment u/s. 143(3) of the act was finalized on 25th March, 2010 and total income was determined at Rs. 32,04,281/- after making various additions. The remaining facts of the case are discussed while adjudicating the various grounds of appeal of the assessee as under:-

During the course of assessment, the assessing officer noticed that the assessee has incurred an amount of Rs. 9,68,201/- in cash towards commission paid to 774 parties. During the course of assessment, the assessee has failed to furnish any address and other relevant details of the parties to whom the commission were paid, therefore, the assessing officer

During the course of assessment, the assessing officer observed that assessee has claimed payment of Rs. 9,35,000/- as commission to Smt. Padmaven M. Vora. On query, the assessee explained that the commission of Rs. 9,35,000/- was paid to her mother in law Smt P. M. Vora for introduction of new clients. In order to prove the genuineness of the services rendered against the huge payment of commission made by assessee to her mother in law Smt. P. M. Vora, the assessing officer has asked the assessee to substantiate the services rendered. However, the assessee has failed to substantiate the rendering of services with relevant supporting evidences. Therefore, the assessing officer has recorded the statement of Smt. P. M. Vora, mother in law of the assessee u/s. 131(1) and noticed that she was ignorant about the stock market and having no knowledge about the IPO and stock broking business. She has admitted that she has never gone out of the house and not having her own office. Smt. P.M. Vora, mother in law of the assessee failed to demonstrate rendering of services against commission payment of Rs. 9,35,000/- made by the assessee. Consequently, the claim

At the time of assessment, the assessing officer observed that assessee has debited salary expenses of Rs. 11,93,300/- and shown an amount of Rs. 8 lacs as salary payable under the head sundry creditors. On query by the assessing officer, the assessee has furnished the details of employees to whom amount of salary payable and stated that the same was outstanding on account of performance bonus payable to employees in addition to the basic salary. The assessing officer has asked the assessee to produce the employees for verification, however, the assessee has submitted that most of the employees have left the job and there whereabouts at present was not known. On perusal of the detail submitted by the assessee, the assessing officer has also noticed that assessee has furnished incomplete addresses of the employees and therefore the same were not traceable. Consequently, the assessing officer has disallowed the amount of salary payable to the amount of Rs. 8 lacs u/s. 37 of the act.

Ground No. 5 & 6 is against the decision of ld. CIT(A) treating the short term capital gain as business income.

During the course of assessment, the assessing officer noticed that assessee has shown short term capital gain and long term capital gain, however, as per the audit report, the assessing officer observed that assessee was in the business of trading in stock market. Therefore, the assessee was I.T.A No. 1969/Ahd/2012 A.Y. 2008-09 Page No 5

Aggrieved assessee has filed appeal before the ld. CIT(A). In respect of commission payment of Rs. 9,68,201/- to 774 parties. The ld. CIT(A) has held that the assessee has failed to prove the genuineness of commission payment, rendering of services, the whole payment was made in cash and the addresses of the recipients were not furnished. However, the ld. CIT(A) has sustained the disallowance to the extent 75% of the expenditure claimed by the assessee by restricting the amount of disallowance to Rs. 7,26,151/-.

In respect of claim of commission payment of Rs. 9,35,000/- to the mother in law of the assessee, Smt. Padmaben M. Vora, the ld. CIT(A) has upheld the disallowance holding that asessee has failed to furnish any evidence to substantiate that her mother in law has rendered any services to justify the payment of commission.

Regarding action of the assessing officer of treating short term capital gain of Rs. 7,47,900/- as business income, the ld. CIT(A) has directed the assessing officer to assess the gain from sale of sharers within 30 days as business income and the balance as short term capital gain on the basis of alternative contention made by the assessee before the ld. CIT(A).

We have heard both the sides and perused the material on record. In respect of claim of commission expenses of Rs. 9,68,201/- to 774 parties, it is noticed that all the payments were made in cash and assessee had failed to substantiate the claim of payment with relevant supporting evidences. The assessee has neither substantiated the services rendered by the recipient of the commission nor furnished the addresses of the recipient of commission parties as a result the genuineness of the commission payment could not be established. Under the circumstances, we consider that the ld. CIT(A) has reasonably restricted the disallowance to 75% of the aforesaid expenditure of Rs. 9,69,201/- claimed to be made to 774 parties, therefore, we do not find any infirmity in the decision of ld. CIT(A).

Regarding claim of payment of commission of Rs. 9,35,000/- to Smt. Padmaben M. Vora who was the mother in law of the assessee, it is I.T.A No. 1969/Ahd/2012 A.Y. 2008-09 Page No 7 Padmaben M. Vora mother in law of the assessee and recorded her statement u/s. 131(1) of the act and found that Smt. Padmaben M. Vora was not having any experience in stock broking business and she could not substantiate that what were services she had rendered to the assessee on the basis of which the assessee has paid commission to her. Considering the facts and circumstances, we do not find any error in the decision of ld. CIT(A) by holding that the recipient of the commission could not establish rendering of services to the assessee. Therefore, this ground of appeal of the assessee is also dismissed.

Regarding disallowance of salary expenses to the amount of Rs. 8 lacs shown as outstanding during the year under consideration, it is observed that during the course of assessment and appellate proceedings, the assessee has not furnished the complete address of the employees and also failed to produce the employees for verification before the lower authorities. The assessing officer has recorded the statements of six employees and found discrepancies in the amount of salary received by them. The ld. counsel has referred page no. 188 of the paper book showing break up of outstanding salary of 8 lacs and also referred page no. 189 to 206 of the paper book showing the identity proof of employees employed with the assessee. The ld. counsel has also referred page no. 207 to 209 as copies of statements of employees obtained during remand report by the assessing officer in which I.T.A No. 1969/Ahd/2012 A.Y. 2008-09 Page No 8 they have admitted that they have worked for the assessee as per assignment given by the assessee. In the light of the above facts and circumstances, we observe that neither the assessee has fully substantiated the claim of outstanding salary expenses with relevant evidences nor the assessing officer has fully disproved the claim of the assessee that she has not deployed any employee during the year under consideration. Considering the above facts, we are of the view that it will be reasonable to restrict the disallowance to the extent of 50% of the outstanding salary to the amount of Rs. 4 lacs. Accordingly, this ground of appeal of the assessee is partly allowed.

Regarding ground No. 4 & 5 of the assessee pertaining to the issue that assessing officer has treated the short term capital gain as business income, we observe that ld. CIT(A) has partly allowed the appeal of the assessee as per the alternative contention made by the assessee that share held for less than 30 days be treated as business income, therefore, we do not find any infirmity in the decision of ld. CIT(A). Accordingly, this ground of appeal of the assessee is rejected.

In the result, the appeal of the assessee is partly allowed.