DEVJI N. PALANI,MUMBAI vs. ASST CIT 13(3), MUMBAI

Facts of the case are that the assessee has filed return of income on 24.9.2008 declaring total income of Rs.23,56,770/- which was processed u/s 143(1) of the Income Tax Act, 1961. Subsequently the case was selected for scrutiny and statutory notices u/s 143(2) and 142 (1) were issued and served upon the assessee.

The issue raised in ground No.A is against the confirmation of action of the AO by the ld.CIT(A) in treating the “Short Term Capital Gains” (STCG) of Rs.13,77,568/- as income from business.

Facts relating to the above issue are that the assessee has shown STCG of Rs.13,77,568/- on sale of investments. The AO observed that the activities of the assessee were of trading nature as he was involved in sale and purchase of shares and thus dealing in shares at a very frequent interval. The AO was of the opinion that the assessee was routinely involved in share transactions and therefore, the AO treated this gain as income from business by rejecting all the contentions of the assessee.

At the outset, the ld. AR fairly conceded that the issue involved in this ground is covered against the assessee by the decision of the Mumbai Bench of the Tribunal in assessee’s own case in AY : 2007-08 dated 12.09.2012. 3 And 7362/Mum/2013 6. We have heard the rival submissions and perused the materials on records including the orders of authorities below. We find that an identical issue has been decided by the Tribunal in ITA No. 7881/Mum/2010(supra), against the assessee . The relevant operative portion of the order is reproduced below : “7. The ld. AR for the assessee has relied on the decision of the Tribunal in the case of Gopal Purohit (29 SOT 171) to argue that income from all delivery based transactions has to be assessed as income as held by the Tribunal in the said case. We have carefully perused the order of the Tribunal in the case of Gopal Purohit (supra), but we find that there is no universal finding in that case that all delivery based transactions have to be treated as investment. It is pertinent to note that the Tribunal in case of Gopal Purohit (supra), had decided the case following the decision of Tribunal in case of Sarnath Infrastructure Pvt. Ltd vs. ACIT (2009) 120 TTJ 216 holding that facts in the case of Sarnath Infrastructure Pvt. Ltd (supra), were identical. However, it is noted that in Sarnath Infrastructure Pvt. Ltd (supra), the shares sold out of investment account had been held that 2-3 years and revenue could not show any shares sold which had been purchased during the year or in the immediately preceding year. Therefore, only in respect of such cases, the decision in case of Gopal Purohit (supra), could be applied. The Hon’ble High court of Bombay had upheld the decision of the Tribunal in the case of Gopal Purohit (supra), on the ground that there was no substantial question of law involved. Even before Hon’ble High Court there was no question raised that all delivery based transactions have always to be treated as investment activity. Thus the decision of the Tribunal as well as the Hon’ble High court in case of Gopal Purohit (supra), cannot be considered as a precedent for the proposition that all delivery based shares have to be treated as investment activity. The assessee can also be a trader in case of delivery based purchases and sales, which is a normal feature of any trading activity. Therefore, in our view reliance placed by the ld. AR on the decision in the case of Gopal Purohit is misplaced. Each case has to be decided based on its own facts. Considering the facts of this case, we hold that the share transactions from which the assessee has shown short term capital gain ITA No : 7881/Mum/2010 Shri Devji Nenshi Palani 8 were of the nature of trading activity of the assessee and accordingly we set aside the order of the CIT(A) treating the short term capital gain as business income.”

4 And 7362/Mum/2013 In view of the fact that in the assessee’s own case the issue has been decided against the assessee. We, therefore , respectfully following the decision of the coordinate bench uphold the orders of authorities below in treating the STCG as income from business.

Grounds of appeal No.B is against the confirmation of the action taken by the AO in making the disallowance u/s 14A read with Rule 8D of Rs.18,91,670/- by the ld. CIT(A). During the course of assessment proceedings, the AO observed that the assessee has earned dividend income and no expenses for the earning of the dividend income were apportioned and disallowed as per the provisions of section 14A of the Act. The assessee was asked vide show cause notice dated 24.11.2010 as to why the provisions of section 14A read with rule 8D should not be invoked which was replied by the assessee by submitting that the provisions of section 14A r.w.r 8D were not applicable to the assessee as no expenses have been incurred in relation to exempt income. However the AO brushing aside the contentions of the assessee invoked the provisions of section 14A read with rule 8D and made disallowance of Rs.18,91,658/- comprising of Rs.17,73,678/- under rule 8D(2)(ii) and Rs.1,17,992/- under rule 8D(2)(iii). The ld. CIT(A) also upheld the action of the AO by rejecting the contention of the assessee that the disallowance u/s 14A cannot exceed the exempt income.

The ld. DR on the other hand, opposed the arguments of the ld.AR by submitting that the assessee has earned interest free income during the year and therefore the application of provisions of section 14A r.w.r.8D were mandatory and was rightly applied by the AO and therefore the ld. CIT(A) judiciously upheld the action of the AO. Finally the ld DR finally prayed that the orders of authorities below be upheld.

We find that in the case of assessee the exempt income from dividend was Rs.40,000/- during the year. We are in agreement with the arguments advanced by the ld.AR that the disallowance u/s 14A r.w.r 8D should not exceed the exempt income earned during the year. The case of the assessee is also supported by the decisions referred and relied to by the ld AR in which it 6 And 7362/Mum/2013 has been held that disallowance cannot be exceed the amount of exempt income. We, therefore, respectfully following the ratio laid down in (i) M/s Daga Global Chemicals (supra), (ii) M/s Arcadia Share & Stock Brokers P. Ltd. (supra) and M/s Silvassa Wooden Drums (supra) set aside the order of the ld. CIT(A) and direct the AO to delete the addition of Rs.18,51,670/- by sustaining the disallowance to the extent of Rs.40,000/- only.

The issue raised in ground No.C,D,E,F,G,H,I and J is against the confirmation of disallowance on account of car expenses, depreciation of motor car, telephone expenses, conveyance allowance and travelling expenses as under:-

The AO during the course of assessment proceedings found that the above said expenses from C to E were incurred by the assessee and charged to the profit and loss account which included personal element as the assessee could not prove the genuineness of the said expenses by producing the necessary documentary evidences. Therefore all these expenses were not incurred wholly 7 And 7362/Mum/2013 and exclusively for the purpose of business and accordingly made the disallowance at the rate of 20% of total expenses Rs. 7,64,255/- as per para 6 of the AO order thereby calculating the disallowance at Rs. 1,52,851/- . The matter carried to the ld. CIT(A), who confirmed the expenses to the extent of 1/6 of the total expenses by following the order of ITAT in AY 2005-06 wherein the tribunal confirmed 1/6th of the total disallowance. Similarly in respect F, G, H , the AO noted that most of these expenses were incurred in cash and based upon the self made vouchers with no third party verification available. The AO further observed that the nature of expenses were such that it was very difficult to ascertain whether these were incurred for the purpose of business of the assessee and accordingly disallowed 20% of the aggregate expenses of Rs, 8,96,150 working out the disallowance at Rs. 1,79,230/-. In appeal proceedings ,the CIT(A), who confirmed the expenses to the extent of 10% of the total expenses by following the order of his predecessor in AY 2007-08 wherein the CIT(A) confirmed 10% of the total disallowance. As regards ground I and J the AO observed that most of these expenses were incurred on account of lodging and boarding in hotels and restaurants which the assessee could not substantiate to be exclusively incurred for business purposes and disallowed Rs. 3,78,348/- @ 20% of these expenses which was also upheld by the CIT(A) by holding that assessee could not prove 8 And 7362/Mum/2013 these expenses before AO as well as before me and keeping in view the nature of these expenses personal element could not be ruled out.

We have heard the rival contentions and perused the material placed before us. We find that the adhoc disallowances has been made by the AO at the rate of 20% of the total expenses in respect of car expense, depreciation , telephone, office expenses, conveyance, miscellaneous expense, foreigen travel and other travelling. The ld CIT(A) reduced qua car , depreciation and telephone to 1/6th whereas the disallowance in respect of office expense, conveyance and miscellaneous was retained at 10% and the disallowance on account of foreign travel and other travel was confirmed. . Having seen the nature of expenses incurred , we find that the basis of confirmation is tribunal decision and CIT(A) decisions in the case of the assessee himself. Further we find that disallowances were purely on adhoc basis. We are therefore of the considered opinion that it would be justified and reasonable if the disallowances is restricted to 10% of the total expenses. Accordingly, we set aside the order of the ld.CIT(A) and direct the AO to make the disallowance equal to 10% of total expenses claimed by the assessee. Accordingly, this ground is partly allowed.

Ground No.A is against the confirmation of addition of Rs.27,49,000 by the ld.CIT(A) as made by the AO on account of commission income on the basis of 9 And 7362/Mum/2013 AIR information available with the department by disregarding the facts that the assessee was following cash system of accounting.

Brief facts of the case are that the assessee was engaged in the business of commission agent and during the course of assessment proceedings, the AO found that the assessee has credited commission of Rs.86,51,000/- whereas as per the AIR information available with the AO the commission received was Rs.1.14 Cr. Accordingly, the AO called upon the assessee to explain the discrepancy of the amount of commission account for and as per AIR. In response to the said notice, the assessee vide letter dated 12.12.2011 submitted before the AO that he was following the cash system of accounting and therefore the commission received has been shown by the assessee on the basis of actual receipt from clients by following cash system of accounting whereas the income as per the AIR information was on the basis of accrual system of accounting and hence the difference. The AO did not agree with the explanation of the assessee and added the difference of Rs.27,49,671/- to the total income of the assessee.

In the appellate proceeding, the ld. CIT(A) upheld the action of the AO on the ground that the assessee was not able to reconcile Rs.27,49,671/- either at the assessment stage or in the appellate proceedings and accordingly dismissed the appeal of the assessee.

The issue raised in ground No.B in confirming the action of disallowance of Rs.2000/- on account of foreign travel expenses.

The next is “C” ground which is in respect of disallowance of travelling expenses of Rs.4,969/- made by the AO and confirmed by the ld.CIT(A).

We find that the ld.CIT(A) upheld the action of the AO on the ground that the assessee failed to prove that one of his employees visited Shirdi for cracking the business deal with one of the client but relevant documents have not been submitted as to which employee was sent to Shirdi, to whom did he meet and what business purpose was served. Since, the assessee failed to controvert the findings of the AO before the ld.CIT(A) and here also no contrary documents were submitted by the ld.AR to disprove the finding of the ld.CIT(A), we confirm the findings of the lower authorities. Ground taken by the assessee is rejected.

The next ground is in respect of disallowance u/s 14A r.w.r 8D of the Act amounting to Rs.18,23,688/-. We have already decided an identical issue in (AY-2008-09) and therefore, our decision in ITA 12 And 7362/Mum/2013 No.3594/Mum/2012 would, mutatis mutandis, apply to this ground also. The AO is directed accordingly.

The ground “Ë” is in respect of disallowance @ 20% of car expenses, car depreciation and telephone expenses amounting at Rs.98,053/-. 24. The assessee debited motor car expenses Rs.2,67,897/-, depreciation on motor car Rs.1,30,829/- and telephone expenses Rs.91,540/- aggregating to Rs.4,90,266/-. The AO on the basis of CIT(A)’s order for the preceding year following the order of ITAT order dated 30.10.2009 in made disallowance at 20% i.e. Rs.98,053/-. In appeal, the ld.CIT(A) also confirmed the action of the AO. 25. We find from the record that the 20% disallowance is on higher side and also the basis of preceding previous year without giving any findings are not justified. In the present circumstances we are of the considered opinion 10% disallowance would be reasonable. Accordingly, we direct the AO to restrict the disallowance to 10%.

The assessee debited office expenses Rs.7,49,131/-, Conveyance expenses Rs.1,12,498/- and Miscellaneous expenses Rs.85,245/- aggregating to 13 And 7362/Mum/2013 Rs.9,46,874/-. The AO for want of verification made adhoc disallowance at 20% i.e. Rs.1,89,375/-. In appeal, the ld.CIT(A) also confirmed the action of the AO.

After hearing both the parties and on perusal of record we find that the 20% disallowance is on higher side and hence, we are of the considered opinion 10% disallowance would just and reasonable. Accordingly, we direct the AO to restrict the disallowance to 10%.

The ground “G” is in respect of disallowance of presentation Articles amounting to Rs.23,033/-.

The assessee debited office expenses Rs.2,30,331/- on account of presentation articles. The AO on the basis of ITAT order for the assessment year 2005-06 disallowed 10% of the same. In appeal the ld.CIT(A) confirmed the action of the AO mainly on the ground of that the assessee could not justify the expenses incurred wholly and exclusively for the purpose of business and disallowance was confirmed following the decision of the ITAT for the assessment year 2005-06. 31. Before us, the assessee could not controvert the finding of the lower authority. Moreover 10% disallowance is quite fair and reasonable. Therefore, we confirm the orders passed by the lower authorities.