This appeal has been filed by the revenue and there are eight grounds of appeal as follows: (i) "For that learned Commissioner (Appeals) was wrong in holding that excess of sale proceeds over purchase price or adjusted purchase price of shares was taxable capital gains under section 45 of the Income Tax Act, 1961".
(ii) "For that learned Commissioner (Appeals) was wrong in holding that sale of bonus shares resulted into taxable capital gains under section 45 of the Income Tax Act".
(iii) "For that learned Commissioner (Appeals) was wrong in confirming disallowance of service charges of Rs. 1,58,600".
(iv) "For that learned Commissioner (Appeals) was wrong in confirming disallowance of travelling expenses of Rs. 55,044".
(v) "For that learned Commissioner (Appeals) was wrong in confirming levy of interest under sections 234A, 234B and 234C of the Income Tax Act".
(vi) "For that learned Commissioner (Appeals) was wrong in not admitting additional grounds and confirming the assessment order and demand notice which were not in accordance with the law".
(vii) "For that learned assessing officer may be directed to allow refund of tax paid with interest thereon".
(viii) "For that the appellant seeks kind permission to raise new contention and grounds of appeal".
So far as the first and second grounds of appeal are concerned, the learned authorised representative emphatically stated that in order to attract capital gains, the precondition is cost of acquisition and cost of improvement. In order to substantiate his case, he cited certain case-laws in favour of the same which are analysed here as under one by one : This case-law relates to attractability of capital gains on self-generated goodwill and the Honble Bombay High Court has held that in case of the same, there was no transfer or sale of goodwill so as to attract section 12B(1) of the 1922 Act.
In this case, the Honble Bombay High Court has held the income chargeable to capital gains, tax is to be computed by deducting from the full value of the consideration "the cost of acquisition of the capital assets and the cost of any improvement thereto", since the cost of improvement of goodwill cannot be ascertained, gains arising on its transfer would not be liable to tax under section 12B.In this case the Hon'ble Calcutta High Court has held that the cost of acquisition of an asset, be it a capital asset or any other asset must be understood in its commonsense that is, it must represent the expenditure incurred in acquiring the asset.
The learned authorised representative drew our attention to the specific simplified procedure for computation of capital gains on transfer of bonus shares containing in the Finance Bill, 1995 and published in 212 ITR 357 (statute portion). On perusal of the same, it will be clarified that the cost of bonus share will be taken as nil for computation of capital gains on sale of bonus shares. For ready reference and better appraisal of the same, the said procedure is quoted as hereunder : "Simplified procedure for computation of capital gains on transfer of bonus shares Bonus shares are received by an existing shareholder without making any further payment. At present, cost of acquisition of these shares is taken on the basis of principles laid down by the Supreme Court in the case of CIT v. Dalmia Investment Company Ltd. (1964) 52 ITR 567 (SC).
It has been held that the cost of a bonus share is to be determined by averaging the cost of the original shares and bonus shares.
Computation of the cost of bonus shares on the principle of averaging, however, is not a simple job and has led to a number of difficulties.
For the sake of clarity and simplicity, section 55 is being amended to provide that the cost of bonus shares will be taken as nil for computation of capital gain on sale of bonus shares. This would not affect the cost of original shares. This procedure will also be applicable to any other security where a bonus issue has been made.
The period of holding of the bonus asset will be reckoned from the date of allotment of such asset.
These amendments will take effect from 1-4-1996, and will, accordingly apply in relation to assessment year 1996-97 and subsequent years (Clauses 3 and 14)." The learned authorised representative further drew our attention to the case-laws in the case of CIT v. Pushparaj Singh (1998) 232 ITR 754 (MP), wherein at page 756, the Honble M.P. High Court has totally agreed with the Income Tax Appellate Tribunal that the cost of acquisition of shares was nil to the assessee and, therefore, no capital gain could be levied thereon.
In this case, the Honble Apex Court has given direction to give reasoning regarding rejection of application under section 256(2) relating to attractability of capital gains on bonus shares.
In this case, the Honble Apex Court explained the procedure for computation of cost of bonus shares on the basis of spreading over of the cost of original shares and the Honble Apex Court has held that this method would apply to Dealers and Investors in shares. The Apex Court ultimately agreed with the High Court in this case that subsequent issue of bonus shares had the affect of altering the original costs of acquisition of shares.
In reply to the learned authorised representative contention, the learned Departmental Representative cited certain case-laws, which are also analysed as hereunder : Learned Departmental Representative in the course of the hearing emphatically stated that CIT v. B. C. Srinivasa Setty (1981) 128 ITR 294 (SC) does not have relevance in the case, since it relates to goodwill and the learned authorised representative has been reiteratedly relied on the same while arguing his case.
The learned Departmental Representative specifically drew our attention to page 522 of this case wherein the Honble Apex Court has held that "there is no dichotomy as to whether the shares are held by investors or dealers in shares. In both the cases, it is surplus receipt that is brought to tax either is capital gains or Profit & Loss as the case may be and in accordance with the relevant statutory provisions.
In both these case-laws, the Honble Apex Court have held that in case of dealer in shares, who values his stock at cost, but bonus shares stood in ordinary share held by him pari passu with the original shares. The correct method of value the cost to the dealer of the bonus share is to take the cost of original shares, spread it over the original shares and the bonus shares collectively and find out the average price of all the shares.
After hearing both the rival submissions and analysing the case-laws as above cited by both the sides, we are of the considered opinion that in respect of bonus shares, the cost of the same should be treated as nil in view of the clarification made in the Finance Bill, 1995 and in 212 ITR (statute portion) 357. Although the clarificatory amendment took effect from 1-4-1996 as per the said statute portion and it does not relate to the relevant year under consideration, i.e., for the assessment year 1992-93 to the instant case, yet considering the amendment to be clarificatory in nature and treating the same to be crystal clear legislative intention, it is deemed proper to treat the cost of bonus share as nil in the case of the assessee. In case of original shares, however, the cost of acquisition or the market price as on the date of transfer whichever is higher has to be treated as the cost of acquisition for the purpose of computation of capital gains tax.
The 3rd ground of the assessee relates to confirmation of disallowance of service charges of Rs. 1,58,600. On a perusal of the assessment order alongwith the order of the Commissioner (Appeals) and after hearing the rival submissions on this point, I beg to differ from my brother-Member so far as allowability of service charges to Shri Sanjiv Taneja and Shri Vijay Kumar Surana is concerned. Despite the assessing officers query for filing details and asking for the I.T. File Nos., the same could not be furnished by the assessee in course of the hearing of the assessment proceedings. I totally agree with the contention of the assessee that business might have increased to a greater extent with the help of the services taken by Shri Taneja and Shri Surana. But under the provisions of the Income Tax Act, objective satisfaction of the assessing officer is the sine qua non of the principles of law. Since no documentary evidence in support of the services rendered by the persons concerned has been filed at the assessment stage, I totally agree with the learned Commissioner (Appeals) in confirming the disallowance.
The 4th ground relates to disallowance of travelling expenses. After hearing the rival submission and going through the materials available on record, I find justification in confirming the disallowance by the Commissioner (Appeals). The Commissioner (Appeals) on page 4, para 5 of his order has categorically stated that the assessee has utterly failed to furnish the details of her tour abroad giving details of the places visited, contacts made by her and results of her contacts during her foreign tour. Hence, the business purpose of the tour has not been established and, therefore, the disallowance was justified. I totally agree with the view taken by the Commissioner (Appeals).
The 5th ground relates to levy of interest under sections 234A, 234B and 234C of the Income Tax Act.
Since the provisions are mandatory, we have nothing to comment on the same. However, interest is leviable on tax on the total income as declared in the return and not on the total income as determined and as has been rightly held by the Honble Patna High Court, Ranchi Bench in the case of Ranchi Club Ltd v. CIT (1996) 217 ITR 72 (Pat) and cited by the authorised representative. The authorised representative further stated that the demand notice accompanying the assessment order is not specific in the case of the assessee.
In reply to the same, the learned Departmental Representative in the case of Lok Nath & Co. v. CWT (1996) 217 ITR 310 (SC), wherein the Honble Supreme Court has held that an erroneous citation of provision of the Act in the assessment order will not invalidate or itself.
According to the learned Departmental Representative, since the demand notice is an accompanying statement of the assessment order, it will also be applicable for the demand notice. He further cited the case-law of K.P. Paulose & Co. v. CIT (1998) 230 ITR 798 (Ker). In this case, the Honble Kerala High Court has also held that erroneous description of an order could not invalidate the same.
Ground No. 6 of the assessee does not hold good at this stage of the proceeding since no direction is being given now to the Commissioner (Appeals). Further admission of additional evidence by Commissioner (Appeals) without affording opportunity to assessing officer to verify the same will amount to violation of rule 46(A).
Ground Nos. 7 & 8 being consequential in nature o not require any specific consideration.
I have perused the order written by my learned brother, the Judicial Member. I agree with his findings with regard to all the grounds excepting ground No. 3 raised before the Tribunal. On a study of the said ground No. 3 and the relevant papers and materials placed in the Paper Book and on hearing the representatives of both the sides, I have not been able to persuade myself to agree with the ultimate finding of my learned brother on this issue.
The issue relates to the disallowance of service charges of Rs. 1,58,600 as confirmed in the first appeal. The said service charges were paid to Shri Sanjiv Taneja and Shri Vijay Kumar Surana. My learned brother has merely relied on the discussions made by the assessing officer in the assessment order to the effect that the assessee could not offer any details of the nature and the services rendered to her by abovementioned two persons. However, the detailed agreement between the group consisting of the main associate M/s. Parasmani Investment Co.
(P) Ltd. and others (including the assessee) on the one hand and S/Shri Vijay Kumar Surana and Sanjiv Taneja on the other, which is dated 15-4-1991 clearly spells out the nature of services to be rendered by the abovementioned two persons to all the five members of the contracting group as below: You will provide services to us and our associates in the field of our business of financing, money lending, investment, leasing, hire purchase, trading, consultancy, agency, broking etc. as may be required from time to time. Within our various business matters you will help us by advising and rendering services as follows : (i) Raising of funds by way of loans, deposits, intercorporate deposits, placement of shares, debentures etc. by private placement basis or by public issues etc. as may be found conducive. For this purpose you will arrange meetings, negotiations, finalisation of agreement and other necessary things.
(ii) Advising, and helping in deals relating to purchase of shares and securities, in markets or by private negotiations etc. with a view of trading in shares and securities for short to medium term, perspective and also to purchases shares in big lots with a view of long term perspective to participate in management of companies and/or to earn profits by way of trading on shares in lot.
(iii) To advise and help us in offloading shares in lots which we held or which we may acquire.
(iv) To advise and help us in expanding our business area in the field of financing, leasing, hire purchases, investments and for that purpose to bring to us good offers, provide credentials of parties, procure business, finalisation of deals etc.
(v) To advise us and help us in the areas of share/securities booking, portfolio management, underwriters, issue managers, Merchant banking, Mutual Fund etc. and to render all services required for obtaining various permissions, licences, approvals, registration etc.
(vi) To advise us and assist us in advertisements, selection of personnel, training of personnel etc.
(vii) To advise us and assist us in the field of publicity, advertisement, public relations, liaison with various parties, authorities etc. in connection with our business; and (viii) To render such other services in our business and business of our associates as may be considered necessary and relevant from time to time in the areas of Finance, Investment, Marketing, Public relations and related legal matters." In the face of such clear-cut agreement between both the sides, in my view, it will not be proper to say that the details of the nature of services as rendered by the two persons under consideration to the five members of the group were not furnished. It is, however, correct that the I.T. file Nos. of the two persons concerned were not intimated on the ground that at the time of making of the assessments, these two persons had left Calcutta. The assessing officer also states that the assessee could not file any documentary evidence in support of the services rendered. In this connection, one must say that taking into consideration the purely oral nature of the services rendered by the two persons like advising the members of the group on various matters, it would be difficult to expect maintenance of any written documents in this regard. Services of this type do not generally carry any demonstrable evidences.
However, it is required to be noted that the departmental authorities have not challenged the genuineness of the payments. The two persons concerned have also not been found to be closely connected with the assessee so as to make the transaction fall within the ambit of section 40A(2). It is also not the departmental case that the amounts paid to these two persons came back to the assessee through some backdoor ways.
My brother, Judicial Member has been of the view that under the provisions of the income-tax Act, objective satisfaction of the assessing officer is a sine qua non of the principles of law. There cannot be any doubt about the same. But the objective satisfaction should be based on the limits of reasonableness and the factual circumstances of the given case. In a case like this, where no documentary evidence in support of the services rendered by the persons concerned can be expected, the objective satisfaction has got to be considered to have been achieved by taking into consideration the other aspect of the transaction like absence of close-link between the assessee and the payees, the genuineness of the payment and also absence of any material on record to indicate flow-back of the payment amount to the assessee through some other means. The nature of the services rendered has been discussed in the agreement between the both parties in full detail. In my order in Shekhawati Rajputana Trading Co.
(P) Ltd. [IT Appeal No. 2934 (Cal) of 1995] (a sister concern also being a member of the same group and involved in the same transaction), the issue has been discussed by me in detail at para 10 of the said order. The position of the benefits obtained by the members of the group out of the advises given by Shri Vijay Kumar Surana and Shri Sanjiv Taneja has also clearly been discussed in the said order. Hence, not only the agreement between the parties concerned serves the purpose of evidence in support of the services having been rendered by the persons concerned, but the discussions about the result of such services on the financial aspects of the members of the group (as discussed in the case of Shekhawati Rajputana Trading Co. (P) Ltd. (supra) go to prove the genuineness of the rendering of the services.
Finally, I am of the view that on the basis of the facts of the case and the materials available on record, it would be proper to allow the claim of the assessee.
On hearing of this appeal by the Division Bench of the Income Tax Appellate Tribunal, E-Bench, Calcutta, the Members constituting the Bench agreed on all the issues, excepting on Ground No. 3, raised by the assessee before the Bench. In respect of the said ground viz.
ground No. 3, the Members have difference of opinion on the following point : "Whether, on the facts and in the circumstances of the case, the payment of service charges of Rs. 1,58,600 to Shri Sanjiv Taneja and Shri Vijay Kumar Surana should be allowed as a deduction ?" Therefore, by virtue of the provisions of section 255(4), we refer the above point of difference to the Honble President of the Income Tax Appellate Tribunal for necessary action.
The appeal of the assessee for the assessment year 1992-93 had come up for hearing before the "E" Bench of the Tribunal. Since there was a difference of opinion amongst the Judicial Member and the Accountant Member in regard to the following issue, I was nominated as Third Member by the Honble President under section 255(4) of the Income Tax Act, 1961 : "Whether, on the facts and in the circumstances of the case, the payment of service charges of Rs. 1,58,600 to Shri Sanjiv Taneja and Shri Vijay Kumar Surana should be allowed as a deduction ?" Identical issue came up before me as 3rd Member in the case of Parasmani Investment Co. (P) Ltd. [IT Appeal No. 516 (Cal) of 1996] for assessment year 1992-93. Facts and circumstances of the instant case being similar, the conclusion cannot but be the same as arrived in the aforementioned appeal. Agreeing thus with the conclusion of the Ld.
Judicial Member and for the reasons given by me in the case of Parasmani Investment Co. (P) Ltd. (supra), I uphold the disallowance of service charges in respect of payments to Sri Sanjiv Taneja and Sri Vijay Kr. Surana.
The orders passed in this case may be placed before the Bench for passing consequential order in accordance with majority view.
On a difference of opinion between the members originally constituting this bench, then point of difference of opinion was referred to Honble Vice-President (Kolkata Zone) as Third Member under section 255(4) of the Income Tax Act.
In accordance with the majority view after duly taking into account the opinion expressed by the learned Third Member, we hold that the payment of service charges of Rs. 1,58,600 to Shri Sanjiv Taneja and Shri Vijay Kumar Surana should not be allowed as a deduction to the assessee.
Ground No. 3 is, accordingly, dismissed.