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2004 (12) TMI 626 - ITAT MUMBAIDisallowance u/s 40A(2) for payment to sister concern - professional charges - interest to clients on Government securities - brokerage paid to a sister concern - losses claimed against income from Government securities. HELD THAT:- The CIT(A) has also dealt with the matter at an equally superficial level by only modifying the quantum and without giving any cogent finding about the conditions of applicability of section 40A(2) being satisfied. Unless there is a clear finding that the market value of the services taken from the sister concern is less than the price at which the services are obtained, there cannot be an occasion to apply the disabling provisions of section 40A(2). This exercise, therefore, necessitates a finding about the fair market value of such services. For this reason alone, the disallowance u/s 40A(2) is inherently unsustainable in law on the facts of this case. It is also noteworthy that the services in question are essentially of such a nature that there cannot even be any generalizations about as to what should be the fair market value. The charges of professional advice of X lawyer may not necessarily comparable with the charges of Y lawyer, and same should be the case of investment consultants. The factum of expenditure, as also the expenditure being in the nature of business expenses, is not in doubt. There is no material to even suggest, leave aside establish, that the expenditure incurred by the assessee is excessive vis-a-vis the fair market value of such services. We are, therefore, of the considered view that it was not a fit case for invoking the provisions of section 40A(2) on the facts of the case. The CIT(A) should have deleted the entire disallowance. On this issue, therefore, we uphold the contention of the assessee and reject the contention of the revenue. The entire disallowance is to be deleted. Ground No. 3 in revenue’s appeal is dismissed and ground No. 3 in assessee’s appeal is allowed. Interest to clients on Government securities - loss incurred for unauthorised use of public money is not be allowed as a deduction in business expenditure - HELD THAT:- As a matter of fact, use of public funds, through such transactions, for financing own business was common enough for the brokers to be termed as a normal financing mode. The very funding of the working capital in the cases of some brokers may be through unscrupulous means but as long as the interest is paid for using the funds which are employed in business, interest continues to be an allowable deduction. The use of fraudulent means to raise the funds, by itself, does not make the interest non-deductible, more so when interest is beyond doubt or dispute compensatory in nature. The payment of interest in such cases cannot be said to be public policy either. In view of these discussions, we approve the conclusions arrived at by the CIT(A). No interference. Ground No. 4 is dismissed. Brokerage payment - There is enough material to demonstrate the factum of services having been rendered by the N.M. Murarka & Co. Once again the disabling provisions of section 40A(2) are invoked but the conditions precedent for invoking the said section are again not satisfied. There are no findings about the fair market place of the services being less than the payments made by the assessee for the same. An expenditure being excessive cannot be inferred based on some subjective perceptions of the authority dealing with the same; it has to be based on cogent material on record. That is not the case there. Thus, we are of the view that the CIT(A) ought to have deleted the entire disallowance. We, therefore, reject revenue’s grievance on this issue and uphold the assessee’s grievance on the same. Accordingly, ground No. 5 is revenue’s appeal is dismissed and ground No. 4 in assessee’s appeal is allowed. Income from Government securities - Since the exercise of examination of details involves going through voluminous evidence, we consider it appropriate not to do it first time at the Tribunal level but to remit the matter regarding claim for all these losses to the file of the Assessing Officer for examination de novo by way of a speaking order, in accordance with the law and after giving a fair and meaningful opportunity of hearing to the assessee. We have also noted that in some cases the CIT(A) has deleted the disallowance of losses only because the Assessing Officer had accepted the same in the remand report proceedings. Once the Assessing Officer himself accepts that, it is certainly not open to him to backtrack now and demand re-verification of claim. Barring this rider, the Assessing Officer shall examine all the claims for losses afresh in accordance with the above directions. Ground No. 7 in revenue’s appeal and ground Nos. 8 to 18 in assessee’s appeal are thus allowed for statistical purposes. The appeal filed by the revenue is, therefore, partly allowed.
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