ENAM FINANCIAL CONSULTANTS (P) LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX
[Citation -2005-LL-1128-1]

Citation 2005-LL-1128-1
Appellant Name ENAM FINANCIAL CONSULTANTS (P) LTD.
Respondent Name ASSISTANT COMMISSIONER OF INCOME TAX
Court ITAT
Relevant Act Income-tax
Date of Order 28/11/2005
Assessment Year 1998-99
Judgment View Judgment
Keyword Tags opportunity of being heard • carry forward and set off • regular books of account • contractual obligation • industrial development • financial consultancy • professional service • speculation business • statutory obligation • trading transaction • breach of contract • penal consequence • speculation loss • welfare expenses • actual delivery • value of stock • body corporate • business loss • notional loss • public policy • staff welfare • ad hoc basis • public issue • market price • actual sale
Bot Summary: In terms of the underwriting agreement, the assessee had agreed to underwrite/procure subscription of 1,87,500 FCDs amounting to Rs. 1,50,00,000 and the amount devolved on the assessee was for Rs. 1,86,350 FCDs amounting to Rs. 1,49,08,000. The assessee carried the matter in appeal before the learned CIT(A) who was of the opinion that the assessee was under statutory obligation to underwrite the FCDs and by not fulfilling such obligations it violated the relevant regulations which attracted penalty though not necessarily in the monetary form but which could have caused other major disadvantages to the assessee and in this background, the assessee rushed to settle the matter to avoid the penalty. A final devolvement notice was duly served on the assessee, by the auditors of NSML and statement of underwriting obligation was served on 7th June, 1995 asking the assessee to subscribe or procure the application for 1,86,350 FCDs devolved on the assessee before 10th July, 1995. In the meanwhile a negotiated settlement was arrived between the parties whereby the assessee paid Rs. 36,60,000 to NSML and on 27th June, 1997, NSML issued a certificate wherein it was mentioned that the disputed matter of devolvement liabilities in respect of public issue of FCDs had been settled and the assessee stood fully discharged from their underwriting obligation. The assessee is undisputedly engaged in the business of merchant banker as authorized by SEBI the activities of underwriting of shares carried on by the assessee are its normal business activities even cl. The consequence which the assessee, at the most could have been burdened with was in the form of cancellation/suspension of the licence to act as an underwriter and that too would have happened only if the assessee would have been found guilty in accordance with the SEBI Regulations. The learned CIT(A) after considering the submissions of the assessee was of the opinion that the loss claimed by assessee fell within the ambit of s. 73 of the Act and accordingly, confirmed the action of the AO. The learned counsel appearing on behalf of the assessee besides reiterating the submissions made before the learned CIT(A) contended that there was no intention on the part of the assessee for acquiring/ purchasing the securities, with a view to earn profits.


This appeal filed by assessee is directed against order of CIT(A)-II, dt. 3rd Dec., 2001 at Mumbai for asst. yr. 1998-99. assessee has raised following grounds of appeal: "A. Claim for damages paid of Rs. 36,60,000 for breach of underwriting arrangement: (1) On facts, in circumstances of case and in laws, learned CIT(A) failed to appreciate that: (a) In terms of model underwriting agreement as per SEBI Regulations and also actual underwriting agreement entered into between appellant as underwriter and issuer company M/s Niwas Spinning Mills Ltd.: (i) failure on part of underwriter to honour its obligation to subscribe to devolved securities and (ii) resultant claim for damages. Are integral part of normal underwriting business: (b) For reasons stated, there was genuine dispute between Issuer Company M/s Niwas Spinning Mills Ltd. and appellant as underwriter. (c) In terms of legal provisions, particularly s. 73 of Indian Contract Act, payment of compensation for loss or damage caused by breach of contract is wholly legal and permissible and therefore, neither prohibited by law nor offence. (2) On facts, in circumstances of case and in law, learned CIT(A)-II, Mumbai erred in holding that: (a) Not subscribing to devolved security is not normal activity of underwriting business: (b) payment of Rs. 36,60,000 by appellant to Issuer Company M/s Niwas Spinning Mills Ltd. was payment which is prohibited by law and accordingly, in invoking Explanation to s. 37(1). (c) damages of Rs. 36,60,000 paid as above in terms of underwriting agreement as well as statutory legal provisions was not loss arising in normal course of underwriting business and hence, not allowable under s. 29 of IT Act, 1961. B. Devolvement loss of Rs. 1,04,000 On facts, in circumstances of case and in Jaw, learned CIT(A)- II, Mumbai erred in holding that said loss of Rs. 1,04,000 arising on account o f marking devolved securities to market price is disallowable by invoking Explanation to s. 73 of Act. C. Disallowances of certain expenses by learned AO on ad hoc basis: On facts, in circumstances of case and in law, learned CIT(A)II, Mumbai erred in confirming ad hoc disallowances of Rs. 50,000 out of general expenses Rs. 20,000 out of staff welfare expenses and Rs. 30,000 out of conveyance expenses." We have heard both parties, perused records and other applicable legal position. Briefly stated, facts of case are that assessee filed return of income on 26th Nov., 1998 declaring loss of Rs. 3,61,169. case was selected for scrutiny and assessment was completed determining total income of assessee at Rs. 35,02,830. major disallowance was made of Rs. 36,60,000 being loss on account damages paid for breach of underwriting agreement. assessee category 1 merchant banker, is engaged in financial consultancy, investment advisory services and managing new issues of shares, debentures and other capital market, market investments both for public and private sector. During year under consideration, assessee claimed loss of Rs. 36,60,000 paid to M/s Niwas Spinning mills Ltd. (hereinafter referred to as NSML) on account of devolvement of issue of FCDs by NSML. assessee had entered into underwriting agreement on 6th Feb., 1995 with NSML in matter of public issue of Rs. 54,46,875 zero interest fully convertible debentures (5) Rs. 80 each for cash at par aggregating to Rs. 43,575 crores, wherein amount payable on application was Rs. 20 per FCD. issue opened for subscription on 2nd May, 1995 and closed on 12th May, 1995. However, public issue was under-subscribed to extent that issue received approximately 4 per cent response from investing public. In terms of underwriting agreement, assessee had agreed to underwrite/procure subscription of 1,87,500 FCDs amounting to Rs. 1,50,00,000 and amount devolved on assessee was for Rs. 1,86,350 FCDs amounting to Rs. 1,49,08,000. NSML) issued devolvement notice to all underwriters associated with public issue including assessee. As no mutually agreeable decision was arrived at between assessee and NSML, NSML referred matter to Arbitration committee of BSE by invoking cl. 20 of underwriting agreement. Further, NSML issued several letters to SEBI and various stock exchanges requesting them to initiate appropriate action against all underwriters including assessee, who had failed to fulfil its underwriting obligations in respect of said public issue. total claim for Rs. 1,96,80,060 was made by NSML against assessee which included amount of interest @ 32 per cent for one year on amount of devolved FCDs and other miscellaneous expenses and it was also mentioned that further interest would be charged on above from assessee till date of actual payment. assessee-company, pending arbitration proceedings and other legal actions taken by NSML, entered into mutual settlement with NSML whereby assessee paid Rs. 36,60,000 to NSML damages and NSML withdrew all proceedings against assessee. This amount has been claimed as business loss against income from underwriting commission. AO enquired regarding this loss. AO, based upon submissions made by assessee reached to conclusion that FCDs were commodities within meaning of s. 43(5) and since there was no actual delivery of debentures, transaction had to be treated as speculative within meaning of s. 43(5) of Act and, therefore, aforesaid payment was not allowable against its regular business income. assessee carried matter in appeal before learned CIT(A) who was of opinion that assessee was under statutory obligation to underwrite FCDs and by not fulfilling such obligations it violated relevant regulations which attracted penalty though not necessarily in monetary form but which could have caused other major disadvantages to assessee and in this background, assessee rushed to settle matter to avoid penalty. Thus, learned CIT(A) held that expenditure incurred by assessee come within ambit of Explanation below s. 37(1) which provide for disallowance of any expenditure incurred for any purpose which was offence or prohibitive by law. Accordingly, learned CIT(A) sustained disallowance and recorded his findings as under: "It would be seen that impugned loss did not arise on account of devolvement of debentures which event never took place as appellant r e f u s e d to subscribe its quota of debentures under underwriting arrangement. normal risk involved in underwriting business is by way of compulsion to subscribe to unprofitable shares. But flouting of obligation is not normal activity of underwriting business. Supreme Court decision in case of CIT vs. U.P. State Industrial Development Corporation (1997) 139 CTR (SC) 267: (1997) 225 ITR 703 (SC) cited by appellant is of no avail because it did not deal with situation arising from flouting of underwriting agreement. payment had to be made by appellant for not fulfilling its underwriting obligation which impaired interest of company as well as general money market and therefore, it could not be said to represent loss arising in normal course of underwriting business. Besides breach of underwriting contract with company, it also involved violation of regulations under SEBI Act and it is this latter aspect that compelled appellant to make payment and settle matter with company. It was therefore, expenditure for illegal conduct of not honouring underwriting contract and thus not observing monetary disciple. Hence, it was for purpose prohibited by SEBI regulations issued under authority of SEBI Act. amount was therefore, not allowable as deduction by virtue of Explanation below s. 37(1). In any case, it was not loss arising in normal course of business and hence not allowable under s. 29 of Act. As corollary, it was not eligible for carry forward and set off against speculation profit of future years. This may technically involve enhancement. Hence, opportunity was given to appellant vide order sheet entry dt. 15th Nov., 2001 to show cause as to why loss should not be treated as disallowable outright and not as speculation loss. reply of appellant dt. 26th Nov., 2001 was duly considered. It is not acceptable for reasons mentioned above. In view of above finding that amount was not allowable by virtue of Explanation below s. 37(1) or not allowable under s. 29 as loss arising in normal course of business, it is not necessary to go into controversy whether it was loss from purchase and sale of shares of other companies within meaning of Explanation below s. 73 which deems business of companies consisting in purchase and sale of shares as speculation business for purpose of set off loss from speculation business under s. 73 of Act." learned counsel for assessee contended that assessee claimed loss of Rs. 36,60,000 paid as damages/compensation for breach of underwriting arrangement under s. 37(1) of Act against regular business income. AO disallowed above stated claim by invoking s. 43(5) of Act. He submitted that assessee was category-1 Merchant Banker and was engaged in activities of issue management, advisor, consultant, manager, underwriter, port folio manager in accordance with provisions of SEBI (Merchant Bankers ) Regulations, 1992. He further drew our attention to Regulation 36 which provides for suspension/cancellation of licence of Merchant Banker if Merchant Banker fails to carry out its obligations. He further drew our attention to cl. 6(b) Sch. III of Code of Conduct (p. 36 paper book II) which restricts Merchant Banker from dealing in securities of client in routine manner. learned counsel further stated that underwriting of shares, debentures, etc. is assessee s business and drew our attention to cl. 11(b) of underwriting agreement between assessee and NSML placed at pp. 15 to 17 of paper book 1 outlining legal rights available to NSML for failure of assessee to perform its obligations and also cl. 20 of same agreement at p. 16 of paper book 1 which provided for mechanism of resolution of dispute between both parties. He also drew our attention to SEBI approved model underwriting agreement and contended that underwriting agreement between assessee and NSML was wholly based on model agreement so devised by SEBI. learned counsel contended that even SEBI approved model underwriting agreement contained provisions even SEBI approved model underwriting agreement contained provisions for settlement of disputes which could arise between underwriter and issuer company. He also drew our attention to relevant provisions of SEBI (Underwriters) Rules, 1993 which provided for general obligations and responsibilities and procedure for action in case of default committed by underwriter. On basis of above provisions, learned counsel contended that it was simply case of breach of commercial obligation arising under contract and, therefore, no violation of public policy or any law was involved. It was further pointed out that in impugned transaction, it was not only assessee but all underwriters did not discharge their commitments. T h e learned counsel further contended that issue under dispute was squarely covered in favour of assessee by decision of Hon ble Supreme Court in case of CIT vs. Shantilal (P) Ltd. (1983) 35 CTR (SC) 395: (1983) 144 ITR 57 (SC) wherein it was held that award by arbitrator on dispute between parties was allowable as business loss. It was further contended that in present case there was no award by arbitrator but there was mutual settlement between parties in dispute even then impugned loss was allowable as damages in view of decision of Hon ble jurisdictional High Court in case of CIT vs. Asian Chemical Co. (1992) 197 ITR 634 (Bom). It was further contended that it was case of payment of compensation for breach of contract, hence it was not speculative transaction within meaning of s. 43(5) of Act and for this proposition, reliance was placed on decision of Hon ble jurisdictional High Court in case of CIT vs. Jaydwar Textiles (1993) 202 ITR 569 (Bom). learned Departmental Representative initiated discussion by stating that debentures were commodities and, therefore, they were covered by provisions of s. 43(5) of Act and for this proposition, he relied on decision of Bench, Delhi of Tribunal in case of ANZ Grindlays Bank vs. Dy. CIT (2004) 82 TTJ (Del) 995: (2004) 88 ITD 53 (Del). It was contended that assessee did not perform its obligation accordingly, loss arising as result of such non-performance could not be called business loss. learned Departmental Representative. further referred provisions of Companies Act relating to underwriting commission wherein term underwriting has been stated by commission of enquiry as follows: word "underwriting" means that person agrees to take up shares specified in underwriting agreement if public or other persons fail to subscribe for them. Consideration for this contract takes form of payment of commission whether or not underwriters are called upon to take up any shares. Underwriters are thus paid for risk they expose themselves to in placing of shares before public. On basis of above, learned Departmental Representative contended that underwriters are paid underwriting commission for risk they take in placing of shares before public which may result into purchasing of securities themselves if public does not subscribe and Underwriting activity inherently involves speculation, therefore, settlement of Underwriting obligations without taking delivery was essentially of speculative nature and loss arising o n this account was speculation loss and for this proposition, he relied on decision of Tribunal in case of Comfund Financial Services (I) Ltd vs. Dy. CIT (1998) 67 ITD 304 (Bang). learned Departmental Representative further contended that case of Shantilal (P) Ltd. (supra) was not applicable to facts of case because there was no award by arbitration in present case. It was also contended that conduct of assessee was against public policy because assessee was under statutory obligation to take subscribe for purchase of FCDs underwritten by assessee. In rejoinder, learned counsel submitted that amount was paid in June, 1997 to resolve dispute much after close of public issue of FCDs and it was settlement of dispute and not of contract and, therefore, it could not be construed as transaction of speculative nature within meaning of s. 43(5) of Act and referred to decision of Tribunal in case of ANZ Grindlays Bank (supra). It was further contended that breach of contractual obligation was not against public policy in sense that decision to not to subscribe was commercial decision based on business realities and it was permissible as per provisions of underwriting agreement subject to right of client to claim damages for any loss suffered by him. Finally, it was contended that penalty was leviable under SEBI Regulation and which was not imposed mainly because of mutual settlement between assessee and NSML, therefore, Explanation to s. 37(1) was attracted. We have considered submissions made by both parties, material on record, orders of authorities below and also applicable legal provisions. Admittedly assessee is engaged in field of Securities Market and is category-I merchant banker entitled to work as underwriter. As per cl. 2(f) of SEBI (Underwriters) Rules, 1993 "underwriter" means person, who engage in business of underwriting of issue of securities of body corporate. Clause 2(g) of same Rules defines "underwriting" as agreement with or without conditions to subscribe to securities of body corporate when existing shareholders of such body corporate or public do not sub-scribe to securities offered to them. As per cl. 15(3) of SEBI (Underwriters) Regulations, 1993, underwriter in event of being called upon to subscribe for securities of body corporate pursuant to agreement referred to in cl. (b) of r. 4 shall subscribe to such securities within 45 days of receipt of such intimation from such body corporate. issue was opened on 2nd May 1995 and was closed on 12th May, 1995. issue was devolved and pre-intimation was given to assessee by NSML on 13th May 1995. final devolvement notice was duly served on assessee, by auditors of NSML and statement of underwriting obligation was served on 7th June, 1995 asking assessee to subscribe or procure application for 1,86,350 FCDs devolved on assessee before 10th July, 1995. assessee did not discharge their obligation. Finally copy of notice dt. 15th July, 1996 referring dispute to arbitration committee of BSE was served by NSML through their advocates making claim of Rs. 1,96,80,060. NSML also lodged complaint with SEBI on 6th May, 1997 to take appropriate action against all underwriters including assessee who had failed to fulfil their devolvement liability in respect of public issue. In meanwhile negotiated settlement was arrived between parties whereby assessee paid Rs. 36,60,000 to NSML and on 27th June, 1997, NSML issued certificate wherein it was mentioned that disputed matter of devolvement liabilities in respect of public issue of FCDs had been settled and assessee stood fully discharged from their underwriting obligation. Copy of same certificate was sent to Stock Exchanges at Mumbai, Baroda and Bangalore and same was also submitted to SEBI who passed order dt. 8th May, 1998, wherein penalty recommended by enquiry officer was set aside. In this background question before us is whether it was settlement of contract or settlement of dispute arising out of breach of contract between parties. If it is case of settlement of dispute between parties then it would not amount to speculative transaction but if it is settlement of contract and then it would be speculative transaction . Before dwelling upon this issue we would like to mention that FCDs are "commodities within meaning of s. 43(5) of Act", and therefore, contention of assessee that FCDs are not commodities stands rejected. Once it is held that FCDs are commodities then nature of transaction requires determination. Revenue has placed reliance on decision of Comfund Financial Services (I) Ltd. (supra) in support of its contention that compensation paid for breach of contract is speculative loss. We are afraid that this proposition is not applicable to case on hand because in case relied by Revenue these observations were made with reference to termination of transactions on due date by way of settlement of contract and making payments of difference amount by assessee and there was no actual breach of contract. However present case is of non- performance of contractual obligation resulting into breach of contract and settlement of dispute relating to same much after last date specified for actual performance. As pointed out by learned counsel appearing on behalf of assessee, Tribunal in this case in respective of other transaction which was settled after due date of performance of contract that same was breach of contract and hence not covered as speculative transaction within meaning of s. 43(5) of Act and which supports case of assessee. Sec. 43(5) refers to "contract settled". assessee has relied upon decision of Hon ble apex Court in case of Shantilal (P) Ltd. (supra), wherein Court held that in case of breach of contract and dispute between parties if damages are awarded as compensation by arbitration award then it would amount to settlement of dispute between parties whereas s. 43(5) speaks of settlement of contract and therefore, in case of breach of contract provisions of s. 43(5) will not come into play. In this case, Hon ble Supreme Court settled controversy which arose due to divergent opinions of Court settled controversy which arose due to divergent opinions of Hon ble Calcutta High Court in case of CIT vs. Pioneer Trading Co. (P) Ltd. (1968) 70 ITR 347 (Cal) and Hon ble Madras High Court in case of R. Chinnaswamy Chettiar vs. CIT (1974) 96 ITR 353 (Mad). Hon ble Calcutta High Court in aforesaid case of Pioneer Trading Co. Ltd. had held that "contract settled" means "contract settled before breach". After breach of contract cause of action is no longer based on contract itself but on its breach. This decision of Hon ble Calcutta High Court was followed by Hon ble Mysore High Court in case of Bhandari Rajmal Kushalraj vs. CIT (1974) 96 ITR 401 (Mys). However, Hon ble Madras High Court took contrary view on point and held that word "settled" was used in s. 43(5) without any restriction as to whether it was before or after breach of contract and for purpose of applicability of s. 43(5) what was material was whether there was actual delivery or transfer of commodity when contract was settled. Hon ble apex Court in case of Shantilal (P) Ltd. (supra) relied by assessee upheld decision of Hon ble Calcutta High Court in case of Pioneer Trading Co. (P) Ltd. (supra). In instant case undisputedly there is non-performance by assessee which resulted into dispute between two parties and subsequently it was settled mutually although arbitration proceedings had also been initiated by aggrieved party, (NSML). learned Departmental Representative had contended that in this case there was no award by arbitration Tribunal, therefore, decision of Hon ble apex Court in case of Shantilal (P) Ltd. (supra) was not applicable, while learned counsel appearing on behalf of assessee relied on two decisions of Hon ble jurisdictional High Court in cases of Asian Chemical Co. (supra) and Jaydwar Textiles (supra), wherein compensation paid for settlement of breach of contract was held as transaction of non.-speculative character. In our considered opinion Hon ble apex Court on facts of case referred to arbitration award and did not restrict deductibility of claim of damages only to such cases for reason that Hon ble apex Court approved decision of Hon ble Calcutta High Court in case of Pioneer Trading Co. (P) Ltd. (supra) and also decision of Mysore High Court wherein compensation was not paid as consequence of arbitration award. This aspect is further settled by decision of Hon ble jurisdictional High Court in case of Asian Chemical Co. (supra) relied on by assessee wherein Hon ble Court, after considering decision of Hon ble Supreme Court in case of Shantilal (P) Ltd. (supra) held that loss on account of settlement following breach of contract was not speculative loss. In recent decision Hon ble Delhi High Court in case of CIT vs. Hans Machoo & Co. (2000) 164 CTR (Del) 93: (2001) 247 ITR 79 (Del) has also held as under: "Sec. 43(5), however, speaks of settlement of contract and contract is settled when it is either performed or promise dispenses with or remits, wholly or in part, performance of promise made to him or accepts, instead of it, any satisfaction which he thinks fit. contract can be said to be settled if instead of effecting delivery or transfer of commodity envisaged by contract, promise, in terms of s. 63 of Indian Contract Act, 1872, accepts any satisfaction which he thinks fit. It is quite another matter when instead of such acceptance parties raise dispute and no agreement can be reached for discharge of contract. There is breach of contract and by virtue of s. 73 of Indian Contract Act, 1872, party suffering by such breach becomes entitled to receive from party who broke contract compensation for any loss or damage caused to him thereby. award of damages for breach of contract is not same thing as party to contract accepting satisfaction of contract otherwise than in accordance with original terms thereof. What is really settled by award of such damages and their acceptance by aggrieved party is dispute between parties. word "settled" or "settlement" in connection with contract has not been defined in IT Act or in Contract Act or in Sale of Goods Act, or in any other statute. proper meaning to be given to words "contract settled" in definition clause would be "a contract determined or concluded or disposed of". By use of expression "settled" what is intended to be dealt with is case of performance of contract and not non-performance: Held that, in instant case, there was breach of contract and, therefore, damages had to be paid. When contract is broken there can be no cause of action founded on contract itself which can be said to be capable of settlement. Hence, Tribunal was correct in allowing deductions in computation of assessee s income from business." Thus, on basis of above discussion it emerges that there is clear distinction between "settlement of contract" and "settlement of dispute arising out of contract" and non-performance cannot be termed as settlement of contract and present case is of non-performance, therefore it is case of settlement of dispute arising as consequence of breach of contract and accordingly, loss arising on account of settlement of dispute is allowable as business loss. Before parting with issue we would like to deal with contention of Revenue that underwriting activity was more or less that of speculator, therefore, underwriting business was speculation business and any loss arising therefrom was to be treated as speculation loss within meaning of Explanation to s. 73 of Act. This contention also does not hold water because in present case, we are concerned with FCDs which are not shares until they are converted into shares and s. 73 applies only to sale and purchase of shares. assessee is undisputedly engaged in business of merchant banker as authorized by SEBI, therefore, activities of underwriting of shares carried on by assessee are its normal business activities even cl. 2(f) defines mentioned earlier SEBI underwriter as person who is engaged in business of underwriting. Once it is established that assessee is engaged in business of underwriting then any loss arising out of agreement executed by assessee in course of its activities is in substance business loss and is thus allowable. term business inherently involves risk and there is always some element of risk in all businesses. Therefore, merely on ground that assessee takes risk of subscription to shares as part of underwriting obligation, underwriting business as whole cannot be termed as speculation business. What is relevant is nature of activity and resultant earnings. Underwriting activity is professional service in capital market which is rendered to earn commission and is not under taken to earn profits by way of speculation in share trading. Further, present dispute is connected with settlement of dispute of breach of contract and not with loss on purchase/sale of shares, therefore, provisions of s. 73 of Act are not applicable at very outset. Learned CIT(A) disallowed loss on ground that assessee settled dispute that had arisen on account of violation of SEBI Regulations and therefore, Explanation below s. 37(1) inserted by Finance Act with retrospective effect from 1st April, 1962 was attracted. learned CIT(A) held that said Explanation covered all payments for purpose which are prohibited by law irrespective of fact that whether they are made to Government or to any other party. According to learned CIT(A) in essence breach of underwriting contract also involved violation of SEBI Regulations which compelled assessee to make payment and settle matter. Therefore, it was for purpose prohibited under SEBI Regulations. In this regard learned counsel appearing on behalf of assessee drew our attention to model underwriting agreement devised by SEBI which envisages situation of failure on part of underwriter and contended that agreement between assessee and NSML was based upon same and therefore, breach of contract by way of failure on part of underwriter to subscribe to devolved FCDs could not be termed as act prohibited under law. consequence which assessee, at most could have been burdened with was in form of cancellation/suspension of licence to act as underwriter and that too would have happened only if assessee would have been found guilty in accordance with SEBI Regulations. We are of considered opinion that non-performance of commercial agreement cannot be termed as act prohibited under any law particularly in view of provisions of Indian Contract Act, 1872 which deals such situations. Even if it is assumed that it was dishonest breach of contract by assessee even then it would make no difference so long it is established that damages paid by assessee were incidental to assessee s trade. conduct of assessee based upon business realities may be unethical but is not illegal. assessee has paid compensation to aggrieved party as consequence of mutual settlement and not any penalty to Government, therefore, penal consequence, if any, which could have flown from violation of SEBI Regulations are not relevant as far as allowability of this amount is concerned. In view of above discussion, we hold that learned CIT(A) s order is not in accordance with law, therefore, we reverse same. Thus, this ground of assessee is accepted. issue raised in ground No. 2 is regarding disallowance of Rs. 1,04,000 on account of depreciation in value of devolved securities. In course of assessment proceedings, AO noted that assessee had claimed loss in P&L a/c on account of depreciation in value of stock carried forward by assessee from earlier years though there was no actual sale and purchase. AO relying on decision of Hon ble Calcutta High Court in case of CIT vs. Sun Distributors & Mining Co. Ltd. (1993) 68 TAXMAN 223 (Cal) treated loss as pertaining to speculation business carried on by assessee within meaning of provisions of s. 73 of IT Act. assessee in appeal before learned CIT(A) and reiterated submissions made before AO. It was also contended that assessee was Merchant Banker and was seddled with such securities as devolved stock in course of carrying of underwriting activities. learned CIT(A) after considering submissions of assessee was of opinion that loss claimed by assessee fell within ambit of s. 73 of Act and accordingly, confirmed action of AO. learned counsel appearing on behalf of assessee besides reiterating submissions made before learned CIT(A) contended that there was no intention on part of assessee for acquiring/ purchasing securities, with view to earn profits. Thus, activity of acquiring devolved stock and disposing of same in due course of time, cannot be termed as to hold that any part of business of assessee consists of dealing in purchase and sale of shares of other companies and accordingly, s. 73 of Act is not applicable. It was further contended that this section is applicable to dealing in purchase and sale of shares and not on debentures and in support of his contention, relied on decision of Hon ble Supreme Court in matter of Apollo Tyres Ltd. vs. CIT (2002) 174 CTR (SC) 521: (2002) 255 ITR 273 (SC) wherein Hon ble apex Court held that "Units of UTI were not shares" within meaning Explanation to s. 73 of Act. learned Departmental Representative, on other hand, kly supported order of learned CIT(A). We have considered submissions made by both sides, material on record, orders of authorities below and also applicable legal provisions. Admittedly, loss of Rs. 1,04,000 is on account of diminution in value of stock of shares resulting from valuation of same on basis of cost or market price which ever is lower. It is also admitted fact that assessee has not purchased or sold shares during year. This is notional loss which has been provided in books of account on basis of accounting principles policy. To put it differently it is only book entry. There is no trading transaction, because there is no transfer to any third party and it is also settled proposition that no one can trade with one-self. diminution in value of asset is not allowable as loss expenditure under Act save as specifically provided for, e.g., depreciation on assets or bad debt. Since it is only notional loss and being so is not allowable as such, therefore, question for applicability of Explanation to s. 73 of IT Act, 1961 does not arise. above discussions, we are of considered opinion that loss on account of diminution in value of devolved shares is not allowable and accordingly, this ground of assessee is rejected. third ground of appeal is in relation to disallowance of Rs. 1 lakh out of miscellaneous expenses, staff welfare expenses and conveyance expenses on ad hoc basis for want of bills and vouchers. learned CIT(A) also confirmed action of AO on ground that burden of proving that expenses were incurred wholly and exclusively for purposes of business was on assessee and appellant failed to discharge this onus and also quantum o f disallowance was reasonable. learned counsel contended that assessee was maintaining regular books of account which were duly audited and same were produced before AO. AO disallowed expenses without pointing out specific defaults/requirement and same was confirmed by learned CIT(A) for failure of assessee to discharge its onus. Therefore, in circumstances, he submitted that matter may be restored back to file of AO for verification of evidences/vouchers as may be required to allow claim of assessee. learned Departmental Representative, on other hand, relied on order of Revenue authorities. We have considered submissions made by both sides, orders of authorities below and material on record. Admittedly, assessee is Company which is required to get its accounts audited as per provisions of Companies Act, 1956. Therefore, maintenance of regular books of account is imperative. From perusal of orders of authorities below, it appears that they have made disallowance on ad hoc basis without pointing out specific failures and, therefore, we deem it fit and proper to restore this issue back to file of AO for adjudication de novo after giving adequate opportunity of being heard to assessee who shall produce necessary evidences in support of its claim and failing which disallowance made by AO shall stand. Thus, this ground of assessee is allowed for statistical purposes. In result, appeal is partly allowed. *** ENAM FINANCIAL CONSULTANTS (P) LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX
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