The ITO, Ward 2 (4), RAJKOT-GUJARAT V. Smt Bhartiben Kishorbhai Ghiya, RAJKOT-GUJARAT

ITA 1177/RJT/2010

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2399 (ITAT-RAJKOT)
• Duration Of Justice: 5 year(s) 3 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-01-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 07-10-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 22-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIMAL I MEHTA
• Assessee Lawyers: S N DIVATIA
• Keywords: Gift; Commercial expediency
• Section: 143(3); 37(1)

Judgement Text

ITA NO . 1177/ RJT/201 0 ASSESSMENT YEAR: 20 0 7 - 08 PAGE 1 OF 5 IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT [CORAM: PRAMOD KUMAR AM AND RAJPAL YADAV JM ] ITA NO. 1177 /RJT/201 0 ASSESSMENT YEAR: 20 0 7 - 08 INCOME TAX OFFICER , . .......... ...... ... .. . ..... APP ELLANT WARD 2(4), RAJKOT . VS. BHARAT IBEN KISHOR GHIYA , . .......... .... ...... ..................RESPONDENT M.K. GHIYA BUILDING, 2 - DIWANPAR A , RAJKOT [PAN: A BSPG 1542 J ] APPEARANCES BY: VIMAL I. MEHTA FOR THE APPELLANT S.N. DIVATIA , FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : O CTOBER 07 , 201 5 DATE OF PRONOUNCING THE ORDER : JANUARY 04 , 2016 O R D E R PER PRAMOD KUMAR AM: 1. THE SHORT ISSUE THAT WE ARE REQUIRED TO ADJUDICATE IN THIS APPEAL IS WHETHER OR NOT LEARNED CIT(A) WAS JUSTIFIED IN DELETING THE IMPUGNED DISALLOWANCE OF R S.51,27,915/ - FOR EARNING COMMISSION ON SALE OF MUTUAL FUND INVESTMENTS. THE ASSESSMENT YEAR INVOLVED IS 2007 - 08 AND THE IMPUGNED CIT(A) S ORDER, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961 ( THE ACT HEREINAFTER) WAS PASS ED ON 16 TH JULY, 2010. ITA NO . 1177/ RJT/201 0 ASSESSMENT YEAR: 20 0 7 - 08 PAGE 2 OF 5 2. THE ISSUE IN APPEAL LIES IN A VERY NARROW COMPASS OF MATERIAL FACTS. THE ASSESSEE IS, INTER ALIA, ENGAGED IN THE BUSINESS OF MARKETING FINANCIAL PRODUCTS, SUCH AS INVESTMENTS IN THE MUTUAL FUNDS OF UTI AND OTHER INSTITUTIONS. D URING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF RS.51,27,915/ - IN RESPECT OF REBATE PAID BACK TO INVESTORS TO ATTRACT CLIENTS THROUGH THE TEMPTATION OF REBATE AND CLAIMED TH E SAME AS REFUND OF ENTRY LOAD WITH REGARD TO VARIOUS CLIENTS/INVESTORS OF THE UTI. THE ASSESSING OFFICER WAS OF THE VIEW THAT SINCE THESE PAYMENTS WERE IN VIOLATION OF AMFI (ASSOCIATION OF MUTUAL FUNDS IN INDIA) GUIDELINES, THESE PAYMENTS CANNOT BE ALLOW ED AS DEDUCTION BY THE VIRTUE OF EXPLANATION TO SECTION 37(1). THE ASSESSING OFFICER WAS ALSO OF THE VIEW THAT SINCE THIS PAYMENT IS REFUND OF BROKERAGE, TAX OUGHT TO HAVE BEEN DEDUCTED UNDER SECTION 194H BUT THE TAX HAS NOT BEEN SO DEDUCTED. IT WAS THUS CONCLUDED THAT THE AMOUNT IN QUESTION IS ALSO TO BE DISALLOWED UNDER SECTION 40(A)(IA) OF THE ACT. IT WAS IN THIS BACKDROP THAT THE AMOUNT OF RS.51,27,915/ - WAS DISALLOWED. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A). LEANED CIT(A) DELETED THE DISALLOWANCE ON THE BASIS OF THE FOLLOWING REASONING : - 3.3 I HAVE CAREFULLY CONSIDERED THE FINDING GIVEN BY THE ASSESSING OFFICE R AND THE SUBMISSION OF THE AR OF THE APPELLANT . IT I S NOTICED THAT T HE EXPENSES OF RS.5127915/ - CLAIMED BY THE A PPELLANT WAS DISALLOWED BY THE ASSESSING OFFICER ON THE GROUND THE THE A PPELLANT HAS REFUNDED BROKERAGE INCOME EARNED BY HER TO THE VARIOUS CLIENTS FOR WHOSE INVESTMENTS, SHE EARNED COMMISSION FROM UTI, WHICH IN VIOLATION OF SEBI S RULES / REGULATION AND SAME IS PROHIBITED BY THE STATUTE OF SEB I, AND THEREFORE, THE A SSESSING OFFICER HELD THAT THE EXPENSES ARE NOT ALLOWABLE U/S 37(1) OF THE A CT. IT IS ALSO FOUND THAT THE APPELLANT HAS SHOWN GROSS COMMISSION INCOME OF RS.5609165/ - AN D NET COMMISSION IN COME OF RS.481249/ - AFTER DEDUCTING EXPENSES OF RS.5127915/ - . THE NET INCOME RATIO IN T ERMS OF PERCENT AGE COMES TO 8.58% , WHICH IS REASONABLE. IF THE INCOME IS TAXED AT RS.5609165/ - , HOW THE APPELLANT WITHOUT EXPENSES CAN EARN SUCH INCOME. THE ASSESSING OFFICER HAS DISALLOWED WHOLE OF THE EXPENSES AND NOT PART EXPENSES HELD A S DISALLOWABLE. IT IS ALSO NOTICED THAT THE ASSESSING OFFICER HAS TAKEN WRONG VIEW THAT THE APPELLANT HAS VIOL AT ED SEBI S RULES/REGULATION AS THERE IS NO VIOLATION OF A NY LAW. FURT HER, THE ITA NO . 1177/ RJT/201 0 ASSESSMENT YEAR: 20 0 7 - 08 PAGE 3 OF 5 SEBI IS REGULATORY AUTHORITY ONLY. THE AMFI IS ALSO A VOLUNTARILY ORGANIZATION AND NOT STATUTORY BODY. AS SUCH ALSO, ANY BREACH OF CODE OF CONDUCT CANNOT BE CONSIDERED A S BREACH OF LAW. THE UTI, WHICH IS THE CONTROLLING AUTHORITY, REGULATING TH E BUSINESS HAS NOT MADE ANY ADVERSE REMARK AGAINST SUCH PRACTICE. ON THE OTHER HAND, UTI HAS ALLOWED PAYMENTS FOR ENTRY LOAD TILL 30.09.2009, ONLY BY CIRCULAR D T D. 30.07.2009 SUCH ENTRY LOAD HA S BEEN BANNED W.E.F. 30.09.2009. THE C A SE OF THE APPELLANT BE LONGS TO FINANCIAL YEAR 2006 - 07 R E LEVANT TO ASSESSMENT YEAR 2007 - 08, WHEN SUCH CIRCULAR WAS NOT IN EXISTENCE AND AS SUCH NO BAN WAS THERE. THIS FACTS SHOW EARLIER I.E. BEFORE 30.09.2009, PAYMENT OF ENTRY LOAD WAS ALLOWABLE LEGALLY. FURTHER, THE APPELLANT HAS CLAIMED THAT SHE IS A DISTRIBUTOR SINCE ABOUT 15 YEARS AND THE PRACTICE OF MAKING SUCH PAYMENTS ARE FOLLOWED SINCE LONG AND THE SAME HAS BEEN ACCEPTED. IT IS ALSO NOTICED THAT IN EARLIER YEARS ALSO, SAME EXPENSES WERE ALLOWED U/S 37(1) OF THE ACT. F URTHER, THE PAYMENT OF REBATES /COMMISSION HAS BEEN MADE ON ACCOUNT OF PRINCIPAL OF COMMERCIAL EXPEDIENCY. WITHOUT PARTING WITH THE REBATES AND COMMISSION, THIS SCALE OF DISTRIBUTION OF MUTUAL FUND WOULD BE PRACTICALLY BE IMPOSSIBLE. IT IS WITH THIS IN MI ND THAT THE APPELLANT HAS CARRIED OUT THE ACTIVITY OF DISTRIBUTION OF M.F. THIS IS PURELY WITH BUSINESS CONSIDERATION AND WHEN THE GENUINENESS OF PAYMENTS AND BUSINESS EXPEDIENCY IS ESTABLISHED, NO DISALLOWANCE CAN BE MADE. THE ASSESSING O FFICER HAS ALSO NOT ESTABLISHED THAT THE PAYMENTS ARE NOT GENUINE OR EXCESSIVE. I A LSO FOUND THAT THE CASE - LAWS RELIED BY THE APPELLANT ARE ALSO RELEVANT. THEREFORE , THE ASSESSING OFFICER S ACTION FOR MAKING DISALLOWANCE OF EXPENSES IS FOUND B A D IN LAW AND HENCE ORDERE D TO BE DELETED. THIS GROUND OF APPEAL IS ALLOWED. 3. AS REGARDS THE BALANCE AMOUNT, WE HAVE NOTED THAT THE ASSESSEE REFUNDED RS.27,23,618/ - , BY WAY OF ACCOUNT PAYEE CHEQUES, TO CERTAIN CLIENTS. THIS PAYMENT, ACCORDING TO THE ASSESSING OFFICER, IS CONT RARY TO THE CODE OF CONDUCT FOR INTERMEDIARIES OF MUTUAL FUNDS , ANNEXED TO AND FORMING PART OF CIRCULAR DATED 26 TH JUNE, 2002 ISSUED BY THE CHIEF GENERAL MANAGER, MUTUAL FUNDS DEPARTMENT, SEBI, WHICH STIPULATES THAT INTERMEDIARIES WILL NOT REBATE COMMIS SION BACK TO INVESTORS AND AVOID ATTRACTING CLIENTS THROUGH TEMPTATION OF REBATE/GIFTS ETC. (POINT NO.14). THE PAYMENT OF FINANCIAL INCENTIVE TO THE INVESTOR IS THUS CONTRARY TO CODE OF CONDUCT BINDING ON THE INTERMEDIARIES BUT, IN OUR CONSIDERED VIEW, I T IS NOT PROHIBITED BY LAW. 4. THE ASSESSING OFFICER IS AGGRIEVED AND IS IN APPEAL BEFORE US. ITA NO . 1177/ RJT/201 0 ASSESSMENT YEAR: 20 0 7 - 08 PAGE 4 OF 5 5. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. 6 . WE FIND THAT THE DISALLOWANCE UNDER SECTION 37(1) CAN ONLY BE INVOKED WHEN THE EXPENDITURE IS INCURRED BY THE ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW . WE HAVE NOTED THAT OUT OF DISALLOWANCE OF RS.51,27,915/ - , THE ASS ESSEE HAS MADE PAYMENT OF RS.24,04,297/ - TO SUB - AGENTS AND DULY DEDUCTED TAX AT SOURCE FROM THE SAME. IT IS NOT EVEN THE CASE OF THE ASSESSING OFFICER, AND RIGHTLY SO, THAT SUCH PAYMENTS ARE IN VIOLATION OF LAW. THERE IS A FINE, BUT SIGNIFICANT, DISTINCT ION BETWEEN PAYMENTS IN VIOLATION OF LAW AND PAYMENTS WHICH ARE LEGAL BUT MAY HAVE ADVERSE LEGAL CONSEQUENCES FOR THE ASSESSEE IN TERMS OF CERTAIN PRIVILEGES AND BENEFITS. THERE IS NOTHING ILLEGAL IN THESE COMMISSION PAYMENTS, EVEN THOUGH THESE PAYMENTS B EING MADE MAY LEAD TO CERTAIN CONSEQUENCES WHICH MAY BE TO THE DETRIMENT TO THE ASSESSEE. TO THIS EXTENT, THEREFORE, THE DISALLOWANCE PROCEEDS ON ERRONEOUS ASSUMPTIONS. THE PAYMENT OF SUCH A COMMISSION, THEREFORE, MAY INVITE ACTION AGAINST THE INTERMEDIA RY BY THE SEBI, BUT IT CANNOT BE CONSIDERED TO BE ILLEGAL. THE EXPLANATION TO SECTION 37(1) COVERS ONLY SUCH PAYMENTS WHICH ARE PROHIBITED BY THE LAW OR, FOR A PURPOSE WHICH IS AN OFFENCE. THAT S NOT THE CASE HERE. THE ACTION OF THE ASSESSING OFFICER WA S THUS WELL BEYOND THE MANDATE OF LAW. 7. FOR THE REASONS SET OUT ABOVE AND BEARING IN MIND ENTIRETY OF THE CASE, WE APPROVE THE CONCLUSIONS ARRIVED AT BY THE LD. CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 8. IN THE RESULT, THE APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON TH E 4 TH DAY OF JANUARY , 201 6 . SD/ - SD/ - RAJAPAL YADAV PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) DATED: 4 TH DAY OF JANUARY , 201 6 ITA NO . 1177/ RJT/201 0 ASSESSMENT YEAR: 20 0 7 - 08 PAGE 5 OF 5 COPIES TO: (1) THE APPELLANT (2) THE RESPONDENT (3) COMMISSIONER (4) CIT(A) (5) DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT