DCIT 4(1)(1), MUMBAI V. INTERACTIVE BROKERS (INDIA) P.LTD, MUMBAI

ITA 1192/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 9109 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 24-10-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 27-02-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K MOHANDA S
• Assessee Lawyers: NEERAJ SETH
• Keywords: Depreciation; Earning of tax free income
• Section: 143(3); 14A

Judgement Text

INCOME-TAX APPELLATE TRIBUNAL -I BENCH MUMBAI , ,, , . . . . . . . . , ,, , BEFORE S/SHRI RAJENDRA, ACCOUNTANT MEMBER AND C.N. PRASAD, JUDICIAL MEMBER / ITA NO.1192/MUM/2015 : /ASSESSMENT YEAR-2009-10 DCIT-4(1)(1), MUMBAI. VS. INTERACTIVE BROKERS (INDIA) PVT. LTD., A-605, DYNASTY BUSINESS PARK, 151, ANDHERI-KURLA ROAD, ANDHERI-(E), MUMBAI 59 PAN : AABCI 6871 R (APPELLANT) ( RESPONDENT) / ITA NO.1323/MUM/2015 : /ASSESSMENT YEAR-2009-10 INTERACTIVE BROKERS (INDIA) PVT. LTD., ANDHERI-(E), MUMBAI 59 VS. DCIT-4(1), MUMBAI. REV ENUE BY: SHRI K. MOHANDAS DR ASS ESSEE BY: SHRI NEERAJ SETH. / DATE OF HEARING: 27/10/2016 / DATE OF PRONOUNCEMENT: 06/01/2017 , ,, ,1961 1961 1961 1961 254 254 254 254( (( (1 11 1) )) ) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , / PER RAJENDRA A.M. - CHALLENGING THE ORDER DATED 12/12/2014 OF THE CIT(A )-9MUMBAI,THE ASSESSING OFFICER (AO) AND THE ASSESSEE HAVE FILED CROSS-APPEALS FOR THE Y EAR UNDER CONSIDERATION.ASSESSEE-COMPANY, ENGAGED IN THE BUSINESS OF SECURITIES TRADING AND B ROKING, FILED ITS RETURN OF INCOME ON 30/09/ 2009,DECLARING TOTAL INCOME OF RS. 37.38 CRORES.THE AO COMPLETED THE ASSESSMENT U/S. 143(3) OF THE ACT,ON 04/09/2013,DETERMINING ITS INC OME AT RS.38.65 CRORES. ITA 1192/MUM/2015 2. THE SOLITARY GROUND OF APPEAL,RAISED BY THE AO, IS ABOUT DELETING THE DISALLOWANCE OF MARK TO MARKET (MTM) LOSS AMOUNTING TO RS. 85.18 LAKHS.D URING THE ASSESSMENT PROCEEDINGS, HAD BOOKED LOSSES OF RS.85,18,813/- ON MTM IN RESPECT O F OPEN POSITION IN OPTION AT THE END OF THE YEAR. HE DIRECTED THE ASSESSEE TO FILE DETAILS OF MTM LOSSES AND TO EXPLAIN AS TO WHY THE SAME SHOULD NOT BE DISALLOWED BEING NOTIONAL LOSS.I N ITS REPLY DATED 25/02/2013, THE ASSESSEE CONTENDED THAT IT FOLLOWED MERCANTILE SYSTEM OF ACC OUNTING AND HAD ANTICIPATED LOSSES AT THE YEAR END WITH RESPECT TO EQUITY INDEX/STOCK FUTURE IN ACCORDANCE WITH THE PROVISIONS OF THE ACT AND THE ACCOUNTING STANDARDS,THAT LOSS SUFFERED BY THE ASSESSEE COULD NOT BE TERMED AS NOTIONAL/CONTINGENT LOSS. REFERRING TO THE CASE OF WOODWARD GOVERNOR INDIA (P) LTD., THE AO HELD THAT MARK TO MARKET TRANSACTIONS HAD TO BE GIV EN PECULIAR TREATMENT, THAT AS PER THE ACCOUNTING POLICY, FOLLOWED BY THE ASSESSEE IN RESP ECT OF THE DERIVATIVE TRANSACTION, IT WAS ITA NO.1192 & 132 3 /MUM/2015-(A.Y. 2009-10) 2 DEBITING THE LOSSES IN RESPECT OF DERIVATIVE OPEN C ONTRACT,THAT IT WAS IGNORING THE PROFIT IF AROSE DUE TO VALUATION OF SUCH CONTRACT ON MTM BASI S, THAT THE TREATMENT GIVEN TO LOSSES AS PER THE ACCOUNTING POLICY HAD NOT BEEN FOLLOWED BY IT IN RESPECT OF THE GAINS, THAT THE POLICY ADOPTED BY THE ASSESSEE WAS UNFAIR AND UNREASONABLE , THAT THE PROVISIONS FOR LOSS DEBITED ON ACCOUNT OF FUTURE CONTRACTS WAS NOTHING BUT A PROVI SION OF CONTINGENT LOSS, THAT SAME COULD NOT BE ALLOWED AS DEDUCTION IN COMPUTING THE INCOME FOR THE YEAR UNDER APPEAL, THAT FUTURE CONTRACTS FOR PURCHASE OF DERIVATES WERE NOT ACCOUN TED FOR AS PURCHASES IN THE BOOKS OF ACCOUNTS, THAT SAME WERE NOT PART OF STOCK IN TRADE , THAT THE REAL INCOME THEORY WOULD ALSO NOT BE APPLICABLE,THAT THE EXPENDITURE WAS NOT IN THE N ATURE OF AN ASCERTAIN/LIABILITY/EXPENDITURE. ACCORDINGLY,THE PROVISION ON ACCOUNT OF MTM LOSES O F RS.85.18 LAKHS IN OPEN POSITION OF FUTURE DERIVATIVE TRANSACTIONS WERE DISALLOWED. 3.AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PRE FERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).BEFORE HIM, THE ASSESSEE MADE ELABORATE SUBMISSIONS.AFTER CONSIDERING THE AVAILABLE MATERIAL, THE FAA REFERRE D TO THE CASES OF EDELWEISS CAPITAL LTD. (ITA/5324/MUM/2007,DATED10/11/2012)AND KOTAK MAHIND RA INVESTMENT LIMITED(ITA/ 1502/MUM/2012,DATED 03/05/2013) AND ALLOWED THE CLA IM MADE BY THE ASSESSEE UNDER THE HEAD MTM LOSSES. 4.DURING THE COURSE OF HEARING BEFORE US, THE DEPAR TMENTAL REPRESENTATIVE (DR) SUPPORTED THE ORDER OF THE AO.THE AUTHORISED REPRESENTATIVE ( AR) RELIED UPON THE CASES OF CENTRUM BROKING LTD.(70 SOT 389) & KOTAK MAHINDRA INVESTMEN T LTD. (59 SOT 4). 5. WE FIND THAT THE ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN THE MATTERS RELIED UPON BY THE AR.IT IS FOUND THAT IN T HE OF THE KOTAK MAHINDRA INVESTMENT LTD. (SUPRA),THE TRIBUNAL HAS HELD THAT M T M LOSSES HAV E BE ALLOWED.WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE FAA.SO,RESPECTFULLY, FOLLOWING THE ORDERS OF THE TRIBUNAL,WE DECIDE ISSUE AGAINST THE AO. ITA 1323/MUM/2015 6. FIRST GROUND OF APPEAL IS ABOUT CONFIRMING THE DISA LLOWANCE OF RS.6.43 LAKHS,MADE BY THE AO, UNDER SECTION 14A OF THE ACT. DURING THE ASSESS MENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAD SHOWN DIVIDEND INCOME OF RS. 6.47 LAKH S,THAT IT HAD CLAIMED THE SAME AS EXEMPT UNDER SECTION 10(34) OF THE ACT,THAT IN THE COMPUTA TION OF INCOME IT HAD NOT MADE ANY DIS - ITA NO.1192 & 132 3 /MUM/2015-(A.Y. 2009-10) 3 ALLOWANCE ON ACCOUNT OF EXPENSES INCURRED TOWARDS E ARNING SUCH EXEMPT INCOME.HE DIRECTED THE ASSESSEE TO EXPLAIN AS TO WHY THE PROVISIONS OF SECTION 14A READ WITH RULE 8D OF THE INCOME TAX RULES,1962(RULES)SHOULD NOT BE APPLIED.V IDE ITS LETTER 14/02/2013 THE ASSESSEE STATED THAT IT HAD EARNED DIVIDEND INCOME FROM THE SHARES THAT WERE HELD STOCK IN TRADE, THAT IT WAS ENGAGED PREDOMINANTLY BUYING & SELLING OF SHARE S AND THAT EARNING OF DIVIDEND WAS OF INCIDENTAL,THAT THE AMOUNT OF DIVIDEND WAS DIRECTLY CREDITED TO THE BANK ACCOUNT OF THE COMPANY,THAT IT HAD NOT INCURRED ANY EXPENDITURE RE LATED TO EARNING OF EXEMPT INCOME,THAT NO INTEREST EXPENDITURE HAD BEEN INCURRED DURING THE Y EAR UNDER APPEAL,THAT THERE WAS NO OPENING AND CLOSING INVESTMENT IN THE BOOKS OF ACCOUNTS.HOW EVER,THE AO DID NOT AGREE WITH THE ASSESSEE AND TAKING INTO CONSIDERATION THE AVERAGE OF THE INVESTMENT ON THE FIRST AND LAST DATE OF THE PREVIOUS YEAR,MADE AN ADDITION OF RS.6.43 LA KHS(.5% OF THE AVERAGE OF THE INVESTMENT). 7. DURING THE APPELLATE PROCEEDINGS,THE ASSESSEE MADE SUBMISSIONS BEFORE THE FAA AND RELIED UPON THE CASES OF HERO CYCLES LTD.(322 ITR 513),YET ISH TRADING COMPANY PVT. LTD. (129 ITD 237)AND GANJAM TRADING COMPANY LTD (ITA 3724/MU M/2005).AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND THE ASSESSMENT ORDE R, THE FAA HELD THAT DISALLOWANCE MADE BY THE AO WAS IN ORDER FOR THE REASONS MENTIONED IN THE ASSESSMENT ORDER. 8. DURING THE COURSE OF HEARING BEFORE US, THE AR RELI ED UPON THE CASE OF HDFC BANK LTD. (67 TAXMANN.COM42 OF THE HONBLE BOMBAY HIGH COURT).THE DR LEFT THE ISSUE TO THE DISCRETION OF THE BENCH. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THE JUDICIAL FORUMS HAVE,ON MORE THAN ONE OCCASIONS,HELD THAT NO DISALLOWANCE U/S.14A COULD BE MADE IF THE SHARES ARE HELD AS STOCK IN TRADE OR THE ASSESS EE HAD NOT CLAIMED ANY EXPENDITURE AGAINST THE EXEMPT INCOME.IN THE CASE BEFORE US,THE AO/FAA HAS NOT PROVED THAT STOCKS WERE HELD BY THE ASSESSEE AS INVESTMENT OR THAT IT HAD CLAIMED B Y ANY EXPENDITURE FOR EARNING THE TAX FREE INCOME.THEREFORE, REVERSING THE ORDER OF THE FAA,WE DECIDE THE FIRST GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. 9. SECOND GROUND IS ABOUT DISALLOWING DEPRECATION OF R S.10.63 LAKHS.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT ASSESSEE HAD CLAIMED DEPRECIATION ON CERTAIN ASSETS WHICH WERE PURCHASED ON 02/06/2008 AND 24/07/2008,THAT TH E ASSESSEE HAD CLAIMED THAT EXPENDITURE WAS INCURRED ON ACCOUNT OF PURCHASE OF COMPUTER AND COMPUTER RELATED ACCESSORIES/SOFTWARE, THAT PURCHASES WERE MADE IN THE NAME OF A HONG KONG COMPANY,THAT IT HAD CLAIMED THAT THE ITA NO.1192 & 132 3 /MUM/2015-(A.Y. 2009-10) 4 FOREIGN COMPANY HAS SHIPPED THE GOODS TO INDIA IN T HE NAME OF THE ASSESSEE.DURING THE COURSE OF SCRUTINY PROCEEDINGS,THE ASSESSEE WAS ASK ED TO EXPLAIN AS TO HOW THE DEPRECATION WAS ALLOWABLE ON THE SAID ITEMS AND AS TO WHY SAME SHOULD NOT BE DISALLOWED. VIDE ITS LETTER DATED 07/03/2013,THE ASSESSEE STATED THAT IT HAD AC QUIRED CERTAIN ASSETS THROUGH ITS GROUP CONCERN,THAT A COPY OF THE FIXED ASSET INVOICE WAS ALREADY FILED,THAT THE FOREIGN GROUP - COMPANY HAS MADE THE INITIAL PAYMENT ON BEHALF OF T HE ASSESSEE, THAT SUBSEQUENTLY A DEBIT NOTE ON THE ASSESSEE WAS RAISED,THAT ASSETS WERE OW NED BY THE ASSESSEE AND WERE USED DURING THE YEAR UNDER CONSIDERATION.THE AO HELD THAT ASSES SEE WAS NOT THE OWNER OF THE ASSETS, THAT IT HAD NOT PRODUCED ANY DOCUMENTARY EVIDENCE TO PRO VE THE PAYMENT WAS MADE BY IT, THAT IT WAS NOT ELIGIBLE FOR CLAIMING DEPRECIATION FOR THE SAID ASSETS.FINALLY,HE MADE THE DISALLOW - ANCE OF RS. 10,63,266/-. 10. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).BEFORE HIM,IT WAS ARGUED THAT ASSETS WERE INITIALLY PURCHASED BY THE HONG KONG GROUP OF COMPANY,THAT SAME WERE SHIPP ED TO INDIA SUBSEQUENTLY, THAT THE ASSESSEE HAS ADDED THEM TO THE FIXED ASSETS IN THE BOOKS OF ACCOUNT AND HAD CLAIMED DEPRECIATION. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND THE ASSESSMENT ORDER, THE FAA HELD THAT THE ASSESSEE HAD NOT SUBSTANTIATED IT S BASIC CLAIM REGARDING OWNERSHIP OF THE ASSETS, THAT THE AO HAD RIGHTLY DISALLOWED CLAIM. 11. DURING THE COURSE OF HEARING BEFORE US,THE AR ARGUE D THAT THE ASSETS WERE APPEARING IN THE BALANCE SHEET AS WELL AS BLOCK OF ASSETS,THAT BOOKS OF ACCOUNTS OF THE ASSESSEE WERE AUDITED, THAT AO HAD NOT REJECTED THE BOOK RESULTS,THAT THE ASSESSEE HAS PRODUCED THE DEBIT NOTE RAISED BY THE HONG KONG COMPANY DURING THE ASSESSMENT PROC EEDINGS. HE REFERRED TO PAGE NOS. 1- 4, 22, 30 OF THE PAPER BOOK.THE DR RELIED ON THE OR DER OF THE FAA. 12.WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE GROUP CONCERN OF THE ASSESSEE HAD PURCHASED COMPUTE RS/COMPUTER RELATED ACCESSORIES IN HONG KONG,THAT THE FOREIGN-ENTITY HAD MADE THE INITIAL P AYMENT,THAT THE GOODS WERE SHIPPED TO INDIA,THAT ASSETS ARE APPEARING IN THE AUDITED BOOK S OF ACCOUNTS OF THE ASSESSEE, THAT THE AO HAD NOT DOUBTED THE GENUINENESS OF THE DETAILS OF T HE BLOCK OF ASSETS. AFTER CONSIDERING THE AVAILABLE MATERIAL,INCLUDING THE DEBIT NOTE RAISED BY THE FOREIGN ENTITY,WE ARE OF THE OPINION, THE AO/FAA WAS NOT JUSTIFIED IN DENYING THE DEPRECI ATION TO THE ASSESSEE.THEREFORE, REVERS - ING THE ORDER OF FAA,WE DECIDE GROUND NO.2 IN FAVOU R OF THE ASSESSEE. ITA NO.1192 & 132 3 /MUM/2015-(A.Y. 2009-10) 5 AS A RESULT, APPEAL FILED BY THE AO IS DISMISSED AN D THE APPEAL OF THE ASSESSEE STANDS ALLOWED. L . ORDER PRONOUNCED IN T HE OPEN COURT ON 06 TH JANUARY, 2017. 6 ,2017 SD/- SD/- ( . . . . . . . . / C.N. PRASAD ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : /01/2017. VR/- / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR K BENCH, ITAT, MUMBAI / , , . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.