DCIT - 4(1), MUMBAI V. M/s. HSBC SECURITIES & CAPITAL MARKETS (INDIA) P. LTD., MUMBAI

ITA 133/MUM/2009

• Counselvise Citation: 13319914 RSA 2009
• Duration Of Justice: 3 year(s) 5 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 05-06-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 07-01-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: YOGESH A THAR
• Assessee Lawyers: V V SHASTRI
• Keywords: Opportunity of being heard; Bonafide belief; Earning of tax free income; Speculation loss; Bad and doubtful debts
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH H , MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER ITA NO.6979/MUM/2008 ASSESSMENT YEAR : 2005-06 M/S. HSBC SECURITIES AND CAPITAL MARKETS (INDIA) PRIVATE LIMITED 52/60, MAHATMA GANDHI ROAD, 6 TH FLOOR, FORT MUMBAI-400 001. PAN NO. AAACJ 1395 E ADDL. COMMISSIONER OF INCOME TAX RANGE-4(1) MUMBAI.. (APPELLANT) VS. (RESPONDENT) ITA NO.133/MUM/2009 ASSESSMENT YEAR : 2005-06 ADDL. COMMISSIONER OF INCOME TAX RANGE-4(1) MUMBAI.. M/S. HSBC SECURITIES AND CAPITAL MARKETS (INDIA) PRIVATE LIMITED MUMBAI-400 001. (APPELLANT) VS. (RESPONDENT) ASSESSEE BY SHRI YOGESH A. THAR RESPONDENT BY SHRI V.V. SHASTRI DATE OF HEARING : 5.6.2012 DATE OF PRONOUNCEMENT : 29.6.2012 ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 2 O R D E R PER RAJENDRA SINGH, AM: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DATED 7.10.2008 OF CIT(A) FOR THE ASSESSMENT YEAR 2005-06. TH ESE APPEALS ARE BEING DISPOSED OF BY A SINGLE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. WE FIST TAKE UP THE APPEAL OF THE ASSESSEE IN ITA NO.6979/M/2008 . IN THIS APPEAL THE ASSESSEE HAS RAISED DISPUTES ON THREE DIFFERENT GROUNDS WHICH RELATE TO DISALLOWANCE O F SECURITY TRANSACTION TAX (STT), LOSS ON ACCOUNT OF ERROR TRADING A ND DISALLOWANCE OF EXPENSES UNDER SECTION 14A OF THE INCOME TAX ACT, 1961(THE ACT.) 2.1 THE FIRST DISPUTE IS REGARDING DISALLOWANCE OF SECUR ITY TRANSACTION TAX (STT) OF RS.35,83,688/- CLAIMED BY THE ASSESSEE AS DEDUCTION WHILE COMPUTING TOTAL INCOME. THE AO OBSERVED THAT ANY AMOUNT PAID ON ACCOUNT OF STT WAS NOT ALLOWABLE IN VI EW OF PROVISION OF SECTION 40(A)(IB) INSERTED BY THE FINANCE ACT, 2004. HE ALSO OBSERVED THAT THERE WAS A SEPARATE PROVISION UNDER SECTIO N 88E TO ALLOW REBATE ON ACCOUNT OF STT PAYMENTS. HE, THEREFORE , DISALLOWED ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 3 THE CLAIM MADE BY THE ASSESSEE. THE ASSESSEE DISPUTED THE DE CISION OF AO AND SUBMITTED BEFORE CIT(A) THAT THE ASSESSEE WAS A BR OKER AND, HAD PAID STT ON BEHALF OF CLIENTS WHICH HAD BEEN INCLUD ED IN THE BROKERAGE INCOME AND THEREFORE, ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION ON ACCOUNT OF STT. CIT(A), HOWEVER, DID NOT ACCEPT THE CONTENTIONS RAISED. HE AGREED WITH THE AO THAT THERE W AS A SPECIFIC PROVISION FOR DISALLOWANCE OF STT UNDER SECTION 40(A)(IB ). FURTHER, REBATE UNDER SECTION 88E WAS ALLOWABLE ONLY IN CASE OF TRADERS AND NOT IN CASE OF INVESTORS AND, THEREFORE, NO DEDUCTION WAS AL LOWABLE IN CASE OF ASSESSEE. CIT(A) ACCORDINGLY CONFIRMED THE DISALLOWANCE M ADE BY THE AO, AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEF ORE THE TRIBUNAL. 2.1.1 BEFORE US, THE LD. AR FOR THE ASSESSEE SUBMITTED T HAT THE ASSESSEE WAS ONLY A BROKER WHO WAS UNDERTAKING TRANSACTIO N ON BEHALF OF CLIENTS. IT WAS POINTED OUT THAT, UNDER THE PROVISIO NS OF SECTION 98 OF STT ACT, STT WAS PAYABLE BY BUYER AND SELLER OF SHARES A ND NOT THE BROKER. FURTHER SECTION 100 PROVIDED THAT COLLECTION AN D RECOVERY OF STT WAS THE RESPONSIBILITY OF STOCK EXCHANGE WHICH IS ALSO REQUIRED TO FILE RETURN IN RESPECT OF STT UNDER SECTION 101 OF THE STT ACT. THEREFORE, SECTION 40(A)(IB) WAS APPLICABLE ONLY IN CA SE OF BUYER AND SELLER OF SHARES AS THE TRADERS ARE ENTITLED TO CLAIM RE BATE UNDER SECTION 88E . THE ASSESSEE IS A BROKER WHO HAD ONLY COLLECTE D SHARE ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 4 TRANSACTION TAX ON BEHALF OF THE STOCK EXCHANGE AND SAME HAD BEEN INCLUDED IN THE BROKERAGE INCOME AND, THEREFORE, CORRE SPONDING DEDUCTION IS REQUIRED TO BE ALLOWED WHILE COMPUTING TO TAL INCOME FROM THE BROKERAGE. THE LD. DR ON THE OTHER HAND PLACED R ELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 2.1.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWABI LITY OF DEDUCTION ON ACCOUNT OF STT PAYMENT IN CASE OF BROKER WHILE COMPUT ING TOTAL INCOME. THE AUTHORITIES BELOW HAVE NOT ALLOWED THE CLA IM OF DEDUCTION IN VIEW OF PROVISIONS OF SECTION 40(A)(IB) AS PER WHICH D EDUCTION ON ACCOUNT OF STT IS NOT ALLOWABLE. HOWEVER, THE CASE OF THE ASSESSEE IS THAT STT IS NOT REQUIRED TO BE COLLECTED OR PAID BY A BROKER. IT IS THE BUYER OR SELLER OF SHARES WHO IS REQUIRED TO PAY STT U NDER SECTION 98 OF STT ACT. THE COLLECTION AND RECOVERY OF STT IS THE RE SPONSIBILITY OF STOCK EXCHANGES UNDER SECTION 100 OF THE STT ACT. THE ASSESSEE HAD ONLY COLLECTED STT ON BEHALF OF STOCK EXCHANGES FROM T HE CLIENTS AND THE SAME WAS INCLUDED IN THE BROKERAGE INCOME AND THER EFORE, WHILE COMPUTING THE TOTAL INCOME, THE STT IS REQUIRED TO BE EXCLUDED. WE FIND MERIT IN THE ARGUMENT ADVANCED ON BEHALF OF THE ASSESSEE . THE LIABILITY ON ACCOUNT OF STT IS THE LIABILITY OF THE CLI ENTS OF THE ASSESSEE WHO ARE BUYING AND SELLING SHARES AND, THEREFORE, THE PROVISIONS OF SECTION 40(A)(IB) WILL BE APPLICABLE IN THOSE CASES AND IT IS BECAUSE OF ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 5 THIS REASON, THE REBATE UNDER SECTION 88E IS ALSO ALLOWAB LE IN CASE OF BUYER/SELLER OF SHARES UNDER SECTION 88E OF THE ACT. THE ASSESSEE IS ONLY A BROKER WHO HAS COLLECTED STT ON BEHALF OF THE ST OCK EXCHANGES AND HAS PAID THE SAME TO THE LATTER. IN OUR VIEW, ST T IS REQUIRED TO BE EXCLUDED WHILE COMPUTING THE INCOME OF THE ASSESSEE FROM B ROKERAGE. THEREFORE IN OUR VIEW THE AUTHORITIES BELOW ARE NOT JUSTIFIED IN DISALLOWING THE CLAIM OF DEDUCTION ON ACCOUNT OF STT IN CASE OF THE ASSESSEE. WE ACCORDINGLY SET ASIDE THE ORDER OF CIT(A) AND DELETE THE ADDITION MADE. 3. THE SECOND DISPUTE IS REGARDING DISALLOWANCE OF LOSS OF RS.26,09,000/- ON ACCOUNT OF ERROR TRADE. THE ASSESSEE HAD INCURRED LOSS ON ACCOUNT OF CERTAIN SHARE TRANSACTIONS. THE AO, THERE FORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY LOSS SHOULD NOT BE TREAT ED AS SPECULATION LOSS UNDER PROVISIONS OF EXPLANATION TO SECTION 73. THE ASSESSEE EXPLAINED THAT THE PROVISIONS OF THE SAID EXPLANA TION WERE APPLICABLE ONLY IN CASES WHERE TAX AVOIDANCE WAS INTENDED AND NOT APPLICABLE TO GENUINE TRANSACTIONS. IT WAS ALSO SUBMITTED THAT IN ITS OWN CASE IN ASSESSMENT YEAR 1997-98, THE TRIBUNAL HAS HEL D THAT THE PROVISIONS OF EXPLANATION TO SECTION 73 COULD NOT BE APP LIED IN CASE OF THE ASSESSEE. THE AO HOWEVER OBSERVED THAT THE SAID DECISIO N OF THE TRIBUNAL WAS BASED ON THE PROPOSITION THAT EXPLANATION TO SECTION 73 ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 6 COULD BE APPLIED ONLY IN CASE OF COLOURABLE TRANSACTIONS WHICH IS NO LONGER A CORRECT VIEW IN VIEW OF THE DECISION OF THE SP ECIAL BENCH OF THE TRIBUNAL IN CASE OF AMD SPG. & WVG. MILL (P) LTD. (100 ITD 142) AS PER WHICH THE PROVISIONS OF EXPLANATION TO SECTION 73 WOULD APPLY TO ALL TRANSACTIONS OF PURCHASE AND SALE OF SHARES. THE AO TH EREFORE DISALLOWED THE CLAIM OF LOSS. THE ASSESSEE DISPUTED THE DECI SION OF AO AND SUBMITTED BEFORE CIT(A) THAT THE ASSESSEE WAS ONLY A BROKER WHO WAS BUYING AND SELLING SHARES ON BEHALF OF CLIENTS. THERE WERE ERRORS IN EXECUTION OF CERTAIN TRANSACTIONS ON BEHALF OF THE CLIENT S AND, THEREFORE, THE ASSESSEE HAD TO OWN UP THESE TRANSACTIONS R ESULTING INTO LOSS. SUCH TRANSACTIONS WILL NOT BE COVERED BY PROVISIONS OF EXPLANATION TO SECTION 73 AND HAS TO BE CONSIDERED AS INCIDENTAL BUSIN ESS LOSS IN CASE OF THE ASSESSEE WHO IS A BROKER. CIT(A) HOWEVER, OBSER VED THAT THE ASSESSEE HAD MADE NO CLAIM BEFORE AO REGARDING ERROR TRADE AND IN THE ANNUAL REPORT ALSO THERE WAS NO MENTION OF ERR OR TRADE. CIT(A), THEREFORE, REJECTED THE CLAIM OF THE ASSESSEE OF LOSS ARISI NG FROM ERROR TRADES AND ACCORDINGLY CONFIRMED DISALLOWANCE MADE BY AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3.1 BEFORE US, THE LD. AR FOR THE ASSESSEE SUBMITTED THA T IT WAS NOT CORRECT ON PART OF THE CIT(A) TO STATE THAT THE ASSESSEE H AD NOT MADE CLAIM OF ERROR TRADE BEFORE THE AO. HE REFERRED TO TH E LETTER DATED 28.9.2007 OF THE ASSESSEE ADDRESSED TO THE AO AND PLACED AT PAGE-42 ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 7 OF THE PAPER BOOK IN WHICH THE ASSESSEE AT PAGE-45 HAD E NCLOSED DETAILS OF ERROR TRADES AS PER ANNEXURE-VI. THE ASSESSEE HAD ALSO GIVEN DETAILS OF ERROR TRADES AS PER ANNEXURE-8 AS PAR T OF THE WRITTEN SUBMISSION MADE BEFORE CIT(A) COPY OF WHICH IS PLACED AT P AGE 36 OF THE PAPER BOOK . IT WAS POINTED OUT THAT WHILE EXECUT ING TRANSACTIONS ON BEHALF OF THE CLIENTS, THE EMPLOYEES OF THE ASSESSEE SOM ETIMES PUNCHED WRONG CODE OF THE SHARES TO BE BOUGHT/SOLD, MENT IONED PURCHASE CONTRACT IN PLACE OF SALE CONTRACT, MENTIONED WRON G QUANTITY ETC. AS A RESULT OF WHICH CLIENTS DID NOT ACCEPT THE TRAN SACTIONS AND ASSESSEE HAD TO OWN UP THESE TRANSACTIONS WHICH WERE SQUARED UP RESULTING INTO LOSS. THE LOSS IS ONLY INCIDENTAL TO BUSIN ESS LOSS AND HAS TO BE ALLOWED AS BUSINESS AND PROVISIONS OF SECTION 73 WILL NOT APPLY. THE LD. DR ON THE OTHER HAND PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 3.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING THE AL LOWABILITY OF LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF CERTAIN SHARE TRAN SACTIONS. THE ASSESSEE IS ONLY A SHARE BROKER WHO BUYS/SELLS SHARES ON BE HALF OF THE CLIENTS. IT HAS BEEN ARGUED THAT LOSS HAD OCCURRED ON TH OSE TRANSACTIONS UNDERTAKEN ON BEHALF OF THE CLIENTS IN WHICH THERE WERE ERRORS AND TRANSACTIONS WERE NOT AS PER ORDERS BOOKED BY THE CLIENTS. THESE PURCHASES/SALES EXECUTED ON BEHALF OF THE CLIENTS ARE THEREFORE, OWNED ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 8 UP BY THE ASSESSEE AND THESE ARE SQUARED UP WHICH HAS RESULT ED INTO LOSS. CIT(A) HAS OBSERVED THAT THE ASSESSEE HAD NOT MADE ANY CLAIM OF ERROR TRADES BEFORE THE AO. THE PERUSAL OF RECOR D SHOWS THAT THE FINDING OF THE CIT(A) IS NOT CORRECT. THE ASSESSEE VIDE L ETTER DATED 28.09.2007, COPY OF WHICH IS PLACED AT PAGE -42 OF THE PAPER BOOK HAD GIVEN DETAILS OF ERROR TRADE BEFORE THE AO AS PER AN NEXURE-VI PLACED AT PAGE 45 OF THE PAPER BOOK. THE ASSESSEE HAD ALSO ENCLOS ED DETAILS OF ERROR TRADES BEFORE CIT(A). THE CLAIM OF THE ASSESSEE H AS NOT BEEN CONTROVERTED BY THE LD. D.R BY PRODUCING ANY MATERIAL . THEREFORE, CLAIM OF THE ASSESSEE THAT IT HAD MADE CLAIM OF ERROR TRA DES BEFORE THE AO AS WELL AS CIT(A) HAS TO BE ACCEPTED. HOWEVER, IT IS AL SO A FACT THAT THE CLAIM OF ERROR TRADE HAS NOT BEEN EXAMINED EITHER BY AO OR CIT(A). THE LD. A.R HAD NO OBJECTION IF THE MATTER IS RESTORED TO THE FILE OF AO FOR NECESSARY VERIFICATION. IN OUR VIEW THE MATTER REQ UIRES FRESH EXAMINATION AND IN CASE LOSS IS FOUND TO HAVE OCCURRED ON ACCOUNT OF ERROR TRADES CONDUCTED BY ASSESSEE ON BEHALF OF CLIENTS, THE CLAIM HAS TO BE ACCEPTED AS BUSINESS LOSS IN VIEW OF THE DECISION OF T HE TRIBUNAL IN THE CASE OF PARKER SECURITIES LTD. (8 SOT 257) RELI ED UPON BY THE LD. AR IN WHICH IT HAS BEEN HELD THAT IN CASE OF BROKERS LO SS ARISING ON ACCOUNT OF PURCHASE AND SALE OF SHARES UNDER FORCED CIRCUMSTA NCES AND UNDER COMPULSION WILL NOT BE COVERED BY EXPLANATI ON TO SECTION 73. WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE ISSUE ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 9 TO THE FILE OF AO FOR FRESH ORDER AFTER NECESSARY EXAMI NATION AND AFTER ALLOWING OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 4. THE THIRD DISPUTE IS REGARDING DISALLOWANCE OF EXPE NSES UNDER SECTION 14A OF THE ACT. THE AO DURING THE ASSESSMENT PROCE EDINGS NOTED THAT THE ASSESSEE HAD DECLARED DIVIDEND INCOME OF RS.2,54,38,255/-, WHICH WAS EXEMPT FROM TAX. THE ASSESSEE HAD HOWEVER, NOT ALLOCATED ANY EXPENDITURE RELATING TO E XEMPT INCOME. THE AO NOTED THAT, IN ASSESSMENT YEAR 2004-05, 5% OF TH E DIVIDEND INCOME HAD BEEN TREATED AS EXPENDITURE TOWARDS EARNING OF DIVIDEND INCOME. HE, THEREFORE, DISALLOWED THE EXPENDITURE TO THE TUNE OF 5% OF DIVIDEND INCOME UNDER SECTION 14A. IN APPEAL, CI T(A) OBSERVED THAT DISALLOWANCE OF EXPENSES UNDER SECTION 14A WAS REQUI RED TO BE MADE AS PER RULE 8D. CIT(A) ACCORDINGLY DIRECTED THE AO TO MAKE DISALLOWANCE AS PER RULE 8D, AGGRIEVED BY WHICH THE ASSE SSEE IS IN APPEAL BEFORE THE TRIBUNAL. 4.1 BEFORE US, THE LD. AR FOR THE ASSESSEE SUBMITTED TH AT THE SAME ISSUE HAD BEEN CONSIDERED BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMENT YEAR 2004-05 IN ITA NO.3186/M/08 IN WHICH YE AR ALSO, THE AO HAD DISALLOWED THE EXPENSES @ 5% OF THE DIVIDEN D INCOME.THE DIVIDEND INCOME IN THAT YEAR WAS RS.4.04 CRORES. THE TRI BUNAL HOWEVER NOTED THAT THE DIVIDEND INCOME HAD MOSTLY ARISEN FROM A GROUP ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 10 COMPANY AND, THEREFORE, IT WAS HELD THAT IT WOULD BE REASONABLE TO DISALLOW THE EXPENSES AT RS.2.00 LACS. THE LD. AR POINTED OUT THAT THIS YEAR DIVIDEND INCOME WAS SMALLER AND INVESTMENT IN SHARE S HAD ONLY MARGINALLY GONE UP FROM RS.58.45 CRORES TO RS.59.50 CRO RES. IT WAS ACCORDINGLY URGED THAT THE ORDER OF CIT(A) MAY BE MOD IFIED AS RULE 8D WAS NOT APPLICABLE IN CASE OF THE ASSESSEE. 4.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING DISALLOWA NCE OF EXPENSES RELATING TO EXEMPT INCOME. THE AO HAD DISALLO WED THE EXPENSES @ 5% OF DIVIDEND INCOME WHEREAS THE CIT(A) HAS DIRECTED THE AO TO COMPUTE THE DISALLOWANCE AS PER RULE 8D. THE ORDER OF CIT(A) CAN NOT BE SUSTAINED IN VIEW OF THE JUDGMENT OF HON'BLE HIGH COURT OF BOMBAY IN CASE OF GODREJ AND BOYCE MFG. CO. V S. DCIT (328 ITR 81), IN WHICH IT HAS BEEN HELD THAT RULE 8D IS AP PLICABLE ONLY FROM ASSESSMENT YEAR 2008-09 AND THAT, IN RESPECT OF PRIOR YEA RS, THE DISALLOWANCE HAS TO BE MADE ON A REASONABLE BASIS. IN T HIS CASE, THE SAME ISSUE HAD BEEN CONSIDERED BY THE TRIBUNAL IN ASSESSMENT YEAR 2004-05 AND THE TRIBUNAL HAS REDUCED THE DISALLOWANCE TO RS.2.00 LACS. THE FACTS IN THIS YEAR ARE ALMOST IDENTICAL AS NO MA JOR DISTINGUISHING FACTORS HAVE BEEN BROUGHT TO OUR NOTICE BY THE LD. DEPARTMENTAL REPRESENTATIVE . HOWEVER, CONSIDERING THE INFLATION, IN ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 11 OUR VIEW, IT WOULD BE APPROPRIATE TO DISALLOW EXPENSE S RELATING TO DIVIDEND INCOME AT RS.2,20,000/-. WE HOLD ACCORDINGLY. 5. ITA NO.133/M/2009 (APPEAL OF THE REVENUE ): THOUGH THE REVENUE HAS RAISED SEVERAL GROUNDS OF APPEAL , EFFECTIVELY THERE ARE THREE GROUNDS WHICH RELATE TO DI SALLOWANCE OF VSAT, LEASE LINE AND TRANSACTION CHARGES, PENALTY FOR VI OLATION OF BYE- LAWS OF STOCK EXCHANGES AND CLAIM OF BAD DEBT. 5.1 WE FIRST TAKE UP THE DISPUTE RELATING TO DISALLOWA NCE OF VSAT, LEASE LINE AND TRANSACTION CHARGES. THE AO NOTED THAT T HE ASSESSEE HAD CLAIMED DEDUCTION OF RS.1,91,259/-, RS.3,79,181/- A ND RS.5,79,500/- ON ACCOUNT OF LEASE LINE CHARGES, VSAT CHAR GES AND TRANSACTION CHARGES WHILE COMPUTING TOTAL INCOME. THE AO OBSERVED THAT THESE CHARGES WERE OF THE NATURE OF PAYMENT FOR PROFESSIONAL SERVICES OR FEES FOR TECHNICAL SERVICES WHICH WERE COVERED UND ER THE PROVISIONS OF SECTION 40(A)(IA) AS PER WHICH IN CASE, NO TA X IS DEDUCTED, THE EXPENDITURE ON ACCOUNT OF SUCH SERVICES COU LD NOT BE ALLOWED AS DEDUCTION. THE ASSESSEE SUBMITTED THAT THE PROF ESSIONAL SERVICES AS DEFINED UNDER SECTION 194J WERE SERVICES RENDERE D BY A PERSON IN THE COURSE OF CARRYING ON OF LEGAL, MEDICAL, E NGINEERING SERVICES ETC. AND THEREFORE, THE PAYMENT MADE BY THE AS SESSEE COULD NOT BE CONSIDERED AS PROFESSIONAL SERVICES. THESE SERVICES COULD ALSO ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 12 NOT BE CONSIDERED AS TECHNICAL SERVICES IN VIEW OF THE JUDG MENT OF HON'BLE HIGH COURT OF MADRAS IN THE CASE OF SKYCELL COMM UNICATIONS LTD. VS DY. CIT (251 ITR 53), IN WHICH IT WAS HELD TH AT MERELY COLLECTING FEES FOR USING SOPHISTICATED TECHNICAL EQUIPMENT S WHICH WAS COMMONLY AVAILABLE TO ALL SUBSCRIBERS COULD NOT BE CONSIDER ED AS FEE FOR TECHNICAL SERVICE. THE ASSESSEE ALSO POINTED OUT THAT F EE FOR VSAT AND, LEASE LINES WERE PAID TOWARDS USING COMMUNICATION N ETWORK OF STOCK EXCHANGES, WHICH COULD NOT BE CONSIDERED AS FEES FOR T ECHNICAL SERVICES. THE AO, HOWEVER, DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT THE HIGHLY SOPHISTICATED SYSTEM AND SERVICES PROVIDED BY THE STOCK EXCHANGES INVOLVED SPECIALIZED KNOW LEDGE, EXPERIENCE AND SKILL IN THE FIELD OF SHARE TRADING. T HE AO, THEREFORE, HELD THAT THE PAYMENTS MADE BY THE ASSESSEE WERE OF THE NATURE OF FEES FOR TECHNICAL SERVICE, COVERED UNDER SECTION 40(A)(IA) . HE THEREFORE, DISALLOWED THE CLAIM. 5.1.1 IN APPEAL CIT(A) OBSERVED THAT VSAT AND LEASE LINE CHARGES WERE NOT PAYMENT FOR ANY TECHNICAL SERVICES. IT WAS OBSERVED BY HIM THAT DOT HAD GRANTED LICENSE TO STOCK EX CHANGES FOR INSTALLATION AND SETTING UP OF CLOSE USER GROUP TELECOMM UNICATIONS NETWORK BASED ON VSATS AND LEASE LINES. THE STOCK EXCHAN GES COLLECTED THE VSAT AND LEASELINE CHARGES FROM THE MEMBER S AND PASSED ON THE SAME TO THE SERVICE PROVIDER. THESE WERE TH EREFORE NOT ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 13 FEES FOR TECHNICAL SERVICES. AS REGARDS THE TRANSACTION CHARG ES, CIT(A) REFERRED TO THE DECISION OF THE TRIBUNAL IN CASE OF M/ S. KOTAK SECURITIES LTD. VS. ADDL. CIT IN ITA NO.1955/MUM/2008 DATED 26-8- 2008 IN WHICH IT WAS HELD THAT THE STOCK EXCHANGE NEITHE R PROVIDED ANY MANAGERIAL SERVICES NOR ANY TECHNICAL SERVICES. CIT(A ) ACCORDINGLY DELETED THE ADDITION MADE BY AO AGGRIEVED BY WHICH REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 5.1.2 BEFORE US, THE LD. DR APPEARING FOR THE REVE NUE ASSAILED THE ORDER OF CIT(A) AND PLACED RELIANCE ON THE FINDI NGS GIVEN BY AO. THE LD. AR ON THE OTHER HAND POINTED OUT THAT THE I SSUE WAS COVERED BY THE JUDGMENT OF HON'BLE HIGH COURT OF BOMBAY IN TH E CASE OF CIT VS. KOTAK SECURITIES (15 TAXMANN.COM77) IN SO FAR AS TH E TRANSACTION CHARGES WERE CONCERNED. THE ISSUE OF VSAT CHARGES AND LEASE LINE CHARGES WERE ALSO COVERED BY THE DECISION OF THE TRIBUNA L IN CASE OF CIT VS. ANGEL BROKING LTD. (35 SOT 457). IT WAS THUS U RGED THAT THE ORDER OF CIT(A) SHOULD BE UPHELD. 5.1.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING DISALLO WANCE OF VSAT, LEASELINE CHARGES AND TRANSACTION CHARGES PAID BY THE ASSESSEE TO THE STOCK EXCHANGE AS BROKERAGE. THE AO HAD DISALLOWED THE CL AIM HOLDING THAT THE PAYMENT MADE BY THE ASSESSEE WERE NOT FOR USE OF STANDARD ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 14 EQUIPMENTS BUT ALSO INVOLVED TECHNICAL SERVICES. HE THEREF ORE, HELD THAT THESE PAYMENTS WERE FEES FOR TECHNICAL SERVICE COVERED BY SECTION 40(A)(IA) AND SINCE THE ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE THE CLAIM HAD BEEN DISALLOWED. THE CIT(A) HAS DELETED THE ADDITION HOLDING THAT VSAT, AND LEASELINE CHARGES, WERE REIMBURSEMENT OF EXPENSES TO THE STOCK EXCHANGES FOR USE OF STANDARD FACILITIES AND TRAN SACTION CHARGES WERE NOT DISALLOWABLE IN VIEW OF THE DECISION OF THE TRIBUNAL IN CASE OF KOTAK SECURITIES LTD. 5.1.4 WE FIND THAT THE ISSUE OF TRANSACTION CHARGES IS CO VERED BY THE JUDGMENT OF HON'BLE HIGH COURT OF BOMBAY IN CASE OF CIT(A) VS. KOTAK SECURITIES LTD.( 15 TAXMANN.COM77). THE HON'BLE HI GH COURT IN THAT CASE HELD THAT THE TRANSACTION CHARGES PAID BY THE A SSESSEE WERE OF THE NATURE OF FEES FOR TECHNICAL SERVICES. HOWEVER, TH E HON'BLE HIGH COURT NOTED THAT BOTH PARTIES WERE UNDER BONAFIDE BE LIEF FOR NEARLY A DECADE THAT NO TAX WAS REQUIRED TO BE DEDUCTED AND, TH EREFORE, THIS BEING THE FIRST YEAR THE DISALLOWANCE COULD NOT BE MAD E AS THE ASSESSEE WAS UNDER THE BONAFIDE BELIEF THAT THE CLAIM WAS ALLOWABLE. THE CASE OF THE ASSESSEE IS IDENTICAL AS IN THIS YEAR ALSO DI SALLOWANCE HAS BEEN MADE FOR THE FIRST TIME IN ASSESSMENT YEAR 2005- 06. NO DISTINGUISHING FEATURES HAVE BEEN BROUGHT TO OUR NOTICE BY THE LD. DR. WE THEREFORE, DELETE THE DISALLOWANCE MADE BY AO ON ACCOUNT OF TRANSACTION CHARGES AND CONFIRMED THE ORDER OF CIT(A) . AS REGARDS ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 15 VSAT AND LEASE LINE CHARGES IT HAS TO BE ALLOWED IN VIE W OF THE DECISION OF THE TRIBUNAL IN THE CASE OF ANGEL STOCK BROKING LTD . (35 SOT 457) IN WHICH THE TRIBUNAL NOTED THAT STOCK EXCHANGES WERE NOT O WNERS OF TECHNOLOGY TO PROVIDE IT FOR A FEES TO THE PROSPECTIVE USERS. THEY WERE CONSUMERS OF TECHNOLOGY FOR WHICH THEY HAD TO GET PERMISSI ON FRON DOT. THEREFORE, THE PAYMENT COULD NOT BE CONSIDERED AS FEES FOR TECHNICAL SERVICES. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL (SUPRA), WE ALLOW THE CLAIM OF THE ASSESSEE. 5.2 THE SECOND DISPUTE IN THE APPEAL RAISED BY THE REVE NUE IS REGARDING DISALLOWANCE OF RS.10,17,929/- ON ACCOUNT OF P AYMENT MADE BY THE ASSESSEE TO THE STOCK EXCHANGE FOR VIOLATION OF BYE LAWS OF STOCK EXCHANGE. THE ASSESSEE SUBMITTED THAT THE STOCK EXCHANGE S ARE NOT STATUTORY AUTHORITIES AND, THEREFORE, VIOLATION O F THEIR BYE-LAWS COULD NOT BE CONSIDERED AS VIOLATION OF LAW. THE PAYME NT MADE BY THE ASSESSEE WAS ONLY FOR BREACH OF CONTRACTUAL OBLIGATION AND THEREFORE CLAIM WAS ALLOWABLE AS DEDUCTION. THE AO HOWEVER HAD N OT ACCEPTED THE EXPLANATION GIVEN. IT WAS OBSERVED BY HIM THAT UN DER THE PROVISIONS OF EXPLANATION TO SECTION 37(1), ANY EXPENDI TURE INCURRED BY THE ASSESSEE FOR ANY PURPOSE WHICH IS PROHIBITED BY LAW CAN NOT BE CONSIDERED AS EXPENDITURE INCURRED FOR THE PURPOSE OF BU SINESS OR PROFESSION. HE, THEREFORE, DISALLOWED THE CLAIM. IN APPE AL CIT(A) OBSERVED THAT STOCK EXCHANGES WERE NOT GOVERNMENT OR SEMI - ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 16 GOVERNMENT BODIES BUT WERE ONLY COMPANIES AND, THEREF ORE, THE PAYMENT MADE FOR VIOLATION OF THEIR REGULATIONS COULD NOT BE CONSIDERED AS PAYMENT PROHIBITED BY LAW OR IN CONNECTION WITH AN OFFENCE. HE, THEREFORE ALLOWED THE CLAIM AGGRIEVED BY WHICH, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 5.2.1 BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE PLACED RELIANCE ON THE ORDER OF AO WHEREAS THE LD. AR SUBMITT ED THAT THE ISSUE WAS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F THE TRIBUNAL IN CASE OF GOLD CREST CAPITAL MARKET LTD. VS. ITO(2 (TRIB.) 355. 5.2.2 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING ALLOWA BILITY OF EXPENDITURE INCURRED BY THE ASSESSEE ON ACCOUNT OF PAYMENT MADE TO STOCK EXCHANGES FOR VIOLATION OF THEIR BYE-LAWS. THE AO HAD TREATED THE EXPENDITURE AS PAYMENT FOR VIOLATION OF LAW AND DISALLOWED THE SAME UNDER SECTION 37(1). CIT(A) HELD THAT VIOLATION O F REGULATIONS OF STOCK EXCHANGES DID NOT AMOUNT TO VIOLATION OF LAW AND THEREFORE, ALLOWED THE CLAIM. THE VIEW TAKEN BY THE CIT(A) IS SU PPORTED BY THE DECISION OF THE TRIBUNAL IN CASE OF GOLD CREST CAPITAL MAR KET LTD. (SUPRA) IN WHICH IT HAS BEEN HELD THAT PAYMENT MADE BY STOCK BROKER TO STOCK EXCHANGE ON ACCOUNT OF UNFAIR TRADE PRACTICE AND UN-BUSINESS ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 17 LIKE CONDUCT IS NOT FOR VIOLATION OF LAW AND, THEREFO RE, CAN NOT BE DISALLOWED UNDER SECTION 37(1). NO CONTRARY DECISION OF T HE JURISDICTIONAL HIGH COURT OR THE HON'BLE APEX COURT HA S BEEN BROUGHT TO OUR NOTICE. WE THEREFORE, SEE NO INFIRMITY IN ALLO WING THE CLAIM. THE ORDER OF CIT(A) IS THEREFORE, UPHELD. 5.3 THE THIRD DISPUTE IS REGARDING DISALLOWANCE OF BAD DEBT. THE AO DURING THE ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE H AD MADE DEDUCTION OF RS.22,68,000/- ON ACCOUNT OF BAD DEBT. THE DETAILS OF WHICH WERE GIVEN AS UNDER :- S.NO. NAME OF THE PARTY AND ADDRESS AMOUNT (RS.000) NATURE OF AMOUNT WRITTEN OFF 1. RECKITT BENCKISER PLC 103-105 BATH ROAD SLOUGH, BERKSHIRE, SL 13UH, ENGLAND. 1,421 FEE 2. CROMPTON GREAVES LTD. 6 TH FLOOR, CG HOUSE, DR. A.B. ROAD, PRABHADEVI, MUMBAI-400 025. 687 FEE 3. BHARAT FORGE LTD. MUNDHWA, PUNE-411 036 32 OUT OF POCKET EXPENSES 4. INTERNATIONAL SEAPORTS (INDIA) P. LTD. EAST INDIA CHAMBERS, 3 VILLAGE ROAD, NUNGAMBAKKAM, CHENNAI-600 034. 29 OUT OF POCKET EXPENSES 5. SIEMENS INFORMATION SYSTEM LTD., 130, 97 OUT OF POCKET ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 18 PANDURANG BUDHKAR MARG, WORLI, MUMBAI- 400 018. EXPENSES TOTAL 2,268 5.3.1 THE ASSESSEE SUBMITTED THAT THE AMOUNTS DUE FROM T HE PARTIES WERE OUTSTANDING FOR LONG TIME AND WERE NOT L IKELY TO BE RECOVERED IN FUTURE. IT WAS ALSO SUBMITTED THAT IN VIEW OF THE AMENDMENT TO SECTION 36(1)(VII) W.E.F. 1.4.1989, THE ASSESSEE WAS NOT REQUIRED TO PROVE THAT THE DEBT HAD BECOME IRRECO VERABLE FOR CLAIM OF BAD DEBT. ASSESSEE HAD MET ALL CONDITIONS AND, THEREF ORE, THE CLAIM SHOULD BE ALLOWED. IN RELATION TO OUT OF POCKET EXPEN SES (OPE), IT WAS SUBMITTED THAT THE SAME WERE INCURRED DURING COURSE OF CA RRYING ON OF CORPORATE AND ADVISORY SERVICES. THESE EXPENSES WERE REQUI RED TO BE REIMBURSED BY THE CLIENTS WHICH WAS NOT DONE MAINLY BECA USE THE TRANSACTION FOR WHICH THE ASSESSEE HAD BEEN APPOINTED HAD NOT GONE THROUGH. THE EXPENSES HAD BEEN INCURRED ON LONG DISTAN CE COMMUNICATION CALLS AND TRAVELING EXPENSES INCURRED BY TH E ASSESSEE. THESE EXPENSES HAVE TO BE ALLOWED AS BUSINESS LOSS. THE AO H OWEVER DID NOT ACCEPT THE CONTENTIONS RAISED. IT WAS OBSERVED BY HIM THAT THE ASSESSEE HAD NOT PRODUCED ANY EVIDENCE TO SHOW THAT THE DE BT HAD BECOME IRRECOVERABLE. IT WAS ALSO OBSERVED BY HIM THAT O PE COULD NOT BE CONSIDERED AS BAD DEBT. CLAIM OF BUSINESS LOSS COULD NOT BE ALLOWED AS THE BURDEN WAS ON THE ASSESSEE TO PROVE THAT THE LOSS HA D ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 19 CRYSTALLIZED DURING THE YEAR WHICH HAD NOT BEEN DONE. THE AO ACCORDINGLY DISALLOWED THE CLAIM. 5.3.2 IN APPEAL, CIT(A) OBSERVED THAT IN CASE OF RECKI TT BENCKISER PLC AND CROMPTON GREAVES LTD. THE ASSESSEE HAD O FFERED THE AMOUNT FOR TAX IN THE EARLIER YEAR AND IN THE CURREN T YEAR THE AMOUNT HAD BEEN WRITTEN OFF AS BAD DEBT. THE ASSESSEE WAS NOT RE QUIRED TO PROVE THAT THE DEBT HAD BECOME IRRECOVERABLE. IN RELA TION TO BHARAT FORGE LTD., INTERNATIONAL SEAPORTS (INDIA) PVT. LTD. AND SIEMENS INFORMATION SYSTEM LTD. CIT(A( OBSERVED THAT THESE A MOUNTS WERE LOST IN THE COURSE OF BUSINESS. CIT(A) ALSO OBSERVED THAT THE FINDING OF THE AO THAT THE ASSESSEE COULD NOT ESTABLISH THAT LOSS CRYST ALLIZED DURING THE YEAR WAS NOT WELL FOUND. HE, THEREFORE, DE LETED THE ADDITIONS AGGRIEVED BY WHICH THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 5.3.3 BEFORE US THE LD. AR FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE CIT(A) WHEREAS THE LD. DR P LACED RELIANCE ON THE ORDER OF AO. 5.3.4 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING ALLOWABILITY OF D EDUCTION OF RS.22,68,000/- ON ACCOUNT OF BAD DEBT AND BUSINESS LOSS. T HE CLAIM OF ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 20 BAD DEBT WAS IN RELATION TO SUM OF RS.14.21 LACS DUE FR OM RECKITT BENCKISER PLC AND RS.6.87 LACS FROM CROMPTON GREAVES LTD. THERE IS NO DISPUTE THAT THESE AMOUNTS HAD BEEN TAKEN INTO ACCOU NT IN THE COMPUTATION OF THE EARLIER YEAR. AO DISALLOWED THE AM OUNT ONLY ON THE GROUND THAT THE ASSESSEE HAD NOT ESTABLISHED THAT THE DEB T HAD BECOME IRRECOVERABLE. IN VIEW OF THE AMENDMENT TO SECTI ON 36(1)(VII) W.E.F. 1.4.1989, THE BURDEN IS NO LONGER ON THE ASSESSEE TO PROVE THAT THE DEBT HAS BECOME BAD/IRRECOVERABLE. THE ONLY CONDITI ONS FOR ALLOWABILITY OF BAD DEBT IS THAT THE AMOUNT SHOULD H AVE BEEN TAKEN INTO ACCOUNT IN THE COMPUTATION OF INCOME OF EARLIER Y EAR AND SHOULD HAVE BEEN ACTUALLY WRITTEN OFF IN THE BOOKS. THERE IS NO DISPUTE REGARDING FULFILLMENT OF THESE CONDITIONS. THEREFORE CL AIM OF BAD DEBTS CAN NOT BE DISALLOWED. THE ORDER OF CIT(A) ALLOWING THE CLAIM IS ACCORDINGLY UPHELD. AS REGARDS THE AMOUNT DUE FROM BHAR AT FORGE LTD., INTERNATIONAL SEAPORTS (INDIA) PVT. LTD. AND SIEMENS INFORMATION SYSTEM LTD. AGGREGATING TO TO RS.1.58 LACS, THESE WERE OUT OF POCKET EXPENSES INCURRED BY THE ASSESSEE IN CONNECTION WITH CERTAIN WORK RELATING TO THESE CLIENTS. THE CASE OF THE ASSESSEE IS THAT THESE EXPENSES WHICH WERE REQUIRED TO BE REIMBURSED BY THE CLI ENTS WERE NOT REIMBURSED AS TRANSACTIONS DID NOT GO THROUGH. THI S CLAIM HAS NOT BEEN CONTROVERTED BY THE AO BY PLACING ANY MATERIAL O N RECORD. THEREFORE, THESE EXPENSES WHICH WERE ACTUALLY INCURRED AND ABOUT ITA NO.6979/M/08 & 133/M/09 A.Y.05-06 21 WHICH THERE IS NO DISPUTE HAS TO BE ALLOWED AS BUSINESS LOSS. WE SEE NO REASON TO INTERFERE WITH THE ORDER OF CIT(A) ALLO WING THE CLAIM AND THE SAME IS THEREFORE UPHELD. 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWE D WHEREAS THAT OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29.6.2012 SD/- SD/- (D. MANMOHAN ) VICE PRESIDENT (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 29.6.2012. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.