DCIT 4(2)(1), MUMBAI V. SATCO CAPITAL MARKETS LTD, MUMBAI

ITA 140/MUM/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8944 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 11-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAM TIWARI
• Keywords: Earning of tax free income; Non-deduction of tax; Speculation loss
• Section: 143(3); 142(1); 14A; 10

Judgement Text

1 ITA NOS.140 & 141/MUM/2016 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E, MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) I.T.A NOS.140 & 141/MUM/2016 (ASSESSMENT YEARS 2011-12 & 2012-13) THE DCIT-4(2)(1), MUMBAI VS M/S SATCO CAPITAL MRKE TS LTD (FORMERLY KNOWN AS M/S SATCO SECURITIES & FINANCIAL SERVICES LTD) 1 ST FLOOR, MAKHIJA CHAMBERS 196, TURNER ROAD, BANDRA (W), MUMBAI-400 050 PAN : AAACS6813N APPELLANT RESPONDEDNT APPELLANT BY SHRI RAM TIWARI RESPONDENT BY SHRI HARIDAS BHAT DATE OF HEARING 25 -10-2017 DATE OF PRONOUNCEMENT 27-10-2017 O R D E R PER G MANJUNATHA, AM : THESE TWO APPEALS FILED BY THE REVENUE ARE DIRECT ED AGAINST SEPARATE, BUT IDENTICAL ORDERS OF THE CIT(A)-9, MUMBAI BOTH DATED 19-10-2015 FOR THE ASSESSMENT YEAR 2011-12 AND 2012-13. SINCE FACTS A RE COMMON AND ISSUES ARE IDENTICAL, THESE APPEALS WERE HEARD TOGETHER AND AR E DISPOSED OF BY THIS COMMON ORDER, OR THE SAKE OF CONVENIENCE. 2. THE ASSESSEE HAS RAISED COMMON GROUNDS OF APPEAL FO R BOTH THE 2 ITA NOS.140 & 141/MUM/2016 ASSESSMENT YEARS. FOR THE SAKE OF BREVITY, GROUNDS OF APPEAL RAISED FOR AY 2011-12 ARE EXTRACTED BELOW:- 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN DIRECTING THE AO TO RECOMPUTE AND RESTRICT THE DISALLOWANCE U/S 14A TO THE EXTENT 20% OF DISALLOWA NCE MADE UNDER RULE 8D(2)(II) ON THE STOCK WHERE NO SUCH RESTRICTION HAVE BEEN MENTIONED. 2. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN ALLOWING THE APPEAL OF THE ASSESSEE REGARD ING DISALLOWANCE OF SUB BROKERAGE AND COMMISSION AMOUNTING TO RS. 2, 05,60,817/- FOR NON DEDUCTION OF TDS AS SUB BROKERAGE AND COMMI SSION COMES UNDER THE PREVIEW OF SECTION 194H OF THE ACT. 2. BY THESE GROUNDS OF APPEAL, THE REVENUE HAS CHALLEN GED TWO ISSUES, VIZ. (I) RESTRICTION OF DISALLOWANCE MADE U/R 8D(2)(II) TO 20%; AND (II) DELETION OF ADDITION MADE BY THE AO TOWARDS DISALLOWANCE OF BRO KERAGE AND COMMISSION U/S 40(A)(IA) OF THE ACT. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S A COMPANY ENGAGED IN THE BUSINESS OF SECURITIES AND BROKING, FILED ITS R ETURN OF INCOME FOR THE ASSESSMENT YEAR 2011-12 ON 12-09-2011 DECLARING NIL INCOME. THE CASE HAS BEEN SELECTED FOR SCRUTINY AND STATUTORY NOTICES U/ S 143(2) AND 142(1) OF THE ACT WERE ISSUED. IN RESPONSE TO THE NOTICES, THE A UTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FILED N ECESSARY DETAILS, AS CALLED FOR. THE ASSESSMENT WAS COMPLETED U/S 143(3) ON 10 -02-2014 DETERMINING 3 ITA NOS.140 & 141/MUM/2016 TOTAL INCOME AT RS.2,47,93,764, INTERALIA MAKING AD DITIONS TOWARDS DISALLOWANCE OF EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME U/S 14A OF THE ACT, AND DISALLOWANCE OF SUB BROKERAGE AND COMM ISSION U/S 40(A)(IA) OF THE ACT, FOR FAILURE TO DEDUCT TAX AT SOURCE U/S 194H O F THE INCOME-TAX ACT, 1961, DISALLOWANCE ON ACCOUNT OF BROKERAGE INCOME AND ADD ITION TOWARDS DEEMED SPECULATION LOSS. AGGRIEVED BY THE ASSESSMENT ORDE R, ASSESSEE PREFERRED APPEAL BEFORE CIT(A). 4. BEFORE THE CIT(A), THE ASSESSEE HAS FILED ELABORATE WRITTEN SUBMISSIONS TO ARGUE THAT THE ISSUE OF DISALLOWANCE U/S 14A IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF ITAT, FOR THE ASSESSMEN T YEAR 2010-11. THE ASSESSEE FURTHER SUBMITTED THAT THE ISSUE OF DISALL OWANCE OF SUB BROKERAGE AND COMMISSION EXPENSES U/S 40(A)(IA) FOR FAILURE TO DE DUCT TAX AT SOURCE IS ALSO COVERED BY THE DECISION OF ITAT FOR AY 2010-11. IN SOFAR AS ADDITION TOWARDS DIFFERENCE IN BROKERAGE AND COMMISSION INCOME IS CO NCERNED, THE ASSESSEE HAS FILED A RECONCILIATION EXPLAINING THE DIFFERENCE QU ANTIFIED BY THE AO. THE CIT(A), FOR THE DETAILED DISCUSSION IN HIS ORDER DA TED 19-10-2015 RESTRICTED THE DISALLOWANCE WORKED OUT BY THE AO U/S 14A TO 20% OF THE DISALLOWANCE MADE BY THE AO BY RELYING UPON THE DECISION OF ITAT IN A SSESSEES OWN CASE FOR EARLIER ASSESSMENT YEAR. AS REGARDS DISALLOWANCE O F COMMISSION AND BROKERAGE PAID TO SUB BROKERS, THE CIT(A) DELETED T HE ADDITION MADE BY THE AO 4 ITA NOS.140 & 141/MUM/2016 ON THE GROUND THAT PAYMENT OF SUB BROKERAGE AND COM MISSION TO A BROKER DEALING IN SECURITIES IS NOT COVERED U/S 194H. INS OFAR AS ADDITION MADE BY THE AO TOWARDS DIFFERENCE IN BROKERAGE AND COMMISSION I NCOME, THE CIT(A) OBSERVED THAT THE ASSESSEE FAILED TO EXPLAIN THE DI FFERENCE QUANTIFIED BY THE AO WITH NECESSARY EVIDENCE. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 5. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATION IS RESTRICTION OF DISALLOWANCE U/S 14A TO THE EXTENT OF 20% OF DISALL OWANCE MADE U/R 8D(2)(II) OF IT RULES, 1962. THE LD.AR FOR THE ASSESSEE SUBM ITTED THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION O F ITAT, IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2010-11 IN ITA NO. 6132/MUM/2013 DATED 29-04-2015, WHEREIN THE ITAT RESTRICTED THE DISALL OWANCE TO BE MADE U/R 8D(2)(II) TO 20% OF THE AMOUNT COMPUTED IN RESPECT OF SHARES HELD AS STOCK IN TRADE. THE RELEVANT PORTION OF THE ORDER IS EXTRAC TED BELOW:- 3. BEFORE US, THE LD A.R SUBMITTED THAT THE ASSESSING OFFICER WAS NOT CORRECT IN INCLUDING THE VALUE OF SHARES HE LD AS 'STOCK IN TRADE' FOR COMPUTING THE AVERAGE VALUE OF INVEST MENTS. HOWEVER, WE NOTICE THAT AN IDENTICAL ISSUE WAS CONSIDERED BY A CO-ORDINATE BENCH OF THE MUMBAI TRIBUNAL IN THE CASE OF DOT V/S DAMANI ESTATES AND FINANCE PVT. LTD IN ITA NO.3029/MUM/201 2 (AY-2008- 09) AND THE TRIBUNAL, VIDE ITS ORDER DATED 17.7.201 3, HAS TAKEN THE VIEW THAT THE DISALLOWANCE COMPUTED UNDER RULE 8D(2)(II) QUA THE SHARES IN STOCK-IN-TRADE WOULD BE RESTRICTED TO 20% OF THE AMOUNT COMPUTED UNDER RULE 8D(2)(II). THE RELEVANT PORTION OF THE 5 ITA NOS.140 & 141/MUM/2016 ABOVE SAID ORDER IS REPRODUCED BELOW: '5.6............... THE SECOND COMPONENT, QUA INTEREST EXPENDITURE I N R.8D(2)(II), HOWEVER, PRESENTS A PROBLEM IN A CASE AS THE INSTANT CASE. THIS IS AS THE SUB-RULE, AS WOULD BE READILY SEEN, SEEKS TO QUANTIFY THE INTEREST ON THE INVESTMENTS, INCOME FR OM WHICH IS NOT TAXABLE, ON A PROPORTIONATE BASIS, AND WHICH THOUGH IS NOT ONLY UNDERSTANDABLE, BUT IS AS APPROPRIATE AND JUST IFIABLE AS A GENERAL FORMULA COULD BE. HOWEVER, IN THE INSTANT C ASE, SHARES, WHICH YIELD THE TAX EXEMPT DIVIDEND INCOME, INTERES T QUA WHICH IS TO BE DISALLOWED, BEING HELD AS STOCK-IN-TRADE, ALS O YIELD SHARE TRADING INCOME, WHICH IS TAXABLE. THEREFORE, TO SAY THAT THE ENTIRE INTEREST RELATABLE TO THE AVERAGE SHARE HOLDING IS TO BE ATTRIBUTED TO THE TAX EXEMPT DIVIDEND INCOME WOULD BE PATENTLY INCORRECT ON FACTS. THAT, IN FACT, THE SHARES ARE BOUGHT AND HEL D PRIMARILY FOR SHARE TRADING INCOME, FURTHER ACCENTUATES THE A PPARENT INCONGRUITY OF THE SITUATION ARISING ON THE MECHANI CAL APPLICATION OF R. 8D(2)(II). CLEARLY, THEREFORE, THE AMOUNT AS PER R. 8D(2)(II) WOULD NEED TO BE SCALED DOWN, BIFURCATING THE EXPENDITURE SO ARRIVED AT BETWEEN THESE TWO INCOMES. AS REGARDS THE RATIO OF SUCH SCALING DOWN, NO HARD AND FAST RULE FOR THE PURPOSE WOULD H OLD, EACH FACT SITUATION BEING DIFFERENT. HOWEVER, CONSIDERING THA T THE DOMINANT OBJECTIVE OF THE SHARE HOLDING, WHICH IN OUR VIEW S HOULD BE DISPOSITIVE OF THE MATTER, IS THE SHARE TRADING INC OME, WE PROPOSE A RATIO OF 20% TOWARD THE TAX-EXEMPT DIVIDEND INCOME. ONE COULD ARGUE THAT THE PERCENTAGE SUGGESTED BY US IS AD HOC OR NOT SCIENTIFIC. WE HAVE ALREADY EXPLAINED THAT AN INDIR ECT EXPENDITURE, INCLUDING BY WAY OF INTEREST, HAS NO D IRECT RELATION WITH THE INCOME, MUCH LESS ITS QUANTUM, ALLOCATING IT ON THE BASIS OF THE INCOME GENERATED OR ARISING WOULD NOT BE APPROPRIAT E, AND NEITHER DOES RULE 8D SUPPORT THE SAME. FURTHER, THA T IN ARRIVING AT THE SUGGESTED RATE OF 20%, WE HAVE BEEN GUIDED PRINCIPALLY BY THE FACT THAT THE SHARE TRADING IS T HE DOMINANT OBJECT OF THE SHARE-HOLDING. WE ALSO CONSIDER IT PE RTINENT TO MENTION THAT THOUGH THE AVERAGE SHARE-HOLDING MAY B E THE SAME, THE SHARE COMPOSITION, IN VIEW OF THE SHARE TRADING ACTIVITY, WOULD VARY CONTINUOUSLY; THE TURNOVER FOR A YEAR BE ING EASILY IN THE RANGE OF 4 TO S TIMES THE AVERAGE SHAREHOLDING. ACC ORDINGLY, IN ARRIVING AT THE DISALLOWANCE U/R. 8D, THE AMOUNT AS PER R. 6 ITA NOS.140 & 141/MUM/2016 8D(2)(II) QUA SHARES HELD AS STOCK-IN-TRADE WOULD S TAND TO BE RESTRICTED TO 20% THEREOF. AS REGARDS THE LEGAL MANDATE FOR THE ADJUSTMENT AF ORESAID, WE HAVE ALREADY CLARIFIED OF THE MANIFESTLY INCORRE CT, IF NOT ABSURD RESULTS THAT WOULD OTHERWISE FOLLOW. IN FACT , IN OUR VIEW, THE LANGUAGE OF R. 8D(2)(II) ITSELF PROVIDES THE MANDATE INASMUCH AS IT PRESCRIBES OR AUTHORIZES A DISALLOWA NCE ONLY QUA INVESTMENT, INCOME FROM WHICH IS NOT TAXABLE, SO TH AT IN LIMITING THE AMOUNT WORKED OUT WITH REFERENCE TO THE TOTAL I NVESTMENT; THE SAME ALSO YIELDING TAXABLE INCOME, WE HAVE ONLY SOUGHT TO OPERATIONALIZE AND IMPLEMENT THE SAID RULE. IT W OULD ALSO BE APPRECIATED THAT NOT DOING SO WOULD ALSO VIOLATE TH E PRINCIPLE OF ONLY THE NET INCOME (FROM ANY SOURCE) BEING SUBJECT TO TAX INASMUCH AS DISALLOWANCE OF THE TOTAL INTEREST AS PER R. 8D( 2)(II) WOULD IN EFFECT BRING THE SHARE TRADING INCOME TO TAX WITHOU T DEDUCTION OF THE INTEREST EXPENDITURE ALLOCABLE OR ATTRIBUTABLE THERETO. NEEDLESS TO ADD THAT NO ADJUSTMENT WOULD ARISE IN RESPECT OF SHARES HELD AS 'INVESTMENTS', SO THAT THE TWO PARTS WOULD NEED TO BE SEPARATELY COMPUTED, WHICH IS OTHERWISE MANIFEST IN THE COMPUT ATION ITSELF.' CONSISTENT WITH THE VIEW TAKEN BY THE CO-ORDINATE BENCH IN THE ABOVE SAID CASE, WE DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO BE MADE UNDER RULE 8D(2)(II) OF THE IT RULES TO 20% OF THE AMOUNT COMPUTED UNDER THAT RULE IN RE SPECT OF SHARES HELD AS 'STOCK IN TRADE'. THE DISALLOWANCE T O BE MADE UNDER RULE 8D(2)(II) IN RESPECT OF SHARES HELD AS I NVESTMENT HAS TO BE COMPUTED IN ACCORDANCE WITH RULE 8D(2)(II) ON LY. IN RESPECT OF THE DISALLOWANCE TO BE MADE UNDER RULE 81D(2)(III), THE CO-ORDINATE BENCH HAS TAKEN THE VIEW THAT THE SHARES HELD AS ST OCK IN TRADE SHOULD ALSO BE INCLUDED IN COMPUTING THE AVERAGE VA LUE OF INVESTMENTS. HENCE, NO INTERFERENCE IS CALLED FOR I N THE COMPUTATION MADE BY THE AO UNDER RULE 8D(2)(III). IN VIEW OF TH E ABOVE, THE ORDER OF LD CIT(A) SHALL STAND MODIFIED IN ACCORDAN CE WITH THE DISCUSSION MADE SUPRA. THE ASSESSING OFFICER IS ACC ORDINGLY DIRECTED TO RECOMPUTE THE DISALLOWANCE IN TERMS OF DISCUSSION M ADE SUPRA. IN THIS VIEW OF THE MATTER AND BEING CONSISTENT WIT H THE VIEW TAKEN BY THE CO- ORDINATE BENCH, WE DIRECT THE AO TO RESTRICT THE DI SALLOWANCE TO BE MADE U/R 7 ITA NOS.140 & 141/MUM/2016 8D(2)(II) TO 20% OF THE AMOUNT COMPUTED U/R 8D(2)(I I) BY THE AO IN RESPECT OF SHARES HELD AS STOCK IN TRADE. 6. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S DISALLOWANCE OF SUB BROKERAGE AND COMMISSION PAID TO SUB BROKERS DEALIN G IN SECURITIES. THE LD.AR FOR THE ASSESSEE SUBMITTED THAT THE ISSUE IS COVERE D IN FAVOUR OF THE ASSESSEE BY THE DECISION OF ITAT, IN ASSESSEES OWN CASE FOR AY 2010-11 IN ITA NO.6527/MUM/2013 ORDER DATED 13-04-2016, WHEREIN TH E CO-ORDINATE BENCH, UNDER SIMILAR SET OF FACTS OBSERVED THAT COMMISSION OR BROKERAGE DEFINITION U/S 194H DOES NOT INCLUDE ANY TRANSACTION IN SECURITY A S IT HAS BEEN SPECIFICALLY EXCLUDED FROM PAYMENT AS STIPULATED IN EXPLANATION TO SECTION 194H OF THE I.T. ACT, 1961. THEREFORE, THE ASSESSEE NEED NOT DEDUCT TDS ON SUB BROKERAGE AND COMMISSION PAID TO BROKERS DEALING IN SECURITIES. THE RELEVANT PORTION OF THE ORDER IS EXTRACTED BELOW:- 8. AFTER CONSIDERING THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS AND VARIOUS DECISIONS RELIED UPON BY THE LD. COUNSEL, WE FIND FROM THE ORDERS THAT, ASSESSEE HAD PAID SUB-BROKERA GE AND COMMISSION TO ITS AGENTS FOR DEALING WITH THE SECUR ITIES, THAT IS, IN CONNECTION WITH THE SERVICES RENDERED IN THE COURSE OF BUYING AND SELLING OF SHARES / SECURITIES. EXPLANATION TO SECT ION 194H DEFINES THE COMMISSION AND BROKERAGE AS FOR THE PURPOSE OF SECTION 194 I-I IN THE FOLLOWING MANNER: '1 94H. ANY PERSON, NOT BEING AN INDIVIDUAL OR A HI NDU UNDIVIDED FAMILY, WHO IS RESPONSIBLE FOR PAYING, ON OR AFTER THE 1ST DAY OF JUNE, 2001, TO A RESIDENT, ANY INCOME BY WAY OF COM MISSION (NOT BEING INSURANCE COMMISSION REFERRED TO IN SECTION 1 94D) OR 8 ITA NOS.140 & 141/MUM/2016 BROKERAGE, SHALL, AT THE TIME OF CREDIT OF SUCH INC OME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT OF S UCH INCOME IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIER, DEDUCT INCOME-TAX THEREON AT THE RATE OF /TEN] PER CENT: PROVIDED..... PROVIDED..... EXPLANATION. FOR THE PURPOSES OF THIS SECTION,- 'COMMISSION OR BROKERAGE' INCLUDES ANY PAYMENT RECE IVED OR RECEIVABLE, DIRECTLY OR INDIRECTLY, BY A PERSON ACT ING ON BEHALF OF ANOTHER PERSON FOR SERVICES RENDERED (NOT BEING PRO FESSIONAL SERVICES) OR FOR ANY SERVICES IN THE COURSE OF BUYI NG OR SELLING OF GOODS OR IN RELATION TO ANY TRANSACTION RELATING TO ANY ASSET, VALUABLE ARTICLE OR THING, NOT BEING SECURITIES;.... (II) ..... (III) ..... (IV) ..... 9. THUS, COMMISSION OR BROKERAGE DEFINITION DOES NOT I NCLUDE ANY TRANSACTION IN SECURITY AS IT HAS BEEN SPECIFIC ALLY EXCLUDED FROM PAYMENT AS STIPULATED IN EXPLANATION TO SECTION 194 H. THERE IS NOTHING ON RECORD TO PROVE THAT SUB-BROKERAGE HAS B EEN PAID FOR ANY OTHER SERVICES OTHER THAN RELATING TO SECURITIES. O NCE THAT IS SO, WE DO NOT FIND ANY REASON TO DEVIATE FROM THE FINDINGS OF THE CIT(A) WHICH IN TURN IS BASED ON THE VARIOUS DECISIONS OF THE TRIBUNAL, ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS DI SMISSED. IN THIS VIEW OF THE MATTER AND BEING CONSISTENT WIT H THE VIEW TAKEN BY THE CO- ORDINATE BENCH IN ASSESSEES OWN CASE FOR AY 2010-1 1, WE DIRECT THE AO TO DELETE ADDITION MADE TOWARDS DISALLOWANCE OF SUB BR OKERAGE AND COMMISSION U/S 40(A)(IA) OF THE ACT, FOR FAILURE TO DEDUCT TAX AT SOURCE U/S 194H OF THE ACT. 7. IN THE RESULT, APPEAL FILED BY THE REVENUE FOR AY 2 011-12 IS DISMISSED. 9 ITA NOS.140 & 141/MUM/2016 8. ITA NO.141/MUM/2016 9 . THE FACTS AND ISSUES INVOLVED IN THIS APPEAL ARE IDENTICAL TO ITA NO.140/MUM/2016. THEREFORE, OUR FINDINGS RECORDED ABOVE IN ITA NO.140/MUM/2016 SHALL APPLY MUTATIS MUTANDIS TO THE PRESENT APPEAL ALSO. THEREFORE, WE DISMISS THE APPEAL FILED BY THE REVEN UE FOR THE ASSESSMENT YEAR 2012-13 ALSO. 10. IN THE RESULT, BOTH THE APPEALS FILED BY THE REVENU E ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH OCTOBER, 2017. SD/- SD/- (MAHAVIR SINGH) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 27 TH OCTOBER, 2017 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI