The ACIT,Ahmedabad Circle-3, Ahmedabad V. Dhanvarsha Fincap Pvt.Ltd., Ahmedabad

ITA 2492/AHD/2008

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 2343 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-01-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 05-01-2011
• Assessment Year: 1999-2000
• Appeal Filed On: 02-07-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business expenditure; Principle of natural justice; Opportunity of cross examination; Capital expenditure
• Section: 142(1); 37(1); 143(1); 147; 131; 148; 6; 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' BEFORE SHRI MUKUL SHRAWAT,JM & SHRI A N PAHUJA,AM ITA NOS.2492 & 2493/AHD/2008 (ASSESSMENT YEARS:-1999-2000 & 2000-01) ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-3,5 TH FLOOR,INSURANCE BUILDING, ASHRAM ROAD, AHMEDABAD V/S DHANVARSHA FINCAP PVT. LTD., 409, SPAN TRADE CENTRE, ASHRAM ROAD, PALDI, AHMEDABAD PAN: AAACD 6605 K [APPELLANT] [RESPONDENT] REVENUE BY :- SHRI DILEEP KUMAR, DR ASSESSEE BY:- SHRI TUSHAR HEMANI, AR O R D E R A N PAHUJA: THESE TWO APPEALS BY THE REVENUE AGAINST TWO SEPARATE ORDERS DATED 9-04-2008 OF THE LD. CIT(APPE ALS)-VII, AHMEDABAD, RAISE THE FOLLOWING COMMON GROUNDS :- 1 THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITIO N OF RS.5,97,044/- IN THE AY 1999-2000 & RS.17,57,508/- IN THE AY 200 0-01 MADE ON ACCOUNT OF COMMISSION EXPENSES. 2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESS ING OFFICER. 2 ADVERTING TO GROUND NO.1 IN THESE TWO APPEALS, FA CTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING I NCOME OF RS.1,23,470/- FOR THE AY 1999-2000 FILED ON 03-12-1 999 BY THE ASSESSEE, DEALING IN SECURITIES, WAS PROCESSED U/S 143(1) OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS TH E ACT]. THEREAFTER, THE ASSESSMENT WAS REOPENED U/S 147 O F THE ACT WITH THE SERVICE OF A NOTICE U/S 148 OF THE ACT ON 28-03 -2003. IN RESPONSE, THE ASSESSEE STATED VIDE LETTER DATED 2 5-04-2003 THAT THE RETURN FILED EARLIER MAY BE TREATED AS RETURN FILED IN COMPLIANCE TO NOTICE U/S 148 OF THE ACT. LIKE WISE RETURN DECL ARING INCOME OF RS.2,01.564 /- FILED ON 25.10.2000 FOR THE AY 2000- 01 WAS ALSO TAKEN UP FOR SCRUTINY. DURING THE COURSE OF ASSESSM ENT ITA NOS.2492 & 2493/AHD/08 2 PROCEEDINGS, THE ASSESSING OFFICER[AO IN SHORT] NOT ICED THAT THE ASSESSEE DEBITED AN AMOUNT OF RS. RS.5,97,044.20 I N THE AY 1999- 2000 & RS.17,57,508.24 IN THE AY 2000-01 TOWARDS S UB- BROKERAGE/COMMISSION PAID TO THE 39 PARTIES MENTIO NED ON PAGE 2 OF THE ASSESSMENT ORDER. FOLLOWING HIS OWN ORDER DA TE 26.2.2004 FOR THE AY 1998-99, THE AO, IN THE LIGHT OF STATEMENT O F FEW PARTIES U/S 131 OF THE ACT , DISALLOWED THE CLAIM FOR DEDUCTIO N OF THE AFORESAID EXPENDITURE TOWARDS COMMISSION IN THE ABSENCE OF AN Y EVIDENCE OF SERVICES RENDERED BY THE RECIPIENTS OF THE COMMISSI ON AND IN THE LIGHT OF PROVISIONS OF SEC.12 OF THE SEBI ACT . ON APPEAL, THE LD. CIT(A) UPHELD THE FINDINGS OF THE AO . ON FURTHER A PPEAL BY THE ASSESSEE, THE ITAT, VIDE THEIR ORDER DATED 12-5- 2006 FOR THE A.YS 1998-99,1999-2000 & 2000-01 IN ITA NOS. 432 TO 434 /AHD/2005 REMANDED THE MATTER BACK TO THE AO IN THE FOLLOWIN G TERMS: '6.., AFTER CONSIDERING THE FACTS OF THE CASE, WE FIND SUBSTANCE IN THE SUBMISSION OF THE ASSESSEE, AS THE ASSESSING OFFICE R ISSUED SHOW CAUSE ON 11 TH MARCH.2003 AGAINST WHICH THE ASSESSEE HAS FILED RE PLY ON 20-3- 2003 AND THE ASSESSMENT WAS COMPLETED ON 25 UL MARCLI,03. WHICH PRIMA FACIE APPEARED THAT THE ASSESSMENT WAS MADE WITHOUT PROPER OPPORTUNITY OF HEARING TO THE ASSESSEE. IT HAS ALSO BEEN NOTICE D THAT THE ASSESSING OFFICER DID NOT ALLOW THE OPPORTUNITY TO THE ASSESS EE TO CROSS EXAMINE THE PERSONS WHOSE STATEMENT WAS TAKEN U/S 131 WHICH AMO UNTS TO VIOLATION OF THE PRINCIPLE OF NATURAL JUSTICE. THE REQUEST OF TH E LD DR THAT THE MATTER SHOULD BE SENT BACK TO THE FILE OF CIT(A) CANNOT BE ACCEPTED AS A DETAILED EXAMINATION AND RECORDING THE FACTS AFTER CROSS EXA MINATION ARE TO BE RECORDED BY THE ASSESSING OFFICER, UNDER THE CIRCUM STANCES, WE FIND APPROPRIATE TO SEND BACK THIS MATTER TO THE FILE OF ASSESSING OFFICER WITH A DIRECTION TO DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH TAW AFTE R PROVIDING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE AND AFTER PROVIDING OPPORTUNITY OF CROSS EXAMINATION OF THOSE PERSONS WHOSE STATEMENTS ARE RECORDED IN U/S 131.IT IS PERT INENT TO MENTION THAT THE ASSESSING OFFICER IS AT LIBERTY TO DECIDE THE ISSUE AFRESH IN ACCORDANCE WITH LAW, WE ARE NOT EXPRESSING ANY OPIN ION ON THE MERIT OF THE CASE.' 2.1 IN PURSUANCE TO THE AFORESAID DIRECTIONS OF TH E ITAT, THE AO ALLOWED AN OPPORTUNITY OF HEARING TO THE ASSESSEE . DESPITE SEEKING ADJOURNMENT ON 23-10-2007 & 2-11-2007, NONE ATTEN DED THEREAFTER NOR FURNISHED ANY WRITTEN COMMUNICATION . IN RESPO NSE TO ANOTHER ITA NOS.2492 & 2493/AHD/08 3 NOTICE DATED 3-12-2007 U/S 142(1) OF THE ACT, THE ASSESSEE FURNISHED WRITTEN SUBMISSIONS AND SOUGHT CROSS-EXA MINATION OF THE RECIPIENTS OF COMMISSION, WHOSE STATEMENTS WERE REC ORDED U/S 131 OF THE ACT. ACCORDINGLY, THE AO SERVED SUMMONS U/S 131 OF THE ACT ON THE ASSESSEE AND THE FOUR PERSONS VIZ. SHRI BHUP ENDRA B PATEL, SUDHIRBHAI R SHAH, RAMNIKLAL A DHANESHA AND PANKAJ BHAI H VORA. AFTER CROSS-EXAMINATION OF THESE PERSONS BY THE DI RECTOR OF THE COMPANY, THE ASSESSEE FILED WRITTEN SUBMISSIONS VID E LETTER DATED 17.12.2007. IN THE LIGHT OF THESE SUBMISSIONS, THE AO OBSERVED AS UNDER: A) IN THE STATEMENT ON OATH ORIGINALLY RECORDED U/S 131 OF THE ACT, THE RECIPIENTS OF COMMISSION FAILED TO RECOGNIZE N AME OF THE PERSONS WHO WERE SUPPOSED TO HAVE BEEN INTRODUCED B Y THEM & THEY COULD NOT PROVIDE ANY INFORMATION ABOUT THE PARTIES INTRODUCED BY THEM. EVEN AFTER THE LIST OF PERSONS AGAINST THEIR NAME WAS SHOWN TO THEM, THEY COULD NOT GIVE ANY INDICATION THAT ANY PERSON SUPPOSEDLY INTRODUCED BY THEM WAS EVEN REMOTELY KNOWN TO THEM. IN NONE OF THE CASES, PERSON COULD GIVE ANY DETAILS OF SERVICE REN DERED BY THEM FOR EARNING COMMISSION. ON THE CONTRARY ALL OF THEM DEN IED HAVING KNOWN ANY OF THE PERSONS LISTED AGAINST THEIR NAMES BARRING ONE OR TWO PERSON BY EACH OF THEM. B) LATER, THE ASSESSEE FILED AFFIDAVITS OF THE E IGHT PERSONS , WHERE IN THE DEPONENTS GAVE THE NAMES OF THE INTRO DUCED PARTIES, BESIDES DETAILS OF THE AMOUNT OF COMMISSION REC EIVED FROM THE ASSESSEE. C) IN THE CROSS-EXAMINATION, ALL THE WITNESSES CONF IRMED THEIR STATEMENT RECORDED AS WITNESS, PARTIES INTRODUCED & COMMISSION RECEIVED BY THEM & GIVEN BY THE ASSESSEE. BESIDES, THEY HAVE CONFIRMED THE FACTS STATED ON OATH IN AFFIDAVIT. IN THE CROSS- EXAMINATION, THESE PERSONS CONFIRMED THE FACTS RECO RDED IN THEIR STATEMENTS U/S 131.BUT NEITHER DESCRIPTION OF SERVI CES RENDERED BY ITA NOS.2492 & 2493/AHD/08 4 THE PERSONS NOR REMAINING FACTS OTHER THAN THE NAME S OF THE PARTY IN CONNECTION WITH THEIR STATEMENTS U/S 131 WERE SPECI FIED. 2.2 IN THE LIGHT OF AFORESAID OBSERVATIONS, TH E AO CONCLUDED AS UNDER: I) THE ADDRESSES OF THE CLIENTS I.E. INTRODUCED PE RSONS BY THE RECIPIENTS WERE NOT VERIFIED II) IN NONE OF THE CASE, PERSON COULD GIVE ANY DETA ILS OF SERVICE RENDERED BY THEM FOR EARNING COMMISSION. III) ALMOST ALL THE PERSONS HAVE SUPPOSEDLY EARNED THIS COMMISSION FOR A.Y.98-99 TO 2000-01 FOR THE FIRST T IME. IV) THE PAYMENT OF COMMISSION WAS NOT REGULAR AND L UMPSUM PAYMENTS WERE MADE WITH NO PARTICULAR TIMING. IN FA CT PAYMENTS HAD BEEN-MADE ONLY ONCE OR TWICE IN THE YE AR. V) THE ASSESSEE ALTOGETHER FAILED TO SUPPORT ITS C ONTENTIONS EITHER BY PRODUCING SOME OF THE INTRODUCED PERSONS OR BY GIVING ANY EVIDENCE THAT ALL SUCH PERSONS SO INTROD UCED TRANSACTED BUSINESS WITH THE ASSESSEE FOR THE FIRST TIME IN THIS YEAR. IT IS QUITE POSSIBLE THAT THE SAME CLIENTS CL AIMED TO HAVE BEEN INTRODUCED BY THE ABOVE PARTIES, WOULD HAVE AL READY BEEN THE ASSESSEE'S CUSTOMERS IN THE PRECEDING YEA RS. ON THIS ACCOUNT ALSO THE ENTIRE ARGUMENT OF THE ASSESS EE BREAKS DOWN. VI) THE AMOUNT OF PAYMENT WAS NOT CALCULATED AT AN Y FIXED PERCENTAGE OR IN ANY MANNER LINKED TO A DETERMINANT FACTOR. VII) MERE PROOF OF PAYMENT OF MONEY RECEIPT BY THE OTHER PARTY IS NOT SUFFICIENT FOR EXPENDITURE TO BE ALLOWABLE AS A BUSINESS EXPENDITURE. 2.3 IN VIEW OF THE FOREGOING, WHILE REFERRING TO THE FOLLOWING OBSERVATIONS OF THE HONBLE SUPREME COURT IN THE CA SE OF SWADESHI COTTON MILLS CO. LTD, V CIT (1967) 63 ITR57: IT IS AN ERRONEOUS PROPOSITION TO CONTEND THAT AS S OON AS AN ASSESSEE HAS ESTABLISHED TWO FACTS, I.E. THE EXISTE NCE OF ANY AGREEMENT BETWEEN THE EMPLOYER AND THE EMPLOYEE AND THE FACT OF ACTUAL PAYMENT NO DISCRETION IS LEFT TO THE INCOME TAX OFFICER EXCEPT TO HOLD THAT THE PAYMENT WAS MADE WH OLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS'. ITA NOS.2492 & 2493/AHD/08 5 AND DUE TO VIOLATION OF PROVISIONS OF SEC 12 OF SEBI ACT, THE AO DISALLOWED COMMISSION PAYMENT OF RS.5,97,044/- IN T HE AY 1999- 2000. SIMILARLY, AN AMOUNT OF RS.17,57,509/- WAS DI SALLOWED IN THE AY 2000-01. 3. ON APPEAL, THE LD. CIT(A) DELETED THE DISALLOWAN CE IN THE FOLLOWING TERMS IN THE AY 1999-2000:- 5. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MAD E. I HAVE ALSO GONE THROUGH THE DETAILS FILED. HERE, THE CONTROVERSY IS VERY LIMITED. NOW, IT IS NOT IN DISPUTE WITH REGARD TO THE SERVICES RENDERED. TH E ONLY QUESTION TO BE DECIDED IS WHETHER THERE IS A SCOPE FOR THE APPLICA TION OF SEC. 12 OF THE SEBI ACT. I FIND THAT IDENTICAL ISSUE CAME UP FOR C ONSIDERATION BEFORE CIT(A)-IX, AHMEDABAD IN THE CASE OF M/S GOLDMINE ST OCKS (P) LTD. FOR A.Y. 1999-00 & 2000-2001. THE ID. CIT(A) VIDE HIS ORDER NO. CIT(A)- IX/CIR.3/86 & 87/04-05 DATED 16/11/2004 ALLOWED THE APPEAL OF THE APPELLANT IN RESPECT OF IDENTICAL TYPE OF PAYMENT O F COMMISSION. FURTHER IT IS NOT THE CASE OF THE A.O. THAT ANY AMOUNT PAID BY WAY OF COMMISSION OF THE SUB BROKERAGE HAS BEEN RECEIVED BACK BY THE APP ELLANT. THEREFORE NATURALLY THE COMMISSION WAS PAID FOR THE PURPOSE O F BUSINESS. RELEVANT EXTRACTS OF THE CIT(A)-IX AHMEDABAD IN THE CASE OF GOLDMINE STOCKS (P) LTD. IS REPRODUCED HEREINBELOW FOR READY REFERENCE: 'I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS MADE B Y THE LEARNED A.R. AND I HAVE ALSO GONE THROUGH THE ASSES SMENT ORDER AND VARIOUS DOCUMENTS SUBMITTED BY THE APPELL ANT IN THE APPEAL PROCEEDINGS. FIRST OF ALL I FIND THAT AP PELLANT HAD FURNISHED COMPLETE DETAILS OF PAYMENT MADE TO THE A LLOWED SUB-BROKERAGE AND HAD ALSO GIVEN FULL ADDRESS OF CL IENTS FOR WHOM COMMISSION WAS PAID ALONG WITH THEIR PAN. PAYM ENTS WERE ALSO MADE TO RESPECTIVE INTERMEDIARIES. IT IS NOT THE CASE OF THE A.O. THAT ANOTHER AMOUNT OF ALLEGED SUB-BROK ERAGE HAS BEEN RECEIVED BACK BY THE APPELLANT. NONE OF TH E RECIPIENTS ARE IN ANY WAY RELATED TO THE COMPANY OR ITS DIRECTORS. THEREFORE, APPELLANT HAS ESTABLISHED THA T COMMISSION / SUB-BROKERAGE HAS BEEN PAID FOR SOLICI TING CLIENTS AND THIS EXPENDITURE WAS INCURRED FOR THE P URPOSE OF BUSINESS. THE ONLY ISSUE TO BE DECIDED IS WHETHER T HIS PAYMENT IS HIT BY SECTION 12 OF SEBI ACT READ WITH EXPLANAT ION TO SECTION 37(1) OF THE IT. ACT. SECTION 12 OF SEBI ACT READS AS UNDER: ITA NOS.2492 & 2493/AHD/08 6 'SECTION 12: REGISTRATION OF STOCK-BROKERS, SHARE T RANSFER AGENTS ETC.: NO STOCK-BROKER, SUB-BROKER, SHARE TRANSFER AGENT, BANKER TO AN ISSUE, TRUSTEE OF TRUST DEED, REGISTRAR TO AN IS SUE, MERCHANT BANKER, UNDERWRITER, PORTFOLIO MANAGER, INVESTMENT ADVISER, AND SUCH OTHER INTERMEDIARY WHO MAY BE ASSOCIATED W ITH SECURITIES MARKET SHALL BUY, SELL OR DEAL IN SECURI TIES EXCEPT UNDER, AND IN ACCORDANCE WITH, THE CONDITIONS OF A CERTIFICATE OF REGISTRATION OBTAINED FROM THE BOARD IN ACCORDAN CE WITH THE 2 (REGULATION) MADE UNDER THIS ACT.' THE MERE READING OF THIS SECTION SHOWS THAT IN UNRE GISTERED SUB-BROKER CANNOT BE BUY, SELL OR DEAL IN SECURITIE S. IT NOWHERE TALKS THAT NO COMMISSION CAN BE PAID TO ANY PERSON WHO SOLICITS CLIENTS FOR A REGISTERED BROKER. IN THIS C ASE IT IS NOT THE SUB-BROKER WHO HAS DEALT WITH IN SHARES OR SECURITI ES. IN FACT HE HAS ONLY BROUGHT CLIENTS TO THE APPELLANT AND IT IS THE APPELLANT WHO HAS DEALT WITH THE STOCK EXCHANGE AND FOR THE PURPOSE OF SOLICITING CLIENTS HE HAS PAID COMMISSIO N TO THE INTERMEDIARY. I FAILED TO UNDERSTAND HOW SECTION 12 OF SEBI ACT HAS BEEN VIOLATED BY PAYMENT OF SUB-BROKERAGE TO PE RSONS WHO HAVE SOLICITED CLIENTS FOR THE APPELLANT. EVEN BYE LAWS OF NATIONAL STOCK EXCHANGE DOES NOT PROHIBIT SHARING O F BROKERAGE IN FACT BYE LAWS NO.218 EVEN PROVIDES FOR SHARING OF BROKERAGE WITH REMISIERS / AUTHORIZED CLERK OR E VEN AN EMPLOYEE ETC. EVEN BYE LAWS NO.218 OF STOCK EXCHANG E, MUMBAI PROVIDES FOR SHARING OF BROKERAGE. IT IS NOT THE CASE OF THE A.O. THAT ANY AMOUNT HAS BEEN RECEIVED BACK BY THE APPELLANT AND IT IS CLEARLY ESTABLISHED THAT THIS P AYMENT WAS MADE FOR THE PURPOSE OF PROCURING BUSINESS FOR THE APPELLANT. THE PAYMENT IS NOWHERE IN VIOLATION OF SEBI ACT AND AS MUCH EXPLANATION TO SECTION 37(1) OF THE IT ACT IS NOT A T ALL ATTRACTED AS THIS PAYMENT HAS BEEN MADE FOR THE GENUINE PURPO SE OF THE BUSINESS. DISALLOWANCE MADE BY THE A.O IS THERE FORE DELETED.' IN VIEW OF THE ABOVE, DISALLOWANCE MADE BY THE A.O. IS DIRECTED TO BE DELETED.' 4.1 IT MAY BE SEEN THAT DEALING IN STOCKS IS A RISK Y BUSINESS ESPECIALLY WHEN IT IS DEALT WITH NEW CUSTOMERS AND IF THEY CAN NOT STICK TO THEIR COMMITMENTS WHEN THE LOSS IS INVOLVED, THEREFORE, T HE DEPENDENCE ON INTERMEDIARIES IS VERY MUCH PREVAILING IN THIS NATU RE OF BUSINESS. ITA NOS.2492 & 2493/AHD/08 7 THE AO IS SEEN TO HAVE PERUSED THE AFFIDAVITS AND C ERTAIN DETAILS FILED WITH REGARD TO THE MIDDLEMEN. HE IS NOT IN POSITION TO R EJECT COMPLETELY THE SAID FACTS AS NOT GENUINE EVEN THOUGH HE HAS GOT HIS OWN DOUBTS ABOUT THE NATURE OF THE PAYMENTS FOR BUSINESS PURPOSE. HENCE, I AM OF THE VIEW THAT THE FACT ABOUT PAYMENTS AS A BOGUS NATURE IS ALSO N OT ESTABLISHED. THE AO IS ALSO OF THE OPINION THAT AS PER THE SEBI NORMS ALSO THE APPELLANT CANNOT HAVE SUB-BROKERS FOR THE PURPOSE O F DEALINGS IN SHARES BUSINESS. HOWEVER, IT APPEARS TO ME THAT THE PERSON S ACTED AS INTERMEDIARIES ARE NOT SUB-BROKERS BUT ONLY THE PER SONS WHO BROUGHT CUSTOMERS AND STOOD FOR THE APPELLANT IN CASE THERE IS A CRISIS IN DEALINGS WITH THE CUSTOMERS. THEREFORE, THEY GET THEIR COMMI SSION WHICH IS ONLY A BUSINESS EXPENDITURE. THE A.R. ALSO RELIED UPON THE DECISION OF GIT(A)-IX AHMEDABAD IN THE CASE OF M/S GOLDMINE STOCK AS CITE D IN PRECEDING PARAS. THEREFORE, THE FACTS AND CIRCUMSTANCES OF TH E APPELLANT'S CASE IS ALMOST SAME AS IN THE ABOVE CASE. HENCE, AFTER CONS IDERING THE CONTENTIONS OF THE APPELLANT AND THE OBSERVATIONS O F THE ASSESSING OFFICER AND RESPECTFULLY FOLLOWING THE ORDER OF CIT(A)-IX I N THE CASE OF GOLDMINE STOCKS PVT. LTD, I DIRECT THE ASSESSING OFFICER TO ALLOW PAYMENT OF COMMISSION AND THE DISALLOWANCE OF COMMISSION AMOUN TING TO RS.5,97,044/- MADE BY THE AO IS DELETED. THIS GROUN D OF APPEAL IS ALLOWED . 3.1 ON SIMILAR LINES, DISALLOWANCE WAS DELETED IN THE AY 2000-01. 4 THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST TH E AFORESAID FINDINGS OF THE LEARNED CIT(A). AT THE OUTSET, BOT H THE PARTIES AGREED THAT ISSUE NEEDS TO BE RESTORED TO THE FILE OF THE AO IN THE LIGHT OF DECISION DATED 27-02-2009 OF THE ITAT IN T HE CASE OF ACIT VS. INNOVATE SECURITIES PVT. LTD. IN ITA NO.371/AH D/2005 FOR THE AY 2001-02 AS ALSO IN ITA NS. 699, 700 &2429/AHD./20 05 FOR THE AY 1999-2000,2000-01 & 2002-03, FOLLOWED IN ITA NOS. 3 66-367 /AHD./2005 IN THE CASE OF M/S GOLDMINE STOCKS (P) LTD.. THE LD. AR ADDED THAT IN FACT, THE LD. CIT(A) IN THE IMPUGNED ORDERS RELIED UPON DECISION OF THE CIT(A) IN THE CASE OF M/S GOLDMINE STOCKS (P) LTD. FOR THE AY 1999-2000 & 2000-01. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. WE FIND THAT WHILE ADJUDICATING A SIMILAR ISSUE , THE ITAT VIDE THEIR ORDER DATED 27-02-2009 IN THE CASE OF INNOVATE SECURITIES PVT. LTD. (SUPRA) , CONCLUDED IN THE FOLLOWING TER MS:- ITA NOS.2492 & 2493/AHD/08 8 42 GROUND NO.1 IN REVENUES APPEALS I.E. IN ITA NOS.699 AND 700/A/05 AND GROUND NO.2 IN REVENUES A PPEAL I.E. IN ITA NO.371/A/05 AND GROUND NO.1 IN REVENUE S APPEAL I.E. IN ITA NO.2429/A/05 ARE COMMON RELATING TO DIS ALLOWANCE OF COMMISSION PAID TO THE PERSONS BY THE ASSESSEE. ALL THESE APPEALS IN WHICH THIS ISSUE IS INVOLVED RELATE TO A SSESSMENT YEARS 1999-2000 TO 2002-03 AND FILED BY THE REVENUE . THE LEARNED DR BEFORE US POINTED OUT THAT THE APPEAL IT A NO.371/A/05 FOR AY 2001-02 IS THE LEAD CASE AND ACC ORDINGLY BOTH THE PARTIES REFERRED TO THE FACTS FOR AY 2001- 02 AND STATED THAT WHATEVER VIEW THIS TRIBUNAL MAY TAKE IN RESPEC T OF COMMISSION PAID TO THE INTRODUCERS OF THE CLIENTS A BOUT ITS ALLOWABILITY AND THE APPLICABILITY OF EXPLANATION T O SECTION 37, THE SAME VIEW MAY BE TAKEN IN ALL THE OTHER ASSESSM ENT YEARS. 43 THE BRIEF FACTS FOR AY 2001-02 RELATING TO THIS ISSUE ARE THAT THE AO NOTED THAT THE ASSESSEE HAS CLAIMED A SUM OF RS.15,37,650/- ON ACCOUNT OF EXPENSES IN RESPECT OF COMMISSION PAID TO DIFFERENT PARTIES, THE DETAILS O F WHICH ARE GIVEN AT PAGES 12 AND 13 OF THE ASSESSMENT ORDER. T HE ASSESSEE WAS ASKED TO PROVE THE GENUINENESS OF THE EXPENDITURE FOR BUSINESS PURPOSE. CERTAIN PARTIES W ERE SUMMONED U/S 131. THE AO NOTED FROM THEIR STATEMENT S THAT NONE OF THE PERSONS TO WHOM SUCH COMMISSION WAS PAI D IS A REGISTERED SUB-BROKER AND NONE OF THESE PERSONS HAD EVER ENGAGED IN SIMILAR ACTIVITY. IT WAS ALSO NOTED THAT MOST OF THE PERSONS HAVE NO OR MINIMAL FINANCIAL WORK AND HAS N OT TAKEN ANY FINANCIAL RESPONSIBILITY TO GUARANTEE THE TRANS ACTION. MOST OF THEM DID NOT REMEMBER THE NAMES OF THE PERSONS I NTRODUCED BY THEM. SHRI HITESH J SHAH CLAIMED TO HAVE BEEN IN TRODUCED AND RECEIVED COMMISSION IN RESPECT OF EVEN THOSE PA RTIES WHICH AS PER THE DETAILS FILED WERE INTRODUCED BY O THER PARTIES. THE AO WAS OF THE VIEW THAT SECTION 12 OF SEBI ACT BARS CERTAIN PERSONS FROM PURCHASE, SELL OR DEAL IN SECU RITIES AND, THEREFORE, THE COMMISSION SO PAID WAS NOT ALLOWABLE IN VIEW OF EXPLANATION TO SECTION 37(1). THE ASSESSEE WENT IN APPEAL BEFORE THE CIT(A), THE CIT(A) DELETED THE DISALLOWA NCE BY OBSERVING AS UNDER: 5.2 I HAVE CAREFULLY CONSIDERED THE ISSUE AND I HA VE ALSO GONE THROUGH THE RELEVANT DETAILS SUBMITTED BY THE APPELLANT. I FIND THAT APPELLANT HAD SUBMITTED COMPLETE DETAILS OF PAYMENT OF COMMISSION ALONG WITH ADDRESS OF THE PERSON TO WHOM SUCH COMMISSION WAS PAID. TWO OF SUCH PERSONS WERE EXAMINED AND EVEN AT THE TIME OF THEIR STATEME NT THEY HAD IDENTIFIED VARIOUS CLIENTS. THOUGH THE AO HAS MENTIONED IN THE ORDER THAT SHRI HITESH J SHAH CLAIMED TO HAVE INTRODUCED AND RECEIV ED COMMISSION IN RESPECT OF EVEN THOSE PARTIES WHICH WERE INTRODUCED BY OTHER PERSONS. BUT ITA NOS.2492 & 2493/AHD/08 9 FROM THE NOTICE U/S 142(1) OR FROM THE ORDER I DO N OT FIND ANY SUCH NAME MENTIONED BY THE AO. MERELY BY SAYING THAT THE CLAI M IS WRONG IT CANNOT BE DISALLOWED UNLESS THE AO POINTS OUT THE NAMES OF SUCH PARTIES. NOWHERE I FIND ANY SUCH NARRATION EITHER IN THE NOT ICE U/S 142(1) WHICH WAS TO BE REPLIED BY 3.2.04 OR IN THE ASSESSMENT OR DER. IN FACT, I FIND THAT THE TWO PARTIES WHOSE STATEMENTS WERE RECORDED HAD NO DETAILS WITH THEM AT THE TIME OF STATEMENT, STILL THEY IDENTIFIED A N UMBER OF PARTIES AND ALSO GAVE THEIR ADDRESSES. THESE PARTIES WERE SUCH WHO W ERE INTRODUCED BY THEM TO APPELLANT FOR THE PURPOSE OF DEALING IN SHA RES. THUS, OBSERVATIONS OF THE AO ARE NOT CORRECT AS PER THE FACTS AVAILABL E FROM THE RECORD. IT IS ALSO NOT THE CASE OF THE AO THAT ANY AMOUNT HAS BEE N RECEIVED BACK BY THE APPELLANT AND IT IS A FACT THAT THESE PAYMENTS WERE MADE TO THE RESPECTIVE INTERMEDIARIES WHO FACILITATED CLIENTS F OR THE APPELLANT. NONE OF THE RECIPIENTS ARE IN ANY WAY RELATED TO THE APPELL ANT COMPANY OR ITS DIRECTORS. THUS THE CLAIM OF THE APPELLANT THAT COM MISSION / SUB BROKERAGE WAS PAID FOR FACILITATING CLIENTS AND THIS EXPENDIT URE WAS INCURRED FOR THE PURPOSE OF BUSINESS IS CORRECT. THE ONLY ISSUE TO BE DECIDED IS WHETHER THIS PAYMEN T IS HIT BY SECTION 12 OF SEBI ACT READ WITH EXPLANATION TO SECTION 37(1) OF THE IT ACT. SECTION 12 OF SEBI ACT READS AS UNDER: SECTION 12: REGISTRATION OF STOCK-BROKERS, SHARE T RANSFER AGENTS ETC.: (I) NO STOCK-BROKER, SUB-BROKERS, SHARE TRANSFER AG ENT, BANKER TO AN ISSUE, TRUSTEE OF TRUST DEED, REGISTRAR TO AN ISSUE , MERCHANT BANKER, UNDERWRITER, PORTFOLIO MANAGER, INVESTMENT ADVISER, AND SUCH OTHER INTERMEDIARY WHO MAY BE ASSOCIATED WITH SECURITIES MARKET SHALL BUY, SELL OR DEAL IN SECURITIES EXCEPT UNDER, AND IN ACC ORDANCE WITH, THE CONDITIONS OF A CERTIFICATE OF REGISTRATION OBTAINE D FROM THE BOARD IN ACCORDANCE WITH THE 2 (REGULATION) MADE UNDER THIS ACT. THE MERE READING OF THIS SECTION SHOWS THAT IN UNRE GISTERED SUB-BROKER CANNOT BUY, SELL OR DEAL IN SECURITIES. IT NOWHERE TALKS THAT NO COMMISSION CAN BE PAID TO ANY PERSON WHO SOLICITS CLIENTS FOR A REGISTERED BROKER. IN THIS CASE IT IS NOT THE SUB-BROKER WHO HAS DEALT WI TH IN SHARES OR SECURITIES. IN FACT HE HAS ONLY BROUGHT CLIENTS TO THE APPELLAN T AND IT IS THE APPELLANT WHO HAS DEALT WITH THE STOCK EXCHANGE AND FOR THE P URPOSE OF SOLICITING CLIENTS HE HAS PAID COMMISSION TO THE INTERMEDIARY. I FAILED TO UNDERSTAND HOW SECTION 12 OF SEBI ACT HAS BEEN VIOLATED BY PAY MENT OF SUB- BROKERAGE TO PERSONS WHO HAVE SOLICITED CLIENTS FOR THE APPELLANT. EVEN BYE LAWS OF NATIONAL STOCK EXCHANGE DOES NOT PROHIB IT SHARING OF BROKERAGE IN FACT BYE LAWS NO.218 EVEN PROVIDES FOR SHARING OF BROKERAGE ITA NOS.2492 & 2493/AHD/08 10 WITH REMISIERS / AUTHORIZED CLERK OR EVEN AN EMPLOY EE ETC. EVEN BYE LAWS NO.218 OF STOCK EXCHANGE, MUMBAI PROVIDES FOR SHARI NG OF BROKERAGE. IT IS NOT THE CASE OF THE AO THAT ANY AMOUNT HAS BEEN RECEIVED BACK BY THE APPELLANT AND IT IS CLEARLY ESTABLISHED THAT THIS P AYMENT WAS MADE FOR THE PURPOSE OF PROCURING BUSINESS FOR THE APPELLANT. TH E PAYMENT IS NOWHERE IN VIOLATION OF SEBI ACT AND AS SUCH EXPLANATION TO SECTION 37(1) OF THE IT ACT IS NOT AT ALL ATTRACTED AS THIS PAYMENT HAS BEEN MADE FOR THE GENUINE PURPOSE OF THE BUSINESS. DISALLOWANCE MADE BY THE AO IS THEREFORE DELETED. IN VIEW OF THE ABOVE, DISALLOWANCE MADE BY THE AO I S DIRECTED TO BE DELETED. 44 IT WAS CONTENDED BY THE LEARNED DR THAT THE ASSESSEE HAS NOT PAID THE COMMISSION TO THE REGISTE RED BROKER. COMMISSION CAN BE PAID ONLY TO THE BROKERS WHICH ARE DULY REGISTERED BROKERS. THUS, THE PAYMENT IS H IT BY EXPLANATION TO SECTION 37(1) OF THE ACT. THE COMMIS SION HAS BEEN PAID FOR INTRODUCING THE CLIENTS UPTO 50% OF T HE BROKERAGE AMOUNT. SOLICITING CLIENT THROUGH 3 RD PARTY IS PROHIBITED. RELIANCE WAS PLACED ON THE DECISION OF THE MADDI VENKATARAMAN AND CO. (P) LTD. V CIT (1998) 22 9 ITR 534 (SC). OUR ATTENTION WAS DRAWN TOWARDS SECTION 12 OF SEBI ACT AS WELL AS EXPLANATION TO SECTION 37(1) . THUS, IT WAS CONTENDED THAT THE AO HAS RIGHTLY DISALLOWED TH E COMMISSION PAID BY THE ASSESSEE. 45 THE LEARNED AR CONTENDED THAT THERE IS NO BAN FOR THE PAYMENT OF COMMISSION TO NON-REGISTERED BRO KER. SECTION 12 OF SEBI ACT NOWHERE STATES THAT COMMISSI ON CANNOT BE PAID TO PERSONS WHO INTRODUCE CLIENTS. RE FERRING TO PAGE 65 OF THE PAPER BOOK IT WAS CONTENDED THAT DURING THE YEAR THE ASSESSEE HAS PAID TOTAL COMMISSION AMO UNTING TO RS.18,19,858/-, THE DETAILS OF WHICH ARE GIVEN T O THE AO. M/S INTERFACE BROKERAGE WAS DULY REGISTERED WITH SE BI. THE BROKERAGE PAID IN RESPECT OF THIS PARTY WAS ALLOWED . REST OF THE BROKERAGE SINCE PAID TO THE OTHER PARTIES WAS DISALLOWED. IT WAS POINTED OUT THAT EACH OF THE PAR TIES HAS DULY CONFIRMED THE SERVICES RENDERED AS WELL AS THE RECEIPT OF THE COMMISSION BY THEM FOR WHICH ATTENTION WAS D RAWN TOWARDS PAGES 66 TO 136 OF THE PAPER BOOK. ALL THES E PERSONS ARE REGULAR ASSESSEES AND HAVING PERMANENT ITA NOS.2492 & 2493/AHD/08 11 ACCOUNT NUMBERS. THERE IS NO DISPUTE ON THIS ACCOUN T. REFERRING TO PAGE 182 WHICH CONTAINS THE REPLY SUBM ITTED TO THE AO ON THIS ISSUE, IT WAS CONTENDED THAT SECTION 12 OF SEBI ACT PROHIBITS SUB-BROKERS FROM BUYING, SELLING AND DEALING IN SECURITIES WITH THE CLIENTS WITHOUT REGI STERING WITH SEBI. THIS MEANS THAT WITHOUT REGISTRATION THE Y CAN NOT ISSUE CONTRACTS / CONFIRMATION MEMOS TO THEIR C LIENTS AND DELIVERY ON SECURITIES AND PAYMENT OF FUNDS CAN NOT BE MADE BETWEEN THE SUB-BROKERS AND THEIR CLIENTS AND ACCORDINGLY THESE SUB-BROKERS CANNOT EARN ANY COMMI SSION FROM THE CLIENTS. REFERRING TO RULE 2 OF SECURITIES AND EXCHANGE BOARD OF INDIA (STOCK-BROKERS AND SUB-BROK ERS) RULES IT WAS CONTENDED THAT THE SUB-BROKER HAS BE EN DEFINED TO MEAN A PERSON NOT BEING A MEMBER OF THE STOCK EXCHANGE WHO ACTS ON BEHALF OF THE STOCK BROKER AS AN AGENT OR OTHERWISE FOR ASSISTING INVESTORS IN BUYIN G, SELLING OR DEALING IN SECURITIES THROUGH SUCH STOCK BROKER. RECEIVING COMMISSION / SUB-BROKERAGE CANNOT BE EQUA TED WITH BUYING, SELLING OR DEALING IN SECURITIES. IN T HE ABSENCE OF ANY PROHIBITION OF PAYMENT OF COMMISSION TO THE PERSON INTRODUCING THE CLIENT, EXPLANATION TO SECTION 37(1 ) CANNOT BE ATTRACTED. REFERRING TO PAGE 198 OF THE PAPER BO OK WHICH CONTAINS THE REGULATIONS NAC IT WAS POINTED OUT THA T REGULATION 33 PERMITS THE SHARING OF THE BROKERAGE. ATTENTION WAS ALSO DRAWN TO PAGE 218 BYE-LAW 218(A) OF THE STOCK EXCHANGE AHMEDABAD AND IT WAS POINTED OUT THA T IT PERMITS THE SHARING OF THE BROKERAGE WITH AUTHORIZE D PERSONS REMISIERS ETC. WHO ARE NOT REGISTERED WITH SEBI U/S 12 OF THE SEBI ACT. IT WAS ALSO POINTED OUT THAT AN OPINION WAS SOLICITED FROM MS D N RAVAL, ADVOCATE WHO WAS FORMERLY EXECUTIVE DIRECTOR (LEGAL) OF SEBI ON THE VERY SAME QUESTION WHETHER THE COMMISSION PAID ON THE INTRODUCTION OF THE CLIENT CAN BE DISALLOWED BY APP LYING EXPLANATION TO SECTION 37(1) OF THE ACT. IN HIS OPI NION HE WAS OF THE VIEW THAT EXPLANATION TO SECTION 37(1) I S NOT APPLICABLE AS IT IS NOT CONTRARY TO ANY LAW, REGULA TION OR BYLAWS. THE AO EXAMINED TWO PERSONS, THE STATEMENTS OF WHOM ARE AVAILABLE AT PAGES 213 TO 220. RELIANCE WA S PLACED ON THE DECISIONS OF THE HON'BLE SUPREME COUR T IN THE CASES OF SRI SATYANARAYANA RICE MILL CONTRACTORS CO . VS CIT (1997) 223 ITR 101 (SC) AND 2 S A BUILDERS V CIT(A)288 ITR 1 (SC). ITA NOS.2492 & 2493/AHD/08 12 46 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND, PERUSED THE MATERIAL ON RECORD ALO NG WITH THE ORDER OF THE TAX AUTHORITIES BELOW. THE ISSUE B EFORE US IS WHETHER THE COMMISSION PAID BY THE ASSESSEE TO T HE PERSONS WHO HAVE INTRODUCED THE CLIENTS CAN BE DISA LLOWED IN ACCORDANCE WITH EXPLANATION TO SECTION 37(1). T HERE IS NO DISPUTE ABOUT THE SERVICES RENDERED BY THESE PER SONS. THE AO HAS DISALLOWED THE COMMISSION BY APPLYING EXPLANATION TO SECTION 37(1). EXPLANATION TO SECTIO N 37(1) STATES AS UNDER: EXPLANATION:- FOR THE REMOVAL OF DOUBTS, IT IS H EREBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PUR POSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN OF SUCH EXPENDITURE. SECTION 37(1) ALLOWS DEDUCTION OF ANY EXPENDITURE N OT BEING AN EXPENDITURE OF THE NATURE REFERRED TO IN SECTIONS 3 0 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSO NAL EXPENSES OF THE ASSESSEE WHICH HAVE BEEN LAID OUT OR EXPENDED W HOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSI ON WHILE COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD PRO FITS AND GAINS OF BUSINESS OR PROFESSION. EXPLANATION WHICH PROHIBITS DEDUCTION OF ANY SUCH EXPENDITURE AS IS ALLOWABLE U /S 37(1) WAS INSERTED BY THE FINANCE ACT, 1998 WITH EFFECT FROM 1-4-1962. THIS EXPLANATION IS CLARIFICATORY IN NATURE WHICH IS CLE AR FROM THE WORDS FOR THE REMOVAL OF DOUBTS APPEARING IN THE EXPLAN ATION. FROM THE PLAIN READING OF THIS EXPLANATION IT IS CLEAR T HAT IF ANY EXPENDITURE WHICH IS OTHERWISE ALLOWABLE IN ACCORDA NCE WITH SECTION 37(1), CANNOT BE ALLOWED IF IT HAS BEEN INC URRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR PRO HIBITED BY LAW. THIS EXPLANATION DEEMS SUCH EXPENDITURE NOT HAVE BE EN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION. THE CASE OF THE REVENUE IS THAT THE INTRODUCTORY COMMISSION PAID BY THE ASS ESSEE IS DISALLOWABLE IN VIEW OF EXPLANATION TO SECTION 37(1 ). EXPLANATION TO SECTION 37(1) WILL APPLY ONLY IF AN EXPENDITURE IS OTHERWISE ALLOWABLE U/S 37(1). THEREFORE, SO FAR AS ALLOWABI LITY OF THE EXPENDITURE U/S 37(1) IS CONCERNED, THE REVENUE DO NOT DISPUTE THAT THIS EXPENDITURE HAS BEEN INCURRED OR EXPENDED WHOL LY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSI ON. THIS ITA NOS.2492 & 2493/AHD/08 13 EXPENDITURE IS ALSO NOT IN THE NATURE OF CAPITAL EX PENDITURE OR PERSONAL EXPENDITURE. THIS EXPENDITURE IS ALSO NOT OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 OF THE ACT. THE CON TENTION OF THE REVENUE IS THAT EXPLANATION TO SECTION 37(1) DEBARS THE ASSESSEE FOR CLAIMING THE DEDUCTION OF THIS EXPENDITURE BECA USE SECTION 12 OF THE SEBI ACT PROHIBITS THE ASSESSEE TO PAY INTRODUC TORY COMMISSION TO ANY PERSON. SINCE THE EXPENDITURE HAS BEEN INCUR RED BY THE ASSESSEE CONTRARY TO THE PROVISIONS OF SECTION 12 O F THE SEBI ACT, THEREFORE, IT IS PROHIBITED BY THE LAW PREVAILING I N THE COUNTRY. 47 NOW THE QUESTION BEFORE US IS WHETHER INCURRENC E OF SUCH EXPENDITURE IS PROHIBITED BY SECTION 12 OF THE SEBI ACT. SECTION 12 OF THE SEBI ACT READS AS UNDER: SECTION 12 OF THE SECURITIES AND EXCHANGE BOARD OF INDIA ACT, READS AS FOLLOWS: NO STOCK-BROKER, SUB-BROKER, SHARE TRANSFER AGENT, BANKER TO AN ISSUE, TRUSTEE OF TRUST DEED, REGISTRAR TO AN ISSUE, MERCH ANT BANKER UNDERWRITER, PORTFOLIO MANAGER INVESTMENT ADVISER AND SUCH OTHER INTERMEDIARY, WHO MAY BE ASSOCIATED WITH SECURITIES MARKET SHALL BUY, SELL OR DEAL IN SECURITIES UNDER, AND IN ACCORDANCE WITH CONDITION OF A CERTIFICATE OF REGISTRATION OBTAINED FROM THE BOARD IN ACCORDANCE WITH THE (REGULATION) MADE UNDER THIS ACT . SECURITIES AND EXCHANGE BOARD OF INDIA (STOCK-BROKE RS AND SUB-BROKERS) RULES, DEFINES SUB-BROKER AS :- SUB-BROKER MEANS ANY PERSON, NOT BEING A MEMBER OF STOCK EXCHANGE WHO ACT ON BEHALF OF STOCK BROKER AS AN AGENT OR OTHERW ISE FOR ASSISTING INVESTORS IN BUYING SELLING OR DEALING IN SECURITIES THROUGH SUCH STOCK-BROKERS FROM THE READING OF THIS SECTION IT IS APPARENTLY C LEAR THAT THIS SECTION REQUIRES REGISTRATION OF THE STOCK-BROKER, SUB-BROKER, SHARE TRANSFER AGENT, BANKER TO AN ISSUE, TRUSTEE O F TRUST DEED, REGISTRAR TO AN ISSUE, MERCHANT BANKER UNDERWRITER, PORTFOLIO MANAGER, INVESTMENT ADVISER AND SUCH OTHER INTERMED IARIES ASSOCIATED WITH SECURITIES MARKET AND WITHOUT THE R EGISTRATION OBTAINED IN ACCORDANCE WITH THE REGULATION UNDER SE BI ACT, THESE PERSONS CANNOT BUY, SELL OR DEAL IN SECURITIES. ITA NOS.2492 & 2493/AHD/08 14 SUB-BROKER HAS BEEN DEFINED UNDER THE RULES TO MEAN A PERSON WHO ACTS ON BEHALF OF STOCK-BROKER AS AN AGENT OR OTHER WISE ASSISTS INVESTORS IN BUYING, SELLING OR DEALING IN SECURITI ES THROUGH SUCH BROKERS. THE REQUIREMENT OF THE SEBI ACT IS FOR THE SUB-BROK ER AND STOCK- BROKER TO BE REGISTERED WITH SEBI. AS A CONSEQUENCE , A SUB-BROKER CANNOT CARRY ON ANY BUSINESS TRANSACTION WITH A STO CK-BROKER UNLESS THE SUB-BROKER HAS RECEIVED A CERTIFICATION OF REGISTRATION FROM SEBI. SEBI HAS PRESCRIBED VARIOUS REQUIREMENT S BEFORE A SUB-BROKER CAN BE GRANTED A CERTIFICATE OF REGISTRA TION BY SEBI. WE HAVE ALSO GONE THROUGH THE REGULATION (33) OF TH E NATIONAL STOCK EXCHANGE OF INDIA. THIS REGULATION DEALS WITH THE SHARING OF BROKERAGE AND READS AS UNDER: SHARING OF BROKERAGE (33)(A) A TRADING MEMBER MAY NOT SHARE BROKERAGE WI TH A PERSON WHO (I) IS ONE FOR OR WITH WHOM TRADING MEMBERS ARE FORBIDDEN TO DO BUSINESS UNDER THE BYE-LAWS, RULES AND REGULATIONS OF THE EXCHANGE; (II) IS A TRADING MEMBER OR EMPLOYEE IN THE EMPLOYMENT OF ANOTHER TRADING MEMBER; (B) IRRESPECTIVE OF ANY ARRANGEMENT FOR THE SHARING OF BROKERAGE WITH ANY PERSON, THE TRADING MEMBER SHALL BE DIRECTLY AND WHOLLY LIABLE TO EVERY OTHER MEMBER WITH WHOM SUCH TRADING MEMBER EFFECTS ANY DEAL ON THE EXCHANGE. FROM THE READING OF THE AFORESAID BYE-LAW IT IS APP ARENT THAT CLAUSE (A) PROHIBITS THE SHARING OF BROKERAGE TO A PERSON WITH WHOM TRADING MEMBERS ARE FORBIDDEN TO DO THE BUSINE SS UNDER THE BYE-LAWS, RULES AND REGULATIONS OF THE EXCHANGE OR SUCH PERSON IS A TRADING MEMBER OR EMPLOYEE IN THE EMPLOYMENT O F ANOTHER TRADING MEMBER. CLAUSE (B) OF BYE-LAW (33) DOES NOT PROHIBIT SHARING OF THE BROKERAGE WITH ANY OTHER PERSON BUT ONLY STATES THAT THE TRADING MEMBER SHALL BE DIRECTLY AND WHOLLY LIA BLE TO EVERY ITA NOS.2492 & 2493/AHD/08 15 OTHER MEMBER WITH WHOM SUCH TRADING MEMBER AFFECTS ANY DEAL ON THE EXCHANGE. THIS BYE-LAW, IN OUR OPINION, DOES N OT PROHIBIT THE PAYMENT OF THE COMMISSION TO THE PERSONS WHO HAVE I NTRODUCED THE CLIENTS TO THE ASSESSEE. THE COMMISSION PAID TO SUC H PERSONS, IN OUR OPINION, CANNOT BE REGARDED CONTRARY TO THE BYE-LAW (33) READ WITH SECTION 12 OF THE SEBI ACT. WE HAVE ALSO GONE THROUGH BYE-LAW 218 OF THE STOCK EXCHANGE OF AHMEDABAD. THIS BYE-LAW READS AS UNDER: 218.(A) A MEMBER MAY SHARE BROKERAGE AS PROVIDED I N SUB-CLAUSE (B) WITH A REMISIER, AUTHORIZED CLERK OR EMPLOYEE IN HIS OWN EXCLUSIVE EMPLOYMENT. HE MAY SIMILARLY SHARE BROKERAGE WITH ANY OTHER PERSON INTRODUCING A CONSTITUENT PROVIDED SUCH PERSON (I) IS NOT ONE FOR OR WITH WHOM MEMBERS ARE FORBIDDEN TO DO BUSINESS SUNDER THE RULES, BYE-LAWS AND REGULATION OF THE EXCHANGE; (II) IS NOT A REMISIER, AUTHORIZED CLERK OR EMPLOYEE IN THE EMPLOYMENT OF ANOTHER MEMBER; (III) DOES NOT ADVERTISE IN THE PUBLIC PRESS OR IN ANY OTHER MANNER THAT HE IS ACTING AS A BROKER; (IV) DOES NOT ACT AS A BROKER WITHIN A DISTANCE OF FIFTY MILES OF THE CITY OF AHMEDABAD; (V) DOES NOT PASS CONTRACTS IN HIS OWN NAME OR ISSUE PRICE LISTS ON PAMPHLETS OR CIRCULARS IN RESPECT OF BUSINESS IN SECURITIES IF WORKING WITHIN A DISTANCE OF FIFTY MILES OF THE CITY OF AHMEDABAD; (VI) DOES NOT ISSUE PRICE LISTS OR PAMPHLETS OR CIRCULAR S IN RESPECT OF BUSINESS SIN SECURITIES TO OTHER THAN HIS OWN CONSTITUENTS IF ACTING AS A BROKER BEYOND THE DISTANCE OF FIFTY MILES FROM THE CITY OF AHMEDABAD. PERCENTAGE SHARE OF BROKERAGE ITA NOS.2492 & 2493/AHD/08 16 (B) A MEMBER MAY PAY HIS REMISIER OR AUTHORIZED CLE RK A SHARE NOT EXCEEDING 50 PER CENT. AND ANY OTHER EMPL OYEE OR OTHER PERSON SHARING BROKERAGE AS PROVIDED IN SUB-C LAUSE (A) A SHARE NOT EXCEEDING 40 PER CENT. OF THE BROKE RAGE CHARGED TO THE CONSTITUENT INTRODUCED BY HIM. FROM THE READING OF THIS BYE-LAW ALSO, IT IS APPARE NTLY CLEAR THAT THERE IS NO PROHIBITION IN THE PAYMENT OF THE COMMI SSION TO ANY OTHER PERSON INTRODUCING THE CLIENT TO THE ASSESSEE PROVIDED IT DOES NOT FALL WITHIN BYE-LAW 218(A)(I) TO (VI). CLAUSE ( B) OF BYE-LAW 218 PUTS A RESTRICTION ON THE PERCENTAGE OF THE SHA RING OF BROKERAGE WITH SUCH PERSONS WHO ARE NOT REMISIER OR AUTHORIZED CLERK. TO SUCH PERSON THE ASSESSEE CANNOT PAY BROKE RAGE MORE THAN 40% OF THE BROKERAGE CHARGED FROM THE CUSTOMERS INT RODUCED BY HIM. THE FACTS OF THE CASE DENOTE THAT THE ASSESSEE HAS PAID THE COMMISSION TO THE EXTENT OF 50% OF THE BROKERAGE WH ILE IT CANNOT PAY AS PER REGULATION 218 OF THE AHMEDABAD STOCK EX CHANGE 40% OF THE BROKERAGE PROVIDED THE PERSON TO WHOM THE CO MMISSION IS PAID COMPLIES WITH THE CONDITIONS AS STIPULATED UND ER BYE-LAW 218(A)(I) TO (VI). WE DO NOT FIND THE DETAILED FAC TS ABOUT THE INTRODUCTORY COMMISSION WHETHER IT COMPLIES WITH TH E CONDITIONS AS STIPULATED UNDER BYE-LAW 218 OR NOT, THEREFORE, IN THE INTEREST OF JUSTICE AND FAIR PLAY TO BOTH THE PARTIES AND ALSO THE FACT THAT SINCE THERE IS NO PROHIBITION U/S 12 OF THE SEBI ACT, WE SET-ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE ISSUE TO THE FI LE OF THE AO WITH THE DIRECTION THAT THE AO SHOULD ALLOW THE DEDUCTIO N TO THE ASSESSEE IN RESPECT OF INTRODUCTORY COMMISSION PAID BY THE A SSESSEE TO THE PERSONS PROVIDED THE COMMISSION SO PAID IS NOT CONT RARY TO THE CONDITIONS STIPULATED UNDER BYE-LAW 218 AS REPRODUC ED BY US HEREINABOVE. THE COMMISSION SO PAID CANNOT EXCEED 4 0% OF THE BROKERAGE RECEIVED BY THE ASSESSEE BECAUSE DURING T HE COURSE OF THE ARGUMENTS BEFORE US IT WAS POINTED OUT THAT THE COMMISSION WAS PAID AT THE RATE OF 50% OF THE BROKERAGE. THE COMMI SSION TO THE EXTENT IT EXCEEDS 40% OF THE BROKERAGE RECEIVED BY THE ASSESSEE FROM THE CLIENTS IS CLEARLY PROHIBITED BY LAW AND T O THAT EXTENT, IN OUR OPINION, EXPLANATION TO SECTION 37(1) WILL CLEA RLY BE APPLICABLE. THE AO SHALL RE-DECIDE THIS ISSUE AFTER CONSIDERING BYE- LAW 218 OF THE STOCK EXCHANGE AHMEDABAD, AFTER GIVI NG PROPER AND REASONABLE OPPORTUNITY TO THE ASSESSEE. HE IS F URTHER DIRECTED TO ALLOW THE COMMISSION ONLY TO THE EXTENT IT IS PE RMISSIBLE IN ITA NOS.2492 & 2493/AHD/08 17 ACCORDANCE WITH BYE-LAW 218 OF THE AHMEDABAD STOCK EXCHANGE. THUS, THIS GROUND IS ALLOWED FOR STATISTICAL PURPOS E. 5.1 FOLLOWING THE AFORESAID DECISION, THE ITAT RESTORED THE ISSUE IN THE CASE OF M/S GOLDMINE STOCKS (P) LTD. ALSO T O THE FILE OF THE AO IN PARA 98 & 99 OF THEIR AFORESAID ORDER DATED 27.2.20 09. 5.2 INDISPUTABLY, THE FACTS AND CIRCUMSTANCES OB TAINING IN THE TWO APPEALS BEFORE US ARE SIMILAR TO THE FACTS AND CIRC UMSTANCES IN THE AFORESAID DECISION OF THE ITAT. THEREFORE, FOLLOWIN G THE VIEW TAKEN IN THE AFORESAID DECISION, WE VACATE THE FINDINGS O F THE LD. CIT(A) AND RESTORE THE ISSUE TO THE FILE OF THE AO WITH SIMILAR DIRECTIONS TO RE-ADJUDICATE THE MATTER AFRESH IN ACCORDANCE WITH THE FINDINGS AND DIRECTIONS IN PARA 46 & 47 OF THE AFORESAID O RDER DATED 27.2.2009 OF THE ITAT IN THE CASE OF INNOVATE SECU RITIES PVT. LTD.(SUPRA) FOR THE AYS. 1999-2000 TO 2002-03. WITH THESE DIRECTIONS, GROUND NO.1 IN THE APPEAL IS DISPOSED O F 6. GROUND NO. 2 IN THESE TWO APPEALS BEING MERE PRAYER ,DOES NOT REQUIRE ANY SEPARATE ADJUDICATION AND IS, THEREFORE , DISMISSED. 7. IN THE RESULT, BOTH THESE APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT TODAY ON 13 -01-2011 SD/- SD/- (MUKUL SHRAWAT) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATE : 13-01-2011 COPY OF THE ORDER FORWARDED TO: 1. DHANVARSHA FINCAP PVT. LTD., 409, SPAN TRADE CEN TRE, ITA NOS.2492 & 2493/AHD/08 18 ASHRAM ROAD, PALDI, AHMEDABAD 2. ACIT, CIRCLE-3, AHMEDABAD 3. CIT CONCERNED 4. CIT(A)-VII, AHMEDABAD 5. DR, ITAT, AHMEDABAD BENCH-C, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD