M/s. Prasad & Co. (P) Ltd., New Delhi V. DCIT, New Delhi

ITA 419/DEL/2010

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7435 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 20-10-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 29-01-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHAMEER SHARMA
• Assessee Lawyers: MAYANK JAIN
• Keywords: Diversion of income; Rule of consistency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F : NEW DELHI BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER ITA NO. 419/DEL/2012 AY: 2005-06 PRASAD & CO.(P) LTD. VS. DCIT, CC 15 CIRCLE 15, E 2, ARA ARA, JHANDEWALAN EXTN. JHANDEWALAN EXTENSION NEW DELHI NEW DELHI PAN: AAACP 4487 H (APPELLANT) (RESPONDENT) APPELLANT BY : SH. MAYANK JAIN, ADV. RESPONDENT BY : SH. SHAMEER SHARMA, SR. D.R. ORDER PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER: THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AG AINST THE ORDER OF LD.CIT(APPEALS)-II, DELHI VIDE ORDER DT. 3.11.2009 PERTAINING TO THE AY 2005- 06. 2. FACTS OF THE CASE:- THE ASSESSEE IS A COMPANY. IT IS A MEMBER OF THE NATIONAL STOCK EXCHANGE (NSE) AND DELHI STOCK EXCHA NGE (DSE). IT IS WORKING AS A SHARE BROKER AND DEALS IN PURCHASE AND SALE OF SHARES ON BEHALF OF ITS CLIENTS. IT FILED ITS RETURN OF INCO ME DECLARING LOSS OF RS.1,40,938/- ON 31.3.2006. DURING SCRUTINY ASSESS MENTS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS RECEIVED PAYM ENTS TO THE TUNE OF RS.12,95,636.08, ON ACCOUNT OF BROKERAGE ON NEW ISS UE OF SHARES. THE ASSESSEE COMPANY TRANSFERRED THE ENTIRE AMOUNT IN T OTO TO ONE M/S PRASAD & CO. WHICH IS A REGISTERED PARTNERSHIP FIRM OWNED BY THE DIRECTORS OF THE ASSESSEE COMPANY SHRI ROHIT PRASAD AND SHRI RAJAT P RASAD. THE ASSESSEE WAS ASKED TO EXPLAIN THESE TRANSFERS. IT SUBMITTED AS FOLLOWS. ITA NO. 419/DEL/2010 AY 2005-06 M/S PRASAD & CO.(P) LTD., NEW DELHI 2 PRASAD & CO. IS A SISTER CONCERN OF THE COMPANY AN D IS WORKING AS BROKER IN THE PRIMARY FINANCIAL MARKET. PRASAD & CO. IS USIN G OUR NAME AS WE ARE MEMBER OF NSE & DSE. WE ARE RECEIVING ALL THE INCO ME ON BEHALF OF PRASAD & CO. AND PASSING IT TO PRASAD & CO. IN FULL. PRASAD & CO. AS PER AGREEMENT KEPT 5% WITH THEM AND PASSED ON 95% OF THE INCOME T O RR FINANCIAL CONSULTANTS LTD. OR RR INVESTOR CAPITAL SERVICES (P ) LTD. PREVIOUS PRASAD & CO. WAS STOCK BROKER AND AS PER A RRANGEMENT (WHICH WAS CONTINUING SINCE 1995) RRFCL WAS MARKETING AND BEAR ING ALL THE EXPENSES. THEREFORE, RRFCL WAS PAID 95% OF COMMISSION BY PRAS AD & CO. AS THERE WAS SPLIT OF TWO GROUP (I.E. PARTITION IN TWO BROTH ER), NEW ARRANGEMENT WAS NOT ENTERED AND OLD ARRANGEMENT IS CONTINUING (I.E. PRA SAD & CO.P.LTD. PASSING ON INCOME TO PRASAD & CO. NO MARKETING, SELLING AND A DMINISTRATIVE EXPENSES ARE BORNE BY PRASAD & CO.(P) LTD. THEREFORE, THIS IS NOT INCOME OF PRASAD & CO. (P) L TD., AS IT IS NOT INCURRING ANY EXPENSES. ALL THE EXPENSES WERE BORNE BY RRFCL AND MARKETING IS DONE BY RRFCL. PRASAD & CO. AS PER OLD ARRANGEMENT PASSING 95% TO RRFCL. DURING THE YEAR, RS.12,95,636.08 WAS RECEIVED BY PRASAD & CO. AND PRASAD & CO. PASS ON TO RRFCL. 3. THE AO REJECTED THE CONTENTION OF THE ASSESSEE A ND HELD THAT THE ASSESSEE COMPANY HAS CONCEALED ITS INCOME BY DIVERT ING THE SAME TO ITS SISTER CONCERNS. HE DETERMINED THE INCOME U/S 143( 3) AT RS.11,54,700/-. AGGRIEVED THE ASSESSEE CARRIED THE MATTER IN APPEAL . BEFORE THE FIRST APPELLATE AUTHORITY THE ASSESSEE SUBMITTED THAT PRI OR TO THE INCORPORATION OF THE ASSESSEE COMPANY, THE DIRECTOR MR.ROHIT PRASAD, WAS A PARTNER IN A PARTNERSHIP FIRM NAMED M/S PRASAD & CO. ALONG WITH MR.RAJAT PRASAD. THE FIRM M/S PRASAD & CO. WORKS AS BROKER IN PRIMARY FI NANCIAL MARKETS AND IT WAS THE MEMBER OF THE DELHI STOCK EXCHANGE HAVING M EMBERSHIP NO. D- 201 AND ALLOTTED IPO BROKER CODE NO. 5/0201/4. A FTER THE INCORPORATION OF THE ASSESSEE COMPANY, THE MEMBERSHIP OF DSE AND THE IPO BROKER CODE NO. BELONGING TO THE PARTNERSHIP FIRM, HAD BEEN TRANSFE RRED TO THE ASSESSEE COMPANY. IT WAS FURTHER SUBMITTED THAT THE ASSESSE E COMPANY WAS DEALING ONLY IN SALE AND PURCHASE OF SHARES ON BEHALF OF CL IENTS AND THE BUSINESS RELATING TO IPO, WAS BEING CARRIED ON BY THE PARTNE RSHIP FIRM M/S PRASAD & CO. USING THE IPO BROKER CODE 5/0201/4, WHICH WAS T RANSFERRED BY THE PARTNERSHIP FIRM TO THE ASSESSEE COMPANY. IT WAS A RGUED THAT IT WAS THE PARTNERSHIP FIRM WHICH HAS CARRIED OUT THE ENTIRE B USINESS OF IPO AND ONLY ITA NO. 419/DEL/2010 AY 2005-06 M/S PRASAD & CO.(P) LTD., NEW DELHI 3 BECAUSE THE IPO BROKER CODE WAS PRESENTLY IN THE NA ME OF THE COMPANY, ALL THE CHEQUES WERE RECEIVED IN THE COMPANYS NAME, WH ICH WERE DEPOSITED IN ITS BANK ACCOUNT AND LATER ON TRANSFERRED IN FULL T O THE PARTNERSHIP FIRM M/S PRASAD & CO. IT PLEADED THAT SUCH A ROOTING OF IP O BUSINESS WAS DONE THROUGH THE ASSESSEE COMPANY, BY M/S PRASAD & CO., FOR THE REASON THAT M/S PRASAD & CO. WAS DOING THIS WORK SINCE THE AY 1 990 AND HAD ATTAINED EXPERTISE IN THAT FIELD. IT WAS ARGUED THAT ALL TH E EXPENSES RELATING TO THE IPO BUSINESS WERE INCURRED BY M/S PRASAD & CO. AND NONE OF THE EXPENSES HAVE BEEN BORNE OR CLAIMED BY THE ASSESSEE COMPANY. 3.1. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE COM PANY RECEIVED TWO INTANGIBLE ADVANTAGES, BY ALLOWING M/S PRASAD & CO . TO ROUTE THE IPO BUSINESS THROUGH THE ASSESSEE COMPANY AND THAT THES E ARE (A) THE NAME OF THE ASSESSEE COMPANY IS AFFIXED ON THE IPO APPLICAT ION FORM ALONG WITH THE BROKER CODE WITHOUT ANY ADVERTISEMENT EXPENSES; (B) AND AS THE GOOD WILL OF THE ASSESSEE COMPANY IN FINANCIAL MARKET WHICH GIVE MORE CLIENTAGE FOR ITS MAIN BUSINESS OF SALE AND PURCHASE OF SHARES THROUG H NSE/DSE. IT WAS CLAIMED THAT THERE IS DIVERSION OF INCOME BY OVERRI DING TITLE AND HENCE THE AMOUNT CANNOT BE BROUGHT TO TAX IN THE HANDS OF THE ASSESSEE COMPANY. IT WAS ALSO FURTHER ARGUED THAT M/S. PRASAD & CO. HAD ACCOUNTED FOR THE ENTIRE INCOME AS WELL AS THE EXPENDITURE AND IN SUCH CIRCU MSTANCES NO TAX CAN BE LEVIED IN THE HANDS OF THE ASSESSEE COMPANY ON THE SAME AMOUNT. 3.2. THE FIRST APPELLATE AUTHORITY REJECTED THE CON TENTIONS OF THE ASSESSEE BY HOLDING THAT THERE IS NO DIVERSION OF INCOME BY WAY OF OVER RIDING TITLE. HE HELD THAT THE RECEIPT HAS TO BE ACKNOWLEDGED IN THE HANDS OF THE ASSESSEE IN THE FIRST STAGE AS ITS INCOME. HE HELD THAT, AT BEST THE ASSESSEE COULD HAVE CLAIMED THE EXPENSES TO THE EXTENT OF AM OUNT PAYABLE TO M/S PRASAD & CO. HE REJECTED THE CONTENTIONS OF THE AS SESSEE THAT IT HAS LEGAL SANCTITIY AND ON THE GROUND THAT IT IS NOT BACKED B Y ANY DOCUMENTARY EVIDENCE ON SUCH ARRANGEMENT. HE UPHELD THE ORDER OF THE AO. 4. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUNDS. 1. THE LD.CIT(A) HAS ERRED IN LAW AND ON THE FACTS AND CIRCUMSTANCES OF THE CASE IN CONFIRMING THE ADDITION OF RS.12,95,636/-. THE CIT(A) HAS FAILED TO ITA NO. 419/DEL/2010 AY 2005-06 M/S PRASAD & CO.(P) LTD., NEW DELHI 4 APPRECIATE THAT THE SAID AMOUNT RECEIVED BY THE ASS ESSEE IS NEITHER ITS INCOME NOR IS CLAIMED AS EXPENDITURE BUT ACTING ONLY AS A CONDUIT. THEREFORE, THE ADDITION MADE TO BE DELETED. 2. WITHOUT PREJUDICE TO GROUND NO.1, IN THE ALTERNA TIVES, IF THE SAID RECEIPTS ARE TREATED AS INCOME THEN THE PROPORTIONATE EXPENSES S HOULD HAVE BEEN ALLOWED AS THE GROSS RECEIPT CANT BE TAXED. 3. THE LD.CIT(A) HAS FAILED TO APPRECIATE THAT THE BUSINESS OF THE ASSESSEE WAS CONDUCTED IN THIS MANNER AND WAS PRE-EXISTING A ND IT CONTINUED TO REMAIN SO, THEREFORE, THE CIT(A) AS WELL AS AO CANN OT DISTURB THE PAST PRACTICE AND TAX THE SAME AS INCOME OF THE ASSESSEE. 4. THE LD.CIT(A) HAS ERRED IN UPHOLDING THE ORDER OF AO TAXING THE SUM OF RS.12,95,636/- MERELY ON THE BASIS OF ENTRIES RECOR DED IN THE BANK ACCOUNT FILED BY THE ASSESSEE. WHEREAS THE ASSESSEE HAS EX PLAINED THE REASONS FOR SUCH ENTRY WHICH SHOULD HAVE BEEN APPRECIATED AND T HE SAID AMOUNT SHOULD NOT HAVE BEEN TAXED AS ASSESSEES INCOME. 5. THE LD.CIT(A) HAS ERRED IN NOT FOLLOWING CONSIST ENCY PRINCIPLE BECAUSE IN THE EARLIER YEARS ALSO THE SAME PRACTICE HAS BEEN E XISTING AND THE ASSESSMENTS HAVE BEEN COMPLETED U/S 143(3) WAY BAC K IN AY 98-99 AND AY 1996-97. 6. THE LD.CIT(A) HAS ERRED IN NOT APPRECIATING THAT THE HISTORICAL BACKGROUND ITSELF IS EVIDENT THAT THE RECEIPTS HAD TO BE ROUTE D THROUGH THE ASSESSEE COMPANY AS THE DSE MEMBERSHIP BROKER LICENSE IS WIT H THE COMPANY FOR IPO SUBSCRIPTION BUT THE BUSINESS IS BEING DONE BY PRAS AD & CO. PARTNERSHIP FIRM BECAUSE THEY HOLD THE SAME MEMBERSHIP NUMBER IN THE PAST. 7. THE CIT(A) HAS ERRED ON FACTS AND IN LAW IN NOT APPRECIATING THAT THE INCOME CANNOT BE EARNED UNLESS THE ASSESSEE HAS INCURRED E XPENDITURE TO EARN SUCH INCOME. NO SUCH EXPENDITURE AHS BEEN INCURRED BY T HE ASSESSEE. THEREFORE, THE REVENUE CANNOT TAX INCOME. THE ADDITION MADE I S ON SURMISES AND CONJECTURES AND MAY BE DELETED. 8. THE ABOVE GROUNDS ARE INDEPENDENT WITHOUT PREJUD ICE TO EACH OTHER. 9. THE APPELLANT PRAYS THAT HE MAY BE ALLOWED TO AD D, AMEND, ALTER OR FOREGO ANY OF THE GROUNDS AT THE TIME OF HEARING. 5. MR.MAYANK JAIN, THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE CONTENTIONS RAISED BEFORE THE FIRST APPELLATE AUTHO RITY. HE TOOK THROUGH THE FACTS OF THE CASE AS NARRATED ABOVE AND SUBMITTED T HAT THE INCOME IN QUESTION, HAS BEEN DIVERTED BY THE DOCTRINE OF OVER RIDING TITLE. HE VEHEMENTLY CONTENDED THAT THE ASSESSEE IS ONLY, A P ASS THROUGH ENTITY, (HEREINAFTER REFERRED TO AS A PTE) AND THE REASON FOR THIS IS THAT THE ASSESSEE IS HAVING MEMBERSHIP OF THE DSE. HE REFER RED TO THE EXPENSES ITA NO. 419/DEL/2010 AY 2005-06 M/S PRASAD & CO.(P) LTD., NEW DELHI 5 CLAIMED BY THE ASSESSEE COMPANY TO DEMONSTRATE THAT NONE OF THE EXPENDITURE IN QUESTION RELATE TO IPO BUSINESS. HE POINTED OUT THAT BOTH THE INCOME AND EXPENDITURE WERE ACCOUNTED FOR BY TH E FIRM M/S PRASAD & CO. AND ARGUED THAT IN SUCH CIRCUMSTANCES, BRINGING THE TOTAL RECEIPTS TO TAX, IN THE HANDS OF THE ASSESSEE COMPANY, IS DOUBL E TAXATION AND HENCE ILLEGAL. HE SUBMITTED THAT IF THE ASSESSEE COMPANY UNDERTAKES IPO BUSINESS, IT WOULD HAVE TO MAINTAIN HUGE INFRASTRU CTURE AND ALSO INCUR EXPENSES IN RUNNING AND MANAGING THE SAID ACTIVITY. 5.1. HE FURTHER ARGUED THAT : (A) THE BOOKS OF ACCOUNTS OF THE ASSESSEE ARE AUDIT ED AND THE FACT THAT THE BUSINESS OF BROKERAGE OF IPO ISSUES ARE OUTSOURCED TO M/S PRASAD & CO. AS PER OLD ARRANGEMENT AND AS PER CUSTOMERS, BUSINESS IS NOT DISPUTED. (B) THE PAYMENTS WERE MADE TO THE SISTER CONCERN BY WAY OF CHEQUES AND THIS POSITION IS NOT DISPUTED. (C ) FOR THE EARLIER AY SCRUTINY ASSESSMENT WAS COM PLETED U/S 143(3) AND THE CLAIMS OF THE ASSESSEE HAVE BEEN ACCEPTED AND HENC E ON THE PRINCIPLE OF CONSISTENCY THE ASSESSEES CLAIM SHOULD BE ACCEPTED . (D) ENTIRE LOSS CAN NEVER BE TAXED AS INCOME AND PR INCIPLE OF NETTING SHOULD BE APPLIED. FOR THIS PROPOSITION HE RELIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN CIT VS. UK BOSE (2013) 212 TAXMAN 399 (DEL). (E) THE ARRANGEMENT IS A SIMPLE COMMERCIAL BUSINES S ARRANGEMENT DONE IN GOOD FAITH AND THE TAXATION PRINCIPLES HAVE TO BE A PPLIED IN ACCORDANCE WITH LEGAL RIGHTS OF THE PARTIES WHICH ARE NOT IN DISPUT E. (F) THE ASSUMPTIONS OF THE LD.AO THAT THE BROKERAGE IS RECEIVED BY THE COMPANY ON ACCOUNT OF WORK DONE BY THE DIRECTORS IS WITHOUT ANY EVIDENCE. (G) THE TAX RATES OF THE ASSESSEE COMPANY AND THAT OF M/S PRASAD & CO. ARE SAME AND HENCE THERE IS NO LOSS TO REVENUE. 5.2. THE LD.SR.D.R. MR.SHAMMER SHARMA RELIED ON THE ORDER OF AO, AS WELL AS THAT OF LD.CIT(A) AND SUBMITTED THAT IT IS THE A SSESSEE COMPANY WHICH IS HOLDING THE REGISTRATION AS A MEMBER OF DSE AND IT IS ALSO THE OWNER OF THE IPO BROKER CODE 5/0201/4 AND WHATEVER IS RECEIVED B Y THE ASSESSEE COMPANY IS DUE TO ITS LEGAL RIGHTS AND HENCE IS IN COME OF THE ASSESSEE COMPANY AT THE FIRST STAGE. HE SUBMITTED THAT THER E IS NO DIVERSION OF ITA NO. 419/DEL/2010 AY 2005-06 M/S PRASAD & CO.(P) LTD., NEW DELHI 6 INCOME BY OVER RIDING TITLE AND UNDER SUCH CIRCUMST ANCES THE ORDER OF THE FIRST APPELLATE AUTHORITY IS TO BE UPHELD. 6. WE HAVE HEARD RIVAL CONTENTIONS. ON CAREFUL CON SIDERATION OF THE FACTS AND CIRCUMSTANCES OF CASE, PERUSAL OF PAPERS ON REC ORD, CASE LAWS CITED, ORDERS OF LOWER AUTHORITIES, WE HOLD AS FOLLOWS. 6.1. THE ASSESSEE COMPANY IS A MEMBER OF THE DSE HA VING MEMBERSHIP NO.D-201. IT IS ALSO ALLOTTED IPO BROKER CODE NO.5 /0201/4. THE UNDISPUTED FACT IS THAT THE INITIAL PUBLIC OFFER (IPO) BUSINES S IS DONE IN THE NAME OF ASSESSEE COMPANY, BY VIRTUE OF ITS MEMBERSHIP AND R EGISTRATIONS. THUS ALL THE INCOME EARNED AT THE FIRST STAGE HAS TO BE TREA TED AS INCOME OF THE ASSESSEE COMPANY. THE DOCTRINE OF OVERRIDING TITLE CANNOT, IN OUR VIEW, BE APPLIED TO THE CASE OF THE ASSESSEE COMPANY. 6.2. BE IT AS IT MAY, THE UNDISPUTED FACT IS THAT M /S PRASAD & CO. HAS DONE THE IPO BUSINESS AND THE ASSESSEE COMPANY HAD NO ACTIVE ROLE WHATSOEVER IN SUCH BUSINESS, EXCEPT THAT OF LENDING THE USE OF ITS MEMBERSHIP AND REGISTRATION. THE INCOME FROM IPOS AS WELL AS THE EXPENDITURE ON THE SAME, IS UNDISPUTEDLY INCURRED B Y M/S PRASAD & CO. THE ARRANGEMENT HAS NOT BEEN DISPUTED BY THE AO. IT IS A FACT THAT THE ENTIRE INCOME HAS BEEN ACCOUNTED FOR BY THE PARTNER SHIP FIRM M/S PRASAD & CO. IN OUR CONSIDERED OPINION THE ENTIRE AMOUNT TRA NSFERRED BY THE ASSESSEE COMPANY TO M/S PRASAD & CO. SHOULD HAVE BEEN ALLOWE D AS EXPENDITURE OF THE ASSESSEE COMPANY. THE FIRST APPELLATE AUTHORIT Y HAS AT PAGE 5 RECOGNISED THIS FACT THAT THE ASSESSEE COULD HAVE C LAIMED EXPENSES TO THE EXTENT OF THE AMOUNT PAYABLE TO M/S PRASAD & CO. W HILE OBSERVING SO, HE CHOSE TO UPHOLD THE ILLEGAL ACTION OF THE AO IN BRI NGING THE TAX TO GROSS RECEIPTS. WHEN THE ASSESSEE HAS NOT RECEIVED ANY I NCOME FROM THIS ACTIVITY, TAX IS LEVIED ON GROSS RECEIPTS, ON A HYPOTHETICAL BASIS. THIS IS AGAINST THE PROVISIONS OF THE INCOME TAX ACT. SAME INCOME IS S OUGHT TO BE TAXED TWICE. THIS SHOULD NOT HAVE BEEN DONE. 6.3. IN VIEW OF THE ABOVE DISCUSSION WE DIRECT THE AO TO GRANT DEDUCTION OF RS.12,95,636/- FROM THE INCOME ASSESSED IN THE HAND S OF THE ASSESSEE. IN ITA NO. 419/DEL/2010 AY 2005-06 M/S PRASAD & CO.(P) LTD., NEW DELHI 7 OTHER WORDS NO INCOME THAT ARISES FROM THE BUSINESS OF IPO CAN BE BROUGHT TO TAX IN THE HANDS OF THE ASSESSEE COMPANY FOR THE REASON THAT IT HAS NOT EARNED OR DERIVED ANY INCOME FROM SUCH ACTIVITY. 7. IN THE RESULT THE APPEAL OF THE ASSESSEE IS ALLO WED IN PART. DECISION PRONOUNCED IN THE OPEN COURT ON 31 ST DECEMBER, 2014. SD/- SD/- (H.S. SIDHU) (J.SUDHAKAR REDDY) JUDICIAL MEMBER VICE PRESIDENT DATED : 31.12.2014 MANGA COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR