PUMARTH CREDIT CAPITAL LTD, MUMBAI V. ACIT CIR 4(2), MUMBAI

ITA 4842/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3975 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-07-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 24-12-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 16-06-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T ROUMUAN PAITE
• Assessee Lawyers: V C SHAH
• Keywords: Business expenditure; Non compliance

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUM BAI , ! ! ! ! '! !, $ BEFORE SHRI SANJAY ARORA, A. M. AND SHRI VIJAY PAL RAO, J. M. ./ I.T.A. NO. 4842/MUM/2011 ( ' ( !)( ' ( !)( ' ( !)( ' ( !)( / / / / ASSESSMENT YEAR: 2008-09) PUMARTH CREDIT CAPITAL LTD. C/O. V.C. SHAH & CO. 3 RD FLOOR, 22 RAJGIR CHAMBERS, 12-14 SHAHID BHAGAT SINGH ROAD, MUMBAI-400 001 ' ' ' ' / VS. ASST. CIT, RANGE 4(2), AAYAKAR BHAVAN, MUMBAI-400 020 * ./ + ./ PAN/GIR NO. AABCP 8823 E ( *, / APPELLANT ) : ( -.*, / RESPONDENT ) & ./ I.T.A. NO. 5098/MUM/2011 ( ' ( !)( ' ( !)( ' ( !)( ' ( !)( / / / / ASSESSMENT YEAR: 2008-09) ASST. CIT, RANGE 4(2), AAYAKAR BHAVAN, MUMBAI-400 020 ' ' ' ' / VS. PUMARTH CREDIT CAPITAL LTD. C/O. V.C. SHAH & CO. 3 RD FLOOR, 22 RAJGIR CHAMBERS, 12-14 SHAHID BHAGAT SINGH ROAD, MUMBAI-400 001 * ./ + ./ PAN/GIR NO. AABCP 8823 E ( *, / APPELLANT ) : ( -.*, / RESPONDENT ) ' (/0 1 2 / ASSESSEE BY : SHRI V. C. SHAH ! 1 2 / REVENUE BY : SHRI T. ROUMUAN PAITE '! 1 03 / // / DATE OF HEARING : 02.07.2013 4) 1 03 / DATE OF PRONOUNCEMENT : 24.07.2013 2 ITA NO.4842 & 5098/MUM/2011 (A.Y. 2008-09) PUMARTH CREDIT CAPITAL LTD. 5 / O R D E R PER SANJAY ARORA, A. M.: THESE ARE A SET OF CROSS APPEALS BY THE ASSESSEE AN D THE REVENUE ARISING OUT OF THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-8 , MUMBAI (CIT(A) FOR SHORT) DATED 21.04.2011, PARTLY ALLOWING THE ASSESSEES AP PEAL CONTESTING ITS ASSESSMENT U/S.143(3) OF THE INCOME TAX ACT, 1961 (THE ACT H EREINAFTER) FOR THE ASSESSMENT YEAR (A.Y.) 2008-09 VIDE ORDER DATED 30.11.2010. ASSESSEES APPEAL (ITA NO. 4842/MUM/2011) 2. THE FIRST ISSUE, AGITATED BY THE ASSESSEE PER IT S GROUND NO. 1, IS THE DISALLOWANCE U/S.14A IN THE SUM OF RS.96,022/- EFFECTED BY THE A SSESSING OFFICER (A.O.) OVER AND ABOVE THE SUM (RS.98,939/-) DISALLOWED BY THE ASSES SEE PER ITS RETURN OF INCOME. THE WORKING OF THE A.O.S DISALLOWANCE APPEARS AT PGS. 6 & 7 OF THE ASSESSMENT ORDER; THE AMOUNT ADDED BY HIM BEING WITH REFERENCE TO RULE 8D (2)(II), I.E., IN RESPECT OF INTEREST, WHILE THAT BY THE ASSESSEE ITSELF IS ONLY IN RESPEC T OF THE INDIRECT EXPENSES WORKED OUT IN TERMS OF RULE 8D(2)(III). THE ASSESSEES CLAIM OF H AVING NOT INCURRED ANY INTEREST EXPENDITURE, I.E., TOWARD EARNING DIVIDEND INCOME; THE INVESTMENT IN SHARE CAPITAL, ON WHICH THE DIVIDEND INCOME (AT RS.2,05,828/-) STANDS RECEIVED BY IT FOR THE YEAR, BEING ENTIRELY OUT OF OWN FUNDS IN THE FORM OF SHARE CAPI TAL AND ACCUMULATED RESOURCES. THE SAME DID NOT FIND FAVOUR WITH THE AUTHORITIES BELOW INASMUCH AS IN THE ABSENCE OF A DIRECT NEXUS BETWEEN THE BORROWINGS AND THE UTILIZATION OF THE FUNDS, A GENERAL POOL OF FUNDS HYPOTHESIS, AS ENVISAGED UNDER RULE 8D(2)(II), WOUL D PREVAIL, SO THAT INTEREST WOULD STAND TO BE DISALLOWED PROPORTIONATELY. AGGRIEVED, THE AS SESSEE IS IN SECOND APPEAL. 3.1 BEFORE US, THE LD. AR WOULD SUBMIT THAT THE REV ENUE HAD INCORRECTLY WORKED OUT THE INTEREST EXPENDITURE INCURRED BY IT AT RS.4,37, 571/-, INASMUCH AS THE SAME INCLUDES BANK CHARGES TO THE EXTENT OF RS.8,95,307/-. A WORK ING OF THE SAME, REPRODUCED AS UNDER, STOOD ALSO SUBMITTED BEFORE THE FIRST APPELLATE AUT HORITY, WHO, HOWEVER, HAS FAILED TO CONSIDER THE SAME: 3 ITA NO.4842 & 5098/MUM/2011 (A.Y. 2008-09) PUMARTH CREDIT CAPITAL LTD. INTEREST PAID RS.7,84,783/- BANK CHARGES PAID RS.8,95,307/- RS.16,80,090/- LESS: INTEREST EARNED FROM BANK DEPOSITS RS.12,42,5 49/- RS.4,37,571/- ON BEING QUERIED BY THE BENCH AS TO THE NATURE OF THE SERVICES FOR WHICH AND THE EXPENDITURE BY WAY OF BANK CHARGES STANDS INCURRED, IT WAS SUBMITTED BY THE LD. AR THAT THE SAME IS IN RESPECT OF ITS REGULAR BUSINESS ACTI VITIES AS A SHARE AND STOCK BROKER AS WELL AS A DEPOSITORY PARTICIPANT. THE SAME HAVING BEEN I NCLUDED UNDER THE HEAD FINANCIAL EXPENSES AT RS.16.80 LACS (SCHEDULE P TO THE BALA NCE-SHEET/PB PG.8), THE ENTIRE NET EXPENDITURE OF RS.4.38 LACS WAS ADOPTED BY THE A.O. FOR COMPUTING THE INTEREST DISALLOWABLE U/S.14A R/W R. 8D. 3.2 THE LD. DR, ON THE OTHER HAND, WOULD SUBMIT THA T THESE FACTS DO NOT ARISE OUT OF THE ORDERS OF THE AUTHORITIES BELOW AND, THEREFORE, AT BEST THE MATTER WOULD NEED TO BE RESTORED BACK FOR ADJUDICATION. 4. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. AS ABUNDANTLY CLARIFIED BY THE LD. CIT(A), THE ASSE SSEE HAS NOT BEEN ABLE TO SHOW THE UTILIZATION OF BORROWED CAPITAL, ON WHICH INTER EST STANDS PAID/ALLOWED, AS EXCLUSIVELY FOR ASSETS OTHER THAN THOSE YIELDING TAX-FREE DIVID END INCOME. AS SUCH, THE PRESCRIPTION OF PROPORTIONATE DISALLOWANCE, IN TERMS OF R. 8D(2)(II ), WOULD APPLY, EVEN AS CLARIFIED BY THE HIGHER COURTS OF LAW, VIZ. DHANUKA & SONS V. CIT [2011] 339 ITR 319 (CAL); GODREJ & BOYCE MFG. CO. LTD. V. DY. CIT [2010] 328 ITR 81 (BOM). WITH REGARD TO THE PAYMENT OF THE BANK CHARGES IN T HE SUM OF RS.8.95 LACS, THE SAID FACT HAS NOT BEEN BROUGHT TO THE NOTICE OF THE TRIBUNAL FOR THE FIRST TIME; THE SAME FORMING PART OF THE WRITTEN SUBMISSIONS BEFORE THE LD. CIT(A), WHO THOUGH HAS FAILED TO CONSIDER THE SAME. IN FACT, AS A PERUSAL OF SCHEDUL E D TO THE BALANCE-SHEET (AS AT THE RELEVANT YEAR-END) WOULD SHOW, THE SAME ALSO CLARIF IES THAT THE FINANCIAL EXPENSES ARE IN RESPECT OF BANK INTEREST AND CHARGES. UNDER THE CIR CUMSTANCES, THEREFORE, WE ONLY CONSIDER IT FIT AND PROPER THAT THE MATTER IS RESTO RED BACK TO THE FILE OF THE A.O. TO VERIFY 4 ITA NO.4842 & 5098/MUM/2011 (A.Y. 2008-09) PUMARTH CREDIT CAPITAL LTD. THE ASSESSEES CLAIM/S AND ADJUDICATE AFRESH IN THE LIGHT OF HIS FINDING PER A SPEAKING ORDER, OF COURSE, AFTER ALLOWING THE ASSESSEE A REA SONABLE OPPORTUNITY OF STATING ITS CASE. WE DECIDE ACCORDINGLY. 5. THE NEXT, GROUND NO.2, OF THE ASSESSEES APPEAL IS IN RELATION TO THE CONFIRMATION OF THE REBATE OF TAX U/S.88E OF THE ACT IN RESPECT OF SECURITIES TRANSACTION TAX (STT) AT RS.10,39,782/-, AS AGAINST THE ACTUAL STT PAID AT R S.24.47 LACS. IT WAS CLARIFIED THAT THE ASSESSEE HAD IN FACT CLAIMED THE SAID REBATE FOR RS .21.18 LACS ONLY, EVEN AS A HIGHER AMOUNT STOOD PAID, THE CHALLANS FOR WHICH WERE THOU GH SUBMITTED SUBSEQUENTLY. HOWEVER, THE BASIS OF THE REDUCTION IN THE REBATE A LLOWED IS ON ACCOUNT OF THE PROPORTION OF EXPENSES ALLOCATED IN DETERMINING THE PROFIT ON THE SECURITIES TRANSACTIONS, I.E., WHICH ARE ENTERED INTO ON OWN ACCOUNT, VIS-A-VIS THE EXPE NDITURE ON THE REGULAR SHARE TRANSACTIONS CONDUCTED ON CLIENT ACCOUNT, FOR WHICH THE ASSESSEE RECEIVES BROKERAGE INCOME. THE REVENUE HAS APPORTIONED THE EXPENDITURE ON THE BASIS OF THE GROSS INCOME FROM THE TWO ACTIVITIES, I.E., AT 35% FOR OWN TRANS ACTIONS, WHILE THE ASSESSEE INSISTS ON THE SAME BEING RIGHTLY ALLOCABLE AT 5% (OF THE TOTAL EX PENDITURE) ONLY. 6. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. EVEN AS CLARIFIED DURING THE COURSE OF THE HEARING ITSELF, THE TRANSA CTIONS FOR BOTH TYPES OF THE BUSINESSES, I.E., ON OWN ACCOUNT AND FOR THE CLIENTS, BEING ESSENTIALLY THE SAME, SO TH AT THEY ENTAIL THE SAME SET OF ACTIVITIES AND, THEREFORE, EXPENDITURE, THOUGH LEADING TO VARYING INCOMES; THE BROKERAGE INCOME ITSELF VARYING FROM 0.1% TO 1%, TH E PROPER BASIS FOR ALLOCATION OF EXPENDITURE WOULD BE THE TURNOVER, RATHER THAN THE GROSS INCOME ARISING THERE-FROM. THIS WOULD AT ONCE SHIFT THE ALLOCATION TO A VALID, COGE NT BASIS. ACCORDINGLY, THIS ISSUE IS AGAIN RESTORED BACK TO THE FILE OF THE A.O. FOR CONSIDERA TION AFRESH ON THE LINES AS INDICATED ABOVE, WHICH HE SHALL BY EXAMINING THE FACTS AND IS SUING SPECIFIC FINDINGS OF FACT/S, AND AFTER ALLOWING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. FURTHER , HE SHALL ALSO VERIFY THE ASSESSEES CLAIM WITH REGARD TO THE PAYM ENT OF STT, STATED TO BE AT RS. 24.47 LACS, I.E., WITH REFERENCE TO THE CHALLANS (FOR THE RELEVANT YEAR) FURNISHED, AS WELL AS THEIR SOURCE/S OF PAYMENT. WE DECIDE ACCORDINGLY. 5 ITA NO.4842 & 5098/MUM/2011 (A.Y. 2008-09) PUMARTH CREDIT CAPITAL LTD. REVENUES APPEAL (ITA NO. 5098/MUM/2011) 7. THE REVENUES APPEAL RAISES TWO ISSUES, WHICH WE SHALL TAKE UP IN SERIATIM. THE FIRST RELATES TO A DISALLOWANCE U/S. 40(A)(IA) IN T HE SUM OF RS.13,80,720/- IN RESPECT OF VSAT, LEASE LINE AND TRANSACTION CHARGES PAID BY TH E ASSESSEE-COMPANY TO THE STOCK EXCHANGE. THE MATTER IS WELL SETTLED; THE LD. CIT(A ) HAVING ALLOWED RELIEF TO THE ASSESSEE BY FOLLOWING THE DECISIONS IN THE CASE OF KOTAK SECURITIES LTD. VS. ADDL. CIT [2008] 25 SOT 440 (MUM) AND DY. CIT VS. ANGEL BROKING LTD. [2010] 35 SOT 457 (MUM). IN FACT, BOTH THE DECISIONS HAVE SINCE TRAVELLED TO THE HON BLE JURISDICTIONAL HIGH COURT AND ATTAINED FINALITY, AT LEAST IN-SO-FAR AS THE STATE OF MAHARASHTRA IS CONCERNED; THE RELEVANT DECISIONS BY THE HONBLE HIGH COURT BEING CIT V. KOTAK SECURITIES LTD. [2012] 340 ITR 333 (BOM) AND ITO VS. ANGEL CAPITAL & DEBIT MARKET LTD. (IN ITA NO.475 OF 2011 DATED 28.07.2011). IT IS, THEREFORE, BY NOW WELL SETTLED THAT THE TDS PROVISION OF SECTION 194J WOULD APPLY ONLY IN RESPECT OF TRANSACTION CHA RGES, AND NOT TO THE VSAT AND LEASE LINE CHARGES. ACCORDINGLY, THE REVENUE SUCCEEDS IN PART, SO THAT THE DISALLOWANCE WOULD STAND RESTRICTED TO THE AMOUNT OF TRANSACTION CHARG ES PAID TO THE STOCK EXCHANGE. WE DECIDE ACCORDINGLY. 8. THE SECOND ISSUE, RAISED PER ITS GROUND NO. 2 BY THE REVENUE, IS IN RESPECT OF DISALLOWANCE OF NON COMPLIANCE CHARGES FOR RS.1,41, 900/- LEVIED ON THE ASSESSEE BY THE STOCK EXCHANGE. THE LD. CIT(A) HAS ALLOWED RELIEF T O THE ASSESSEE FOLLOWING THE DECISION BY THE TRIBUNAL IN THE CASE OF ITO VS. GDB SHARE & STOCK BROKING SERVICES LTD. [2004] 3 SOT 569 (KOL) . THIS IS FOR THE REASON THAT THE SAME DOES NOT INV OLVE BREACH OF ANY LAW, BUT IS ONLY FOR DEFAULT ON VARIOUS PROCEDURAL RULES FORMULATED BY THE SEBI WHICH THE STOCK EXCHANGE IS REQUIRED TO MONITOR AND OBSERVE. 9. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 9.1 THE A.O. HAS RELIED ON THE DECISIONS BY THE TRI BUNAL IN THE CASE OF ASST. CIT V. SUBHASH CHAND SHOREWALA , 91 TTJ (DEL) 57; AND KAPOOR SONS & CO. VS. ITO [1984] 7 ITD (DEL) 319, WHEREIN PENALTY FOR FAILURE TO ADHER E TO THE REGULATORY PROCEDURE 6 ITA NO.4842 & 5098/MUM/2011 (A.Y. 2008-09) PUMARTH CREDIT CAPITAL LTD. MANDATED BY THE STOCK EXCHANGE HAS BEEN HELD AS NOT AN ALLOWABLE EXPENDITURE. RELIANCE HAS ALSO BEEN PLACED BY HIM ON THE DECISION BY THE APEX COURT REPORTED AT 1970 AIR 245 TO THE EFFECT THAT IF A STATUTE GIVES POWER TO THE GOVERNMENT OR OTHER AUTHORITY TO MAKE RULES, THE RULES SO FRAMED HAVE THE FORCE OF THE ST ATUTE, AND ARE TO BE DEEMED TO BE INCORPORATED AS A PART OF THE STATUTE, AS WELL AS B Y THE JURISDICTIONAL HIGH COURT IN HEMENDRA V. SHAH V. BOMBAY STOCK EXCHANGE , HOLDING THAT THE RULES AND REGULATIONS OF THE STOCK EXCHANGE ARE STATUTORY IN CHARACTER. 9.2 THE BASIC LAW IN THE MATTER IS IN FACT WELL SET TLED BY THE DECISIONS BY THE APEX COURT, AS IN THE CASE OF HAJI AZIZ AND ABDUL SHAKOOR BROS. VS. CIT [1961] 41 ITR 350 (SC) AND INDIAN ALUMINIUM CO. LTD. VS. CIT [1971] 79 ITR 514 (SC), HOLDING THAT A PENALTY FOR A VIOLATION OF THE LAW IS NOT AN ALLOWA BLE EXPENDITURE AS THE SAME CANNOT BE CONSIDERED AS AN INCIDENT OF THE BUSINESS. THE EXPLANATION TO SECTION 37(1), INTRODUCED BY FINANCE (NO.2) ACT, 1998, W.R.E.F. 01.04.1962, F URTHER FORTIFIES THIS LEGAL POSITION. THE ISSUE OR THE MOOT POINT, THEREFORE, TO BE CONSIDERE D IS WHETHER THE PENALTY/S LEVIED ON THE ASSESSEE COULD BE CONSIDERED AS ARISING IN THE COUR SE OF THE NORMAL CONDUCT OF THE BUSINESS, I.E., AS AN INCIDENT OF THE TRADE, SO AS TO CONSTITUTE A DEDUCTIBLE BUSINESS EXPENDITURE. THE APEX COURT HAS FURTHER, PER ITS DE CISIONS AS IN PRAKASH COTTON MILLS (P.) LTD. V. CIT [1993] 201 ITR 684 (SC) AND SWADESHI COTTON MILLS LTD. V. CIT [1998] 233 ITR 199 (SC), AMPLY CLARIFIED THAT THE NOMENCLATURE OF THE LEVY WOULD NOT BE DETERMINATIVE, AND THE NATURE OF THE DEFAULT (FOR W HICH THE PENALTY IS BEING LEVIED) AS WELL AS THE SCHEME OF THE STATUTE PROVIDING FOR THE IMPO ST IS TO BE EXAMINED, TO SEE IF IT IS COMPENSATORY OR PENAL IN CHARACTER, SO THAT TO THE EXTENT IT IS COMPENSATORY, THE SAME WOULD BE AN ALLOWABLE EXPENDITURE. 9.3 WE MAY NOW PROCEED TO EXAMINE THE FACTS OF THE CASE. THE IMPUGNED PENALTY IS TOWARD NON COMPLIANCE CHARGES LEVIED BY AND PAID TO THE NATIONAL STOCK EXCHANGE (NSE) ON ACCOUNT OF MISMATCH OF CTCL DATA. THE DATA UPLOADED FROM THE ENET SERVER COULD NOT BE TALLIED WITH THE EXCHANGE RECORD DUE T O TECHNICAL REASON/S. IF THE NON RECONCILIATION HAS INDEED BEEN FOR TECHNICAL REASON S, WHY WE WONDER PENALTY SHOULD AT ALL 7 ITA NO.4842 & 5098/MUM/2011 (A.Y. 2008-09) PUMARTH CREDIT CAPITAL LTD. BE LEVIED. BOTH THE NATURE OF THE DEFAULT AS WELL A S OF THE RELEVANT PROVISION IS NOT CLEAR, AND WOULD NEED TO BE EXAMINED. THE CASE LAW CLOSEST TO THE CASE (ON FACTS) APPEARS TO BE IN MR. VIMALA B. SHAH (IN ITA NO.2024/MUM/2006 DATED 04.07.2007), RELIED UPON BY THE AO, WHEREIN PENALTY FOR NON-COMPLIANCE OF THE DISCI PLINARY REQUIREMENTS STAND HELD AS NOT AN ALLOWABLE EXPENDITURE EVEN THOUGH THEY MAY B E COMPENSATORY IN NATURE. BOTH THE PARTIES HAVE RELIED ON CASE LAW. WHILE THE LAW IN T HE MATTER IS CLEAR, THE MATTER, TO OUR MIND, WOULD TURN ON FACTS, INCLUDING AS TO THE NATU RE OF THE LEVY AND ITS SCHEME. CLEARLY, IT CANNOT BE REGARDED AS COMPENSATORY MERELY FOR TH E REASON THAT IT IS FOR A PROCEDURAL DEFAULT, EVEN AS IT APPEARS THE ASSESSEE HAS COMPLI ED WITH THE PROCEDURE. THE LD. CIT(A) HAS MERELY RELIED ON CASE LAW WITHOUT EXAMINING FAC TS AND ISSUING RELEVANT FINDINGS. 9.4 UNDER THE CIRCUMSTANCES, WE ONLY CONSIDER IT FI T AND PROPER THAT THE MATTER IS RESTORED BACK TO THE FILE OF THE FIRST APPELLATE AU THORITY TO DETERMINE THE ISSUE ARISING AFRESH IN ACCORDANCE WITH THE LAW, AFTER HEARING TH E PARTIES, AND BY ISSUING SPECIFIC FINDINGS OF FACT. WE DECIDE ACCORDINGLY. 10. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES AND THE REVENUES APPEAL IS PARTLY ALLOWED AND PARTLY ALLOW ED FOR STATISTICAL PURPOSES. / 06 ' (/0 1 71 89: ! ;0 1 0 <= > ! 1 5 !;0 > 71 89: 5 !;0 1 0 <= ORDER PRONOUNCED IN THE OPEN COURT ON JULY 24, 201 3 SD/- SD/- (VIJAY PAL RAO) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; ?' DATED : 24.07.2013 !.'. ./ ROSHANI , SR. PS 8 ITA NO.4842 & 5098/MUM/2011 (A.Y. 2008-09) PUMARTH CREDIT CAPITAL LTD. 5 1 -0' @')0 5 1 -0' @')0 5 1 -0' @')0 5 1 -0' @')0/ COPY OF THE ORDER FORWARDED TO : 1. *, / THE APPELLANT 2. -.*, / THE RESPONDENT 3. A ( ) / THE CIT(A) 4. A / CIT CONCERNED 5. '!DE -0' , , / DR, ITAT, MUMBAI 6. EF( G / GUARD FILE 5' 5' 5' 5' / BY ORDER, 8 88 8/ // / < < < < (DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI