DCIT 4(1), MUMBAI V. EDELWEISS SECURIIES P. LTD, MUMBAI

ITA 5939/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7956 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-08-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 11-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 25-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M MURALI
• Assessee Lawyers: A V SONDE
• Keywords: Earning of tax free income; Bad and doubtful debts
• Section: 14A; 37

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL E B ENCH, MUMBAI , ! '# $ $ $ $ , % && , , '# ' BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUICIAL MEMBER ./ I.T.A. NO.5939/MUM/2011 ( ( ( ( ( / ASSESSMENT YEAR :2008-09 THE DCIT-4(1), AAYAKAR BHAVAN, MUMBAI-400 020 / VS. M/S. EDELWEISS SECURITIES LTD., 14 TH FLOOR, EXPRESS TOWER, NARIMAN POINT, MUMBAI-400 021 ./ I.T.A. NO.7235/MUM/2011 ( ( ( ( ( / ASSESSMENT YEAR :2008-09 M/S. EDELWEISS SECURITIES LTD., 14 TH FLOOR, EXPRESS TOWER, NARIMAN POINT, MUMBAI-400 021 / VS. THE DCIT-4(1), AAYAKAR BHAVAN, MUMBAI-400 020 #) ! ./ %* ./ PAN/GIR NO. : AAACK 3792N ( )+ / APPELLANT ) .. ( ,-)+ / RESPONDENT ) REVENUE BY: SHRI M. MURALI ASSESSEE BY: SHRI A.V. SONDE . /0! / DATE OF HEARING :07.08.2014 12( . /0! / DATE OF PRONOUNCEMENT :13.08.2014 '3 / O R D E R PER N.K. BILLAIYA, AM: THESE CROSS APPEALS BY THE REVENUE AND THE ASSESS EE ARE PREFERRED AGAINST THE ORDER OF THE LD. CIT(A)-8, MUMBAI DT. 2 1.6.2011 PERTAINING TO ITA NOS. 7235 & 5939/M/2011 2 A.Y.2008-09. AS BOTH THESE APPEALS WERE HEARD TOGE THER, THEY ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CO NVENIENCE AND BREVITY. ITA NO. 5939/M/2011 REVENUES APPEAL 2. THE REVENUE HAS RAISED FOLLOWING TWO GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITI ON THE PENALTY LEVIED BY STOCK EXCHANGE OF RS. 1,53,613/- AND RS. 23,21,347/- BEING VSAT/LEASE LINE CHARGES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITI ON OF PROVISION FOR LOSS ON MARK TO MARKET ON DERIVATIVE OF RS. 2,21,49,882/-. 3. AT THE VERY OUTSET, THE LD. COUNSEL FOR THE ASSE SSEE STATED THAT BOTH GRIEVANCES OF THE REVENUE ARE COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT AND BY THE ORDER OF THE TRIBUNAL. 4. THE LD. DEPARTMENTAL REPRESENTATIVE FAIRLY CONCE DED TO THIS. 5. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTH ORITIES BELOW AND THE DECISIONS RELIED UPON BY THE LD. COUNSEL. FIRS T GRIEVANCE RELATES TO THE DELETION OF THE PENALTY LEVIED BY STOCK EXCHANG E AMOUNTING TO RS. 1,53,613/- AND RS. 23,21,347/- BEING VSAT/LEASE LI NE CHARGES. 6. THE LD. CIT(A) HAS CONSIDERED THIS ISSUE AT PARA -2 ON PAGE-1 OF HIS ORDER WHEREIN HE HAS FOLLOWED THE DECISION OF HIS P REDECESSOR FOR A.YRS. ITA NOS. 7235 & 5939/M/2011 3 2005-06. 2006-07 & 2007-08. WE ALSO FIND THAT AN I DENTICAL ISSUE WAS BEFORE THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS ANGEL CAPITAL AND DEBIT MARKETING IN ITA NO. 475 OF 2011 WHEREIN THE HONBLE HIGH COURT HAS HELD THAT IN SO FAR AS VSAT AND LEASE LIN E CHARGES PAID BY THE ASSESSEE ARE CONCERNED, THEY DO NOT HAVE ANY ELEMEN T OF INCOME THEREFORE DEDUCTING TAX WHILE MAKING SUCH PAYMENTS DO NOT ARI SE AND IN SO FAR AS THE PENALTY LEVIED BY THE STOCK EXCHANGE ON ACCOUN T OF IRREGULARITIES COMMITTED BY THE ASSESSEES CLIENTS, SUCH PAYMENTS WERE NOT ON ACCOUNT OF ANY INFRACTION OF LAW AND HENCE ALLOWABLE AS BUS INESS EXPENDITURE. IT WAS HELD THAT IN SUCH A CASE EXPLANATION TO SEC. 37 WOULD NOT APPLY. RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE HIGH COURT, GROUND NO. 1 IS DISMISSED. 7. GROUND NO. 2 RELATES TO THE DELETION OF ADDITION OF PROVISION FOR LOSS ON MARK TO MARKET ON DERIVATIVES AMOUNTING TO RS. 2,21,49,882/-. 8. AN IDENTICAL ISSUE CAME UP FOR HEARING IN THE CA SE OF GROUP COMPANY OF THE ASSESSEE NAMELY M/S. ECL FINANCE LTD ., IN ITA NO. 7656/M/2011 WHEREIN THE TRIBUNAL HAS CONSIDERED THE ISSUE AT PARA-5 OF ITS ORDER AND AT PARA-8, THE TRIBUNAL FOLLOWED THE FINDINGS OF ITA NO. 5324/M/07 AND AT PARA-9 CONSIDERED INSTRUCTION NO. 3/2010 OF CBDT DT. 23.3.2010 AND CONFIRMED THE FINDINGS OF THE LD. CIT (A). WE FIND THAT THE LD. CIT(A) HAS FOLLOWED THE DECISION OF THE TRI BUNAL IN ITA NO. 5324/M/07. AS NO DISTINGUISHING FACT/DECISION HAS BEEN BROUGHT BEFORE US, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). THIS GROUND OF THE REVENUE IS DISMISSED. 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ITA NOS. 7235 & 5939/M/2011 4 ITA NO. 7235/M/2011 ASSESSEES APPEAL 10. FIRST GRIEVANCE OF THE ASSESSEE RELATES TO THE DISALLOWANCE U/S. 14A R.W. RULE 8D OF THE I.T. RULES. 11. DURING THE COURSE OF THE SCRUTINY ASSESSMENT PR OCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS EAR NED EXEMPT INCOME ON WHICH THE ASSESSEE HAS ALLOCATED RS. 59,66,420/- TO WARDS EXPENSES INCURRED TO EARN EXEMPT INCOME. THE ASSESSEE WAS A SKED TO FURNISH THE COMPUTATION OF EXPENDITURE TO BE DISALLOWED AS PER THE PROVISIONS OF SEC. 14 OF THE ACT READ WITH RULE 8D. THE ASSESSEE FILE D A DETAILED REPLY DT. 6.12.2010. THE REPLY OF THE ASSESSEE DID NOT FIND FAVOUR WITH THE AO WHO WAS OF THE OPINION THAT IT IS INCUMBENT UPON TH E AO TO DISALLOW ANY EXPENDITURE WHICH IS ATTRIBUTABLE TO EARNING OF EXE MPT INCOME. THE AO PROCEEDED BY COMPUTING THE DISALLOWANCE AS PER RU LE 8D AND COMPUTED SUCH DISALLOWANCE AT RS. 8,95,14,178/-. 12. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. 13. IT WAS STRONGLY CONTENDED BEFORE THE LD. CIT(A) THAT THE DIVIDEND AMOUNT OF RS. 7.518 CRORES HAS BEEN EARNED ON SHAR ES HELD AS STOCK-IN- TRADE AND RS. 7 CRORES ON MUTUAL FUND WHICH WERE CL AIMED AS EXEMPT U/S. 10(34) AND 10(35) RESPECTIVELY. IT WAS POINTED OUT THAT THE ASSESSEE ITSELF HAS DISALLOWED 5% OF DIVIDEND INCOME. THE DISALLOWA NCE WAS COMPUTED AT RS. 59.66 LAKHS. IT WAS FURTHER CONTENDED THAT INTEREST BEARING BORROWED FUND HAD BEEN UTILIZED FOR FIXED DEPOSITS WITH VARIOUS BANKS RESULTING IN TAXABLE INTEREST INCOME. EARNING OF D IVIDEND INCOME WAS ONLY INCIDENTAL AND ANCILLARY TO ITS SHARE TRADING BUSINESS ACTIVITY. AFTER ITA NOS. 7235 & 5939/M/2011 5 CONSIDERING THE FACTS AND THE SUBMISSIONS, THE LD. CIT(A) OBSERVED THAT THE AMOUNT OF DISALLOWANCE FOR THE PURPOSE OF SEC. 14A HAS TO BE DETERMINED AS PER RULE 8D AND ACCORDINGLY CONFIRMED THE DISALLOWANCE MADE BY THE AO. 14. AGGRIEVED BY THIS, THE ASSESSEE IS BEFORE US. 15. THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTE NTION TO THE FINANCIAL STATEMENT OF THE ASSESSEE AND POINTED OUT THAT THE ASSESSEE IS HAVING SUFFICIENT OWN FUNDS TO COVER UP THE INVESTM ENTS. FURTHER THE INCREMENTAL LOAN DURING THE YEAR HAS GONE DOWN. IT IS THE SAY OF THE LD. COUNSEL THAT CONSIDERING THE FINANCIALS OF THE ASSE SSEE, NO BORROWED FUND HAS BEEN UTILIZED FOR EARNING EXEMPT INCOME. 16. PER CONTRA, THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE FINDINGS OF THE REVENUE AUTHORITIES. 17. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUT HORITIES BELOW AND THE RELEVANT MATERIAL PLACED BEFORE US. WE HAVE AL SO CONSIDERED THE JUDICIAL DECISIONS RELIED UPON BY THE ASSESSEE. BA LANCE SHEET OF THE ASSESSEE SHOWS THAT IT HAS RESERVES AND SURPLUS AMO UNTING TO RS. 2387387218/-. TOTAL INVESTMENT IN QUOTED AND UNQUO TED SHARES IS AT RS. 75,09,09,184/-. THESE FINANCIALS FIGURES SPEAK FOR THEMSELVES. THE ASSESSEE IS HAVING INTEREST FREE FUNDS OF ITS OWN. THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF RELIANCE UTILITIES & POWER LTD. 313 ITR 340 HAS HELD THAT IF THERE BE INTEREST FREE FUND AVAILABLE TO ASSESSE E SUFFICIENT TO MEET THE INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN, IT CAN BE PRESUMED THAT THE INVESTM ENTS WERE FROM INTEREST FREE FUNDS AVAILABLE. THE SAME VIEW WAS REITERATED BY THE HONBLE ITA NOS. 7235 & 5939/M/2011 6 BOMBAY HIGH COURT IN THE CASE OF CIT VS HDFC BANK L TD. IN INCOME TAX APPEAL NO. 330 OF 2012. WE ALSO FIND THAT THE ASSESSEE HAS SUO MOTU DISALLOWED 59.60 LAKHS. THE AO HAS COMPUTED T HE DISALLOWANCE BY APPLYING RULE 8D AND WHILE DOING SO, THE AO HAS CO NSIDERED THE VALUE OF STOCK-IN-TRADE SHARES AND SECURITIES AS INVESTME NTS. FURTHER, THE AO HAS CONSIDERED THE TOTAL INVESTMENT INSTEAD OF INVE STMENT ON WHICH DIVIDEND INCOME WAS EARNED WHICH MAKES THE ASSESSME NT ORDER ERRONEOUS AND FURTHER THE FIRST APPELLATE AUTHORITY ORDER IS ALSO ERRONEOUS AS HE HAS CONFIRMED THE FINDINGS OF THE AO. IN OUR CONSIDERE D VIEW, CONSIDERING THE FINANCIALS OF THE ASSESSEE IN TOTALITY THE SUO MOTU DISALLOWANCE MADE BY THE ASSESSEE SHOULD SUFFICE THE MANDATE OF PROVI SION OF SEC. 14A OF THE ACT. NO FURTHER DISALLOWANCE IS REQUIRED. WE, ACCORDINGLY, SET ASIDE THE FINDINGS OF THE LD. CIT(A) AND DIRECT THE AO TO DELETE THE DISALLOWANCE MADE U/S. 14A OF THE ACT READ WITH RUL E 8D. FIRST GRIEVANCE OF THE ASSESSEE IS ALLOWED. 18. THE SECOND ISSUE RELATES TO THE DISALLOWANCE OF BAD DEBTS OF RS. 16,94,140/-. 19. THIS ISSUE HAS BEEN DISCUSSED BY THE AO AT PARA -8 ON PAGE 22 OF HIS ORDER. APPLYING THE PROVISIONS OF SEC. 36(1)(V II) R.W. SEC. 36(2) OF THE ACT, THE AO CAME TO THE CONCLUSION THAT SUCH BA D DEBTS CANNOT BE ALLOWED. 20. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) AND IT WAS POINTED OUT THAT OUT OF THE TOTAL WRITE OFF OF RS. 16,94,140/-, RS. 15,45,548/- REPRESENT ROUNDING UP DIFFERENCE OF BRO KERAGE CHARGED AND RECOVERED BY THE ASSESSEE FROM ITS CLIENT. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS, THE LD. CIT(A) WAS OF THE OPINION THAT THE ASSESSEE DID ITA NOS. 7235 & 5939/M/2011 7 NOT CHOOSE TO SELL THE SHARES WITHIN TWO DAYS FROM THE CLOSURE OF ACCOUNTS IS NOT JUSTIFIABLE AND ACCORDINGLY CONFIRMED THE F INDINGS OF THE AO. 21. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE STA TED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SHREYAS MORAKIA 2 85 ITR 37. 22. THE LD. DR SIMPLY RELIED UPON THE FINDINGS OF T HE LOWER AUTHORITIES. 23. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUT HORITIES BELOW AND THE DECISION OF THE HONBLE BOMBAY HIGH COURT BROUG HT TO OUR NOTICE. ON IDENTICAL FACTS, THE HONBLE BOMBAY HIGH COURT HELD AS UNDER: HELD, _ DISMISSING THE APPEAL, THAT THE VALUE OF THE SHAR ES TRANSACTED BY THE ASSESSEE AS A STOCK BROKER ON BEH ALF OF HIS CLIENT WAS AS MUCH A PART OF THE DEBT AS WAS THE BROKERAGE CHARGE D BY THE ASSESSEE ON THE TRANSACTION. THE BROKERAGE HAVING BEEN CREDITED TO THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE, IT WAS EVIDENT THAT A PART OF THE DEBT WAS TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSE E. THE FACT THAT THE LIABILITY TO PAY THE BROKERAGE MAY ARISE AT A POINT IN TIME ANTERIOR TO THE LIABILITY TO PAY THE VALUE OF THE SHARES TRANSACTED WOULD NOT MAKE ANY MATERIAL DIFFERENCE TO THE POSITION. BOTH CONSTITUT E A PART OF THE DEBT WHICH ARISES FROM THE VERY SAME TRANSACTION INVOLVI NG THE SALE OR, AS THE CASE MAY BE, PURCHASE OF SHARES. SINCE BOTH FORM A COMPONENT PART OF THE DEBT, THE REQUIREMENTS OF SECTION 36(2)(I) ARE FULF ILLED WHERE A PART THEREOF IS TAKEN INTO ACCOUNT IN COMPUTING THE INCO ME OF THE ASSESSEE. THEREFORE, THE ASSESSEE WAS ENTITLED TO DEDUCTION B Y WAY OF BAD DEBTS UNDER SECTION 36(1)(VII) READ WITH SECTION 36(2) IN RESPECT OF THE AMOUNT WHICH COULD NOT BE RECOVERED FROM ITS CLIENTS IN RE SPECT OF TRANSACTIONS EFFECTED BY HIM ON BEHALF OF HIS CLIENTS RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE BOMBAY HIGH COURT, FINDINGS OF THE LD. CIT(A) ARE SET ASIDE. S ECOND GRIEVANCE OF THE ASSESSEE IS ALLOWED. ITA NOS. 7235 & 5939/M/2011 8 24. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE CROSS APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH AUGUST, 2014 SD/- SD/- (SANJAY GARG ) (N.K. BILLAIYA) '# / JUDICIAL MEMBER ! '# / ACCOUNTANT MEMBER MUMBAI; 4' DATED : 13 TH AUGUST, 2014 . . ./ RJ , SR. PS '3 '3 '3 '3 . .. . ,/ ,/ ,/ ,/ 5(/ 5(/ 5(/ 5(/ / COPY OF THE ORDER FORWARDED TO : 1. )+ / THE APPELLANT 2. ,-)+ / THE RESPONDENT. 3. 6 ( ) / THE CIT(A)- 4. 6 / CIT 5. 7& ,/ , , / DR, ITAT, MUMBAI 6. &8 9 / GUARD FILE. '3 '3 '3 '3 / BY ORDER, -/ ,/ //TRUE COPY// : :: : / ; ; ; ; % % % % (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI