ADDL CIT RG 4(2), MUMBAI V. TOTAL SECURITIES LTD, MUMBAI

ITA 5951/MUM/2009

• Counselvise Citation: 595119914 RSA 2009
• Duration Of Justice: 1 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 05-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 09-11-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SONGATE
• Keywords: Transactions in derivatives
• Section: 194C; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E, MUMBAI BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER & SHRI N.V. VASUDEVAN, JUDICIAL MEMBER. I.T.A. NO. 5951/MUM/2009 ASSESS MENT YEAR : 2006-07. ADDL. COMMISSIONER OF INCOME-TAX, TOTAL SECURITIES LTD. RANGE-4(2), MUMBAI. VS. 601, DURGA CHAMBERS, 40, WATERFIELD RO AD, BANDRA, MUMBAI 400 050. PAN : AABCT 1302 N. APPELLANT. RESPONDENT. APPELLANT BY : SHRI D. SONGATE. RESPONDENT BY: NONE. O R D E R PER P.M. JAGTAP, A.M. : THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST TH E ORDER OF THE LEARNED CIT(APPEALS)-IV, MUMBAI DATED 21-8-2009. 2. IN GROUND NO.1, THE REVENUE HAS CHALLENGED THE A CTION OF THE LEARNED CIT(APPEALS) IN DELETING THE ADDITION OF RS.78,745 15/- MADE BY THE AO BY WAY OF DISALLOWANCE OF ARBITRAGE/JOBBING CHARGES PAID TO J OBBERS. 3. IT IS OBSERVED THAT THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF PAYMENTS MADE BY THE ASSESSEE TO JOBBERS WAS DELETED BY THE LEARNED CIT(APPEALS) BY HIS IMPUGNED ORDER FOLLOWING HIS APPELLATE ORDER PASSED IN ASSESSEES OWN CASE FOR 2 I.T.A. NO. 5951/MUM/2009 ASSESSMENT YEAR: 2006-07 ASSESSMENT YEAR 2005-06 ON A SIMILAR ISSUE. THE SAI D ORDER OF THE LEARNED CIT(APPEALS) FOR ASSESSMENT YEAR 2005-06 WAS ASSAIL ED BY THE REVENUE IN AN APPEAL FILED BEFORE THE TRIBUNAL AND THE COORDINATE BENCH OF THE TRIBUNAL VIDE ITS ORDER DATED 31 ST DEC., 2010 PASSED IN ITA NO. 800/MUM/2009 HAS UPHE LD THE ORDER OF THE LD. CIT(A) DELETING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF PAYMENTS MADE TO JOBBERS RELYING ON THE TRIBUNALS ORDER IN THE CASE OF DCIT VS. ASSET ALLIANCE SECURITIES PVT. LTD. (ITA NO. 1488/M UM/2009 DATED 16-7-2010) WHEREIN A SIMILAR ISSUE WAS DECIDED IN FAVOUR OF TH E ASSESSEE FOR THE FOLLOWING REASONS GIVEN IN PARAGRAPH NO. 9: THE REVENUE IS IN APPEAL. WE HAVE EXAMINED THE F ACTS AND THE RIVAL CONTENTIONS. WHEREAS THE LEARNED SEN IOR DR STRONGLY RELIED ON THE ORDER PASSED BY THE AO AND T HE STATUTORY PROVISIONS, THE BASIC CONTENTION OF THE ASSESSEE BE FORE US WAS THAT THERE WAS A JOINT VENTURE BETWEEN IT AND THE JOBBER S / ARBITRAGERS TO SHARE THE PROFITS AND LOSSES ARISING ON ACCOUNT OF THE DEALINGS BETWEEN THEM, THAT SUCH AN ARRANGEMENT WAS ON PRINC IPAL TO PRINCIPAL BASIS, THAT THEREFORE THE JOBBER / ARBITR AGER CANNOT BE TERMED AS A CONTRACTOR FOR CARRYING OUT ANY WORK FO R THE ASSESSEE AND IN THESE CIRCUMSTANCES THERE WAS NO QUESTION OF INVOKING SECTION 194C. IT WAS EXPLAINED THAT THIS WAS A BUS INESS DONE BY THE ASSESSEE ON ITS OWN ACCOUNT IN THE STOCK EXCHAN GE AND NOT FOR OR ON BEHALF OF ITS CLIENTS FOR BROKERAGE AND FOR T HE PURPOSE OF TRADING IN SHARES AND SECURITIES IN THE STOCK EXCHA NGE ON ITS OWN ACCOUNT, THE ASSESSEE ENTERED INTO AGREEMENTS WITH SEVERAL JOBBERS / ARBITRAGERS WITH THE UNDERSTANDING THAT THE ULTIM ATE PROFIT OR LOSS IN SUCH TRADE WOULD BE DIVIDED BETWEEN THEM EQUALLY . AT OUR INSTANCE THE LEARNED REPRESENTATIVE FOR THE ASSESSE E HAS FILED COPIES OF THE AGREEMENTS ENTERED INTO WITH THE JOBBERS / A RBITRAGERS. THE AGREEMENTS ARE IN STANDARD FORM. WE MAY REFER TO T HE AGREEMENT WITH MR AMIT ZAVERI, WHICH IS AT PAGE 23 OF THE PAP ER BOOK. THE PREAMBLE TO THE AGREEMENT STATES THAT MR AMIT ZAVER I HAS SHOWN HIS WILLINGNESS TO ACCEPT THE AGREEMENT FOR DEALING AND TRADING IN THE CASH AND F&O SEGMENT OF NSE IN ACCORDANCE WITH THE RULES PRESCRIBED BY SEBI AND THAT HE HAS ACCEPTED TO SHAR E THE PROFIT AND LOSS IN THE TRANSACTIONS MADE BY HIM ON BEHALF OF THE ASSESSEE 3 I.T.A. NO. 5951/MUM/2009 ASSESSMENT YEAR: 2006-07 COMPANY AS MUTUALLY AGREED UPON BY THE PARTIES FROM TIME TO TIME. CLAUSE 1 OF THE AGREEMENT SAYS THAT THE ASSE SSEE HAS GIVEN TO THE DEALER (MR AMIT ZAVERI) THE RIGHT TO TRADE I N THE CASH AND F&O SEGMENT OF THE NSE. HOWEVER, THE OVERALL SUPER VISION AND CONTROL WILL BE WITH THE ASSESSEE. CLAUSE 2 PROVID ES THAT MR AMIT ZAVERI IS AUTHORIZED TO TRADE AND OUT OF THE NET PR OCEEDS, WHETHER PROFIT OR LOSS, FROM SUCH DEALING OF SHARES AND SEC URITIES WILL BE SHARED BETWEEN THE ASSESSEE AND HIM IN THE RATIO OF 50 : 50. CLAUSE 3 PROVIDES THAT ALL TRANSACTIONS, DEALINGS A ND OTHER FORMALITIES WILL BE CARRIED OUT IN THE NAME OF THE ASSESSEE ONLY. CLAUSE 4 PROVIDES THAT THE ASSESSEE WILL BE SOLELY ENTITLED TO RECEIVE AND KEEP ANY KIND OF DIVIDEND, INTEREST AND OTHER CORPORATE BENEFITS DURING THE COURSE OF TRANSACTIONS CARRIED OUT BY MR AMIT ZAVERI. CLAUSE 5 OBLIGES THE ASSESSEE TO PAY ALL M ARGIN MONIES TO THE STOCK EXCHANGE FOR THE TRANSACTIONS CARRIED OUT BY MR AMIT ZAVERI IN THE NAME OF THE ASSESSEE. MORE IMPORTANT LY IT PROVIDES THAT ALL APPLICABLE EXPENSES WILL BE DEDUCTED / ADDED BE FORE THE DISTRIBUTION OF THE PROFIT / LOSS AS AGREED UPON IN CLAUSE 2 ABOVE . CLAUSE 6 SAYS THAT THE PARTIES WILL ABIDE BY THE RU LES PRESCRIBED BY NSE AND SEBI AND CLAUSE 7 PROVIDES FOR DISCONTINUAN CE OF THE AGREEMENT BY GIVING ONE DAYS NOTICE. ALL THE AGRE EMENTS FILED BEFORE US ARE IDENTICALLY WORDED. IT HAS BEEN ARGU ED ON BEHALF OF THE ASSESSEE ON THE BASIS OF THESE AGREEMENTS THAT THERE WAS A JOINT VENTURE BETWEEN IT AND THE JOBBERS OR ARBITRAGERS F OR TRADING IN SHARES AND SECURITIES IN THE STOCK EXCHANGES ON THE COMPANYS OWN ACCOUNT AND THE PROFITS OR LOSSES ON SUCH TRADI NG WERE TO BE DIVIDED EQUALLY BETWEEN THE ASSESSEE AND THE CONCER NED JOBBER OR ARBITRAGER. IT WAS FURTHER REPRESENTED BEFORE US T HAT NO EXPENDITURE OR PAYMENT MADE TO THE JOBBER OR ARBITR AGER WAS CLAIMED IN THE ASSESSEES BOOKS OF ACCOUNT FROM WHI CH TDS HAD TO BE MADE AND IT WAS ONLY THE NET INCOME FROM THE JOINT VENTURE THAT WAS ACCOUNTED FOR IN THE ASSESSEES BOOKS. IN OTHER WORDS, THE SUBMISSION WAS THAT THE PAYMENT TO THE JOBBERS AND ARBITRAGERS WAS NOT DEBITED TO THE ASSESSEES PROFIT AND LOSS A CCOUNT AT ALL AND THEREFORE THERE WAS NO LIABILITY TO DEDUCT THE TAX. WE CALLED UPON THE ASSESSEE TO PROVE THIS CLAIM WITH REFERENC E TO THE ACCOUNTS. THE ASSESSEE FILED THE ACCOUNTS AND OTHE R DETAILS TO ESTABLISH ITS CLAIM. WE FIND FROM THE PAPERS SUBMI TTED BY THE ASSESSEE IN THE FORM OF THREE SEPARATE PAPER BOOKS THAT ON 11 TH MARCH 2008 THE ASSESSEE HAD EXPLAINED THE TRADING I NCOME OF 4 I.T.A. NO. 5951/MUM/2009 ASSESSMENT YEAR: 2006-07 RS.6,91,06,197/- APPEARING IN SCHEDULE G TO THE A UDITED PROFIT AND LOSS ACCOUNT AND IT WAS POINTED OUT THAT OUT OF THE ABOVE TRADING INCOME, JOBBING INCOME AMOUNTED TO RS.1,57, 75,393/- AND ARBITRAGE INCOME AMOUNTED TO RS.14,90,112/-. OUT O F THE BALANCE, THE OWN TRADING INCOME, WHICH AROSE TO THE ASSESSEE APPARENTLY WITHOUT THE HELP OF THE JOBBERS / ARBITRAGERS, AMOU NTED TO RS.3,07,47,989/-. THE BALANCE OF RS.2,10,92,703/- REPRESENTED SECURITY TRANSACTION TAX COLLECTED BY THE ASSESSEE. THE TOTAL OF THE TRADING INCOME FORMED PART OF THE FIGURE OF RS.10,3 8,05,456/- WHICH WAS CREDITED TO THE PROFIT AND LOSS ACCOUNT F OR THE YEAR ENDED 31.03.2006 AS BROKING, TRADING AND DEPOSITOR Y INCOME. IT WAS THIS FIGURE WHICH WAS EXPLAINED IN SCHEDULE G TO THE ACCOUNTS. THE ASSESSEE AGAIN WROTE A LETTER DATED 11 TH APRIL 2008 TO THE AO EXPLAINING THE JOBBING / ARBITRAGE INCOME WHICH WAS INCLUDED IN THE FIGURE OF RS.6,91,06,196/-. IN THI S LETTER IT WAS SUBMITTED TO THE AO THAT THE JOBBING / ARBITRAGE AC TIVITY WAS CARRIED OUT BY THE ASSESSEE IN ASSOCIATION WITH THE JOBBERS / ARBITRAGERS IN ACCORDANCE WITH PROFIT SHARING AGREE MENTS ENTERED INTO WITH THEM. IT WAS POINTED OUT IN THIS LETTER THAT THE SHARE OF THE JOBBERS AND ARBITRAGERS WERE GIVEN TO THEM AND THE DETAILS OF SUCH AMOUNTS HAD ALREADY BEEN ENCLOSED IN THE EARLI ER DATED 11 TH MARCH 2008. WE HAVE LOOKED INTO THE DETAILS FILED BY THE ASSESSEE ALONG WITH ITS LETTER DATED 11 TH MARCH 2008 FILED BEFORE THE AO. THE DETAILS HAVE BEEN GIVEN UNDER THE HEAD DETAILS OF JOBBERS / ARBITRAGERS ALONG WITH INCOME EARNED FROM JOBBING A ND ARBITRAGE ACTIVITY. THE ASSESSEE HAS FURNISHED THE NAMES OF THE JOBBERS, THEIR PERMANENT ACCOUNT NUMBERS AND ADDRESSES. SIM ILAR DETAILS HAVE ALSO BEEN GIVEN IN RESPECT OF ARBITRAGERS. TH E GROSS AMOUNT RECEIVED IN RESPECT OF THE BUSINESS CARRIED ON BY T HE ASSESSEE THROUGH THE JOBBERS / ARBITRAGERS IS ALSO GIVEN, JO BBER-WISE AND ARBITRAGER-WISE, FROM WHICH THE SHARE OF THE JOBBER / ARBITRAGER HAS BEEN DEDUCTED AND THE BALANCE HAS BEEN TAKEN AS THE ASSESSEES SHARE OF PROFIT IN THE JOINT VENTURES. THE TOTAL S HARE OF THE JOBBER OUT OF THE GROSS RECEIPTS AND PAID TO THEM COMES TO RS.1,42,24,997/- AND THE TOTAL SHARE PAID TO THE AR BITRAGERS CAME TO RS.19,46,576/-. THE AGGREGATE OF THE TWO COMES TO RS.1,61,71,573/- WHICH IS THE AMOUNT THAT HAS BEEN DISALLOWED BY THE AO BY INVOKING SECTION 194C READ WITH SECTION 4 0(A)(IA) OF THE ACT. THE FACTS SHOW THAT THERE WERE SEPARATE J OINT VENTURES ENTERED INTO BY THE ASSESSEE WITH SEVERAL JOBBERS / ARBITRAGERS AND 5 I.T.A. NO. 5951/MUM/2009 ASSESSMENT YEAR: 2006-07 PAYMENTS HAVE BEEN MADE TO THEM UNDER SUCH AGREEMEN TS AND THE ASSESSEES SHARE IN THE PROFITS HAS BEEN TAKEN TO T HE PROFIT AND LOSS ACCOUNT. IN THESE CIRCUMSTANCES THE PROVISION S OF SECTION 194C ARE NOT ATTRACTED BECAUSE IN ESSENCE AND SUBST ANCE THE AMOUNTS PAID TO THE JOBBERS OR ARBITRAGERS DID NOT IN REALITY REPRESENT THE EXPENSE OF THE ASSESSEE COMPANY BUT R EPRESENTED PAYMENT OF THE SHARE OF THE JOBBERS / ARBITRAGERS U NDER THE AGREEMENT ENTERED INTO WITH THEM. IN SUCH A CASE T HE ASSESSEE IS RIGHT IN SAYING THAT THERE WAS NO QUESTION OF DEDUC TING ANY TAX AT SOURCE. THE ABOVE FACTS ALSO ESTABLISH THAT THE RE LATIONSHIP BETWEEN THE ASSESSEE AND THE JOBBERS / ARBITRAGERS WAS NOT OF PRINCIPAL AND AGENT BUT WAS THAT OF PRINCIPAL TO PR INCIPAL. BOTH HAD AGREED TO EMBARK UPON A JOINT VENTURE TO TRADE IN SHARES AND SECURITIES IN THE STOCK EXCHANGE AND TO SHARE THE P ROFIT / LOSS EQUALLY. WE DO NOT SEE HOW SUCH PAYMENTS CAN BE TE RMED AS PAYMENTS TO CONTRACTORS FOR ANY WORK TO BE CARRIED OUT BY THEM. WE THEREFORE UPHOLD THE FINDING OF THE CIT(A) THAT THESE PAYMENTS DO NOT ATTRACT SECTION 194C AND THE ASSESS EE WAS NOT LIABLE TO DEDUCT TAX THERE FROM. ACCORDINGLY SECTI ON 40(A)(IA) IS ALSO NOT APPLICABLE. THE PAYMENTS, IN OUR VIEW, WE RE RIGHTLY ALLOWED AS DEDUCTION BY THE CIT(A). THE GROUNDS 7 TO 10 ARE DISMISSED. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN THE CASE OF DCIT VS. ASSET ALLIANCE SECURITIES PVT. LTD. (SUPRA) AS WELL AS IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2005-06, WE UPHOLD THE IMPUGNED ORD ER OF THE LEARNED CIT(APPEALS) DELETING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF PAYMENT MADE TO JOBBERS AND DISMISS GROUND NO.1 OF THE REVE NUES APPEAL. 4. AS REGARDS GROUND NO.2, IT IS OBSERVED THAT THE ISSUE RAISED THEREIN RELATING TO DISALLOWANCE MADE IN RESPECT OF VSAT, LEASE LINE AND TRANSACTION CHARGES U/S 40(A)(IA) IS ALSO SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN THE CASE OF KOTAK SECURITIES LTD. VS. ACIT 318 ITR (AT) 258 WHEREIN 6 I.T.A. NO. 5951/MUM/2009 ASSESSMENT YEAR: 2006-07 IT WAS HELD THAT STOCK EXCHANGES DO NOT RENDER ANY MANAGERIAL OR TECHNICAL SERVICES TO ITS MEMBERS IN LIEU OF THE PAYMENT OF TRANSACTIO N CHARGES ETC. AND SINCE SUCH PAYMENTS ARE MADE BY THE MEMBER BROKERS MAINLY FOR THE FACILITIES PROVIDED BY THE STOCK EXCHANGE, THE PROVISION OF SECTION 194J ARE N OT APPLICABLE SO AS TO MAKE THE BROKERS LIABLE TO DEDUCT TAX AT SOURCE FROM THE SAI D PAYMENTS. IT WAS HELD THAT THE PROVISIONS OF SECTION 40(A)(IA), THEREFORE, ARE NOT ATTRACTED SO AS TO MAKE ANY DISALLOWANCE ON ACCOUNT OF SUCH CHARGES. RESPECTFUL LY FOLLOWING THE SAID DECISION OF THE TRIBUNAL IN THE CASE OF KOTAL SECURITIES LTD . (SUPRA) AS WELL AS THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSE SSMENT YEAR 2005-06 (SUPRA) WHEREIN THE SAME HAS BEEN FOLLOWED, WE UPHOLD THE I MPUGNED ORDER OF THE LEARNED CIT(APPEALS) DELETING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF VSAT CHARGES, LEASE LINE CHARGES AND TRANSACTION CHARGES AND DISMISS GROUND NO.2 OF THE REVENUES APPEAL. 5. AS REGARDS GROUND NO.3, IT IS OBSERVED THAT THE ISSUE INVOLVED THEREIN RELATING TO DISALLOWANCE MADE ON ACCOUNT OF PENALTY LEVIED BY THE BOMBAY STOCK EXCHANGE IS ALSO SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE SEVERAL DECISIONS OF THE TRIBUNAL. IN ONE OF SUCH DECISIONS RENDERED IN THE CASE OF ITO VS. GDB SHARE AND STOCK BROKING SERVICES LTD. 88 TTJ (K OL.) 352, IT WAS HELD BY THE TRIBUNAL THAT PENALTY PAID BY THE ASSESSEE AS A REG ISTERED BROKER TO THE STOCK EXCHANGE FOR NOT COMPLYING WITH VARIOUS REQUIREMENT S IS NOT IN THE NATURE OF INFRINGEMENT OF ANY LAW AS ENVISAGED IN EXPLANATION TO SECTION 37 AND THE SAME IS ALLOWABLE AS DEDUCTION BEING THE EXPENSES WHOLLY AN D EXCLUSIVELY INCURRED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUSINESS. A SIMILAR VIEW HAS BEEN TAKEN BY CHANDIGARH BENCH OF ITAT IN THE CASE OF MASTER CAPI TAL SERVICES LTD. VS. DCIT 23 SOT 69 (CHD.). RESPECTFULLY FOLLOWING THE SAID D ECISIONS OF THE COORDINATE 7 I.T.A. NO. 5951/MUM/2009 ASSESSMENT YEAR: 2006-07 BENCHES OF THE TRIBUNAL, WE UPHELD THE IMPUGNED ORD ER OF THE CIT(APPEALS) DELETING THE DISALLOWANCE MADE BY THE AO ON ACCOUNT OF PENALTY PAID BY THE ASSESSEE TO STOCK EXCHANGE AND DISMISS GROUND NO.3. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED ON THIS 13 TH DAY OF MAY, 2011. SD/- SD/- (N.V.VASUDEVAN) (P.M. JAGTAP ) JUDICIAL MEMBER ACCOUNT ANT MEMBER MUMBAI, DATED: 13 TH MAY, 2011. WAKODE COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, E-BENCH (TRUE COPY) BY ORDE R ASSTT. REGIST RAR, ITAT, MUMBAI BEN CHES 8 I.T.A. NO. 5951/MUM/2009 ASSESSMENT YEAR: 2006-07 DATE INITIAL DRAFT DICTATED ON 06-05-11 SR. P.S. DRAFT PLACED BEFORE THE AUTHOR 09-05-11 SR. P.S. DRAFT PROPOSED AND PLACED BEFORE THE SECOND MEMBER AM/JM DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/JM APPROVED DRAFT COMES TO THE SR. PS SR. P.S. KEPT FOR PRONOUNCEMENT ON SR. P.S. FILE SENT TO THE BENCH CLERK SR. P.S. DATE ON WHICH FILE GOES TO THE HEAD CLERK DATE OF DISPATCH