DY.C.I.T-4(1), MUMBAI V. M/S. IL & FS INVESTSMART LTD., MUMBAI

ITA 5992/MUM/2008

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8430 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 30-10-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 03-10-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P K SHUKLA
• Assessee Lawyers: D V LAKHANI
• Keywords: Business expenditure; Non-deduction of tax
• Section: 14A; 37; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES I : MUMBAI BEFORE SHRI D.K.AGRAWAL, JUDICIAL MEMBER AND SHRI N.K.BILLAIYA, ACCOUNTANT MEMBER ITA. NO.5372/MUM/2008 ASSESSMENT YEAR 2005-2006 IL & FS INVESTSMART LTD. MUMBAI 400 051 PAN AAACI3364A VS. ADDL. CIT, RANGE 4 (1) MUMBAI. (APPELLANT) (RESPONDENT) ITA.NO. 5992/MUM/2008 ASSESSMENT YEAR 2005-2006 DCIT - 4 (1) MUMBAI-20. VS. M/S. IL & FS INVESTSMART LTD. MUMBAI 400 051 PAN AAACI3364A (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI D.V. LAKHANI (A.R.) FOR REVENUE : SHRI P.K. SHUKLA (D.R.) DATE OF HEARING : 30-10-2012 DATE OF PRONOUNCEMENT : 30-10-2012 ORDER PER N.K.BILLAIYA, A.M. THESE CROSS-APPEALS ARE DIRECTED BY THE REVENUE AN D THE ASSESSEE AGAINST THE VERY SAME ORDER OF THE CIT(A)-IV, MUMBA I DATED 3-7-2008. BOTH THESE APPEALS ARE TAKEN-UP TOGETHER AND ARE BEING D ISPOSED BY THIS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 1. ITA.NO.5992/MUM/2008 :- WITH THIS APPEAL, THE REVENUE HAS CHALLENGED THE CORRECTNESS OF THE ORDER OF THE CIT( A) PERTAINING TO THE 2 ASSESSMENT YEAR 2005-2006. THE REVENUE HAS RAISED A S MANY AS 14 GROUNDS OF APPEAL. AT THE VERY OUTSET, COUNSEL FOR THE ASSESSE E POINTED OUT THAT THE ISSUES INVOLVED IN GROUND NO. 1 TO 7 ARE COVERED BY THE DE CISION OF THE JURISDICTIONAL HIGH COURT, TO WHICH THE LEARNED D.R. HAS FAIRLY CO NCEDED. 2. WE HAVE CAREFULLY PERUSED THE FACTS GIVING RISE TO THE GRIEVANCE WHICH SHOW THAT VSAT/LEASELINE CHARGES AMOUNTING TO RS.3, 32,774/- WERE DISALLOWED BY THE ASSESSING OFFICER, WHICH ADDITION WAS DELETED BY THE CIT(A). THE DISALLOWANCE WAS MADE FOR NON-DEDUCTION OF TAX AT SOURCE. WE HAVE THE BENEFIT OF THE ORDER OF THE JURISDICTIONAL HIGH COU RT IN ITA.(L) NO.475 OF 2011 IN THE CASE OF ANGEL CAPITAL & DEBIT MARKET LTD., WHER EIN FOLLOWING QUESTIONS OF LAW WERE RAISED BY THE REVENUE. (A) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE HONBLE TRIBUNAL WAS JUSTIFIED IN HOLDIN G THAT VSAT AND LEASELINE CHARGES PAID TO THE STOCK EXCHANGE BY THE ASSESSEE COMPANY WERE ALLOWABLE AS A DEDUCTION FROM TAXABLE INCOME EVEN THOUGH THE ASSESSEE COMPANY HAD FAILED TO DEDUCT TDS THEREON ? (B) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW THE HONBLE TRIBUNAL WAS JUSTIFIED IN HOLDIN G THAT VSAT AND LEASE LINE CHARGES PAID TO THE STOCK EXCHANGE B Y THE ASSESSEE COMPANY WERE NOT PAID IN CONSIDERATION OF TECHNICAL SERVICES RENDERED BY THE STOCK EXCHANGE WITHIN THE MEANING OF SECTION 194J READ WITH EXPLANATION 2 TO SECTION 9 (1) (VII) OF THE INCOME TAX ACT. ? 2.1. THE HONBLE HIGH COURT HAS THUS HELD AS UNDER : AS REGARDS THE FIRST TWO QUESTIONS ARE CONCERNED, THE FINDINGS OF FACT RECORDED BY THE I.T.A.T. IS THAT VSAT AND L EASE LINE CHARGES PAID BY THE ASSESSEE TO STOCK EXCHANGE WERE MERELY 3 REIMBURSEMENT OF THE CHARGES PAID/PAYABLE BY THE ST OCK EXCHANGE TO THE DEPARTMENT OF TELECOMMUNICATION. SI NCE THE VSAT AND LEASE LINE CHARGES PAID BY THE ASSESSEE DO NOT HAVE ANY ELEMENT OF INCOME, DEDUCTING TAX WHILE MAK ING SUCH PAYMENTS DO NOT ARISE. HENCE, QUESTION NOS. (A) AND (B) CANNOT BE ENTERTAINED. 3. RESPECTFULLY FOLLOWING THE DECISION OF THE HONB LE JURISDICTIONAL HIGH COURT GROUND NO. 1 TO 7 ARE DISMISSED. 4. GROUND NO. 8 TO 13 RELATES TO THE DISALLOWANCE O F PENALTY OF RS.25,82,779/- BEING DEBITED BY THE ASSESSEE ON VIO LATION OF THE BYE LAWS OF THE STOCK EXCHANGE. THE COUNSEL ONCE AGAIN POINTED OUT THAT THE ISSUES INVOLVED IN THESE GROUNDS ARE ALSO COVERED BY THE VERY SAME DEC ISION OF THE HONBLE JURISDICTIONAL HIGH COURT (SUPRA) WHEREIN ON THE FO LLOWING QUESTION RAISED BY THE REVENUE, THE HONBLE HIGH COURT HELD IN PARA-3 AS UNDER : 3. AS REGARDS QUESTION (C) IS CONCERNED THE FINDIN G OF FACT RECORDED BY THE I.T.A.T. IS THAT THE AMOUNT PAID AS PENALTY WAS ON ACCOUNT OF IRREGULARITIES COMMITTED BY THE A SSESSEES CLIENTS. SUCH PAYMENTS WERE NOT ON ACCOUNT OF ANY I NFRACTION OF LAW AND HENCE ALLOWABLE AS BUSINESS EXPENDITURE. IN SUCH A CASE THE EXPLANATION TO SECTION 37 WOULD NOT APPL Y. ACCORDINGLY QUESTION (C) RAISED BY THE REVENUE CANN OT BE ENTERTAINED. 5. THE LEARNED COUNSEL FOR THE ASSESSEE HAS ALSO PO INTED OUT THAT THE ISSUE IS ALSO COVERED BY THE DECISION OF THE HONBLE TRIB UNAL IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. ITO (2010) 2 ITR (TRIBU) 35 5 (MUM.) AND CLASSIC SHARE & STOCK BROKING SERVICES LTD. VS. DCIT (2007) 11 SO T 377 (MUM). 6. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOWE R AUTHORITIES AND THE DECISIONS CITED ABOVE. WE FIND THAT THE PENALTY WAS ON ACCOUNT OF IRREGULARITIES 4 COMMITTED BY THE ASSESSEES CLIENTS. MOREOVER, THE CAPITAL MARKET REGULATIONS OF THE STOCK EXCHANGES WERE IN THE NATURE OF INDOOR MANAGEMENT GOVERNING RELATIONS BETWEEN THE MEMBER AND THE STOCK EXCHANGE AND NOT AN OFFENCE PUNISHABLE BY THE STATUTE. RESPECTFULLY FOLLOWING T HE ABOVE DECISIONS, WE HOLD THAT THE CIT(A) HAS RIGHTLY DELETED THE ADDITION. T HEREFORE, WE DO NOT FIND ANY MERIT TO INTERFERE WITH THE FINDINGS OF THE CIT(A). GROUND NO. 8 TO 13 ARE ACCORDINGLY DISMISSED. 7. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. 8 . ITA.NO.5372/MUM/2008 :- WITH THIS APPEAL THE ASSESSEE HAS CHALLENGED THE CORRECTNESS OF THE ORDER OF THE CIT( A) BY RAISING 8 GROUNDS. GROUND NO.1 RELATES TO THE DISALLOWANCE OF TRANSACT ION CHARGES PAID TO STOCK EXCHANGE AMOUNTING TO RS.1,44,70,916/- BY INVOKING THE PROVISIONS OF SECTION 40(IA). COUNSEL FOR THE ASSESSEE POINTED OUT THAT T HE ISSUE IS COVERED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF CIT VS. KOTAK SECURITIES LTD. 340 ITR 333. FROM THE PERUSAL OF TH E ASSESSMENT ORDER SHOW THAT THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE ON PAYMENT OF TRANSACTION CHARGES AMOUNTING TO RS.1,44,70,916/-. IT IS THE CO NTENTION OF THE ASSESSEE THAT SUCH TRANSACTION CHARGES DO NOT COME UNDER THE DEFINITION OF FEES FOR TECHNICAL/MANAGERIAL SERVICES. WE FIND THAT IDENTIC AL ISSUE HAS BEEN DECIDED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF KOTAK SECURITIES LTD. (SUPRA) AND THE OPERATIVE PORTION OF THE ORDER OF THE HONBLE B OMBAY HIGH COURT READS AS UNDER : HELD (I) THAT THE ASSESSEE WAS LIABLE TO DEDUCT TA X AT SOURCE BEFORE CREDITING THE TRANSACTION CHARGES TO THE ACC OUNT OF THE STOCK EXCHANGE. (I) THAT THOUGH SECTION 194J WAS INSERTED WITH EFFECT F ROM JULY 1, 1995, TILL THE ASSESSMENT YEAR IN QUESTION THAT IS ASSESSMENT YEAR 2005-06 BOTH THE REVENUE AND THE ASSESSEE PROCEEDED ON THE FOOTING THAT SECTION 194J WAS NOT 5 APPLICABLE TO THE PAYMENT OF TRANSACTION CHARGES AN D ACCORDINGLY, DURING THE PERIOD FROM 1995 TO 2005 NE ITHER HAD THE ASSESSEE DEDUCTED TAX AT SOURCE WHILE CREDI TING THE TRANSACTION CHARGES TO THE ACCOUNT OF THE STOCK EXC HANGE NOR HAD THE REVENUE RAISED ANY OBJECTION OR INITIATED A NY PROCEEDINGS FOR NOT DEDUCTING THE TAX AT SOURCE. IN THESE CIRCUMSTANCES, IF BOTH THE PARTIES FOR NEARLY A DEC ADE PROCEEDED ON THE FOOTING THAT SECTION 194J WAS NOT ATTRACTED, THEN, IN THE ASSESSMENT YEAR IN QUESTION NO FAULT COULD BE FOUND WITH THE ASSESSEE IN NOT DEDUCTING T HE TAX AT SOURCE UNDER SECTION 194J OF THE ACT AND CONSEQUENT LY, NO ACTION COULD BE TAKEN UNDER SECTION 40(A)(IA) OF TH E ACT. FROM ASSESSMENT YEAR 2006-07 THE ASSESSEE HAD BEEN DEDUC TING TAX AT SOURCE WHILE CREDITING THE TRANSACTION CHARG ES TO THE ACCOUNT OF THE STOCK EXCHANGE THOUGH NOT AS FEES FO R TECHNICAL SERVICES BUT AS ROYALTY. 9. AS THE ASSESSMENT YEAR INVOLVED IN THE PRESENT A PPEAL IS 2005-2006, THE RATIO LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT (SUPRA) SQUARELY APPLY. RESPECTFULLY FOLLOWING THE AFORESAID DECISION GROUN D NO.1 IS ALLOWED. 10. GROUND NO. 2, 3 AND 4 RELATES TO THE DISALLOWAN CE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A READ WITH RULE 8D OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS EARNED DIVIDEND AMOUNTING TO RS.7,80,60,038/- WHICH WERE CLAIMED TO BE EXEMPT FROM TAX. THE ASSESSING OFFICER WAS OF THE O PINION THAT CERTAIN EXPENSES HAVE TO BE ATTRIBUTED FOR EARNING TAX EXEM PT DIVIDEND INCOME AND ACCORDINGLY, MADE A DISALLOWANCE OF RS.15,61,200/- BEING 2% OF THE DIVIDEND INCOME. WHEN THE MATTER WAS AGITATED BEFORE THE CIT (A), THE ASSESSEE ARGUED THAT RULE 8D IS NOT APPLICABLE FOR THE YEAR UNDER C ONSIDERATION. HOWEVER, THIS CONTENTION OF THE ASSESSEE DID NOT FIND FAVOUR FROM THE CIT(A) WHO WAS OF THE OPINION THAT THE CBDT NOTIFICATION NO. 45/2008 DATE D 24-3-2008 IS A 6 PROCEDURAL PROVISION AND IS APPLICABLE TO ALL PENDI NG PROCEEDINGS AND ACCORDINGLY, DIRECTED THE ASSESSING OFFICER TO RECO MPUTED THE DISALLOWANCE IN VIEW OF THE CBDT CIRCULAR NO.45/2008 DATED 24-3-200 8. 11. BEFORE US, LEARNED COUNSEL ARGUED THAT THIS ISS UE HAS BEEN SETTLED NOW BY THE HONBLE SUPREME COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. 328 ITR 81. 12. WE FIND FORCE IN THE SUBMISSION OF THE LEARNED COUNSEL AND ACCORDINGLY RESTORE THIS ISSUE BACK TO THE FILE OF THE ASSESSIN G OFFICER. THE ASSESSING OFFICER IS DIRECTED TO RE-COMPUTE THE DISALLOWANCE WITHOUT APPLYING RULE 8D AND ALSO CONSIDERING THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. 313 ITR 340. 13. GROUND NO.5 RELATES TO THE DISALLOWANCE OF STT PAID ON BEHALF OF THE CLIENT AMOUNTING TO RS.47,91,318/-. DURING THE COUR SE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUND THAT THE A SSESSEE HAS DEBITED RS.47,91,318/- AS STT CHARGES IN ITS P & L ACCOUNT WHICH ACCORDING TO THE ASSESSING OFFICER IS NOT AN ALLOWABLE EXPENSES AND WENT ON TO DISALLOW THE SAME. WHEN THE MATTER WAS ARGUED BEFORE THE CIT(A), THE CIT(A) HELD THAT STT CANNOT BE ALLOWED AS DEDUCTION AS PROVIDED UNDER SE CTION 40A (IB) BUT ONLY TAX REBATE UNDER SECTION 88E IS ALLOWABLE AND REJECTED THE CLAIM OF THE ASSESSEE. 14. BEFORE US, LEARNED COUNSEL FOR THE ASSESSEE ARG UED THAT THE ASSESSEE IS A REGISTERED BROKER WITH BOMBAY STOCK EXCHANGE AND NA TIONAL STOCK EXCHANGE AND EXECUTES THE TRANSACTIONS ON BEHALF OF ITS CLIE NTS WHO ENTERED INTO TRANSACTIONS FOR PURCHASE OR SALE OF SHARES ON THE FLOOR OF STOCK EXCHANGE. AS PER THE PRACTICE, THE ASSESSEE CHARGES THE STT TO T HE CLIENTS IN THE BILLS AND COLLECTS THE STT AND MAKE THE PAYMENT OF THE SAID S TT SO COLLECTED TO THE APPROPRIATE AUTHORITY. THE COUNSEL FURTHER SUBMITTE D THAT IN RESPECT OF SOME HIGH-PROFILE INSTITUTIONAL CLIENTS, THE ASSESSEE AG REED TO CHARGE THE BROKERAGE INCLUSIVE OF ALL THE TAXES WHICH MEANS THAT THE BRO KERAGE AMOUNT SO RECEIVED FROM SUCH HIGH PROFILE INSTITUTIONAL CLIENTS WITH C ERTAIN PERCENTAGE OF STT IS 7 ALSO INCLUDED. THE COUNSEL FURTHER DEMONSTRATED ITS METHOD OF ACCOUNTING STATING THAT WHEN IT RECEIVES A BROKERAGE OF SAY RS .1000/-, IT INCLUDES RS.100/- AS STT. THEREFORE, THE BROKERAGE ACCOUNT IS CREDITE D WITH RS.1000/- AND STT OF RS.100/- IS DEBITED TO THE P & L ACCOUNT. THE NET I NCOME FROM THIS TRANSACTION REMAINS RS.900/- ONLY. 15. PER CONTRA, LEARNED D.R. RELIED UPON THE FINDIN GS OF THE LOWER AUTHORITIES. 16. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES. WE FIND SOME FORCE IN THE CONTENTION OF THE COUNSEL FOR THE ASSESSEE SO FAR AS THE TREATMENT OF BROKERAGE INCLUSIVE OF STT IS CONCERNED. HOWEVER, IN ALL FAIRNESS, IN OUR HUMB LE OPINION, THIS ISSUE DESERVES TO BE LOOKED AFRESH. THEREFORE, WE RESTORE THIS ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO EXAMINE T HE BOOK ENTRIES IN THE LIGHT OF DEMONSTRATION MADE BY THE COUNSEL FOR THE ASSESSEE BEFORE US. NEEDLESS TO MENTION THAT A REASONABLE OPPORTUNITY OF BEING HEAR D SHOULD BE GIVEN TO THE ASSESSEE. 17. GROUND NO. 6 AND 7 ARE CONSEQUENTIAL IN NATURE AND ARE DISPOSED OF ACCORDINGLY. 18. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH DAY OF OCTOBER, 2012. SD/- SD/- (D.K.AGRAWAL) (N.K.BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATE 30 TH OCTOBER, 2012 VBP/- 8 COPY TO 1. M/S. IL & FS INVESTSMART LTD. , IL & FS FINANCIAL CENTRE, PLOT C - 22, G BLOCK, BANDRA-KURLA COMPLEX, BANDRA (E), MUMBAI 400 051 PAN AAACI3364A 2. DCIT - 4 (1), 6 TH FLOOR, R.NO.640, AAYAKAR BHAVAN, MUMBAI 400 020. 3. CIT(A) - IV , MUMBAI . 4. CIT - 4 , MUMBAI 5. DR I BENCH 6. GUARD FILE (TRUE COPY) BY ORDER ASST. REGISTRAR, I.T.AT. MUMBAI BENCHE S MUMBAI.