SATCO CAPITAL MARKETS LTD, MUMBAI V. ASST CIT 4(2), MUMBAI

ITA 6132/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92487 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-04-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 18-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N V NADKARNI
• Keywords: Bad and doubtful debts
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE S/SHRI B.R.BASKARAN (AM) AND AMIT SHUKLA, (JM) . . , , ./ I.T.A. NO. 6132 / MUM/20 13 ( / ASSESSMENT YEAR : 2010 - 2011 ) M/S SATCO CAPITAL MARKETS LTD., (FORMERLY KNOWN AS SECURITIES AND FINANCIAL SERVICES LTD.) MAKHIJA CHAMBERS, 196, TURNER ROAD, BANDRA (W), MUMBAI - 400050 / VS. ASSTT. COM MISSIONER OF INCOME TAX CIRCLE 4(2), 6 TH FLOOR, AAYAKAR BHAVAN, M K ROAD, MUMBAI - 400020 ( / APPELLANT ) .. ( / RESPONDENT ) ./ ./PAN/GIR NO. : AAACS6813N / A PPELLANT BY SHRI HARIDAS BHAT / RE SPONDENT BY SMT.N V NADKARNI / DATE OF HEARING : 21.4 . 201 5 / DATE OF PRONOUNCEMENT : 29. 4 . 201 5 / O R D E R PER B.R. BASKARAN (AM) THE ASSESSEE HAS FIL ED THIS APPEAL CHALLENGING THE ORDER DATED 08 - 08 - 2013 PASSED BY LD.CIT(A) - 8, MUMBAI AND IT RELATES TO THE ASSESSMENT YEAR 2010 - 11. 2. THE GROUNDS OF APPEAL URGED BY THE ASSESSEE GIV E RISE TO THE FOLLOWING FOUR ISSUES : A) DISALLOWANCE MADE U/S 14A . B) DIS ALLOWANCE OF IRRECOVERABLE AMOUNTS WRITTEN OFF OF . C) A DDITION OF RETENTION MONEY RETAINED FROM SUB - BROKERAGE D) DISALLOWANCE OF DIFFERENCE IN SERVICE TAX . ITA NO. 61 32/ MUM/201 3 2 3 . FACTS OF THE CASE ARE STATED IN BRIEF . T HE ASSESSEE IS ENGAGED IN SECURITIES BROKING BUSINESS . THE FIRST ISSUE RELATES TO DISALLOWANCE OF MADE UNDER SECTION 14A OF THE ACT. THE ASSESSEE HAD RECEIVED TAX FREE DIVIDEND INCOME OF RS.2,00,745/ - AND IT HAD MADE A DISALLOWANCE OF RS.1,50,696/ - U/S 14A OF THE ACT. THE AO NOTICED THAT THE ASSESSEE , WHILE COMPU TING THE AVERAGE VALUE OF THE INVESTMENT FOR THE PURPOSE OF COMPUTING DISALLOWANCE UNDER RULE 8D, DID NOT INCLUDE THE VALUE OF SHARES HELD AS STOCK - IN - TRADE. HENCE, THE AO RECOMPUTED THE DISALLOWANCE AS PER RULE 8D OF THE IT RULES BY INCLUDING THE VALUE OF STOCK - IN - TRADE ALSO ALONG WITH THE VALUE OF SHARES HELD AS INVESTMENT AND ACCORDINGLY COMPUTED AVERAGE VALUE OF INVESTMENT AND THE DISALLOWANCE . IN THAT PROCESS, THE DISALLOWANCE TO BE MADE U/S 14A READ WITH RULE 8D WORK ED OUT TO RS.2 , 14 , 276 / - . AC CORDINGLY, THE AO MADE FURTHER ADDITION OF RS.63,580/ - (RS.2,14,276 RS . 1,50,696) U/S 14A OF THE ACT . IN THE APPELLATE PROCEEDINGS, THE LD.CIT(A) ALSO CONFIRMED THE SAME. 4 . BEFORE US, THE LD A.R SUBMITTED THAT THE ASSESSING OFFICER WAS NOT CORRECT IN I NCLUDING THE VALUE OF SHARES HELD AS STOCK IN TRADE FOR COMPUTING THE AVERAGE VALUE OF INVESTMENTS. HOWEVER, WE NOTICE THAT AN IDENTICAL ISSUE WAS CONSIDERED BY A CO - ORDINATE BENCH OF THE MUMBAI TRIBUNAL IN THE CASE OF DCIT V/S DAMANI ESTATES AND FINANC E PVT. LTD IN ITA NO.3029/MUM/2012 (AY - 2008 - 09) AND THE TRIBUNAL, VIDE ITS ORDER DATED 17.7.2013 , HAS TAKEN THE VIEW THAT THE DISALLOWANCE COMPUTED UNDER RULE 8D(2)(II) QUA THE SHARES IN STOCK - IN - TRADE WOULD BE RESTRICTED TO 20% OF THE AMOUNT COMPUTED UNDE R RULE 8D(2)(II). T HE RELEVANT PORTION OF THE ABOVE SAID ORDER IS REPRODUCED BELOW: 5.6 THE SECOND COMPONENT, QUA INTEREST EXPENDITURE IN R. 8D(2)(II), HOWEVER, PRESENTS A PROBLEM IN A CASE AS THE INSTANT CASE. THIS IS AS ITA NO. 61 32/ MUM/201 3 3 THE SUB - RULE, AS WOULD BE READILY SEEN, SEEKS TO QUANTIFY THE INTEREST ON THE INVESTMENTS, INCOME FROM WHICH IS NOT TAXABLE, ON A PROPORTIONATE BASIS, AND WHICH THOUGH IS NOT ONLY UNDERSTANDABLE, BUT IS AS APPROPRIATE AND JUSTIFIABLE AS A GENERAL FORMULA COULD BE. HOWEVER, IN THE INSTANT CASE, SHARES, WHICH YIELD THE TAX EXEMPT DIVIDEND INCOME, INTEREST QUA WHICH IS TO BE DISALLOWED, BEING HELD AS STOCK - IN - TRADE, ALSO YIELD SHARE TRADING INCOME, WHICH IS TAXABLE. THEREFORE, TO SAY THAT THE ENTIRE INTEREST RELATABLE TO THE AVERAGE S HARE HOLDING IS TO BE ATTRIBUTED TO THE TAX EXEMPT DIVIDEND INCOME WOULD BE PATENTLY INCORRECT ON FACTS. THAT, IN FACT, THE SHARES ARE BOUGHT AND HELD PRIMARILY FOR SHARE TRADING INCOME, FURTHER ACCENTUATES THE APPARENT INCONGRUITY OF THE SITUATION ARISING ON THE MECHANICAL APPLICATION OF R. 8D(2)(II). CLEARLY, THEREFORE, THE AMOUNT AS PER R. 8D(2)(II) WOULD NEED TO BE SCALED DOWN, BIFURCATING THE EXPENDITURE SO ARRIVED AT BETWEEN THESE TWO INCOMES. AS REGARDS THE RATIO OF SUCH SCALING DOWN, NO HARD AND FAS T RULE FOR THE PURPOSE WOULD HOLD, EACH FACT SITUATION BEING DIFFERENT. HOWEVER, CONSIDERING THAT THE DOMINANT OBJECTIVE OF THE SHARE HOLDING, WHICH IN OUR VIEW SHOULD BE DISPOSITIVE OF THE MATTER, IS THE SHARE TRADING INCOME, WE PROPOSE A RATIO OF 20% TOW ARD THE TAX - EXEMPT DIVIDEND INCOME. ONE COULD ARGUE THAT THE PERCENTAGE SUGGESTED BY US IS AD HOC OR NOT SCIENTIFIC. WE HAVE ALREADY EXPLAINED THAT AN INDIRECT EXPENDITURE, INCLUDING BY WAY OF INTEREST, HAS NO DIRECT RELATION WITH THE INCOME, MUCH LESS ITS QUANTUM, ALLOCATING IT ON THE BASIS OF THE INCOME GENERATED OR ARISING WOULD NOT BE APPROPRIATE, AND NEITHER DOES RULE 8D SUPPORT THE SAME. FURTHER, THAT IN ARRIVING AT THE SUGGESTED RATE OF 20%, WE HAVE BEEN GUIDED PRINCIPALLY BY THE FACT THAT THE SHARE TRADING IS THE DOMINANT OBJECT OF THE SHARE - HOLDING. WE ALSO CONSIDER IT PERTINENT TO MENTION THAT THOUGH THE AVERAGE SHARE - HOLDING MAY BE THE SAME, THE SHARE COMPOSITION, IN VIEW OF THE SHARE TRADING ACTIVITY, WOULD VARY CONTINUOUSLY; THE TURNOVER FOR A Y EAR BEING EASILY IN THE RANGE OF 4 TO 5 TIMES THE AVERAGE SHARE - HOLDING. ACCORDINGLY, IN ARRIVING AT THE DISALLOWANCE U/R. 8D, THE AMOUNT AS PER R. 8D(2)(II) QUA SHARES HELD AS STOCK - IN - TRADE WOULD STAND TO BE RESTRICTED TO 20% THEREOF. ITA NO. 61 32/ MUM/201 3 4 AS REGARDS THE LEGA L MANDATE FOR THE ADJUSTMENT AFORESAID, WE HAVE ALREADY CLARIFIED OF THE MANIFESTLY INCORRECT, IF NOT ABSURD RESULTS THAT WOULD OTHERWISE FOLLOW. IN FACT, IN OUR VIEW, THE LANGUAGE OF R. 8D(2)(II) ITSELF PROVIDES THE MANDATE INASMUCH AS IT PRESCRIBES OR AU THORIZES A DISALLOWANCE ONLY QUA INVESTMENT, INCOME FROM WHICH IS NOT TAXABLE, SO THAT IN LIMITING THE AMOUNT WORKED OUT WITH REFERENCE TO THE TOTAL INVESTMENT; THE SAME ALSO YIELDING TAXABLE INCOME, WE HAVE ONLY SOUGHT TO OPERATIONALIZE AND IMPLEMENT THE SAID RULE. IT WOULD ALSO BE APPRECIATED THAT NOT DOING SO WOULD ALSO VIOLATE THE PRINCIPLE OF ONLY THE NET INCOME (FROM ANY SOURCE) BEING SUBJECT TO TAX INASMUCH AS DISALLOWANCE OF THE TOTAL INTEREST AS PER R. 8D(2)(II) WOULD IN EFFECT BRING THE SHARE TRAD ING INCOME TO TAX WITHOUT DEDUCTION OF THE INTEREST EXPENDITURE ALLOCABLE OR ATTRIBUTABLE THERETO. NEEDLESS TO ADD THAT NO ADJUSTMENT WOULD ARISE IN RESPECT OF SHARES HELD AS 'INVESTMENTS', SO THAT THE TWO PARTS WOULD NEED TO BE SEPARATELY COMPUTED, WHICH IS OTHERWISE MANIFEST IN THE COMPUTATION ITSELF. CONSISTENT WITH THE VIEW TAKEN BY THE CO - ORDINATE BENCH IN THE ABOVE SAID CASE, WE DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO BE MADE UNDER RULE 8D(2)(II) OF THE IT RULES TO 20% OF THE AMO UNT COMPUTED UNDER THAT RULE IN RESPECT OF SHARES HELD AS STOCK IN TRADE . THE DISALLOWANCE TO BE MADE UNDER RULE 8D(2)(II) IN RESPECT OF SHARES HELD AS INVESTMENT HAS TO BE COMPUTED IN ACCORDANCE WITH RULE 8D(2)(II) ONLY. IN RESPECT OF THE DISALLOWAN CE TO BE MADE UNDER RULE 8D(2)(III), THE CO - ORDINATE BENCH HAS TAKEN THE VIEW THAT THE SHARES HELD AS STOCK IN TRADE SHOULD ALSO BE INCLUDED IN COMPUTING THE AVERAGE VALUE OF INVESTMENTS. HENCE, NO INTERFERENCE IS CALLED FOR IN THE COMPUTATION MADE BY THE AO UNDER RULE 8D(2)(III). IN VIEW OF THE ABOVE, THE ORDER OF LD CIT(A) SHALL STAND MODIFIED IN ACCORDANCE WITH THE DISCUSSION MADE SUPRA. THE ASSESSING OFFICER IS ACCORDINGLY DIRECTED TO RECOMPUTE THE DISALLOWANCE IN TERMS OF DISCUSSION MADE SUPRA. ITA NO. 61 32/ MUM/201 3 5 5. THE NEXT ISSUE RELATES TO THE DISALLOWANCE OF IRRECOVERABLE AMOUNT WRITTEN OFF. THE AO NOTICED THAT THE ASSESSEE HAD WRITTEN OFF A SUM OF RS.21.84 LAKHS OUT OF RENT DEPOSIT MADE BY THE ASSESSEE. BEFORE THE AO, THE ASSESSEE SUBMITTED THAT THE DIFFERENCE IN ENHANCED RENT WAS DETERMINED DURING THE YEAR UNDER CONSIDERATION AND THE SAME WAS ADJUSTED BY THE LAND LORD AGAINST THE RENT DEPOSIT. HOWEVER, THE AO TOOK THE VIEW THAT THE LOSS OF RENTAL DEPOSIT REPRESENTS LOSS OF CAPITAL AND ACCORDINGLY DISALLOWED TH E CLAIM BY HOLDING THE SAME AS CAPITAL LOSS. THE LD CIT(A) ALSO CONFIRMED THE SAME. 6. BEFORE US, THE LD A.R PLACED RELIANCE ON THE ORDER DATED 28 - 02 - 2007 PASSED BY THE CO - ORDINATE BENCH IN THE CASE OF KANORIA SECURITIES & FINANCIAL SERVICES (P) LTD IN I TA NO.6292/MUM/2003 TO CONTEND THAT THE CLAIM OF THE ASSESSEE IS ALLOWABLE. FROM THE PERUSAL OF THE SUBMISSIONS MADE BY THE ASSESSEE, IT APPEARS THAT THERE WAS A DISPUTE BETWEEN THE ASSESSEE AND LAND LORD WITH REGARD TO THE QUANTUM OF RENT. WHEN THE QUAN TUM OF RENT WAS FINALLY SETTLED BETWEEN THE PARTIES, THE ARREAR RENT WAS DEDUCTED BY THE LAND LORD AGAINST THE RENT DEPOSIT. ACCORDINGLY, THE ASSESSEE HAS TRANSFERRED THE AMOUNT SO DEDUCTED FROM THE RENT DEPOSIT ACCOUNT TO RENT EXPENDITURE ACCOUNT. WE NO TICE THAT, THE TAX AUTHORITIES, WITHOUT APPRECIATING THESE FACTUAL ASPECTS, HAS HELD THAT THE LOSS OF RENT DEPOSIT IS A CAPITAL LOSS. HOWEVER, ACCORDING TO THE ASSESSEE, IT WAS NOT LOSS OF RENT DEPOSIT AS PRESUMED BY THE TAX AUTHORITIES, BUT IT WAS ONLY A DJUSTMENT OF PART OF RENT DEPOSIT TOWARDS ARREAR RENT. HOWEVER, THE FACTUAL DETAILS RELATING TO RENT ARREAR, DISPUTE AND ADJUSTMENT OF RENT DEPOSIT HAVE NOT BEEN EXAMINED BY THE TAX AUTHORITIES. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS IS SUE AND RESTORE THE SAME TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO EXAMINE THIS ISSUE AFRESH. ITA NO. 61 32/ MUM/201 3 6 THE ASSESSEE IS ALSO DIRECTED TO FURNISH ALL THE RELEVANT DOCUMENTS TO SUBSTANTIATE ITS CLAIM ON THIS ISSUE. 7. THE NEXT ISSUE RELATES TO THE DI SALLOWANCE OF RETENTION MONEY. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAD CLAIMED SUB - BROKERAGE/COMMISSION INCOME OF RS.1,61,41,616/ - . THE AO NOTICED THAT THE ASSESSEE HAD ACTUALLY PAID A SUM OF RS.1,49,40,094/ - AND RETAINED A SUM OF RS.9,56,5 64/ - AS CONTINGENCY FUND. THE SAME WAS DISCLOSED IN THE BALANCE SHEET AS ITS LIABILITY, THE PURPOSE BEING TO COVER ANY EVENTUAL BAD DEBT THAT MAY ARISE AGAINST ANY SUB - BROKER. THE AO TOOK THE VIEW THAT THE LIABILITY PERTAINING TO THE AMOUNT RETAINED BY T HE ASSESSEE DID NOT ACCRUE AND ACCORDINGLY DISALLOWED THE AMOUNT OF RS.9,56,564/ - REFERRED ABOVE. THE LD CIT(A) ALSO CONFIRMED THE SAME. 8. WE HAVE HEARD THE PARTIES ON THIS ISSUE AND PERUSED THE RECORD. IT IS A FACT THAT THE ASSESSEE HAS CLAIMED A SUM OF RS.1,61,41,616/ - AS SUB - BROKERAGE/COMMISSION INCOME. THE LIABILITY IS DETERMINED ON THE BASIS OF CONTRACT BETWEEN THE ASSESSEE AND THE SUB - BROKERS AND ACCORDINGLY, THE ASSESSEE SEEMS TO HAVE CLAIMED THE ABOVE SAID AMOUNT AS EXPENDITURE. HOWEVER, WHIL E MAKING ACTUAL PAYMENT, THE ASSESSEE HAS RETAINED A PART OF LIABILITY AS CONTINGENCY FUND IN ORDER TO COVER UP POSSIBLE BAD DEBTS. THUS, IT IS SEEN THAT THE ASSESSEE HAS RETAINED A PART OF LIABILITY THAT HAS ALREADY ACCRUED TO IT. HENCE, IN OUR VIEW, TH E TAX AUTHORITIES ARE NOT JUSTIFIED IN HOLDING THAT THE LIABILITY TO THE EXTENT OF AMOUNT RETAINED AS CONTINGENCY FUND DID NOT ACCRUE AT ALL. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THIS ADDITION. 9. T HE NEXT ISSUE RELATES TO THE ADDITION ON ACCOUNT OF DIFFERENCE IN BROKERAGE INCOME. THE AO NOTICED THAT THERE WAS A DIFFERENCE OF RS.9,380/ - BETWEEN THE BROKERAGE INCOME SHOWN IN THE BOOKS OF ACCOUNT ITA NO. 61 32/ MUM/201 3 7 AND THAT SHOWN IN THE SERVICE TAX RETURN. THOUGH THE AS SESSEE SUBMITTED THAT THE DIFFERENCE OCCURRED AT THE TIME OF FINALIZATION OF BOOKS OF ACCOUNT AND HENCE IT DID NOT REVISE THE SERVICE TAX RETURNS, YET THE AO ADDED THE DIFFERENCE AS INCOME OF THE ASSESSEE. THE LD CIT(A) ALSO CONFIRMED THE SAME. 10. IN O UR VIEW, THE DIFFERENCE IS A MATTER OF RECONCILIATION. IF THE ASSESSEE IS ABLE TO SHOW THE MISTAKE THAT OCCURRED IN THE SERVICE TAX RETURN VIS - - VIS THE BOOKS OF ACCOUNT, THIS ADDITION IS NOT WARRANTED. HOWEVER, THE ASSESSEE HAS FAILED TO FURNISH ANY REC ONCILIATION STATEMENT OR FAILED TO SHOW THE MISTAKE OCCURRED IN PREPARATION OF SERVICE TAX RETURN. HENCE, WE HAVE NO OTHER OPTION, BUT TO CONFIRM THIS ADDITION. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. THE AB OVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 29TH APR , 2015 . 29TH APR , 2015 SD SD ( / AMIT SHUKLA ) ( . . / B.R. BASKARAN) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI: 29 TH APR ,2015 . . . ./ SRL , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - CONCERNED 4. / CIT CONCERNED 5. , , / DR, ITAT, MUMBAI CONCERNED 6. / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) , /ITAT, MUMBAI