IDBI CAPITAL MARKET SERVICES LTD, MUMBAI V. DCIT RG 4(1), MUMBAI

ITA 618/MUM/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 88418 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-02-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 12-02-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 30-01-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KISHAN VYAS
• Assessee Lawyers: N C JAIN
• Keywords: Earning of tax free income
• Section: 14A; 43(5)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL I BE NCH, MUMBAI , !' $ $ $ $ % & ' , !' ( BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER & SHRI AMIT SHUKLA, JUDICIAL MEMBER ./I .T.A. NO. 618/MUM/2012 ( ) ) ) ) / ASSESSMENT YEAR : 2008-09 IDBI CAPITAL MARKET SERVICES LTD. 3 RD FLOOR, MAFTLAL CENTER, NARIMAN POINT, MUMBAI 400021 / VS. THE DCIT, RANGE 4(1), AAYKAR BHAVAN, MK MARG, MUMBAI 400020 '* ./ +, ./ PAN/GIR NO. : AAACI 1268F ( *- / APPELLANT ) .. ( ./*- / RESPONDENT ) APPELLANT BY SHRI N.C. JAIN RESPONDENT BY SHRI KISHAN VYAS 0 %1 / DATE OF HEARING :12.02.2015 23) 0 %1 / DATE OF PRONOUNCEMENT:18.02.2015 !& / O R D E R PER N.K.BILLAIYA, JM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LD. CIT(A)-9, MUMBAI DATED 8/11/2011 PERTAINING TO ASSE SSMENT YEAR 2008-09. THE ASSESSEE HAS CHALLENGED THREE ADDITIONS/DISALLO WANCES MADE BY THE AO. THE FIRST DISALLOWANCE IS IN RESPECT OF MARK TO MAR KET LOSS OF RS.18,29,87,255/- . THE SECOND DISALLOWANCE IS IN RESPECT OF NON-DE DUCTION OF TAX AT SOURCE ON PAYMENT MADE TO BOMBAY STOCK EXCHANGE AMOUNTING TO RS.94,01,055/- AND ./I .T.A. NO. 618/MUM/2012 ( ) ) ) ) / ASSESSMENT YEAR : 2008-09 2 THE THIRD DISALLOWANCE IS MADE UNDER SECTION 14A OF THE INCOME TAX ACT, 1961 (THE ACT) AMOUNTING TO RS.1,00,76,221/-. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF INVES TMENT, SHARE BROKING AND GOVERNMENT SECURITIES AND IT IS A MEMBER OF BOMBA Y STOCK EXCHANGE AS WELL AS NATIONAL STOCK EXCHANGE. THE RETURN FOR THE YEA R WAS SELECTED FOR SCRUTINY ASSESSMENT. WHILE SCRUTINIZING THE RETURN OF INCOM E THE AO NOTICED THAT AN AMOUNT OF RS.18,29,87,255/- HAS BEEN DEBITED TO LO SS ON SWAPS BEING MARK TO MARKET LOSS AS ON 31/3/2008. THE ASSESSEE WAS ASKE D TO JUSTIFY THE SAME. THE ASSESSEE EXPLAINED THAT AS ON 31 ST MARCH THE OUTSTANDING INTEREST SWAP CONTRACTS WERE VALUED AND IN CASE THERE WAS A LOS S IN VALUATION THE SAME IS DEBITED TO P&L ACCOUNT. IT WAS FURTHER EXPLAINED T HAT THE TRANSACTION OF THE ASSESSEE IS AKIN TO FOREIGN EXCHANGE DERIVATIVE. T HE ACCOUNTING STANDARD AS-11 DEALS WITH GIVING OF ACCOUNTING TREATMENT FO R THE EFFECT OF CHANGES IN FOREIGN EXCHANGE RATE. THE ASSESSEE ALSO RELIED U PON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVER NOR INDIA PVT. LTD. [2009] 179 TAXMAN 326 (SC). AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS, THE AO OBSERVED THAT THE ASSESSEE HAS RECOGNIZED ON LY THE LOSS AND NOT THE PROFIT. ACCORDING TO THE AO THE ASSESSEE HAS NOT B EEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT BOOKS IN RESPECT O F LOSSES AND GAIN AND ACCORDINGLY DENIED THE CLAIM OF DEDUCTION OF RS.18 ,29,87,255/-. 2.1 PROCEEDING FURTHER, THE AO NOTICED THAT THE AS SESSEE HAS PAID LEASE LINE AND TRANSACTION CHARGES TO BOMBAY STOCK EXCHANGE. THE TOTAL AMOUNT PAID WAS AT RS.94,01,055/-. THE AO WAS OF THE FIRM BELI EF THAT ASSESSEE OUGHT TO HAVE DEDUCTED TAX UNDER SECTION 194J OF THE ACT, FA ILING WHICH THE ASSESSEE HAS VIOLATED THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. THE AO ACCORDINGLY, ./I .T.A. NO. 618/MUM/2012 ( ) ) ) ) / ASSESSMENT YEAR : 2008-09 3 DISALLOWED THE ENTIRE PAYMENT MADE TO THE BOMBAY ST OCK EXCHANGE AMOUNTING TO RS.94,01,055/-. 2.2 THE AO FURTHER OBSERVED THAT THE ASSESSEE HAS SHOWN DIVIDEND INCOME OF RS.85,14,000/-. THE SAME IS CLAIMED AS EXEMPT. HOWEVER, THE AO NOTICED THAT THE ASSESSEE HAS NOT DISALLOWED PROPORTIONATE EXPENSES IN RELATION TO SUCH EXEMPT INCOME IN VIEW OF SECTION 14A OF THE ACT. T HE ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM. THE ASSESSEE SUBMITTED ITS COM PUTATION OF EXPENDITURE AT RS. 99,89,517/-. THE AO PROCEEDED BY INVOKING THE FORM ULA GIVEN UNDER RULE 8D AND COMPUTED DISALLOWANCE AT RS.1,00,76,221/-. AGGR IEVED BY THESE THREE DISALLOWANCES/ ADDITIONS THE ASSESSEE CARRIED THE M ATTER BEFORE LD. CIT(A). 3. IN SO FAR AS THE ADDITION ON ACCOUNT OF MARK TO MARKET LOSS THE LD. CIT(A) AFTER CONSIDERING THE FACTS AND THE SUBMISSI ONS RELIED UPON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE C ASE OF BHARAT RUIA IN ITA NO.1539 OF 2010, TREATED THE LOSS AS SPECULATIO N LOSS AND CONFIRMED THE DISALLOWANCE. LD. CIT(A) ALSO CONFIRMED THE DISA LLOWANCE TREATING THE SAME AS CONTINGENT LIABILITY. 4. BEFORE US, LD. COUNSEL FOR THE ASSESSEE EXPLAIN ED THE NATURE OF TRANSACTION. LD. COUNSEL FOR THE ASSESSEE STATED THAT MARK TO MARKET LOSS ARE ALLOWED FOLLOWING THE DECISION OF THE TRIBUNAL SP ECIAL BENCH MUMBAI IN THE CASE OF BANK OF BEHERAIN & KUWAIT , ITA NO.4404 & 1 883/MUM/2004, ABN AMBRO SECURITIES IN ITA NO.7073/MUM/2006. LD. COUN SEL FOR THE ASSESSEE FURTHER STATED THAT THE LIABILITY IS NOT CONTINGENT LIABILITY. RELIANCE IN THIS CONNECTION WAS PLACED ON THE DECISION OF THE HONB LE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PVT. LTD. (SUPRA). THE LD. COUNSEL FURTHER STATED THAT THE RELIANCE ON THE DECISION OF HONBL E BOMBAY HIGH COURT IN THE ./I .T.A. NO. 618/MUM/2012 ( ) ) ) ) / ASSESSMENT YEAR : 2008-09 4 CASE OF BHARAT RUIA (SUPRA) IS TOTALLY MISPLACED AS THE SWAP AGREEMENT IS NOT A DERIVATIVE CONTRACT AND CANNOT BE TERMED AS COMM ODITY FOR THE PURPOSE OF SECTION 43(5) OF THE ACT. 5. PER CONTRA, LD. DR STRONGLY SUPPORTED THE ORDERS OF THE REVENUE AUTHORITIES. 6. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTH ORITIES BELOW AND THE RELEVANT DOCUMENTARY EVIDENCES BROUGHT ON RECORD BE FORE US. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAS MADE THE VALU ATION OF INTEREST RATE SWAP CONTRACTS AS AT THE END OF THE YEAR. IT IS ALSO AN UNDISPUTED FACT THAT ASSESSEE HAD INCURRED LOSSES ON SUCH VALUATION. THE SAID LO SSES HAVE BEEN CLAIMED AS DEDUCTION IN THE P&L ACCOUNT. IT IS ALSO AN UNDIS PUTED FACT THAT THE ASSESSEE HAS MADE THE ENTRIES FOLLOWING ACCOUNTING STANDARD , AS-11 OF THE ICAI. SUCH LOSSES BEING TREATED AS MARK TO MARKET THE LOSSES H AVE BEEN ALLOWED BY THE TRIBUNAL IN SERIES OF CASES FOLLOWING SPECIAL BENCH DECISION IN THE CASE OF BANK OF BAHRAIN & KUWAIT (SUPRA). THE HONBLE SUP REME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PVT. LTD.(SUPRA) HAS CONSID ERED SUCH LOSSES AS ALLOWABLE AND NOT OF CONTINGENT IN NATURE. WE FIND THAT THE OBSERVATIONS OF THE AO THAT THE ASSESSEE HAS NEVER ACCOUNTED FOR THE GA INS ON SUCH TRANSACTIONS IS TOTALLY MISPLACED AND AGAINST THE FACTS OF THE CASE . AS WE FIND IN THE P&L ACCOUNT AT PAGE 49 OF THE PAPER BOOK WHEN THE ASSES SEE HAD GAINS OF RS.25.57 LACS THE ASSESSEE HAS INCLUDED THE SAME IN ITS INCO ME. CONSIDERING THE FACTS IN TOTALITY AND IN THE LIGHT OF JUDICIAL DECISIONS, W E SET ASIDE THE FINDINGS OF LD. CIT(A) AND DIRECT THE AO TO DELETE THE ADDITION OF RS.18,29,87,255/-. GROUND NO.1 IS ALLOWED. ./I .T.A. NO. 618/MUM/2012 ( ) ) ) ) / ASSESSMENT YEAR : 2008-09 5 7. GROUND NO.2 IS IN RELATION TO THE DISALLOWANCE M ADE UNDER SECTION 40(A)(IA) OF THE ACT IN RESPECT OF PAYMENTS MADE TO BOMBAY STOCK EXCHANGE. WE FIND THAT THIS ISSUE IS SQUARELY COVERED IN FAV OUR OF THE ASSESSEE AND AGAINST THE REVENUE EXCEPT THAT THE TRANSACTION CHARGES HAV E BEEN CONSIDERED TO BE SUBJECT TO TDS BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF KOTAK SECURITIES LTD IN INCOME TAX APPEAL NO.3111 O F 2009. HOWEVER, WE FIND THAT THE HONBLE HIGH COURT HAS OBSERVED THAT SECTION 194J WAS INSERTED W.E.F. 1/7/1995 AND TILL ASSESSMENT YEAR 2005-06 BO TH THE REVENUE AND THE ASSESSEE PROCEEDED ON THE FOOTING THAT SECTION 194 J WAS NOT APPLICABLE TO THE PAYMENT OF TRANSACTION CHARGES AND ACCORDINGLY DUR ING THE PERIOD FROM 1995 TO 2005 NEITHER THE ASSESSEE HAS DEDUCTED TAX AT SO URCE NOR THE REVENUE HAS RAISED ANY OBJECTION. THE HONBLE HIGH COURT FURT HER OBSERVED THAT IN THESE CIRCUMSTANCES IF BOTH THE PARTIES FOR NEARLY A DEC ADE PROCEEDED ON THE FOOTING THAT SECTION 194J IS NOT ATTRACTED, THEN IN THE ASS ESSMENT YEAR IN QUESTION, NO FAULT CAN BE FOUND WITH THE ASSESSEE IN NOT DEDUCTI NG TAX AT SOURCE UNDER SECTION 194J OF THE ACT AND CONSEQUENTLY, NO ACTIO N COULD BE TAKEN UNDER SECTION 40(A)(IA) OF THE ACT. 7.1 RETURN OF INCOME FOR THE YEAR UNDER CONSIDERAT ION WAS FILED ON 14/08/2009 AND THIS DECISION OF THE HONBLE WAS PRO NOUNCED ON 21/10/2011. THUS, THE ASSESSEE HAD ALREADY FILED THE RETURN OF INCOME AND THE TIME PERIOD FOR DEDUCTING TAX AT SOURCE WAS ALSO LAPSED. CONSI DERING THESE PECULIAR FACTS, IN OUR CONSIDERED OPINION NO DISALLOWANCE ON THIS ACCO UNT SHOULD BE MADE FOR THE YEAR UNDER CONSIDERATION. GROUND NO.2 IS ACCORDING LY ALLOWED. 8. GROUND NO.3 RELATES TO THE DISALLOWANCE MADE UN DER SECTION 14A OF THE ACT. BEFORE US LD. COUNSEL FOR THE ASSESSEE STATED THAT EVEN IF SECTION 14A R.W. RULE 8D IS APPLICABLE THE AO HAS WORKED OUT THE DIS ALLOWANCE NOT IN ./I .T.A. NO. 618/MUM/2012 ( ) ) ) ) / ASSESSMENT YEAR : 2008-09 6 CONSONANCE WITH THE SPIRIT OF SECTION 14A R.W. RUL E 8D. IT IS THE SAY OF THE LD. COUNSEL THAT THE AO ERRED IN INCLUDING IN AVERAGE INVESTMENT EVEN THEN INVESTMENT INCOME FROM WHICH IS NOT EXEMPT. WE HAV E GIVEN THOUGHTFUL CONSIDERATION TO THESE SUBMISSIONS OF THE LD. COUNS EL. IN OUR CONSIDERED OPINION THIS ISSUE NEEDS TO BE VERIFIED AT THE ASS ESSMENT STAGE. WE ACCORDINGLY, RESTORE THIS ISSUE TO THE FILE OF THE AO. THE AO IS DIRECTED TO CONSIDER THIS ISSUE AFRESH IN THE LIGHT OF THE PROV ISIONS OF SECTION 14A R.W. RULE 8D KEEPING IN MIND THAT INVESTMENT FROM WHICH THE I NCOME IS TAXABLE SHOULD NOT BE INCLUDED IN COMPUTATION OF THE AVERAGE INVES TMENT. GROUND NO.3 IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT AT THE TIME OF HEARING ON 18 TH DAY OF FEB. 2015. SD/- SD/- (AMIT SHUKLA ) (N.K. BILLAIYA) !' /JUDICIAL MEMBER !' / ACCOUNTANT MEMBER MUMBAI; 4! DATED : 18. 02.2015 . . ./ VM , SR. PS !& !& !& !& 0 00 0 .% .% .% .% 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. 78 .% , , / DR, ITAT, MUMBAI 6. 89 : / GUARD FILE. !& !& !& !& / BY ORDER, /% .% //TRUE COPY// ; ;; ; / < < < < + + + + (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI