GULITA SECURITIES LTD, MUMBAI V. DCIT RG 4(1), MUMBAI

ITA 6261/MUM/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 56232 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: G
• Assessment Year: 2006-2007
• Appeal Filed On: 19-08-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK
• Assessee Lawyers: SUBASH SHETTY
• Keywords: Depreciation; Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G, MUMBAI BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A. NO.6261 /MUM/2010 ASSESSMENT YEAR : 2006-07. GULITA SECURITIES LTD., DEPUTY COMMISSIONER OF ROOM NO.6, 1 ST FLOOR, VS. INCOME TAX, JAYASHREE SADAN, RANGE - 4(1), OLD NAGARDAS ROAD, MUMBAI. ANDHERI EAST, MUMBAI 400057. PAN AAACG 0526E APPELLANT. RESPONDENT I.T.A. NO.3645/MUM/2010 ASSESSMENT YEAR : 2006-07. DEPUTY COMMISSIONER OF M/S GULITA SECURITIES, INCOME TAX, RANGE-4(4), VS. MUMBAI. MUMBAI. APPELLANT. RESPONDENT. ASSESSEE BY : SHRI SUBASH SHETTY. DEPARTMENT BY : SHRI A.K. NAYAK. DATE OF HEARING : 29-11-2011. DATE OF PRONOUNCEMENT : 16-12-2011. O R D E R. PER P.M. JAGTAP, A.M. : THESE TWO APPEALS, ONE FILED BY THE ASSESSEE BEIN G ITA NO.6261/MUM/2010 AND OTHER FILED BY THE REVENUE BEING ITA NO. 3645/M UM/2010 ARE CROSS APPEALS 2 ITA NO.6261/MUM/2010 & ITA NO. 3545/MUM/2010 WHICH ARE DIRECTED AGAINST THE ORDER OF LEARNED CIT (APPEALS)-8, MUMBAI DATED 23- 02-2010. 2. THE FIRST ISSUE RAISED IN GROUND NO.1 OF THE ASS ESSEES APPEAL RELATES TO THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LE ARNED CIT(APPEALS) ON ACCOUNT OF ASSESSEES CLAIM FOR DEPRECIATION OF RS. 2,76,890/- ON THE MEMBERSHIP RIGHTS OF NATIONAL STOCK EXCHANGE. 3. AT THE TIME OF HEARING BEFORE US, THE LEARNED RE PRESENTATIVES OF BOTH THE SIDES HAVE AGREED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF HONBLE SUPREME COUR T IN THE CASE OF TECHNO SHARES AND STOCK LIMITED VS. CIT REPORTED IN 327 IT R 323 WHEREIN IT WAS HELD THAT THE RIGHT OF MEMBERSHIP OF A STOCK EXCHANGE WAS A BUSINESS OR COMMERCIAL RIGHT AND COULD BE SAID TO BE OWNED BY THE ASSESSEE AND U SED FOR THE BUSINESS PURPOSES IN TERMS OF SECTION 32(1)(II). IT WAS HELD THAT THE RIGHT OF MEMBERSHIP, WHICH INCLUDE THE RIGHT OF NOMINATION, WAS A LICENCE O R AKIN TO A LICENCE WHICH WAS ONE OF THE ITEMS WHICH FELL IN SECTION 32(1)(II) AN D THE ASSESSEE, THEREFORE, WAS ENTITLED FOR DEPRECIATION ON SUCH RIGHT. RESPECTFUL LY FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF TECHNO SHARES AND STOCK LIMITED VS. CIT (SUPRA), WE DIRECT THE AO TO ALLOW THE CLAIM OF THE ASSESSEE FOR DEPRECIATION ON THE MEMBERSHIP RIGHT OF NATIONAL STOCK EXCHANGE AND ALL OW GROUND NO. 1 OF THE ASSESSEES APPEAL. 4. THE ISSUE RAISED IN GROUND NO. 2 OF THE ASSESSEE S APPEAL RELATES TO THE DISALLOWANCE OF EXPENSES AMOUNTING TO RS.1,13,937/- MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) U/S 14A OF TH E ACT READ WITH RULE 8D OF THE INCOME-TAX RULES, 1962. 3 ITA NO.6261/MUM/2010 & ITA NO. 3545/MUM/2010 5. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS ENGAGED IN THE BUSINESS OF SHARES AND STOCK BROKING. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 15-11-2006 DECLARI NG TOTAL INCOME OF RS.34,71,476/-. IN THE SAID RETURN, DIVIDEND INCOME OF RS.6,51,096/- WAS CLAIMED TO BE EXEMPT FROM TAX BY THE ASSESSEE. NO DISALLOWANCE ON ACCOUNT OF EXPENSES INCURRED IN RELATION TO THE SAID EXEMPT INCOME, HOW EVER, WAS MADE BY THE ASSESSEE AS REQUIRED BY THE PROVISIONS OF SECTION 14A. THE AO WORKED OUT SUCH EXPENSES INCURRED BY THE ASSESSEE IN RELATION TO EXEMPT INCO ME AT RS.4,36,819/- BY APPLYING RULE 8D OF INCOME-TAX RULES AND MADE A DISALLOWANCE TO THAT EXTENT U/S 14A. ON APPEAL, THE LEARNED CIT(APPEALS) UPHELD THE ACTION OF THE AO IN MAKING A DISALLOWANCE U/S 14A BY APPLYING RULE 8D OF INCOME- TAX RULES IN PRINCIPLE. HE, HOWEVER, FOUND THAT THERE WAS NO DIRECT OR INDIRECT NEXUS OF INTEREST EXPENSES INCURRED BY THE ASSESSEE WITH THE EARNING OF EXEMPT DIVIDEND INCOME. HE, THEREFORE, DELETED THE DISALLOWANCE MADE BY THE AO U/S 14A TO THE EXTENT IT WAS ON ACCOUNT OF INTEREST AND ACCORDINGLY RESTRICTED THE ADDITION MADE BY THE AO ON THIS ISSUE TO RS.1,13,937/-. 6. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS AGREED BY THE LEARNED REPRES ENTATIVES OF BOTH THE SIDES, THE ISSUE INVOLVED IN THIS APPEAL NOW STANDS SQUARELY C OVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOY CE MANUFACTURING CO. LTD. (2010) 234 CTR (BOM) 1, WHEREIN IT HAS BEEN HELD TH AT RULE 8D OF INCOME-TAX RULES, 1962 IS APPLICABLE ONLY FROM ASSESSMENT YEAR 2008-09. AS FURTHER HELD BY HONBLE HIGH COURT, THE DISALLOWANCE U/S 14A FOR TH E YEARS PRIOR TO ASSESSMENT YEAR 2008-09 HAS TO BE MADE BY ADOPTING SOME REASON ABLE METHOD. RESPECTFULLY FOLLOWING THE SAID DECISION OF HONBLE JURISDICTION AL HIGH COURT, WE SET ASIDE THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) ON THIS ISSUE AND RESTORE THE MATTER TO 4 ITA NO.6261/MUM/2010 & ITA NO. 3545/MUM/2010 THE FILE OF THE AO WITH A DIRECTION TO RECOMPUTE TH E DISALLOWANCE OF EXPENSES TO BE MADE U/S 14A BY APPLYING SOME REASONABLE METHOD AFT ER GIVING THE ASSESSEE AN OPPORTUNITY OF BEING HEARD. GROUND NO. 2 OF THE ASS ESSEES APPEAL IS THUS TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 7. NOW WE SHALL TAKE UP THE APPEAL OF THE REVENUE W HICH INVOLVES A SOLITARY ISSUE RELATING TO DISALLOWANCE MADE BY THE AO U/S 4 0(A)(IA) ON ACCOUNT OF TRANSACTION CHARGES AMOUNTING TO RS.8,39,374/- AND ON ACCOUNT OF LEASELINE AND VSAT CHARGES AMOUNTING TO RS.1,79,285/- WHICH HAS B EEN DELETED BY THE LEARNED CIT(APPEALS). 8. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT IN SO FAR A S THE DISALLOWANCE ON ACCOUNT OF LEASELINE AND VSAT CHARGES IS CONCERNED, THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HONBLE BOMBAY HIGH COU RT IN THE CASE OF CIT VS. ANGEL CAPITAL & DEBIT MARKET LTD. (INCOME TAX APPEA L (L) NO. 475 OF 2011), WHEREIN IT WAS HELD THAT VSAT AND LEASELINE CHARGES PAID BY THE ASSESSEE TO STOCK EXCHANGE BEING MERELY REIMBURSEMENT OF THE CHARGES PAID/PAYABLE BY THE STOCK EXCHANGE TO THE DEPARTMENT OF TELECOMMUNICATION, TH E SAME DO NOT HAVE ANY ELEMENT OF INCOME AND THERE IS NO QUESTION OF DEDUC TING ANY TAX FROM THE PAYMENT OF THE SAID CHARGES. RESPECTFULLY FOLLOWING THE DE CISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. ANGEL CAPITAL & D EBIT MARKET LTD. (SUPRA), WE UPHOLD THE IMPUGNED ORDER OF THE LEARNED CIT(APPEAL S) DELETING THE DISALLOWANCE MADE BY THE AO U/S 40(A)(IA) ON ACCOUNT OF VSAT AND LEASELINE CHARGES. IN SO FAR AS THE DISALLOWANCE MADE ON ACCOUNT OF TRANSACTION CHARGES IS CONCERNED, IT IS OBSERVED THAT THIS ISSUE IS SQUARELY COVERED IN FAV OUR OF THE REVENUE AND AGAINST THE ASSESSEE BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF KOTAK SECURITIES RENDERED VIDE ITS JUDGMENT DATED OCTOBER 21, 2011 PASSED IN ITA NO. 5 ITA NO.6261/MUM/2010 & ITA NO. 3545/MUM/2010 3111 OF 2009 WHEREIN IT IS HELD THAT WITH A VIEW TO REGULATE THE TRADING IN SECURITIES, THE STOCK EXCHANGE PROVIDES RISK MANAGE MENT AND SURVEILLANCE TO THE STOCK BROKERS TO ENSURE THE SAFETY OF THE MARKET. I T IS HELD THAT THE SURVEILLANCE FUNCTION INVOLVES PRICE MONITORING EXPOSURE OF THE MEMBERS, RUMOUR VERIFICATION ON A DAILY BASIS AND REMEDIAL ACTIONS LIKE REDUCTIO N OF FILTERS, IMPOSITION OF SPECIAL MARGIN, SUSPENSION OF SCRIPS / MEMBERS. IT IS HELD THAT THESE ARE SOME OF THE IDENTIFIED MANAGERIAL SERVICES RENDERED BY THE STOC K EXCHANGE FOR WHICH TRANSACTION CHARGES ARE LEVIED AND THE ASSESSEE WHO IS A STOCK BROKER IS LIABLE TO DEDUCT TAX AT SOURCE BEFORE CREDITING THE TRANSACTI ON CHARGES TO THE ACCOUNT OF THE STOCK EXCHANGE AS PER THE PROVISIONS OF SECTION 194 J. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN TH E CASE OF KOTAK SECURITIES (SUPRA) WE SET ASIDE THE IMPUGNED ORDER OF THE LEAR NED CIT(APPEALS) ON THIS ISSUE AND RESTORE THAT OF THE AO MAKING THE DISALLOWANCE ON ACCOUNT OF TRANSACTION CHARGES BY INVOKING THE PROVISIONS OF SECTION 40(A) (IA). 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE AS WEL L AS THAT OF THE REVENUE ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF DEC.,2011. SD/- SD/ - (V. DURGA RAO) (P.M. J AGTAP) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED : 16 TH DEC., 2011. 6 ITA NO.6261/MUM/2010 & ITA NO. 3545/MUM/2010 COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, G-BENCH. 6. GUARD FILE. (TRUE COPY ) BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI. WAKODE