DCIT Rg. - 4(1), MUMBAI V. M/s. ICICI WEB TRADE LTD., MUMBAI

ITA 6559/MUM/2006

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1226 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 08-06-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 05-12-2006
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: AJAY KUMAR SRIVASTAVA
• Keywords: Depreciation; Fair market value; Speculation loss; Commercial expediency; Set aside
• Section: 43B; 92A; 234B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I, MUMBAI BEFORE SHRI D.K. AGARWAL, J.M AND SHRI A.L. GEHLOT , A.M. ITA NO. 6559/M/2006 ASSESSMENT YEAR: 2002-03 DY. COMMISSIONER OF INCOME-TAX, APPELLANT RANGE 4(1), 6 TH FLOOR, ROOM NO. 640, AAYAKAR BHAVAN, MUMBAI 20. VS. M/S ICICI WEB TRADE LTD., RESPONDENT ICICI TOWERS, BANDRA KURLA COMPLEX, MUMBAI 400 051. (PAN AAAC16284P) ITA NO. 7035/M/2006 ASSESSMENT YEAR: 2002-03 M/S ICICI WEB TRADE LTD., APPELLANT ICICI TOWERS, BANDRA KURLA COMPLEX, MUMBAI 400 051. (PAN AAAC16284P) VS. DY. COMMISSIONER OF INCOME-TAX, RESPONDENT RANGE 4(1), 6 TH FLOOR, ROOM NO. 640, AAYAKAR BHAVAN, MUMBAI 20. REVENUE BY : MR. AJAY KUMAR SRIVASTAVA ASSESSEE BY : MS. AARTI VISSANJI ORDER PER A.L. GEHLOT, A.M.: THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER OF CIT(A)- IV, MUMBAI, PASSED ON 27.09.2006 FOR THE ASSESSMENT YEAR 2002- 03. ITA NO. NO. 7039/M/2006 APPEAL BY THE ASSESSEE 2. GROUND NO. 1 IS GENERAL IN NATURE; THEREFORE, TH E SAME IS NOT REQUIRED TO BE ADJUDICATED BY US. ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 2 3. GROUND NO. 2 IS AGAINST THE ACTION OF THE CIT(A) IN CONFIRMING THE LOSS ON SALE OF SECURITIES OF RS. 2,08,036/- AS A SPECULATION LOSS APPLYING THE EXPLANATION TO SECTION 73 OF IT A CT, 1961 AND AD- HOC DISALLOWANCE OF RS. 20,000/-. 4. THE AO NOTICED DURING THE COURSE OF ASSESSMENT P ROCEEDINGS THAT THE ASSESSEE HAD SHOWN LOSS OF RS. 2,08,036/- ON PURCHASE/SALE OF SECURITIES. ON BEING ASKED TO EXPL AIN AS TO WHY SHARE TRADING LOSS SHOULD NOT BE TREATED AS SPECULA TIVE LOSS IN VIEW OF THE PROVISIONS OF EXPLANATION TO SECTION 73 OF T HE ACT, AND WHY PROPORTIONATE EXPENSES SHOULD ALSO NOT BE ALLOCATED TO SHARE TRADING TRANSACTION WHILE DETERMINING SPECULATION L OSS, THE ASSESSEE SUBMITTED THAT THE ASSESSEE DID NOT HAVE S EPARATE BUSINESS OF BUYING AND SELLING OF SECURITIES, AND A LL THE EXPENSES INCURRED WERE FOR THE PURPOSE OF AND IN RELATION TO THE BROKING BUSINESS OF THE ASSESSEE CARRIED THROUGH WEBSITE. THE AO DID NOT ACCEPT THE ASSESSEES EXPLANATION AND CONCLUDED THA T THE ASSESSEES CASE WAS COVERED UNDER THE PROVISIONS OF EXPLANATION TO SECTION 73 OF THE ACT AND THE SHARE TRADING LOSS WA S NOTHING BUT SPECULATION LOSS. HE ALSO HELD THAT DETERMINATION O F SHARE TRADING LOSS COULD NOT BE POSSIBLE WITHOUT ALLOCATING EXPEN SES WHICH WERE INVARIABLY INCURRED FOR SHARE TRADING BUSINESS. THE REFORE, THE AO TREATED THE LOSS OF RS. 2,08,036/- ON PURCHASE/SALE OF SECURITIES AS SPECULATION LOSS AND HE ALLOCATED RS. 20,000/- TO T HE SPECULATION BUSINESS AND DISALLOWED THE SAME FROM OTHER INCOME. THE CIT(A) CONFIRMED THE ACTION OF THE AO. 5. AT THE OUTSET THE LEARNED AR SUBMITTED THAT THIS ISSUE HAS ALREADY BEEN DECIDED BY THE ITAT AGAINST THE ASSESS EE IN ASSESSEES OWN CASE FOR AY 2001-02 VIDE ITA NO. 2972/MUM/05 OR DER DATED 22 ND MAY, 2008 BY OBSERVING AS UNDER:- ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 3 3. AFTER HEARING BOTH THE PARTIES, WE DO NOT FIND M ERIT IN THE GROUND RAISED BY THE ASSESSEE. THERE IS NO DISP UTE THAT PROVISIONS OF SECTION 73 EXPLANATION CAN BE APPLIED WHERE A COMPANY DEALS IN PURCHASE AND SALE OF SHARES OF OTH ER COMPANIES. HOWEVER, THERE ARE TWO EXCEPTIONS PROVID ED IN THE SAID EXPLANATION AND UNDISPUTEDLY THE ASSESSEE DOE S NOT FALL WITHIN THE AMBIT OF THOSE TWO EXCEPTIONS. THE ONLY ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE IS THAT SUCH P URCHASE AND SALE OF SECURITIES WERE EFFECTED ONLY FOR TESTING T HE WORKING OF THE WEBSITE TO ENSURE THAT THE SAME FUNCTIONS WITHI N ANY GLITCHES. WE DO NOT FIND ANY MERIT IN SUCH SUBMISSI ON SINCE THE ASSESSEE IS CONTINUOUSLY CARRYING ON THE PURCHASE A ND SALE OF SHARES AS INFORMED TO US BY THE LEARNED COUNSEL FO R THE ASSESSEE. FURTHER, THE ASSESSEE ITSELF IS SHOWING S UCH TRANSACTIONS AS PART OF ITS BUSINESS ACTIVITY. THER EFORE, THERE IS NO REASON TO TAKE ANY CONTRARY VIEW. IN OUR VIEW, T HE CIT(A) HAS RIGHTLY UPHELD THE ORDER OF THE AO TREATING THE SAME AS SPECULATION LOSS. 6. AFTER HEARING THE LEARNED DR, WE FIND THAT SINCE THE ISSUE HAS ALREADY BEEN DECIDED BY THE ITAT AGAINST THE ASSESS EE IN ASSESSEES OWN CASE FOR AY 2001-02, WE RESPECTFULLY FOLLOW THE DECISION OF THE ITATR AND IN THE LIGHT OF THAT WE CONFIRM ORDER OF CIT(A) ON THIS ISSUE. 7. GROUND NOS. 3, 4 & 5 ARE NOT PRESSED BY THE LEAR NED AR AT THE TIME OF HEARING BEFORE US, THEREFORE, THE SAME ARE DISMISSED AS NOT PRESSED. 8. GROUND NO. 6 & 7 OF THE ASSESSEES APPEAL AND G ROUND NO. 2 OF REVENUES APPEAL ARE COMMON GROUNDS, WHICH ARE A S UNDER:- GROUND NO. 6 OF ASSESSEE :- THE CIT(A) ERRED IN RESTRICTING DEDUCTION FOR MARKETING AGENT FEES PAID TO ICICI CA PITAL SERVICES LIMITED (L-CAPS) TO RS. 1,24,37,940/- AGAI NST THE CLAIM OF APPELLANT AT RS. 4,97,51,760 AS PER PROVIS IONS OF SECTION 40A(2)(A) OF THE ACT. GROUND NO 7 IS ALSO R ELATED TO ABOVE ISSUE. GROUND NO.2 OF REVENUE :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A ) ERRED IN ALLOWING RELIEF AT 25% I.E. RS. 1,24,37,940/- ON TH E TOTAL DISALLOWANCE ON ACCOUNT OF ADVERTISING AND MARKETIN G AGENCY FEES OF RS. 4,97,51,760/- MADE BY THE AO BEING THE ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 4 EXPENDITURE CONSIDERED TO BE ARBITRARY, EXCESSIVE A ND UNREASONABLE AND NOT WHOLLY AND EXCLUSIVELY INCURRE D FOR THE PURPOSE OF BUSINESS. 9. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE HAS ENTERED INTO AN AGREEMENT WITH ICICI CAPITAL SERVICES LTD. BY WAY OF WHICH A COMMISSION SHALL BE PAID BY THE ASSESSEE TO M/S I CICI CAPITAL SERVICES LTD. @ RS. 500/- FOR EVERY NEW CLIENT ACCO UNT OPENED SUBJECT TO SUBMISSION OF COMPLETED FORMS IN ALL RES PECTS. FURTHER, AN AMOUNT OF RS. 2.75 CRORES IS PAYABLE AS ASSISTAN CE EXPENDITURE. IT IS SUBMITTED THAT THE CLAIM FOR RS. 2.75 CRORES WAS NOT MADE DURING THE YEAR. THIS EXPENSE IS CLAIMED TO BE MET OUT OF REGISTRATION CHARGES OF RS. 750 COLLECTED FROM EACH NEW CLIENT REGISTERED WITH ITS ASSESSEE FOR ITS WEB SERVICES. AFTER A DETAILED DISCUSSION ON THE ISSUE, THE AO DISALLOWED THE CLAI M OF MARKETING AGENT FEE OF RS. 4,87,15,760/-. THE CIT(A) RESTRIC TED THE ADDITION TO RS. 3,73,13,820/- BY GIVING PART RELIEF OF RS. 1 ,24,37,940/- BY OBSERVING AS UNDER:- . ..IT ALSO CANNOT BE ALTOGETHER RULED OUT THA T NO ASSISTANCE WAS RECEIVED FROM I-CAPS FOR USING ITS C ENTRES AND ITS INFRASTRUCTURE IN ADDITION TO SALARY PAID TO IT S OWN EMPLOYEES. KEEPING IN VIEW THE FACT THAT THE APPELL ANT WAS ENTITLED TO RECEIVE CERTAIN PART OF THE FEES TO BE COLLECTED FROM PROSPECTIVE CLIENTS WHEN THEY ARE REGISTERED WITH I TS WEB SERVICES AND ALSO THE FACT THAT ADVERTISEMENT EXPEN SES TO THE EXTENT OF RS. 2,53,90,101/- AS WELL AS DP FEES OF R S. 2,46,78,600/- AND PRINTING AND FRANKING EXPENSES ON FORMS AMOUNTING TO RS. 80,09,085/- WERE CLAIMED BY THE AP PELLANT IN ADDITION TO THE MARKET AGENCY FEES, WHICH EXPENSES STAND ALLOWED TO IT, IT WILL BE FAIR AND REASONABLE IF TH E 25% OF THE TOTAL MARKETING AGENCY FEES OF RS. 4,97,51,760/- I. E. RS. 1,24,37,940/- ARE ALLOWED TO THE APPELLANT AS GENUI NE EXPENSES. THE ADDITION IS, THUS, RESTRICTED TO RS. 3,73,13,820/- AND THE APPELLANT GETS A RELIEF OF RS. 1,14,37,940/ -. 10. THE LEARNED AR REITERATED THE SUBMISSIONS, WHIC H WERE MADE BEFORE THE CIT(A). THE LEARNED AR REFERRED THE RELE VANT AGREEMENT, OF WHICH A COPY HAS BEEN PLACED ON RECORD AT PAGE N O.1 OF ASSESSEES PAPER BOOK. THE LEARNED AR SUBMITTED THA T AGREEMENT ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 5 WAS IN RESPECT OF SOURCING E-BROKING ACCOUNTS AND P ROVIDING CLIENT ASSISTANCE WHICH IS A NEW CONCEPT OF THE TRADE. THE LEARNED AR SUBMITTED THAT THE SAID AGREEMENT DATED 1 ST APRIL, 2000. IN AY 2001-02, THE AO HIMSELF HAD ALLOWED SUCH CLAIM. THE LEARNED AR SUBMITTED THAT THERE ARE AS MANY AS 98 CENTRES OF W HICH LIST SHOWING COMPLETE ADDRESSES HAS BEEN PLACED AT PAGES 31 TO 37 OF ASSESSEES PAPER BOOK. THE SAID LIST HAS BEEN FURNI SHED BEFORE THE REVENUE AUTHORITIES. THE LEARNED AR HAS ALSO REFERR ED PAGE 58 AND OTHERS OF ASSESSEES PAPER BOOK TO SHOW THAT SERVIC ES RENDERED AGAINST THE PAYMENT MADE. THE LEARNED AR HAS RAISED A LEGAL ISSUE THAT SECTION 40A(2) IS NOT APPLICABLE AS THE ASSESS EE DID NOT SATISFY THE CONDITION OF HOLDING 20% AS REQUIRED IN EXPLANA TION (B) OF SECTION 40A OF THE ACT. THE LEARNED AR DEMONSTRATED BY REFERRING PAGE 14 OF ASSESSEES PAPER BOOK THAT THE CONDITION OF 20% SHARE HOLDING IS NOT THERE, THEREFORE, ASSESSEE IS NOT A SPECIFIED PERSON IN SUB-SECTION (B) OF SECTION 40A(2) OF THE ACT. ON ME RIT, THE LEARNED AR SUBMITTED THAT AO & CIT(A) HAVE WRONGLY INVOKED SECTION 40(A)(2) AS THE PAYMENTS WERE NEITHER EXCESSIVE NOR REASONABLE. IN SUPPORT OF HIS CONTENTION, THE LEARNED AR RELIED UP ON THE JUDGMENT IN THE CASE OF S.K. ENGINEERING VS. JCIT, REPORTED IN [2006] 103 ITR 97 (BANG.). 11. THE LEARNED DR, ON THE OTHER HAD, RELIED UPON T HE ORDER OF REVENUE AUTHORITIES AND SUBMITTED THAT APART FROM T HE IMPUGNED PAYMENT, THE ASSESSEE INCURRED EXPENSES ON ADVERTIS EMENT, DP, PRINTING, TRAVELLING ETC., THEREFORE, THERE IS NO J USTIFICATION FOR THE IMPUGNED PAYMENT. THE LEARNED DR, FURTHER SUBMITTED THAT THERE IS NO DENIAL OF THE SERVICES RENDERED AGAINST THE P AYMENT BY THE ASSESSEE BUT THE QUESTION IS ONLY THE PAYMENT SHOUL D BE REASONABLE. THE ASSESSEE HAS FAILED TO ESTABLISH TH AT THE PAYMENT MADE TO SISTER CONCERNS WAS A REASONABLE PAYMENT. T HE ASSESSEE DID NOT FURNISH ANY DETAILS IN THIS REGARD NEITHER BEFORE THE AO, NOR BEFORE THE CIT(A) AND EVEN AT THIS STAGE ALSO. THE LEARNED DR SUBMITTED THAT IN SECTION 40A (2) THE WORDS CLEARLY USED IS NOT ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 6 EXHAUSTIVE, AS PER WHICH THE LIST GIVEN IS NOT EXHA USTIVE LIST. THE LEARNED DR SUBMITTED THAT THIS SECTION REQUIRES ALS O VERIFYING REASONABLENESS OF THE AMOUNTS EVEN THOUGH THERE IS NO INDIRECT LINK OF THE ASSESSEE AND RECIPIENT PAYMENTS. THE AS SESSEE HAS FAILED TO DEMONSTRATE THAT THERE IS NO INDIRECT LIN K. THE ALTERNATE SUBMISSION OF THE LEARNED DR IS THAT THERE IS SOME CONFUSION REGARDING FACTS WHICH HAVE NOT BEEN PROPERLY APPREC IATED AND PUT FORTH BEFORE THE AO. THE AO HAS EXAMINED ONLY REASO NABLENESS OF THE EXPENDITURE BUT THE AO FAILED TO EXAMINE WHETHE R IT IS WHOLLY AND EXCLUSIVELY FOR THE BUSINESS AND ABOUT COMMERCI AL EXPEDIENCY OF THE EXPENDITURE. THE LEARNED DR SUBMITTED THAT T HE AO DID NOT EXAMINE THE LIST OF 98 CENTRES. THE CASE OF THE AO IS IN RESPECT OF REASONABLENESS OF THE AMOUNT; THEREFORE, THE SAME I S TO BE CONSIDERED ACCORDINGLY. 12. IN THE REJOINDER, THE LEARNED AR SUBMITTED THAT THE LEARNED DR IS NOT CORRECT IN SAYING THAT THE WORDS CLEARLY USED IN SECTION 40A(2) IS NOT EXHAUSTIVE. THE LEARNED AR REFERRED S ECTION 92A AND SUBMITTED THAT WHEREVER THE LEGISLATURE WANTS TO DE FINE THE SECTION CLEARLY SPECIFIED AS SPECIFIED IN SECTION 92A OF TH E ACT. AS REGARDS REASONABLENESS OF THE EXPENDITURE, THE LEARNED AR R ELIED UPON THE RELEVANT PORTION IN KANGA PALKHIVALA AND VYAS NINTH E EDITION AT PAGE 899, READS AS UNDER:- C) DEPARTMENTS SUBJECTIVE STANDARD REASONABLENESS IT IS NOT OPEN TO THE DEPARTMENT TO ADOPT A SUBJECT IVE STANDARD OF REASONABLENESS AND DISALLOW A PART OF BUSINESS E XPENDITURE AS BEING UNREASONABLY LARGE OR DECIDE WHAT TYPE OF EXPENDITURE THE ASSESSEE SHOULD INCUR AND IN WHAT CIRCUMSTANCES. THE JURISDICTION OF THE ASSESSING OF FICER IS CONFINED TO DECIDING THE REALITY OF THE EXPENDITURE , NAMELY, WHETHER THE AMOUNT CLAIMED AS DEDUCTION WAS FACTUAL LY EXPENDED AS LAID DOWN AND WHETHER IT WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS; THE REASONABLENESS OF THE EXPENDITURE COULD BE CONSIDER ED ONLY FOR THE PURPOSE OF DETERMINING WHETHER, IN FACT, THE AM OUNT WAS SPENT; ONCE IT IS ESTABLISHED THAT THERE WAS A NEXU S BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS, TH E ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 7 DEPARTMENT CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF I N THE ARMCHAIR OF A BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE SAID ROLE TO DECIDE HOW MU CH IS A REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMS TANCES OF THE CASE. BUT THIS PRINCIPLE IS NOW SUBJECT TO EXPR ESS PROVISIONS LIKE SUB-S(3) OF THIS SECTION (NOW DELET ED) AND S. 40A(2). 13. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. THE ADMITTED FACTS OF THE CASE OF THE AO ARE U/S 40A OF THE ACT, WHICH READS AS UNDER:- 40A. EXPENSES OR PAYMENTS NOT DEDUCTIBLE IN CERTAI N CIRCUMSTANCES.--(1) THE PROVISIONS OF THIS SECTION SHALL HAVE EFFECT NOTWITHSTANDING ANYTHING TO THE CONTRARY CON TAINED IN ANY OTHER PROVISION OF THIS ACT RELATING TO THE COMPUTA TION OF INCOME UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PR OFESSION'. (2)(A) WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERS ON REFERRED TO IN CLAUSE (B) OF THIS SUB-SECTION, AND THE ASSES SING OFFICER IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UN REASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS , SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEG ITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR TH E BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESS IVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. (B) THE PERSONS REFERRED TO IN CLAUSE (A) ARE THE FOLLOWING, NAMELY:-- EXPLANATION.--FOR THE PURPOSES OF THIS SUB-SECTION, A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A BUSINESS OR PROFESSION, IF,-- (A) IN A CASE WHERE THE BUSINESS OR PROFESSION IS CARRIED ON BY A COMPANY, SUCH PERSON IS, AT ANY TIME DURING THE PRE VIOUS YEAR, THE BENEFICIAL OWNER OF SHARES (NOT BEING SHARES EN TITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RI GHT TO PARTICIPATE IN PROFITS) CARRYING NOT LESS THAN TWEN TY PER CENT. OF THE VOTING POWER; AND ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 8 (B) IN ANY OTHER CASE, SUCH PERSON IS, AT ANY TIME DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS TH AN TWENTY PER CENT. OF THE PROFITS OF SUCH BUSINESS OR PROFESSION . 14. WE FIND FORCE IN THE SUBMISSION OF THE LEARNED AR THAT SECTION 40A IS NOT APPLICABLE AS THE ASSESSEE DOES NOT FALL IN CATEGORY (B) OF SECTION OF SUB-SECTION (2) OF SECTI ON 40A OF THE ACT. THE LEARNED AR REFERRED PAGE 14 OF THE PAPER BOOK R EADS AS UNDER:- A SHARE CAPITAL AUTHORISED 40,000,000 EQUITY SHARES OF RS. 10/- EACH 400,000,0 00 400,000,000 ISSUED, SUBSCRIBED AND PAID UP 30,000,000 EQUITY SHARES OF RS. 10 EACH 300,000,00 0 300,000,000 2,99,99,300 SHARES ARE HELD BY ICICI TRUSTEESHIP SE RVICES LIMITED AT THE TRUSTEE OF ICICI EQUITY FUND AND 700 SHARES ARE HEL D BY NOMINEES OF ICICI LIMITED. 15. THE LEARNED AR WITH REFERENCE TO ABOVE FACTS A ND FROM EXPLANATION (B) OF SUB SECTION 2 OF SECTION 40A HAS CLEARLY DEMONSTRATED THAT THE ASSESSEE WAS NOT HAVING 20% S HAREHOLDING; THEREFORE, IT DOES NOT FALL IN THE PERSONS REFERRED IN SUB-SECTION (B) OF SECTION 40A OF THE ACT THEREFORE WE ARE OF THE V IEW THAT THE AO IS NOT CORRECT IN APPLYING SECTION 40A (2) OF THE ACT. ON MERIT, WE FIND THAT THE EXPENDITURE IS NOT GENUINE AS THE AO HIMSE LF HAS ACCEPTED PART AMOUNT AND ALLOWED THE SAME. IT IS NOT THE CAS E OF THE AO THAT EXPENDITURE WAS INCURRED WITHOUT ANY SERVICES RENDE RED. THE REQUIREMENT OF SECTION 40A(2) IS THAT ASSESSEE RECO RDS ANY EXPENDITURE AND SUCH EXPENDITURE IS EXCESSIVE OR UN REASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS , SERVICES, FACILITIES, THEN THE AO IS EMPOWERED TO DISALLOW EX CESS OR UNREASONABLE PORTION OF THAT EXPENDITURE. IN THE CA SE UNDER CONSIDERATION, THE AO DID NOT EVEN WHISPER ABOUT EX CESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES. THEREFORE, THE AO HAS WRONGLY INVOKED SECTION 40A ( 2) OF THE ACT. ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 9 THE CIT (A) IS INCORRECT IN UPHOLDING THE ORDER OF THE AO. THERE ARE NO SUBSTANCE IN DRS SUBMISSIONS THAT THE AO HAS EX AMINED ONLY REASONABLENESS OF THE EXPENDITURE BUT HE FAILED TO EXAMINE WHETHER IT IS WHOLLY AND EXCLUSIVELY FOR THE BUSINESS AND A BOUT COMMERCIAL EXPEDIENCY OF THE EXPENDITURE, BECAUSE THE AO HIMSE LF ALLOWED THE PART AMOUNT.. SINCE IT IS NOT A CASE THAT FALLS U/ S 40A OF THE ACT, WE ARE OF THE CONSIDERED VIEW THAT THE ORDERS OF TH E REVENUE AUTHORITIES CANNOT BE SUSTAINED AND IN THE LIGHT OF THAT THE ADDITION SUSTAINED BY THE CIT(A) IS HEREBY DELETED. GROUNDS NOS. 6 & 7 OF THE ASSESSEES APPEAL IS ALLOWED AND GROUND NO.2 OF THE REVENUE IS DISMISSED. 16. GROUND NO. 8 IS IN RESPECT OF DISALLOWANCE OF R S. 34,28,589/- ON ACCOUNT OF SEBI TURNOVER TAX/FEES. THE OBJECTION OF THE AO IS THAT THE AMOUNT WAS NOT DEPOSITED IN THE PREVIOUS Y EAR ITSELF. THE VIEW OF THE AO HAS BEEN CONFIRMED BY THE CIT(A). 17. THE LEARNED AR SUBMITTED THAT THE AMOUNT WAS PA ID BEFORE THE DUE DATE OF FILING OF RETURN. SHE SUBMITTED THA T IN ACCORDANCE WITH THE JUDGMENT OF THE APEX COURT IN THE CASE OF ALLIED MOTORS PVT. LTD. AND OTHERS VS. CIT, [1997] 224 ITR 677 (S C), THE ASSESSEE IS ENTITLED FOR DEDUCTION IN THIS CONNECTION. 18. AFTER HEARING THE LEARNED DR, WE FIND THAT TURN OVER TAX PAID BEFORE THE DATE OF FILING OF RETURN IS ALLOWABLE, WHICH IS AS PER THE RATIO LAID DOWN BY THE APEX COURT IN THE CASE OF AL LIED MOTORS PVT. LTD. (SUPRA). THEREFORE, IN PRINCIPLE WE AGREE WITH SUBMISSIONS OF THE LEARNED AR BUT SUBJECT TO VERIFICATION OF THE D ATES OF DEPOSIT. THE AO IS DIRECTED TO VERIFY THE DATES AND ALLOW TH E SAME IF PAYMENTS WERE MADE BEFORE THE DATE OF FILING THE RE TURN AS PER THE ABOVE JUDGMENT OF THE SUPREME COURT. 19. GROUND NO. 10 IS IN RESPECT OF DISALLOWANCE OF PROVISION FOR INCENTIVE RS. 52,33,685/-. ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 10 20. THE ASSESSEE CLAIMED DEDUCTION FOR PROVISION OF INCENTIVE FOR MARGIN TRADE AND CASH TRADE. THE AO DISALLOWED THE ASSESSEES CLAIM OBSERVING THAT CLAIM OF THE ASSESSEE IS A CON TINGENT LIABILITY, WHICH IS NOT ARISING IN THE CURRENT ASSESSMENT YEAR . THE CIT(A) CONFIRMED THE ORDER OF THE AO OBSERVING AS UNDER:- 9.2 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELL ANT BUT DO NOT FIND MERIT IN THE SAME. HAD IT BEEN AN ASCER TAINED LIABILITY, THE APPELLANT COULD HAVE ACCOUNTED FOR T HE SAME AS SUCH IN THE BOOKS OF ACCOUNT AND WOULD HAVE BEEN AB LE TO FURNISH THE DETAILS OF SUCH AMOUNTS DURING THE ASSE SSMENT PROCEEDINGS. THAT IT COULD NOT FURNISH THE DETAILS BEFORE THE AO ALONG WITH EVIDENCE, IT ONLY MEANS THAT IT WAS NOT AN ASCERTAINED BUT A CONTINGENT LIABILITY. THE PROVISI ONS FOR A CONTINGENT LIABILITY CANNOT BE ALLOWED UNDER THE ME RCANTILE METHOD OF ACCOUNTANCY WHICH THE APPELLANT IS FOLLOW ING. THE DISALLOWANCE IS HELD TO BE RIGHTLY MADE AND THE ADD ITION OF RS. 52,33,685/- IS CONFIRMED. 21. THE LEARNED AR SUBMITTED THAT THE ASSESSEE USED TO GRANT INCENTIVE TO ITS CUSTOMERS, WHO EXCEEDED BEYOND TUR NOVER LIMITS FOR TRANSACTIONS DONE ON THE SITE FOR THE QUARTER JANUA RY 2002 TO MARCH 2002. THE METHOD FOLLOWED FOR THE SAME WAS TH AT A TRANSACTION ENTERED BY THE CUSTOMER/ACCOUNT HOLDER WAS CHARGED WITH THE HIGHEST BROKERAGE RATE. AT THE END OF THE QUARTER TOTAL TURNOVER OF TRANSACTION OF THE CUSTOMER WAS CALCULA TED AND APPLICABLE BROKERAGE RATE AS PER THE INCENTIVE SCHE ME WAS DECIDED. THE DIFFERENTIAL BETWEEN THE BROKERAGE CHARGED AND ACTUAL PAYABLE WAS PAID TO THE CUSTOMER AS INCENTIVE. THE LEARNED AR FURTHER SUBMITTED THAT THE ASSESSEE HAD MADE A PROVISION FO R INCENTIVE PAYABLE ON THE BASIS OF THE TURNOVER OF THE CUSTOME R AND APPLICABLE INCENTIVE RATES. THE LIST OF CUSTOMERS ALONG WITH T HE INCENTIVE AMOUNTS WAS AVAILABLE AS ON MARCH 31, 2002 BUT THE ACTUAL PAYMENT WAS MADE IN THE FOLLOWING MONTH VIZ. APRIL 2002. THUS, THE LIABILITY FOR PAYMENT OF INCENTIVE HAD ARISEN I N THE AFORESAID ASSESSMENT YEAR ON THE CUSTOMER REACHING THE ELIGIB LE TURNOVER LIMIT AND COULD NOT BE TERMED AS CONTINGENT LIABILI TY. THE ACTUAL ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 11 CREDIT TO THE CUSTOMER ACCOUNT IN THE FOLLOWING YEA R WAS OF NO CONSEQUENCE. THE LEARNED AR REFERRED PAGES 46 TO 5 5 OF THE ASSESSEES PAPER BOOK WHERE DETAILS OF INCENTIVE ON TURNOVER HAVE BEEN PLACED. THE LEARNED DR, ON THE OTHER HAND, REL IED UPON THE ORDERS OF THE REVENUE AUTHORITIES AND SUBMITTED THA T LIST POINTED OUT BY THE LEARNED AR WERE NOT BEFORE THE AO. THE S AID LIST IS REQUIRED TO BE VERIFIED BY THE AO, THEREFORE, THE M ATTER MAY BE SENT BACK TO THE FILE OF THE AO. 22. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. ON SPECIFIC QUERY BY THE BENCH REGARDING ACCOUNTING TREATMENT OF THIS AMOUNT, THE LEARNED AR WHILE REFERRING PAGE 18 OF DETAILS OF INCOME FROM OPERATI ONS HAS BEEN PLACED SUBMITTED THAT INCOME FROM OPERATIONS- D) BR OKERAGE INCOME, WHICH IS THE NET AMOUNT AFTER ADJUSTMENT OF THE IMPUGNED AMOUNT. SIMILARLY THE LEARNED AR REFERRED PAGE 17 O F THE ASSESSEES PAPER BOOK WHERE DETAILS OF THE CURRENT LIABILITIE S AND PROVISIONS AND SUBMITTED THAT PROVISIONS OF RS. 15,491,177/- I NCLUDES PROVISIONS ALSO. FROM THE FACTS WE HAVE NOT CONVINC ED WITH THE ACCOUNTING ENTRIES POINTED OUT BY THE LEARNED AR. S UBMISSION OF THE LEARNED AR IS SUBJECT TO VERIFICATION. HOWEVER, CONSIDERING THE DETAILS OF LIST AND OTHERS, IN PRINCIPLE, IT CAN BE HELD THAT VARIOUS CUSTOMERS OF WHICH LIST HAS BEEN PLACED AT PAGES 45 TO 55 HAVE EXCEEDED THE ELIGIBLE TURNOVER IN THE YEAR UNDER CO NSIDERATION, THEREFORE, THEY ARE ENTITLED TO INCENTIVES. IN OTHE R WORDS, IT IS AN ACCRUED LIABILITY AND NOT THE CONTINGENT LIABILITY. WE MAY MENTION HERE THAT IF THE ASSESSEE HAS MADE PROVISION OF THI S INCENTIVE, THEN, PROVISION IS REQUIRED TO BE REVERSED IN SUBSEQUENT YEARS ON FIRST DAY OF THE SUBSEQUENT YEAR ITSELF. THE ASSESSEE IS REQUIRED TO FOLLOW THE SYSTEM OF ACCOUNTING REGULARLY IN SUBSEQUENT YE ARS. SINCE ALL THE DETAILS ARE NOT AVAILABLE ON RECORD, WE THEREFO RE, REMIT THIS ISSUE BACK TO THE FILE OF THE AO WITH A DIRECTION T O VERIFY THE ACCOUNTING ENTRIES AND IF IT IS FOUND THAT THE ASSE SSEE HAS PASSED PROPER ENTRIES IN ACCORDANCE WITH THE ACCOUNTING PR OCEDURES AND ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 12 THERE IS NO DOUBLE CLAIM OF DEDUCTION OF THIS EXPEN DITURE, THE AO MAY ALLOW THE CLAIM OF THE ASSESSEE IN ACCORDANCE W ITH LAW. THE AO SHALL PROVIDE AN OPPORTUNITY OF HEARING TO THE ASSE SSEE. 23. GROUND NO. 11 IS IN RESPECT OF CHARGING OF INTE REST U/S 234B AND 234D. 24. AT THE OUTSET THE LEARNED AR SUBMITTED THAT SEC TION 234D IS NOT APPLICABLE IN THIS YEAR IN THE LIGHT OF ITO V. EKTA PROMOTERS (P.) LTD., [2008] 113 ITD 719(DELHI)(SB) WHEREIN IT IS H ELD THAT SECTION 234D, WHICH HAS BEEN BROUGHT ON THE STATUTE FROM 01 .06.2003, CANNOT BE APPLIED TO THE ASSESSMENT YEAR 2003-04 OR EARLIER YEARS, BUT IT WILL HAVE APPLICATION ONLY WITH EFFECT FROM THE ASSESSMENT YEAR 2004-05. 25. AFTER HEARING THE LEARNED REPRESENTATIVES OF TH E PARTIES, WE ARE OF THE VIEW THAT IN THE LIGHT OF JUDGMENT OF IT AT IN THE CASE OF EKTA PROMOTERS (SUPRA) WE ARE OF THE VIEW THAT INTE REST U/S 234D IS NOT CHARGEABLE TO THE ASSESSEE. THE AO IS DIRECTED ACCORDINGLY. CHARGING OF INTEREST U/S 234B IS CONSEQUENTIAL IN N ATURE; THEREFORE, THE AO IS DIRECTED ACCORDINGLY. ITA NO. 6559/M/06 APPEAL BY THE REVENUE 26. GROUND NO.1 IS AGAINST THE ACTION OF THE CIT(A) IN DELETING THE ADDITION OF RS. 53,02,639/- AGAINST THE NON ALL OWANCE OF DEPRECIATION ON STOCK EXCHANGE CARD. 27. AFTER HEARING THE LEARNED REPRESENTATIVES OF TH E PARTIES, WE FIND THAT THIS ISSUE IS COVERED AGAINST THE ASSESSE E IN THE CASE OF CIT VS. TECHNO SHARES & STOCKS LTD. & ORS., 225 CTR (BOM) 337 WHEREIN IT HAS BEEN HELD THAT EXPRESSION LICENSES IN S. 32(1)(II) HAS TO BE CONSTRUED RESTRICTIVELY SO AS TO APPLY TO LICENCES RELATING TO ACQUISITION/USER OF INTELLECTUAL PROPERTY RIGHTS AN D NOT ALL LICENSES; ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 13 FURTHER, WHAT S. 32(1)(II) CONTEMPLATES IS THE BUSI NESS OR COMMERCIAL RIGHTS RELATING TO INTELLECTUAL PROPERTIES AND NOT ALL CATEGORIES OF BUSINESS OR COMMERCIAL RIGHTS; DEPRECIATION IS NOT THEREFORE ALLOWABLE ON THE BOMBAY STOCK EXCHANGE MEMBERSHIP C ARD AS IT DOES NOT FALL IN ANY OF THE CATEGORIES SPECIFIED IN S. 32(1)(II). THEREFORE, WE SET ASIDE THE ORDER OF THE CIT (A) AN D RESTORE THAT ORDER OF THE AO AND ALLOWED THE REVENUES GROUND. 28. GROUND NO. 2 IS COMMON TO THAT OF ASSESSEES GR OUND NO.6 AND 7,T HE CIT(A) ERRED IN RESTRICTING DEDUCTION FOR MARKET ING AGENT FEES PAID TO ICICI CAPITAL SERVICES LIMITED (L-CAPS ) TO RS. 1,24,37,940/- AGAINST THE CLAIM OF APPELLANT AT RS. 4,97,51,760 AS PER PROVISIONS OF SECTION 40A(2)(A) OF THE ACT. GRO UND NO 7 IS ALSO RELATED TO ABOVE ISSUE. GROUND NO.2 OF REVENUES AP PEAL IS THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN ALLOWING RELIEF AT 25% I.E. RS. 1,2 4,37,940/- ON THE TOTAL DISALLOWANCE ON ACCOUNT OF ADVERTISING AND MA RKETING AGENCY FEES OF RS. 4,97,51,760/- MADE BY THE AO BEING THE EXPENDITURE CONSIDERED TO BE ARBITRARY, EXCESSIVE AND UNREASONA BLE AND NOT WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. THESE GROUNDS HAVE BEEN DECIDED VIDE PARS 8TO 15 OF THIS ORDER. T HE AO IS DIRECTED ACCORDINGLY. 29. GROUND NO. 3 IS IN RESPECT OF PF PAYMENT OF RS. 95,614/-. 30. THE AO DISALLOWED AN AMOUNT OF RS. 95,614/- U/S 43B BEING PAYMENT OF CONTRIBUTION TO PF AND EMPLOYEE PE NSION FUND ON THE GROUND THAT THE AMOUNTS WERE NOT PAID IN THE RE LEVANT FUND BEFORE THE DUE DATE. THE CIT(A) FOLLOWED THE DECIS ION OF MUMBAI TRIBUNAL IN THE CASE OF START CHEMICALS AND OTHERS AND DIRECTED THE AO TO ALLOW THE CLAIM OF THE ASSESSEE IF THE PAYMEN T IS MADE BEFORE THE DUE DATE OF FILING THE RETURN OF INCOME. ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 14 31. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED THE RECORD. IT IS TO BE SEEN THAT WHETH ER SUCH PF CONTRIBUTION IS CONTRIBUTION BY EMPLOYER OR EMPLOYE ES CONTRIBUTION. IF IT IS EMPLOYERS CONTRIBUTION, THE N THE SAME IS ALLOWABLE IF THE PAYMENT IS MADE BEFORE THE DUE DAT E OF FILING OF THE RETURN . IF IT IS EMPLOYEES CONTRIBUTION, THE SAME IS ALL OWABLE IF THE AMOUNT IS PAID WITHIN THE DUE DATE/GRACE PERIOD IN THE LIGHT OF CIT VS. PAMWI TISSUES LTD., [2008] 215 CTR (BOM). SINCE THE DATES ARE SUB JECT TO VERIFICATION, WE REMIT THE MATTER BACK TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY THE PAYMENT DATES AND DECIDE THE ISSUE IN ACCORDANCE WI TH ABOVE JUDGMENT OF THE JURISDICTION HIGH COURT (SUPRA) AFTER PROVIDING REA SONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 32. IN THE RESULT, THE APPEAL OF THE ASSESSEE AND APPEAL OF THE REVENUE BOTH ARE PARTLY ALLOWED FOR STATISTICAL PUR POSES. PRONOUNCED IN OPEN COURT ON THIS 25 TH DAY OF JUNE, 2010. SD/- SD/- (D.K. AGARWAL) (A.L. GEHLO T) JUDICIAL MEMBER ACCOUNTAN T MEMBER DATED: 25 TH JUNE, 2010. COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE, I BENCH, I.T .A.T., MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR, I.T.A.T., MUMBAI. KV ITA NOS. 6559 & 7035/M/06 ICICI WEB TRADE LTD. 15 S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 9.6.10 SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR 10.6.10 SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER