Income Tax Appellate Tribunal - Mumbai
Hsbc Securities & Capital Markets ... vs Department Of Income Tax on 5 June, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "H", MUMBAI
BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND
SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER
ITA No.6979/Mum/2008
Assessment Year : 2005-06
M/s. HSBC Securities and Addl. Commissioner of Income
Capital Markets (India) Private tax -Range-4(1)
Limited Mumbai..
52/60, Mahatma Gandhi Road,
6th Floor, Fort Vs.
Mumbai-400 001.
PAN No. AAACJ 1395 E
(Appellant) (Respondent)
ITA No.133/Mum/2009
Assessment Year : 2005-06
Addl. Commissioner of Income M/s. HSBC Securities and
tax -Range-4(1) Capital Markets (India) Private
Mumbai.. Limited
Vs. Mumbai-400 001.
(Appellant) (Respondent)
Assessee by Shri Yogesh A. Thar
Respondent by Shri V.V. Shastri
Date of hearing : 5.6.2012
Date of Pronouncement : 29.6.2012
2 ITA No.6979/M/08 & 133/M/09
A.Y.05-06
ORDER
PER RAJENDRA SINGH, AM:
These cross appeals are directed against the order dated 7.10.2008 of CIT(A) for the assessment year 2005-06. These appeals are being disposed of by a single consolidated order for the sake of convenience.
2. We fist take up the appeal of the assessee in ITA No.6979/M/2008. In this appeal the assessee has raised disputes on three different grounds which relate to disallowance of Security Transaction Tax (STT), loss on account of error trading and disallowance of expenses under section 14A of the Income tax Act, 1961(the Act.) 2.1 The first dispute is regarding disallowance of Security Transaction Tax (STT) of Rs.35,83,688/- claimed by the assessee as deduction while computing total income. The AO observed that any amount paid on account of STT was not allowable in view of provision of section 40(a)(ib) inserted by the finance act, 2004. He also observed that there was a separate provision under section 88E to allow rebate on account of STT payments. He, therefore, disallowed 3 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 the claim made by the assessee. The assessee disputed the decision of AO and submitted before CIT(A) that the assessee was a broker and, had paid STT on behalf of clients which had been included in the brokerage income and therefore, assessee was entitled to claim deduction on account of STT. CIT(A), however, did not accept the contentions raised. He agreed with the AO that there was a specific provision for disallowance of STT under section 40(a)(ib). Further, rebate under section 88E was allowable only in case of traders and not in case of investors and, therefore, no deduction was allowable in case of assessee. CIT(A) accordingly confirmed the disallowance made by the AO, aggrieved by which the assessee is in appeal before the Tribunal.
2.1.1 Before us, the ld. AR for the assessee submitted that the assessee was only a broker who was undertaking transaction on behalf of clients. It was pointed out that, under the provisions of section 98 of STT Act, STT was payable by buyer and seller of shares and not the broker. Further section 100 provided that collection and recovery of STT was the responsibility of stock exchange which is also required to file return in respect of STT under section 101 of the STT Act. Therefore, section 40(a)(ib) was applicable only in case of buyer and seller of shares as the traders are entitled to claim rebate under section 88E . The assessee is a broker who had only collected share 4 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 transaction tax on behalf of the stock exchange and same had been included in the brokerage income and, therefore, corresponding deduction is required to be allowed while computing total income from the brokerage. The ld. DR on the other hand placed reliance on the orders of authorities below.
2.1.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of deduction on account of STT payment in case of broker while computing total income. The authorities below have not allowed the claim of deduction in view of provisions of section 40(a)(ib) as per which deduction on account of STT is not allowable. However, the case of the assessee is that STT is not required to be collected or paid by a broker. It is the buyer or seller of shares who is required to pay STT under section 98 of STT Act. The collection and recovery of STT is the responsibility of stock exchanges under section 100 of the STT Act. The assessee had only collected STT on behalf of stock exchanges from the clients and the same was included in the brokerage income and therefore, while computing the total income, the STT is required to be excluded. We find merit in the argument advanced on behalf of the assessee . The liability on account of STT is the liability of the clients of the assessee who are buying and selling shares and, therefore, the provisions of section 40(a)(ib) will be applicable in those cases and it is because of 5 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 this reason, the rebate under section 88E is also allowable in case of buyer/seller of shares under section 88E of the Act. The assessee is only a broker who has collected STT on behalf of the stock exchanges and has paid the same to the latter. In our view, STT is required to be excluded while computing the income of the assessee from brokerage. Therefore in our view the authorities below are not justified in disallowing the claim of deduction on account of STT in case of the assessee. We accordingly set aside the order of CIT(A) and delete the addition made.
3. The second dispute is regarding disallowance of loss of Rs.26,09,000/- on account of error trade. The assessee had incurred loss on account of certain share transactions. The AO, therefore, asked the assessee to explain as to why loss should not be treated as speculation loss under provisions of Explanation to section 73. The assessee explained that the provisions of the said Explanation were applicable only in cases where tax avoidance was intended and not applicable to genuine transactions. It was also submitted that in its own case in assessment year 1997-98, the Tribunal has held that the provisions of Explanation to section 73 could not be applied in case of the assessee. The AO however observed that the said decision of the Tribunal was based on the proposition that Explanation to section 73 6 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 could be applied only in case of colourable transactions which is no longer a correct view in view of the decision of the Special Bench of the Tribunal in case of AMD SPG. & WVG. MILL (P) Ltd. (100 ITD 142) as per which the provisions of Explanation to section 73 would apply to all transactions of purchase and sale of shares. The AO therefore disallowed the claim of loss. The assessee disputed the decision of AO and submitted before CIT(A) that the assessee was only a broker who was buying and selling shares on behalf of clients. There were errors in execution of certain transactions on behalf of the clients and, therefore, the assessee had to own up these transactions resulting into loss. Such transactions will not be covered by provisions of Explanation to section 73 and has to be considered as incidental business loss in case of the assessee who is a broker. CIT(A) however, observed that the assessee had made no claim before AO regarding error trade and in the annual report also there was no mention of error trade. CIT(A), therefore, rejected the claim of the assessee of loss arising from error trades and accordingly confirmed disallowance made by AO aggrieved by which the assessee is in appeal before the Tribunal. 3.1 Before us, the ld. AR for the assessee submitted that it was not correct on part of the CIT(A) to state that the assessee had not made claim of error trade before the AO. He referred to the letter dated 28.9.2007 of the assessee addressed to the AO and placed at page-42 7 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 of the paper book in which the assessee at page-45 had enclosed details of error trades as per annexure-VI. The assessee had also given details of error trades as per annexure-8 as part of the written submission made before CIT(A) copy of which is placed at page 36 of the paper book . It was pointed out that while executing transactions on behalf of the clients, the employees of the assessee sometimes punched wrong code of the shares to be bought/sold, mentioned purchase contract in place of sale contract, mentioned wrong quantity etc. as a result of which clients did not accept the transactions and assessee had to own up these transactions which were squared up resulting into loss. The loss is only incidental to business loss and has to be allowed as business and provisions of section 73 will not apply. The ld. DR on the other hand placed reliance on the orders of authorities below.
3.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding the allowability of loss incurred by the assessee on account of certain share transactions. The assessee is only a share broker who buys/sells shares on behalf of the clients. It has been argued that loss had occurred on those transactions undertaken on behalf of the clients in which there were errors and transactions were not as per orders booked by the clients. These purchases/sales executed on behalf of the clients are therefore, owned 8 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 up by the assessee and these are squared up which has resulted into loss. CIT(A) has observed that the assessee had not made any claim of error trades before the AO. The perusal of record shows that the finding of the CIT(A) is not correct. The assessee vide letter dated 28.09.2007, copy of which is placed at page -42 of the paper book had given details of error trade before the AO as per annexure-VI placed at page 45 of the paper book. The assessee had also enclosed details of error trades before CIT(A). The claim of the assessee has not been controverted by the Ld. D.R by producing any material. Therefore, claim of the assessee that it had made claim of error trades before the AO as well as CIT(A) has to be accepted. However, it is also a fact that the claim of error trade has not been examined either by AO or CIT(A). The Ld. A.R had no objection if the matter is restored to the file of AO for necessary verification. In our view the matter requires fresh examination and in case loss is found to have occurred on account of error trades conducted by assessee on behalf of clients, the claim has to be accepted as business loss in view of the decision of the Tribunal in the case of Parker Securities Ltd. (8 SOT 257) relied upon by the Ld. AR in which it has been held that in case of brokers loss arising on account of purchase and sale of shares under forced circumstances and under compulsion will not be covered by Explanation to Section
73. We, therefore, set aside the order of CIT(A) and restore the issue 9 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 to the file of AO for fresh order after necessary examination and after allowing opportunity of being heard to the assessee.
4. The third dispute is regarding disallowance of expenses under section 14A of the Act. The AO during the assessment proceedings noted that the assessee had declared dividend income of Rs.2,54,38,255/-, which was exempt from tax. The assessee had however, not allocated any expenditure relating to exempt income. The AO noted that, in assessment year 2004-05, 5% of the dividend income had been treated as expenditure towards earning of dividend income. He, therefore, disallowed the expenditure to the tune of 5% of dividend income under section 14A. In appeal, CIT(A) observed that disallowance of expenses under section 14A was required to be made as per Rule 8D. CIT(A) accordingly directed the AO to make disallowance as per Rule 8D, aggrieved by which the assessee is in appeal before the Tribunal.
4.1 Before us, the ld. AR for the assessee submitted that the same issue had been considered by the Tribunal in assessee's own case in assessment year 2004-05 in ITA No.3186/M/08 in which year also, the AO had disallowed the expenses @ 5% of the dividend income.The dividend income in that year was Rs.4.04 crores. The Tribunal however noted that the dividend income had mostly arisen from a group 10 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 company and, therefore, it was held that it would be reasonable to disallow the expenses at Rs.2.00 lacs. The ld. AR pointed out that this year dividend income was smaller and investment in shares had only marginally gone up from Rs.58.45 crores to Rs.59.50 crores. It was accordingly urged that the order of CIT(A) may be modified as Rule 8D was not applicable in case of the assessee.
4.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance of expenses relating to exempt income. The AO had disallowed the expenses @ 5% of dividend income whereas the CIT(A) has directed the AO to compute the disallowance as per Rule 8D. The order of CIT(A) can not be sustained in view of the judgment of Hon'ble High Court of Bombay in case of Godrej and Boyce Mfg. Co. vs. DCIT (328 ITR 81), in which it has been held that Rule 8D is applicable only from assessment year 2008-09 and that, in respect of prior years, the disallowance has to be made on a reasonable basis. In this case, the same issue had been considered by the Tribunal in assessment year 2004-05 and the Tribunal has reduced the disallowance to Rs.2.00 lacs. The facts in this year are almost identical as no major distinguishing factors have been brought to our notice by the ld. Departmental Representative . However, considering the inflation, in 11 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 our view, it would be appropriate to disallow expenses relating to dividend income at Rs.2,20,000/-. We hold accordingly.
5. ITA No.133/M/2009 (Appeal of the Revenue ):
Though the revenue has raised several grounds of appeal, effectively there are three grounds which relate to disallowance of VSAT, lease line and transaction charges, penalty for violation of bye- laws of stock exchanges and claim of bad debt.
5.1 We first take up the dispute relating to disallowance of VSAT, lease line and transaction charges. The AO noted that the assessee had claimed deduction of Rs.1,91,259/-, Rs.3,79,181/- and Rs.5,79,500/- on account of lease line charges, VSAT charges and transaction charges while computing total income. The AO observed that these charges were of the nature of payment for professional services or fees for technical services which were covered under the provisions of section 40(a)(ia) as per which in case, no tax is deducted, the expenditure on account of such services could not be allowed as deduction. The assessee submitted that the professional services as defined under section 194J were services rendered by a person in the course of carrying on of legal, medical, engineering services etc. and therefore, the payment made by the assessee could not be considered as professional services. These services could also 12 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 not be considered as technical services in view of the judgment of Hon'ble High Court of Madras in the case of Skycell Communications Ltd. Vs Dy. CIT (251 ITR 53), in which it was held that merely collecting fees for using sophisticated technical equipments which was commonly available to all subscribers could not be considered as fee for technical service. The assessee also pointed out that fee for VSAT and, lease lines were paid towards using communication network of stock exchanges, which could not be considered as fees for technical services. The AO, however, did not accept the contentions raised. It was observed by him that the highly sophisticated system and services provided by the stock exchanges involved specialized knowledge, experience and skill in the field of share trading. The AO, therefore, held that the payments made by the assessee were of the nature of fees for technical service, covered under section 40(a)(ia). He therefore, disallowed the claim.
5.1.1 In appeal CIT(A) observed that VSAT and lease line charges were not payment for any technical services. It was observed by him that DOT had granted license to stock exchanges for installation and setting up of Close User Group telecommunications Network based on VSATs and lease lines. The stock exchanges collected the VSAT and leaseline charges from the members and passed on the same to the service provider. These were therefore not 13 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 fees for technical services. As regards the transaction charges, CIT(A) referred to the decision of the Tribunal in case of M/s. Kotak Securities Ltd. Vs. Addl. CIT in ITA No.1955/Mum/2008 dated 26-8-
2008 in which it was held that the stock exchange neither provided any managerial services nor any technical services. CIT(A) accordingly deleted the addition made by AO aggrieved by which revenue is in appeal before the Tribunal.
5.1.2 Before us, the ld. DR appearing for the revenue assailed the order of CIT(A) and placed reliance on the findings given by AO. The ld. AR on the other hand pointed out that the issue was covered by the judgment of Hon'ble High Court of Bombay in the case of CIT vs. Kotak Securities (15 Taxmann.com77) in so far as the transaction charges were concerned. The issue of VSAT charges and lease line charges were also covered by the decision of the Tribunal in case of CIT vs. Angel Broking Ltd. (35 SOT 457). It was thus urged that the order of CIT(A) should be upheld.
5.1.3 We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance of VSAT, leaseline charges and transaction charges paid by the assessee to the stock exchange as brokerage. The AO had disallowed the claim holding that the payment made by the assessee were not for use of standard 14 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 equipments but also involved technical services. He therefore, held that these payments were fees for technical service covered by Section 40(a)(ia) and since the assessee had not deducted tax at source the claim had been disallowed. The CIT(A) has deleted the addition holding that VSAT, and leaseline charges, were reimbursement of expenses to the stock exchanges for use of standard facilities and transaction charges were not disallowable in view of the decision of the Tribunal in case of Kotak Securities Ltd.
5.1.4 We find that the issue of transaction charges is covered by the judgment of Hon'ble High Court of Bombay in case of CIT(A) vs. Kotak securities Ltd.( 15 Taxmann.com77). The Hon'ble High Court in that case held that the transaction charges paid by the assessee were of the nature of fees for technical services. However, the Hon'ble High Court noted that both parties were under bonafide belief for nearly a decade that no tax was required to be deducted and, therefore, this being the first year the disallowance could not be made as the assessee was under the bonafide belief that the claim was allowable. The case of the assessee is identical as in this year also disallowance has been made for the first time in assessment year 2005-06. No distinguishing features have been brought to our notice by the ld. DR. We therefore, delete the disallowance made by AO on account of transaction charges and confirmed the order of CIT(A) . As regards 15 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 VSAT and lease line charges it has to be allowed in view of the decision of the Tribunal in the case of Angel Stock Broking Ltd. (35 SOT 457) in which the Tribunal noted that stock exchanges were not owners of technology to provide it for a fees to the prospective users. They were consumers of technology for which they had to get permission fron DOT. Therefore, the payment could not be considered as fees for technical services. Respectfully following the decision of the Tribunal (supra), we allow the claim of the assessee.
5.2 The second dispute in the appeal raised by the revenue is regarding disallowance of Rs.10,17,929/- on account of payment made by the assessee to the stock exchange for violation of bye laws of stock exchange. The assessee submitted that the stock exchanges are not statutory authorities and, therefore, violation of their bye-laws could not be considered as violation of law. The payment made by the assessee was only for breach of contractual obligation and therefore claim was allowable as deduction. The AO however had not accepted the explanation given. It was observed by him that under the provisions of Explanation to section 37(1), any expenditure incurred by the assessee for any purpose which is prohibited by law can not be considered as expenditure incurred for the purpose of business or profession. He, therefore, disallowed the claim. In appeal CIT(A) observed that stock exchanges were not government or semi- 16 ITA No.6979/M/08 & 133/M/09
A.Y.05-06 government bodies but were only companies and, therefore, the payment made for violation of their regulations could not be considered as payment prohibited by law or in connection with an offence. He, therefore allowed the claim aggrieved by which, the revenue is in appeal before the Tribunal.
5.2.1 Before us, the ld. Departmental Representative placed reliance on the order of AO whereas the ld. AR submitted that the issue was covered in favour of the assessee by the decision of the Tribunal in case of Gold Crest Capital Market Ltd. vs. ITO(2 (Trib.)
355. 5.2.2 We have perused the records and considered the contentions carefully. The dispute is regarding allowability of expenditure incurred by the assessee on account of payment made to stock exchanges for violation of their bye-laws. The AO had treated the expenditure as payment for violation of law and disallowed the same under section 37(1). CIT(A) held that violation of regulations of stock exchanges did not amount to violation of law and therefore, allowed the claim. The view taken by the CIT(A) is supported by the decision of the Tribunal in case of Gold crest capital Market Ltd. (supra) in which it has been held that payment made by stock broker to stock exchange on account of unfair trade practice and un-business 17 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 like conduct is not for violation of law and, therefore, can not be disallowed under section 37(1). No contrary decision of the Jurisdictional high Court or the Hon'ble Apex Court has been brought to our notice. We therefore, see no infirmity in allowing the claim. The order of CIT(A) is therefore, upheld.
5.3 The third dispute is regarding disallowance of bad debt. The AO during the assessment proceedings noted that the assessee had made deduction of Rs.22,68,000/- on account of bad debt. The details of which were given as under :-
S.No. Name of the Party Amount Nature
and address (Rs.000) of
amount
written
off
1. Reckitt Benckiser Plc 1,421 Fee
103-105 Bath road
Slough, Berkshire, SL
13UH, England.
2. Crompton Greaves Ltd. 687 Fee
th
6 Floor, CG House, Dr.
A.B. Road, Prabhadevi,
Mumbai-400 025.
3. Bharat forge Ltd. 32 Out of
Mundhwa, Pune-411 036 Pocket
Expenses
4. International Seaports 29 Out of
(India) P. Ltd. East India Pocket
Chambers, 3 Village Expenses
Road, Nungambakkam,
Chennai-600 034.
5. Siemens Information 97 Out of
System Ltd., 130, Pocket
18 ITA No.6979/M/08 & 133/M/09
A.Y.05-06
Pandurang Budhkar Expenses
Marg, Worli, Mumbai-
400 018.
Total 2,268
5.3.1 The assessee submitted that the amounts due from the
parties were outstanding for long time and were not likely to be recovered in future. It was also submitted that in view of the amendment to section 36(1)(vii) w.e.f. 1.4.1989, the assessee was not required to prove that the debt had become irrecoverable for claim of bad debt. Assessee had met all conditions and, therefore, the claim should be allowed. In relation to Out of Pocket Expenses (OPE), it was submitted that the same were incurred during course of carrying on of corporate and advisory services. These expenses were required to be reimbursed by the clients which was not done mainly because the transaction for which the assessee had been appointed had not gone through. The expenses had been incurred on long distance communication calls and traveling expenses incurred by the assessee. These expenses have to be allowed as business loss. The AO however did not accept the contentions raised. It was observed by him that the assessee had not produced any evidence to show that the debt had become irrecoverable. It was also observed by him that OPE could not be considered as bad debt. Claim of business loss could not be allowed as the burden was on the assessee to prove that the loss had 19 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 crystallized during the year which had not been done. The AO accordingly disallowed the claim.
5.3.2 In appeal, CIT(A) observed that in case of Reckitt Benckiser Plc and Crompton Greaves Ltd. the assessee had offered the amount for tax in the earlier year and in the current year the amount had been written off as bad debt. The assessee was not required to prove that the debt had become irrecoverable. In relation to Bharat Forge Ltd., International Seaports (India) Pvt. Ltd. and Siemens Information System Ltd. CIT(A( observed that these amounts were lost in the course of business. CIT(A) also observed that the finding of the AO that the assessee could not establish that loss crystallized during the year was not well found. He, therefore, deleted the additions aggrieved by which the revenue is in appeal before the Tribunal.
5.3.3 Before us the ld. AR for the assessee reiterated the submissions made before the CIT(A) whereas the ld. DR placed reliance on the order of AO.
5.3.4 We have perused the records and considered the matter carefully. The dispute is regarding allowability of deduction of Rs.22,68,000/- on account of bad debt and business loss. The claim of 20 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 bad debt was in relation to sum of Rs.14.21 lacs due from Reckitt Benckiser Plc and Rs.6.87 lacs from Crompton Greaves Ltd. There is no dispute that these amounts had been taken into account in the computation of the earlier year. AO disallowed the amount only on the ground that the assessee had not established that the debt had become irrecoverable. In view of the amendment to section 36(1)(vii) w.e.f. 1.4.1989, the burden is no longer on the assessee to prove that the debt has become bad/irrecoverable. The only conditions for allowability of bad debt is that the amount should have been taken into account in the computation of income of earlier year and should have been actually written off in the books. There is no dispute regarding fulfillment of these conditions. Therefore claim of bad debts can not be disallowed. The order of CIT(A) allowing the claim is accordingly upheld. As regards the amount due from Bharat forge Ltd., International Seaports (India) Pvt. Ltd. and Siemens Information system Ltd. aggregating to to Rs.1.58 lacs, these were out of pocket expenses incurred by the assessee in connection with certain work relating to these clients. The case of the assessee is that these expenses which were required to be reimbursed by the clients were not reimbursed as transactions did not go through. This claim has not been controverted by the AO by placing any material on record. Therefore, these expenses which were actually incurred and about 21 ITA No.6979/M/08 & 133/M/09 A.Y.05-06 which there is no dispute has to be allowed as business loss. We see no reason to interfere with the order of CIT(A) allowing the claim and the same is therefore upheld.
6. In the result, appeal of the assessee is partly allowed whereas that of the revenue is dismissed.
Order pronounced in the open court on 29.6.2012 Sd/- Sd/-
(D. MANMOHAN ) (RAJENDRA SINGH)
VICE PRESIDENT ACCOUNTANT MEMBER
Mumbai, Dated: 29.6.2012.
Jv.
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR " " Bench
True Copy
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.