Income Tax Appellate Tribunal - Delhi
Prasad & Co. (P) Ltd., New Delhi vs Assessee on 31 December, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'F' : NEW DELHI
BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER AND
SHRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER
ITA No. 419/Del/2012
AY: 2005-06
Prasad & Co.(P) Ltd. Vs. DCIT, CC 15
Circle 15, E 2, ARA ARA, Jhandewalan Extn.
Jhandewalan Extension New Delhi
New Delhi
PAN: AAACP 4487 H
(Appellant) (Respondent)
Appellant by : Sh. Mayank Jain, Adv.
Respondent by : Sh. Shameer Sharma, Sr.D.R.
ORDER
PER J. SUDHAKAR REDDY, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee directed against the order of Ld.CIT(Appeals)-II, Delhi vide order dt. 3.11.2009 pertaining to the AY 2005-
06.
2. Facts of the case:- The assessee is a Company. It is a Member of the National Stock Exchange (NSE) and Delhi Stock Exchange (DSE). It is working as a share broker and deals in purchase and sale of shares on behalf of its clients. It filed its return of income declaring loss of Rs.1,40,938/- on 31.3.2006. During scrutiny assessments, the Assessing Officer noticed that the assessee has received payments to the tune of Rs.12,95,636.08, on account of brokerage on new issue of shares. The assessee company transferred the entire amount in toto to one M/s Prasad & Co. which is a registered Partnership Firm owned by the Directors of the assessee company Shri Rohit Prasad and Shri Rajat Prasad. The assessee was asked to explain these transfers. It submitted as follows.
ITA No. 419/Del/2010AY 2005-06 M/s Prasad & Co.(P) Ltd., New Delhi "Prasad & Co. Is a sister concern of the company and is working as broker in the primary financial market. Prasad & Co. Is using our name as we are member of NSE & DSE. We are receiving all the income on behalf of Prasad & Co. And passing it to Prasad & Co. In full. Prasad & Co. As per agreement kept 5% with them and passed on 95% of the income to RR Financial Consultants Ltd. Or RR Investor Capital Services (P) Ltd.
Previous Prasad & Co. Was stock broker and as per arrangement (which was continuing since 1995) RRFCL was marketing and bearing all the expenses. Therefore, RRFCL was paid 95% of commission by Prasad & Co. As there was split of two group (i.e. partition in two brother), new arrangement was not entered and old arrangement is continuing (i.e. Prasad & Co.P.Ltd. passing on income to Prasad & Co. No marketing, selling and administrative expenses are borne by Prasad & Co.(P) Ltd.
Therefore, this is not income of Prasad & Co. (P) Ltd., as it is not incurring any expenses. All the expenses were borne by RRFCL and marketing is done by RRFCL. Prasad & Co. As per old arrangement passing 95% to RRFCL. During the year, Rs.12,95,636.08 was received by Prasad & Co. And Prasad & Co. Pass on to RRFCL."
3. The AO rejected the contention of the assessee and held that the assessee company has concealed its income by diverting the same to its sister concerns. He determined the income u/s 143(3) at Rs.11,54,700/-. Aggrieved the assessee carried the matter in appeal. Before the First Appellate Authority the assessee submitted that prior to the incorporation of the assessee company, the Director Mr.Rohit Prasad, was a partner in a Partnership Firm named M/s Prasad & Co. along with Mr.Rajat Prasad. The firm M/s Prasad & Co. works as broker in primary financial markets and it was the Member of the Delhi Stock Exchange having Membership No. D- 201 and allotted IPO broker code no. 5/0201/4. After the incorporation of the assessee company, the Membership of DSE and the IPO broker code no. belonging to the partnership firm, had been transferred to the assessee company. It was further submitted that the assessee company was dealing only in sale and purchase of shares on behalf of clients and the business relating to IPO, was being carried on by the partnership firm M/s Prasad & Co. using the IPO broker code 5/0201/4, which was transferred by the partnership firm to the assessee company. It was argued that it was the partnership firm which has carried out the entire business of IPO and only 2 ITA No. 419/Del/2010 AY 2005-06 M/s Prasad & Co.(P) Ltd., New Delhi because the IPO broker code was presently in the name of the company, all the cheques were received in the company's name, which were deposited in its bank account and later on transferred in full to the partnership firm M/s Prasad & Co. It pleaded that such a rooting of IPO business was done through the assessee company, by M/s Prasad & Co., for the reason that M/s Prasad & Co. was doing this work since the AY 1990 and had attained expertise in that field. It was argued that all the expenses relating to the IPO business were incurred by M/s Prasad & Co. and none of the expenses have been borne or claimed by the assessee company.
3.1. It was further submitted that the assessee company received two intangible advantages, by allowing M/s Prasad & Co. to route the IPO business through the assessee company and that these are (a) the name of the assessee company is affixed on the IPO application form along with the broker code without any advertisement expenses; (b) and as the good will of the assessee company in financial market which give more clientage for its main business of sale and purchase of shares through NSE/DSE. It was claimed that there is diversion of income by overriding title and hence the amount cannot be brought to tax in the hands of the assessee company. It was also further argued that M/s. Prasad & Co. had accounted for the entire income as well as the expenditure and in such circumstances no tax can be levied in the hands of the assessee company on the same amount.
3.2. The First Appellate Authority rejected the contentions of the assessee by holding that there is no diversion of income by way of over riding title. He held that the receipt has to be acknowledged in the hands of the assessee in the first stage as its income. He held that, at best the assessee could have claimed the expenses to the extent of amount payable to M/s Prasad & Co. He rejected the contentions of the assessee that it has legal sanctitiy and on the ground that it is not backed by any documentary evidence on such arrangement. He upheld the order of the AO.
4. Aggrieved the assessee is in appeal before us on the following grounds.
"1. The Ld.CIT(A) has erred in law and on the facts and circumstances of the case in confirming the addition of Rs.12,95,636/-. The CIT(A) has failed to 3 ITA No. 419/Del/2010 AY 2005-06 M/s Prasad & Co.(P) Ltd., New Delhi appreciate that the said amount received by the assessee is neither its income nor is claimed as expenditure but acting only as a conduit. Therefore, the addition made to be deleted.
2. Without prejudice to ground no.1, in the alternatives, if the said receipts are treated as income then the proportionate expenses should have been allowed as the gross receipt can't be taxed.
3. The Ld.CIT(A) has failed to appreciate that the business of the assessee was conducted in this manner and was pre-existing and it continued to remain so, therefore, the CIT(A) as well as AO cannot disturb the past practice and tax the same as income of the assessee.
4. The Ld.CIT(A) has erred in upholding the order of AO taxing the sum of Rs.12,95,636/- merely on the basis of entries recorded in the bank account filed by the assessee. Whereas the assessee has explained the reasons for such entry which should have been appreciated and the said amount should not have been taxed as assessee's income.
5. The Ld.CIT(A) has erred in not following consistency principle because in the earlier years also the same practice has been existing and the assessments have been completed u/s 143(3) way back in AY 98-99 and AY 1996-97.
6. The Ld.CIT(A) has erred in not appreciating that the historical background itself is evident that the receipts had to be routed through the assessee company as the DSE membership broker license is with the company for IPO subscription but the business is being done by Prasad & Co. Partnership firm because they hold the same membership number in the past.
7. The CIT(A) has erred on facts and in law in not appreciating that the income cannot be earned unless the assessee has incurred expenditure to earn such income. No such expenditure ahs been incurred by the assessee. Therefore, the revenue cannot tax income. The addition made is on surmises and conjectures and may be deleted.
8. The above grounds are independent without prejudice to each other.
9. The appellant prays that he may be allowed to add, amend, alter or forego any of the grounds at the time of hearing."
5. Mr.Mayank Jain, the Ld. Counsel for the assessee reiterated the contentions raised before the First Appellate Authority. He took through the facts of the case as narrated above and submitted that the income in question, has been diverted by the doctrine of overriding title. He vehemently contended that the assessee is only, a pass through entity, (hereinafter referred to as a 'PTE') and the reason for this is that the assessee is having Membership of the DSE. He referred to the expenses 4 ITA No. 419/Del/2010 AY 2005-06 M/s Prasad & Co.(P) Ltd., New Delhi claimed by the assessee company to demonstrate that none of the expenditure in question relate to IPO business. He pointed out that both the income and expenditure were accounted for by the firm M/s Prasad & Co. and argued that in such circumstances, bringing the total receipts to tax, in the hands of the assessee company, is double taxation and hence illegal. He submitted that if the assessee company undertakes IPO business, it would have to maintain huge infrastructure and also incur expenses in running and managing the said activity.
5.1. He further argued that :
(a) the books of accounts of the assessee are audited and the fact that the business of brokerage of IPO issues are outsourced to M/s Prasad & Co. as per old arrangement and as per customers, business is not disputed.
(b) the payments were made to the sister concern by way of cheques and this position is not disputed.
(c ) for the earlier AY scrutiny assessment was completed u/s 143(3) and the claims of the assessee have been accepted and hence on the principle of consistency the assessee's claim should be accepted.
(d) entire loss can never be taxed as income and principle of netting should be applied. For this proposition he relied on the decision of Hon'ble Delhi High Court in CIT vs. UK Bose (2013) 212 Taxman 399 (Del).
(e) the arrangement is a simple commercial business arrangement done in good faith and the taxation principles have to be applied in accordance with legal rights of the parties which are not in dispute.
(f) the assumptions of the Ld.AO that the brokerage is received by the company on account of work done by the Directors is without any evidence.
(g) the Tax rates of the assessee company and that of M/s Prasad & Co. are same and hence there is no loss to Revenue.
5.2. The Ld.Sr.D.R. Mr.Shammer Sharma relied on the order of AO, as well as that of Ld.CIT(A) and submitted that it is the assessee company which is holding the registration as a Member of DSE and it is also the owner of the IPO broker code 5/0201/4 and whatever is received by the assessee company is due to its legal rights and hence is income of the assessee company at the first stage. He submitted that there is no diversion of 5 ITA No. 419/Del/2010 AY 2005-06 M/s Prasad & Co.(P) Ltd., New Delhi income by over riding title and under such circumstances the order of the First Appellate Authority is to be upheld.
6. We have heard rival contentions. On careful consideration of the facts and circumstances of case, perusal of papers on record, case laws cited, orders of lower authorities, we hold as follows.
6.1. The assessee company is a Member of the DSE having membership no.D-201. It is also allotted IPO Broker Code no.5/0201/4. The undisputed fact is that the initial public offer (IPO) business is done in the name of assessee company, by virtue of its Membership and registrations. Thus all the income earned at the first stage has to be treated as income of the assessee company. The doctrine of overriding title cannot, in our view, be applied to the case of the assessee company.
6.2. Be it as it may, the undisputed fact is that M/s Prasad & Co. has done the IPO business and the assessee company had no active role whatsoever in such business, except that of lending the use of its Membership and registration. The income from IPOs as well as the expenditure on the same, is undisputedly incurred by M/s Prasad & Co. The arrangement has not been disputed by the AO. It is a fact that the entire income has been accounted for by the partnership firm M/s Prasad & Co. In our considered opinion the entire amount transferred by the assessee company to M/s Prasad & Co. should have been allowed as expenditure of the assessee company. The First Appellate Authority has at page 5 recognised this fact that the assessee could have claimed expenses to the extent of the amount payable to M/s Prasad & Co. While observing so, he chose to uphold the illegal action of the AO in bringing the tax to gross receipts. When the assessee has not received any income from this activity, tax is levied on gross receipts, on a hypothetical basis. This is against the provisions of the Income Tax Act. Same income is sought to be taxed twice. This should not have been done.
6.3. In view of the above discussion we direct the AO to grant deduction of Rs.12,95,636/- from the income assessed in the hands of the assessee. In 6 ITA No. 419/Del/2010 AY 2005-06 M/s Prasad & Co.(P) Ltd., New Delhi other words no income that arises from the business of IPO can be brought to tax in the hands of the assessee company for the reason that it has not earned or derived any income from such activity.
7. In the result the appeal of the assessee is allowed in part.
Decision pronounced in the open Court on 31st December, 2014.
sd/- sd/-
(H.S. SIDHU) (J.SUDHAKAR REDDY)
JUDICIAL MEMBER VICE PRESIDENT
Dated : 31.12.2014
• Manga
Copy forwarded to: -
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT
Assistant Registrar
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