Income Tax Appellate Tribunal - Mumbai
Asit C. Mehta Investment Intermediates ... vs Dcit 4(1)(1), Mumbai on 26 September, 2022
IN THE INCOME TAX APPELLATE TRIBUNAL
"F" BENCH, MUMBAI
SHRI B.R. BASKARAN, ACCOUNTANT MEMBER
SHRI RAHUL CHAUDHARY, JUDICIAL MEMBER
ITA No. 3550/MUM/2016
(Assessment Year: 2012-13)
M/s Asit. C Mehta Investment Intermediates Ltd.,
5th Floor, Nucleus House,
Saki Vihar Road, Andheri (E),
Mumbai - 400072 [PAN:AAACA5009N] .................. Appellant
Vs
Commissioner of Income Tax (Appeals)-9,
Aayakar Bhavan, M.K. Road,
Mumbai - 400020 ................ Respondent
ITA No. 4448/MUM/2018
(Assessment Year: 2013-14)
M/s Asit. C Mehta Investment Intermediates Ltd.,
5th Floor, Nucleus House,
Saki Vihar Road, Andheri (E),
Mumbai - 400072 [PAN:AAACA5009N] .................. Appellant
Deputy Commissioner of Income Tax Vs
Circle-4(1)(1), Mumbai
Aayakar Bhavan, M.K. Road,
Mumbai - 400020 ................ Respondent
Appearances
For the Appellant/Assessee : Shri Yogesh Thar/
Shri Chaitanya Joshi
For the Respondent/Department : Shri Achal Sharma
Date of conclusion of hearing : 29.06.2022
Date of pronouncement of order : 26.09.2022
ORDER
Per Rahul Chaudhary, Judicial Member:
1. The present appeals have been filed by the Appellant/Assessee against the appellate orders passed by the first appellate authority for the Assessment Years 2012-13 and 2013-14. Since ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 the appeals involve common ground/issues, the same were heard together and are, therefore, being disposed of by way of common order.
ITA No. 3550/MUM/2016 (Assessment Year 2012-13)2. By way of the present appeal the Appellant/Assessee has challenged the order, dated 18.03.2016, passed by the Ld. Commissioner of Income Tax (Appeals)-9, Mumbai [hereinafter referred to as „the CIT(A)‟] for the Assessment Years 2012-13, whereby the CIT(A) had partly allowed the appeal filed by the Appellant/Assessee against the Assessment Order, dated 25.02.2015 passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟).
3. The Appellant has raised the following grounds of appeal in ITA No. 3550/Mum/2016:
"1. The Ld CIT (A) has erred in confirming the addition of Rs.
9,77,10,205/- made by Assessing Officer to the income of your petitioner
2. The Ld CIT (A) has erred in retaining and confirming the addition of Rs. 31,14,289/- being 15% of various expenses disallowed and added by the Assessing Officer.
3. The Ld CIT (A) has erred in retaining and not giving full relief to your petitioner to the extent of Rs. 11,55,403/- added by the Ld Assessing Officer u/s 14A of Income Tax Act, 1961.
4. The Ld CIT (A) has erred in confirming the addition of Rs.
95,74,500/- mad on account of disallowance of interest expenditure made by the Assessing Officer.2
ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14
5. Both the Ld CIT (A) and Assessing Officer have erred in ignoring the volumes evidence produced and put on record by your petitioner from time to time.
6. The order appealed against is bad in law and is against the principle of natural justice.
7. The order appealed against is based on surmises and conjectures. 8. Your Petitioner reserves the right to add, to delete and/or amend any of the foregoing grounds."
4. The relevant facts, in brief, are the Appellant is a public limited company engaged in shares and stock broking business. The Appellant filed return of income for assessment year 2012-13 on 27.09.2012 declaring loss of INR.10,61,00,147/-. The case of the Appellant was selected for scrutiny and assessment under Section 143(3) of the Act was framed on the Appellant, vide order dated 25.02.2015, at total income of INR 85,95,220/- after making following additions/disallowances:
- Disallowance of INR 11,55,403/- under section 14A of the Act
- Disallowance of business associate expenses are INR 9,77,10,205/-
- Disallowance of INR 51,90,482/- under Section 37 of the Act being 25% of specified business expenses claimed as deduction by the Appellant
- Disallowance of INR 95,74,500/- relating to interest free deposit of INR 6.50 Crores given as per leave and license agreement out of the deduction for interest cost claimed by the Appellant
5. The Assessment Order, dated 25.02.2015, was rectified under Section 154 of the Act as the Assessing Officer computed total income at „Nil‟ after setting off brought forward losses of INR 85,95,220/- pertaining to Assessment Year 2009-10.3
ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14
6. Being aggrieved, the Appellant challenged the above additions/disallowances made by the Assessing Officer before the CIT(A). The CIT(A) confirmed the disallowance of INR 9,77,10,205/- and INR 95,74,500/- pertaining to business associate expenses and interest cost, respectively. The CIT(A), however, granted partial relief to the Appellant by directing the Assessing Officer to exclude the shares held as stock-in-trade while computing disallowance as per 14A of the Act read with Rule 8D(2)(iii) of the Income Tax Rules, 1962 (hereinafter referred to as „the Rules‟) and by reducing the rate of ad-hoc disallowance made under Section 37 of the Act from 25% to 15%.
7. Not being satisfied with the relief granted by the CIT(A), the Appellant has preferred the present appeal on the grounds specified in paragraph 2 above which are taken up in seriatim hereinafter.
Ground No. 18. Ground No. 1 pertains to disallowance of business associate expenses 9,77,10,205/- made by the Assessing Officer and confirmed by the CIT(A).
9. The Learned Authorised Representative for the Appellant appearing before us submitted that the Appellant is engaged in the business of trading in stock and shares. During the relevant previous year, the Appellant had around 263 sub- brokers/business associates located across India and each of such sub-broker/business associate was registered with Securities & Exchange Board of India (SEBI) and held a valid registration certificate. From the inception of the Appellant-
4ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 Company in the year 1995-96 till Assessment Year 2011-12 all the payments made to such sub-brokers/business associates were allowed as deduction. Explaining the business of the Appellant, the Learned Authorised Representative for the Appellant submitted that the Appellant gets bulk the brokerage business from various clients situated in cities across India requiring purchase/sale of shares, securities etc. which is generated with the help of its sub-brokers/business associates and therefore, a part of the commission received is shared by the Appellant with the sub-brokers/business associates which is claimed as deduction. The client residing in different areas put their purchase/sale orders to the sub-brokers/business associates who execute the same trade disclosing the registration code of the Appellant. Further, the sub- brokers/business associates are also responsible for collecting/marking payments from/to the clients. The Appellant maintains account of each sub-brokers/business associate. The Appellant had submitted a list of all the sub-brokers/business associates to whom payments were made during the relevant previous year along with their name, complete address, permanent account number and sub-registration number (with BSE, NSE. However, no enquiry/verification was conducted by the Assessing Officer before making the disallowance.
10. Per Contra, the Ld. Departmental Representative submitted that during the assessment proceedings, the Appellant had failed to show that there was a business connection between commission expenses paid by the Appellant to the sub-brokers/business associates with the brokerage business of the Appellant. Further, the CIT(A) has also recorded that the Appellant has failed to prove that any services were rendered by the sub-
5ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 brokers/business associates to the Appellant. He relied upon the relevant observations made by Assessing Officer and CIT(A) to support the aforesaid contentions.
11. In rejoinder, the Ld. Authorised Representative for the Appellant submitted that all the relevant documents/details were placed before the authorities below. Taking us through pages 99 to 117 of the paper-book, he submitted that the business connection and rendition of services was established during the assessment as well as appellate proceedings. The Ledger Account giving details of business associate expense as well as details of income generated from top 13 sub-brokers/business associates during the relevant previous year was placed before authorities below. However, the same were rejected without making any inquiry or verification. He relied upon the decision of the Tribunal in the case of ACIT Vs Uday S Kotak: [2007] 13 SOT 548 (Mum.) in this regard. He reiterated that no such disallowance has been made by the preceding assessment years and submitted that the principle of consistency requires that no disallowance be made for the business associate expenses in the assessment years before us.
12. We have heard the rival submissions and perused the material on record. It is admitted position that the Appellant is engaged in share/broking business wherein it is normal business practice to have sub-brokers/business associates. The Appellant had filed list of its sub-brokers/business associates containing office addresses, permanent account numbers, and NSE/BSE registration numbers. The details of „Business Associate Expenses‟ furnished by the Appellant contained Ledger Number and name. We note that out of total Business Associate 6 ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 Expenses of INR.9,77,10,205/-, expenses of INR.8,94,31,461/- claimed by the Appellant pertained to Ledger No. 908124 - „Ba :
Commission - Equity & Derivative‟ details of which were furnished by the Appellant (placed at page 113-117 of the paper-book). A perusal of the aforesaid documents/details shows that deduction for INR for 43,45,279/- has been claimed for the payments to a business associate with name Varanasi [Satyam Share] which is claimed to have resulted in generation of the corresponding income are INR.81,06,777/- as reflected in the details of income generated from the top 13 sub- brokers/business associates. The name, address, registration number and permanent account number of the aforesaid sub- brokers/business associate are also reflected at serial number 8 in the list of sub-brokers/business associates furnished by the Appellant. The Appellant has also provided the reconciliation statement of the outstanding balances of all the sub- brokers/business associates. We note that no defect has been pointed out in the details furnished by the Appellant by the authorities below. In our view, the findings returned by the AO/CIT(A) are without any factual basis and are on based conjecture/surmise. The Appellant has claimed deduction for business associate expenses in the preceding assessment years, however, no disallowance has been made in respect of the same. It is admitted position there has been no change in the facts and circumstances as compared to preceding assessment years. Thus, in view of the aforesaid, we hold that the Appellant is entitled to claim deduction for business associate expenses of INR 9,77,10,205/- having substantiated his claim by filing relevant documents/details before the authorities below. Accordingly, we reverse the decision of CIT(A) 7 ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 and delete the disallowance of INR 9,77,10,205/- made by Assessing Officer. Ground No. 1 raised by the Appellant is allowed.Ground No. 2
13. Ground No. 2 pertains to ad-hoc disallowance of certain expenses. The Appellant had claimed deduction for Computer Expenses (INR 77,200), General Charges (INR 63,642), Motor Car Expenses (INR 87,765), Staff Welfare Expenses (INR 60,256), Printing & Stationery Expenses (INR 41,49,224), Telephone Expenses (INR 1,09,99,782), and Travelling & Conveyance Expenses (INR 56,12,921) all aggregating to INR 2,10,50,790/- in the return of income for the relevant assessment year. The Assessing Officer made ad-hoc disallowance at the rate of 25% which was reduced to 15% by the CIT(A). Not being satisfied, the Appellant has carried the issue in appeal before us.
14. Learned Authorised Representative for the Appellant submitted that the above said expenses were incurred wholly and exclusively for the purpose of business, and that the rate of 15% determined by the CIT(A) is on higher side. No such disallowance was made in the Assessment Years 2008-09, 2009- 10 and 2010-11. However, in the immediately preceding Assessment Year 2010-11, the Assessing Officer had made the disallowance at the rate of 10%. In appeal, the CIT(A) restricted the amount of disallowance of INR 10 lakhs which was not disturbed by the Tribunal in appeal filed by the Revenue. In response, the Learned Departmental Representative referring to the assessment order submitted that the Assessing Officer had made the disallowance in view of the fact that the tax auditor 8 ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 had reported that the possibility of personal expenses which were not allowable as deduction under Section 37 of the Act having debited to profit and loss account could not be ruled out. Further, as noted by the CIT(A) in paragraph 4.3 of the order impugned, the Assessing Officer had disallowed the deduction for entire expenses as the expenses were incurred in cash and were not fully supported by bill or vouchers. Even the ledger accounts furnished by the Appellant were bulky and Appellant could not substantiate the claim.
15. We have considered the rival contentions and perused the material on record. Some ledgers relating to travelling expenses have been placed before us and the same are bulky. Even the tax auditor has expressed opinion that the possibility of some expenses being of personal nature being debited to the Profit & Loss Account cannot be ruled out. We note that in the immediately preceding assessment year 2010-11, the assessing officer had, in similar facts and circumstances, adopted rate of 10% for making the disallowance. Accordingly, keeping in view the facts and circumstances of the present case we restrict the disallowance to 10% of the expenditure. Thus, Ground No. 2 raised by the Appellant is partly allowed.
Ground No. 316. Ground No. 3 pertains to the disallowance made under Section 14A of the Act. Applying Rule 8D the Assessing Officer had computed disallowance of INR 10,95,163/- in terms of Rule 8D(2)(ii) and INR 1,50,503/- in terms of Rule 8D(2)(iii) of the Rules. In appeal, the CIT(A) granted partial relief and directed exclusion of shares held as stock-in-trade from while computing average value of investment for determining the quantum of 9 ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 disallowance in terms of Rule 8(d)(2)(iii) of the Rules. Not being satisfied, the Appellant is before us.
17. We have considered the rival submissions and perused the material on record. We note that the Appellant has earned exempt dividend income of INR 6,20,419/- during the relevant previous year and therefore, the amount of disallowance under Section 14A of the Act cannot exceed the same in view of the judgment of Hon‟ble Supreme Court in the case of DCIT Vs. State Bank of Patiala: [2018] 259 Taxman 314 (SC)[08-10-2018] and the judgment of the Hon‟ble Bombay High Court in the case of Nirved Traders (P.) Ltd. v. Dy. CIT [IT Appeal No. 149 of 2017, dated 23.4.2019.
18. In view of the judgment of the Hon‟ble Gujarat High Court in the case of CIT Vs. Suzlon Energy Limited: 354 ITR 630 (Gujarat) [03-04-2013] cited by the Learned Authorised Representative for Appellant, we find merit in the contention advanced by the Learned Authorised Representative for Appellant that investment made in foreign subsidiary should be excluded while computing disallowance under Section 14A read with Rule 8D of the Rules since the dividend income of foreign subsidiaries is taxable in India and therefore, the Assessing Officer is directed accordingly. The Assessing Officer is also directed to verify and consider only the investments yielding exempt income during the relevant previous year while computing disallowance under Section 14A read of the Act with Rule 8D of the Rules as held by the special bench of the Tribunal in the case of ACIT Vs. Vireet Investment (P.) Ltd: [2017] 58 ITR(T) 313 (Delhi - Trib.) (SB).
19. Ground No. 3 raised by the Appellant is partly allowed in terms of our directions in paragraph 17 and 18 above.
10ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 Ground No. 4
20. Ground No. 4 pertains to disallowance of interest expenditure of INR 95,74,500/- made by the Assessing Officer and confirmed by the CIT(A).
21. During the assessment proceedings, the Assessing Officer that the Appellant had given interest free deposit of INR 6.5 Crores to related parties in terms of Leave & License Agreements. Interest free deposit of INR 1 Crore each were given to Asit C. Mehta Commodities Services Pvt. Ltd. and Asit C. Mehta Financial Services Ltd. Similarly, interest free deposit of INR 2.75 Crores and 1.75 Crores were given to Ms. Deena Asit Mehta and to Asit C. Mehta, respectively. The Assessing Officer also noted that the Appellant had claimed deduction of interest of INR 3.40 Crores on borrowed funds of INR 23.08 Crores. The Assessing Officer concluded that the borrowed funds were used for the purpose of making the aforesaid interest free deposit. Therefore, taking average interest rate of 14.73%, the Assessing Officer disallowed INR 95,74,500/- (6.5 Crores x 14.73%) under Section 36(1)(iii) of the Act. Being aggrieved the Appellant carried the issue in appeal before the CIT(A) who confirmed the aforesaid disallowance made by the Assessing Officer following the decision of Hon‟ble Allahabad High Court in the case of CIT vs. Sahu Enterprises Private Limited : (2013) 352 ITR 8 (Allahabad). Being aggrieved the Appellant has preferred appeal before us on this issue.
22. The Ld. Authorised Representative for the Appellant appearing before us submitted that the Assessing Officer has admittedly recorded that the deposits were made with the object of 11 ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 reducing the rental cost of office premises taken under Leave & License Agreement and therefore, the act of making deposits should be looked at from the perspective of commercial expediency. Relying upon the judgment of the Hon‟ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT : 288 ITR 1 (SC) he submitted that no disallowance under Section 36(1)(iii) of the Act can be made since interest free deposits were made on account of commercial expediency for the purpose of business of the Appellant. The Ld. Authorised Representative for the Appellant submitted that sufficient owned/interest-free funds were available to make the deposits. Relying upon the judgment of Hon‟ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd.: (2009) 313 ITR 340 (Bom) he submitted that it should be presumed that deposits were made out of the aforesaid funds and therefore no disallowance was warranted under Section 36(1)(iii) of the Act. Per contra, the Ld. Departmental Representative submitted that the deposits wer not made by the Appellant on account of commercial expediency but for the purpose of shifting profits and circumventing taxable rental income of the licensors. He placed reliance upon decision of the Tribunal in the case of Deena Asit Mehta vs. DCIT:[ITA No. 3549/Mum/2016, Assessment Year 2012-13, pronounced on 09.02.2018]. He submitted that in the aforesaid decision, while examining the Leave & License Agreement, the Tribunal had observed that the security deposits were hugely disproportionate to the leave & license fee and that the security deposits were made to circumvent real rent. The Tribunal had, therefore, directed the Assessing Officer to estimate interest on security deposit at the rate of 9% and bring the same to tax in the hands of Ms. Deena Asit Mehta as 12 ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 leave & license fee under the head „Income from House Property‟. In rejoinder, the Ld. Authorised Representative for the Appellant submitted that it is admitted position that the interest free deposits made with the Directors of the Appellant-Company (namely Asit C. Mehta and Ms. Deena Asit Mehta) were received back during the relevant previous year as the aforesaid Directors had subscribed and paid for 9% cumulative preference shares of INR 4.5 Crores.
23. We have heard the rival contention and perused the material on record including the judicial precedents/decisions cited during the course of hearing. We note that out of INR 6.5 Crores given as interest free deposits INR 4.5 Crores were received back as subscription amount for 9% cumulative preference shares during the relevant previous year and were available for utilization for the business of the Appellant. As regards balance amount of INR 2 Crores, a perusal of the balance-sheet as on 31.03.2012 shows that the Appellant had sufficient owned/interest free funds to make deposits as well as interest bearing funds, and therefore, as per the judgment of the Hon‟ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) it can be presumed that the interest free deposits were made out of owned/interest free funds and therefore, disallowance under Section 36(1)(iii) of the Act was not warranted. As regards, the findings returned by the Tribunal in the case of Deena Asit Mehta (supra) are concerned; we note that the same were given after examining the leave & license transaction from the perspective of the licensor and not from the perspective of licensee. In view of the aforesaid, we reverse the decision of CIT(A) on this issue and delete the addition of 13 ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 INR 95,74,500/-made by the Assessing Officer. Ground No. 4 raised by the Appellant is allowed.
Ground No. 5,6 & 724. Ground No. 5, 6 & 7 are disposed off as being infructuous in view of our adjudication on the Ground No. 1 to 4 above.
ITA No. 4448/Mum/2018 (Assessment Year 2013-14)25. By way of the present appeal the Appellant/Assessee has challenged the order, dated 18.03.2013.06.201816, passed by the Ld. Commissioner of Income Tax (Appeals)-9, Mumbai [hereinafter referred to as „the CIT(A)‟] for the Assessment Years 2013-14, whereby the CIT(A) had partly allowed the appeal filed by the Appellant/Assessee against the Assessment Order, dated 11.03.2016 passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟).
26. All the grounds raised in the present appeal are directed against disallowance made by the Assessing Officer under Section 36(1)(iii) of the Act. For Assessment Year 2013-14, taking average interest rate of 10.44%, the Assessing Officer made disallowance of INR 67,91,045/- (6.5 Crores x 10.44%) under Section 36(1)(iii) of the Act. Being aggrieved the Appellant carried the issue in appeal before the CIT(A). The CIT(A) reduced the rate of interest to 9% in view of the decision of the Tribunal in the case of Deena Asit Mehta (supra). Being aggrieved, the Appellant has preferred appeal before us on this issue. Identical addition made by the Assessing Officer for the Assessment Year 2012-13 has been deleted by us while adjudicating Ground No. 4 in appeal for the Assessment Year 2012-13 (ITA No. 3550/Mum/2016) and our findings in relation to the same 14 ITA. No. 3550/Mum/2016 & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 contained in paragraph 21 to 24 above shall apply mutatis mutandis to Ground No. 1 to 3 raised in the present appeal. Accordingly, Ground No. 1 to 3 raised by the Appellant are allowed and addition of INR 67,91,045/- made by the Assessing Officer, to the extent sustained by the CIT(A), is deleted. Ground No. 4 and 5 are disposed off as being infructuous.
27. In the result, the appeal filed by the Appellant for the Assessment Year 2012-13 (ITA No. 3550/Mum/2016) is partly allowed whereas the appeal filed by Appellant for the Assessment Year 2013-14 (ITA No. 4448/Mum/2018) is allowed.
Order pronounced on 26.09.2022.
Sd/- Sd/-
(B.R. Baskaran) (Rahul Chaudhary)
Accountant Member Judicial Member
मुंबई Mumbai; दिन ुंक Dated : 26.09.2022
Alindra, PS
15
ITA. No. 3550/Mum/2016 & 4448/Mum/2018
Assessment Years: 2012-13 & 2013-14
आिे श की प्रदिदिदि अग्रेदिि/Copy of the Order forwarded to :
1. अपीलार्थी / The Appellant
2. प्रत्यर्थी / The Respondent.
3. आयकर आयुक्त(अपील) / The CIT(A)-
4. आयकर आयुक्त / CIT
5. विभागीय प्रविविवि, आयकर अपीलीय अविकरण, मुुंबई / DR, ITAT, Mumbai
6. गार्ड फाईल / Guard file.
आदे शािुसार/ BY ORDER, सत्यावपि प्रवि //True Copy// उप/सहायक पुंजीकार /(Dy./Asstt. Registrar) आयकर अपीलीय अविकरण, मुुंबई / ITAT, Mumbai 16