Income Tax Appellate Tribunal - Mumbai
Prime Broking Company (I) Ltd, Mumbai vs Assessee on 4 October, 2012
ITA No.6627 of 2010 Prime Broking Company India Ltd
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" Bench, Mumbai
Before Shri D.K. Agarwal, Judicial Member and
Shri B. Ramakotaiah, Accountant Member
ITA No.6627/Mum/2010
(Assessment year: 2007-08)
Prime Broking Company (I) Ltd, Vs. ACIT, Circle 4(2),
CAS, 2nd Floor, Voltas Mumbai
International House, 28 G.N.
Vaidya Marg, Fort,
Mumbai 400001
PAN: AAACP 3113 C
(Appellant) (Respondent)
Assessee by: Shri Vipul B.Joshi &
Shri Aditya Bhatt
Department by: Shri A.C. Tejpal, CIT(DR)
Date of Hearing: 04/10/2012
Date of Pronouncement: 19/10/2012
ORDER
Per B. Ramakotaiah, A.M.
This is an assessee's appeal against the order of the CIT (A)-8 Mumbai dated, 29.07.2010. Assessee has raised two grounds on two issues in the grounds of appeal.
2. We have heard the learned Counsel and the learned DR and perused the paper book placed on record containing written submissions made to CIT (A) along with the enclosures.
3. Ground No.1 is on the issue of disallowance of an amount of `.3,78,948/- paid to stock exchanges which were disallowed by AO on the reason that these are paid in violation of law and penalty cannot be allowed as an expense. The CIT (A) confirmed the same.
4. As seen from the details of amounts involved in this break up of the charges, dues and late fees required by the Exchanges are as under:
Page 1 of 7ITA No.6627 of 2010 Prime Broking Company India Ltd Particulars Charges by Charges NSE by BSE Charges for exceeding exposure limits 65,000 34,685 Dues for non settlement 1,20,353 -
Charges for open limit 94,864 -
Charges for non registration of codes 7,400 9,400
Charges for non confirmation of 6A/7A - 31,865
Charges for non reporting 5,800 1,000
Other charges including in WDM 8,225 356
segment
Total 301,642 77,306
As can be seen from the above, the payments are for violation of various limits placed by the Stock Exchange or for non-reporting of some data etc., There is no penalty for violation of any law or statute. These are only for contractual violations, in the nature of technical violations. Assessee relied before CIT(A) on the decision of the Hon'ble Bombay High Court in the case of Chemicals & Fibers of India Ltd, 124 ITR 413 that breach of obligation does not amount to infraction of law or public policy. Now this issue is covered by the decision of the Hon'ble Bombay High Court in the case of CIT vs. Angel Capital & Debit Market Ltd in ITA No.475 of 2011 dated 28th July,2011 wherein the Hon'ble High Court held that the amount paid as penalty to stock exchanges was on account of irregularities committed by assessee clients and such payments were not on account of infraction of law and hence allowable as business expenditure. Hon'ble High Court held that the ITAT findings on this issue is similar to the case of CIT vs. The Stock and Bond Trading Company in ITA No.4117 of 2010 dated 14th October, 2011, and held as under:
"3. As regards the second question is concerned, the finding of fact recorded by the CIT (A) and upheld by the ITAT is that the payments made by assessee to the Page 2 of 7 ITA No.6627 of 2010 Prime Broking Company India Ltd Stock Exchange for violation of their regulation are not an account of an offence or which is prohibited by law. Hence, the invocation of explanation to section 37 of the Income Tax Act 1961 is not justified. In our opinion, in the facts and circumstances of the present case, no fault can be found with the decision of the ITAT. Accordingly, the second question cannot be entertained".
5. Even though the learned CIT (DR) tried to distinguish on the basis of the decision of the Hon'ble Supreme Court in the case of Organo Chemical Industries and another vs. Union of India, AIR 1979 (SC) 1803 to submit that the damages are for breach of statutory obligations, the said decision is not applicable as the issue was examined by the Hon'ble Supreme Court while analyzing the damages paid under the Employees Provident Funds and Miscellaneous Provisions Act 1952 (section 14B) whereas the payments made to the Stock Exchanges are not in violation of any Act, but contractual violations between the Stock Exchanges and the Broker clients. These amounts cannot be considered as payments for infraction of law. Accordingly, respectfully following the principles laid down by the jurisdictional High Court in the above referred cases, we hold that the charges levied and collected by the NSE and BSE does not violate the provisions of section 37(1) and therefore, allowable as business expenditure. Ground No.1 is accordingly allowed.
6. Ground No.2 is on the issue of disallowance under section 40(a)(ia) of an amount claimed as reimbursement of rent. The fact relating to the present issue was that assessee is 100% subsidiary of Prime Securities Ltd (PSL) and they were occupying the office premises known as Phoenix House and PSL paid `.31,94,070/- including parking and dish antenna charges to group of co-owners and made TDS on the amounts so paid. Since assessee is sharing the same premises with the said PSL, it raised debit notes for reimbursement of expenses at 80% of the rent, 40% of parking Page 3 of 7 ITA No.6627 of 2010 Prime Broking Company India Ltd charges and 60% of dish antenna charges every month and accordingly assessee paid an amount of `.25,55,256/- to the parent company. It was the submission that this amount is only reimbursement of expenditure on which TDS under section 194I need not be deducted. It was further submitted that the TDS was already made by the said PSL when paid to the co-owners on the gross amount and as assessee does not have any separate agreement or has not sublet the premises, there is no need for deducting the tax. Assessee relied on the clarifications issued by the Board Circular No.715 and also the decision of the ITAT in the case of Income Tax Officer vs. Dr. Willmar Schwabe (I) P. Ltd. [2005] 3 SOT 71 ( Delhi ). It further relied on various other cases to submit that provisions of section 40(a)(ia) does not apply. The CIT (A) however, did not agree with assessee's contentions and upheld AO's order that provisions of section 194I will apply and since assessee did not deduct the tax amount of `.25,55,256/- has to be disallowed in view of the provisions of section 40(a)(ia).
7. The learned counsel referring to various submissions made before AO and the CIT (A) submitted that there is no payment of rent but only reimbursed the cost of common utilities and filed the submissions made to AO in assessment year 2006-07 wherein in addition to the rent and other charges, assessee also reimbursed the salaries, office maintenance expenses, travelling expenses which were accepted by AO without any disallowance under section 40(a)(ia). As far as legal provisions are concerned, assessee relied on the following case law:
(a) G.E. India Technology Centre (P) Ltd vs. CIT (2010) 327 ITR 456 (SC).
(b) CIT vs. Siemens Akkitongeselschaft (2009) 310 ITR 320 (Bom.)
(c) Mahindra & Mahindra vs. DCIT (2010) 122 ITD 216 (Mum.) Page 4 of 7 ITA No.6627 of 2010 Prime Broking Company India Ltd
(d) Dresser-Rand India (P) Ltd vs. ACIT (2012) 13 ITR 422 (Mum.Trib).
(e) DCIT vs. Lazard India (P) Ltd (2010) 41 SOT 72 (Mum.)
(f) ACIT vs. Result Services (P) Ltd (2012) 52 SOT 598 (Del.)
(g) Global E-Business Operations (P) Ltd vs. DCIT (2012) 23 taxmann.com 455 (Bang.)
(h) Emersons Process Management India (P) Ltd vs. Add. CIT (2011) 47 SOT 157 (Mum.) (URO).
8. After considering the issue and rival contentions, we are of the view that there is no requirement of any TDS on the reimbursement of the expenditure. There is no dispute with reference to assessee sharing the office premises with the 100% holding company PSL. There is also no dispute that in assessment year 2006-07 assessee not only reimbursed the rent and other charges but also salary, office expenses, travelling expenses etc which were accepted by AO and no disallowance was made under section 40(a)(ia). This indicates that assessee is only reimbursing the expenditure and there is no lessor and lessee relationship between the PSL and assessee. In addition, the said PSL deducted the tax on the entire gross amount paid to co-owners as per the details on record. Therefore, we are of the opinion that the provisions of section 194I does not apply.
9. Similar issue was considered by the Coordinate Bench in the case of ACIT vs. Results Services (P) Ltd, 52 SOT 598 (Del), wherein "assessee was a 100% subsidiary of holding company 'M'. The holding company had taken office premises on rent and it permitted assessee to use portion of said premises. Assessee reimbursed certain amount to the holding company without deducting any TDS. The rent for the whole premises was paid directly by the holding company to the lessor and the tax was deducted as per provisions of section 194-I. In course of assessment, AO opined that assessee was liable to deduct TDS under section 194-I on payment made to the holding company for the use of office premises. On assessee's Page 5 of 7 ITA No.6627 of 2010 Prime Broking Company India Ltd failure to do so, AO disallowed payment made by assessee by invoking provisions of section 40(a)(ia). On appeal, the Commissioner (Appeals) deleted the disallowance. On further appeal, the Tribunal held that the amount only represented reimbursement of actual rent expenses and since there was no lessor and lessee relationship, provision of section 194-I are not attracted".
10. Similar principle were established in the other cases relied upon by the learned Counsel cited supra. Therefore, legally the amount of reimbursement does not attract the provision of section 194-I.
11. However, a question was raised how assessee is claiming the expenditure in its books whether as rent or otherwise. No such details were placed on record. Moreover, how the amount was treated by M/s PSL in their books of account was also not made available. In case the said PSL is claiming the gross rent against the Profit & Loss A/c and showing the reimbursement of rent as income, then the issue may have to be examined whether there is any lessee or lessor relationship between the two companies which are independent legal entities. In the case of Result Services (Supra), there is an agreement with the owners that the premises will be used along with its subsidiaries/associated companies etc. and extracts of those agreement were taken into consideration in holding that the expenditure was reimbursement of expenditure. Neither AO nor the CIT (A) examined the lease agreement with the owners, nor the accounting treatment given by the said PSL or assessee in the books of account. Therefore, in order to examine the facts the matter has to be restored to the file of AO to examine the lease deed entered by the said PSL and the co-owners and whether they have a right to share the accommodation with the group concerns/subsidiary companies as considered by the Coordinate Page 6 of 7 ITA No.6627 of 2010 Prime Broking Company India Ltd Bench in the above case of Result Services (Supra). The accounting treatment given by the respective parties has a bearing on the issue and has to be examined while deciding the issue whether section 194-I provisions are applicable. Before deciding the issue, assessee should be given due opportunity and AO is also directed to keep in mind the stand taken in earlier years or later years so that rule of consistency can also be followed. With these directions the ground is restored to the file of AO to examine the facts first and decide on principles of law. Accordingly, the matter is therefore, set aside to the file of AO for fresh consideration.
12. In the result appeal filed by assessee is considered allowed for statistical purposes.
Order pronounced in the open court on 19th October, 2012.
Sd/- Sd/-
(D.K. Agarwal) (B. Ramakotaiah)
Judicial Member Accountant Member
Mumbai, dated 19th October, 2012.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, "C" Bench, ITAT, Mumbai
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Mumbai Benches, MUMBAI
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