Income Tax Appellate Tribunal - Mumbai
H.J. Securities P. Ltd, Mumbai vs Department Of Income Tax on 9 August, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
"H" BENCH: MUMBAI
BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER
AND SHRI R.S. PADVEKAR, JUDICIAL MEMBER
ITA No.260 and 2457/Mum/2009
(Assessment Years: 2005-06 and 2006-07)
DCIT -4(1),
6th Floor, R.No.640,
Aayakar Bhavan,
M.K. Road,
Mumbai -400 020 .......... Appellant
Vs
M/s. H.J. Securities Pvt. Ltd.,
24-26, Gr. Floor, Cama Bldg.,
Dalal Street, Fort,
Mumbai -400 001 ........ Respondent
PAN: AAACH 5600 H
Appellant by: Shri Pavan Ved
Respondent by: Shri S.C. Tiwari
Date of Hearing: 09.08.2011
Date of Pronouncement: 28.09.2011
ORDER
PER R.S. PADVEKAR, JM:
Both these appeals are filed by the revenue challenging the respective impugned orders of the Ld. CIT (A) Mumbai for the A.Ys. 2005-06 & 2006-07. The common issues are involved in both these appeals and hence, both these appeals are disposed off by this consolidated order.
2. The first issue is disallowance made to the jobbers invoking Sec. 40(a)(ia) of the Act.
2 ITAs 260 and 2457/Mum/2009 M/s. H.J. Securities Pvt. Ltd.
3. Briefly stated the facts are as under. The assessee-company is a Member of Bombay Stock Exchange (BSE) and is in the business of share broking and trading in shares and securities. The assessee also made the investments in the shares. It was noticed by the A.O. that the assessee-company is engaged in the jobbing in shares. The assessee has credited the profit from the jobbing activity to its profit and loss account. The A.O. was of the opinion that the payment made to the jobbers is subjected to the TDS provision and the assessee should have deducted the TDS on the payments made to the jobbers. Since no tax has been deducted at source (TDS) on the payments made to the jobbers hence the provisions of sec. 40(a)(ia) of the Act are applicable. The A.O, therefore, made the additions of ` 3,81,26,746/- in the A.Y. 2005-06 and ` 3,44,51,182/- in the A.Y. 2006-07. The assessee challenged the addition before the Ld. CIT (A) in both the assessment years and the Ld. CIT (A) deleted the addition. The operative part of the decision of the Ld. CIT (A), more particularly, in the A.Y. 2005-06 is as under:-
"The role of jobbers as summarized in Encyclopedia of Britannica Volume 23, Pages 517 & 518 is that a jobber transacts business on the floor of the Exchange but does not deal with the public and the jobber serves only in the capacity of a principal, buying and selling for his own account and dealing only with brokers and other jobbers. Thus, in effect the transactions are on principal to principal basis. The jobber seeks to maximize his profits by adjusting his buying and selling prices and the jobbers trade on their own account and in view of growing volume of transactions, the jobbers enter into agreement for felicitation of their trade and minimization of market risks. The jobbers are in fact clients acting on their own account and the jobbers deal in shares and securities on profit / loss sharing basis as decided mutually and periodically the 3 ITAs 260 and 2457/Mum/2009 M/s. H.J. Securities Pvt. Ltd.
profit / loss incurred by a jobber is ascertained and shared between the appellant and the jobber after deducting the cost. The relationship between the jobber and the appellant company is that of co-sharer of profit / loss, therefore, provisions of section 194C are not attracted. As provisions of section 194C are not attracted, the disallowance u/s.40(a)(ia) is held to be not proper."
4. Now, the revenue is in appeal before us for the impugned assessment years.
5. We have heard the parties and perused the records. The Ld. Counsel submits that the arrangement between the assessee as a broker and the jobber is on the principal to principal basis and jobber takes away the share of profit in the business done by using the infrastructure of the assessee. He submits that this issue stands covered in favour of the assessee by the decision of the ITAT Mumbai Bench in the case of Dy. CIT vs. M/s. Asset Alliance Securities P. Ltd. in ITA no.1488/Mum/2009 dated 18.07.2010 (2010) TIOL-460-ITAT- MUM. We have also heard the Ld. D.R.
6. We find that the nature of the payments made by the share brokers to the jobbers has been considered by the ITAT Mumbai Bench in the case of M/s. Asset Alliance Securities Pvt. Ltd. (supra) and it is held as under:-
The facts show that there were separate joint ventures entered into by the assessee with several jobbers/arbitragers and payments have been made to them under such agreements and the assessee's share in the profits has been taken to the Profit and Loss Account. In these circumstances the provisions of section 194C are not attracted because in essence and substance the amounts paid to the jobbers or arbitragers did not in reality 4 ITAs 260 and 2457/Mum/2009 M/s. H.J. Securities Pvt. Ltd.
represent the expense of the assessee company but represented payment of the share of the jobbers/arbitragers under the agreement entered into with them. In such a case the assessee is right in saying that there was no question of deducting any tax at source. The above facts also establish that the relationship between the assessee and the jobbers/arbitragers was not of principal and agent but was that of principal to principal. Both had agreed to embark upon a joint venture to trade in shares and securities in the Stock Exchange and to share the profit / loss equally. We do not see how such payments can be termed as payments to contractors for any work to be carried out by them. We therefore uphold the finding of the CIT (A) that these payments do not attract section 194C and the assessee was not liable to deduct tax therefrom. Accordingly section 40(a)(ia) is also not applicable. The payments, in our view, were rightly allowed as deduction by the CIT (A). The grounds 7 to 10 are dismissed.
7. We, therefore, following the decision of the co-ordinate Bench in the case of M/s. Asset Alliance Securities Pvt. Ltd. (supra) confirm the order of the Ld. CIT (A) in both the assessment years and the respective i.e. nos. 1, 2 & 3, taken by the revenue in the A.Y. 2005-06 and grounds 1 & 2 in the A.Y. 2005-06 are dismissed.
8. The next issue is disallowance u/s.40(a)(ia) of the I.T. Act in respect of payment to the NSE & BSE towards lease line and transaction and other charges.
9. The assessee is a share broker and also a Member of BSE & NSE. In the assessment year 2005-06, it was noticed by the A.O. that the assessee has debited ` 67,61,831/- towards VSAT charges and transaction processing charges which were paid to the NSE/BSE. In the opinion of the A.O. the said charges are paid for utilizing technical services and hence, the assessee was required to make the TDS at the 5 ITAs 260 and 2457/Mum/2009 M/s. H.J. Securities Pvt. Ltd.
time of payment to the NSE/BSE. The A.O. was of the further opinion that as the assessee failed to make the TDS on the said payments and hence, in view of the provision of sec.40(a)(ia) of the Act, the entire payment is to be disallowed. He, accordingly, disallowed the expenditure claimed by the assessee towards the payment of VSAT, lease line charges and transaction charges. Same way, in the A.Y. 2006-07 on the same reasoning, he made the disallowance of ` 37,47,375/-. The assessee challenged both the additions before the Ld. CIT (A) and Ld. CIT (A) following the decision of the ITAT Mumbai Bench in the case of Kotak Securities Ltd. vs. Addl. CIT -4(3) Mumbai 124 TTJ (Mumbai) 241/24 DTR 121 (Mum) allowed the claim of the assessee. Now the revenue has challenged the decision of the Ld. CIT (A).
10. We have heard the parties perused the records and gone through the decisions relied upon by the parties. We find that this issue stands fairly covered in favour of the assessee by the decision of the ITAT Mumbai "A" Bench in the case of Kotak Securities Ltd. (supra). The operative part of the said decision is as under:-
"28. To call a payment as fees for technical services it should have been paid in consideration for rendering by the recipient of payment of any (a) managerial service (b) technical or consultancy services; stock exchanges merely provide facility for its members to purchase and sell shares, securities etc., within the framework of its bye laws. In the event of dispute it provides mechanism for settlement of disputes. It regulates conditions subject to which a person can be a member and when and in what circumstances membership can be transferred, cancelled, suspended, etc. The exchange provides a place where the members meet and transact business. The transaction fee paid is on the basis of volume of transaction effected by a member. The stock exchanges do not render any managerial service nor do 6 ITAs 260 and 2457/Mum/2009 M/s. H.J. Securities Pvt. Ltd.
they render any technical consultancy service. The transaction fee is not paid in consideration of any service provided by the stock exchange. It is a payment for use of facilities provided by the stock exchange and such facilities are available for use by any member. The provisions of s. 194J which casts a burden on a person to deduct at source and treat him a defaulter on failure to deduct tax at source, needs to be interpreted strictly and in the absence of a clear obligation on the part of a person spelt out in unambiguous terms by the provisions of s. 194J/ r/w Expln. 2 to s. 9(1)(vii) of the Act, such obligation cannot be implied or left to the ipsi dixit of the Revenue authorities. We therefore hold that transaction fee paid cannot be said to be a fee paid in consideration of the stock exchange rendering any technical services to the assessee. The provisions of s. 194J are therefore not attracted. Therefore, there was no obligation on the part of the assessee to deduct tax at source. Consequently, the provisions of s. 40(a)(ia) were also not attracted and therefore the disallowance made is directed to be deleted."
11. We find no reason to interfere in the order of the Ld. CIT (A) in both the assessment years on this issue. We, accordingly, confirm the same and dismiss respective grounds taken by the revenue in both the appeals.
12. The next issue is treatment of the share transactions whether the Ld. CIT (A) was justified in holding that the assessee did the transaction as an investor and not as a business and the income gain on the share transactions cannot be brought to tax as a business income and this issue is arising in the revenue's appeal in the A.Y. 2005-06, more particularly, ground nos.11, 12 & 13.
13. Briefly stated, the facts are as under. The assessee is a Member of BSE /NSE and also engaged in the trading of the shares. As noted 7 ITAs 260 and 2457/Mum/2009 M/s. H.J. Securities Pvt. Ltd.
by the A.O. the main business of the assessee is share trading and jobbing as more than 96.3% of the revenue is generated from the said activity apart from the business income in the share transactions, the assessee is also declared income from the investment under the head "capital-gains". The A.O. has noted that the assessee has carried huge transactions in shares during the year. The assessee has declared capital-gain at ` 1,95,78,768/-. The A.O. was of the opinion that the said income is generated from the share transactions and it is nothing but the business income of the assessee. The A.O. also referred to the decision of the Hon'ble Supreme Court in the case of Vekant Swamy Naidu & Co. vs. CIT 35 ITR 194. The A.O. treated the entire capital gain declared by the assessee as business income by giving the following reasons:-
1) During the year, the assessee company has earned income from share trading and share broking. There is no other business activity. Hence, whatever nomenclature of income is offered, it is of shares trading only. Whether the income was offered as dividend or income from investment or income from sale of shares. In all cases, income derived is from purchase and sales of securities.
2) It is also observed that the assessee has carried out huge transactions in shares on daily basis, turnover of which runs in crores of rupees. The assessee also carries out transaction in delivery and non-delivery of all type of market transactions.
Hence, the main business of the assessee is to trade in shares, purchase and sales of shares.
3) Since the main business of the assessee is of purchase and sale of securities, it cannot be said that the assessee has carried out investment activity in shares, which is beneficial to the assessee just for the tax purposes. In fact and in substance, the 8 ITAs 260 and 2457/Mum/2009 M/s. H.J. Securities Pvt. Ltd.
assessee is engaged in the business of share trading only. The entire fund of the assessee are utilized for the purpose of making investment in shares only. There is no other business activity.
4. The main intention of the assessee at the time of purchase was to sell subsequently at a profit. There is no motive other than that as there was no intention of the assessee to hold the shares for long time and earn dividend income.
5. The scale of the activity is substantial and transactions are carried out in large scale which may be estimated from the facts that there is STT payment of ` 70 lakhs, hence turnover is thousands of crores.
6. The transactions are carried out continuously and regularly, as the only activity carried out by the assessee is share trading. The entire business set up is for that only and the assessee carries transactions through-out the day in front of trading terminals only.
7. Whatever funds are available with the assessee has been utilized only for making purchase of shares whether, it is borrowed or whether it is owned funds. The entire funds are used for by the assessee for the purpose of making purchases of shares only.
8. Normally the shares of assessee are not held for a substantial period. For few scrips, which is hold for substantial period is for reason that the scrips can be utilized in the margin or can be given as collateral to get loans or against these scrips transactions are carried-out in futures and option. Otherwise normally shares are not held for a substantial period rather the majority of transactions are squared up for less than 1-3 months.
9 ITAs 260 and 2457/Mum/2009 M/s. H.J. Securities Pvt. Ltd.
9. The ratio of sale to purchase is quite high almost all the scrips which have been purchased are sold within 3 months, hence holding period is quite lesser.
10. The assessee has shown some of the scrips are held as stock-in-trade whereas few shares are held as investment. The classification is not done on any scientific basis but carried out on the basis of tax benefits at the time of finalization of balance sheet as to which way it would be beneficial. There is no separate client code for investment activity. There was no intention at the time of purchase to make any investment whatsoever. The shares are classified in investment only when books are finalized and it is seen that substantial profits are earned."
14. The assessee challenged the action of the A.O. before the Ld. CIT (A) and Ld. CIT (A) accepted the plea of the assessee and directed the A.O. to accept the capital-gain declared by the assessee as long- term as well as short-term-capital-gains. The operative part of the findings of the Ld. CIT (A) is as under:-
"(i) The appellant is in the business of share brokerage and its income from brokerage business as per Return of Income is at ` 23.77 crores and the appellant has disclosed income from investment at ` 1.95 crores. The appellant was asked to furnish details of investment vis-à-vis own funds, details of dividend earned, turnover of trading arbitrate and investments to have a correct picture of the nature of transaction undertaken by the appellant.
(ii) It is seen that the investment in share as on 31st March of A.Y. 03-04 to 07-08 is much less than the appellant's own funds 10 ITAs 260 and 2457/Mum/2009 M/s. H.J. Securities Pvt. Ltd.
for A.Y. 05-06, the appellant's own fund as per Balance Sheet is at ` 12.56 crores whereas the investment in shares is at ` 8.39 crores, the dividend received by the appellant in 05-06 is at ` 28.92 lakhs. The appellant is maintaining an investment portfolio and has not treated the shares as stock in trade, therefore, the shares have held as investment and not as stock in trade. The shares, therefore, are capital assets as defined in Section 2(14) of the I.T. Act and transfer of the capital assets are assessed as Long Term Capital Gain and Short Term Capital Gain u/s.229B and 242B respectively. The A.O. is, therefore, directed not to treat ` 1,95,78,968/- as business income but as Long Term and Short Term Capital Gain. Ground C is allowed."
15. Now, the revenue is in appeal before us.
16. We have heard the rival submissions of the parties and perused the records. The Ld. Counsel for the assessee submits that in the A.Ys. 2003-04, 2004-05 and 2006-07 the assessment were completed u/s.143(3) of the Act and in all the assessment orders, the A.O. has accepted that the assessee is maintaining two portfolios; one portfolio referred to as 'stock in trade' and another as 'investments, and said is also permissible. It is further submitted that in A. Yrs. 2003-04, 2004- 05 and 2006-07 also the assessee has done huge trading transactions in the shares and also the investment transactions and as short-term and long-term capital gains declared by the assesse has been accepted by the A.O. (copies of the assessment order for the A.Ys. 2003-04, 2004-05 and 2006-07 (Pages 31 to 48) of the paper-book Volume-II). The Ld. Counsel relied on the decision of the Hon'ble High Court of Bombay in the case of Gopal Purohit and submits that it is certainly surprising why the different approach is adopted by the A.O. only in this year when there is no change of the facts as well as the nature of transactions. He, therefore, pleaded for confirming the order of the Ld. CIT (A) on the rule of consistency. Per contra, the Ld. D.R. 11 ITAs 260 and 2457/Mum/2009 M/s. H.J. Securities Pvt. Ltd.
argues that the assessee's 92% income is from the trading transactions of the shares and just to get benefit of capital gain for saving the tax the assessee has classified the portfolios.
17. We find no merits in the arguments of the Ld. D.R. We find that so far as the nature and volume of the transactions are concerned, those were also same in the A.Ys. 2003-04 and 2004-05. In both those years, the assessee has declared two portfolios in respect of the share transactions i.e. stock-in-trade and investment. The assessee also declared the business income from the trading of the shares as well as capital-gains from the investments. We further find that in the subsequent year i.e. A.Y. 2006-07, again the A.O. has accepted the portfolios as well as the head of incomes declared by the assessee i.e. 'business income from share trading as well as capital-gains from the investments'.
18. In the case of CIT vs. Gopal Purohit 228 CTR (Bom) 582, in the identical situation, their Lordships have held that there should be consistency in the approach of the tax authority/A.O., when there is no change in the nature of transactions of the assessee. In the said case, the following substantial questions of law have been framed:-
(a) Whether, on the facts and circumstances of the case and in law, the Hon'ble Tribunal was justified in treating the income from sale of 7,59,003 shares of Rs 5,00,12,879 as an income from short-term capital gain and sale of 3,88,797 shares of Rs 6,65,02,340 as long-term capital gain as against the "income from business" assessed by the AO ?
(b) Whether, on the facts and circumstances of the case and in law, the Hon'ble Tribunal was justified in holding that principle of consistency must be applied here as authorities 12 ITAs 260 and 2457/Mum/2009 M/s. H.J. Securities Pvt. Ltd.
did not treat the assessee as a share trader in preceding year, in spite of existence of similar transaction, which cannot in any way operate as res judicata to preclude the authorities from holding such transactions as business activities in current year ?
(c) Whether, on the facts and circumstances of the case and in law, the Hon'ble Tribunal was justified in holding that presentation in the books of account is the most crucial source of gathering intention of the assessee as regards tot he nature of transaction without appreciating that the entries in the books of accounts alone are conclusive proof to decide the income ?"
on the principles of the consistency, the Hon'ble High Court has held as under:-
"3. Insofar as Question (b) is concerned, the Tribunal has observed in Para 8.1 of its judgment that the assessee has followed a consistent practice in regard to the nature of the activities, the manner of keeping records and the presentation of shares as investment at the end of the year, in all the years. The Revenue submitted that a different view should be taken for the year under consideration, since the principle of res judicata is not applicable to assessment proceedings. The Tribunal correctly accepted the position that the principle of res judicata is not attracted since each assessment year is separate in itself. The Tribunal held that there ought to be uniformity in treatment and consistency when the facts and circumstances are identical, particularly in the case of the assessee. This approach of the Tribunal cannot be faulted. The Revenue 13 ITAs 260 and 2457/Mum/2009 M/s. H.J. Securities Pvt. Ltd.
did not furnish any justification for adopting a divergent approach for the assessment year in question. Question
(b), therefore, does not also raise any substantial question."
19. In the present case, in our opinion, the rule of consistency must be adopted and we fail to understand when the nature of the transactions are the same then why the different approach is adopted by the A.O.? On the principles of consistency, we uphold the order of the Ld. CIT (A) and dismiss the relevant grounds taken by the revenue in the A.Y. 2005-06.
20. In the result, both the appeals of the revenue are dismissed.
Order pronounced in the open court on this day of 28th September 2011.
Sd/- Sd/-
(P.M. JAGTAP) (R.S. PADVEKAR)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 28th September 2011
Copy to:-
1) The Appellant.
2) The Respondent.
3) The CIT (A) IV, Mumbai.
4) The CIT-4, Mumbai.
5) The D.R. "H" Bench, Mumbai.
By Order
/ / True Copy / /
Asstt. Registrar
I.T.A.T., Mumbai
*Chavan
14 ITAs 260 and 2457/Mum/2009
M/s. H.J. Securities Pvt. Ltd.
Sr.N. Concerned
Episode of an order Date Initials
1 Draft dictated on 14/15.09.2011 Sr.PS
2 Draft placed before author 15.09.2011 Sr.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.PS/PS Sr.PS/PS
6 Kept for pronouncement on Sr.PS/PS
7 File sent to the Bench Clerk Sr.PS/PS
8 Date on which file goes to the Head Clerk
9 Date of dispatch of Order