2014-VIL-900-ITAT-MUM

Income Tax Appellate Tribunal MUMBAI

I.T.A. No.5939/Mum/2011, I.T.A. No.7235/Mum/2011

Date: 13.08.2014

THE DCIT-4 (1) ,

Vs

M/s . EDELWEISS SECURI TIES LTD. AND VICE-VERSA

BENCH

Shri N.K. Billaiya, Accountant Member And Shri Sanjay Garg, Juicial Member

JUDGMENT

N.K. Billaiya, AM:

These cross appeals by the Revenue and the assessee are preferred against the order of the Ld. CIT(A)-8, Mumbai dt. 21.6.2011 pertaining to A.Y.2008-09. As both these appeals were heard together, they are disposed of by this common order for the sake of convenience and brevity.

ITA No. 5939/M/2011 – Revenue’s appeal

2. The Revenue has raised following two grounds:

“1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition the penalty levied by Stock Exchange of Rs. 1,53,613/- and Rs. 23,21,347/- being VSAT/lease line charges.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of provision for loss on mark to market on derivative of Rs. 2,21,49,882/-.”

3. At the very outset, the Ld. Counsel for the assessee stated that both grievances of the Revenue are covered in favour of the assessee by the decision of the Hon’ble Jurisdictional High Court and by the order of the Tribunal.

4. The Ld. Departmental Representative fairly conceded to this.

5. We have carefully perused the orders of the authorities below and the decisions relied upon by the Ld. Counsel. First grievance relates to the deletion of the penalty levied by Stock Exchange amounting to Rs. 1,53,613/- and Rs. 23,21,347/- being VSAT/Lease Line charges.

6. The Ld. CIT(A) has considered this issue at para-2 on page-1 of his order wherein he has followed the decision of his predecessor for A.Yrs. 2005-06. 2006-07 & 2007-08. We also find that an identical issue was before the Jurisdictional High Court in the case of CIT Vs Angel Capital and Debit Marketing in ITA No. 475 of 2011 wherein the Hon’ble High Court has held that in so far as VSAT and Lease Line charges paid by the assessee are concerned, they do not have any element of income therefore deducting tax while making such payments do not arise and in so far as the penalty levied by the Stock Exchange on account of irregularities committed by the assessee’s clients, such payments were not on account of any infraction of law and hence allowable as business expenditure. It was held that in such a case Explanation to Sec. 37 would not apply. Respectfully following the decision of the Hon’ble High Court, ground No. 1 is dismissed.

7. Ground No. 2 relates to the deletion of addition of provision for loss on mark to market on derivatives amounting to Rs. 2,21,49,882/-.

8. An identical issue came up for hearing in the case of group company of the assessee namely M/s. ECL Finance Ltd., in ITA No. 7656/M/2011 wherein the Tribunal has considered the issue at para-5 of its order and at para-8, the Tribunal followed the findings of ITA No. 5324/M/07 and at para-9 considered Instruction No. 3/2010 of CBDT dt. 23.3.2010 and confirmed the findings of the Ld. CIT(A). We find that the Ld. CIT(A) has followed the decision of the Tribunal in ITA No. 5324/M/07. As no distinguishing fact/decision has been brought before us, we do not find any reason to interfere with the findings of the Ld. CIT(A). This ground of the Revenue is dismissed.

9. In the result, the appeal filed by the Revenue is dismissed.

ITA No. 7235/M/2011 – Assessee’s appeal

10. First grievance of the assessee relates to the disallowance u/s. 14A r.w. Rule 8D of the I.T. Rules.

11. During the course of the scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has earned exempt income on which the assessee has allocated Rs. 59,66,420/- towards expenses incurred to earn exempt income. The assessee was asked to furnish the computation of expenditure to be disallowed as per the provisions of Sec. 14 of the Act read with Rule 8D. The assessee filed a detailed reply dt. 6.12.2010. The reply of the assessee did not find favour with the AO who was of the opinion that it is incumbent upon the AO to disallow any expenditure which is attributable to earning of exempt income. The AO proceeded by computing the disallowance as per Rule 8D and computed such disallowance at Rs. 8,95,14,178/-.

12. The assessee carried the matter before the Ld. CIT(A) but without any success.

13. It was strongly contended before the Ld. CIT(A) that the dividend amount of Rs. 7.518 crores has been earned on shares held as stock-intrade and Rs. 7 crores on Mutual Fund which were claimed as exempt u/s. 10(34) and 10(35) respectively. It was pointed out that the assessee itself has disallowed 5% of dividend income. The disallowance was computed at Rs. 59.66 lakhs. It was further contended that interest bearing borrowed fund had been utilized for fixed deposits with various banks resulting in taxable interest income. Earning of dividend income was only incidental and ancillary to its share trading business activity. After considering the facts and the submissions, the Ld. CIT(A) observed that the amount of disallowance for the purpose of Sec. 14A has to be determined as per Rule 8D and accordingly confirmed the disallowance made by the AO.

14. Aggrieved by this, the assessee is before us.

15. The Ld. Counsel for the assessee drew our attention to the financial statement of the assessee and pointed out that the assessee is having sufficient own funds to cover up the investments. Further the incremental loan during the year has gone down. It is the say of the Ld. Counsel that considering the financials of the assessee, no borrowed fund has been utilized for earning exempt income.

16. Per contra, the Ld. Departmental Representative supported the findings of the Revenue authorities.

17. We have carefully perused the orders of the authorities below and the relevant material placed before us. We have also considered the judicial decisions relied upon by the assessee. Balance sheet of the assessee shows that it has Reserves and Surplus amounting to Rs. 2387387218/-. Total investment in quoted and unquoted shares is at Rs. 75,09,09,184/-. These financials figures speak for themselves. The assessee is having interest free funds of its own. The Hon’ble High Court of Bombay in the case of Reliance Utilities & Power Ltd. 313 ITR 340 has held that “ if there be interest free fund available to assessee sufficient to meet the investments and at the same time the assessee had raised a loan, it can be presumed that the investments were from interest free funds available”. The same view was reiterated by the Hon’ble Bombay High Court in the case of CIT Vs HDFC Bank Ltd. in Income Tax Appeal No. 330 of 2012. We also find that the assessee has suo motu disallowed 59.60 lakhs. The AO has computed the disallowance by applying Rule 8D and while doing so, the AO has considered the value of stock-in-trade shares and securities as investments. Further, the AO has considered the total investment instead of investment on which dividend income was earned which makes the assessment order erroneous and further the First Appellate Authority order is also erroneous as he has confirmed the findings of the AO. In our considered view, considering the financials of the assessee in totality the suo motu disallowance made by the assessee should suffice the mandate of provision of Sec. 14A of the Act. No further disallowance is required. We, accordingly, set aside the findings of the Ld. CIT(A) and direct the AO to delete the disallowance made u/s. 14A of the Act read with Rule 8D. First grievance of the assessee is allowed.

18. The second issue relates to the disallowance of bad debts of Rs. 16,94,140/-.

19. This issue has been discussed by the AO at Para-8 on page 22 of his order. Applying the provisions of Sec. 36(1)(vii) r.w. Sec. 36(2) of the Act, the AO came to the conclusion that such bad debts cannot be allowed.

20. The assessee carried the matter before the Ld. CIT(A) and it was pointed out that out of the total write off of Rs. 16,94,140/-, Rs. 15,45,548/- represent rounding up difference of brokerage charged and recovered by the assessee from its client. After considering the facts and the submissions, the Ld. CIT(A) was of the opinion that the assessee did not choose to sell the shares within two days from the closure of accounts is not justifiable and accordingly confirmed the findings of the AO.

21. Before us, the Ld. Counsel for the assessee stated that the issue is squarely covered in favour of the assessee by the decision of the Hon’ble Bombay High Court in the case of Shreyas Morakia 285 ITR 37.

22. The Ld. DR simply relied upon the findings of the lower authorities.

23. We have carefully perused the orders of the authorities below and the decision of the Hon’ble Bombay High Court brought to our notice.

On identical facts, the Hon’ble Bombay High Court held as under:

“Held,_ dismissing the appeal, that the value of the shares transacted by the assessee as a stock broker on behalf of his client was as much a part of the debt as was the brokerage charged by the assessee on the transaction. The brokerage having been credited to the profit and loss account of the assessee, it was evident that a part of the debt was taken into account in computing the income of the assessee. The fact that the liability to pay the brokerage may arise at a point in time anterior to the liability to pay the value of the shares transacted would not make any material difference to the position. Both constitute a part of the debt which arises from the very same transaction involving the sale or, as the case may be, purchase of shares. Since both form a component part of the debt, the requirements of section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee. Therefore, the assessee was entitled to deduction by way of bad debts under section 36(1)(vii) read with section 36(2) in respect of the amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients”

Respectfully following the decision of the Hon’ble Bombay High Court, findings of the Ld. CIT(A) are set aside. Second grievance of the assessee is allowed.

24. In the result, the appeal filed by the Revenue is dismissed and the cross appeal filed by the assessee is allowed.

Order pronounced in the open court on 13th August, 2014

 

DISCLAIMER: Though all efforts have been made to reproduce the order accurately and correctly however the access, usage and circulation is subject to the condition that VATinfoline Multimedia is not responsible/liable for any loss or damage caused to anyone due to any mistake/error/omissions.