IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH "I", MUMBAI
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER
ITA No. 168/Mum/2010
Assessment Year : 2006-07
IL&FS Investsmart Ltd. Addl. Commissioner of income Now known as HSBC Invest tax
Direct (India) Ltd. Range-4(1) Dhanasingh Processor Mumbai. Premises Vs.
J.B. Nagar, Andheri Kurla Road
PAN No.AAACI 3364 A
ITA No. 1102/Mum/2010
Assessment Year : 2006-07
DCIT -4(1) IL&FS Investsmart Ltd. 6th Floor, Room No.640 Now known as HSBC Invest Aayakar Bhavan Direct (India) Ltd. Mumbai-20. Vs. C-22, G-Block, Bandra Kurla Complex, Bandra (E)
PAN No.AAACI 3364 A
Assessee by : Shri Dilip V. Lakhani
Revenue by : Shri O.P. Singh
Date of hearing : 19/08/2013 Date of Pronouncement : 23/08/2013 2 ITA No.168 & 1102/M/10
PER B. RAMAKOTAIAH, AM:
These are cross appeals by the assessee and revenue against the orders of the CIT(A), Mumbai dated 04.11.2009 for the assessment year 2006-07.
2. We have heard the ld. AR and the ld. DR.
3. The assessee has raised six grounds on four issues in its appeal. The assessee is in the business of share and stock broking, merchant banking, underwriting of securities and distribution of financial products etc. It filed total income of Rs.89.54 crores. In the course of assessment proceedings, the AO disallowed entrance fee paid to the club of Rs.15,68,750/- and also STT paid to an extent of Rs.55,88,717/-, bad debts to the extent of Rs.15,93,763/- and an amount of Rs.6,52,460/- stated to be penalty in violation of bye-laws of stock exchange and disallowance under section 14A invoking Rule 8D at Rs.33,51,001/-. AO also levied interest u/s 234B. The assessee contested the same before CIT(A) who deleted the disallowance of penalty and also gave relief on interest under section 234B while confirming addition of other disallowances. Revenue is in appeal in deletion of amount of penalty and interest under section 234B whereas the assessee is in appeal on the disallowances made in the assessment order.
4. Ground No.1 pertains to disallowance of an amount of Rs.33,53,001/- under Section 14A r.w. Rule 8D. The AO noticed that the assessee has earned an amount of Rs.12,06,10,934/- as dividend income and claimed exempt under section 10(34) of the Act. Invoking provisions of Rule 8D, AO computed disallowance at Rs.33,51,001/- which was confirmed by the ld. CIT(A).
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5. It was contended that application of Rule 8D is not permitted for assessment year 2006-07 as the said provision came into effect w.e.f. assessment year 2008-09 and the Hon'ble Jurisdictional High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. 328 ITR 81 (Bom) stated that reasonable amount can be disallowed under section 14A but cannot be done under Rule 8D which has only prospective applicability. Coming to the merits, it was submitted that out of the total dividend earned an amount of Rs.11.36 crores was earned from mutual funds wherein the agent commission was borne by the mutual fund itself and there is no expenditure by the assessee in earning that dividend. Further, it was submitted that the assessee has more than Rs.658.78 crores of reserves and surplus and investments only Rs.37.43 crores as against Rs.16.04 crores at the beginning of the year. It was submitted that the assessee has own funds many more times and it's profit in the year itself is more than investments. Therefore, there is no utilization of borrowed funds which are exclusively used for the business purposes. It was the contention that no amount need be disallowed under section 14A. The ld. DR however supported the orders of the AO.
6. We have considered the rival contentions. As held by the Hon'ble Jurisdictional High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra) Rule 8D cannot be invoked for assessment year 2006-07. Even as seen from the computation the AO arrived at average investment at Rs.39.88 crores whereas average of investments at the end of the year and beginning of the year comes to about Rs.27.00 crores only. Therefore, even working seems to be wrong. Be that as it may, Rule 8D cannot be invoked for this assessment year and only a reasonable amount can be considered for disallowance for earning exempt income. As seen from the reserves and profits assessee has more funds than investments, so disallowance of interest without establishing nexus does not arise. Considering that assessee has earned dividend income of Rs.12.06 crores, we are of the opinion that 1% of the amount can be 4 ITA No.168 & 1102/M/10
considered as reasonable, as has been held by the various co-ordinate benches in similar cases for the relevant assessment year. Even though the ld. Counsel submitted that an amount of Rs.11.36 crores pertained to dividend on mutual funds, this fact was neither recorded by AO nor canvassed before authorities. Therefore, this contention can not be accepted. We are of the opinion that 1% of the dividend earned can be considered as reasonable amount for disallowance under section 14A on the given facts. The ground is partially allowed and AO is directed to disallow accordingly.
7. Ground No.2 pertains to disallowance of STT paid on behalf of claints amounting to Rs.55,88,717/-. It was the contention of AO that STT paid on behalf of the claints can not be allowed as deduction in view of the provisions of section 40(a)(ib) of the Income tax Act. Same was confirmed by CIT(A).
8. It was fairly admitted that the CIT(A) has followed the order in assessment year 2005-06 and dismissed the ground and in assessment year 2005-06 the matter was restored to AO for examination of the contentions raised by the assessee. The order of ITAT in ITA No.5372/Mum/2008 and ITA No.5992/Mum/2008 for assessment year 2005-06 is as under :-
"16. We have carefully considered the rival submissions and perused the orders of the lower authorities. We find some force in the contention of the Counsel for the assessee so far as the treatment of brokerage inclusive of STT is concerned. However, in all fairness, in our humble opinion, this issue deserves to be looked afresh. Therefore, we restore this issue back to the file of AO with a direction to examine the book entries in the light of demonstration made by the Counsel for the assessee before us. Needless to mention that a reasonable opportunity of being heard should be given to assessee."
Respectfully following the above, we restore this issue to the file of AO for fresh examination as in earlier year.
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9. Ground No.3 pertains to the issue of disallowance of bad debts. Assessing Officer disallowed total amount of Rs.15,93,763/- as bad debt out of which an amount of Rs.14,71,960/- is on account of brokerage which has been taken into computation of income by the assessee in earlier years. The ld. CIT(A) gave relief to that extent, while confirming the balance amount of Rs.1,21,803/- which according to him is not covered by the provisions of section 36(2). It was the submission that this amount was receivable from the clients in the business of share trading and brokerage and amount is allowable as deduction in view of the Hon'ble Jurisdictional High Court decision in the case of CIT Vs. Shreyas S. Morakhia (342 ITR 285). Since, in the business of share broking, the amount payable by the clients are also considered as 'amount taken into account', following the principles laid down by the Hon'ble Jurisdictional High Court in the above referred case, we direct AO to allow the amount as bad debt of Rs. 1,21,803. Accordingly, ground No.3 is allowed.
10. Ground No.4 is alternate ground claiming the amount of bad debt as business loss. This ground becomes academic in view of allowing ground No.3.
11. Ground No.5 and 6 pertain to issue of entrance fee paid to club. AO disallowed total amount of Rs.15,68,750/- as amount paid to club M/s Wellington Gymkhana. The assessee relied on the decision of Hon'ble Bombay High Court in the case of OTIS Elevator Co.(I) Ltd. (195 ITR 682) which Assessing Officer did not agree and held that expenditure was capital in nature and hence can not be allowed. The ld. CIT(A) while allowing "hoarding charges" of Rs.68,750/- however, confirmed the amount of Rs.15.00 lacs. It was submitted that this amount was paid for employee-director and the amount is allowable by virtue of the judgment of Hon'ble Supreme Court in the case of CIT, Bangalore vs. United Glass MFG Co. Ltd. in Civil Appeal No. 6447 of 2012 and also by the decision of 6 ITA No.168 & 1102/M/10
Hon'ble Delhi High Court in the case of CIT vs. Samtel Color Ltd. (326 ITR 425). The ld. DR however submitted that the amount is paid towards entrance fee for a period of ten years. Since there is enduring benefit the amount is capital in nature.
12. We have considered the rival submissions. The Hon'ble Delhi High Court in the case of CIT vs. Samtel Color Ltd (supra), considered similar facts and held that admission fee paid towards corporate membership was an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it facilitated the smooth and efficient running of a business and did not add to the profit earning apparatus of a business enterprise. The Hon'ble Delhi High Court followed the judgment of Hon'ble Bombay High Court in the case of Otis Elevator Co.(I) Ltd. (195 ITR 682), relied on by assessee before the authorities. In view of the above, we direct the AO to allow the amount as expenditure u/s. 37(1). The grounds are allowed.
13. In the result, assessee appeal is partly allowed.
14. In the revenue appeal ground No.1-5 pertain to the issue of allowing an amount of Rs.6,52,450/- paid to stock exchange, considered by AO as in violation of bye-laws of stock exchange and as infringement of law. 14.1 It was submitted that this issue was squarely covered by the orders of ITAT in assessment year 2005-06 in ITA No.5372/M/08 and ITA No.5992/M/08 dated 30.10.2012 wherein it was held as under :- "4. Ground No. 8 to 13 relates to the disallowance of penalty of Rs.25,82,779/- being debited by the assessee on violation of the bye laws of the stock exchange. The Counsel once again pointed out that the issues involved in these grounds are also covered by the very same decision of the Hon'ble jurisdictional High Court (supra) wherein on the following question raised by the Revenue, the Hon'ble High Court held in para-3 as under:
"3. As regard question (C) is concerned the finding of fact recorded by the I.T.A.T. is that the amount paid as penalty was 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. In such a case the Explanation to 7 ITA No.168 & 1102/M/10
section 37 would not apply. Accordingly question (C) raised by the Revenue cannot be entertained."
5. The learned Counsel for the assessee has also pointed out that the issue is also covered by the decision of the Hon'ble Tribunal in the case Godrej & Boyce Mfg. Co. Ltd. vs. I.T.Act (2010) 2 ITR (Tribu) 355 (Mum.) and Classic Share & Stock Broking Services Ltd. vs. DCIT (2007) 11 SOT 377 (Mum.).
6. We have carefully perused the orders of the lower authorities and the decisions cited above. We find that the penalty was on account of irregularities committed by the assessee's clients. Moreover, the capital market regulations of the stock exchanges were in the nature of indoor management governing relations between the member and the stock exchange and not an offence punishable by the statute. Respectfully following the above decisions, we hold that the CIT(A) has rightly deleted the addition. Therefore, we do not find any merit to interfere with the findings of the CIT(A). Ground No. 8 to 13 are accordingly dismissed."
Respectfully following the same , we do not see any reason to differ from the order of CIT(A) on the issue. Accordingly grounds are rejected.
15. Ground Nos. 6 to 9 pertain to issue of calculating interest u/s 234B on amount disallowed u/s. 14A. The ld. CIT(A) considered the ground placed before him as under :
"8. Ground No. 10 is regarding interest u/s 234B of Rs.40,28,558/-. The appellant submitted that the provisons of Rule 8D were not in existence at the time of filing of return hence, the appellant could not be charged with the default of making less payment of advance tax. The appellant relied upon the decision in the case Sedco Forex International Drillin Co. Ltd. 264 ITR, Page 320. The return of income was filed on 30.11.2006. The CBDT, vide Notification No. 45/2008 is dated 24.3.08, the Special Bench's decision of ITAT, Mumbai dated 20.10.2008 in the case of M/s Daga Capital Management Pvt. Ltd. in ITA No. 8057/M/03. Under the circumstances, it is held that the appellant could not have visualized the disallowance u/s 14A in accordance with Rule 8D amounting to Rs33,51,001/- at the time of filing of return. The law does not envisage impossible. The A.O. is, therefore, directed to exclude the amount of disallowance u/s 14A for levy of interest u/s 234B."
15.1 The ld. DR submitted that interest u/s. 234B is mandatory and provisions of section 14A are already on statute, therefore, ld. CIT(A) is not correct in deleting the interest. The ld. Counsel however supported the orders of CIT(A) to submit that rule 8D was not applicable for the 8 ITA No.168 & 1102/M/10
year and so the disallowance made under the section should not be considered for calculating the interest u/s 234B.
16. After considering the rival submissions, we are not in agreement with the order of CIT(A). In principle, the levy of interest u/s. 234B is mandatory as held by the Hon'ble Supreme Court in the case of CIT vs Anjum M H Ghaswala 252 ITR 1(SC) and is to be calculated on the assessed income. As held by the Hon'ble Delhi High Court in the case of CIT vs Insilco Ltd 321 ITR 105 levy of interest u/s 234B is compensatory in nature and is chargeable not-withstanding the fact that default is bonafide. No discretion can be exercised in matter of levy of interest u/s 234B as considered by the coordinate bench in the case of ACIT vs Prime Securities Ltd 95 ITD 249. Therefore, exclusion of the amount as considered by the CIT(A) is not according to the provisions of law. Therefore, modifying the order of CIT(A), we direct AO to levy interest u/s. 234B, if applicable at the time of giving effect to this order, on the basis of assessed income as per the provisions of law. Grounds are allowed
17. Revenue appeal is partly allowed.
18. In the result, both the appeals are partly allowed.
Order pronounced in the open court on 23rd August, 2013.
(SANJAY GARG ) (B. RAMAKOTAIAH ) JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai, Dated: 23/08/2013.
9 ITA No.168 & 1102/M/10
Copy to: The Appellant
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR " " Bench
Dy/Asstt. Registrar, ITAT, Mumbai.