2011 (2) TMI 1427 - AT - Income Tax

Deduction of TDS u/s 194H - Disallowance of sub-brokerage u/s 40(a)(ia) - Assessee was engaged in distribution of units of Mutual Funds and no tax was deducted at source from brokerage by Mutual Fund companies - Assessee contended since he received brokerage without any TDS in view of provisions of section 194H, the payment of sub-brokerage on similar lines should also gets exemption u/s 194H - CIT(A) has accepted the contention and directed the A.O. to delete the disallowance so made u/s 40(a)(ia). HELD THAT - As per 194H, the commission or brokerage definition does not include transactions in securities.There is no doubt that Mutual Funds are categorised as securities under Securities Contract (Regulation) Act. From the details placed, we are convinced that the sub-brokerage paid is connected with the services rendered in the course of buying and selling of units of Mutual Funds or in relation to transactions pertaining to Mutual Funds and as per the provisions of section 194H Explanation (i) these are not covered by the provision for deduction of tax at source. There is nothing on record to indicate that the sub-brokerage is paid for any other services other than relating to securities. The A.O. also accepts that the brokerage received by the assessee is not covered by TDS whereas he was of the opinion that the sub-brokerage paid is covered by the provisions. We are unable to understand this logic of the A.O. For these reasons, we are of the opinion that the order of the CIT(A) does not require any modification and accordingly the same is confirmed. With reference to cross objection regarding disallowance made by AO includes service tax, since the entire amount disallowed by the AO was allowed to the assessee, there is no need to adjudicate this issue separately and there is no need to give any specific direction to the A.O.

Summary

Issues:
1. Disallowance of sub-brokerage under section 40(a)(ia) of the Income Tax Act.
2. Interpretation of provisions of section 194H regarding deduction of tax at source on commission or brokerage.

Analysis:
1. The appeal before the Appellate Tribunal ITAT Mumbai involved the disallowance of sub-brokerage by the Assessing Officer under section 40(a)(ia) of the Income Tax Act. The Revenue contended that the sub-brokerage amounting to &8377; 6,57,57,041/- should have been subject to tax deduction at source under section 194H. The CIT(A) had deleted this disallowance, stating that the sub-brokerage fell within the exclusion provided in the explanation to section 194H. The Tribunal upheld the CIT(A)'s decision, emphasizing that the sub-brokerage was connected to the buying and selling of units of Mutual Funds, which are considered securities. The Tribunal found that as per the provisions of section 194H, the sub-brokerage paid in relation to securities was not subject to tax deduction at source. The Tribunal rejected the Revenue's grounds on this issue, confirming the CIT(A)'s order.

2. The Tribunal analyzed the provisions of section 194H, which require tax deduction at source on commission or brokerage payments. The definition of "commission or brokerage" under this section excludes transactions in securities. The Tribunal noted that Mutual Funds are categorized as securities, and the Revenue did not dispute this classification. The Tribunal observed that the brokerage income primarily derived from Mutual Funds and that the sub-brokerage was paid in connection with services related to Mutual Funds transactions. Based on the details provided, the Tribunal concluded that the sub-brokerage payments were not covered by the provision for tax deduction at source under section 194H. The Tribunal highlighted that the sub-brokerage was specifically related to securities and, therefore, did not require tax deduction at source. The Tribunal dismissed the Revenue's appeal and upheld the CIT(A)'s decision regarding the interpretation of section 194H.

3. In addition to the above issues, the Tribunal addressed a cross objection raised by the assessee regarding the inclusion of service tax in the disallowed amount. The assessee argued that the disallowed sum included service tax, which should not have been disallowed. The Tribunal acknowledged this contention but noted that since the entire disallowed amount was allowed to the assessee, there was no need for a separate adjudication on this issue. The Tribunal clarified that the disallowance made by the Assessing Officer should have been reduced by the service tax amount. Consequently, the cross objection was considered allowed for statistical purposes.

In conclusion, the Appellate Tribunal ITAT Mumbai dismissed the Revenue's appeal, confirmed the CIT(A)'s decision on the disallowance of sub-brokerage, and treated the cross objection by the assessee as allowed.