2011 (9) TMI 1040 - AT - Income Tax

Disallowance u/s 14A - Held that - In the facts of the case, the turnover of the share trading cannot be a basis for disallowance of interest expenditure; because the dividend income earned is only on that part of the shares, which are held as stock-in-trade. Even otherwise, it is clear from the record that the assessee s own fund is much more than the average stock-in-trade of the assessee; then, in our opinion, no disallowance of interest expenditure can be made u/s 14A. Not deducted tax at source (TDS) while making payments to the BSE - Decided in favour of assessee Disallowance of payment to the Jobbers/Arbitragers - Held that - 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 there from. Accordingly section 40(a)(ia) is also not applicable. Disallowance of the penalty paid to the Stock Exchange - Decided in favour of assessee.

Issues Involved:
1. Disallowance under Section 14A.
2. Levy of interest under Section 234B.
3. Disallowance under Section 40(a)(ia) for payments to Stock Exchange.
4. Disallowance under Section 40(a)(ia) for payments to arbitragers/jobbers.
5. Disallowance of penalty paid to Stock Exchange.

Detailed Analysis:

1. Disallowance under Section 14A:
The primary issue was the disallowance of Rs. 10,91,135/- under Section 14A by the Assessing Officer (AO), which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee argued that the dividend income of Rs. 1,40,535/- was earned from shares held as stock-in-trade and that the disallowance was unjustified. It was emphasized that the assessee's own funds were significantly higher than the borrowed funds, and the interest expenditure was allowable under Section 36(1)(iii). The Tribunal noted that Rule 8D, invoked by the AO, was not applicable for the assessment year in question as per the jurisdictional High Court's decision in Godrej & Boyce Mfg. P. Ltd. vs. ACIT. The Tribunal concluded that no disallowance under Section 14A was justified since the dividend income was earned from shares held as stock-in-trade and the assessee's own funds were sufficient to cover the investments. The Tribunal ruled in favor of the assessee.

2. Levy of Interest under Section 234B:
The second issue pertained to the levy of interest under Section 234B, which the CIT(A) held as non-appealable. The Tribunal noted that the levy of interest under Section 234B is mandatory and consequential, requiring no specific finding. Thus, no detailed ruling was necessary on this ground.

3. Disallowance under Section 40(a)(ia) for Payments to Stock Exchange:
The revenue's appeal included the disallowance of Rs. 24,03,648/- under Section 40(a)(ia) for payments to the Stock Exchange, which the CIT(A) had deleted. The Tribunal referenced its earlier decisions in the assessee's own case for the assessment years 2005-06 and 2006-07, where it was held that such payments did not require Tax Deducted at Source (TDS) as they were not in the nature of professional or technical services. The Tribunal upheld the CIT(A)'s decision, ruling in favor of the assessee.

4. Disallowance under Section 40(a)(ia) for Payments to Arbitragers/Jobbers:
Another ground of the revenue's appeal was the disallowance of Rs. 1,58,36,356/- for payments to arbitragers/jobbers without TDS deduction. The Tribunal again referred to its previous rulings in the assessee's favor, stating that the payments were part of a joint venture and not subject to TDS under Section 194C. The Tribunal upheld the CIT(A)'s decision, ruling in favor of the assessee.

5. Disallowance of Penalty Paid to Stock Exchange:
The final issue was the disallowance of Rs. 7,500/- paid as a penalty to the Stock Exchange, which the CIT(A) had deleted. The Tribunal referred to its earlier decisions, which held that such penalties were not for infraction of law but were part of the business expenditure. The Tribunal upheld the CIT(A)'s decision, ruling in favor of the assessee.

Conclusion:
The Tribunal allowed the assessee's appeal regarding the disallowance under Section 14A and dismissed the revenue's appeal on all grounds, including disallowances under Section 40(a)(ia) and the penalty paid to the Stock Exchange. The Tribunal's decisions were consistent with its prior rulings in the assessee's favor for the previous assessment years. The order was pronounced in the open court on 29.09.2011.

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