2010 (12) TMI 1262 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of VSAT, Leaseline, and Transaction charges u/s 40(a)(ia).
2. Treatment of Rs. 47,23,828/- as Capital Gain vs. Business Income.
3. Direction to recompute disallowance u/s 14A in accordance with Rule 8D.

Summary:

1. Disallowance of VSAT, Leaseline, and Transaction charges u/s 40(a)(ia):
The revenue contended that the learned CIT(A) erred in deleting the disallowance of Rs. 2,21,755/- u/s 40(a)(ia) for VSAT, Leaseline, and Transaction charges, arguing these were for professional and technical services requiring TDS deduction. The CIT(A) relied on the ITAT Mumbai decision in Kotak Securities Pvt. Ltd., which held that such fees are not for technical services, thus no TDS was required. The Tribunal upheld the CIT(A)'s decision, referencing the ITAT ruling that transaction fees paid to the stock exchange do not constitute fees for technical services, and thus, the provisions of section 40(a)(ia) were not applicable.

2. Treatment of Rs. 47,23,828/- as Capital Gain vs. Business Income:
The AO treated the short-term capital gains of Rs. 47,23,828/- as business income, citing the assessee's frequent transactions and use of borrowed funds. The CIT(A) reversed this, noting the assessee maintained separate demat accounts for investments and trading, and the AO accepted long-term capital gains of Rs. 2,37,29,464/-. The Tribunal supported the CIT(A), emphasizing the assessee's clear demarcation between investment and trading activities, and the lack of evidence that borrowed funds were used for investments. The Tribunal also referenced CBDT Circular No. 4/2007, which allows for separate portfolios for investment and trading.

3. Direction to recompute disallowance u/s 14A in accordance with Rule 8D:
The AO disallowed Rs. 4,69,413/- as expenditure related to earning dividend income, applying Rule 8D. The CIT(A) upheld this, following the ITAT Special Bench decision in Daga Capital Management Pvt. Ltd. The Tribunal noted the Bombay High Court's ruling in Godrej and Boyce Mfg. Co. Ltd. v. DCIT, which stated Rule 8D is not retrospective and thus not applicable for AY 2005-06. The Tribunal restored the issue to the AO to reconsider the assessee's claim that no expenditure was incurred for earning dividend income.

Conclusion:
The revenue's appeal was dismissed, and the assessee's appeal was partly allowed for statistical purposes. The Tribunal upheld the CIT(A)'s decisions on the disallowance of VSAT, Leaseline, and Transaction charges, and the treatment of capital gains. The issue of disallowance u/s 14A was remanded to the AO for reconsideration.