2016 (5) TMI 1403 - AT - Income Tax

Addition u/s 40A(2)(b) - incentive paid to ICICI Bank - disallowance of 50% of brokerage earned by the assessee - Held that - For making disallowance u/s.40A(2)(b) onus is on revenue to prove unreasonableness. As found that since the bonds were acquired by ICICI Bank (l-Bank) and aforesaid entities, which were financial institutions and not retail investors, there was no expenditure incurred by the assessee towards marketing in retail business. The pass on of such incentive was based on the market practice followed in assessee s line of business. Incentive passed on to I-bank was duly offered to tax by that client in its return of income. As regards the reasonableness, the incentive passed on to I-Bank was comparable to other two independent entities. Therefore, the incentive paid to I-Bank was allowable u/s.37(1) of the Act. Thus, we do not find any merit in the action of CIT(A) for upholding the disallowance of 50%. The AO is directed to delete the entire disallowance so made. Disallowance of 25% on procurement expenses made to I-Bank - addition as it is unreasonable and not incurred wholly and exclusively for the purpose of assessee s business - Held that - As carefully gone through the order of Tribunal and found that exactly similar issue was dealt by the Tribunal in assessee s own case and entire disallowance so made by the AO was deleted. As the facts and circumstances during the year under consideration are same, respectfully following the order of the Tribunal in assessee s own case, we direct the AO to delete the disallowance so made on account of procurement expenses. Disallowance of software expenses - revenue or capital expenditure - Held that - The issue under consideration is squarely covered by the decision of Hon ble Bombay High Court in the case of Raychem RPG Ltd.(2011 (7) TMI 953 - Bombay High Court). Respectfully following it, we do not find any merit for disallowance of software expenses of ₹ 1,20,000/- so incurred by assessee, which is essentially revenue in nature. Invoking Explanation to Section 73 and treating share trading loss as speculative loss - Held that - The issue has been decided by Hon ble Bombay High Court in the case of Prasad Agents 2009 (3) TMI 35 - BOMBAY HIGH COURT against the assessee. Disallowance on account of depreciation on BSE membership card - Held that - No infirmity in the order of CIT(A) for allowing assessee s claim for depreciation on BSE Membership Card. See Techno Shares & Stocks Ltd., 2010 (9) TMI 6 - SUPREME COURT OF INDIA . Transaction between the assessee company and ICICI Securities INC was at arm s length and in accordance with provisions of TP rules - AO has disallowed client s introduction fee paid to the ICICI (INC) (ISI) on the plea that expenditure was not incurred for the purpose of assessee s business - Held that - . Ground raised by revenue in the assessment year 2004-05 are similar to the ground discussed by us for the assessment year 2003-04 wherein held as found from the record that ISI is an entity based in USA and assessee has rendered services abroad to clients developed by ISI. By invoking provisions of Section 40A(2)(b), the AO has made disallowance. However, the AO has not given any specific details in support of this disallowance. After giving detailed finding at para 5.2, the CIT(A) concluded that payment made to ISI was as per prevailing market conditions and it was within norms fixed by BSE. Accordingly, the AO was not justified in making disallowance out of introduction fee paid to ISI. The detailed findings so recorded by CIT(A) are as per material on record. Ld. DR has not brought any positive material on record to controvert the finding of CIT(A). Accordingly, we do not find any reason to interfere in the findings of CIT(A) resulting into deletion of disallowance out of introduction fee paid to ISI.

Summary

Issues:
Cross appeals filed by assessee and revenue against CIT(A)'s order for assessment years 2003-04 & 2004-05 under Section 143(3) of the I.T. Act.

Analysis:
1. The AO disallowed 95% of the total brokerage earned by the assessee in respect of incentive paid to ICICI Bank invoking Section 40A(2)(b). The CIT(A) deleted disallowance to the extent of 50%. Assessee argued that incentives passed to ICICI Bank were comparable with those passed to other independent concerns. The Tribunal found that the incentive paid to ICICI Bank was allowable under Section 37(1) as it was based on market practice and comparable to other entities. The entire disallowance was directed to be deleted.

2. Disallowance of 25% on procurement expenses made to ICICI Bank was challenged. The Tribunal, following its own precedent in the assessee's case, directed the AO to delete the disallowance.

3. Disallowance of software expenses of ?1,20,000 was contested. The Tribunal, relying on a decision of the Bombay High Court, found no merit in the disallowance, deeming it as revenue in nature.

4. Share trading loss treated as speculative loss under Explanation to Section 73 was challenged. The Tribunal dismissed this ground based on a decision against the assessee by the Bombay High Court.

5. Revenue raised grievances on depreciation of BSE membership card, incentive disallowance, and procurement expenses. The Tribunal upheld the CIT(A)'s decision allowing depreciation on the membership card and 100% of incentive payments and procurement expenses.

6. The revenue's objection to the disallowance of an introduction fee paid to an entity based in the USA was dismissed. The Tribunal found the payment to be in line with market conditions and Transfer Pricing Rules, directing the AO to delete the disallowance.

7. The Tribunal allowed the assessee's appeal in part and dismissed the revenue's appeals for the assessment years 2003-04 & 2004-05. The orders were pronounced on 24/05/2016.