2014 (8) TMI 1142 - AT - Income Tax

Addition of penalty levied by Stock Exchange being VSAT/lease line charges - CIT-A deleted the addition - Held that - An identical issue was before the Jurisdictional High Court in the case of CIT Vs Angel Capital and Debit Marketing 2014 (5) TMI 584 - BOMBAY HIGH COURT wherein held that in so far as VSAT and Lease Line charges paid by the assessee are concerned, they do not have any element of income therefore deducting tax while making such payments do not arise and in so far as the penalty levied by the Stock Exchange 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. It was held that in such a case Explanation to Sec. 37 would not apply. Addition of provision for loss on mark to market on derivative - Held that - An identical issue came up for hearing in the case of group company of the assessee namely M/s. ECL Finance Ltd. 2013 (1) TMI 783 - ITAT MUMBAI allowing the assessee appeal. Disallowance u/s. 14A r.w. Rule 8D - assessee has suo motu disallowed ₹ 59.60 lakhs - Held that - AO has computed the disallowance by applying Rule 8D and while doing so, the AO has considered the value of stock-in-trade shares and securities as investments. Further, the AO has considered the total investment instead of investment on which dividend income was earned which makes the assessment order erroneous and further the First Appellate Authority order is also erroneous as he has confirmed the findings of the AO. Considering the financials of the assessee in totality the suo motu disallowance made by the assessee should suffice the mandate of provision of Sec. 14A of the Act. No further disallowance is required. We, accordingly, set aside the findings of the Ld. CIT(A) and direct the AO to delete the disallowance made u/s. 14A of the Act read with Rule 8D. First grievance of the assessee is allowed. Disallowance of bad debts - Held that - The fact that the liability to pay the brokerage may arise at a point in time anterior to the liability to pay the value of the shares transacted would not make any material difference to the position. Both constitute a part of the debt which arises from the very same transaction involving the sale or, as the case may be, purchase of shares. Since both form a component part of the debt, the requirements of section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee. The assessee was entitled to deduction by way of bad debts under section 36(1)(vii) r.w.s. 36(2) in respect of the amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients. See case of Shreyas Morakia 2012 (3) TMI 103 - BOMBAY HIGH COURT . - Decided in favour of assessee.

Summary

Issues:
1. Revenue's appeal - Deletion of penalty and provision for loss on derivatives.
2. Assessee's appeal - Disallowance under Sec. 14A, Disallowance of bad debts.

Revenue's Appeal:
The Revenue appealed against the deletion of penalty and provision for loss on derivatives. The CIT(A) deleted the penalty levied by Stock Exchange and provision for loss on derivatives based on precedents and High Court decisions. The Tribunal upheld the CIT(A)'s decision, citing that payments for VSAT/Lease Line charges did not have an income element, and penalties were not due to legal infractions. The Tribunal dismissed the Revenue's appeal on both grounds.

Assessee's Appeal - Disallowance under Sec. 14A:
The Assessee appealed against the disallowance under Sec. 14A related to expenses incurred to earn exempt income. The AO disallowed expenses using Rule 8D, which the CIT(A) upheld. The Assessee contended that no borrowed funds were used for earning exempt income and that the suo motu disallowance should suffice. The Tribunal agreed, setting aside the CIT(A)'s decision, stating that the financials showed sufficient own funds. Citing legal precedents, the Tribunal directed the AO to delete the disallowance under Sec. 14A.

Assessee's Appeal - Disallowance of Bad Debts:
The Assessee challenged the disallowance of bad debts. The AO disallowed bad debts, which included a rounding up difference of brokerage charges. The CIT(A) upheld the AO's decision, stating the Assessee's inaction was not justifiable. The Assessee invoked a Bombay High Court decision to support its case. The Tribunal, following the High Court's ruling, allowed the Assessee's appeal, emphasizing that the brokerage and shares' value were part of the same debt. Consequently, the Tribunal set aside the CIT(A)'s decision on the bad debts issue.

In conclusion, the Tribunal dismissed the Revenue's appeal and allowed the Assessee's cross-appeal, directing the AO to delete the disallowance under Sec. 14A and bad debts. The judgments were pronounced on 13th August 2014.