2010 (12) TMI 191 - AT - Income Tax

Addition/ Disallowance - Non deduction of TDS - disallowance made by the AO u/s 40(a)(ia) of the Act - Held that the transaction fee paid to a stock exchange on the basis of volume of transactions is payment for use of facilities provided by stock exchange and not for any services, either technical or managerial and hence provisions of section 194J are not attracted and no disallowance can be made by invoking section 40(a)(ia) of the Act. Disallowance u/s 14A assessee does not dispute the quantification of the disallowance made by the AO - dis allowance made by AO sustained. Disallowance made u/s 94(7) - From a reading of section 94(7) it is clear that it comes into play, only when all the three conditions are fulfilled, i.e. a) the assessee should buy securities or units within a period of three months, prior to the record date; b) should sell or transfer such securities within a period of three months from the record date or in cases of units within a period of nine months from the record date and c) the dividend or income on such securities or units is exempt from tax. The wording then occurring in the section makes it clear. - On going through the context used in s. 94(7)(b), the object of the legislature, circumstances under which the statute was amended, the conclusion is that the amended provision is applicable to the asstt. year 2005-06. - payment had been made to the Stock Exchange on account of short payment of margin money. This is only a compensatory payment under the rules of the Stock Exchange which is allowable as revenue expenditure as the same is not for infraction of law. Disallowance of protective addition amounting to Rs. 37,95,700 - the entire loss on purchase and sale is to be considered only in this year. - the loss to be disallowed is only the loss which arises on the purchase and sale of such securities or units. Loss on account of valuation has no place in the section. Section 94(7) comes into operation only in the event of sale of securities or units which is taken place in this year. As the loss on sale and purchase of unit is above the dividend declared, the loss to the extent of Rs. 71,41,420 has to be disallowed in this year. - the appeal filed by the assessee is allowed in part and the appeal filed by the Revenue is also allowed in part.

Issues Involved:
1. Disallowance under Section 40(a)(ia) for non-deduction of TDS on transaction and V-sat charges.
2. Disallowance under Section 14A.
3. Disallowance under Section 94(7) concerning dividend stripping.
4. Allowability of penalty paid to stock exchange.
5. Protective addition of Rs. 37,95,700.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Transaction and V-sat Charges:
The assessee appealed against the confirmation of disallowance made by the AO under Section 40(a)(ia) for non-deduction of TDS on transaction and V-sat charges paid to the Stock Exchanges. The Tribunal noted that this issue was covered in favor of the assessee by the decision in "Kotak Securities Ltd. v. Addl. CIT 124 TTJ 241" and "DCIT v. Angle Broking Ltd. 35 SOT 457," which held that such payments are for the use of facilities provided by the stock exchange and not for technical services, thus not attracting Section 194J. Consequently, no disallowance under Section 40(a)(ia) was warranted. The Tribunal allowed the assessee's ground on this issue.

2. Disallowance under Section 14A:
The AO estimated the disallowance under Section 14A at 3% of the dividend income, which the CIT(A) directed to be recomputed as per Rule 8D. The Tribunal referred to the jurisdictional High Court's decision in "Godrej Boyce Manufacturing Co. Ltd. (2010) 234 CTR (Bom.) 1," which held that Rule 8D applies prospectively and that prior to its introduction, disallowance under Section 14A should be on a reasonable basis. Since the assessee did not dispute the AO's quantification, the Tribunal vacated the CIT(A)'s order and sustained the AO's disallowance.

3. Disallowance under Section 94(7) Concerning Dividend Stripping:
The assessee challenged the disallowance made under Section 94(7) for losses incurred on redemption of units. The Tribunal examined the facts and noted that the purchases were made before the record dates, and redemptions were beyond three months after the record dates, thus initially not attracting Section 94(7). However, the Finance (No. 2) Act, 2004, extended the redemption period to nine months from the record dates, applicable from 1-4-2005. The Tribunal dismissed the assessee's arguments, including those distinguishing the loss due to market factors and the applicability of amendments prospectively, citing the decision in "Suri & Sons v. ACIT 124 TTJ (Asr.) 800." The Tribunal upheld the CIT(A)'s disallowance under Section 94(7).

4. Allowability of Penalty Paid to Stock Exchange:
The Revenue's grounds on the allowability of penalty paid to the stock exchange were dismissed by the Tribunal, referencing the decision in "ACIT v. Ramesh M. Damani ITA No. 5143/Mum/2006," which held such payments as compensatory and allowable as revenue expenditure. The Tribunal followed this precedent and dismissed the Revenue's grounds on this issue.

5. Protective Addition of Rs. 37,95,700:
The AO made a protective addition of Rs. 37,95,700, considering it as income for the assessment year 2005-06. The CIT(A) deleted this addition, stating it pertained to the assessment year 2004-05. The Tribunal disagreed with the CIT(A), stating that the loss on purchase and sale should be considered in the year of sale, i.e., the assessment year 2005-06, and upheld the AO's addition, albeit for different reasons.

Conclusion:
The assessee's appeal was partly allowed, particularly on the issue of disallowance under Section 40(a)(ia). The Revenue's appeal was also partly allowed, particularly concerning the protective addition of Rs. 37,95,700. The Tribunal's order was pronounced in the open court on 3rd Dec., 2010.

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