2011 (7) TMI 660 - AT - Income Tax

Business expenditure- share broker- sub-brokerage paid to relatives- payee are the experienced brokers of Stock Exchange for years and registered with the SEBI for doing sub-brokerage activity- Held that - There are no counter evidences in the possession of the revenue that the sub brokers are not capable of having their own clientele, who were said to have been diverted to the assessee and earned the impugned sub-brokerage. It is evident from the way they earned income and taxing of the same by the revenue. The same accepted by the revenue. It is also not the case of the revenue that there exists any tax avoidance. Thus, it is a possible view that the payee are capable of earning sub brokerage. Assessee has successfully discharged requisite initial onus. Decided against the Revenue.

Issues Involved:

1. Legitimacy of the sub-brokerage payments.
2. Proof of services rendered by the recipients.
3. Capability of recipients to have their own clientele.
4. Reasonableness of the sub-brokerage amounts under Section 40A(2) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Legitimacy of the Sub-brokerage Payments:
The revenue contended that the assessee failed to prove the legitimacy of the sub-brokerage payments made to his father and wife. The assessee credited a commission of Rs. 1,25,30,459 in the Profit and Loss account and debited Rs. 58,50,000 to his father and Rs. 20,00,000 to his wife. The Assessing Officer (AO) found no mention of these payouts in the Audit Report under Section 44AB of the Act and deemed the explanations provided by the assessee as unconvincing. However, the Commissioner of Income Tax (Appeals) [CIT(A)] found that the appellant satisfactorily replied to the questions raised by the AO and deleted the addition of Rs. 78,50,000.

2. Proof of Services Rendered by the Recipients:
The revenue argued that the assessee failed to prove the rendering of services by the recipients, Mr. Ashok Sabnis and Mrs. Sujata Sabnis. The AO noted that no evidence was provided to prove that the clients, in respect of whom the sub-brokerage was paid, belonged to the recipients. The CIT(A) found that both recipients were qualified and registered brokers of the Pune Stock Exchange and had obtained registration from SEBI as sub-brokers. They performed various activities as brokers and sub-brokers, maintained their own staff, and paid salaries from their accounts. The CIT(A) concluded that these facts were sufficient to establish their capability of earning commission/brokerage.

3. Capability of Recipients to Have Their Own Clientele:
The revenue questioned whether the recipients had their own clientele capable of being diverted to the assessee. The CIT(A) noted that both recipients had been in the business for over 12 years and had consistently earned commission/brokerage in preceding and succeeding years. The CIT(A) highlighted that the AO did not exclude the sub-brokerage amounts from the recipients' income while completing their assessments, indicating an inconsistency in the AO's approach. The Tribunal found that the revenue did not provide any direct evidence to demonstrate that the recipients were incapable of having their clientele or that the clientele list was not credible.

4. Reasonableness of the Sub-brokerage Amounts under Section 40A(2):
The revenue raised concerns about the reasonableness of the sub-brokerage amounts under Section 40A(2) of the Income Tax Act, 1961. The Tribunal noted that this issue was not raised by the AO during the assessment or first appellate proceedings and did not emanate from the orders of the lower authorities. Therefore, the Tribunal did not admit this ground for consideration.

Conclusion:
The Tribunal upheld the order of the CIT(A), concluding that the assessee successfully discharged the requisite initial onus, and the revenue failed to rebut the same. The Tribunal found that the recipients were experienced brokers capable of earning sub-brokerage and had their clientele. The revenue did not provide any direct evidence against the assessee, and the amounts in question were not found to be excessive or unreasonable under Section 40A(2). Consequently, the appeal of the revenue was dismissed.

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