2012 (9) TMI 614 - AT - Income Tax

Assessee is a broking house for public issue. - Assessee had paid sub brokerage to its Holding Co which is a Merchant Banker - primary market brokerage was received by the assessee, whereas the entire work was done by availing the services of the sister concern company. - Held that - As the payment made by the assessee to its holding company were actually being disbursed to the sub-brokers and the incurrence of such expenditure was for the business expediency of the assessee. The disallowance could not be made under section 40A(2)(a) and also that the amount paid by the assessee was allowable under section 37(1). No controverting material has been placed on record by AO. Decision in favour of assessee Bad debt written off & waiver of interest Interest waived off in same year in which it was provided in books - Assessee has borrowed interest bearing funds and at the same time advanced interest free loans to its holding company Assessee also use facilities provided by its holding company Disallowed u/s 40A(2)(a) claim of expenditure is excessive and unreasonable Held that - Since the holding company incur heavy losses. Simultaneously assessee did not pay any compensation to the said concern with regard to facilities being availed by it. Therefore said amount is allowable. Decision in favour of assessee.

Issues Involved:
1. Disallowance of sub-brokerage payment of Rs. 1,58,41,607/-.
2. Disallowance of writing off interest receivable of Rs. 9,47,438/-.

Issue-wise Detailed Analysis:

1. Disallowance of Sub-brokerage Payment of Rs. 1,58,41,607/-:

The revenue appealed against the order of CIT(A) that deleted the disallowance of Rs. 1,58,41,607/- on account of sub-brokerage. The Assessing Officer (AO) had disallowed this amount, asserting that M/s. KJMC Global Market (I) Ltd., being the lead manager, could not act as a sub-broker according to SEBI guidelines. The AO noted that the sub-brokerage should have been paid to the actual sub-brokers and not to M/s. KJMC Global Market (I) Ltd. The AO also observed that the expenses claimed by M/s. KJMC Global Market (I) Ltd. on account of sub-brokerage and marketing expenses exceeded the income earned, indicating that the said concern was not rendering any services to the assessee company as a sub-broker.

The CIT(A) deleted the addition on the grounds that the payments made to M/s. KJMC Global Market (I) Ltd. were actually passed on to the network of sub-brokers who provided services. The CIT(A) emphasized that the payments were made under a Memorandum of Understanding (MOU) and were necessary for the business expansion of the assessee. The CIT(A) also noted that similar payments had been made in previous years without any disallowance and that the provisions of section 40A(2)(a) were not applicable.

The Tribunal upheld the CIT(A)'s decision, noting that the payments made by the assessee were indeed disbursed to sub-brokers and were incurred out of commercial expediency. The Tribunal concluded that the disallowance could not be made under section 40A(2)(a) and that the amount was allowable under section 37(1) of the Act. Therefore, the Tribunal dismissed the revenue's appeal on this ground.

2. Disallowance of Writing Off Interest Receivable of Rs. 9,47,438/-:

The revenue also appealed against the deletion of the disallowance of Rs. 9,47,438/- in respect of writing off interest receivable from M/s. KJMC Financial Services Ltd. The AO had disallowed this amount, arguing that the waiver of interest was excessive and unreasonable under section 40A(2)(a). The AO noted that the assessee had advanced loans to its holding company and had waived the interest for six months due to the holding company's financial difficulties.

The CIT(A) deleted the addition, accepting the assessee's argument that the waiver was reasonable given the holding company's substantial losses and the fact that the assessee did not pay any compensation for the use of the holding company's premises and facilities. The CIT(A) also noted that similar compensation had been paid and allowed in previous years, and the waiver was a business decision made out of commercial expediency.

The Tribunal upheld the CIT(A)'s decision, recognizing that the holding company had incurred significant losses and that the waiver of interest was a reasonable business decision. The Tribunal agreed that the provisions of section 40A(2)(a) were not applicable in this context and that the amount was allowable as a bad debt under section 36(1)(vii) read with section 36(2) of the Act. Consequently, the Tribunal dismissed the revenue's appeal on this ground as well.

Conclusion:

The Tribunal dismissed the revenue's appeal on both grounds, upholding the CIT(A)'s decision to delete the disallowances of Rs. 1,58,41,607/- on account of sub-brokerage and Rs. 9,47,438/- in respect of writing off interest receivable. The Tribunal found that the payments were made out of commercial expediency and were allowable under the relevant provisions of the Income Tax Act.

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