2013 (8) TMI 107 - AT - Income Tax

Disallowance u/s.14A r.w.r. 8D - Held that - CIT(A) following the decision of Godrej & Boyce Manufacturing Co. Ltd (2010 (8) TMI 77 - BOMBAY HIGH COURT) substituted the same with an illogical formula, i.e.,total expenditure (direct and indirect) x the value of transactions yielding tax-exempt income/value of the total transactions in shares. The same has no basis in facts. In fact, in the assessment for A.Y. 2005-06 u/s. 143(3), 2% of the dividend income had been disallowed by the Assessing Officer (AO). A similar disallowance for the current year would, it was pleaded by him, meet the ends of justice. Against assessee. Bad debts disallowed - assessee-company a share broker has only the brokerage as embedded in the value of shares purchased or sold, i.e., as included in the debt being written off, that could be subject to an allowance u/s.36(1)(vii) in view of section 36(2)(i) - Held that - As in CIT vs. Shreyas S. Morakhia 2012 (3) TMI 103 - BOMBAY HIGH COURT clarified that both the brokerage as well as the principal sum of the shares transacted by a broker on behalf of his clients form part of the debt realizable there-from and, thus, is to be considered as taken into account in computing the income of the assessee-broker in terms of s.36(2)(i). Thus entire such amount would stand to be considered as eligible for deduction u/s. 36(1(vii). In favour of assessee. Penalty levied by the Stock Exchange - Held that - As it has been consistently held by the tribunal as being not toward any default constituting any offence in law, so as to attract disallowance with reference to Explanation to Section 37(1). The same is clarified to be in respect of procedural defaults, which cannot be equated with any violation or contravention of any law, therefore, direct its deletion. In favour of assessee.

Summary

Issues:
1. Disallowance u/s.14A read with rule 8D of the Income Tax Rules, 1962
2. Claim for bad debt disallowance
3. Penalty levied by the Stock Exchange

Issue 1: Disallowance u/s.14A read with rule 8D of the Income Tax Rules, 1962:
The appeal contested the assessment u/s.143(3) of the Income Tax Act, 1961 for the assessment year 2007-08. The first disallowance of Rs.3,61,453 u/s.14A was initially deleted by the CIT(A) but replaced with an illogical formula. The appellant argued that a similar disallowance made in the previous assessment year would suffice. The tribunal observed that the formula provided by the CIT(A) did not reasonably estimate the expenditure related to tax-exempt income. Instead, they suggested a reasonable estimation of 5% of the dividend income as expenditure related to such income, considering the nature of share brokering activities and the regular source of income from dividend earnings.

Issue 2: Claim for bad debt disallowance:
The second issue involved a claim for bad debt disallowance of Rs.1,73,673, which was disallowed on the grounds that only brokerage embedded in the value of shares could be subject to allowance u/s.36(1)(vii) for a share broker. However, the jurisdictional High Court clarified that both brokerage and the principal sum of shares transacted by a broker form part of the debt realizable, making the entire amount eligible for deduction u/s. 36(1)(vii). Consequently, the tribunal directed the deletion of the disallowance.

Issue 3: Penalty levied by the Stock Exchange:
The third issue pertained to a penalty of Rs.34,000 levied by the Stock Exchange for technical defaults like short delivery charges and failure to raise adequate margin money. The tribunal noted that such penalties were not for violating any law but for procedural defaults, not constituting an offense. The tribunal directed the deletion of the penalty, aligning with its consistent view and the decision of the jurisdictional high court in similar cases.

In conclusion, the tribunal partly allowed the assessee's appeal, directing the deletion of the disallowance related to bad debts and the penalty levied by the Stock Exchange. The tribunal also adjusted the disallowance u/s.14A by suggesting a reasonable estimation of 5% of the dividend income as expenditure related to tax-exempt income, considering the nature of the appellant's share brokering activities.