2013 (9) TMI 521 - AT - Income Tax

Disallowance of Interest - Held that - There was no nexus between the interest bearing funds taken by assessee and the debit balances in the name of two accounts which can be considered as diversion of funds - The debit balances with the two concerns were running accounts in the course of purchase and sale of shares and were business transactions - Since there was no diversion of borrowed funds for non business purposes Following S A Builders and other Vs CIT 2006 (12) TMI 82 - SUPREME COURT - the funds advanced were for business purposes - there was no need for disallowance of any interest - It was also seen that AO in the assessment order compared the debit balance which does not pertain to the year under assessment - his comparison on facts was also not correct as he had taken the debit balances of later year for disallowing the interest this year Decided against Revenue. Disallowance of Finance Brokerage and Consulting Charges - Held that - The borrowed funds were utilized for the purpose of business and interest was allowable as deduction allowed the brokerage and commission charges - the CIT (A) was correct in allowing the brokerage and consulting charges claimed by assessee for obtaining various loans Decided against Revenue. Disallowance of Sub-Brokerage Held that - During the course of assessment proceedings the appellant had furnished information of Shri Madhusudan Kela, though those were not treated sufficient by the AO to consider genuineness of the person as well as the payment of sub-brokerage - Assessee had not filed any confirmation either during the special audit or before AO, in view of the factual findings given by the CIT (A), we have no other option than to accept his findings in the absence of any contrary evidence placed by the Revenue - The Revenue had also not raised any ground with reference to admission of any additional evidence which indicate that the factual aspect that assessee filed confirmation letters before AO in the course of the assessment proceedings were to be accepted - It was also seen that the learned CIT (A) directed to verify the receipt of payments given to Shri Madhusudan Kela and after examination directed AO to allow the claim - We do not see any reason to interfere with the findings of the CIT (A) on this issue - It was for AO to examine the factual aspects and allowed the claim as the matter was restored to him by the CIT (A) Decided against Revenue. Deletion of Service Charges Held that - The service charges were debited to cost of shares, a copy of investment in shares account has also filed - It was claimed that the service charges was not shown in Profit & Loss A/c and in any other head - the claim appeared to be in order - Assessee filed copy of shares purchase account of Polaris Software shares and claimed that there is no double claim Decided against Revenue. Disallowance of Finance Charges - Held that - The issue require fresh examination by AO keeping in view the above observations - The issue in the ground was therefore, restored to the file of AO to examine the nature of funds obtained by assessee and its utilization afresh without getting carried away by the observations in earlier years - It was also submission that in the trading account no interest was charged or paid on the debit/credit balance with the clients - Therefore, this aspect also had to be considered by AO while considering the allowance of interest claimed by assessee - The matter is accordingly restored to the file of AO for fresh examination and decision. Three accounts which were maintained by assessee s sister concerns were for the purpose of business and interest was allowed in assessment year 2000-01 on examination by the CIT (A) factually, the order of which was confirmed in that year - Since the facts in this year were at variance more so with reference to financial charges paid to Bank which was one of the major component and also brokerage paid for arranging inter corporate deposits aspect of which were neither discussed nor verified Decided in favour of Assessee. Disallowance of Depreciation - BSE Membership card - intangible asset - section 32(1)(ii) - Held that - Following Technoshares & Stocks Ltd. and Others 2010 (9) TMI 6 - SUPREME COURT OF INDIA - On the analysis of the Rules of BSE, it was clear that the right of membership (including right of nomination) gets vested in the Exchange on the demise/ default committed by the member; that, on such forfeiture and vesting in the Exchange the same gets disposed of by inviting offers and the consideration received thereof is used to liquidate the dues owed by the former/ defaulting member to the Exchange, Clearing House, etc. - the right of membership (including the right of nomination) vests in the Exchange only when a member commits default - Otherwise, he continued to participate in the trading session on the floor of the Exchange; that he continued to deal with other members of the Exchange and even had the right to nominate subject to compliance of the Rules - Moreover, by virtue of Explanation 3 to Section 32(1)(ii) the commercial or business right which is similar to a licence or franchise was declared to be an intangible asset - Therefore, the right of membership, which included right of nomination, was a licence or akin to a licence which was one of the items which falls in Section 32(1)(ii) of the 1961 Act - The right to participate in the market had an economic and money value - It was an expense incurred by the assessee which satisfied the test of being a licence or any other business or commercial right of similar nature in terms of Section 32(1)(ii) - the Tribunal was right in holding that depreciation was allowable on the cost of the membership card under Section 32(1)(ii) of the 1961 Act. Disallowance of 20% Admissible Depreciation Disallowance on Various Expenditure - Held that - The issue of depreciation was allowed in favour of assessee in assessment year 2000-01 and the Revenue had not contested the same as can be seen from the issues raised in other appeals - there was no need for disallowing 20% of the depreciation as was done by the CIT (A) the cars were reflected in assessee s balance sheet and were used for assessee s business, assessee was entitled for depreciation as claimed - There was no need for disallowing 20% of the claim. Unexplained Cash Credit Held that - we are unable to understand how this entry will become unexplained cash credit - As far as the transactions to Shri I.R. Khandwala were concerned, money was ultimately received and paid and there was evidence on record that said transaction was a bonafide transaction - If we were to consider Shri I.R. Khandwala had not advanced money directly and the journal entry was passed without any basis, the actual credit was from Khandwala Securities Ltd in earlier year which was also not disputed by AO -Looking at either way, there was no basis for making addition under section 68 as unexplained income of assessee - Therefore, we have no hesitation in deleting the said addition made by AO and confirmed by the CIT (A). Penalty u/s 271(1)(c) The CIT (A) order per se cannot be faulted - as seen from the appeal for the assessment year in quantum, the issue of BSE Membership and interest claim of borrowed funds were restored to the file of AO for fresh consideration - Therefore, to that extent levy or deletion of penalty on the issue does not arise at this point of time as the issues were already restored to the file of AO for fresh adjudication.

Summary

Issues Involved:
1. Disallowance of interest on borrowed funds.
2. Disallowance of finance brokerage and consulting charges.
3. Disallowance of sub-brokerage paid.
4. Disallowance of service charges.
5. Disallowance of finance charges due to alleged diversion of borrowed funds.
6. Disallowance of depreciation on BSE Membership Card.
7. Disallowance of depreciation on vehicles.
8. Disallowance of various business expenditures.
9. Addition of unexplained credit.
10. Deletion of penalty under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Disallowance of Interest on Borrowed Funds:
The Revenue appealed against the deletion of disallowance of Rs.62,75,916/- on account of interest paid. The AO disallowed this interest, arguing that the assessee borrowed interest-bearing loans and advanced interest-free loans to certain concerns. The CIT(A) found that the advances were part of running accounts related to share transactions and not loans. The CIT(A) concluded that there was no nexus between the borrowed funds and the advances, supported by the presumption that interest-free funds were available. The Tribunal upheld the CIT(A)'s decision, noting that the AO's comparison of debit balances from a later year was incorrect.

2. Disallowance of Finance Brokerage and Consulting Charges:
The AO disallowed Rs.6,00,412/- towards finance brokerage and consulting charges, linking it to the disallowed interest claim. The CIT(A) allowed the deduction, stating that the borrowed funds were used for business purposes. The Tribunal agreed, noting no dispute over the genuineness of the payments and dismissed the Revenue's ground.

3. Disallowance of Sub-Brokerage Paid:
The AO disallowed Rs.1,19,00,000/- paid as sub-brokerage to Shri Madhusudan Kela due to lack of personal examination and detailed service information. The CIT(A) found that the assessee provided sufficient information, including confirmation letters and details of clients procured by Kela. The Tribunal upheld the CIT(A)'s direction for the AO to verify the receipts in Kela's tax returns and allow the claim if found correct.

4. Disallowance of Service Charges:
The AO disallowed Rs.1,83,750/- as service charges, alleging double debit. The CIT(A) deleted this disallowance, noting that the service charges were added to the cost of shares and not double debited. The Tribunal found no contrary evidence and upheld the CIT(A)'s decision.

5. Disallowance of Finance Charges Due to Alleged Diversion of Borrowed Funds:
The AO disallowed Rs.90,64,896/- out of Rs.95,23,575/- claimed as finance charges, alleging diversion of borrowed funds to sister concerns. The CIT(A) upheld the disallowance, stating that the borrowings were not required if funds were not diverted. The Tribunal found that the AO and CIT(A) did not examine the issue factually and restored the matter to the AO for fresh examination.

6. Disallowance of Depreciation on BSE Membership Card:
The AO disallowed depreciation on the BSE Membership Card, claiming it was not an asset and was suspended. The CIT(A) upheld this, questioning the card's valuation and use. The Tribunal noted the Supreme Court's decision in Technoshares & Stocks Ltd. allowing depreciation on such cards. The Tribunal restored the issue to the AO to verify the card's use and cost of acquisition.

7. Disallowance of Depreciation on Vehicles:
The AO disallowed 20% of the depreciation on a vehicle registered in a director's name. The CIT(A) allowed the depreciation in earlier years. The Tribunal upheld the CIT(A)'s decision, noting the vehicle was used for business and reflected in the company's balance sheet.

8. Disallowance of Various Business Expenditures:
The AO disallowed 20% of expenditures under various heads. The CIT(A) deleted such disallowances in earlier years. The Tribunal found the disallowances arbitrary and directed the AO to allow the claimed amounts.

9. Addition of Unexplained Credit:
The AO added Rs.25 lakhs as unexplained credit, citing a fraudulent transfer noted by the statutory auditor. The CIT(A) confirmed this, stating the journal entry was not factual. The Tribunal found the transactions bona fide, supported by evidence of repayment and the nature of the entries. The Tribunal deleted the addition, noting no basis for treating it as unexplained cash credit.

10. Deletion of Penalty under Section 271(1)(c):
The CIT(A) deleted penalties related to the BSE Membership Card, interest claims, and unexplained credit, stating the AO did not find the assessee's explanations false or lacking disclosure. The Tribunal restored the penalty issues related to the BSE Membership Card and interest claims to the AO for fresh consideration, following the finalization of the restored matters. The Tribunal upheld the deletion of penalty on the unexplained credit, as the addition was deleted.

Conclusion:
The Tribunal dismissed the Revenue's appeal (ITA No.3707/Mum/2011), allowed the assessee's appeal for statistical purposes (ITA No.4931/Mum/2007), and partly allowed the Revenue's appeal (ITA No.6044/Mum/2008).