2013 (11) TMI 359 - AT - Income Tax

Disallowance u/s 37 - Fines and penalties - Hed that - Revenue has not specified any specific violation of any provision of law, so that it is difficult to understand the basis of its case. Clearly, the various defaults or deficiencies, which stand to be regulated by NSE in terms of its bye-laws, cannot be regarded as an infraction of law, so as to attract disallowance - Following decision of Haji Aziz and Abdul Shakoor Bros. vs. CIT 1960 (11) TMI 15 - SUPREME Court - Decided against Revenue. Disallowance u/s 43B - Payment to PF and ESI funds - disallowance u/s.2(24)(x) r.w.s. 36(1)(va) of the Act on account of employee s contribution - Held that - Payment/s made within the grace period as allowed by virtue of any circular, order, etc. would be eligible for deduction u/s. 36(1)(va). The language of the provision accords primacy to not only the relevant Act, but also to any circular, order, notification, etc. issued thereunder. Two, a due date , for all practical purposes, as also by definition, is the date by which the relevant action (payment in the instant case) could be performed so as to be considered as eligible, and without inviting any penal consequences. As such, the benefit of the grace period could not be disallowed, and which would rather bring the two enactments in harmony - Following decision of CIT v. Godaveri (Mannar) Sahakari Sakhar Kharkhana Ltd. 2007 (10) TMI 145 - BOMBAY HIGH COURT - Decided partly in favour of Revenue. TDS u/s 194J - various payments to the Stock Exchange - Held that - the Stock Exchange is billed for the total charges on these counts (i.e., including lease line and VSAT charges) by the Department of Telecommunication (DOT), which in turn allocates the same to its different constituents (which would be on some definite/utilization basis), without including any charge of its own. The payment to the Stock Exchange is thus, only in the nature of reimbursement. Even as, therefore, it may result in a TDS liability in the hands of the Stock Exchange (inasmuch as what it pays to the DOT is only the latter s income), in-so-far as the individual brokers are concerned, who make the payments to the Stock Exchange, no tax is deductible inasmuch as the same is only a reimbursement of the charges as levied by DOT. - Decided in favor of assessee.

Summary

Issues Involved:
1. Disallowance under Section 37 for fines and penalties.
2. Disallowance under Section 2(24)(x) read with Section 36(1)(va) for delayed payments to EPF and ESIC.
3. Disallowance of bad debts under Section 36(1)(vii).
4. Disallowance under Section 40(a)(ia) for non-deduction of TDS on lease line and VSAT charges.
5. Disallowance of set-off for brought forward long-term capital loss and current year long-term capital loss.

Issue-wise Detailed Analysis:

1. Disallowance under Section 37 for fines and penalties:
The Revenue challenged the deletion of disallowance of Rs. 2,87,505/- under Section 37 for fines and penalties. The Assessing Officer (A.O.) disallowed this amount based on the Explanation to Section 37(1), but the Commissioner of Income Tax (Appeals) [CIT(A)] allowed it, stating that the fines were procedural defaults imposed by the National Stock Exchange (NSE) and not statutory infractions. The Tribunal upheld the CIT(A)'s decision, noting that the Revenue did not specify any legal violations, and procedural defaults regulated by NSE cannot be equated with statutory infractions.

2. Disallowance under Section 2(24)(x) read with Section 36(1)(va) for delayed payments to EPF and ESIC:
The A.O. disallowed Rs. 35,70,973/- and Rs. 46,229/- for delayed payments to EPF and ESIC, respectively, beyond the statutory due dates. The CIT(A) allowed the deduction based on the Supreme Court's decision in CIT vs. Alom Extrusions Ltd. The Tribunal examined whether the payments were governed by Section 43B, concluding that Section 43B does not apply to employee contributions under Section 36(1)(va). The Tribunal held that payments made within the grace period allowed by relevant circulars should be deductible, providing partial relief to the Revenue.

3. Disallowance of bad debts under Section 36(1)(vii):
The A.O. disallowed the write-off of bad debts amounting to Rs. 33,93,886/-, limiting the deduction to brokerage income. The CIT(A) allowed the full deduction based on the Special Bench decision in Dy. CIT vs. Shreyas S. Morakhia. The Tribunal upheld the CIT(A)'s decision, referencing the jurisdictional High Court's affirmation in CIT vs. Shreyas S. Morakhia, which clarified that both the transaction value and brokerage form part of the debt, fulfilling Section 36(2)(i) requirements.

4. Disallowance under Section 40(a)(ia) for non-deduction of TDS on lease line and VSAT charges:
The A.O. disallowed Rs. 44,89,619/- for non-deduction of TDS on lease line and VSAT charges under Section 194J. The CIT(A) upheld the disallowance. The Tribunal overturned this decision, citing the jurisdictional High Court's ruling in ITO vs. Angel Capital & Debit Market Ltd., which stated that these charges were reimbursements to the Stock Exchange without any income element, and thus not subject to TDS.

5. Disallowance of set-off for brought forward long-term capital loss and current year long-term capital loss:
The A.O. disallowed the set-off of brought forward long-term capital loss from A.Y. 2003-04 and current year long-term capital loss on STT-paid transactions against taxable long-term capital gains. The CIT(A) upheld the disallowance, noting the absence of records supporting the brought forward loss claim. The Tribunal confirmed the disallowance, agreeing with the Revenue that STT-paid transactions are exempt under Section 10(38) and cannot be set off against taxable gains. The Tribunal also found no evidence supporting the brought forward loss claim from A.Y. 2003-04.

Conclusion:
The Tribunal partly allowed both the Revenue's and the assessee's appeals, providing detailed reasoning for each issue based on statutory provisions and judicial precedents. The order was pronounced in the open court on 17/05/2013.