2013 (11) TMI 1316 - AT - Income Tax

Disallowance of Interest expenditure - Assessee has borrowed huge funds from banks and also in the form of inter Corporate deposits etc - Assessee has been making early payments to the clients when the securities are sold and receiving delayed payments on the purchase transaction from the clientele and in the process has been incurring huge interest liability which apparently has not been passed to the clientele - Assessee has not been advancing any money to facilitate the transactions of clientele instead the assessee has been giving away the sale consideration immediately without waiting for the receipt of sale proceeds and assessee has been paying the monies which come from the clients on pay out day and pay in days Held that - Relying upon the Hon ble Supreme court decision in the case of Bengal Enamel Works Ltd. 1969 (12) TMI 4 - SUPREME Court , it has been held that Assessee is the best judge of the expenditure. The expenditure incurred by assessee may found to be unnecessary and unavoidable. Still the same has to be accepted by department if it is for the purpose of business. There need not be any legal obligation to incur expenditure, but the principles of commercial expediency will ultimately prevail and the act of the assessee has to be viewed from businessman angle not from the department. The interest paid by the assessee on borrowings was paid to various banks etc. on prevailing market rate and brokerage has been charged by the assessee on prevailing market rate. Therefore, it cannot be said that the interest expenditure incurred by the assessee was on account of any illegal activity. Allowability of excess brokerage shown in the service tax return as compared to brokerage income shown in profit and loss account Held that - Assessee has been reflecting the service tax return, the brokerage on accrued basis but in profit and loss account the brokerage has been shown on actual basis on the basis of constant method adopted by the assessee - Sometime the assessee is required to reduce the brokerage at the request of the assessee during the final settlement of the bills and some time the assessee is also required to waive part of the brokerage disputed by the clients - Therefore, difference as per the service tax return and as per profit and loss account was found explainable Decided against the Revenue.

Issues Involved:
1. Deleting the disallowance of interest amounting to Rs. 21,92,68,519/-.
2. Deleting the addition of Rs. 40,65,275/- disallowed under Section 14A of the Act.
3. Deleting the addition of Rs. 9,03,235/- on account of excess brokerage shown in service tax return.
4. Deleting the disallowance of Rs. 26,54,791/- on account of prior period expenses.
5. Deleting the addition of Rs. 17,69,000/- on account of interest accrued but not due.

Issue-wise Detailed Analysis:

1. Deleting the disallowance of interest amounting to Rs. 21,92,68,519/-:
The Assessing Officer (AO) disallowed the interest expenditure on the grounds that the borrowed funds were not utilized for the purpose of business, relying on the Special Auditor's report under Section 142(2A). The Special Auditor found that the transactions lacked commercial prudence and resulted in losses. The AO also noted adverse findings from SEBI against the assessee and concluded that the transactions were against public policy, thus disallowing the interest expenditure.

The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal, observing that on identical facts, the issue was decided in favor of the assessee for the assessment year 2000-01. The CIT(A) noted that the assessee earned substantial brokerage income, which exceeded the interest expenditure. The CIT(A) also held that even if the transactions were considered illegal, the expenditure incurred to earn the brokerage must be allowed, as only the income from illegal activities can be taxed, not the gross receipts.

The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee's brokerage income was significantly higher than the interest expenditure. The Tribunal also noted that the AO's reliance on SEBI's report was misplaced as it pertained to subsequent years. The Tribunal concluded that the interest expenditure was incurred for the purpose of business and was allowable.

2. Deleting the addition of Rs. 40,65,275/- disallowed under Section 14A of the Act:
The AO made an ad hoc disallowance of Rs. 40,65,275/- on the grounds that the assessee earned dividend income, which is exempt, and therefore, no expenditure on account of interest and other expenses is allowable against such income.

The CIT(A) deleted the disallowance, noting that on identical facts, the disallowance was deleted for the assessment year 2000-01. The CIT(A) observed that the assessee is a trader, and the entire share purchases were kept under the head stock-in-trade, with dividend income being consequential. The CIT(A) concluded that any expenditure incurred during the regular course of business is allowable.

The Tribunal upheld the CIT(A)'s decision, agreeing that there is a direct nexus between the trading activity and the expenditure incurred, and therefore, the disallowance was not justified.

3. Deleting the addition of Rs. 9,03,235/- on account of excess brokerage shown in service tax return:
The AO made a similar disallowance in the earlier year, which was deleted by the CIT(A) after examining the issue and finding no difference in brokerage shown by the assessee in the profit and loss account.

The CIT(A) followed the order for the assessment year 2000-01 and deleted the addition for the current year as well. The CIT(A) noted that the difference between the service tax return and the profit and loss account was explainable due to the constant method adopted by the assessee and the need to adjust brokerage during final settlement with clients.

The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere with the CIT(A)'s detailed examination and reconciliation of the brokerage figures.

4. Deleting the disallowance of Rs. 26,54,791/- on account of prior period expenses:
The AO disallowed the expenses, noting that they related to an earlier year. The CIT(A) deleted the disallowance, following his earlier order, which found that the expenses were not claimed in the earlier year and were booked in the year when the final settlement was made.

The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were allowable in the year of final settlement if not claimed in the earlier year.

5. Deleting the addition of Rs. 17,69,000/- on account of interest accrued but not due:
The AO added the accrued interest on Government Security. The CIT(A) deleted the addition, noting that interest on securities is receivable only on the coupon date and not on an accrual basis.

The Tribunal upheld the CIT(A)'s decision, agreeing with the legal position that such interest is taxable on the basis of actual receipt, not accrual.

Conclusion:
The Tribunal dismissed the department's appeal, confirming the CIT(A)'s orders on all issues. The Tribunal found that the CIT(A) correctly applied the law and facts, and the disallowances and additions made by the AO were not justified.

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