2014 (7) TMI 989 - AT - Income Tax

Additional disallowance u/s 14A r.w. Rule 8D Held that - The available funds with the assessee are far more than the borrowed funds & that the borrowings of the company in the immediately preceding year which has substantially come down which means that the investments have been made out of interest free funds i.e. assessee s own funds - Following the decision in The Assistant Commissioner of Income Tax, Cir. 4(2), Versus M/s. Intime Spectrum Securities Ltd. 2012 (8) TMI 303 - ITAT, MUMBAI - Therefore no disallowance can be made u/s. 14A - Decided in favour of assessee. Disallowance of foreign travelling expenses Held that - The CIT(A) has allowed entire travelling expenditure for trips to Dubai and 50% of expenditure for trips to other places considering the submission that assessee is also engaged in the business of financial activities including leasing financial and advisory services and that the Directors had visited Dubai to study real estate market - as the issue in the year under question is same the same order is to be followed Decided in favour of assessee. Disallowance of STT as capital expenses Held that - The assessee in this case is neither the purchaser nor the seller - He is merely a collecting agent of STT on behalf of the Government - the assessee has both collected the amount and paid the same to the Government - assessee being a broker has neither purchased shares on its own nor sold shares on its own - It was only an intermediary - section 40(a)(ib) of the Act does not get attracted in this case nor section 88E benefit can be extended to the assessee - Following the decision in M/s A.K. Equities Pvt. Ltd. Vs. ITO 2010 (2) TMI 1115 - ITAT MUMBAI - Only when the purchaser or the seller claims a deduction of STT paid, then only 40(a)(ib) is attracted Decided in favour of Assessee. Disallowance of bad debts Held that - The AO has disallowed the part claim of the assessee on the ground that the claim should be after adjusting all receivables by the assessee against the clients by sale of holdings by the assessee belonging to the clients - assessee has made the claim that the amount written off by the assessee pertaining to the outstanding receivables after considering any sale of client s holding and this fact has been examined by the CIT(A) - the amount of ₹ 2.92 crores was the balance after recoveries from the margin money/shares of the debtors and nothing has been brought on record by the AO to rebut the said claim of the assessee Following CIT Vs. Shreyas S. Morakhia 2010 (7) TMI 455 - ITAT MUMBAI Decided in favour of Assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Penalty paid to stock exchanges.
3. Disallowance of foreign travel expenses.
4. Disallowance of Security Transaction Tax (STT) as capital expenses.
5. Disallowance of bad debts.

Detailed Analysis:

1. Disallowance under Section 14A:
The primary issue is the disallowance of Rs. 17,29,400 under Section 14A read with Rule 8D. The assessee contested that it had sufficient own funds to cover the investments generating tax-free income, citing the decision in CIT Vs. Reliance Utilities & Power Ltd (313 ITR 340). The Tribunal noted that the assessee's own funds were Rs. 45.41 crores against the total investment of Rs. 15.81 crores as of 31st March 2008. Given the sufficient own funds and reduced loans, the Tribunal held that no interest expenditure could be disallowed under Section 14A, aligning with the decision in the assessee's case for A.Y. 2006-07.

2. Penalty Paid to Stock Exchanges:
The Revenue challenged the deletion of Rs. 11,29,599 disallowed by the AO as penalty paid to stock exchanges. The CIT(A) had deleted this disallowance based on the Tribunal's decision for A.Y. 2007-08, which followed the Bombay High Court's ruling in CIT Vs. The Stock and Bond Trading Co. The Tribunal upheld the CIT(A)'s decision, confirming that such payments were not for an offense or prohibited by law, thus not attracting the explanation to Section 37(1).

3. Disallowance of Foreign Travel Expenses:
The AO disallowed Rs. 1,70,521 towards foreign travel expenses, which was deleted by the CIT(A) referencing earlier orders for A.Y. 2002-03 and 2007-08. The Tribunal noted the identical facts and upheld the CIT(A)'s decision, dismissing the Revenue's ground.

4. Disallowance of Security Transaction Tax (STT) as Capital Expenses:
The assessee claimed non-recovery of STT charges due to inadvertent transactions. The CIT(A) deleted the disallowance based on the Tribunal's decision in the case of M/s A.K. Equities Pvt. Ltd., which clarified that STT is not a capital expense when the assessee acts as a collecting agent. The Tribunal upheld this view, deciding in favor of the assessee.

5. Disallowance of Bad Debts:
The AO disallowed Rs. 2,92,58,921 of non-brokerage dues claimed as bad debts. The CIT(A) allowed the claim following the Special Bench decision in DCIT Vs. Shreyas S. Morakhia, which was upheld by the Bombay High Court. The Tribunal noted that the CIT(A) verified the bad debts after considering recoveries from clients' holdings and upheld the CIT(A)'s decision.

For A.Y. 2009-10:
The issue was the disallowance of Rs. 46,17,785 under Section 14A. The Tribunal noted that the assessee's own funds exceeded the investments and that the interest received was more than the interest paid. Citing similar cases like Paresh K. Shah Vs. DCIT and others, the Tribunal held that no disallowance was warranted under Section 14A.

Conclusion:
The Tribunal allowed the assessee's appeals and dismissed the Revenue's appeals, confirming the CIT(A)'s decisions across all issues. The order was pronounced on 07-05-2014.