2015 (2) TMI 250 - AT - Income Tax

Accrual of income - brokerage on new issue of shares (IPO) - double taxation - addition to income to to the tune of ₹ 12,95,636.08, on account of brokerage on new issue of shares - Held that - The assessee company is a Member of the DSE having membership no.D-201. It is also allotted IPO Broker Code no.5/0201/4. The undisputed fact is that the initial public offer (IPO) business is done in the name of assessee company, by virtue of its Membership and registrations. Thus all the income earned at the first stage has to be treated as income of the assessee company. The doctrine of overriding title cannot, in our view, be applied to the case of the assessee company. Undisputed fact is that M/s Prasad & Co. has done the IPO business and the assessee company had no active role whatsoever in such business, except that of lending the use of its Membership and registration. The income from IPOs as well as the expenditure on the same, is undisputedly incurred by M/s Prasad & Co. The arrangement has not been disputed by the AO. It is a fact that the entire income has been accounted for by the partnership firm M/s Prasad & Co. Thus the entire amount transferred by the assessee company to M/s Prasad & Co. should have been allowed as expenditure of the assessee company. The First Appellate Authority has recognised this fact that the assessee could have claimed expenses to the extent of the amount payable to M/s Prasad & Co. While observing so, he chose to uphold the illegal action of the AO in bringing the tax to gross receipts. When the assessee has not received any income from this activity, tax is levied on gross receipts, on a hypothetical basis. This is against the provisions of the Income Tax Act. Same income is sought to be taxed twice. This should not have been done. Thus we direct the AO to grant deduction of ₹ 12,95,636/- from the income assessed in the hands of the assessee as no income that arises from the business of IPO can be brought to tax in the hands of the assessee company for the reason that it has not earned or derived any income from such activity. - Decided partly in favour of assessee.

Summary

Issues:
- Appeal against order of Ld.CIT(Appeals)-II, Delhi for AY 2005-06.
- Dispute over income declared by the assessee related to brokerage on new issue of shares.
- Contention of diverting income to sister concerns.
- Disagreement on diversion of income by overriding title.
- Claim for deduction of income in hands of the assessee company.
- Taxation on gross receipts without actual income earned.

Analysis:
1. The appeal was filed against the order of Ld.CIT(Appeals)-II, Delhi for AY 2005-06. The assessee, a company working as a share broker, declared a loss of Rs. 1,40,938 for the year. However, during scrutiny assessments, it was found that the company received payments amounting to Rs. 12,95,636.08 on account of brokerage on new issue of shares, which were transferred to a registered Partnership Firm owned by the directors of the assessee company.

2. The Assessing Officer (AO) rejected the assessee's explanation, alleging that the company concealed income by diverting it to sister concerns. The AO determined the income at Rs. 11,54,700 under section 143(3). The assessee contended that the partnership firm was carrying out the IPO business and all expenses were borne by them, not the company. The First Appellate Authority upheld the AO's decision, stating the income must be acknowledged in the company's hands initially.

3. The assessee appealed on various grounds, including the contention that the amount received was not its income but only acted as a conduit. The counsel argued for deduction of expenses related to the amount received, claiming the income was not earned by the company. The counsel also emphasized the historical background and consistency in previous assessments.

4. The Tribunal considered the facts and held that the income earned by the company from IPO business must be treated as its income due to Membership and registrations. However, the IPO business was actually conducted by the partnership firm, and the entire income and expenditure were accounted for by them. The Tribunal directed the AO to allow deduction of Rs. 12,95,636 from the assessed income, stating that no income from the IPO business could be taxed in the company's hands as it did not earn any income from that activity.

5. The Tribunal's decision highlighted the importance of recognizing the actual entity earning income and the need to avoid double taxation by taxing gross receipts without considering actual income derived. The appeal was allowed in part, granting relief to the assessee regarding the taxation of income related to the IPO business.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved, the arguments presented, and the Tribunal's decision in the case.