2016 (1) TMI 447 - AT - Income Tax

Disallowance of D-mat charges - Held that - gone through the orders of authorities below and found that the D-mat charges were paid by the assessee to various banks. The income arising from application of share in IPO was taxed by the A.O. as business income. However making payment to the bank for D-mat charges does not amount to any illegal payment nor such payment is in contravention of any law. Accordingly we do not find any merit in disallowance of D-mat charges in all the three years under consideration - Decided in favour of assessee Disallowance of new issue expenses - A.O. s action by holding that expenditure was not allowable in view of Explanation to section 37(1) - Held that - As during the year the assessee has not written off the amount payable to M/s Viraj Investments and further more M/s Viraj Investments has also wrote letter to the assessee asking repayment of dues payable by the assessee and failing which court action was threatened by them. Under these circumstances mere on a plea that M/s Viraj Investment written off the amount in its books of account will not empower the A.O. to add the income in assessee s hands unless it is proved that assessee is not going to pay the amount. In the interest of justice and fair play we restore this issue to the file of the A.O. to verify the actual payment made by the assessee in the subsequent assessment years and if it is found that the amount was not actually been paid the A.O. is at liberty to add the same in the income of the assessee. To the extent of interest expenditure if claimed by assessee during the year under consideration with respect to this amount same is liable to be added. - Decided against assessee Addition made on account of transfer of 50% of IPO shares to the financiers - CIT(a) deleted the addition - Held that - confirmation letters have been filed by the financiers before the AO with regard to the price paid by them. After considering the statement recorded by the AO as well as confirmation filed by the financiers the CIT(A) recorded a finding to the effect that the shares were transferred by the assessee to the financiers at an issue price in accordance with the arrangement entered into between the assessee and the financiers. As the statement recorded by the AO from the financiers corroborated the stand of the assessee that the assessee had transferred 50% of shares allotted in IPO to the financiers at issue price and not at the listed price the additions so made by the AO was not warranted. The detailed finding recorded by CIT(A) at para 7.3 to 7.6 has not been controverted by ld. DR by brining any positive material on record. Accordingly we do not find any reason to interfere in the order of the CIT(A) for deleting the addition made on account of transfer of 50% of IPO shares to the financiers. - Decided against revenue Penalty u/s 271(1)(c) - addition u/s 41(1) - Held that - Addition was made by the AO merely on the plea that M/s Viraj Investments to whom assessee was to make payment has written off amount in its books of account. However at the very same time M/s Viraj Investments has written a letter to the assessee asking for the repayment and threatened to take legal course of action in case of non-repayment. In these circumstances it cannot be taken that assessee has earned any income u/s.41(1). The CIT(A) has deleted the penalty by observing that assessee has not concealed any particulars of income therefore same cannot be termed as concealment of income within the meaning of Section 271(1)(c) of the Act. The CIT(A) also observed that issue is debatable therefore do not warrant any penalty. Reliance was placed on the decision of Hon ble Supreme Court in the case of Reliance Petroproducts Ltd. 2010 (3) TMI 80 - SUPREME COURT . Accordingly we do not find any infirmity in the order of CIT(A) for deleting the penalty so imposed. Thus the appeal of the revenue is dismissed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of De-mat charges and new issue expenses.
2. Addition of Rs. 47,53,110/- due to liability payable to M/s Viraj Investments.
3. Deletion of additions made on account of transferring 50% of IPO shares to financiers at issue price instead of listed price.
4. Imposition of penalty u/s 271(1)(c) of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance of De-mat Charges and New Issue Expenses:
The assessee, dealing in shares, had De-mat charges disallowed by the Assessing Officer (A.O.) for the assessment years 2004-05, 2005-06, and 2006-07, amounting to Rs. 1,26,688/-, Rs. 3,06,942/-, and Rs. 6,07,564/- respectively. The A.O. argued that these expenses were incurred for earning illegal income through multiple IPO applications, thus not allowable as business expenditure under Explanation to section 37(1) of the Income Tax Act, 1961. The assessee relied on Supreme Court and Bombay High Court rulings that expenses incurred in illegal activities should be deductible if the income from such activities is taxed. However, the Tribunal found that De-mat charges paid to banks were not illegal and directed the deletion of the disallowance.

Similarly, the A.O. disallowed new issue expenses, but the Tribunal held that these expenses were incurred wholly and exclusively for earning income from IPO applications and directed their deletion.

2. Addition of Rs. 47,53,110/- Due to Liability Payable to M/s Viraj Investments:
In A.Y. 2006-07, the A.O. added Rs. 47,53,110/- to the assessee's income, claiming that M/s Viraj Investments had written off this amount as bad debt. However, M/s Viraj Investments had also sent a letter to the assessee demanding payment and threatening legal action. The Tribunal restored the issue to the A.O. to verify actual payment in subsequent years and allowed the addition only if the amount was not paid. Interest expenditure related to this amount, if claimed, was also to be added.

3. Deletion of Additions Made on Account of Transferring 50% of IPO Shares to Financiers at Issue Price:
The revenue appealed against the CIT(A)'s deletion of additions made for transferring 50% of IPO shares to financiers at issue price instead of listed price. The CIT(A) found that the shares were transferred at issue price as per the arrangement between the assessee and financiers, corroborated by financiers' statements and confirmation letters. The Tribunal upheld CIT(A)'s decision, noting that the A.O. failed to provide evidence of undisclosed additional income and relied on notional estimations. The additions of Rs. 6,67,396/-, Rs. 39,23,272/-, and Rs. 1,72,20,502/- for A.Y. 2004-05, 2005-06, and 2006-07 respectively were deleted.

4. Imposition of Penalty u/s 271(1)(c) of the Income Tax Act, 1961:
The A.O. imposed a penalty for the addition made due to the difference between the issue price and the lowest listed price of securities transferred to financiers. Since the CIT(A) deleted the quantum addition, the Tribunal dismissed the penalty appeal.

The A.O. also levied a penalty concerning the addition of Rs. 47,53,110/- due from M/s Viraj Investments. The CIT(A) deleted the penalty, noting that the assessee had not concealed income and the issue was debatable. The Tribunal upheld this decision, referencing the Supreme Court ruling in Reliance Petroproducts Pvt. Ltd. (322 ITR 158), and dismissed the revenue's appeal.

Conclusion:
The Tribunal allowed the assessee's appeals in part, deleting the disallowances of De-mat charges and new issue expenses, and restored the issue of liability payable to M/s Viraj Investments to the A.O. for verification. The revenue's appeals were dismissed, upholding the deletion of additions related to IPO shares transferred to financiers and the deletion of penalties imposed u/s 271(1)(c).