2018 (5) TMI 2161 - AT - Income Tax

Allowable revenue/business expenses - penalty levied by the NSE/NSDL for committing irregularities in conduct of business having regard to Rules Bye-laws and Regulations of Exchange - HELD THAT - We find that the issue is no longer res integra. As in the case of CIT vs. The Stock and Bond Trading Company 2011 (10) TMI 172 - BOMBAY HIGH COURT as held that payments made by the assessee to the Stock Exchanges for violation of their regulations are not akin to an offence which is prohibited by law as contemplated in Explanation to section 37 - we are inclined to entertain the appeal of the assessee for admissibility of the expenditure on this score. Consequently the addition/disallowance made by the Assessing Officer in this ground is directed to be deleted. Addition u/s 14A - Expenditure incurred on earning exempt income - HELD THAT - As in its own case concerning A.Y. 2012-13 2011 (10) TMI 172 - BOMBAY HIGH COURT has restricted the amount of disallowance to the extent of exempt income earned. In parity we restrict the disallowance under section 14A to the extent of exempt income. Nature of expenses - Annual Maintenance Charges incurred disallowed - HELD THAT - Annual Maintenance charges incurred are in the nature of periodical renewal of licence for meeting day-to-day need concerning software used for carrying on the highly complex stock market transactions. We thus agree with the plea of the assessee that Annual Maintenance expenses of such nature corroborated by invoices/bills are revenue in nature in contrast to the capital expenditure held by the revenue. Thus AO is directed to delete the addition on this score. Disallowance of Mark to Market Loss - loss has been incurred by the assessee in open contracts of futures and options segment and it is a case of the assessee that the loss in the open contracts has been booked as per accounting standard prescribed by ICAI and the accounting policy has been followed consistently - HELD THAT - We find ourselves in agreement with the plea on behalf of the assessee that Mark to Market Loss on futures and options contract is not a notional loss and the loss has crystallised at the end of the year notwithstanding the continuance of the contract. We also note the plea of the assessee that it has made entries following accounting standard AS-11 of ICAI. As in the case of CIT vs. Woodward Governor India Pvt. Ltd 2009 (4) TMI 4 - SUPREME COURT has considered such loss as allowable and not of contingent in nature. In the light of the aforesaid the Assessing Officer is directed to delete the disallowance towards Mark to Market Losses in open contracts of futures and options. Nature of expenses - software charges - revenue or capital expenditure - HELD THAT - As claimed that ODIN software are application software which requires renewals and upgradation from time to time. This being so in parity with the decision of co-ordinate bench of Mumbai Tribunal in the case of Emkay Share Stock Brokers Limited 2012 (9) TMI 124 - ITAT MUMBAI on behalf of the assessee we accept the plea of the assessee for allowability of such expenditure on application software as revenue expenditure. AO is accordingly required to cancel the aforesaid addition/disallowance. Short deduction of tds - Disallowance of various expenses u/s 40(a)(ia) - amount includes payment to NSDL for transaction charges and payment to Stock Exchange towards annual charges and others VSAT charges Rs. 2, 00, 000/-. - HELD THAT - While making all these payments towards various expenses the assessee has in fact deducted TDS albeit at a lower rate as controverted on behalf of the revenue. Thus there is no total failure to withhold TDS on such payments. A short deduction of tax at source by itself does not attract the provisions of section 40(a)(ia) of the Act. Section 40(a)(ia) can be invoked only when two conditions namely (i) that tax is deductible at source and (ii) such tax has not been deducted is satisfied. In a situation where tax has been deducted by the assessee under a wrong provision of TDS and there is a shortfall section 40(a)(ia) disallowance cannot be made as consistently held in long line of judicial precedents including CIT vs. S.K. Tekriwal 2012 (12) TMI 873 - CALCUTTA HIGH COURT . Therefore this ground of appeal is allowed. AO is directed to delete the disallowance made by invoking section 40(a)(ia) of the Act.

Summary

Issues involved:
1. Disallowance of penalty levied by the National Stock Exchange/NSDL
2. Disallowance under section 14A of the Income Tax Act
3. Disallowance of Annual Maintenance Charges
4. Disallowance of Mark to Market Loss
5. Disallowance of software charges
6. Disallowance of various expenses under section 40(a)(ia) of the Act

Issue 1: Disallowance of penalty levied by the National Stock Exchange/NSDL:
The assessee disputed the disallowance of Rs. 22,421 made by the Assessing Officer for penalties imposed by the National Stock Exchange/NSDL. The tribunal referred to a judgment of the Hon’ble Bombay High Court, stating that such payments are not akin to an offense prohibited by law under section 37 of the Income Tax Act. Consequently, the tribunal directed the deletion of the addition/disallowance made by the Assessing Officer.

Issue 2: Disallowance under section 14A of the Income Tax Act:
The second ground involved a disallowance of Rs. 1,35,864 under section 14A. The tribunal noted that in a similar case concerning a different assessment year, the disallowance was restricted to the extent of exempt income earned. Following this precedent, the tribunal partially allowed the ground by restricting the disallowance to the extent of exempt income, which was Rs. 42,082.

Issue 3: Disallowance of Annual Maintenance Charges:
The tribunal addressed the disallowance of Annual Maintenance Charges amounting to Rs. 5,15,100. It was argued that these charges were for the renewal of licenses for software used in complex stock market transactions. The tribunal agreed that these expenses were revenue in nature and directed the Assessing Officer to delete the addition on this ground.

Issue 4: Disallowance of Mark to Market Loss:
Regarding the disallowance of Mark to Market Loss of Rs. 63,098, the tribunal considered the loss incurred in open contracts of futures and options. It was found that the loss had been booked following accounting standards and was not a notional loss. Citing a Supreme Court judgment, the tribunal directed the Assessing Officer to delete the disallowance towards Mark to Market Losses in open contracts.

Issue 5: Disallowance of software charges:
The tribunal addressed the disallowance of Rs. 1,37,843 on account of software charges. It was argued that the expenses were for purchasing and upgrading software necessary for business operations. Following a precedent from the Mumbai Tribunal, the tribunal accepted the plea for the allowability of such expenditure as revenue expenditure, directing the Assessing Officer to cancel the addition/disallowance.

Issue 6: Disallowance of various expenses under section 40(a)(ia) of the Act:
The final issue involved the disallowance of various expenses totaling Rs. 14,52,592 under section 40(a)(ia) of the Act. The tribunal analyzed the TDS deductions made by the assessee on these payments and concluded that although there were short deductions, they did not attract the provisions of section 40(a)(ia). Citing judicial precedents, the tribunal allowed the appeal, directing the Assessing Officer to delete the disallowance made under section 40(a)(ia) of the Act.

In conclusion, the tribunal partly allowed the appeal of the assessee, making detailed judgments on each issue raised in the grounds of appeal.