2016 (12) TMI 302 - AT - Income Tax

Treatment as business income instead of dividend income - Held that - The assessee is dealing in shares and securities, which means that it is buying and selling shares for its customers. The shares purchased, often, are kept by the assessee and such shares may have been purchased as cum dividend. The assessee is duty bound to remit the dividend as and when received to the purchasers of the shares. Therefore, there are credit and debit entries in the ledger account. At times, due to the ignorance of the buyers who may not be aware that they have purchased shares as cum dividend and therefore, did not claim the dividend amount from the broker. Because of such ignorance, the amount remained with the assessee. This is nothing but a benefit derived by the assessee from the transactions done in its ordinary course of business. Therefore, such surplus has a direct nexus with the business of the assessee and therefore, an income of the assessee. The Revenue Authorities have rightly taxed the surplus as income of the assessee Disallowance of interest expenses invoking provisions of Section 40A(2)(b) - Held that - A perusal of the returned income of the payees shows that all the payees are assessed at the highest rate of tax. Since both, the payer and payees, are assessed at the same rate of tax, in our considered opinion, there is no basis of any Revenue leakage. As decided in case of PWS Engineers Limited 2016 (6) TMI 596 - GUJARAT HIGH COURT a certain income has already been taxed in the hands of the Directors. Permitting the Revenue to tax the same income again at the same rate in the hands of the principal payer would amount to double taxation. Only on this count, we answer question in favour of the appellant-assessee and against Revenue TDS u/s 194J - Non deduction of tds on turnover charges (transaction charges) paid to the stock exchange - Held that - The transaction charges paid to the Bombay Stock Exchange by its members are for technical services rendered is not an appropriate view. Such charges, really, are in the nature of payments made for facilities provided by the Stock Exchange. No TDS on such payments would, therefore, be deductible under Section 194J of the Act. - Decided in favour of the appellant-assessee Disallowance of depreciation on electrical fittings - Held that - We find that under Rule 5 of the Income-tax Rules, which contains the depreciation table for various block of assets and under Part A(II) depreciation on furniture and fittings is @ 10%. It has been further explained that electrical fittings include electrical wiring, switches, sockets, other fittings and fans, etc. In the light of the depreciation table provided under the Income-tax Rules, we do not find any error or infirmity in the findings of the CIT(A).

Summary

Issues Involved:
1. Treatment of ?2,41,866/- as business income instead of dividend income.
2. Disallowance of interest expenses invoking provisions of Section 40A(2)(b).
3. Disallowance of turnover charges invoking provisions of Section 40(a)(ia).
4. Ad-hoc disallowance of financial charges invoking provisions of Section 40A(2)(b).
5. Disallowance of depreciation on electrical fittings.
6. Levy of interest under Sections 234A, 234B, and 234C.
7. Initiation of penalty proceedings under Section 271(1)(c).

Detailed Analysis:

1. Treatment of ?2,41,866/- as Business Income Instead of Dividend Income:
The first issue pertains to the treatment of ?2,41,866/- as business income instead of dividend income. The Assessing Officer (AO) noticed that the assessee claimed ?2,41,866/- as exempt dividend income but did not hold any investment. The AO concluded that the surplus was actually business income derived from transactions in the ordinary course of business. The CIT(A) upheld this view. The Tribunal also agreed, stating that the surplus had a direct nexus with the business and was rightly taxed as income. Consequently, this ground was dismissed.

2. Disallowance of Interest Expenses Invoking Provisions of Section 40A(2)(b):
The second issue involves the disallowance of interest expenses of ?18,59,963/-. The AO found that the assessee paid interest at 24% to related persons but only 8%-12% to others, deeming the 24% rate unreasonable and restricting it to 18%. The CIT(A) upheld the AO's decision. However, the Tribunal, relying on the Gujarat High Court decision in PWS Engineers Limited, found no revenue leakage since both payer and payees were taxed at the same rate. Thus, the Tribunal directed the AO to delete the addition, allowing this ground.

3. Disallowance of Turnover Charges Invoking Provisions of Section 40(a)(ia):
For AY 2009-10, the AO disallowed ?38,56,887/- in transaction charges paid to stock exchanges due to non-deduction of tax at source, citing the Bombay High Court's decision in CIT vs. Kotak Securities Limited. However, the Supreme Court reversed this decision, stating that such charges were payments for facilities, not technical services, and thus not subject to TDS under Section 194J. The Tribunal directed the AO to delete the addition, allowing this ground.

4. Ad-hoc Disallowance of Financial Charges Invoking Provisions of Section 40A(2)(b):
The AO made an ad-hoc disallowance of 50% of financial charges paid to related persons, totaling ?9,37,500/-. The CIT(A) upheld this. The Tribunal, referencing a previous decision in the assessee's own case, remanded the issue back to the AO for verification of details, treating this ground as allowed for statistical purposes.

5. Disallowance of Depreciation on Electrical Fittings:
The AO disallowed ?90,992/- claimed as depreciation on electrical installations, allowing only 10% instead of 15%. The CIT(A) upheld this, noting that the assessee was not a manufacturing concern. The Tribunal agreed, referencing the Income-tax Rules that specify a 10% depreciation rate for electrical fittings. This ground was dismissed.

6. Levy of Interest Under Sections 234A, 234B, and 234C:
The levy of interest under Sections 234A, 234B, and 234C was deemed mandatory though consequential. The Tribunal directed the AO to levy interest as per the law, dismissing this ground as it was consequential.

7. Initiation of Penalty Proceedings Under Section 271(1)(c):
The initiation of penalty proceedings under Section 271(1)(c) was considered premature and was dismissed.

Separate Judgments for Different Assessment Years:
- For AY 2009-10, the Tribunal directed the deletion of ?38,56,887/- in transaction charges and ?2,67,833/- in interest expenses, and remanded the issue of financial charges to the AO.
- For AY 2010-11, the Tribunal directed the deletion of ?19,83,919/- in transaction charges and ?1,65,365/- in interest expenses, and remanded the issue of financial charges to the AO.

Conclusion:
In conclusion, the appeals filed by the assessee were partly allowed, with specific directions for certain issues and dismissals for others. The Tribunal's decisions were based on detailed legal analysis and relevant case law, ensuring compliance with the provisions of the Income-tax Act.