2025 (4) TMI 480 - HC - Income Tax

Disallowance of Client Assistant Charges paid to ICICI Bank Ltd - assessee company has its own infrastructure facilities required for the purpose of the broking business having its own membership card of the stock exchange and its own premises etc. - whether the claim of expenditure made by Assessee is to be allowed as a business expenditure? - HELD THAT - As not disputed that the Respondent Assessee has incurred these expenses. Merely because the beneficiary of three-in-one account scheme is ICICI Bank Ltd. and ICICI Securities has not charged any amount that cannot be a ground for disallowing the expenditure incurred by the ICICI Securities. The second reason is with respect to the client assistant charges being in lieu of the brokerage. Assuming that is so we have not been shown any provision of any law whereby Assessee could not have shared such alleged brokerage amount with ICICI Bank Ltd.. This would amount to sharing of brokerage and the business of Assessee being a brokerage the same would constitute expenditure incurred for the purposes of business. Therefore even on this count the disallowance cannot be sustained. The third reason is that ICICI Bank Ltd. is a gainer of large deposits and earns demat charges. Even in our view that factor cannot be a consideration for disallowability of expenditure incurred by the Respondent Assessee. No substantial question of law arising out of Question No. 1 and therefore the same is rejected. Losses are notional losses and therefore cannot be allowed to be set off against the taxable income - In our view even if it is a contingent in nature this is the provision made on account of loss and based on conservative principle same ought to be allowed as a deduction. Such losses have been held to be allowable by the Hon ble Supreme Court in the case of Principal Commissioner of Income Tax vs. Suzlon Energy Ltd 2020 (2) TMI 1559 - SC ORDER . Assessee submits that this is not a notional loss but an actual loss. However we are not going into that issue since there is no clear finding on the same. The question can also be answered/adjudicated taking the revenue s contention has correct since the same is covered by the decision of the Hon ble Supreme Court 2020 (2) TMI 1559 - SC ORDER . No substantial question of law arises from Question No. 2 proposed by the Appellant- Revenue.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

(i) Whether the Income Tax Appellate Tribunal (ITAT) was justified in deleting the disallowance of Client Assistant Charges amounting to Rs. 17,18,85,698/- paid to ICICI Bank Ltd., despite the assessee company having its own infrastructure for the broking business.

(ii) Whether the ITAT was justified in allowing the unrealized loss of Rs. 1,96,414/- in respect of open positions in Futures and Options, considering such a loss as contingent and notional, and therefore not allowable against taxable income.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Disallowance of Client Assistant Charges

Relevant legal framework and precedents: The primary legal question revolves around the allowance of business expenditure under the Income Tax Act. The Tribunal's decision was based on the nature of the client assistant charges, which involved the deputation of ICICI Bank Ltd. staff to the Respondent - Assessee.

Court's interpretation and reasoning: The Court noted that the Respondent - Assessee had incurred these expenses, and the mere fact that ICICI Bank Ltd. was a beneficiary of the three-in-one account scheme did not justify disallowing the expenditure. The Court found no legal provision preventing the sharing of brokerage with ICICI Bank Ltd., and thus, the expenditure was considered incurred for business purposes.

Key evidence and findings: The Tribunal relied on the earlier year's acceptance of these charges by the Assessing Officer. The CIT (Appeal) had disallowed the expenditure, arguing that the charges were a guise for sharing brokerage, and ICICI Bank Ltd. was a major beneficiary without being charged by the Respondent - Assessee.

Application of law to facts: The Court applied the principle that business expenditures incurred wholly and exclusively for business purposes are allowable. It rejected the CIT (Appeal)'s reasoning, emphasizing that the expenditure related to the Respondent - Assessee's business and was therefore legitimate.

Treatment of competing arguments: The Court dismissed the Revenue's argument that the expenses were not incurred for business purposes, citing the lack of a legal basis for disallowance. It also refuted the notion that ICICI Bank Ltd.'s gains from the three-in-one account scheme impacted the legitimacy of the expenditure.

Conclusions: The Court concluded that no substantial question of law arose from this issue, and the Tribunal's decision to allow the expenditure was upheld.

Issue 2: Allowance of Unrealized Loss in Futures and Options

Relevant legal framework and precedents: The Revenue contended that unrealized losses in Futures and Options were contingent and notional, referencing CBDT instruction No. 3 of 2010. The Court considered the Supreme Court's decision in Principal Commissioner of Income Tax vs. Suzlon Energy Ltd, which allowed such losses based on conservative accounting principles.

Court's interpretation and reasoning: The Court acknowledged the Revenue's contention of the loss being contingent but emphasized that, even if contingent, the provision made for such loss is allowable as a deduction under conservative accounting principles.

Key evidence and findings: The Court did not delve into whether the loss was notional or actual, as the Supreme Court's precedent covered the issue, allowing the deduction of such losses.

Application of law to facts: The Court applied the Supreme Court's ruling, indicating that the provision for loss, even if contingent, should be allowed as a deduction, thereby supporting the Tribunal's decision.

Treatment of competing arguments: The Court did not address the Respondent - Assessee's argument that the loss was actual, as the Supreme Court's decision was sufficient to resolve the issue in favor of allowing the deduction.

Conclusions: The Court found no substantial question of law in this issue, affirming the Tribunal's decision to allow the unrealized loss as a deduction.

SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "Merely because the beneficiary of three-in-one account scheme is ICICI Bank Ltd. and ICICI Securities has not charged any amount, that cannot be a ground for disallowing the expenditure incurred by the ICICI Securities."

Core principles established: The judgment reinforces the principle that business expenditures incurred wholly and exclusively for business purposes are allowable, and provisions for contingent losses can be deducted based on conservative accounting principles.

Final determinations on each issue: The Court dismissed the appeal, upholding the Tribunal's decisions on both issues, finding no substantial questions of law warranting interference.