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2012 (7) TMI 133 - AT - Income TaxRegarding disallowance of Security Transaction Tax - on account of STT payment in case of broker while computing total income - AO observed that any amount paid on account of STT was not allowable in view of provision of section 40(a)(ib) inserted by the finance act, 2004 Held that - Liability on account of STT is the liability of the clients of the assessee who are buying and selling shares and, therefore, the provisions of section 40(a)(ib) will be applicable in those cases and it is because of this reason, the rebate under section 88E is also allowable in case of buyer/seller of shares under section 88E of the Act. The assessee is only a broker who has collected STT on behalf of the stock exchanges and has paid the same to the latter - STT is required to be excluded while computing the income of the assessee from brokerage - authorities are not justified in disallowing the claim of deduction on account of STT in case of the assessee In favor of assessee Regarding disallowance of loss on account of error trade - loss had occurred on those transactions undertaken on behalf of the clients in which there were errors and transactions were not as per orders booked by the clients Held that - in case of brokers loss arising on account of purchase and sale of shares under forced circumstances and under compulsion will not be covered by Explanation to Section 73. - Matter requires fresh examination and in case loss is found to have occurred on account of error trades conducted by assessee on behalf of clients, the claim has to be accepted as business loss matter remanded to AO for fresh order Regarding disallowance of expenses under section 14A AO had disallowed the expenses @ 5% of dividend income - CIT(A) has directed the AO to compute the disallowance as per Rule 8D Held that - Same issue had been considered by the Tribunal in assessment year 2004-05 and the Tribunal has reduced the disallowance to Rs. 2.00 lacs - in this year are almost identical as no major distinguishing factors have been brought to notice by the ld. Departmental Representative disallowance of expenses relating to dividend income at Rs. 2,20,000 Regarding disallowance of VSAT, leaseline charges and transaction charges paid by the assessee to the stock exchange as brokerage - AO had disallowed the claim holding that payments were fees for technical service covered by Section 40(a)(ia) and since the assessee had not deducted tax at source the claim had been disallowed Held that - VSAT, and leaseline charges, were reimbursement of expenses to the stock exchanges for use of standard facilities and transaction charges were not disallowable - transaction charges paid by the assessee were of the nature of fees for technical services In favor of assessee Regarding allowability of expenditure incurred by the assessee on account of payment made to stock exchanges for violation of their bye-laws - AO had treated the expenditure as payment for violation of law and disallowed the same under section 37(1) Held that - Violation of regulations of stock exchanges did not amount to violation of law - no infirmity in allowing the claim In favor of assessee Allowability of deduction on account of bad debt - amounts had been taken into account in the computation of the earlier year - AO disallowed the amount only on the ground that the assessee had not established that the debt had become irrecoverable Held that - In view of the amendment to section 36(1)(vii) w.e.f. 1.4.1989, the burden is no longer on the assessee to prove that the debt has become bad/irrecoverable - only conditions for allowability of bad debt is that the amount should have been taken into account in the computation of income of earlier year and should have been actually written off in the books - no dispute regarding fulfillment of these conditions - claim of bad debts can not be disallowed Business loss - out of pocket expenses incurred by the assessee in connection with certain work relating to these clients Held that - Eexpenses which were required to be reimbursed by the clients were not reimbursed as transactions did not go through - claim has not been controverted by the AO by placing any material on record. Therefore, these expenses which were actually incurred and about which there is no dispute has to be allowed as business loss
Issues Involved:
1. Disallowance of Security Transaction Tax (STT) 2. Disallowance of loss on account of error trading 3. Disallowance of expenses under section 14A of the Income Tax Act, 1961 4. Disallowance of VSAT, lease line, and transaction charges 5. Disallowance of payment made to stock exchange for violation of bye-laws 6. Disallowance of bad debt Issue-wise Detailed Analysis: 1. Disallowance of Security Transaction Tax (STT): The first issue pertains to the disallowance of STT claimed by the assessee as a deduction. The Assessing Officer (AO) disallowed this based on Section 40(a)(ib) of the Income Tax Act, which explicitly prohibits such deductions. The assessee argued that as a broker, it collected STT on behalf of clients, which should be deductible. The Tribunal found merit in the assessee's argument, noting that the broker merely collected STT on behalf of stock exchanges, and thus, STT should be excluded from the brokerage income. The Tribunal set aside the CIT(A)'s order and allowed the deduction. 2. Disallowance of Loss on Account of Error Trading: The second issue involves the disallowance of a loss incurred due to error trading. The AO treated the loss as speculation loss under Explanation to Section 73. The assessee contended that the loss was due to genuine errors during transactions and should be considered as a business loss. The Tribunal noted that the claim of error trades was indeed made before the AO and CIT(A). It restored the issue to the AO for fresh examination, emphasizing that if the loss was due to error trades, it should be allowed as a business loss. 3. Disallowance of Expenses Under Section 14A: The third issue is about the disallowance of expenses related to exempt income (dividend) under Section 14A. The AO disallowed 5% of the dividend income as expenses, while the CIT(A) directed the AO to compute the disallowance as per Rule 8D. The Tribunal held that Rule 8D is applicable only from the assessment year 2008-09, as per the Bombay High Court's judgment in Godrej and Boyce Mfg. Co. vs. DCIT. The Tribunal reduced the disallowance to Rs. 2,20,000, considering the previous year's Tribunal decision and inflation. 4. Disallowance of VSAT, Lease Line, and Transaction Charges: The fourth issue in the revenue's appeal concerns the disallowance of VSAT, lease line, and transaction charges. The AO categorized these payments as fees for technical services under Section 40(a)(ia) due to non-deduction of tax at source. The CIT(A) disagreed, treating these charges as reimbursement for using standard facilities. The Tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court's judgment in CIT vs. Kotak Securities Ltd. and the Tribunal's decision in Angel Broking Ltd., which clarified that these charges are not fees for technical services. 5. Disallowance of Payment Made to Stock Exchange for Violation of Bye-laws: The fifth issue involves the disallowance of payments made to the stock exchange for violating its bye-laws. The AO disallowed the payments under Explanation to Section 37(1), considering them as expenses for violating the law. The CIT(A) allowed the claim, noting that stock exchanges are not statutory authorities. The Tribunal upheld the CIT(A)'s decision, supported by the Tribunal's ruling in Gold Crest Capital Market Ltd., which stated that such payments are not for violating the law and are thus deductible. 6. Disallowance of Bad Debt: The final issue pertains to the disallowance of bad debt and business loss claims. The AO disallowed the bad debt claims due to lack of evidence proving irrecoverability and disallowed out-of-pocket expenses as business loss. The CIT(A) allowed the claims, noting that the amounts had been accounted for in earlier years and written off in the current year. The Tribunal upheld the CIT(A)'s decision, emphasizing that under the amended Section 36(1)(vii), the assessee need not prove the debt's irrecoverability, and the out-of-pocket expenses were indeed business losses. Conclusion: The appeal of the assessee was partly allowed, and the appeal of the revenue was dismissed. The Tribunal's decision was pronounced in the open court on 29.6.2012.
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