2012 (10) TMI 776 - AT - Income Tax

Penalty paid to NSE for trading violation - Disallowance - Held that - The nature of assessee s business is that it is regulated by NSE and NSE as part of its exercise to keep check on members keep on checking books of accounts from time to time and for violation of procedure and norms generally imposes penalty, which are not in the nature of violation of law and hence cannot be termed as penalty. Moreover, the assessee has been paying these types of penalties from 1998 onwards till 2007-08 and in none of the years the so-called penalty was disallowed. Therefore, the first ground of appeal with respect to penalty for trading violation is allowed - in favour of assessee. Disallowance of Telephone expenses for personal usage - Held that - It is clear from the facts of the case that the telephone was installed at the residence of the director and its personal use cannot be denied the disallowance of 20% is very reasonable disallowance which is based upon the facts and circumstances of the case - against assessee. Disallowance of business promotion expenses - Held that - The facts of the case that assessee was generally engaged in trading of shares on its own account and had spent an amount of Rs.1,10,615/- as business promotion expenses, keeping in view the facts of the case, the disallowance of 20% is reasonable especially keeping in view the fact that as per assessment order, the assessee had very few clients. Disallowance of municipal tax - Held that - It is seen that at the time of sale of property, the seller is required to clear all outstanding dues of municipal taxes if any. The Assessing Officer has made disallowance on the basis that the assessee had sold the property vide agreement to sell dated 29.8.2002 and whereas the date of tax was 19.9.2002 i.e. after the date of agreement to sell. However, AO has not appreciated the fact that past accrued taxes and liabilities before the date of sale has to be borne by the seller. Nor AO has brought out any contrary observation from the agreement to sell from where it could be said that municipal tax was to be paid by the purchaser. Therefore, the disallowance made by the AO and upheld by the Ld CIT(A) was not justified - in favour of assessee.

Summary

Issues:
- Disallowance of payment to NSE as penalty for trading violation
- Disallowance of telephone expenses for personal usage
- Disallowance of business promotion expenses on an ad hoc basis
- Disallowance of house tax paid despite being allowable under the Income Tax Act

Analysis:
1. Payment to NSE as Penalty for Trading Violation:
The Assessing Officer disallowed Rs. 99,808 paid to NSE for trading violation. The Ld CIT(A) upheld this disallowance, considering it as a penalty, despite the argument that it was not a violation of law. However, the ITAT found that the penalties imposed by NSE were not for legal violations but for breaching norms. The ITAT allowed this ground of appeal, noting that similar penalties were allowed in previous years.

2. Disallowance of Telephone Expenses for Personal Usage:
The Ld CIT(A) upheld the disallowance of Rs. 42,493 for telephone expenses due to lack of a log book to verify business calls. The ITAT, however, considered the disallowance of 20% reasonable, as the telephone was also used for personal purposes, especially since it was installed at the director's residence. The ITAT differentiated this case from previous judgments cited by the appellant.

3. Disallowance of Business Promotion Expenses:
The disallowance of Rs. 22,123 for business promotion expenses was upheld by the Ld CIT(A) due to insufficient details. The ITAT found a 20% disallowance reasonable based on the limited client base of the assessee. The ITAT distinguished this case from the precedent cited by the appellant, emphasizing the specific circumstances.

4. Disallowance of House Tax Paid:
The disallowance of Rs. 2,21,014 for house tax paid after selling the property was upheld by the Ld CIT(A). However, the ITAT disagreed, noting that the tax was paid for the relevant year and that the seller is typically responsible for past accrued taxes. The ITAT found the disallowance unjustified, as the tax liability should have been cleared by the seller before the sale.

In conclusion, the ITAT partially allowed the appeal, overturning the disallowances related to penalty for trading violation and house tax paid, while upholding reasonable disallowances for telephone expenses and business promotion expenses.