2012 (11) TMI 812 - AT - Income Tax

Disallowance u/s 14A Expenditure incurred in relation to exempt income - CIT(A) has directed the AO to determine the quantum of disallowance with reference to the ratio of the total expenditure debited to P&L Account in proportion that the value of transaction in shares which has yielded exempt income bears to the value of total transaction in shares Held that - Matter should be go back to AO with a direction to readjudicate the issue as per the provisions of law by taking into consideration the decision in case of GODREJ AND BOYCE MFG. CO. LTD. (2010 (8) TMI 77 - BOMBAY HIGH COURT). Issue remand back to AO Disallowance u/s 40(a)(ia) Held that - Though for A.Y 2006-07 the issue has been restored back to the file of CIT(A) but it was the request of assessee that since the issue regarding disallowance under section 14A of the Act is being restored to the file of AO this matter may also be restored back to the file of AO with similar direction. Issue remand back to AO Capital or revenue expenditure Disallow repairs and maintenance under various heads of accounts - aluminum patti work, net working charges, expenditure for administration department Held that - As concluding from the facts of the case that all these expenditure were incurred in the regular course of business, after hearing both the parties we see no justification in sustenance of such disallowance. Issue decides in favour of assessee Bad debts u/s 36 Bad debts includes total debts amount or only brokerage in hand of share broker Held that - Following the decision in case of Shri Shreyas S. Morakhia (2012 (3) TMI 103 - BOMBAY HIGH COURT) that bad debt relating to transaction of shares in the hands of share broker is allowable u/s 36(1)(vii) r.w.s. 36(2) as the same is an amount which could not be recovered by the share broker from his client as brokerage receivable from client was part of the debt which was taken into account while computing the income. Issue decides in favour of assessee Disallowance of penalty u/s 37 Nature of payment made to stock exchange - Whether payment made to stock exchange for violation of trading beyond exposure limit, late submission of margin certificate and delay in marking delivery of shares due to deficiency is in nature of penalty Held that - Following the decision in case of PRASAD & CO (2012 (2) TMI 124 - DELHI HIGH COURT) & in case of GOLDCREST CAPITAL MARKETS LTD. (2009 (1) TMI 553 - ITAT, MUMBAI) that NSE was an independent body and the bye laws made by it for the regulation of its members did not have the force of the law. Such bye-law could be, at the best be seen as private contracts entered between assessee and stock exchange and any violation, therefore, cannot be, in our opinion, equated with an offence or with an act prohibited by law, in the nature of assessee s business, as a member of NSE payments related to switching on the terminals, switched off for not abiding by the regulations of such exchange, or for delay in settlement or furnishing of data can only be considered as incidental. Issue decides in favour of assessee

Summary

Issues Involved:
1. Disallowance under section 14A of the Income Tax Act, 1961.
2. Disallowance under section 40(a)(ia) of the Income Tax Act, 1961.
3. Capitalization of expenditure incurred under the head "Repairs and Maintenance".
4. Disallowance of bad debts written off under section 36(1)(vii) read with section 36(2) of the Income Tax Act, 1961.
5. Disallowance of penalty under section 37(1) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Disallowance under section 14A of the Income Tax Act, 1961:
The Assessee and Revenue both appealed against the disallowance made under section 14A read with Rule 8D. The Assessing Officer (AO) disallowed Rs. 53,27,355/- due to dividend income earned by the assessee. The Commissioner of Income Tax (Appeals) [CIT(A)] directed the AO to use a specific formula to determine the disallowance. Both parties requested a remand to the AO for reconsideration. The Tribunal restored the matter to the AO for re-adjudication in light of the Bombay High Court's decision in Godrej Boyce Mfg. Co. Both appeals were allowed for statistical purposes.

2. Disallowance under section 40(a)(ia) of the Income Tax Act, 1961:
The AO disallowed Rs. 5,88,254/- for payments made to non-residents without TDS. This issue was covered by an earlier Tribunal decision for AY 2006-07, where the Tribunal directed the CIT(A) to examine the merits of the case. The Tribunal restored this issue to the AO with similar directions, allowing the ground for statistical purposes.

3. Capitalization of expenditure incurred under the head "Repairs and Maintenance":
The AO capitalized certain expenses totaling Rs. 3,33,453/- related to repairs and maintenance. The assessee argued these were routine business expenses not providing enduring benefits. The Tribunal, after reviewing the details, found these expenses were incurred in the regular course of business and deleted the disallowance, allowing the assessee's ground.

4. Disallowance of bad debts written off under section 36(1)(vii) read with section 36(2) of the Income Tax Act, 1961:
The CIT(A) deleted the disallowance of Rs. 6,89,768/- for bad debts written off. This issue was covered by the Bombay High Court's decision in CIT vs. Shreyas S. Morakhia, which allowed bad debts for share brokers. The Tribunal, following this precedent, dismissed the Revenue's ground.

5. Disallowance of penalty under section 37(1) of the Income Tax Act, 1961:
The CIT(A) deleted the disallowance of Rs. 8,70,951/- for penalties paid to the stock exchange. This issue was covered by the Tribunal's decision for AY 2006-07 and supported by the Delhi High Court's decision in CIT vs. Prasad & Company, which held such penalties are not in the nature of fines and are allowable under section 37(1). The Tribunal dismissed the Revenue's ground.

Conclusion:
The Tribunal allowed the assessee's appeal on the issues of repairs and maintenance expenses and statistical purposes for disallowance under section 14A and section 40(a)(ia). The Tribunal dismissed the Revenue's appeal on bad debts and penalties under section 37(1).