2014 (1) TMI 1276 - AT - Income Tax

Disallowance u/s.14A of the Act r.w Rule 8D of the Act Utilization of borrowed capital - Indirect expenses Held that - The assessee has not been able to show the utilization of borrowed capital, on which interest stands paid/allowed, as exclusively for assets other than those yielding tax-free dividend income - As such, the prescription of proportionate disallowance as per Rule 8D(2)(ii) would apply Relying upon Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT - With regard to the payment of the bank charges, the fact has not been brought to the notice of the tribunal for the first time; the same forming part of the written submissions before the CIT(A), who though has failed to consider the same the matter remitted back to the AO for fresh adjudication Decided partly in favour of Assessee. Confirmation of rebate u/s 88E of the Act Securities transaction tax Held that - The transactions for both types of the businesses, i.e., on own account and for the clients, being essentially the same, so that they entail the same set of activities thus, expenditure, though leading to varying incomes; the brokerage income itself varying from 0.1% to 1%, the proper basis for allocation of expenditure would be the turnover, rather than the gross income arising there-from the issue is again restored back to the file of the AO for fresh consideration Decided in favour of Assessee. Disallowance u/s 40(a)(ia) of the Act Held that - The decision in Kotak Securities Ltd. vs. Addl. CIT 2008 (8) TMI 592 - ITAT MUMBAI followed the TDS provision of section 194J would apply only in respect of transaction charges, and not to the VSAT and lease line charges - the Revenue succeeds in part, so that the disallowance would stand restricted to the amount of transaction charges paid to the Stock Exchange Decided partly in favour of Revenue. Disallowance of non-compliance charges Held that - The decision in Haji Aziz and Abdul Shakoor Bros. vs. CIT 1960 (11) TMI 15 - SUPREME Court followed - A penalty for a violation of the law is not an allowable expenditure as the same cannot be considered as an incident of the business - The Explanation to section 37(1), introduced by Finance (No.2) Act, 1998, w.r.e.f. 01.04.1962, further fortifies this legal position - Also in Prakash Cotton Mills (P.) Ltd. v. CIT 1993 (4) TMI 3 - SUPREME Court the nomenclature of the levy would not be determinative, and the nature of the default (for which the penalty is being levied) as well as the scheme of the statute providing for the impost is to be examined, to see if it is compensatory or penal in character, so that to the extent it is compensatory, the same would be an allowable expenditure - The data uploaded from the eNet server could not be tallied with the exchange record due to technical reason/s - it cannot be regarded as compensatory merely for the reason that it is for a procedural default, even as it appears the assessee has complied with the procedure the matter remitted back to the AO for fresh adjudication Decided partly in favour of Revenue.

Summary

Issues:
1. Disallowance u/s.14A - Interest expenditure claim by the Assessee.
2. Rebate of tax u/s.88E - Allocation of expenses for securities transactions.
3. Disallowance u/s.40(a)(ia) - VSAT, lease line, and transaction charges.
4. Disallowance of non-compliance charges by the stock exchange.

Issue 1 - Disallowance u/s.14A:
The appeal concerns the disallowance of interest expenditure by the Assessee. The Assessing Officer disallowed an amount over and above the sum disallowed by the Assessee. The Assessee argued against the disallowance, claiming no interest expenditure incurred towards earning dividend income. The Tribunal found that the Assessee failed to show the utilization of borrowed capital exclusively for assets yielding tax-free dividend income. The matter was restored back to the Assessing Officer for verification and fresh adjudication.

Issue 2 - Rebate of tax u/s.88E:
The issue involved the allocation of expenses for securities transactions in claiming a rebate of tax u/s.88E. The Revenue disputed the allocation of expenses made by the Assessee. The Tribunal directed the matter to be restored back to the Assessing Officer for reconsideration based on the turnover as the proper basis for allocation of expenditure.

Issue 3 - Disallowance u/s.40(a)(ia):
The Revenue's appeal addressed the disallowance of charges paid by the Assessee to the Stock Exchange under section 40(a)(ia). The Tribunal held that TDS provisions applied only to transaction charges, not to VSAT and lease line charges. The disallowance was restricted to the amount of transaction charges paid, following established legal precedents.

Issue 4 - Disallowance of non-compliance charges:
The final issue pertained to non-compliance charges levied on the Assessee by the stock exchange. The Tribunal examined the nature of the penalty and its deductibility as a business expenditure. The matter was sent back to the first appellate authority for a detailed examination of the facts and legal position to determine the allowability of the penalty as a deductible business expense.

In conclusion, the judgments addressed various complex issues related to disallowances, rebate of tax, and non-compliance charges, emphasizing the need for thorough examination of facts and adherence to legal principles in determining the tax liabilities and deductions for the parties involved.