2015 (10) TMI 811 - AT - Income Tax

Disallowance of VSAT charges for non-deduction of tax - charges paid by the assessee to Stock Exchange - CIT(A) deleted the addition - Held that - Payment of VSAT/lease line charges to the stock exchange without deduction of tax at source is covered in favour of assessee by the decision of Hon ble Bombay High Court in the case of Angel Capital & Debit Market Ltd. 2014 (5) TMI 584 - BOMBAY HIGH COURT . Similar issue has been considered by various benches of the Tribunal as well as assessee s own case for the assessment year 2005-06 and 2006-07 and the issue has been decided in assessee s favour stating VSAT and Lease Line charges paid by the assessee to Stock Exchange were merely reimbursement of the charges paid/payable by the Stock Exchange to the Department of Telecommunication. Since the VSAT and Lease Line charges paid by the assessee do not have any element of income, deducting tax while making such payments do not arise - Decided in favour of assessee. Penalty paid to SEBI - CIT(A) deleted the penalty - Held that - This issue is also covered by the decision of Angel Capital & Debit Market Ltd (supra) as that the amount paid as penalty was on account of irregularities committed by the assessees clients. Such payments were not on account of any infraction of law and hence allowable as business expenditure. In such as case the explanation to Section 37 would not apply.- Decided in favour of assessee. Disallowance of mark to market loss on account of derivative transactions by considering the same to be contingent loss - Held that - Taking into account the details and the explanations submitted by the AR and taking into account the guidance note issued by ICAI, which the companies have to follow, besides the several case laws cited by the Revenue authorities and by the AR, we are of the opinion that the assessee has rightly claimed the provision in the Profit & Loss Account Respectfully following the decision of the Tribunal in assessee s own case, we do not find any merit for the disallowance made by the AO on account of provisions for loss on mark to market.- Decided in favour of assessee. Disallowance made u/s.14A - Held that - As we found that the assessment year under consideration is A.Y.2007-08, in which rule 8D is not applicable keeping view the decision of the Tribunal in assessee own case vis-a-vis the decisions of other benches of the Tribunal, we restrict the disallowance to the extent of 10% of the dividend income. - Decided partly in favour of assessee. Disallowance of transactions charges paid without deduction of tax at source - CIT(A) deleted the addition - Held that - Considering case of Mehta Vakil & Co. Pvt.Ltd. 2015 (10) TMI 757 - ITAT MUMBAI wherein after considering the decision of Hon ble Bombay High Court in the case of Kotak Securities Ltd., 2011 (10) TMI 24 - Bombay High Court , wherein held since both the revenue and the assessee were under the bonafide belief for nearly a decade that tax was not deductible at source on payment of transaction charges, no fault can be found with the assessee in not deducting the tax at source in the assessment year in question and consequently disallowance made by the assessing officer under Section 40(a)(ia) of the Act in respect of the transaction charges cannot be sustained. - Decided in favour of the assessee.

Summary

Issues Involved:
1. Disallowance of VSAT/Lease Line Charges for Non-Deduction of Tax
2. Deletion of Penalty Paid to SEBI
3. Disallowance of Mark to Market Loss on Derivative Transactions
4. Disallowance under Section 14A
5. Disallowance of Transaction Charges Paid without Deduction of Tax at Source

Issue-wise Detailed Analysis:

1. Disallowance of VSAT/Lease Line Charges for Non-Deduction of Tax:
The assessee, a share broker, was disallowed VSAT/lease line charges by the AO due to non-deduction of tax under section 40(a)(ia) of the I.T. Act. The CIT(A) deleted this addition. The Tribunal, referencing the Hon'ble Bombay High Court's decision in Angel Capital & Debt Market Ltd., upheld the CIT(A)'s decision. The High Court had observed that VSAT and Lease Line charges paid by the assessee to the Stock Exchange were merely reimbursements and did not have any element of income, thus no tax deduction was required. Therefore, the Tribunal found no infirmity in the CIT(A)'s order.

2. Deletion of Penalty Paid to SEBI:
The revenue contested the deletion of a penalty of Rs. 55,000 paid to SEBI. The Tribunal noted that this issue was also covered by the Bombay High Court's decision in Angel Capital & Debt Market Ltd., which stated that the penalty paid due to clients' irregularities did not constitute an infraction of law and was allowable as business expenditure. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the penalty.

3. Disallowance of Mark to Market Loss on Derivative Transactions:
The AO disallowed the mark to market loss on derivative transactions, considering it a contingent loss. The CIT(A) upheld this disallowance. However, the Tribunal referenced its own previous decision in the assessee's case and other similar cases, where it was held that anticipated losses in derivatives trading, valued at cost or market price whichever is lower, are allowable. The Tribunal emphasized that such losses are not contingent liabilities and directed the AO to allow the provision for mark to market loss, thereby overturning the CIT(A)'s decision.

4. Disallowance under Section 14A:
For the assessment year 2007-08, the CIT(A) partially upheld the disallowance under Section 14A. The Tribunal noted that Rule 8D was not applicable for this year and, following its own and other benches' decisions, restricted the disallowance to 10% of the dividend income. This provided a balanced resolution, partially allowing the assessee's appeal.

5. Disallowance of Transaction Charges Paid without Deduction of Tax at Source:
The AO disallowed transaction charges paid to the stock exchange without tax deduction. The CIT(A) deleted this disallowance. The Tribunal referenced the Bombay High Court's decision in Kotak Securities Ltd., which acknowledged a bona fide belief that no tax was deductible at source on transaction charges. Given that the assessee started deducting tax at source post the High Court's decision, the Tribunal upheld the CIT(A)'s deletion of the disallowance, aligning with the precedent set in similar cases.

Conclusion:
The Tribunal's order resulted in a partial allowance of the assessee's appeal and a dismissal of the revenue's appeal, with detailed adherence to precedent and established legal principles. The judgment emphasized the importance of consistent application of law and recognition of bona fide beliefs in tax deduction practices.