2018 (5) TMI 1580 - AT - Income Tax

Disallowances of consultancy charges - disallowance of losses debited in the P 12 75 462/- after due verification and in accordance with law - allowed for statistical purposes.

Issues Involved:
1. Disallowance of loss in Futures and Options (F&O) amounting to ?45,32,817.
2. Addition of ?8,88,000 towards salary under Section 40A(2)(b) of the Income Tax Act.
3. Disallowance of consultancy charges amounting to ?12,36,500.
4. Disallowance of rebate claimed under Section 88E amounting to ?12,75,452.

Issue-wise Detailed Analysis:

1. Disallowance of Loss in F&O Transactions:
The first issue pertains to the disallowance made by the Assessing Officer (AO) on account of transactions done by the assessee in the Future and Option (F&O) segment, amounting to ?45,32,817. The AO issued a showcause notice to the assessee to explain why the losses debited in the Profit and Loss account, by way of client code modifications arranged through M/s Sunchen Securities Ltd., should not be disallowed. The assessee contended that the client code is allotted by the broker and modifications are beyond the control of the dealer or investor. However, the AO rejected this contention and added ?45,32,817 to the total income, treating the transactions as bogus due to the broker being blacklisted by SEBI.

Upon appeal, the Tribunal noted that the transactions were carried out through recognized stock exchanges and proper banking channels, with all relevant documents provided by the assessee. The Tribunal relied on precedents, including the case of Rahul Vasisht vs. Income Tax Officer and Commissioner of Income-tax v. Emerald Commercial Ltd., to conclude that the transactions cannot be deemed bogus simply due to the broker's subsequent blacklisting. The Tribunal deleted the addition made by the AO, allowing this ground of the assessee.

2. Addition of Salary under Section 40A(2)(b):
The second issue involves the addition of ?8,88,000 on account of salary paid to specified persons under Section 40A(2)(b) of the Income Tax Act. The AO disallowed the salary payments made to individuals residing in Surat, arguing that the payments were irrelevant to the assessee's business operations. The assessee contended that the salaries were paid for business purposes and provided comparative statements of salary increases.

The Tribunal observed that the AO failed to provide evidence that the salaries were excessive or unrelated to the business. It emphasized that the assessee has the prerogative to decide salary payments and that the Revenue can only interfere if payments are in excess of fair market value. The Tribunal found that the AO did not establish that the salaries exceeded fair market value and deleted the addition, allowing this ground of the assessee.

3. Disallowance of Consultancy Charges:
The third issue concerns the disallowance of consultancy charges amounting to ?12,36,500. The AO disallowed these payments, arguing that the assessee did not produce documentary evidence to prove the consultants' expertise and the relevance of their services to the business. The assessee argued that the consultancy fees were paid to individuals with special knowledge in share transactions, correlating with the business turnover.

The Tribunal noted that the consultancy fees were consistent with the business turnover and that the AO did not provide evidence to dispute the genuineness of these payments. The Tribunal also considered the income tax returns of the consultants, which disclosed the consultancy fees received. Consequently, the Tribunal deleted the addition, allowing this ground of the assessee.

4. Disallowance of Rebate under Section 88E:
The fourth issue involves the disallowance of rebate claimed under Section 88E, amounting to ?12,75,452. The AO allowed a rebate of ?48,46,680 against the assessee's claim of ?61,22,142, without providing reasons for the disallowance. The assessee contended that the entire amount of Securities Transaction Tax (STT) was debited in the profit and loss account and supported by necessary certificates.

The Tribunal found that the AO did not provide reasons for the partial disallowance and that the assessee had submitted all necessary documents, including Form No. 10BB. It concluded that the disallowance was based on conjectures and surmises without evidence. The Tribunal directed the AO to provide the rebate under Section 88E after due verification, allowing this ground of the assessee for statistical purposes.

Conclusion:
The appeal of the assessee is partly allowed, with the Tribunal deleting the disallowances and additions made by the AO on all grounds, except for directing the AO to verify and provide the rebate under Section 88E as per law.

← Previous Next →