2019 (2) TMI 1282 - HC - Income Tax

Disallowance of sub-brokerage and sub-brokerage - assessee had failed to prove that any services were rendered by the parties to whom sub-brokerage was paid - HELD THAT - The Tribunal, on the basis of the evidence on record, came to the conclusion that there was confirmations from the recipients regarding the payments as well as of rendering services. Additionally, we notice that in case of sub-brokerage charges of ₹ 82.27 Lacs (rounded off) which were part of larger disputed figure of ₹ 89.32 Lacs (rounded off) was offered to tax by the assessee in the later assessment year 1999-00 on the ground that due to denial of permission for remission of payment by Reserve Bank of India by order dated 20.11.1997, such payments could not be made. This is an additional reason why we would not interfere with the order of the Tribunal. Addition u/s 40A2(b) - Disallow 50% of the sub-brokerage charges paid by the assessee to related parties - HELD THAT - Tribunal, while giving relief to the assessee, observed that the Assessing Officer had made disallowance without any reason. In the earlier assessment years, such expenditure was recognized and accepted. However, the Assessing Officer had not built up a case that payment was excessive so as to apply Section 40A(2)(b) of the Income Tax Act, 1961. In view of such findings of the Tribunal, no question of law arises. Disallowance of interest expenses - interest bearing funds of the company were used for purchase of shares on behalf of directors & family members of the directors - HELD THAT - In the present case, the balance sheet of the company would show that the company s net worth was arrived at principally by taking into account its share capital, reserves and surplus and application money after adjusting the amounts transfered to profit & loss account. Thus, the facts involved in the present case are substantially similar to those examined in the case of Reliance Utilities and Power Ltd ( 2009 (1) TMI 4 - BOMBAY HIGH COURT) in which also to arrive at the amount of interest free funds available to the company, reference was made to its share capital, reserves and surplus and depreciation reserves. No question of law arises.

Summary

Issues:
1. Disallowance of sub-brokerage charges
2. Disallowance of sub-brokerage charges to related parties
3. Disallowance of interest expenses

Analysis:

Issue 1: Disallowance of Sub-Brokerage Charges
The Tribunal allowed the expenditure on sub-brokerage charges after finding evidence of actual payment and services rendered by the receiving parties. The Tribunal also noted that a portion of the disputed amount was offered for tax in a later assessment year due to non-payment permission by the Reserve Bank of India. The Court upheld the Tribunal's decision, emphasizing the evidence of payment confirmations and services received. The Assessing Officer's disallowance lacked sufficient reasoning, and no excessive payment case was established under Section 40A(2)(b) of the Income Tax Act, 1961. Thus, the Court found no legal issue to intervene with the Tribunal's order.

Issue 2: Disallowance of Sub-Brokerage Charges to Related Parties
The Tribunal provided relief to the assessee by overturning the Assessing Officer's disallowance of 50% of sub-brokerage charges paid to related parties. The Tribunal found the disallowance unjustified as there was no evidence of excessive payment to invoke Section 40A(2)(b) of the Income Tax Act, 1961. Previous years' acceptance of such expenditure further supported the Tribunal's decision. Consequently, the Court concluded that no legal question arose from the Tribunal's findings on this issue.

Issue 3: Disallowance of Interest Expenses
The Revenue contested the Tribunal's deletion of disallowed interest expenses related to the purchase of shares on behalf of directors and their family members. The Assessing Officer disallowed interest calculated on borrowings for share purchases. However, the Tribunal disagreed, noting that the company had sufficient interest-free funds exceeding the interest-bearing loans. The Tribunal cited a relevant court decision to support its stance. The Court upheld the Tribunal's decision, emphasizing the company's net worth and the availability of interest-free funds. Despite the respondent's argument, the Court found the facts akin to the precedent case and ruled no legal question emerged.

In conclusion, the Court dismissed the Income Tax appeals based on the detailed analysis and findings on the issues of sub-brokerage charges and interest expenses.