2023 (11) TMI 1187 - AT - Income Tax

Deduction u/s 36(1)(iii) - Interest on Overdraft / borrowings - assessee has given loans and advances to subsidiary company - assessee submitted before the assessing officer that own funds are available and that there is no borrowing to state that there has been diversion of funds and nterest cost debited to the P L Account is mainly towards bank guarantee charge which is required to be submitted to BSE / NSE towards margin for trade executed on behalf of the clients - HELD THAT - With regard to the interest on bank overdraft, we notice that as per the submissions it is paid towards the temporary overdraft facility to meet the margin requirements for trades executed on behalf of the various institutional clients. CIT(A), in his order has given a finding that there is a direct nexus between the interest on OD account and the broking business of the assessee. With regard to the bank guarantee, we notice that the same is required to be submitted to BSE / NSE towards margin call trade executed on behalf of clients and that the assessee has submitted sample copies of the bank guarantee issued in favour of exchangers before the lower authorities. The third item in the finance cost is the bank charges debited by the bank towards various banking related activities. The entire finance cost debited by the assessee in the P L Account are not towards any borrowings which is claimed to have been used for lending interest free loans. These costs have a direct nexus with the business of the assessee, i.e. stock broking for institutional clients since it is incurred to meet margin requirements of trade executed for assessee's clients. We further notice that the CIT(A), has given a categorical finding Therefore finance cost should be allowed as a deduction under section 36(1)(iii) of the Act. This ground of the assessee is allowed in favour. Nature of loss - addition towards Business loss held as Speculation loss - AO held that the assessee has derived the loss from the trading of purchase and sale of shares that is settled otherwise than the actual delivery, thus treated the loss as arising out of speculative transaction as per provisions of section 43(5) and held the same as not to be allowed - CIT(A) held that the AO has given a categorical finding with regard to the assessees involved in business of trading in securities predominantly and derivatives to a lesser extent, thus upheld AO order - HELD THAT - AO has considered the net loss computed by the assessee in the computation of income and has treated the same as speculative. On further perusal of the computation we notice that the said loss is computed after making various adjustments towards suo motu disallowances and items considered separately. Therefore, we are unable to appreciate the basis on which, AO has come to the conclusion that the loss computed by the assessee is arising out of share trading. CIT(A) also has completely ignored the various submissions made by the assessee on the merits of the issue but has simply relied on the finding given by the AO that the income is arising out of share trading. Assessee is not deriving any income out of share trading that is speculative in nature and, therefore, the finding given by the lower authority stating that assessee is involved in speculation is factually incorrect - This ground of the assessee is allowed in favour. Disallowance of bonus - HELD THAT - From the perusal of details submitted by the assessee before the Assessing Officer we notice that the assessee has submitted relevant details to substantiate the payment of bonus to the employees. We also notice that the assessee has made a suo motu disallowance towards unpaid bonus. Assessee has also furnished the employee wise bonus paid details, tax deducted there from, details of payment etc., which have been not considered by the assessing officer. From the perusal of the facts and records submitted before us it is clear that the assessee has claimed the deduction towards bonus based on actual payment and has suo moto disallowed the un-paid bonus. Lower authorities are not correct in making the disallowance by completely ignoring the various factual submissions made by the assessee and accordingly, we delete the disallowance. This ground is allowed in favour of the assessee. Disallowance u/s 14A r.w.r. 8D - assessee made a suo motu disallowance - HELD THAT - On perusal of materials on record, we notice that the assessee has incurred the expenditure towards depository charges. We notice that the depository charges are incurred for opening the Demat account which is a statutory requirement for the members of NSE / BSE. Therefore there is merit in the contention that the said expense is incurred in the normal course of broking business and accordingly we hold that the depository charges should not be disallowed under section 14A r.w.r. 8D(2)(i). With regard to disallowance under rule 8D(2)(iii), it is now a settled position that the investments that are yielding exempt income only should be considered for the purpose of disallowance. Therefore we direct the assessing officer to recomputed the disallowance under section 14A r.w.r 8D(2)(iii) taking into consideration only those investments which are earning tax free income and also take into account the suo moto disallowance made by the assessee. Adhoc disallowance of 25% of the entire expenditure u/s 37(1) - HELD THAT - As books of accounts are subject to audit and there is no finding given by the auditors stating that the expenses include anything of personal nature. The lower authorities have made the adhoc disallowance by stating that the certain expenses are claimed through self made vouchers, without recording any specific adverse finds with regard to the various details furnished by the assessee. We also notice in this regard that the lower authorities did not call on the assessee to submit any further details nor did they confront the assessee with any defects in the supporting documents filed by the assessee. Given the volume of expenditure incurred by the assessee towards various expenses and considering the fact that assessee is part of IDFC in which government holds shares, the lower authorities are not correct in making adhoc disallowance without any specific adverse findings with regard to the details furnished substantiating the expenses. Accordingly we hold that the adhoc disallowance made by the assessing officer without recording any specific adverse finding with regard to the expenditure incurred is not tenable. Disallowance of Professional fees paid - assessee has paid an amount to IDFC Capital (USA) Inc. towards rendering of marketing support services - AO held that the assessee has not met the basic requirement of transfer pricing documentation and compliance as per the Indian Transfer Pricing Regulations, inspite of having international transactions with IDFC (USA) Inc - HELD THAT - We notice that the Central Board of Direct Taxes, vide instruction no.3/2016 dated 10th March 2016 has issued Guidelines for Implementation of Transfer Pricing Provisions replacing the Instruction No. 15/2015 dated 16th October 2015. From the above it is clear that AO does not have the jurisdiction to propose any transfer pricing adjustment in case where he has not made any reference to the TPO. Therefore the additional made by the assessing officer towards transfer pricing adjustment is not tenable and is deleted. This ground is allowed in favour of the assessee. Assessee did not submit any justification or documentary evidence substantiating the provision made towards professional fees paid to AE. - We therefore remit the issue back to the assessing officer to examine the issue afresh by calling for relevant details and decide the allowability of the claim in accordance with law. The assessee is directed to submit the required details as may be called for and cooperate with the proceedings. It is ordered accordingly.

Summary

Issues Involved:
1. Disallowance under Section 36(1)(iii) r.w.s. 57(iii)
2. Addition towards business loss held as speculation loss
3. Disallowance of bonus
4. Disallowance under Section 14A read with Rule 8D
5. Disallowance under Section 37(1)
6. Disallowance of professional fees paid
7. Charging of interest under Section 234B

Summary of Judgment:

1. Disallowance under Section 36(1)(iii) r.w.s. 57(iii):
The Assessing Officer (AO) disallowed Rs. 56,50,752 as interest expenses, arguing that the funds were diverted to a subsidiary without charging interest. The CIT(A) upheld the disallowance. However, the Tribunal found that the finance costs were related to business operations, specifically bank guarantee charges and overdraft interest for broking business, and allowed the deduction under Section 36(1)(iii).

2. Addition towards Business Loss Held as Speculation Loss:
The AO classified a loss of Rs. 15,48,648 as speculative under Section 43(5), which was upheld by the CIT(A). The Tribunal noted that the assessee's income was primarily from brokerage and advisory services, not speculative transactions. The Tribunal deleted the addition, finding the AO's conclusion factually incorrect.

3. Disallowance of Bonus:
The AO disallowed Rs. 3.50 crores claimed as bonus, suspecting it was to evade tax. The CIT(A) upheld this, citing late filing of returns. The Tribunal found that the assessee provided sufficient evidence of bonus payments and had already disallowed unpaid bonuses. The Tribunal deleted the disallowance, noting the lower authorities ignored factual submissions.

4. Disallowance under Section 14A Read with Rule 8D:
The AO disallowed Rs. 50,77,533 under Section 14A, considering the entire investment portfolio. The CIT(A) partially upheld this. The Tribunal directed the AO to recompute the disallowance, considering only investments yielding exempt income and excluding depository charges incurred in the normal course of business.

5. Disallowance under Section 37(1):
The AO made an ad-hoc disallowance of 25% of expenses for lack of verification, reduced to 20% by the CIT(A). The Tribunal found that the assessee provided detailed evidence of expenses, and the lower authorities made disallowances without specific adverse findings. The Tribunal deleted the ad-hoc disallowance.

6. Disallowance of Professional Fees Paid:
The AO disallowed Rs. 2,87,62,981 paid to IDFC Capital (USA) Inc., citing non-compliance with transfer pricing documentation. The CIT(A) upheld this. The Tribunal noted that the AO lacked jurisdiction to make transfer pricing adjustments without referring to the Transfer Pricing Officer (TPO) and deleted the addition. The Tribunal remitted the issue of Rs. 1,28,75,981 provision for professional fees back to the AO for fresh examination.

7. Charging of Interest under Section 234B:
The Tribunal found this issue consequential and did not warrant separate adjudication.

Conclusion:
The appeal was allowed in favor of the assessee. The Tribunal directed necessary adjustments and remanded specific issues for further examination by the AO.