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TMI Blog2012 (7) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... those transactions undertaken on behalf of the clients in which there were errors and transactions were not as per orders booked by the clients – Held that:- in case of brokers loss arising on account of purchase and sale of shares under forced circumstances and under compulsion will not be covered by Explanation to Section 73. - Matter requires fresh examination and in case loss is found to have occurred on account of error trades conducted by assessee on behalf of clients, the claim has to be accepted as business loss – matter remanded to AO for fresh order Regarding disallowance of expenses under section 14A – AO had disallowed the expenses @ 5% of dividend income - CIT(A) has directed the AO to compute the disallowance as per Rule 8D – Held that:- Same issue had been considered by the Tribunal in assessment year 2004-05 and the Tribunal has reduced the disallowance to Rs. 2.00 lacs - in this year are almost identical as no major distinguishing factors have been brought to notice by the ld. Departmental Representative – disallowance of expenses relating to dividend income at Rs. 2,20,000 Regarding disallowance of VSAT, leaseline charges and transaction charges paid by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.10.2008 of CIT(A) for the assessment year 2005-06. These appeals are being disposed of by a single consolidated order for the sake of convenience. 2. We fist take up the appeal of the assessee in ITA No.6979/M/2008. In this appeal the assessee has raised disputes on three different grounds which relate to disallowance of Security Transaction Tax (STT), loss on account of error trading and disallowance of expenses under section 14A of the Income tax Act, 1961(the Act.) 2.1 The first dispute is regarding disallowance of Security Transaction Tax (STT) of Rs. 35,83,688/- claimed by the assessee as deduction while computing total income. The AO observed that any amount paid on account of STT was not allowable in view of provision of section 40(a)(ib) inserted by the finance act, 2004. He also observed that there was a separate provision under section 88E to allow rebate on account of STT payments. He, therefore, disallowed the claim made by the assessee. The assessee disputed the decision of AO and submitted before CIT(A) that the assessee was a broker and, had paid STT on behalf of clients which had been included in the brokerage income and therefore, assessee was entitled to cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of the assessee. The liability on account of STT is the liability of the clients of the assessee who are buying and selling shares and, therefore, the provisions of section 40(a)(ib) will be applicable in those cases and it is because of this reason, the rebate under section 88E is also allowable in case of buyer/seller of shares under section 88E of the Act. The assessee is only a broker who has collected STT on behalf of the stock exchanges and has paid the same to the latter. In our view, STT is required to be excluded while computing the income of the assessee from brokerage. Therefore in our view the authorities below are not justified in disallowing the claim of deduction on account of STT in case of the assessee. We accordingly set aside the order of CIT(A) and delete the addition made. 3. The second dispute is regarding disallowance of loss of Rs. 26,09,000/- on account of error trade. The assessee had incurred loss on account of certain share transactions. The AO, therefore, asked the assessee to explain as to why loss should not be treated as speculation loss under provisions of Explanation to section 73. The assessee explained that the provisions of the said E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, mentioned purchase contract in place of sale contract, mentioned wrong quantity etc. as a result of which clients did not accept the transactions and assessee had to own up these transactions which were squared up resulting into loss. The loss is only incidental to business loss and has to be allowed as business and provisions of section 73 will not apply. The ld. DR on the other hand placed reliance on the orders of authorities below. 3.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding the allowability of loss incurred by the assessee on account of certain share transactions. The assessee is only a share broker who buys/sells shares on behalf of the clients. It has been argued that loss had occurred on those transactions undertaken on behalf of the clients in which there were errors and transactions were not as per orders booked by the clients. These purchases/sales executed on behalf of the clients are therefore, owned up by the assessee and these are squared up which has resulted into loss. CIT(A) has observed that the assessee had not made any claim of error trades before the AO. The perusal of record shows that the find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2004-05 in ITA No.3186/M/08 in which year also, the AO had disallowed the expenses @ 5% of the dividend income. The dividend income in that year was Rs.4.04 crores. The Tribunal however noted that the dividend income had mostly arisen from a group company and, therefore, it was held that it would be reasonable to disallow the expenses at Rs. 2.00 lacs. The ld. AR pointed out that this year dividend income was smaller and investment in shares had only marginally gone up from Rs. 58.45 crores to Rs.59.50 crores. It was accordingly urged that the order of CIT(A) may be modified as Rule 8D was not applicable in case of the assessee. 4.2 We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance of expenses relating to exempt income. The AO had disallowed the expenses @ 5% of dividend income whereas the CIT(A) has directed the AO to compute the disallowance as per Rule 8D. The order of CIT(A) can not be sustained in view of the judgment of Hon'ble High Court of Bombay in case of G odrej and Boyce Mfg. Co. vs. DCIT (328 ITR 81) , in which it has been held that Rule 8D is applicable only from assessment year 2008-09 and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bserved by him that the highly sophisticated system and services provided by the stock exchanges involved specialized knowledge, experience and skill in the field of share trading. The AO, therefore, held that the payments made by the assessee were of the nature of fees for technical service, covered under section 40(a)(ia). He therefore, disallowed the claim. 5.1.1 In appeal CIT(A) observed that VSAT and lease line charges were not payment for any technical services. It was observed by him that DOT had granted license to stock exchanges for installation and setting up of Close User Group telecommunications Network based on VSATs and lease lines. The stock exchanges collected the VSAT and leaseline charges from the members and passed on the same to the service provider. These were therefore not fees for technical services. As regards the transaction charges, CIT(A) referred to the decision of the Tribunal in case of M/s. Kotak Securities Ltd. Vs. Addl. CIT in ITA No.1955/Mum/2008 dated 26-8- 2008 in which it was held that the stock exchange neither provided any managerial services nor any technical services. CIT(A) accordingly deleted the addition made by AO aggrieved by which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of CIT(A) . As regards VSAT and lease line charges it has to be allowed in view of the decision of the Tribunal in the case of Angel Stock Broking Ltd. (35 SOT 457) in which the Tribunal noted that stock exchanges were not owners of technology to provide it for a fees to the prospective users. They were consumers of technology for which they had to get permission from DOT. Therefore, the payment could not be considered as fees for technical services. Respectfully following the decision of the Tribunal (supra), we allow the claim of the assessee. 5.2 The second dispute in the appeal raised by the revenue is regarding disallowance of Rs. 10,17,929/- on account of payment made by the assessee to the stock exchange for violation of bye laws of stock exchange. The assessee submitted that the stock exchanges are not statutory authorities and, therefore, violation of their bye-laws could not be considered as violation of law. The payment made by the assessee was only for breach of contractual obligation and therefore claim was allowable as deduction. The AO however had not accepted the explanation given. It was observed by him that under the provisions of Explanation to section 37(1), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6th Floor, CG House, Dr. A.B. Road, Prabhadevi, Mumbai-400025. 687 Fee 3. Bharat forge Ltd. Mundhwa, Pune-411036 32 Out of Pocket Expenses 4. International Seaports (India) P. Ltd. East India Chambers, 3 Village Road, Nungambakkam, Chennai-600034 29 Out of Pocket Expenses 5. Siemens Information System Ltd., 130, 97 Out of Pocket Pandurang Budhkar Marg, Worli, Mumbai-400018. Expenses Total 2,268 5.3.1 The assessee submitted that the amounts due from the parties were outstanding for long time and were not likely to be recovered in future. It was also submitted that in view of the amendment to section 36(1)(vii) w.e.f. 1.4.1989, the assessee was not required to prove that the debt had become irrecoverable for claim of bad debt. Assessee had met all conditions and, therefore, the claim should be allowed. In relation to Out of Pocket Expenses (OPE), it was submitted that the same were incurred during course of carrying on of corporate and advisory services. These expenses were required to be reimbursed by the clients which was no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been taken into account in the computation of income of earlier year and should have been actually written off in the books. There is no dispute regarding fulfillment of these conditions. Therefore claim of bad debts can not be disallowed. The order of CIT(A) allowing the claim is accordingly upheld. As regards the amount due from Bharat forge Ltd., International Seaports (India) Pvt. Ltd. and Siemens Information system Ltd. aggregating to to Rs. 1.58 lacs, these were out of pocket expenses incurred by the assessee in connection with certain work relating to these clients. The case of the assessee is that these expenses which were required to be reimbursed by the clients were not reimbursed as transactions did not go through. This claim has not been controverted by the AO by placing any material on record. Therefore, these expenses which were actually incurred and about which there is no dispute has to be allowed as business loss. We see no reason to interfere with the order of CIT(A) allowing the claim and the same is therefore upheld. 6. In the result, appeal of the assessee is partly allowed whereas that of the revenue is dismissed. (Order pronounced in the open court on 29. ..... 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