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TMI Blog2012 (9) TMI 614X X X X Extracts X X X X X X X X Extracts X X X X ..... xcessive and unreasonable – Held that:- Since the holding company incur heavy losses. Simultaneously assessee did not pay any compensation to the said concern with regard to facilities being availed by it. Therefore said amount is allowable. Decision in favour of assessee. - ITA NO. 3885/MUM/11 - - - Dated:- 22-6-2012 - SHRI I.P. BANSAL SHRI B. RAMAKOTAIAH JJ. Appellant by : Shri P.B.K. Menon Respondent by : Shri Sunil Nahata ORDER PER I.P.BANSAL, J.M This is an appeal filed by the revenue. It is directed against the order passed by Ld. CIT(A)-10,Mumbai dated 21/2/2011 for assessment year 2001-02. Grounds of appeal raised by the revenue read as under: 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.1,58,41,607/- on account of sub-brokerage. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 9,47,438/- in respect of writing off interest receivable from KJMC Financial Services Ltd. 3. On the facts and in the circumstances of the case, the impugned order of the Ld. CIT(A) is contrary to law to be set asid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee and the said concern for sharing the expenses but being a lead manager of the assessee, it cannot work as a sub-broker. The subbrokerage, if any, was to be paid by the assessee should have been paid to its sub-brokers and not to M/s. KJMC Global Marketing (I) Ltd. From the P L Account of M/s. KJMC Global Marketing (I) Ltd. he noted that the expenses claimed by the said concern on account of sub-brokerage and marketing expenses exceeded the income earned on account of brokerage / sub-brokerage and thus the said concern was actually not rendering any services to the assessee company as sub-broker. On these facts, AO disallowed the sub-brokerage paid by the assessee to the said concern amounting to Rs.1,58,41,607/-. 3. The addition was agitated in the appeal filed before Ld. CIT(A). The impugned addition was deleted by Ld. CIT(A) vide his order dated 8/6/2004 which was made subject matter of appeal before the Tribunal and the appeal of the department was decided by the Tribunal vide its order dated 28/2/2005 in ITA No.5767/Mum/2004, wherein the issue of sub-brokerage was restored to the file of Ld. CIT(A) after examining the applicability of section 40A(2)(a) of the Act within th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was submitted that in these circumstances entire primary market brokerage was received by the assessee, whereas the entire work was done by availing the services of the sister concern company. 6. It was submitted that primary market brokerage was paid to M/s. KJMC Global Market (I) Ltd. by account payee cheque which in turn has been paid to its network of sub-brokers through whom M/s. KJMC Global Market (I) Ltd. had mobilized the funds in the primary market. A chart filed showing the income from brokerage earned and the amount of expenditure incurred by M/s. KJMC Global Market (I) Ltd. as sub-brokerage payments as well as marketing expenses showing that the impugned payments received by M/s. KJMC Global Market (I) Ltd. was ultimately paid to the subbrokers from whom M/s. KJMC Global Market (I) Ltd. had availed the services in respect of primary market issues like ICICI, IDBI, UTI MP, HDFC Mutual Fund IPO, NHAI Bonds etc. It was further submitted that M/s. KJMC Global Market (I) Ltd. has not acted as sub-broker but have used the code of assessee and were ultimately paid by M/s. KJMC Global Market (I) Ltd. to its sub-brokers towards their entitlement. It was submitted that such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2)(a) are not attracted. Considering these facts Ld. CIT(A) has deleted the addition on the following grounds: 1. Vide Memorandum of Understanding dated 27/09/2000 the assessee had agreed to pay M/s. KJMC Global Market (I) Ltd. subbrokerage on account of availing its network of sub-brokers throughout India for availing services in the primary market issue. 2. A chart has been filed by the assessee showing that sub-brokerage has been finally paid to third party by M/s. KJMC Global Market (I) Ltd. and documentary proof is also submitted of evidencing the fact that the primary market issues were handled by M/s. KJMC Global Market (I) Ltd. through their network of sub-brokers. 3. A statement was also filed showing details of sub-brokerage disbursed by M/s. KJMC Global Market (I) Ltd. and brokerage earned by the assessee. 4. M/s. KJMC Global Market (I) Ltd. did not act as sub-broker of assessee but other sub-brokers registered with M/s. KJMC Global Market (I) Ltd. had actually acted as sub-brokers, who are third parties. 5. M/s. KJMC Global Market (I) Ltd. was having sufficient skilled staff and experienced personnel and infrastructure facilities and also highly qualified sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e have carefully considered the rival submissions in the light of the material placed before us. It is the case of AO that M/s. KJMC Global Market (I) Ltd. being lead managers could not act as sub-broker, hence, payment made by assessee company to that concern was not permissible as per SEBI regulations. However, at the same time Ld. A.O has also recorded a fact in para 3.15 of the assessment order that out of total brokerage / subbrokerage earned by M/s. KJMC Global Market (I) Ltd., it has in turn paid sub-brokerage and marketing expenses of Rs. 1.87 crores which is higher than the corresponding income earned and thus A.O observed that M/s. KJMC Global Market (I) Ltd., was not actually rendering any services to the assessee company as a sub-broker. He observed that payment made by the assessee to that concern amounting to Rs.1,58,41,607/- was excessive and unreasonable. In this manner A.O has disallowed the entire amount under the provisions of section 40A(2)(a) of the Act. From these findings of the A.O it is clear that whatever was paid by the assessee company to M/s. KJMC Global Market (I) Ltd., was in turn paid by the said concern to the sub-brokers and it was claimed so in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed before AO that the waiver was also considered in the light of the fact that assessee was not paying any compensation for the premises belonging to that concern utilized by the assessee and also on account of various expenses incurred by the said concern towards the facilities availed by the assessee company in relation to the day to day normal functions including secretarial and legal marketing and use of data base of investors of their fixed deposits. It was submitted that in earlier years such compensation / reimbursement was being paid by the assessee to the said concern on all these facilities availed by the assessee. The AO disallowed the claim of the assessee with the following observations: 4.1 The submissions made have been carefully considered. The assessee has advanced loans of Rs. 1.24 crores to KJMC Financial Services Ltd., the holding company, for which it was charging interest @ 15% approximately. This interest has been charged in the earlier year also. In the year under consideration, it has charged interest of Rs.9,47,438/- for the first six months. The interest for the next six months of the year has been waived as per the decisions of the directors. Due to n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e did not pay compensation for the facilities being availed by it from the said concern. He also observed that there was no question of applying provisions of section 40A(2)(a) of the Act and thus Ld. CIT(A) has deleted the addition. Revenue is aggrieved, hence, has filed ground No.2. 14. After narrating the facts Ld. D.R relying on the findings recorded by A.O pleaded that the addition has rightly made and it has been wrongly deleted by Ld. CIT(A). 15. On the other hand, relying on the order passed by Ld. CIT(A) it was pleaded that addition has rightly been deleted. 15. We have carefully considered the rival submissions in the light of the material placed before us. The incurrence of huge loss by M/s. KJMC Financial Services to the tune of Rs. 2.15 crores has not been denied. The assessee had credited the interest pertaining to six months and later on finding that the said concern was incurring huge losses has debited the said amount of interest to P L Account as bad debt written off. Simultaneously assessee did not pay any compensation to the said concern with regard to facilities being availed by it from the said concern for which the payment in the earlier year was made ..... X X X X Extracts X X X X X X X X Extracts X X X X
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