9911796707
TMI Blog2012 (9) TMI 614X X X X Extracts X X X X X X X X Extracts X X X X ..... d 31/3/2004 is passed under section 143(3) of the Income Tax Act, 1961(the Act). During the course of assessment proceedings the AO noticed that assessee had paid sub brokerage to M/s. KJMC Global Market (I) Ltd. of a sum of Rs.1,58,41,607/-. It was submitted that the aforementioned payment is in respect of primary market issue of bonds / equities and FDs and also on account of primary market brokerage of mutual fund schemes. The assessee was required to furnish the details, which were filed with the AO. The assessee was required to file details which was furnished and in furtherance the assessee also filed certain affidavits of director and employees of the aforementioned concern and AO proceeded to examine the applicability of section 40A(2)(a) of the Act. The AO observed that M/s. KJMC Financial Services Ltd. is the holding company of the assessee and is registered with RBI as NBFC Company providing services of lease and hire purchase, loans and advances. M/s. KJMC Global Market (I) Ltd. is Category 1 Merchant Banker registered with SEBI for Project Finance, Loan Syndication, Debt Structuring and Re-structuring, Equity research etc. and the assessee company is member of BSE (Ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act which assessee had failed to discharges and one more ground regarding disallowance of interest of Rs. 9,47,438/- made under section 40A(2)(a) of the Act was also restored for fresh decision by the Ld. CIT(A). It is in this manner the impugned order has been passed by the Ld. CIT(A), which is dated 21/2/2011 in which the Ld. CIT(A) has deleted both the additions and revenue has raised the aforementioned grounds of appeal. 4. Ld. CIT(A) has pointed out to the observations of Tribunal regarding non-examination and ascertainment of the kind of the services provided by M/s. KJMC Global Marketing (I) Ltd. and also the fact that whether the rate of sub-brokerage was as per rate prevailing in the market and also the fact that whether the amount paid to M/s. KJMC Global Market (I) Ltd. was passed on to actual broker who have rendered actual services. It was also required to be examined that whether the aforementioned amount is allowable under section 37 of the Act having been incurred wholly and exclusively for the purpose of business and it was observed that burden is on the assessee to show that payment was reasonable and within the parameters laid down in section 40A(2)(a) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ub-brokerage" and such amount has also been recorded in the financial statement of M/s. KJMC Global Market (I) Ltd. as there was no prohibition of SEBI for Merchant Banker to act as fund mobilizer for primary market as per SEBI Regulations. 7. It was further submitted that the assessee does not have enough manpower and infrastructure support, therefore, it involved the services of sister concern in primary market and such payment made by the assessee to sister concern is out of commercial expediency and has necessarily been incurred for conducting business of the assessee of earning brokerage income, therefore, these payments are allowable as deduction under section 37(1) of the Act. These payments have actually been made to third parties who are in no way concerned or connected with the assessee or with its sister concern. In fact, these payments are the payments made by the assessee to sub-brokers for their entitlements and such fact cannot be denied. It was submitted that provisions of section 40A(2)(a) are not applicable. 8. It was also brought to the notice of Ld. CIT(A) that for A.Y 2002-03 such issue was decided by Ld.CIT(A) vide order dated 18/1/2006 which order was passe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f assessee and sub-brokers of M/s. KJMC Global Market (I) Ltd. has worked for the assessee for which M/s. KJMC Global Market (I) has made payments which are reimbursed by the assessee to M/s. KJMC Global Market (I) Ltd. and in turn M/s. KJMC Global Market (I) Ltd. has paid the said payment to its sub-brokers. 7. There is no violation of SEBI guidelines. 8. The assessee has been making such payments from assessment year 1997-98 onwards and no disallowance whatsoever has been made on that account. 9. Disallowance on account of sub-brokerage paid by assessee to M/s. KJMC Global Market (I) Ltd. in respect of assessment year 2002-03 has been deleted by Ld. CIT(A) vide order dated 18/01/2006 against which no appeal is filed by the Department. It was also observed that for assessment year 2000-01 assessee had come up in proceedings under section 263 of the Act for examination of allowability of impugned sub-brokerages. The order under section 263 was upheld by the Tribunal. In the order passed by the AO as per direction to him under section 263 the AO has accepted the claim and no disallowance on account of sub-brokerage was made. 9. Considering all the aforementioned fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... network of M/s. KJMC Global Market (I) Ltd., and because of that assessee could earn brokerage. Therefore, in fact M/s. KJMC Global Market (I) Ltd., did not receive any amount from the assessee as it acted only as a media to take the payment of the assessee and disburse the said amount onward to the sub-brokers which were working in the network of M/s. KJMC Global Market (I) Ltd. It is also of the case of the assessee that by entering such an arrangement M/s. KJMC Global Market (I) Ltd. did not violate any regulation of SEBI. All these submissions were made by the assessee before Ld. CIT(A) and supporting documents were also filed on the basis of which Ld. CIT(A) has recorded the findings which have been described in details in the above part of this order. Those findings of the Ld. CIT(A) have not been controverted. It has been held that the payment made by the assessee were actually being disbursed to the sub-brokers and the incurrence of such expenditure was for the business expediency of the assessee. Therefore, in our opinion Ld. CIT(A) was right in holding that the disallowance could not be made under section 40A(2)(a) of the Act and also that the amount paid by the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest credited by changing the nomenclature from interest not receivable to compensation paid and has claimed it under the head " Bad Debts and Interest waived written" 2. As regards the claim of services of KJMC Financial Services Ltd. the holding company it is worthy to note that the assessee has made payments to the persons covered u/s.40A(2)(b) including this company, in respect of the expenses shared by it with them. Hence, further claim of expenditure is excessive and unreasonable and not allowable u/s. 40A(2)(a). Further, on perusal of the records of the assessee, it is seen that the assessee has borrowed interest bearing funds and at the same time advanced interest free loans to its holding company. Thus the amount of Rs. 9,47,438/- under section 40A(2)(a) is disallowed and added back to the total income." 13. Before Ld. CIT(A) it was submitted by the assessee that M/s. KJMC Financial Services Ltd. had incurred net loss of Rs. 2.15 crores during the financial year 2000-01 and had requested for waiver the interest. Accordingly the said interest was waived as no compensation was paid for use of their premises as well as towards various facilities availed by the assessee. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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