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TMI Blog2013 (11) TMI 1316X X X X Extracts X X X X X X X X Extracts X X X X ..... ent if it is for the purpose of business. There need not be any legal obligation to incur expenditure, but the principles of commercial expediency will ultimately prevail and the” act of the assessee has to be viewed from businessman angle not from the department. The interest paid by the assessee on borrowings was paid to various banks etc. on prevailing market rate and brokerage has been charged by the assessee on prevailing market rate. Therefore, it cannot be said that the interest expenditure incurred by the assessee was on account of any illegal activity. Allowability of excess brokerage shown in the service tax return as compared to brokerage income shown in profit and loss account – Held that:- Assessee has been reflecting the service tax return, the brokerage on accrued basis but in profit and loss account the brokerage has been shown on actual basis on the basis of constant method adopted by the assessee - Sometime the assessee is required to reduce the brokerage at the request of the assessee during the final settlement of the bills and some time the assessee is also required to waive part of the brokerage disputed by the clients - Therefore, difference as per the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above trade transactions have no business prudence or commercial expediency. Therefore, the claim of interest towards financing the clients cannot be considered as business expenditure. Thereafter the AO has given his own finding also and he has repeated the finding in various paras that there was no business expediency and, therefore, the there was no reason to allow the interest paid on account of financing the transactions. It has also been observed that the SEBI has given an adverse finding against the assessee and the assessee has barred for two years for doing the business in the Stock Exchange. It was also observed by the AO that the transaction done by the assessee are against public policy and therefore, illegitimate expenditure cannot be allowed. The AO in para 4.7.7 has observed that the profit motive is inherent force in undertaking a transaction. The profit motive is the basic force in carrying any business activity. Mere fact that the transaction has been entered with a motive for earning profits without justifying circumstantial fact is not sufficient. The facts of the case are contrary to objective of profit motive. The activities of transactions in share brokin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee was involved in synchronized trade transactions with Ketan Parkeh group and thus the assessee facilitated circular trades and the creation of artificial volumes and artificial markets in the said scripts. Accordingly, it was submitted that the CIT(A) was incorrect in holding that the similar issue has been decided in earlier year and, therefore, for the same reasoning, the issue decided in favour of the assessee was incorrect. It was further explained that the special auditor has given a specific finding that the assessee was indulged in transactions which were against public policy, and, therefore, if the transactions were against public policy, then expenditure cannot be allowed under section 37(1) as held by the Hon ble Supreme Court in the case of Maddi Venkatraman and Co. Pvt. Ltd Vs. CIT, reported in 229 ITR 534. Attention of the Bench was drawn on finding of the learned AO recorded in para 4.7 onwards. It was further stated that every year is independent and fact of the every year has to be considered independently. 7. In reply, the counsel of the assessee stated that the learned DR has read para 34 of the order of the CIT(A) for assessment year 2000-01, but has ig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and incurring of the expenditure for the same purpose is illegal. The expenditure is not like bribes etc. but it is a genuine expenditure. Reliance was placed on various case laws by the learned AR, copy of which are also filed during the appellate proceeding. 8. We have heard rival submission and we have perused the material along with various case laws on which our attention were drawn. The CIT(A) allowed the issue in favour of the assessee following the decision for immediately preceding year i.e. 2000-01. No detail finding has been given by the CIT(A) for the year under consideration as he simply followed his finding for earlier year. Therefore, we feel that facts involved in the earlier year and finding of the CIT(A) should be taken into consideration at this point of time. Facts and findings have been recorded in para 14 to 36 at pages 5 to 15 of the order CIT(A), which are reproduced here under for understanding the issue in a proper manner :- 5. It is evident from the above that under section 142(2A), the Assessing Officer has power only to get the assessee's accounts audited and to obtain a report in a prescribed from and setting forth certain particulars. However ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act by the A.O. in this case should be considered as invalid and bad in law and as a result, the order should be held as barred by limitation and also as null, void and bad in law on this ground. 11. I have considered the submissions of the assessee and also the order of the A.O. I would like to first adjudicate upon factual issue raised by assessee regarding the limitation of the assessment. As rightly pointed out by assessee, Assessing Officer has directed the assessee to get accounts audited and report to be submitted: (i) within 90 days of the receipt of the A.O's direction vide A.O's letter dated 25.3.2003 i.e., by 25.06.2003 (ii) As per provisions of explanation 1(iii) to section 153, which says that the period commencing from the date on which Assessing Officer directs the assessee to get his accounts audited under sub section. 2(2A) of section 142 and ending that last day which assessee is required to furnish a report of such audit under sub section. , the period i.e., to be excluded is 25.3.2003 to 24.06.2003. Therefore, the time remaining with A.O. for completing the assessment is only 7 days i.e., 31.3.1002 (- minus) 25.3.2003. (iv) Under the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n submitted that assess Rs.12,37,44,543/- on account of interest on over-credit facilities provided by various unrelated banks, short term loans from unrelated banks and affiliated companies and issuance of debentures. Assessee further stated reasons given by A.O., disallowance can be summarised.as under: 1. Assessee company was engaged in the business of 'financing' its clients by either paying the clients the proceeds from the sale of their securities prior to the settlement date fixed by the Stock Exchange or by receiving payment on purchase of securities from the clients after the settlement dated fixed by the Stock Exchange 2. The assessee has not offered any interest income earned from the clients, on which it has suffered interest cost by way of 'financing' the purchase and sale of shares in client's account. 3. There was no compulsion or obligation on the part of the assessee to make the early payments or to receive belated payments. 4. The assessee lacked profit motive. In certain transactions, the assessee did not charge any brokerage. 5. There is no evidence on record with regard to any implied contract entered into by the assessee with the clien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng any interest to tax does nor arise. Assessee stated that making immediate payment of the sale proceeds or receiving delayed payment on purchase transactions can, by no stretch of imagination, be classified as lending monies to clients or financing the client because each transaction is (i) a sell or purchase transaction which, by its very nature, can not be financed; and (ii) effected on the basis of actual delivery of shares. 18. Assessee further stated that . on. an over all basis, it can be noted that - aggregate brokerage income of assessee during the subject previous year of Rs7,44,07,631/- far exceeded the total finance cost of Rs12,37,44,543/-; the brokerage income in fact, was more than 5 times of the interest cost. 19. Assessee further stated that. Assessing Officer has grossly erred in law in basing his disallowance on the allegation that there was no compulsion or obligation o the part of the assessee to make early payments and on the allegation that there was no implied contract entered by the assessee with the clients for such early payment son sale transactions or delayed payment on purchase transactions. 20. Assessee further stated that providing im ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I have considered the submissions of the assessee and also the order of the A.O. The crux of the problem appears to be that assessee has been making early payments to the clients when the securities are sold and receiving delayed payments on the purchase transaction from the clientele and in the process has been incurring huge interest liability which apparently has not been passed to the clientele and whether such liability is in synergy with market practices or not? From the records and the submissions of the assessee it could be seen that assessee has not been advancing any money to facilitate the transactions of clientele instead the assessee has been giving away the sale consideration immediately without waiting for the receipt of sale proceeds and assessee has been paying the monies which come from the clients on pay out day and pay in days. By doing so assessee has not violated any guidelines laid out by SEBI or BSE. In the process assessee has been earning goodwill of the client and clientele has been given an assurance and security in respect of their receipts payments. This is not a abnormal market practice, but it is very much prevalent all over the world. For instance, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee has not charged any brokerage in the year ended 31.3.2000, have been charged brokerage in the subsequent years and such brokerage ran to huge amounts. The clientele of the assessee also is not the kind of retail clientele which Assessing Officer had in its mind. The clientele of the assessee consisted of foreign banks like BNP Paribas, Mutual Funds like Morgan.. Stanley Mutual Fund, foreign investment companies like American Investment, Management Inc . local Mutual Fund such as Cann Bank Mutual Fund and foreign governments .such as Government of Singapore etc. The very fact that assessee's income has gone up by 60% in the next year i.e., to the tune of Rs. 108 crores who that interest cost incurred by assessee was worth incurring. In the case of CIT Vs.Dhanrajgiri Raja Narsingiriji, Supreme Court ha observed that assessee had incurred expenditure for the purpose of business. It was for the assessee to decide how best to protect his own interest. It was duty of the assessee to see that prosecution was properly conducted. The fact that he did not leave carriage of the case in the hands of the prosecuting agency of the Government is no ground for disallowing the expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en the directors' and shareholders of the company may have been. 30. It does not matter whether the company was right this view or wrong, and in any .event we are in no position to judge of the soundness of its decision because we have not all the materials before us. It has to be remembered that considerations of this kind go deeper than the apparent profit or loss on an isolated transaction standing by itself. It is not enough to say that the 50,000 shares which were cancelled earned in the following year only 3.5. percent interest as against 5 percent on the debentures because we do not know to what extend the holdings of the company would have been disturbed if this had not been done. 31. Further Supreme Court. in the case of Bengal Enamel Works Ltd. 77 ITR 109 has held that for eligibility of allowance under Section 37(1), there should be nexus between expenditure and the purpose of the business and the expenditure should have been wholly and exclusively laid out for that purpose. Once these facts are established, the revenue or Court can not justifiably claim to put itself in the armchair of the businessman or in the position of Board of Directors and assume the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facilitate. The carrying on the assessee' business. A man's business may be benefited a number of ways, one of them may be relations with those whom he has to deal with in the course of his business. (CIT Vs. A. Tellery Sons Pvt. Ltd., 1972, Tax LR. Allahabad). In the instant case, from the details furnished by the assessee, it could be seen that most of the clients who were not charged any brokerage during the year continued to be with assessee and paid huge brokerages in the subsequent years. Just because of the fact that the assessee has not charged brokerage for one year, he does not mean that the assessee has never charged brokerage in future or assessee has been rendering free services to all its clients. In fact, Court have held that if the expenditure is incurred for the purpose of trade and if such expenditure may inure benefit to the third party, then the same is allowable even if the assessee is not benefited by such expenditure. Hence, in order that an expenditure may be allowed u/s. 37(1), it need not have been incurred with the object of gaining a direct and immediate benefit It would suffice even if it was incurred in order indirectly to facilitate the carrying on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he parties for the year under consideration, it is seen that while allowing the issue in favour of the assessee, learned CIT(A) has discussed the issue in detail for immediately preceding year i.e. for the assessment year 2000-01. In fact, the assessee purchased the share on behalf of its clients, makes payment, which is called Delivery Versus Payment (DVP). This is constant activity done by the assessee. Similarly, the assessee makes the payment to a person, who wants to sell his shares and thereafter the assessee sells those shares in the market through stock exchange. The assessee raised the bills to the party on behalf of the shares are purchased. These bills include cost of purchases plus brokerage of the assessee. Similarly, the assessee raised bills to the party, who sells their shares through the assessee. The sale consideration in the bill is mentioned, reduced by the payment made by the assessee plus brokerage payable to the assessee. In this way, the assessee made huge profits on account of brokerage. These facts have been recorded in the order of the AO itself. It is recorded that during the year under consideration the assessee has earned brokerage of Rs.108,85,85,105/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -MUM-INTL), the Mumbai Bench of the Tribunal has held that loss incurred by the assessee in security transaction in violation of Section 15 of the Securities Contract Regulation Act, 1956, undisputedly borne out that it was set off against profit from comparable transaction. In this case, it was argued on behalf of the department that losses incurred by the assessee are not allowable on account of expenses as they are relating to illegal activities. Thereafter it was held by the Tribunal that if the expenses are on account of illegal transaction, then income part of the same transaction has to be treated on account of illegal transaction and both i.e. income as well as expenditure is to be set off against each other. In the present case also facts are similar. If the department treats the activities of the assessee are illegal, then income earned by the assessee as well as expenditure incurred by the assessee has to be treated on the same transaction and they have to be netted against each other. 11. We have also seen other cases on which reliance has been placed by the learned AR and found that they are in support of the case of the assessee. We have also taken into considerat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , he made an ad hoc disallowance of Rs.40,65,235/-. 14.2 Learned CIT(A) deleted the disallowance by observing that on identical facts, disallowance has been deleted for immediately preceding year i.e. assessment year 2000-01. Accordingly, he deleted the addition for the year under consideration. 14.3 After considering the submission of both the sides, we found no infirmity in the finding of the learned CIT(A). We noted that the CIT(A) has taken into consideration that the assessee is a trader and the entire shares purchases have been kept under the head stock-in-trade. This fact has been accepted by the AO. Dividend income is the consequential income. Any expenditure incurred during the regular course of business is allowable. There is a direct nexus between the trading activity and incurring expenditure either on account of interest or on account of other administrative expenses. Therefore, we are of the considered view that disallowance made by the AO was not justified and learned CIT(A) was justified in not deleting the same. Accordingly, we confirm the order of the CIT(A) in this respect. 15. The next issue relates to deleting the addition of Rs.9,03,235/- on account of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at year if the same is not claimed in earlier year. Undisputedly, these expenses were not booked in earlier year, therefore, in our view, learned CIT(A) was justified in deleting the disallowance made by the AO on account of prior period expenses. Accordingly, we confirm the order of the learned CIT(A) in this respect also. 17. The next issue relates to deleting the addition of Rs.17,69,000/- on account of interest accrued but not due. 17.1 The AO added a sum of Rs.17,69,000/- as accrued interest on Government Security. It was submitted before CIT(A) that interest on security become due and payable only on the coupon date of security. It was stated that where the coupon date falls beyond the last date on a particular financial year, the interest is merely taken into books of account of the said financial year in accordance with the periodicity concept of accounting. It was also stated that the interest in securities is receivable only after the last date of financial year, and there is no right of the assessee to receive the interest in the year under consideration. Reliance was placed on the decision of the Tribunal in the case of Union Bank of India Vs. DCIT, Special Range-22 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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