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TMI Blog2005 (2) TMI 905X X X X Extracts X X X X X X X X Extracts X X X X ..... (India) Ltd. without appreciating the fact that M/s. KJMC Global Market (India) Ltd., being a lead manager is not entitled to its fund based activities in the nature of sub-broking as per SEBI Regulations and the assessee is not required to pay any sub-brokerage. 2. Briefly stated, the facts of the case are that the assessee was engaged, during the relevant previous year, in the business of stock broking and investment. The assessee had claimed before the Assessing Officer to have paid a sum of Rs. 1,58,41,607 by way of sub-brokerage to KJMC Global Market (India) Ltd., a sister concern of the assessee company. The said claim was disallowed by the Assessing Officer on the following, inter alia, grounds : (a) KJMC Global Market (I) Ltd., being a Lead Manager could not act as a sub-broker as per SEBI Regulations. (b) Only registered sub-brokers for primary market issues were entitled for sub-brokerage in the ratio decided by the main broker. Since KJMC Global Market (I) Ltd. was not a registered sub-broker, the said company could not act as sub-broker and hence there was no question of payment of sub-brokerage by the assessee to the said company. (c) The sub-broking activ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat out of the total brokerage/sub-brokerage earned by it, it has, in turn paid sub-brokerage and marketing expenses of Rs. 1.87 crore which was higher than the corresponding income shown by the assessee. The Assessing Officer therefore, inferred that M/s. KJMC Global Market (I) Ltd. was not rendering any service to the company as a sub-broker. He further held that KJMC Global Market (I) Ltd. rendered its services in its capacity as a Lead Manager and not as a sub-broker. Considering the aforesaid facts and the reasons given in the assessment order, the Assessing Officer disallowed the claim of the assessee for sub-brokerage payment of Rs. 1,58,41,607 on the ground that it was excessive and unreasonable having regard to the services and facilities for which the payment was made or the legitimate needs of the business of the assessee or the benefit derived by or accruing to the assessee. The Assessing Officer invoked the provisions of section 40A(2) (a) of the Act for making the aforesaid disallowance. 5. On appeal the learned CIT (Appeals) deleted the above addition. 6. At the time of hearing before us, the learned Departmental Representative supported the assessment order an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cceeding year i.e. assessment 2001-02 under appeal. 8. The learned counsel for the assessee further submitted that the amount paid in the name of sub-brokerage to M/s. KJMC Global Market (I) Ltd. was not paid for broking services but was in the nature of compensation for the facilities and the network of sub-brokers provided by KJMC Global Market (I) Ltd. and utilized by the assessee company. It was submitted that KJMC Global Market (I) Ltd. had vast network of sub-brokers in practically all the important cities in the country while the assessee-company had no such network. The assessee instead of engaging and appointing its own sub-brokers thought it more appropriate to utilize the services of sub-brokers of KJMC Global Market (I) Ltd. It was in lieu of these services provided by KJMC Global (I) Ltd. that sub-brokerage was paid to it. He submitted that the Assessing Officer has not doubted that KJMC Global (I) Ltd. to whom sub-brokerage was paid did not render any services to the assessee company. 9. The learned counsel for the assessee further submitted that a sum of Rs. 27 lakhs paid to KJMC Global (I) Ltd. by way of compensation for the facilities provided by the said com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . There is no finding recorded by the Departmental authorities to show whether entire amount of sub-brokerage paid by the assessee to M/s KJMC Global Market (I) Ltd. was, in turn, passed on by M/s KJMC Global Market (I) Ltd. to the sub-brokers who had reportedly rendered their services as sub-brokers. The Assessing Officer has held that the amount of sub-brokerage paid by the assessee to M/s KJMC Global Market (I) Ltd. was excessive and unreasonable having regard to the services and facilities for which they were made or the legitimate needs of the business of the assessee or the benefit derived by or accruing to the assessee from the said payments. The learned CIT(A) has, on the other hand, held that the Assessing Officer could not invoke section 40A(2) at all on the facts of the case as payments were ultimately made to the sub-brokers who were third parties unconnected with KJMC Capital Market or KJMC Global. Sub-brokers, as held by the learned CIT(A), may be third parties unconnected with the assessee or M/s KJMC Global Market (I) Ltd. but the fact remains that the impugned payments were not made by the assessee to third parties directly. If it had been so, they would have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount of interest that was to accrue for the next six months of the year was waived on the ground that it was not recoverable. This is how the assessee has placed a sum of Rs. 9,47,438 under the head Bad debts and interest waived/written off and claimed the allowance therefor. The Assessing Officer, however, disallowed the aforesaid claim by invoking section 40A(2)(a) . The Assessing Officer held that M/s. KJMC Financial Services was a sister concern and that the waiver of interest and writing off of interest receivable from M/s. KJMC Financial Services was in the nature of expenditure which was excessive and unreasonable and thus not allowable under section 40A(2)(a) . 14. On appeal the learned CIT(A) deleted the addition. 15. At the time of hearing the learned Departmental Representative supported the order of the assessment whereas the learned counsel for the assessee supported the order of the learned CIT(A). 16. We have considered the rival submissions. The learned CIT(A) has deleted the disallowance with the following observations : I have considered the submissions of the assessee and also the order to the Assessing Officer. Assessee has waived interest receivab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gnorance or mistake on the part of the Assessing Officer in applying the correct provision of law does not denude the CIT(A) of his jurisdiction to examine the matter with reference to the relevant provisions of law. As regards the claim of the assessee that it had written off or waived the amount of interest in lieu of compensation which it was required to pay for using the facilities provided by M/s KJMC Financial Services Ltd., the Assessing Officer is right in observing that the liability to pay the said compensation as also its reasonableness is required to be examined first before giving the set off. Thus, two distinct aspects require consideration: one, applicability of section 36(1) and (2) for the amount of interest written off as bad debt; and two, applicability of section 40A(2) for the amount required to be paid for utilizing the facilities provided by M/s KJMC Financial Services Ltd. and the adjustment of such expenditure/liability, if it is not hit by section 40A(2) , against the amount of interest waived. Both these aspects have not been examined by the learned CIT(A). His order on this point is, therefore, set aside and the matter is restored to him for a fresh deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessment order as the Assessing Officer need not mention the same if he does not arrive at a conclusion adverse to the assessee. 4. On the facts and in the circumstances of the case and in law the learned CIT, Mumbai City IV, Mumbai erred in holding that the Assessing Officer had not applied his mind at all while passing the order dated 31-3-2003 when the necessary and detailed explanations were called for and placed on record as mentioned by himself in para 6.2 of his order and the reasons assigned by him for doing so are contrary to the facts of the case, the provisions of the Income-tax Act, 1961 and Rules made thereunder. 5. On the facts and in the circumstances of the case and in law the learned CIT, Mumbai City IV, Mumbai erred in passing this order under section 263 by holding that the replies by the assessee cannot be treated as complete justification of reasonability of payments without appreciating that it is a case of application of mind and arrival by the Assessing Officer at a judicial decision after proper detailed enquiries and the reasons assigned by him for doing so are contrary to the facts of the case, the provisions of the Income-tax Act, 1961 and Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such payment i.e., compensation as well as sub-brokerage to the sister concerns has not been examined in accordance with the provisions of section 40A(2) (b) of the Income-tax Act also. He, therefore, issued a show cause notice to the assessee under section 263, heard the assessee and passed the impugned order with the following directions : 7. Thus, after considering the overall facts of the case and after going through the submissions, I feel that the assessment order passed by the Assessing Officer is stereo-typed assessment order. The Assessing Officer failed to make proper enquiries about the payment of such huge amounts to its sister concerns in view of the provisions of section 40A(2)(a) of the Income-tax Act, 1961 and thereby passed an order which is erroneous and prejudicial to the interest of the revenue. I, therefore, set aside the assessment order, as per the powers vested in me under section 263 of the Income-tax Act, 1961, passed on 31-3-2003 under section 143(3) of the Income-tax Act, 1961, with a direction to the Assessing Officer to pass a fresh assessment order and to cause spot enquiries as well as third party enquiries. 8. The Assessing Officer should al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing a fresh assessment. He has relied upon the following decisions: Ralon Silk Mills v. CIT [1996] 221 ITR 155 (Guj.) , CIT v. Arvind Jewellers [2005] 259 ITR 502 (Guj.) , Malabar Industrial Co. Ltd. v. CIT [2000] 243 ITR 83 (SC) , CIT v. Kanda Rice Mills [1989] 178 ITR 446 (Punj. Har.) and CIT v. Gabriel India Ltd. [1993] 203 ITR 108 (Bom.) . 24. Per contra, the learned CIT-DR supported the impugned order passed by the learned Commissioner under section 263 . 25. We have considered the rival submissions. During the year under consideration, the assessee had claimed to have paid sub-brokerage of Rs. 4.17 crores to M/s KJMC Global Market (I) Ltd. as also further compensation of Rs. 70 lakhs to KJMC Global Market (I) Ltd. and Rs. 14 lakhs to M/s KDMC Financial Services Ltd. All these companies are inter-related within the meaning of section 40A(2)(b) of the Income-tax Act, 1961. The learned Commissioner has observed that it was for the first time that sub-brokerage amounting to Rs. 4.17 crores was claimed to have been paid to M/s KJMC Global Market (I) Ltd., a sister concern. It is evident on bare perusal of the assessment order that there is no discussion at all in the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oneous because such an enquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. 26. We have given, in the preceding paragraphs, a factual background of the case. There is no doubt that the Assessing Officer did initiate enquiry and issued some notices to the assessee in pursuance of which details were filed by the assessee. The details as filed by the assessee were accepted by the Assessing Officer without subjecting them to any examination or investigation. Considering the fact that large sums of money were claimed to have been paid over to the sister-concerns, it was the duty of the Assessing Officer to verify the correctness of the claim with reference to the provisions of section 40A(2)(b) . Mere issuance of a few letters to the assessee and consequential submission of details filed by the assessee would not always mean that the expenses claimed were reasonable having regard to the parameters laid down in section 40A(2). The assessment order is quite silent and is just a stereo-typed order dealing with routine disallowances without touching upon the substantial aspects of the case. Perusal of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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