Securities Transaction Tax treatment for brokers: intermediary payment not disallowable and section 88E relief held inapplicable.

The note explains that Securities Transaction Tax is charged on the purchaser or seller in a taxable securities transaction, while a share broker or stock exchange may act only as collector and remitter. Where the assessee was merely an intermediary and not the purchaser or seller, the amount of STT paid on clients' transactions was not disallowable under section 40(a)(ib) of the Income-tax Act, 1961. On the same factual basis, section 88E was also treated as inapplicable to the assessee. The allegation that the arrangement was tax planning or a colourable device was rejected, and the disallowance was deleted.

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Issues: Whether the amount of Securities Transaction Tax paid by a share broker as a collecting agent on behalf of clients could be disallowed under section 40(a)(ib) of the Income-tax Act, 1961, and whether the assessee could claim the benefit of section 88E of that Act.

Analysis: The statutory scheme of Securities Transaction Tax under Chapter VII of the Finance (No. 2) Act, 2004 fastens the charge on the purchaser or seller in a taxable securities transaction, while the stock exchange or prescribed person only acts as a collector and remitter of the tax. On the facts, the assessee was neither the purchaser nor the seller but only an intermediary collecting and paying the tax to the Government. In that situation, the amount paid did not attract disallowance under section 40(a)(ib), and the restriction in section 88E was also held inapplicable to the assessee. The observation that the arrangement was tax planning or a colourable device was rejected.

Conclusion: The disallowance was deleted and the appeal was allowed in favour of the assessee.

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