2013 (10) TMI 546 - AT - Income Tax

Tribunal Decisions: Disallowances Reduced, Penalties Deleted, Mark-to-Market Loss Allowed

The Tribunal partly allowed the appeals by both the assessee and the Revenue. The disallowance under Section 14A was reduced to 5% of the dividend income ... Disallowance u/s 40(a)(ia) - VSAT & transaction charges paid to Stock Exchange - Held that:- liability of TDS exists u/s. 194J in respect of transaction charges only. (i) that the assessee was liable to deduct tax at source before crediting the transaction charges to the account of the stock exchange. (ii) That though section 194J was inserted with effect from July 1, 1995, till the assessment year in question that is assessment year 2005-06 both the Revenue and the assessee proceeded on the footing that section 194J was not applicable to the payment of transaction charges and accordingly, during the period from 1995 to 2005 neither had the assessee deducted tax at source while crediting the transaction charges to the account of the stock exchange nor had the Revenue raised any objection or initiated any proceedings for not deducting the tax at source. In these circumstances, if both the parties for nearly a decade proceeded on the footing that section 194J was not attracted, then, in the assessment year in question no fault could be found with the assessee in not deducting the tax at source under section 194J of the Act and consequently, no action could be taken under section 40(a)(ia) of the Act - Following decision of Commissioner of Income-tax - 4(3) Versus Kotak Securities Ltd. [2011 (10) TMI 24 - Bombay High Court] - Decided in favour of assessee. Disallowance of penalty u/s 37 of the Act - Business expenditure - Held that:-penalty/payments made by the Assessee to the Stock Exchange for violation of their regulation, being risk management oriented, are not an account of an offence which is prohibited by law.Hence, the invocation of explanation to section 37 is not justified - Following decision of CIT Vs M/s. Stock and Bond Trading Co. [2011 (10) TMI 172 - BOMBAY HIGH COURT] - Decided against Revenue. Disallowance u/s 14A - Held that:- A perusal of the balance sheet of the assessee as exhibited at page-1 of the paper Book supports the contention of the Counsel that assessee has sufficient own funds to cover up the investments - where both own funds and loan funds are available with the assessee, the presumption is that the investment is made out of own funds - Following decision of The Commissioner of Income Tax Versus Reliance Utilities & Power Ltd. [2009 (1) TMI 4 - HIGH COURT BOMBAY] - Decided partly against Revenue. Disallowance of mark to mark loss on derivatives - Held that:- There is no dispute that the assessee holds derivatives as its stock-in-trade and there is also no dispute that it follows the principle 'cost or market price, whichever is lower' in valuing the derivatives. When the derivatives are held as stock-in-trade then whatever rules apply to the valuation of stock-in-trade will have to be necessarily apply to their valuation also. It is a well settled position in law that 'while anticipated loss is taken into account in valuing the closing stock, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its realization. This is the theory underlying the rule that the closing stock is to be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy' - profits that are chargeable to tax are those realized in the year and that an exception is recognized where a trader purchased and still holds goods which are fallen in value in which case though no loss has been realized nor it has occurred, nevertheless at the close of the year he is permitted to treat these goods as of their market value - Following decision of Chainrup Sampatram vs. Commissioner of Income Tax, West Bengal [1953 (10) TMI 2 - SUPREME Court] - Decided in favour of assessee. Issues Involved:1. Disallowance under Section 14A.2. Deletion of disallowance under Section 40(a)(ia) for VSAT and transaction charges.3. Deletion of addition for penalty on violation of stock exchange bye-laws.4. Disallowance of mark-to-market loss on derivatives.Detailed Analysis:Issue 1: Disallowance under Section 14AAssessee's Appeal (A.Y. 2007-08):- The assessee, a share and stock broker, received dividend income of Rs. 79,20,978/- and claimed it as exempt under Section 10(34).- The Assessing Officer (AO) disallowed Rs. 24,66,986/- under Section 14A read with Rule 8D, which the assessee contested.- The CIT(A) confirmed the disallowance using a formula akin to Rule 8D, despite acknowledging its non-applicability for the year.- The Tribunal held that Rule 8D is prospective and not applicable for the year under consideration. A reasonable disallowance of 5% of the dividend income, after allowing a rebate for the amount already disallowed by the assessee, was deemed just.Revenue's Appeal (A.Y. 2007-08):- The Revenue contested the deletion of the addition of Rs. 38,51,983/- under Section 14A read with Rule 8D.- The Tribunal's decision in the assessee's appeal was applied, and the ground was partly allowed.Assessee's Appeal (A.Y. 2008-09):- The AO disallowed Rs. 1,24,22,472/- under Section 14A read with Rule 8D, which the assessee contested.- The CIT(A) directed the AO to consider the decision of the predecessor for A.Y. 2007-08.- The Tribunal found that the assessee had sufficient own funds to cover investments, following the jurisdictional High Court's decision in CIT Vs Reliance Utilities & Power Ltd. The disallowance computed by the assessee under Rule 8D at Rs. 39,19,175/- was deemed just, and the AO was directed to recompute the disallowance accordingly.Issue 2: Deletion of Disallowance under Section 40(a)(ia) for VSAT and Transaction ChargesRevenue's Appeal (A.Y. 2007-08):- The AO disallowed Rs. 2,43,566/- for VSAT and transaction charges paid to the Stock Exchange.- The Tribunal noted that TDS provisions were not applicable to VSAT and Leaseline charges as per the jurisdictional High Court's decisions in CIT Vs M/s. Stock and Bond Trading Co. and Kotak Securities Ltd.- The Tribunal dismissed this ground, giving the benefit of bona fide to the assessee.Issue 3: Deletion of Addition for Penalty on Violation of Stock Exchange Bye-LawsRevenue's Appeal (A.Y. 2007-08):- The AO added Rs. 53,010/- for penalties paid to the Stock Exchange.- The Tribunal, following the jurisdictional High Court's decision in CIT Vs M/s. Stock and Bond Trading Co., held that such payments are not on account of an offense or prohibited by law, and dismissed this ground.Issue 4: Disallowance of Mark-to-Market Loss on DerivativesAssessee's Appeal (A.Y. 2008-09):- The AO disallowed Rs. 5,96,510/- as 'notional loss' on derivatives.- The Tribunal relied on various judicial pronouncements, including Edelweiss Capital Ltd, and held that anticipated losses can be taken into account while valuing the closing stock.- The Tribunal allowed this ground, recognizing the loss as valid.Conclusion:The appeals by both the assessee and the Revenue were partly allowed. The Tribunal provided detailed reasoning for each issue, ensuring that the principles of justice and precedents were followed. The decisions were pronounced in the open court on 12th June, 2013.