2013 (11) TMI 1316 - AT - Income Tax

Tribunal upholds CIT(A)'s decision on tax disallowances, additions

DEPUTY COMMISSIONER OF INCOME TAX Versus M/s CREDIT SUISSE FIRST BOSTON (INDIA) SECURITIES LTD

DEPUTY COMMISSIONER OF INCOME TAX Versus M/s CREDIT SUISSE FIRST BOSTON (INDIA) SECURITIES LTD - TMI Issues Involved:1. Deleting the disallowance of interest amounting to Rs. 21,92,68,519/-.2. Deleting the addition of Rs. 40,65,275/- disallowed under Section 14A of the Act.3. Deleting the addition of Rs. 9,03,235/- on account of excess brokerage shown in service tax return.4. Deleting the disallowance of Rs. 26,54,791/- on account of prior period expenses.5. Deleting the addition of Rs. 17,69,000/- on account of interest accrued but not due.Issue-wise Detailed Analysis:1. Deleting the disallowance of interest amounting to Rs. 21,92,68,519/-:The Assessing Officer (AO) disallowed the interest expenditure on the grounds that the borrowed funds were not utilized for the purpose of business, relying on the Special Auditor's report under Section 142(2A). The Special Auditor found that the transactions lacked commercial prudence and resulted in losses. The AO also noted adverse findings from SEBI against the assessee and concluded that the transactions were against public policy, thus disallowing the interest expenditure.The Commissioner of Income Tax (Appeals) [CIT(A)] allowed the appeal, observing that on identical facts, the issue was decided in favor of the assessee for the assessment year 2000-01. The CIT(A) noted that the assessee earned substantial brokerage income, which exceeded the interest expenditure. The CIT(A) also held that even if the transactions were considered illegal, the expenditure incurred to earn the brokerage must be allowed, as only the income from illegal activities can be taxed, not the gross receipts.The Tribunal upheld the CIT(A)'s decision, emphasizing that the assessee's brokerage income was significantly higher than the interest expenditure. The Tribunal also noted that the AO's reliance on SEBI's report was misplaced as it pertained to subsequent years. The Tribunal concluded that the interest expenditure was incurred for the purpose of business and was allowable.2. Deleting the addition of Rs. 40,65,275/- disallowed under Section 14A of the Act:The AO made an ad hoc disallowance of Rs. 40,65,275/- on the grounds that the assessee earned dividend income, which is exempt, and therefore, no expenditure on account of interest and other expenses is allowable against such income.The CIT(A) deleted the disallowance, noting that on identical facts, the disallowance was deleted for the assessment year 2000-01. The CIT(A) observed that the assessee is a trader, and the entire share purchases were kept under the head stock-in-trade, with dividend income being consequential. The CIT(A) concluded that any expenditure incurred during the regular course of business is allowable.The Tribunal upheld the CIT(A)'s decision, agreeing that there is a direct nexus between the trading activity and the expenditure incurred, and therefore, the disallowance was not justified.3. Deleting the addition of Rs. 9,03,235/- on account of excess brokerage shown in service tax return:The AO made a similar disallowance in the earlier year, which was deleted by the CIT(A) after examining the issue and finding no difference in brokerage shown by the assessee in the profit and loss account.The CIT(A) followed the order for the assessment year 2000-01 and deleted the addition for the current year as well. The CIT(A) noted that the difference between the service tax return and the profit and loss account was explainable due to the constant method adopted by the assessee and the need to adjust brokerage during final settlement with clients.The Tribunal upheld the CIT(A)'s decision, finding no reason to interfere with the CIT(A)'s detailed examination and reconciliation of the brokerage figures.4. Deleting the disallowance of Rs. 26,54,791/- on account of prior period expenses:The AO disallowed the expenses, noting that they related to an earlier year. The CIT(A) deleted the disallowance, following his earlier order, which found that the expenses were not claimed in the earlier year and were booked in the year when the final settlement was made.The Tribunal upheld the CIT(A)'s decision, agreeing that the expenses were allowable in the year of final settlement if not claimed in the earlier year.5. Deleting the addition of Rs. 17,69,000/- on account of interest accrued but not due:The AO added the accrued interest on Government Security. The CIT(A) deleted the addition, noting that interest on securities is receivable only on the coupon date and not on an accrual basis.The Tribunal upheld the CIT(A)'s decision, agreeing with the legal position that such interest is taxable on the basis of actual receipt, not accrual.Conclusion:The Tribunal dismissed the department's appeal, confirming the CIT(A)'s orders on all issues. The Tribunal found that the CIT(A) correctly applied the law and facts, and the disallowances and additions made by the AO were not justified.