2014 (3) TMI 463 - AT - Income Tax

Tribunal Upholds CIT(A) Decisions on Revenue's Appeals, Allows Deduction for Settlement Guarantee Fund

The Tribunal upheld the decisions of the CIT(A) in dismissing the revenue's appeals on all three issues, including the deletion of an addition on account ... Deletion of difference on account of excess purchases and sales – Held that:- CIT(A) was of the view that the assessee shows purchases and sales on the basis of value of each transaction it has entered into to derive true profit or loss on such transaction - the figures of Purchases and sales in Form 1ODB are without Brokerage while the assessee has to account for all the transactions net of Brokerage - The CIT(A) has considered the reconciliation statement which was also filed before AO but he has not considered fact that there is brokerage which has to be taken into account and the assessee has accounted for sales as well as purchases on the basis of net of brokerage - Once this fact has been considered by the CIT(A) and even now revenue could not point out any defect in the reconciliation statement – there is no reason to interfere in the order of CIT(A) – Decided against Revenue. Deduction on account of settlement guarantee fund – Held that:- The amount on account of payment of settlement guarantee fund by the calcutta Stock Exchange Ltd. was borne by all the members of Calcutta Stock Exchange vide rules and regulation of the exchange - The financial contribution compulsorily collected by Stock Exchange of which assessee is a member and who is also governed by rules and regulations of the Calcutta Stock Exchange is not penalty - assessee never defaulted in Calcutta Stock Exchange at any point of time and this payment made was for the better functioning of Calcutta Stock Exchange, which in no way can be called as penalty in nature – thus, the CIT(A) has rightly allowed the claim of the assessee – Decided against Revenue. Disallowance u/s 14A of the Act r.w. Rule 8D of the Act – Held that:- CIT(A) was of the view that the assessee's books of account are clear and no defect is pointed out by the AO in the interest free fund position explained by the assessee or in the books of account of the assessee which proves that borrowed funds were not used for the purposes of making the investments, the disallowance cannot be made - Assessee contended that no satisfaction whatsoever has been recorded by the AO regarding correctness of accounts of the assessee no diwsallowance can be made u/s. 14A of the Act read with Rule 8D of the Rules - As regards to AY 2008-09, the CIT(A) specifically made disallowance of demat charges and 0.50% on average value of investment - Once the CIT(A) held that there is no defect pointed out by AO and there is no satisfaction that the borrowed funds were used for making investment, the disallowance is unwarranted – Decided in favour of Assessee. Issues Involved:1. Appeal against deletion of addition on account of difference in accounts of excess purchases and sales.2. Appeal against allowing deduction on account of settlement guarantee fund deposited with Calcutta Stock Exchange.3. Disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.Issue 1:The first issue involves an appeal against the deletion of an addition on account of a difference in accounts of excess purchases and sales. The Assessing Officer (AO) made additions based on excess sales and purchases as declared in Form No. 10DB by the assessee. The AO added back the difference in accounts as the reconciliation provided by the assessee was deemed unacceptable due to lack of supporting documentation. However, the Commissioner of Income Tax (Appeals) (CIT(A)) deleted the addition after considering the reconciliation statement and noted discrepancies in the figures provided in Form 10DB and the final accounts. The CIT(A) also highlighted differences in accounting principles applied by the assessee and the AO. The Tribunal upheld the CIT(A)'s decision, emphasizing the inclusion of brokerage in the accounts and the absence of defects in the reconciliation statement.Issue 2:The second issue pertains to an appeal against the allowance of a deduction on account of a settlement guarantee fund deposited with Calcutta Stock Exchange. The AO disallowed the deduction, considering it as a penalty for an offense prohibited by law. However, the CIT(A) allowed the claim, noting that the payment was not in the nature of a penalty as the assessee was not declared a defaulter by the exchange. The Tribunal upheld the CIT(A)'s decision, highlighting that the payment was a financial contribution collected from all members for the exchange's functioning and was not a penalty. The Tribunal confirmed the allowance of the deduction.Issue 3:The third issue involves the disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962. The AO disallowed certain expenses under Rule 8D, considering the utilization of loans for trading purposes. However, the CIT(A) found no defects in the interest-free fund positions explained by the assessee and the books of accounts, leading to the conclusion that no borrowed funds were used for investments. The Tribunal held that the disallowance could not be made based on presumptions and that the AO failed to establish the expenditure incurred to earn tax-free income. The Tribunal upheld the CIT(A)'s decision to restrict the disallowance for one assessment year and delete the disallowance for the other assessment year.In conclusion, the Tribunal dismissed the appeals of the revenue and confirmed the decisions of the CIT(A) on all three issues. The Tribunal allowed one cross objection of the assessee while dismissing the other cross objection.