2014 (5) TMI 584 - HC - Income Tax

Court rules VSAT/Lease Line charges not subject to TDS, penalty deductible as business expense

The Income Tax Commissioner Mumbai City-4 Versus Angel Capital & Debit Market Ltd.

The High Court dismissed the appeal, ruling that the VSAT and Lease Line charges were reimbursement amounts, not subject to TDS deduction, and the penalty ... Allowability of deduction – VSAT and Lease line charges paid to stock exchange – Failure to deduct TDS – Technical services u/s 194J r.w. Explanation 2 to 9(1)(vii) of the Act – Held that:- Tribunal was of the view that VSAT and Lease Line charges paid by the assessee to Stock Exchange were merely reimbursement of the charges paid/payable by the Stock Exchange to the Department of Telecommunication - the VSAT and Lease Line charges paid by the assessee do not have any element of income, deducting tax while making such payments do not arise – Decided against Revenue. Deletion of disallowance u/s 37(1) of the Act – Payment towards penalty paid to Stock exchange – Held that:- Tribunal was of the view that the amount paid as penalty was on account of irregularities committed by the assessee’s clients - payments were not on account of any infraction of law and hence allowable as business expenditure – thus, the explanation to section 37 would not apply – Decided against Revenue. Issues:1. Allowability of VSAT and Lease Line charges as deduction without TDS deduction2. Nature of VSAT and Lease Line charges in relation to technical services3. Deductibility of penalty paid to Stock ExchangeAnalysis:Issue 1: Allowability of VSAT and Lease Line charges as deduction without TDS deductionThe Revenue raised the issue of whether the VSAT and Lease Line charges paid by the assessee to the Stock Exchange were allowable as a deduction from taxable income despite the failure to deduct TDS. The High Court noted that the ITAT had found these charges to be reimbursement of amounts paid by the Stock Exchange to the Department of Telecommunication, lacking any income element. Consequently, the requirement to deduct tax did not apply in this scenario. Therefore, the Court held that questions (A) and (B) raised by the Revenue could not be entertained.Issue 2: Nature of VSAT and Lease Line charges in relation to technical servicesThe second question raised was regarding whether the VSAT and Lease Line charges paid to the Stock Exchange were in consideration of technical services rendered, as per the Income Tax Act. The Court reiterated the ITAT's finding that these charges were not for technical services but were reimbursements. Therefore, the Court concluded that the charges were not paid in consideration of technical services, as per the relevant provisions of the Income Tax Act.Issue 3: Deductibility of penalty paid to Stock ExchangeRegarding the third question raised by the Revenue, the issue was the deductibility of the penalty paid to the Stock Exchange. The ITAT had found that the penalty was imposed due to irregularities by the assessee's clients, not for any legal violations. As a result, the penalty payment was considered a business expenditure and not covered by the explanation to Section 37 of the Income Tax Act. Therefore, the Court held that the penalty payment was allowable as a deduction, and the question raised by the Revenue could not be entertained.In conclusion, the High Court dismissed the appeal, emphasizing that the VSAT and Lease Line charges were reimbursement amounts, not subject to TDS deduction, and the penalty paid to the Stock Exchange was a legitimate business expenditure, making it deductible.