2018 (1) TMI 731 - AT - Income Tax

Tribunal allows appeal on sub-brokerage payments, directs recomputation for Section 14A.

The Tribunal allowed the appeal regarding the disallowance of sub-brokerage payments, deleting the addition under Section 40(a)(ia). For the addition ... TDS u/s 194H - disallowance of Sub-brokerage payments to sub-brokers on the transactions related to shares and securities - Held that:- On same identical facts in the case of S.J. Investment Pvt. Limited [2011 (2) TMI 1427 - ITAT MUMBAI] the coordinate ITAT Bench Mumbai held that the sub- brokerge paid in connection with the services rendered in the course of business of buying and selling of units of mutual fund or in relation to transactions pertaining to mutual fund is not covered by provisions of tax at source in view of the explanation (i) to section 194H of the Act. We note that there is no material to even suggest that the commission had been paid in connection with increasing the assessee volume of transactions or for doing any other activity. Therefore we hold that commission/brokerage of ₹ 10,67,725/- is not liable for deduction of tax at source (TDS). - Decided in favour of assessee Addition u/s 14A r.w.r 8D in respect of shares held as stock by the assessee company - Held that:- In REI Agro Ltd.(2013 (9) TMI 156 - ITAT KOLKATA) this Tribunal held that only investments which has given rise to the exempted income should be taken into consideration while computing u/s 8D(2)(ii) & 8D(2)(iii) of the Rules. The AO is directed accordingly to compute the disallowance under section 14A read with Rule 8D. Issues Involved:1. Disallowance of Sub-brokerage payments under Section 40(a)(ia) of the Income Tax Act, 1961.2. Addition under Section 14A read with Rule 8D concerning shares held as stock-in-trade.Detailed Analysis:1. Disallowance of Sub-brokerage Payments:The primary issue revolves around the disallowance of sub-brokerage payments amounting to Rs. 10,67,725/- made by the assessee to its agents for conducting share business. The Assessing Officer (AO) disallowed these payments under Section 40(a)(ia) of the Income Tax Act, 1961, due to non-deduction of Tax Deducted at Source (TDS) as per Section 194H. The AO contended that these payments were not for brokerage on securities but were commissions for business activities conducted by the agents, thus necessitating TDS deduction.The assessee argued that TDS was not applicable on brokerage related to securities transactions as per the definition of 'Commission or Brokerage' in Section 194H, which excludes securities. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the payments were for business activities and not specifically for securities brokerage.Upon appeal, the Tribunal examined the definition of 'Commission or Brokerage' under Section 194H, which explicitly excludes securities. The Tribunal also referenced the ITAT Kolkata Bench's decision in the case of Smt. Usha Chowdhury, which supported the non-applicability of TDS on brokerage related to securities. The Tribunal concluded that there was no material evidence to support the AO's claim that the payments were for business activities. Therefore, the Tribunal held that the sub-brokerage payments were not liable for TDS deduction and deleted the disallowance under Section 40(a)(ia).2. Addition under Section 14A read with Rule 8D:The second issue pertains to the addition of Rs. 9,78,908/- under Section 14A read with Rule 8D, related to shares held as stock-in-trade by the assessee company. The AO based this addition on the Tax Audit Report, which computed the disallowance under Section 14A. The assessee contended that the shares were held as stock-in-trade and not investments, thus Rule 8D should not apply. The CIT(A) rejected this argument, noting that the balance sheet showed significant investments in shares, and upheld the AO's addition.On appeal, the Tribunal considered the judgment of the Hon’ble Calcutta High Court in the case of CIT vs. M/s G.K.K Capital Markets (P) Ltd., which held that Rule 8D does not apply to shares held as stock-in-trade. However, the Tribunal noted that the assessee's balance sheet showed shares held as investments, thus disqualifying the assessee from benefiting from this judgment. The Tribunal also referenced the ITAT Kolkata Bench's decision in REI Agro Ltd., which stated that only interest-bearing investments should be considered for disallowance under Rule 8D.The Tribunal directed the AO to recompute the disallowance under Section 14A read with Rule 8D, considering only the investments that generated exempt income. Consequently, the Tribunal allowed the appeal for statistical purposes.Conclusion:The Tribunal allowed the appeal regarding the disallowance of sub-brokerage payments, deleting the addition under Section 40(a)(ia). For the addition under Section 14A read with Rule 8D, the Tribunal directed a recomputation based on the principles established in REI Agro Ltd., allowing the appeal for statistical purposes.