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        Tribunal Upholds CIT(A) Decisions on Revenue Appeal, Stressing Compliance with SEBI Guidelines

        DCIT, Central Circle-29, New Delhi. Versus Futurz Next Services Ltd.

        DCIT, Central Circle-29, New Delhi. Versus Futurz Next Services Ltd. - [2022] 94 ITR (Trib) 119 (ITAT [Del]) Issues Involved:
        1. Client Code Modifications (CCM)
        2. Disallowance of Business Expenses
        3. Disallowance under Section 14A read with Rule 8D
        4. Interest Expenses under Section 36(1)(iii)
        5. Addition under Section 2(22)(e) for Deemed Dividend

        Issue-Wise Detailed Analysis:

        1. Client Code Modifications (CCM):
        The AO made an addition of Rs. 8,74,367/- on the grounds of Client Code Modifications (CCM), alleging that the assessee shifted profits to other clients or shifted losses to itself from other clients, as reported by the Special Auditors. The CIT(A) deleted the addition, observing that the volume of CCM transactions was within the permissible limit allowed by SEBI, and no violation of rules and regulations was found by the Exchange/SEBI. The Tribunal upheld the CIT(A)'s decision, noting that the assessee is not a member of any exchange and cannot execute CCM. The Tribunal also referenced similar cases where CCM within 1% was considered normal and permissible.

        2. Disallowance of Business Expenses:
        The AO disallowed Rs. 6,36,885/- on account of hotel and staff welfare expenses due to the absence of documentary evidence. The CIT(A) confirmed this disallowance, stating that the appellant failed to produce bills/vouchers to substantiate the expenses. The Tribunal upheld the CIT(A)'s decision, agreeing that the payment through banking channels alone does not substantiate the allowability of the expenses incurred wholly and exclusively for business purposes.

        3. Disallowance under Section 14A read with Rule 8D:
        The AO made a disallowance of Rs. 1,77,82,267/- under Section 14A read with Rule 8D, despite the assessee not earning any exempt income during the year. The CIT(A) deleted the disallowance, referencing the decision of the Delhi High Court in Cheminvest Ltd. v. CIT, which held that no disallowance can be made under Section 14A if no exempt income is earned during the year. The Tribunal upheld the CIT(A)'s decision, noting that the assessee did not receive any dividend income during the year.

        4. Interest Expenses under Section 36(1)(iii):
        The AO disallowed Rs. 95,45,816/- out of total interest expenses, alleging that the borrowed funds were diverted to group concerns without charging any interest. The CIT(A) deleted the disallowance, observing that the assessee had sufficient own funds and free reserves, and the transactions with group concerns were regular business transactions. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's decisions in S.A. Builders Ltd. v. CIT and Hero Cycles (P.) Ltd. v. CIT, which support the allowability of interest expenses for advances given on account of commercial expediency.

        5. Addition under Section 2(22)(e) for Deemed Dividend:
        The AO made an addition of Rs. 19,34,21,760/- under Section 2(22)(e), treating certain payments as deemed dividends. The CIT(A) deleted the addition, holding that the transactions in the client ledger account were business transactions related to the sale/purchase of shares, currency, and derivatives, and thus outside the purview of Section 2(22)(e). The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's decision in CIT v. Creative Dyeing & Printing (P.) Ltd., which supports the view that business transactions are beyond the ambit of deemed dividend provisions.

        Conclusion:
        The Tribunal dismissed the appeal filed by the Revenue, upholding the CIT(A)'s decisions on all issues. The Tribunal's judgment emphasized the adherence to SEBI guidelines, the necessity of documentary evidence for business expenses, the non-applicability of Section 14A in the absence of exempt income, the commercial expediency of interest expenses, and the exclusion of business transactions from the scope of deemed dividends under Section 2(22)(e).

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        ActsIncome Tax
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