2022 (7) TMI 591 - AT - Income Tax

Tribunal upholds CIT(A) decisions on Income Tax Act disallowances & additions (A)

DCIT, Circle-25 (2) New Delhi Versus Trustline Securities Pvt. Ltd.

The Tribunal upheld the CIT(A)'s decisions in a case involving disallowance under Section 14A of the Income Tax Act, addition of income from other ... Disallowance u/s 14A r.w.r. 8D - CIT-A restricted the addition - HELD THAT:- As observed that apart from the investment of Rs. 5,95,53,892/- in shares, the assessee being a share broker had certain shares in stock on which dividend income of Rs. 87,971/- was received during the year. The Ld. CIT(A) restricted the disallowance u/s. 14A to Rs. 22,721/- being 0.5% of average holding of shares as stock in-trade of Rs. 45,44,163/-. In doing so, the Ld. CIT(A) relied on numerous precedents mentioned in para 5.1d of his order including the judgment in ACB India Ltd. vs. ACIT [2015 (4) TMI 224 - DELHI HIGH COURT]. We have not found any flaw in the finding of the Ld. CIT(A) which is backed by the judgment (supra) of the jurisdictional High Court. This ground is therefore rejected. Addition under the head 'Income from other sources' - While making the impugned addition the Ld. AO observed that 'it seems that the shares pledged by the assessee company with bank for obtaining working capital facilities were their own shares - Addition deleted by the Ld. CIT(A) - HELD THAT:- As the value of shares is an unexplained income of the assessee'. It is obvious that the addition made by the Ld. AO was not based on any sound legal foundations but on conjecture and surmises. The Ld. CIT(A) quoted extensively from Circular No. 395 of NSE dated 07.04.2004 which allows the brokers to provide margin trading facility to their clients. For this purpose a broker may use his own funds or borrow from scheduled commercial bank and/or NBFCs, regulated by Reserve Bank of India. CIT(A), therefore came to the conclusion that the assessee pledged shares of the clients with banks for obtaining bank finance in order to meet the requirement of depositing margin money by each of the clients as per the regulation of SEBI. We concur with the view of the CIT(A) and hold that the Ld. AO was not at all justified in taking value of shares pledged as security for taking loans from the banks as undisclosed investment of the assessee. The impugned addition has rightly been deleted by the Ld. CIT(A). We, accordingly reject this ground No. 2 of the Revenue. Disallowance of directors' remuneration - According to the Ld. AO the above remuneration paid to the directors was not in accordance with provisions of section 197 of Companies Act, 2013. He therefore calculated allowable remuneration which worked out to Rs. 6,04,560/- and disallowed excess remuneration - CIT-A deleted the addition - HELD THAT:- We observe that the Ld. CIT(A) has taken note of the fact that the assessee company is a nongovernment public limited company not listed in the Stock market (shares of the assessee company are not traded). It is because of this reason that the provisions of the Companies Act, 1956/2013 do not apply to the case of the assessee company. We agree with the findings of the Ld. CIT(A) and hold that he has rightly deleted the impugned disallowance. Accordingly ground No. 3 of the Revenue is rejected. Disallowance of lead charges - AR submitted that the assessee in order to develop its clientele had entered into agreement with certain persons who were introducing new clients and had been sharing brokerage income with them - HELD THAT:- On consideration of the rival submissions, we are of the opinion that the disallowance made by the Ld. AO does not rest on sound footing as despite requisite details filed by the assesses before him, he made the impugned disallowance which is not sustainable. Agreeing with the findings of the Ld. CIT(A) which is backed by the judgment of the Hon'ble Supreme Court in SA Builders Ltd. [2006 (12) TMI 82 - SUPREME COURT] we reject ground No. 4 of the Revenue as well. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Addition under the head 'Income from other sources.'3. Disallowance of Directors' remuneration.4. Disallowance of lead charges.Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The Revenue challenged the restriction of disallowance under Section 14A read with Rule 8D from Rs. 26,50,909/- to Rs. 22,721/- by the CIT(A). The AO had disallowed the amount based on the investment in shares, despite the assessee not receiving any exempt income during the year. The CIT(A) restricted the disallowance to Rs. 22,721/- following the Delhi High Court's decisions in ACB India Ltd. v. ACIT and Cheminvest Ltd. v. CIT, which state that only investments generating income during the year should be considered. The Tribunal found no flaw in the CIT(A)'s findings, which were supported by jurisdictional High Court judgments, and thus rejected the Revenue's ground.2. Addition under the head 'Income from other sources':The AO added Rs. 24,86,72,622/- as income from other sources, based on the discrepancy between the book value and the pledged value of shares. The assessee explained that the shares pledged included clients' shares authorized for margin trading. The CIT(A) found that the shares were pledged per SEBI guidelines for margin trading and deleted the addition. The Tribunal concurred with the CIT(A), noting that the AO's addition was based on conjecture and not on sound legal foundations. The Tribunal upheld the CIT(A)'s deletion of the addition.3. Disallowance of Directors' remuneration:The AO disallowed Rs. 73,91,440/- of directors' remuneration, considering it not in accordance with Section 197 of the Companies Act, 2013. The CIT(A) deleted the disallowance, noting that the remuneration was consistent with earlier years and the limits under Section 198 of the Companies Act did not apply to the assessee per a government notification. The Tribunal agreed with the CIT(A), noting that the provisions of the Companies Act did not apply to the assessee, a non-government public limited company not listed on the stock market. The Tribunal upheld the deletion of the disallowance.4. Disallowance of lead charges:The AO disallowed Rs. 1,94,90,650/- paid as lead charges, citing non-compliance with SEBI guidelines and lack of agreements/confirmations. The CIT(A) deleted the disallowance, noting that the payments were made per SEBI guidelines for introducing clients and requisite details were provided. The Tribunal agreed with the CIT(A), noting that the AO's disallowance was not based on sound footing and was contrary to the details provided by the assessee. The Tribunal upheld the deletion of the disallowance.Conclusion:The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all grounds. The disallowances and additions made by the AO were found to be unsustainable based on the evidence and legal precedents presented.