AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2016 (2) TMI 383
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....rst issue in the appeal of the assessee is that the Ld. CIT(A) erred in restricting the allowance of sub-brokerage to 50% of the expenditure incurred and claimed by the assessee holding it as excessive and unreasonable within the meaning of Sec. 40A(2)(b) of the Act. 3. Brief facts are that the assessee is a 100% subsidiary of Stock Holding Corporation of India Ltd., and engaged in the business of share broking and providing Portfolio Management Services. The assessee filed its return of income on 29.9.2011 declaring total income of Rs. 5,0,73,621/-. The assessment was completed on 21.2.2014 u/s. 143(3) of the Act determining the income at Rs. 26,93,95,020/-. While completing the assessment, the Assessing Officer disallowed sub-brokerage of Rs. 21,80,51,674/- paid by the assessee to Stock Holding Corporation of India Ltd., for the reason that assessee has not deducted TDS u/s. 194J of the Act. According to the AO, the payments made by the assessee to Stock Holding Corporation of India Ltd., being the sub-brokerage is nothing but fees for professional and technical services, therefore the provisions of Sec. 194J of the Act are attracted. 3.1. The assessee contended that the provis....
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....by the assessee was reduced from 75% to 60% w.e.f 1.10.2010 as per the agreement dated 3.11.2010. Therefore the Counsel for the assessee submits that it is not unusual that the subbrokerage payments range from 50 to 80% depending upon the market conditions. Referring to page-43 of the Paper Book, the Ld. Counsel for the assessee submits that a list of brokers sharing brokerage in the ratio between 60:40 to 80:20 was submitted before the lower authorities. Referring to page-47 of the Paper Book, it is the submission of the Ld. Counsel that no evidence has been lead by the lower authorities to justify the stand that the commission paid by the assessee is excessive. Further, there is no rebuttal by the lower authorities on the submission of the assessee that it is not an unusual practice in paying sub-brokerage more than 50-60%. 5.1. It is further contended by the Ld. Counsel that both the assessee and the Stock Holding Corporation of India Ltd, are taxed at maximum marginal rate therefore the Stock Holding Corporation of India Ltd has admitted the commission income and paid taxes hence it is Revenue neutral. Referring to the decision of Edwise Consultants Pvt. Ltd Vs DCIT In ITA No.....
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....g (supra), the Ld. Counsel submits that without giving any cogent findings about the conditions of applicability of Sec. 40A(2) and unless there is a clear findings that the market value of the services taken from the sister concern is less than the price at which the services are obtained there cannot be an occasion to apply the disabling provisions of Sec. 40A(2). The Ld. Counsel submits that no exercises have been conducted by the lower authorities in such direction, therefore, the provisions of Sec 40A(2) are not justifiably invoked in assessee's case. 6. The Ld. Departmental Representative vehemently supports the orders of the lower authorities. 7. We have heard both parties and perused the orders of lower authorities, case laws relied on and the material evidence placed before us. The assessee is a stock broker and a member of Stock Exchange carrying on the business of sale and purchase of share and securities in the name and style of SHCIL Services Ltd. The assessee entered into agreement with Stock Holding Corporation of India Ltd. for conducting business as sub-broker in shares and securities on behalf of its clients with the stock broker. The assessee during this assess....
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.....3. In the course of the assessment proceedings as well as the appellate proceedings, the assessee very much contested that the payment of sub-brokerage is not unusual that it ranges more than 50%. The assessee also furnished list of sub-broking companies who paid sub-brokerage in the ratio of 60:40 and 80:20. The assessee also given an instance in the case of a broker name Kaonain Securities Pvt. Ltd. where 70% of its brokerage was paid by way of subbrokerage. It is also submitted by the assessee as under: a) "That the genuineness of the expenditure was not in doubt. b) A list of entities who in the understanding of the appellant pay sub-brokerage in excess of 60% of the total brokerage earned, going progressively upwards to 80% c) Copy of an article from Economic Times dated 26th December, 2008 to the effect that several brokers have agreed for a 30-70 arrangement favouring the subbroker. d) A advertisement giving particulars of an entity, namely Kaonain Securities Pvt. Ltd., appearing on the internet, showing that they are willing to part with 70% by way of commission to a franchisee partner. e) Balance sheet of Interconnected Stock Exchange of India Ltd. to show t....
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....he fair market services is concerned, that the fair market value of such services is to be determined first. Unless this benchmark is set, there cannot be any question of resorting to disallowance under section 40A(2)(b) for excessive payment vis-à-vis fair market value of services. In the case of Batlivala & Karanai Vs ACIT ( 2 SOT 379), a coordinate bench of this Tribunal has observed as follows Section 40A(2) provides that where the Assessing Officer is of the view that expenditure incurred by the assessee, in respect of which payment is made to the specified persons, is excessive or unreasonable having regard to the market value of goods, services or facilities for which the payment is made, or the legitimate needs of the business of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is considered to be excessive or unreasonable shall not be allowed as deduction. The emphasis is on the market value of the goods or services ............................. The CIT(A) has also dealt with the matter at an equally superficial level by only modifying the quantum and without giving any cogent finding about the conditions of appli....
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....e by the above objective standards or otherwise. The object, scope and effect of the introduction of Section 40A(2)(a) was explained by the Board in its Circular No.6P of 1968 dated 6.7.1968 and in that Circular at para 74, the Board has stated that where payment for any expenditure is found to have been made ot a relative or associate concern falling within the specified categories, it will be necessary for the AO to scrutinize the reasonableness of the expenditure with reference to the criteria mentioned in the Section. It was further stated that the AO is expected to exercise his judgemnet in a reasonable and fair manner, and it should be borne in mind that this provisions is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner, which will cause hardship in bonafide cases". 10. In the case of Edwise Consultants Pvt. Ltd Vs DCIT (supra), the Co-ordinate Bench of this Tribunal held as under: We have earlier noticed that all the directors are in charge of the entire operations of the assessee company and the financial/operational results of the company are growing every year. Hence, on....