ASIT C. MEHTA INVESTMENT INTERMEDIATES LIMITED ,MUMBAI vs. DCIT 4(1)(1), MUMBAI

The present appeals have been filed by the Appellant/Assessee against the appellate orders passed by the first appellate authority for the Assessment Years 2012-13 and 2013-14. Since 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 the appeals involve common ground/issues, the same were heard together and are, therefore, being disposed of by way of common order.

By way of the present appeal the Appellant/Assessee has challenged the order, dated 18.03.2016, passed by the Ld. Commissioner of Income Tax (Appeals)-9, Mumbai [hereinafter referred to as „the CIT(A)‟] for the Assessment Years 2012-13, whereby the CIT(A) had partly allowed the appeal filed by the Appellant/Assessee against the Assessment Order, dated 25.02.2015 passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟).

The Appellant has raised the following grounds of appeal in :

The order appealed against is bad in law and is against the principle of natural justice.

The order appealed against is based on surmises and conjectures. 8. Your Petitioner reserves the right to add, to delete and/or amend any of the foregoing grounds.”

The relevant facts, in brief, are the Appellant is a public limited company engaged in shares and stock broking business. The Appellant filed return of income for assessment year 2012-13 on 27.09.2012 declaring loss of INR.10,61,00,147/-. The case of the Appellant was selected for scrutiny and assessment under Section 143(3) of the Act was framed on the Appellant, vide order dated 25.02.2015, at total income of INR 85,95,220/- after making following additions/disallowances:

The Assessment Order, dated 25.02.2015, was rectified under Section 154 of the Act as the Assessing Officer computed total income at „Nil‟ after setting off brought forward losses of INR 85,95,220/- pertaining to Assessment Year 2009-10. 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14

The Learned Authorised Representative for the Appellant appearing before us submitted that the Appellant is engaged in the business of trading in stock and shares. During the relevant previous year, the Appellant had around 263 sub- brokers/business associates located across India and each of such sub-broker/business associate was registered with Securities & Exchange Board of India (SEBI) and held a valid registration certificate. From the inception of the Appellant- 4 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 Company in the year 1995-96 till Assessment Year 2011-12 all the payments made to such sub-brokers/business associates were allowed as deduction. Explaining the business of the Appellant, the Learned Authorised Representative for the Appellant submitted that the Appellant gets bulk the brokerage business from various clients situated in cities across India requiring purchase/sale of shares, securities etc. which is generated with the help of its sub-brokers/business associates and therefore, a part of the commission received is shared by the Appellant with the sub-brokers/business associates which is claimed as deduction. The client residing in different areas put their purchase/sale orders to the sub-brokers/business associates who execute the same trade disclosing the registration code of the Appellant. Further, the sub- brokers/business associates are also responsible for collecting/marking payments from/to the clients. The Appellant maintains account of each sub-brokers/business associate. The Appellant had submitted a list of all the sub-brokers/business associates to whom payments were made during the relevant previous year along with their name, complete address, permanent account number and sub-registration number (with BSE, NSE. However, no enquiry/verification was conducted by the Assessing Officer before making the disallowance.

Per Contra, the Ld. Departmental Representative submitted that during the assessment proceedings, the Appellant had failed to show that there was a business connection between commission expenses paid by the Appellant to the sub-brokers/business associates with the brokerage business of the Appellant. Further, the CIT(A) has also recorded that the Appellant has failed to prove that any services were rendered by the sub- 5 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 brokers/business associates to the Appellant. He relied upon the relevant observations made by Assessing Officer and CIT(A) to support the aforesaid contentions.

In rejoinder, the Ld. Authorised Representative for the Appellant submitted that all the relevant documents/details were placed before the authorities below. Taking us through pages 99 to 117 of the paper-book, he submitted that the business connection and rendition of services was established during the assessment as well as appellate proceedings. The Ledger Account giving details of business associate expense as well as details of income generated from top 13 sub-brokers/business associates during the relevant previous year was placed before authorities below. However, the same were rejected without making any inquiry or verification. He relied upon the decision of the Tribunal in the case of ACIT Vs Uday S Kotak: [2007] 13 SOT 548 (Mum.) in this regard. He reiterated that no such disallowance has been made by the preceding assessment years and submitted that the principle of consistency requires that no disallowance be made for the business associate expenses in the assessment years before us.

We have heard the rival submissions and perused the material on record. It is admitted position that the Appellant is engaged in share/broking business wherein it is normal business practice to have sub-brokers/business associates. The Appellant had filed list of its sub-brokers/business associates containing office addresses, permanent account numbers, and NSE/BSE registration numbers. The details of „Business Associate Expenses‟ furnished by the Appellant contained Ledger Number and name. We note that out of total Business Associate 6 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 Expenses of INR.9,77,10,205/-, expenses of INR.8,94,31,461/- claimed by the Appellant pertained to Ledger No. 908124 – „Ba : Commission - Equity & Derivative‟ details of which were furnished by the Appellant (placed at page 113-117 of the paper-book). A perusal of the aforesaid documents/details shows that deduction for INR for 43,45,279/- has been claimed for the payments to a business associate with name Varanasi [Satyam Share] which is claimed to have resulted in generation of the corresponding income are INR.81,06,777/- as reflected in the details of income generated from the top 13 sub- brokers/business associates. The name, address, registration number and permanent account number of the aforesaid sub- brokers/business associate are also reflected at serial number 8 in the list of sub-brokers/business associates furnished by the Appellant. The Appellant has also provided the reconciliation statement of the outstanding balances of all the sub- brokers/business associates. We note that no defect has been pointed out in the details furnished by the Appellant by the authorities below. In our view, the findings returned by the AO/CIT(A) are without any factual basis and are on based conjecture/surmise. The Appellant has claimed deduction for business associate expenses in the preceding assessment years, however, no disallowance has been made in respect of the same. It is admitted position there has been no change in the facts and circumstances as compared to preceding assessment years. Thus, in view of the aforesaid, we hold that the Appellant is entitled to claim deduction for business associate expenses of INR 9,77,10,205/- having substantiated his claim by filing relevant documents/details before the authorities below. Accordingly, we reverse the decision of CIT(A)

Learned Authorised Representative for the Appellant submitted that the above said expenses were incurred wholly and exclusively for the purpose of business, and that the rate of 15% determined by the CIT(A) is on higher side. No such disallowance was made in the Assessment Years 2008-09, 2009- 10 and 2010-11. However, in the immediately preceding Assessment Year 2010-11, the Assessing Officer had made the disallowance at the rate of 10%. In appeal, the CIT(A) restricted the amount of disallowance of INR 10 lakhs which was not disturbed by the Tribunal in appeal filed by the Revenue. In response, the Learned Departmental Representative referring to the assessment order submitted that the Assessing Officer had made the disallowance in view of the fact that the tax auditor 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 had reported that the possibility of personal expenses which were not allowable as deduction under Section 37 of the Act having debited to profit and loss account could not be ruled out. Further, as noted by the CIT(A) in paragraph 4.3 of the order impugned, the Assessing Officer had disallowed the deduction for entire expenses as the expenses were incurred in cash and were not fully supported by bill or vouchers. Even the ledger accounts furnished by the Appellant were bulky and Appellant could not substantiate the claim.

We have considered the rival contentions and perused the material on record. Some ledgers relating to travelling expenses have been placed before us and the same are bulky. Even the tax auditor has expressed opinion that the possibility of some expenses being of personal nature being debited to the Profit & Loss Account cannot be ruled out. We note that in the immediately preceding assessment year 2010-11, the assessing officer had, in similar facts and circumstances, adopted rate of 10% for making the disallowance. Accordingly, keeping in view the facts and circumstances of the present case we restrict the disallowance to 10% of the expenditure. Thus, Ground No. 2 raised by the Appellant is partly allowed.

We have considered the rival submissions and perused the material on record. We note that the Appellant has earned exempt dividend income of INR 6,20,419/- during the relevant previous year and therefore, the amount of disallowance under Section 14A of the Act cannot exceed the same in view of the judgment of Hon‟ble Supreme Court in the case of DCIT Vs. State Bank of Patiala: [2018] 259 Taxman 314 (SC)[08-10-2018] and the judgment of the Hon‟ble Bombay High Court in the case of Nirved Traders (P.) Ltd. v. Dy. CIT [IT Appeal No. 149 of 2017, dated 23.4.2019.

In view of the judgment of the Hon‟ble Gujarat High Court in the case of CIT Vs. Suzlon Energy Limited: 354 ITR 630 (Gujarat) [03-04-2013] cited by the Learned Authorised Representative for Appellant, we find merit in the contention advanced by the Learned Authorised Representative for Appellant that investment made in foreign subsidiary should be excluded while computing disallowance under Section 14A read with Rule 8D of the Rules since the dividend income of foreign subsidiaries is taxable in India and therefore, the Assessing Officer is directed accordingly. The Assessing Officer is also directed to verify and consider only the investments yielding exempt income during the relevant previous year while computing disallowance under Section 14A read of the Act with Rule 8D of the Rules as held by the special bench of the Tribunal in the case of ACIT Vs. Vireet Investment (P.) Ltd: [2017] 58 ITR(T) 313 (Delhi - Trib.) (SB).

Ground No. 3 raised by the Appellant is partly allowed in terms of our directions in paragraph 17 and 18 above. 10 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 Ground No. 4 20. Ground No. 4 pertains to disallowance of interest expenditure of INR 95,74,500/- made by the Assessing Officer and confirmed by the CIT(A).

During the assessment proceedings, the Assessing Officer that the Appellant had given interest free deposit of INR 6.5 Crores to related parties in terms of Leave & License Agreements. Interest free deposit of INR 1 Crore each were given to Asit C. Mehta Commodities Services Pvt. Ltd. and Asit C. Mehta Financial Services Ltd. Similarly, interest free deposit of INR 2.75 Crores and 1.75 Crores were given to Ms. Deena Asit Mehta and to Asit C. Mehta, respectively. The Assessing Officer also noted that the Appellant had claimed deduction of interest of INR 3.40 Crores on borrowed funds of INR 23.08 Crores. The Assessing Officer concluded that the borrowed funds were used for the purpose of making the aforesaid interest free deposit. Therefore, taking average interest rate of 14.73%, the Assessing Officer disallowed INR 95,74,500/- (6.5 Crores x 14.73%) under Section 36(1)(iii) of the Act. Being aggrieved the Appellant carried the issue in appeal before the CIT(A) who confirmed the aforesaid disallowance made by the Assessing Officer following the decision of Hon‟ble Allahabad High Court in the case of CIT vs. Sahu Enterprises Private Limited : (2013) 352 ITR 8 (Allahabad). Being aggrieved the Appellant has preferred appeal before us on this issue.

The Ld. Authorised Representative for the Appellant appearing before us submitted that the Assessing Officer has admittedly recorded that the deposits were made with the object of 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 reducing the rental cost of office premises taken under Leave & License Agreement and therefore, the act of making deposits should be looked at from the perspective of commercial expediency. Relying upon the judgment of the Hon‟ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT : 288 ITR 1 (SC) he submitted that no disallowance under Section 36(1)(iii) of the Act can be made since interest free deposits were made on account of commercial expediency for the purpose of business of the Appellant. The Ld. Authorised Representative for the Appellant submitted that sufficient owned/interest-free funds were available to make the deposits. Relying upon the judgment of Hon‟ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd.: (2009) 313 ITR 340 (Bom) he submitted that it should be presumed that deposits were made out of the aforesaid funds and therefore no disallowance was warranted under Section 36(1)(iii) of the Act. Per contra, the Ld. Departmental Representative submitted that the deposits wer not made by the Appellant on account of commercial expediency but for the purpose of shifting profits and circumventing taxable rental income of the licensors. He placed reliance upon decision of the Tribunal in the case of Deena Asit Mehta vs. DCIT:[ITA No. 3549/Mum/2016, Assessment Year 2012-13, pronounced on 09.02.2018]. He submitted that in the aforesaid decision, while examining the Leave & License Agreement, the Tribunal had observed that the security deposits were hugely disproportionate to the leave & license fee and that the security deposits were made to circumvent real rent. The Tribunal had, therefore, directed the Assessing Officer to estimate interest on security deposit at the rate of 9% and bring the same to tax in the hands of Ms. Deena Asit Mehta as & 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 leave & license fee under the head „Income from House Property‟. In rejoinder, the Ld. Authorised Representative for the Appellant submitted that it is admitted position that the interest free deposits made with the Directors of the Appellant-Company (namely Asit C. Mehta and Ms. Deena Asit Mehta) were received back during the relevant previous year as the aforesaid Directors had subscribed and paid for 9% cumulative preference shares of INR 4.5 Crores.

We have heard the rival contention and perused the material on record including the judicial precedents/decisions cited during the course of hearing. We note that out of INR 6.5 Crores given as interest free deposits INR 4.5 Crores were received back as subscription amount for 9% cumulative preference shares during the relevant previous year and were available for utilization for the business of the Appellant. As regards balance amount of INR 2 Crores, a perusal of the balance-sheet as on 31.03.2012 shows that the Appellant had sufficient owned/interest free funds to make deposits as well as interest bearing funds, and therefore, as per the judgment of the Hon‟ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (supra) it can be presumed that the interest free deposits were made out of owned/interest free funds and therefore, disallowance under Section 36(1)(iii) of the Act was not warranted. As regards, the findings returned by the Tribunal in the case of Deena Asit Mehta (supra) are concerned; we note that the same were given after examining the leave & license transaction from the perspective of the licensor and not from the perspective of licensee. In view of the aforesaid, we reverse the decision of CIT(A) on this issue and delete the addition of 4448/Mum/2018 Assessment Years: 2012-13 & 2013-14 INR 95,74,500/-made by the Assessing Officer. Ground No. 4 raised by the Appellant is allowed.

By way of the present appeal the Appellant/Assessee has challenged the order, dated 18.03.2013.06.201816, passed by the Ld. Commissioner of Income Tax (Appeals)-9, Mumbai [hereinafter referred to as „the CIT(A)‟] for the Assessment Years 2013-14, whereby the CIT(A) had partly allowed the appeal filed by the Appellant/Assessee against the Assessment Order, dated 11.03.2016 passed under Section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as „the Act‟).

All the grounds raised

In the result, the appeal filed by the Appellant for the Assessment Year 2012-13 ( Appellant for the Assessment Year 2013-14 (ITA No. 4448/Mum/2018) is allowed.