ICICI SECURITIES LTD ( EARLIER KNOWN AS ICICI BROKERAGE SERVICES LTD),MUMBAI vs. ADDL CIT RG 4(1), MUMBAI

First, we may take-up the appeal of the assessee in ITA No. 5789/Mum/2010 wherein the Grounds of appeal read as under:-

Briefly put, the relevant facts are that the assessee is a company incorporated under the provisions of the Companies Act, 1956 and is a member of the National Stock Exchange and Bombay Stock Exchange Ltd. The

The first Ground raised by the assessee pertains to disallowance of Depreciation of Rs.29,49,800/- on Stock Exchange Card. The claim of Depreciation on Stock Exchange Card was disallowed by the Assessing Officer. On appeal, CIT(A) held that the issue of claim of Depreciation on Stock Exchange Card is covered against the assessee by the decision of Hon’ble Bombay High Court in the case of CIT vs. Techno Shares & Stock Limited in ITA No. 971 of 2006 and 218 of 2007. Aggrieved by the order of CIT(A), assessee is in appeal before us.

At the time of hearing, the ld. Representative for the assessee fairly pointed out that the above issue is covered by the decision of co-ordinate bench in the case of Sino Securities (P.) Ltd. vs. ITO [2012] 134 ITD 321 (Mumbai) wherein it was held that BSE Card is not an asset of the nature referred under Section 32(1)(ii) of the Act and thus, depreciation on the said asset is not allowable. Thus, the ld. Representative agrees that the issue is

The next issue pertains to disallowance of Client Assistance Charges and Client Maintenance Charges paid by the assessee to ICICI Bank Ltd. In this regard, the relevant facts are that during the year under consideration, the assessee paid Rs.1,09,54,85,747/- to ICICI Bank Ltd. towards client servicing charges. The charges comprised of :-

There existed a Service Agreement dated 04.06.2004 (‘original agreement’) between the assessee and ICICI Bank (“Bank”) which was renewed by an amendment agreement dated 20.03.2006 effective from 01.04.2005. During the year under consideration, the Client Assistance and Maintenance Charges were paid by assessee to the Bank under the said amended agreement. The nature of activities provided by the Bank to the assessee included soliciting customers, cross-selling icicidirect.com to the customers, capturing leads and referring customers to the Bank's sales team, contacting customers referred through lead captures, giving demo of icicidirect.com to walk-in customers, training the customer to trade and assisting him to put through a trade, form filling, documentation etc., providing facilities to the

The details of Client Assistance Charges comprised of charges for the deputed staff location-wise and fixed amount per session cost for metro and non-metro locations in assessment year 2005-06 and present year i.e. assessment year 2006-07 are placed at page 65 of the Paper Book. The assessee paid a sum of Rs.62,33,14,500/- to the Bank for Client Assistance Charges out of which Rs.20,29,59,185/- was disallowed by the Assessing Officer.

A separate agreement dated 01.04.2005 catered to provision of services by the Bank to assessee's customers through its Finnacle system to enable them to trade online using the assessee's platform called ICICI Direct.com. Charges of the Bank were fixed at Rs.150 per quarter per customer for the 3- in-1 account which linked the customer's Trading account with his Bank account and Depository account maintained with the Bank. The Bank, in turn, incurs costs for Finnacle licences, annual maintenance and support of the systems, lease lines, IT security, etc. apart from other operation costs. Copy of the agreement along with Annexure - A enumerating the scope of services is placed at pages 66-76 of the Paper Book. A flow chart showing the link

The Assessing Officer disallowed (a) Rs.42,43,44,600/- being payments made by the assessee under the agreement dated 01.04.2005 as not having been incurred wholly and exclusively for the purpose of its business for the reasons stated in paragraphs 8.17 to 8.24 of the assessment order. Two principal reasons for the disallowance are that (i) the agreement dated 01.04.2005 was a colourable device to transfer the assessee's profit to ICICI Bank Ltd. without paying Dividend Distribution Tax (“DDT”) of 12.5% during financial year 2005-06 and 15% from 01.04.2006, that both being related parties, the transactions were not at arm’s length price and had been entered for extra commercial considerations; (ii) the 3-in-1 accounts were maintained and hence were mutually beneficial to both parties, viz., the assessee and the Bank, and thus, payment was for non-commercial considerations (b) Rs.20,29,59,185/- as excess payment made under the amended agreement dated 20.03.2006 on the ground that the increase in rate with retrospective effect was not genuine and was a means to transfer the assessee's profit without payment of DDT. The CIT(A) has confirmed the disallowance, against which assessee is in appeal before us.

At the outset, it has been asserted that the CIT(A) has wrongly observed in para 5.3.1 (b) of his order that the amendment dated 30.06.2004 to the agreement dated 04.06.2004 was suppressed before the Assessing Officer. It has been brought out that there is a specific reference to the agreement dated 30.06.2004 in the Statement of Facts before the CIT(A) stating that the

The ld. Representative referred to the discussion by the Assessing Officer, in paragraph 8.18 while considering the services in relation to the 3-in- 1 accounts, to the effect that 'For all these services, the assessee was making payment to the bank in earlier years as per the existing agreement' and then holds 'the bank has not provided any additional services during F.Y.2005-06 for which it has been paid by the assessee in terms of the provisions of agreement dated 1.4.2005.' It has been pointed out that in the earlier year, expenditure for the same type of services has not been disallowed as non-business expenditure or on the ground that the service agreement was a colourable device. Part disallowance made under Section 40A(2) of the Act in the past was deleted by the Tribunal on the ground that the fact of services provided to the assessee by the Bank is not disputed. As the services were genuine, the agreement under which the payment was made can neither be said to be colourable device to transfer profit and nor the disallowance of the entire expenditure is justified on the ground that it was not laid out for the purpose of assessee's business. It is contended that the stand of the Assessing Officer that corresponding benefit by way of increase in deposits and receipt of transaction charges when the Demat account was utilised was derived by the Bank from which it made earnings, is of no consequence. It is well settled that once the nexus between the expenditure and the purpose of the business has been established, as in the present case, the Revenue cannot claim to put itself in the armchair of the businessman and disallow the expenditure. It was open to the Assessing Officer to disallow expenditure which he considered excessive or unreasonable under Section 40A(2) of the Act provided the onus of proving

It was further submitted that the stand of the Assessing Officer that the Client Maintenance Charges were paid to ICICI Bank in lieu of dividend to evade the Dividend Distribution Tax is not justified for the reason that the agreement pursuant to which the Client Maintenance Charges were fixed was entered into on 01.04.2005, i.e. at the beginning of the year, at which point in time the assessee could not have predicted whether or to what extent it would earn profits during the year. These charges were paid irrespective of profits earned by the assessee.

In respect of the disallowance of Rs.20,29,59,185/-, it was submitted that the Assessing Officer has worked out the disallowance by comparing the salary cost per employee per branch per annum mentioned in the agreement dated 04.06.2004 and the amendment dated 20.03.2006. It has been explained that in doing so, the Assessing Officer has overlooked the amendment dated 30.06.2004; and, that it was clear from a comparison of the salary cost per employee per branch per annum under the original agreement and the two subsequent amendments that there is no increase between the

We have carefully considered the rival submissions and perused the material on record. The limited controversy before us is whether the Client Assistance Charges and Client Maintenance Charges paid by the assessee to Bank for services provided by the Bank is allowable or not. Firstly, we shall discuss the Client Assistance Charges paid by the assessee to Bank during the year under consideration. In this regard, we find that the assessee had claimed Rs.62,33,14,500/- towards Client Maintenance Charges, of which the Assessing Officer disallowed only Rs. 20,29,59,185/- treating the same to be excessive. Thus, it is an undisputed fact that the Bank has provided services to the assessee and it is not the case of the Assessing Officer that no services have been provided by the Bank to the assessee. Thus, the Assessing Officer, in effect, has disputed the quantum of expenditure and we shall accordingly restrict ourselves to that question. The Assessing Officer has disallowed the excess payment holding that during the year under consideration the assessee has increased the Client Assistance Charges paid to the Bank as compared to earlier year and such increase was not justified and, therefore, the increased amount was disallowed by the Assessing Officer. It was also held by the Assessing Officer that the Bank is a related party and assessee has tried to shift the profit to Bank to avoid paying Dividend Distribution Tax on profits earned by the assessee which can be distributed to the ICICI Bank. It is also the case of the Assessing Officer that the agreement entered into by the assessee is a

In light of our above discussion, we find that the increase in client assistance cost is justified by the corresponding increase in turnover and moreover, the increase in cost was due to the fact that the Bank had served more locations as compared to the preceding year, which can be termed as an expansion of business and not excess payment, as sought to be made out by the Assessing Officer. We accordingly set aside the order of CIT(A) and direct the Assessing Officer to allow the entire Client Assistance Charges paid by the assessee to Bank.

As regards the disallowance of Rs. 42,43,44,660/- towards Client Maintenance Charges, the Assessing Officer noted that the assessee has entered into agreement dated 01.04.2005 with the Bank to pay Rs. 150 per customer per quarter towards Client Maintenance Charges. The Assessing Officer noted that in earlier years also, similar payments were made and the scope of this service is covered in the main agreement and that there was no need to enter into separate agreement for this service. As per the Assessing Officer, the entire arrangement is a colourable device and has been entered in order to shift the profits to ICICI Bank, which is stated by him to be a related party in terms of Section 40A(2)(b) of the Act. Before us, the ld. Representative for the assessee has argued that the said payment has been made for the purpose of technical support provided by the Bank with respect

As explained by the ld. Representative for the assessee, the business model of the assessee and ICICI Bank Ltd. is such that it cannot function in isolation without the use of the technical support from ICICI Bank Ltd. The clients execute transactions on the software maintained and operated by the Bank. The Bank incurs various expenditure for operation and maintenance of the software and, in turn, recovers it from the assessee. It is not the case of the Assessing Officer that the software on which clients of the assessee carry on the transactions is owned by the assessee. The question that arises for consideration is, if the Bank does not own any software, how does it serve its customers? This question remains unanswered in the assessment order. Secondly, if the assessee was owning and maintaining such software, the assessee would have incurred huge sum of expenditure and, in that case, the same would have been allowed as business expenditure. Instead of making such huge investment, the assessee is availing the services provided by ICICI Bank Ltd. and, in turn, paying the amount charged by it for providing services which the Assessing Officer has treated to be not for the purpose of the business. It was also pointed out before us that both the assessee and ICICI Bank Ltd. have earned profits and as such, it cannot be the case that instant

In light of our above discussion and the decision of our co-ordinate bench in assessee’s own case for assessment years 2004-05 and 2005-06, we hereby set-aside the order of the CIT(A) and direct the Assessing Officer to delete the addition made on account of Client Assistance and Client Maintenance Charges.

The next issue pertains to disallowance of Rs. 25,29,860/- under Section 14A r.w.r. 8D of the Income Tax Rules, 1962 (“Rules”). The assessee in its return of income claimed that it has not incurred any expenditure pertaining to exempt income earned by it during the year and, therefore, it did not disallow any part of the expenditure under Section 14A r.w.r. 8D of the Rules. In the course of assessment proceedings, assessee was asked to show cause why no disallowance under Section 14A r.w.r. 8D of the Rules should be made. The assessee submitted that it has not incurred any expenditure pertaining to exempt income. Further, it was submitted that assessee had sufficient own funds to make the investments and no interest bearing funds were utilized for the purpose of investment and, therefore, no disallowance under Section 14A r.w.r 8D of the Rules was warranted. The Assessing Officer without assigning any reason for rejecting the claim of the assessee proceeded to invoke Rule 8D of the Rules and disallowed Rs.22,68,864/- being proportionate interest expenditure and Rs. 2,60,996/- being 0.5% of the average value of investment. On appeal, CIT(A) upheld the action of Assessing Officer in making disallowance of Rs. 22,68,864/- and Rs.2,60,996/-. Aggrieved by the same, assessee is in appeal before us.

Before us, the ld. Representative for the assessee submitted that assessee was having own funds in the form of Share Capital and Reserves of Rs.38,38,14,093/- as against investment of Rs. 5,52,93,567/-. As such, it was having sufficient own funds and no disallowance of interest expenditure was warranted under Section 14A r.w.r.8D of the Rules. The ld. Representative for the assessee further relied on the decision of Reliance utilities & Power Ltd.

On the other hand, the ld. DR appearing for the Revenue has defended the stand of the lower authorities by reiterating the reasoning contained in the respective orders.

In this regard, we find that it is undisputed that as per Balance sheet of the assessee for the year ended 31.03.2006, Share Capital and Reserves stood at Rs.38,38,14,093/- as against investment of Rs. 5,52,93,567/-. Thus, admittedly, the own funds of assessee are higher than the investment made by the assessee. The Hon’ble Bombay High Court in the case of Reliance utilities & Power Ltd. (Supra) has held that if the own interest free funds of the assessee are higher than the amount of investment, then it should be presumed that the investment has been made out of the own funds and no disallowance of interest expenditure should be made. Respectfully following the decision of Jurisdictional High Court in the case of Reliance utilities & Power Ltd. (Supra), we hereby set-aside the order of CIT(A) and direct the Assessing Officer to delete the addition made in this ground.

Further, we find that Rule 8D was inserted in the statute w.e.f. assessment year 2008-09 and the Hon’ble Supreme Court in the case of CIT vs. Essar Techholdings Ltd. [2018] 90 taxmann.com 2 (SC) held that Rule 8D is prospective in operation and cannot be applied to any assessment year prior to assessment year 2008-09. We, in the present case, are concerned with assessment year 2006-07, which is prior to assessment year 2008-09, the provisions of Section 8D of the Act are not applicable for the year under

The next Ground pertains to disallowance of Bad debts of Rs.13,90,390/- by the Assessing Officer holding that assessee failed to submit details of bad debts and justification for its write-off. On appeal, CIT(A) upheld the action of the Assessing Officer following his order for assessment year 2004-05 in assessee’s own case. In this regard, the ld. Representative contended before us that there is no dispute that the bad debts have been actually written-off in the books of account of the assessee. It was further argued that as per Section 36(1)(vii) of the Act, the only condition for claiming deduction of bad debts is that the bad debts must be written-off in the books of account of the assessee; and, the assessee is neither required to give any justification for writing-off the bad debt and nor is he required to establish that the debt has actually become bad. In this regard, reliance has been placed on the decision of the Hon’ble Supreme Court in the case of T.R.F. Limited vs. CIT, 323 ITR 397 (SC). It was further pointed out that in assessment year 2004-05, similar matter had travelled to the Tribunal, and the claim has been allowed.

On the other hand, the ld. DR has defended the stand of the Assessing Officer by reiterating that the justification for write-off has not been spelt out and no efforts have been shown to be made for recovery.

In the result, appeal of the assessee is allowed.

Now, we take up the appeal of the Revenue wherein the Grounds of appeal read as under:-

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.2,35,929/- made by Assessing Officer.

(i) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs.3,21,50,335/- made u/s.40(a)(ia) in respect of transactional charges paid to Stock Exchange, without appreciating the facts that these were composite charges for

On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs. 65,660/- made in respect of mark to market losses of open interest in derivative transactions at the end of the year relying upon the Supreme Court of India in the case of CIT vs Woodward Governor India P. Ltd. 312 ITR 254 (SC).

On the facts and in the circumstances of the case, the impugned order of the Ld. CIT(A) is contrary to law to be set aside and that of the Assessing Officer be restored.”

The first Ground raised by the Revenue in its appeal pertains to deletion of addition of Depreciation of Rs. 1,23,00,800/- allowed in earlier years on BSE Card under Section 28(iv) of the Act. The facts in this regard are that the assessee received 10,000 shares of BSE Ltd. at Rs. 1 per share on demutualisation of BSE Ltd. during the year. The assessee had acquired

Before us, the ld. DR relied on the order of Assessing Officer to contend that the allowance of Depreciation to the assessee will amount to double deduction in the hands of the assessee; firstly, by way of allowance of Depreciation; and, secondly, while computing Capital Gains at the time of sale of share. Thus, to protect the Revenue, protective addition in the hands of the assessee to the extent of Deprecation claimed by the assessee was justified.

Per contra, the ld. Representative for the assessee submitted that in the present assessment year no benefit can be said to have been derived by the assessee under Section 28(iv) of the Act as in this year consequent to corporatisation and demutulisation of BSE, the assessee was allotted shares in substitution of the BSE card. Secondly, the assessee did not claim proportionate higher cost of acquisition of BSE card when it sold the shares. It claimed Rs. 1 per share and offered higher Capital Gains, which showed that no double benefit has been taken by the assessee. It was further submitted that this issue is covered in favour of the assessee by the decision of our co-

We have carefully considered the rival submissions and perused the material on record. We find that in the present case the addition on account of depreciation allowed in the earlier years on BSE membership card has been made by treating it as a benefit flowing to the assessee in the current year on protective basis for the reason that assessee has been allotted shares of BSE Ltd. pursuant to it holding BSE membership card; and, the apprehension of the Assessing Officer is that the assessee may claim cost of BSE membership card as expenditure while computing the Capital Gains at the time of sale of shares of BSE Ltd. In our opinion, no addition can be made merely on an apprehension that the assessee may take a double benefit in future. Assessment of income has to be made on the basis of ‘real income’ theory and not on the basis of any perceived future contingent happening. Moreover, in the instant case, it has been factually explained by the assessee that at the time of sale of part shares of BSE Ltd. in assessment year 2008-09, assesee has claimed cost of shares at Rs.1 and has not derived any double benefit as apprehended by the Assessing Officer and thus, addition on protective basis is not warranted. In our view, the CIT(A) has rightly analysed the fact-position that assessee has not derived any double benefit and accordingly, deleted the addition made by the Assessing Officer. We thus uphold the order of the CIT(A), and accordingly Revenue fails on this Ground.

The next Ground pertains to excess claim of Deprecation of Rs.2,35,929/-. The relevant facts are that assessee had not claimed the Depreciation for assessment years 2000-01 and 2001-02, and thereafter in

The next issue pertains to addition on account of non-deduction of TDS on transaction charges under Section 40(a)(ia) of the Act. The assessee paid transaction charges amounting to Rs. 3,21,50,353/- to the Stock Exchanges and did not deduct any TDS on the same. The Assessing Officer disallowed the expenditure under Section 40(a)(ia) of the Act relying upon his order for assessment year 2005-06. On appeal, CIT(A) deleted the addition made by the Assessing Officer relying on the decision of our co-ordinate bench in the case of Kotak Securities Ltd 25 SOT 440 wherein it was held that the Stock Exchange did not provide managerial services to its members and the fees paid by the member were not for any technical services, hence tax was not deductible on the same. Aggrieved by the same, Revenue is in appeal before us.

The ld. DR before us relied upon the order of Assessing Officer to contend that since TDS was not deducted on payment made to Stock Exchanges the disallowance under Section 40(a)(ia) of the Act was rightly made by the Assessing Officer.

Per contra, the ld. Representative for the assessee submitted that the question whether disallowance could be made in subsequent years has been considered by the Tribunal in ACIT vs. Twenty First Century Shares & Securities Ltd. [2014] 61 SOT 17 (Mum-Trib.). The assessment year involved therein was assessment year 2007-08. The Tribunal in that case referring to the decision in the case of ACIT vs. DICGC restored the matter to the file of Assessing Officer to ascertain whether the return of income for assessment year 2007-08 was filed before the completion of proceedings for assessment year 2006-07 (when the transaction charges were first disallowed) and whether the assessee was under a bonafide belief that it was not liable to deduct tax from transaction charges. The assessee in present case filed its return of income for assessment year 2006-07 on 30.11.2006 and the disallowance of transaction charges was first made in assessment year 2005-06 and assessment order for that year was passed after 30.11.2006. As such, assessee was under bonafide belief that tax was not deductible. It was thus argued that in light of the decision of our co- ordinate bench in the case of Kotak Securities Ltd. (supra) the disallowance has been rightly deleted by the CIT(A).

We have carefully considered the rival submissions. It is pertinent here to refer to the decision of the Hon’ble Supreme Court in the case of CIT vs. Kotak Securities Ltd. [2016] 383 ITR 1 (SC) wherein it was held that transaction charges are in the nature of payments made for facilities provided by the Stock Exchange and no TDS on such payments would, therefore, be deductible under Section 194J of the Act. Respectfully, following the decision of the Hon’ble Supreme Court in the case of Kotak Securities Ltd. (Supra), we hereby uphold

The next issue pertains to addition on account of mark to market loss on outstanding derivative contract of Rs. 65,600/-. The assessee claimed loss of Rs. 65,600/- on marked to market valuation of derivative contracts outstanding as at the year end. The Assessing Officer disallowed this loss as notional loss. On appeal, CIT(A) allowed the loss relying on decision of the Hon’ble Supreme Court in the case of CIT vs. Woodward Governor India P. Ltd. 312 ITR 254. Aggrieved by the decision of CIT(A), the Revenue is in appeal before us.

Before us, the ld, DR relied on the order of Assessing Officer to contend that the loss claimed by the assessee is notional loss and, therefore, the same should not be allowed.

Per Contra, the ld. Representative for the assessee relied on the order of CIT(A) and submitted that the issue is covered in favour of the assessee by the decision of Hon’ble Supreme Court in the case of Woodward Governor India P. Ltd. (supra) and also decision of the Hon’ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. 368 ITR 377 (Bom).

We find that the above issue is fully covered in favour of the assessee by the decision of Hon’ble Supreme Court in the case of Woodward Governor India P. Ltd. (supra). Accordingly, we do not find any infirmity in the order of the CIT(A) and thus we uphold the decision of CIT(A) on this issue.