PHILIP CAPITAL (INDIA) P.LTD,MUMBAI vs. ACIT CIR 4(2), MUMBAI

O R D E R

Per Ravish Sood, JM

P a g e | Philip Capital (India) Pvt. Ltd. Vs. ACIT, Circle 4(2) “Aggrieved by the order passed by the Commissioner of Income-tax (Appeals)- 9, Mumbai [hereinafter referred to as the „learned CIT(A)‟], under section 250(6) of the Income-tax Act, 1961 (Act) and based on the facts and circumstances of the case, Phillip Capital (India) Private Limited (formerly MF Global Sify Securities India Private Limited) [hereinafter referred to as the Appellant] respectfully submits that the learned CIT(A) erred in upholding the order of the Additional Commissioner of Income- tax Range 4(2), Mumbai [hereinafter referred to as the learned Assessing Officer], on the following grounds:

1. On the facts and in the circumstances of the case, in disallowing expenditure of Rs.3,45,944 attributable to earning exempt income relying on the provision of Rule 8D of the Act read with section 14A.

2. The CIT (A) has erred in law and on the facts, in not allowing 100% claim of expenses of Rs.1,07,51,192/- on account of foreign travelling expenditure considering the same as remote and illusionary, which was wholly and exclusively being incurred for the purpose of business. The authority were also not justified in just allowing 50% claim of expenses on general and arbitrary basis and the claim of expenses is fully supported and verifiable and there is no valid basis for such balance disallowance.

3. The CIT (A) has erred in law and on the facts, in adding a sum of Rs.6,03,890/- on account of „Unexplained Deposits‟ collected from various clients, relying on the provisions of Sec.68 of the Income Tax Act 1961 („the Act‟) without appreciating the efforts that your assessee had made to provide sufficient available details for each and every such credit in its account.

4. On the facts and circumstances of the case and law applicable thereto, the Ld. Assessing Officer erred in initiating penalty proceedings u/s 271(1)(c) of the Income Tax Act, 1961.”

2. Briefly stated, the assessee company which is engaged in the business of broking, clearing and depository services had e-filed its return of income for A.Y. 2010-11 on 09.12.2010, declaring income at Rs.28,52,80,164/-. The return of income filed by the assessee was processed as such under Sec.143(1) of the I.T Act. Subsequently, the case of the assessee was selected for scrutiny assessment under Sec.143(2).

Sr. No. Particular Amount 1. Disallowance under Sec.14A Rs.3,45,944/- (in respect of tax free dividend income of Rs.2,82,776/-) 2. Disallowance of foreign travelling expenses Rs.1,07,51,192/-

P a g e | Philip Capital (India) Pvt. Ltd. Vs. ACIT, Circle 4(2) 3. Addition towards unexplained cash credit Rs.6,03,890/- under Sec.68 In the backdrop of the aforesaid additions/disallowances the income of the assessee was assessed at Rs. 29,69,81,190/-.

P a g e | Philip Capital (India) Pvt. Ltd. Vs. ACIT, Circle 4(2) in the course of the hearing of the appeal dismissed the same as not pressed.

P a g e | Philip Capital (India) Pvt. Ltd. Vs. ACIT, Circle 4(2) during the year was liable to be vacated. Insofar the addition towards unexplained cash credit of Rs. 6,03,890/- sustained by the CIT(A) was concerned, it was submitted by the Ld. A.R that the assessee keeping in view the smallness of the amount therein involved had not pressed the said addition in the course of hearing of the appeal before the CIT(A). It was submitted by the Ld. A.R that as a similar addition was deleted by the Tribunal in the assesses own case for the immediately preceding year i.e. A.Y. 2009-10, therefore, following the view therein taken the addition made during the year was liable to be deleted.

7. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material and judicial pronouncements relied upon by them. We shall first advert to the disallowance under Sec. 14A of Rs. 3,45,944/- made by the A.O, which pursuant to certain directions of the CIT(A) was partly modified. The aforesaid disallowance under Sec. 14A of Rs. 3,45,944/- made by the A.O comprised of viz. (i) under Rule 8D (2)(ii) : Rs. 37,767/-; and (ii) under Rule 8D(2)(iii) : Rs. 3,08,178/-. Insofar the disallowance u/Rule 8D(2)(ii) made by the A.O is concerned, it is the claim of the assessee that as it had sufficient own funds for making investments in the exempt dividend income yielding shares, therefore,

P a g e | Philip Capital (India) Pvt. Ltd. Vs. ACIT, Circle 4(2) no disallowance was called for in respect of the interest expenditure by attributing any part of the interest bearing borrowed funds to making of such investments. As is discernible from the submissions made by the assessee before the CIT(A), it was the claim of the assessee that as against the investment of Rs. 6 crore made in shares of its two subsidiaries viz. MF Global Commodities India Pvt. Ltd. and MF Global India Pvt. Ltd., it had share capital plus free reserves of Rs. 185.83 crores, which were substantially higher than the investments made in the aforesaid exempt income yielding shares. In sum and substance, the assessee had tried to impress upon the CIT(A) that in the backdrop of sufficient own funds available for making the aforementioned investments no disallowance under Sec. 14A r.w. Rule 8D(2)(ii) was called for in its hands. We have deliberated at length on the aforesaid contentions advanced by the Ld. A.R in context of the disallowance under Sec. 14A r.w. Rule 8D(2)(ii) as had been sustained by the CIT(A). In our considered view there is substantial force in the contention of the Ld. A.R that in the backdrop of sufficient own funds available with the assessee for making the investments in the exempt income yielding shares, no disallowance under Rule 8D(2)(ii) could have validly been made. Our aforesaid view is fortified by the judgment of the Hon‟ble High Court of Bombay in the case of HDFC Bank Ltd. Vs. DCIT (2016) 383 ITR 529 (Bom). As regards the disallowance made by the A.O under Sec. 14A r.w. Rule 8D(2)(iii), we are in agreement with the contention advanced by the Ld. A.R that for the purpose of working out the „average of the value of investments‟ for computing the disallowance under Rule 8D(2)(iii) only those investments which had yielded tax free income during the year are to be considered. Our aforesaid view is fortified by the order of the “Special Bench” of the ITAT, Delhi in the case of ACIT Vs. Vireet Investment (P) Ltd. (2017) 82 Taxmann.com 415 (Delhi-Trib) (SB). In terms of our aforesaid

P a g e | Philip Capital (India) Pvt. Ltd. Vs. ACIT, Circle 4(2) observations, we are of the considered view that the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) shall be computed after excluding the investments which had not yielded any exempt income during the year under consideration. We thus in the backdrop of our aforesaid observations restore the matter as regards the computing of the disallowance under Sec. 14A r.w Rule 8D to the file of the A.O for fresh adjudication. The Ground of Appeal No. 1 is allowed for statistical purposes.

8. We shall now advert to the disallowance of 50% out of foreign travelling expenses aggregating to Rs. 1,07,51,192/- as had been sustained by the CIT(A). Admittedly, the A.O while framing the assessment in the case of the assessee for the immediately preceding year viz. A.Y. 2009-10 had disallowed 50% out of foreign travelling expenses aggregating to Rs. 91,94,433/-, which was thereafter confirmed by the CIT(A). On further appeal by the assessee, the Tribunal after deliberating at length on the facts of the case for the said preceding year viz. A.Y. 2009-10 was persuaded to subscribe to the claim of the assessee that no disallowance out of foreign travelling expenses was called for in its hands and had deleted the same. Insofar the year under consideration is concerned, we find that the facts leading to the disallowance of the foreign travelling expenses remain the same as were there before us in the appeal of the assessee for A.Y. 2009-10. In fact, the only distinguishing fact as is discernible from the records is that while for in A.Y. 2009-10 the A.O had disallowed only 50% of the foreign travelling expenses, however, during the year under consideration viz. A.Y. 2010-11 the entire claim of expenses booked by the assessee under the said head was disallowed by him. We have perused the order passed by the Tribunal in the assesses own case for A.Y. 2009-10 viz. M.F Global Sify Securities India Private Limited Vs.

P a g e | Philip Capital (India) Pvt. Ltd. Vs. ACIT, Circle 4(2) Addl. CIT (ITA No. 4407/Mum/2012), dated 01.09.2017 and find that the facts and the issue, as well as the reasoning adopted by the A.O for making the aforesaid disallowance had remained the same. Apart there from, the Ld. D.R had also admitted that the facts and issue leading to the disallowance of the foreign travelling expenses during the year under consideration are squarely covered in favour of the assessee by the order passed by the Tribunal in the assesses own case for A.Y. 2009-10.

“16. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record in context of the issue under consideration. We have given a thoughtful consideration to the issue before us and find substantial force in the contentions raised by the ld. A.R before us. We have deliberated on the material available on record and find that the assessee is a multinational company which primarily caters to its clients, which consists of Foreign Institutional Investors (FII) and Non Resident Indians (NRI‟s) based in foreign countries. We are of the considered view that in the backdrop of the very nature of the business of the assessee, it was indispensably required on its part to hold regular meetings with its clients, in order to both maintain as well as facilitate furtherance of the business relationships with them. We are of the considered view that in light of the business of the assessee whose Head office, as well as the offices of the other group companies are located outside India, frequent visits by the directors of the assessee company and its employees could not be ruled out. We now advert to the details of the foreign travelling expenses, which as claimed by the lower authorities had not been furnished by the assessee. We find that the assessee in order to substantiate the complete details of the foreign travelling expenses incurred by it to the last of the paisa, had placed on record the complete details of the foreign travelling expenses incurred for the year ended 31 March, 2008, aggregating to P a g e | Philip Capital (India) Pvt. Ltd. Vs. ACIT, Circle 4(2) Rs.91,94,433/-(Page 122 of „APB‟). We have deliberated on the details furnished by the assessee and find that the same is not merely an eyewash, but rather is duly supported by substantial in house details placed on record by the assessee (Page 220-261) of the „APB‟. We are persuaded to be in agreement with the contentions of the ld. A.R that there was an impeccable procedure for sanctioning by the assessee company of the foreign travelling undertaken by its employees/directors, as well as approval of the expenses incurred therein. We have given a thoughtful consideration to the issue before us and after deliberating on the material available on record in the backdrop of the contentions raised by the authorized representatives for both the parties, are unable to persuade ourselves to be in agreement with the view arrived at by the lower authorities in respect of the proportionate disallowance of the foreign travelling expenses in the hands of the assessee. We thus being of the considered view that the foreign travelling expenses which are irrebutably found to have been incurred by the assessee wholly and exclusively for the purpose of its business, therefore, find no justification for any proportionate disallowance of the said expenditure in the hands of the assessee. We thus delete the disallowance of Rs.45,97,216/-(supra) made by the A.O in respect of the foreign travelling expenses. The order of the CIT(A) confirming the aforesaid disallowance is thus set aside on the issue under consideration. The Ground of appeal No. 4 raised by the assessee before us is allowed”.

We thus following our earlier view delete the disallowance of 50% out of the foreign travelling expenses aggregating to Rs. 1,07,51,192/- as had been sustained by the CIT(A). The order of the CIT(A) in context of the aforesaid issue is set aside in terms of our aforesaid observations. The Ground of Appeal No. 2 is allowed.

10. We shall now take up the addition of the unexplained cash credit of Rs. 6,03,890/- made by the A.O under Sec. 68, which thereafter was sustained by the CIT(A). In the course of the assessment proceedings the A.O called upon the assessee to explain the „nature‟ and „source‟ of an amount aggregating to Rs. 1,54,28,474/- shown under the head “Temp A/c” as a current liability in its balance sheet for the year under consideration. Insofar an amount of Rs. 6,03,890/- shown by the assessee under the aforesaid head was concerned, the same could not be reconciled by the assessee. Resultantly, the A.O treating the said amount as an unexplained cash credit added the same to the total income of the assessee under Sec. 68 of the I.T Act.

P a g e | Philip Capital (India) Pvt. Ltd. Vs. ACIT, Circle 4(2) Admittedly, though the assessee had assailed the aforesaid addition by raising a specific ground of appeal before the CIT(A), however, the same was not pressed in the course of the proceedings before the said first appellate authority. On a specific query by the bench that now when the aforesaid addition made by the A.O under Sec. 68 was not pressed by the assessee before the CIT(A), then on what basis the same had been assailed before us, the Ld. A.R relied on the judgment of the Hon‟ble High Court of Bombay in CIT Vs. Behr India Ltd. (2016) 389 ITR 419 (Bom). It was submitted by the Ld. A.R that in the aforementioned case the Hon‟ble High Court of jurisdiction had upheld the order of the Tribunal and did not find any infirmity on the part of the latter in entertaining a ground which was dismissed by the CIT(A) as not pressed. It was submitted by the Ld. A.R that in the aforementioned case the claim of the revenue that the Tribunal had erred in entertaining a ground which was dismissed by the CIT(A) as not pressed was not admitted by the Hon‟ble High Court. In sum and substance, it was submitted by the Ld. A.R that even though the assessee on account of smallness of amount involved had not pressed before the CIT(A) the specific ground of appeal wherein it had assailed the addition of Rs. 6,03,890/- made by the A.O under Sec. 68, however, the same would not debar the assessee from raising the same in the present appeal before the Tribunal. We have given a thoughtful consideration to the aforesaid issue and are persuaded to subscribe to the contention advanced by the Ld. A.R that the assessee would not be fettered from assailing the aforesaid addition made by the A.O under Sec. 68, for the reason that the same was not pressed before the CIT(A).

11. In the backdrop of our aforesaid observations, we shall now proceed with the merits of sustainability of the aforesaid addition of P a g e | Philip Capital (India) Pvt. Ltd. Vs. ACIT, Circle 4(2) Rs. 6,03,890/- made by the A.O under Sec. 68, which as observed hereinabove was upheld by the CIT(A). We find that involving identical facts a similar addition towards unexplained credit of Rs. 29,91,792/- as was credited by the assessee in the “Client A/c” maintained with the banks was made by the A.O in the assesses own case for the immediately preceding year i.e. A.Y. 2009-10. The said addition was thereafter on appeal confirmed by the CIT(A). On further appeal by the assessee, the Tribunal after deliberating on the facts leading to the addition in hands of the assessee had deleted the same. We find that the facts and the issue leading to the aforesaid addition under Sec. 68 in the hands of the assessee during the year under consideration viz. A.Y. 2010-11, remains the same as were there before us in the assesses own case for A.Y. 2009-10. In fact, the Ld. D.R has admitted before us that the issue leading to an addition towards unexplained credit of Rs. 6,03,890/- under Sec. 68 in the present appeal was squarely covered in the favour of the assessee by the order of the Tribunal in the assesses own case for A.Y. 2009-10.

12. We have given a thoughtful consideration to the facts leading to the addition of Rs. 6,03,890/- under Sec. 68 in the hands of the assessee. In our considered view the issue involved in the present appeal is squarely covered by the order passed by the Tribunal in the assesses own case viz. M.F Global Sify Securities India Private Limited Vs. Addl. CIT (ITA No. 4407/Mum/2012), dated 01.09.2017 for A.Y. 2009-10. The Tribunal while deleting an addition of Rs. 29,91,792/- made by the A.O under Sec. 68, had observed as under :-

P a g e | Philip Capital (India) Pvt. Ltd. Vs. ACIT, Circle 4(2) early credit of money from the clients, advised them to deposit the money directly in the “Client account” maintained by the assessee with the banks at respective places. Though the clients as advised, after depositing the amounts in the bank account would intimate the same by way of letter or e-mail along with the proof of deposit to the assessee, who on the basis of the said communication would reconcile the deposits with the credits in the bank account, however, in certain cases either due to non communication by the clients or for some other reason the amounts deposited in the bank account of the assessee would not be reconciled. We had deliberated on the assessment records of the assessee for the A.Y. 2006-07 and A.Y. 2007-08, and are persuaded to be in agreement with the claim of the assessee that it was consistently, as a matter of practice, after the lapse of a period of three years, offering the unidentified amounts deposited by the clients in its bank account, for tax. We find that in the backdrop of the directions of SEBI to the President/Executive directors of all the Stock Exchanges, therein contemplating strict adherence of its rules regulating both the manner and the mode of dealing with the amounts received by the member brokers from its clients, which made it obligatory on their part to forthwith deposit such money received from the clients to the current or deposit account at a bank to be kept in the name of the member or in one consolidated client account for all the clients, the money deposited in the “Client account” maintained with the banks, would by no means loose the color and character as that of being the money of the clients. That still further, the strict regulations monitoring the withdrawal of the amounts from the “Clients account”, which clearly provided an embargo as regards utilization of the amounts credited in the “Clients account” for any other purpose, except for those contemplated therein, thus duly established that the amounts received in the “Clients account” exclusively belonged to the respective clients and would in no way be available to the assessee for being utilised for a purpose other than for the benefit of the client, which too had to be in strict compliance of the parameters laid down by SEBI. We thus in the backdrop of our aforesaid observations are thus of the considered view that it can safely be concluded that the assessee was holding the amounts lying in the “Clients account” only in a fiduciary capacity. We find that the issue that an amount held by a person in a fiduciary capacity cannot be brought to tax as an unexplained credit u/s 68, is no more res integra in light of the judgment of the Hon‟ble High Court of Bombay in the case of CIT Vs. Tanubhai D. Desai (1972) 84 ITR 713 (Bom), wherein the Hon‟ble High Court after referring to the rights and regulations of solicitors, in respect of the amounts of their clients held by them in a fiduciary capacity, had observed as under:- “The relevant principle laid down by the House of Lords in its judgment in that case is that if a person in a fiduciary position receives any financial benefit arising out of the use of the property of the beneficiary, he cannot keep it unless he is authorised to do so. Applying that principle the House of Lords held that on the facts of the case the solicitor was not authorised to keep the interest either by custom or by implied agreement, although, as a matter of fact, a similar practice had long been followed by a number of solicitors in the United Kingdom. As seen earlier, the relevant rules of this High Court do not permit a solicitor to treat the moneys P a g e | Philip Capital (India) Pvt. Ltd. Vs. ACIT, Circle 4(2) received by him from or on account of his clients as his personal moneys and such moneys are held by him in a fiduciary capacity. Even the income received from such moneys must equally be held by the solicitor in a fiduciary capacity. What the solicitor actually does with the income, i.e., whether he appropriates it to himself or not, is, in our opinion, a matter of no consequence. If he appropriates it to himself, it would simply amount to a breach of his fiduciary relationship and whatever may be the consequences in law would follow. But his unauthorised act of converting any part of the corpus or even the income derived therefrom which is not in accordance with the provisions of the rules of this High Court would not convert those amounts held by him in a fiduciary capacity into moneys held by him beneficially, for himself. In the said case before the House of Lords the solicitor had in fact converted the interest earned in that case to his own use, but none-the-less the House of Lords, on the basis that the moneys and, therefore, the interest also was held by the solicitor in a fiduciary capacity, held that the taxation must proceed on the basis that the income did not in fact belong to him and was not liable to be taken into computation in his personal assessment. A similar view has been taken by a Division Bench of the Calcutta High Court in CIT vs. Sandersons & Morgans (1970) 75 ITR 443 (Cal).” We are of the considered view that in the backdrop of the aforesaid judgment of the Hon’ble High Court, now when the amounts aggregating to Rs. 29,91,792/-(supra) credited in the “Clients account” maintained by the assessee with the bank, could safely be held to be the clients money which were held by the assessee in a fiduciary capacity, therefore, the same could not be assessed as the unexplained credit in its hands under Sec. 68 of the “Act”. We are of the considered view that in the backdrop of our aforesaid observations, the amount of Rs. 29,91,792/- (supra) could not have been assessed as the unexplained cash credit of the assessee under Sec.