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Income Tax Appellate Tribunal, “G” Bench, Delhi
Before: SHRI R. K. PANDA & MS. SUCHITRA KAMBLE
PER R.K. PANDA, A.M: These are cross appeals. The first one is filed by the assessee and the second one filed by the Revenue and are directed against the order dated 28th February, 2013 of the CIT(A)-XII New Delhi relating to assessment year
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2009-10. For the sake of convenience both the appeals were heard together and are being disposed of by this common order. ITA No. 3206/Del/2013 (Assessee)
Although a number of grounds have been raised by the assessee they all relate to the order of Ld. CIT(A) in confirming the addition of Rs. 81,53,443/- and Rs. 59,27,785/- made by the AO under section 40(a)(ia) on account of non deduction of TDS.
Facts of the case in brief are that the assessee is a company and is a member of National Stock Exchange, Bombay Stock and MCX-SX. It is also earning brokerage income from providing platform of trading in shares etc and also engaged in its own trading of shares. It filed its return of income on 29th September, 2009 declaring an income of Rs. 3,48,590/- During the course of assessment proceedings, the AO observed that assessee has debited an amount of Rs. 1,24,58,945/- as brokerage. From the various details filed by the assessee, he observed that assessee has paid brokerage of Rs. 2,39,64,252/- and earned brokerage of Rs. 1,40,16,546/-. He, therefore, asked the assessee to file the details of TDS deducted on such payment under the provisions of Section 194H of the Income Tax Act. It was replied by the assessee that it has not deducted any TDS from the brokerage payment as per the provisions of explanation (i) to section 194H of the Income Tax Act. It was argued that in case of authorized sub broker, no TDS provision is applicable as they were dealing in securities. However, TDS was deducted on payment of brokerage to authorised persons pertaining to F and O segment. 4. However, the AO was not satisfied with the explanation given by the assessee. He observed that in a particular case of client M/s J.V. Stock Broking
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Private Limited, the assessee has paid an amount of Rs. 81,52,443/- on account of brokerage. No TDS was deducted from this payment. From the copy of the agreement filed, the AO noted from clause 7 of the agreement with the said company that M/s J.V. Stock Broking Private Limited was to be paid branch running expenses as consideration for managing whole of the affairs of the branch. From the details filed for branch running expenses, he observed that no amount is being shown for this sub broker as being paid. Therefore, this amount which actually pertains to branch running expenses has been shown under commission and brokerage paid and later justified that TDS was not to be deducted on this amount. Since according to the AO, TDS was deductible on amounts paid for branch running expenses under section 194C of the Act and the assessee has not deducted TDS as per the provisions of Section 40(ia) of the Act, the AO made addition of Rs. 81,52,443/- to the total income of the assessee. 5. The AO further noted that the explanation of the assessee that certain persons were exempted from the deduction of TDS from the brokerage as per the provisions of section 194H is not acceptable. He observed that brokerage paid is not for buying or selling security but for introducing clients and therefore the TDS provisions are applicable to the assessee. Since the assessee has not deducted TDS from such payment the AO disallowed an amount of Rs. 59,27,785/- under section 40(ia) of the Income Tax Act. 6. In appeal, the learned CIT(A) upheld both the additions made by the AO under section 40(ia) by observing as under: “I have perused the facts stated in assessment order as well facts stated by the assessee in his submission and the comments of the Assessing Officer dt. 31.12.12 & 26.2.13 respectively. Clause 7 of the agreement with J.V. Stock Broking Pvt. Ltd is important which states that:
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“That out of total brokerage earned an amount*equivalent to 0.05% on the jobbing turnover value and a charge of 0.05% on the delivery turnover value shall be retained by the first party and the balance amount of brokerage earned shall be paid by the first party to the second party for managing whole of the affairs of the branch as Branch running Expenses. This arrangement may be reviewed with mutual consent of both the parties from time to time. ” From the above, it is clear that this agreement is contrary to assessee's submission stated supra. Hence the nature of transaction is of a work contract covered u/s 194C and TDS is applicable. Further, in respect of the addition of Rs. 59,27,785/- the Assessing Officer has stated that: “Vide its submission dated 14.12.11 the assessee has stated that the nature of brokerage paid to sub-broker/authorized persons. It was paid to mobilize business for the company and introduce clients to the company. The brokerage paid is not for buying or selling of securities. But it is for introducing clients and getting business for the assessee. Hence in this cases where TDS has not been deducted on account of payment for brokerage done is being added back to the income of the assessee as per provisions of section 40 (ia) of the Act.” Keeping in view of the above stated fact, I uphold both the additions made by the assessing officer of Rs. 81,53,443/- & 59,27,785 on account on non deduction of TDS.”
Aggrieved with such order of the CIT(A), the assessee is in appeal before the Tribunal challenging the addition of Rs. 81,51,443/- and Rs. 59,27,785/- under section 40(ia) of the Income Tax Act.
The learned counsel for the assessee vehemently challenged the order of the CIT(A) in upholding the addition made by the AO under section 40(ia) of the Act of both the amounts for non deduction of tax. He submitted that the company is an authorised stock broker and member of National Stock Exchange of India Limited and Bombay Stock Exchange Limited. That being the authorised Stock Broker, the company is dealing in purchase and sale of shares and derivatives on behalf of the clients on brokerage basis. The company gets clients through own efforts and also takes services of authorized sub brokers / persons for cash segment and for F & O segment. The brokers / authorized persons are appointed by the trading members of the Stock Exchange to act as
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agents of the concerned trading member for assisting the investors in buying, selling or dealing in securities of capital market segments as well as in future F & O segment. Referring to the provisions of section 194H, he submitted that the commission or brokerage does not include payment for services in relation to securities. Referring to the decision of Mumbai Bench of the Tribunal in the case of ACIT vs. M/S S.J. Investment Agencies P. Ltd. 107, vide ITA No. 3820/Mum/2009 with CO No. 01/Mum/2010 order dated 23rd February, 2011 for AY 2006-07 he submitted that the Tribunal in the said decision has upheld the order of the CIT(A) in deleting the disallowance of sub brokerage made by the AO under section 40(ia) of the Income Tax Act. Referring to the decision of the Mumbai Bench of the Tribunal in the case of Prayas Securities Pvt. Ltd., Mumbai vs. Assistant Commissioner of Income Tax vide ITA No. 4731/Mum/2010 order dated 10th August, 2011 for assessment year 2006-07 he submitted that similar view has been taken and it has been held that any payment of commission or brokerage made in respect of a transaction in securities is not covered by the requirement of tax deduction under section 194H of the I.T. Act. It has been held that the assessee, which has paid commission or brokerage to the sub brokers for mobilizing business and securities was not required to deduct the tax. He submitted that similar view has been taken by the Mumbai Bench of the Tribunal in the case of Jain Investment vs. ITO in ITA No. 3663 / Mum / 2010 order dated 24th February, 2011 for assessment year 2006-07 and in the case of M/s Tanna Agro Impex P. Ltd., vs. Addl. Commissioner of Income Tax, Range 2(3) vide ITA No. 3224/Mum/2010 order dated 29th July, 2011 for assessment year 2007-08. He accordingly submitted that this being a covered matter in favour of the assessee, therefore the grounds raised by the assessee should be allowed. In his alternate contention, the learned counsel for the assessee submitted that
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since the payee has already offered the commission income to tax, therefore, in view of the decision of the Hon’ble Supreme Court in the case of Hindustan Coca Cola Beverages Private Ltd vs. CIT reported in 293 ITR 226 no disallowance can be made under section 40(a)(ia) of the Income Tax Act. 9. The learned DR on the other hand heavily relied on the order of the AO and the CIT(A). 9.1. We have considered the rival arguments made by both the sides, perused the orders of the AO as well as CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the assessee in the instant case is a member of National Stock Exchange, Bombay Stock Exchange and MCX Stock Exchange. It has paid certain amount to different brokers and sub brokers on which no tax has been deducted for which the AO made disallowance under section 40(ia) of the Income Tax Act for violation of the provisions of section 194H / 194C and made addition of Rs. 81,52,443/- and Rs. 59,27,785/- respectively. We find in appeal the learned CIT(A) upheld the action of the AO and such reasoning of the CIT(A) has already been reproduced in the preceding paragraphs. 10. It is the submission of the learned counsel for the assessee that provisions of section 194H are not applicable to commission / brokerage paid in respect of a transaction in securities. We find the Mumbai Bench of the Tribunal in the case of S.J. Investment Agencies Private Ltd (Supra) while dealing with such an issue has dismissed the appeal filed by the Revenue against the order of the CIT(A) deleting the addition made. The relevant observation of the Tribunal at para 6 of the order reads as under: “After considering the arguments and submission we agree with the 'findings of the CIT(A). The provisions of section 194H are as under: - “194H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the ist day of June, 2001, to a resident, any
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income by way of commission (not being insurance commission referred to in section 194D) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of [ten] per cent: Provided ... Provided ... Provided ..... Explanation.—For the purposes of this section,— (i) “commission or brokerage” includes any payment received or receivable, directly or indirectly^ by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities; (ii) .… ..... (iii) ...... (iv) As can be seen from the above provision, the commission or brokerage definition does not include transactions in securities. There is no doubt that Mutual Funds are categorised as securities on which there is no. objection from the Revenue either before the A.O. or before the CIT(A). In fact the CIT(A) also gives a finding that the A.O. has not disputed that units of Mutual Funds are securities as per Securities Contracts (Regulation) Act, 1956. Assessee is in the business of Mutual Funds distribution and investment agent. From the details of brokerage received and service tax deducted there from it can be seen that out of the brokerage income of Rs. 8,28,56,873/- the brokerage income of ?8,27,47,095/- is from Mutual Funds. The balance brokerage of Rs. 1,09,779/- is towards bonds and fixed deposits. The sub- brokerage is paid in relation to units of Mutual Funds. From the details placed on record, we ar e convinced that the sub-brokerage paid is connected with the services rendered in the course of buying and selling of units of Mutual Funds or in relation to transactions pertaining to Mutual Funds and as per the provisions of section 194H Explanation (i) these are not covered by the provision for deduction of tax at source. There is nothing on record, to indicate that the sub-brokerage is paid for any other services other than relating to securities. The A.O. also accepts that the brokerage received by the assessee is not covered by TDS whereas he was of the opinion that the sub-brokerage paid is covered by the provisions. We are unable to understand this logic of the A.O. For these reasons, we are of the opinion that the order of the CIT(A) does not require any modification and accordingly the same is confirmed. Revenue’s grounds on this issue are accordingly rejected.
We find the Mumbai Bench of the Tribunal in the case of Prayas Securities Pvt. Ltd. (Supra) while dealing with an identical issue reads as under: “So far as the payment of NSE charges is concerned, it appears to us that section 194H which is referred to in the assessee's reply dated 19.11.2008 to the Assessing Officer (reproduced in page 2 of the assessment order) is not applicable since they are only payments to the sub-brokers for mobilizing business for the assessee, who is
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actually the broker of NSE. The payment is for the services of the sub-brokers in relation to the securities. Explanation (i) below section 194H excludes from the purview of "commission or brokerage" any payment made for services rendered in the course of buying or selling or in relation to any transaction relating to securities and the word "securities" is defined in Explanation (iii) to have the same meaning assigned to it under the Securities Contracts (Regulation) Act, 1956, which we have already referred to. The effect of these provisions is that any payment of commission or brokerage made in respect of a transaction in securities is not covered by the requirement of tax deduction under section 194H of the Act. Therefore, the assessee which has paid commission or brokerage to the sub-brokers for mobilizing business in securities was not required to deduct the tax. In this view of the matter the disallowance made under section 40(a)(ia) in respect of NSE charges is also not justified.”
In view of the above decisions cited (Supra) we are of the considered opinion that assessee has not violated the provisions of section 194H of the Income Tax Act so as to enable the AO to make addition / disallowance under section 40(ia) of the Income Tax Act on account of non-deduction of tax from the brokerage paid to various parties. The learned DR could not distinguish the above decisions cited by learned counsel for the assessee nor could bring any material before us so as to take a different view than the views taken by the Mumbai Bench of the Tribunal. We, therefore, set aside the order of the CIT(A) and direct the AO to delete the addition.
ITA No. 3217/Del/2013 (Revenue)
The grounds raised by the Revenue are as under:
i. The Ld. CIT(A) erred in law and on facts in directing the AO to rework the amount of disallowance u/s 14A under the Rule 8D of the I.T. Rules 1962 in accordance with law laid down by the Hon’ble Jurisdictional High Court in Maxoop’s case as well as the submission of the assessee. ii. The appellant craves, leave or reserving the right to amend modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.
Facts of the case in brief is that the AO during the course of assessment proceedings observed that assessee has earned an amount of Rs.
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66,00,000/- as exempt dividend income. However, the assessee has not disallowed any amount as per the provisions of section 14A. He, therefore, asked the assessee to explain as to why disallowance under section 14A should not be made. It was explained by the assessee that the dividend income is received on shares which are lying under the head investment for a long time. Such investments were made out of own funds and free reserves and no borrowed fund has been utilized. It was accordingly argued that no disallowance is called for. On being asked by the AO, the assessee filed the computation of disallowance under section 14A according to which such expenditure for earning the exempt income was Rs. 1,17,317/-.
2.1 However, the AO was not satisfied with the above calculation. Applying the provisions of section 14A read with Rule 8D he determined such disallowance at Rs. 28,46,727/-.
In appeal, the learned CIT(A) directed the AO to recompute the disallowance in the light of the decision of Hon’ble Delhi High Court in the case of Max up Investment. The relevant observation of Ld. CIT(A) reads as under : FINDING Ground No.3 (a) & (b): I have perused the facts stated in assessment order as well facts stated by the assessee in his submission. The assessee has stated that the details of interest expenditure were filed, during the course of assessment proceedings showing interest of Rs. 1,59,67,466/- paid on margin money to his clients where trade was done by the clients and this amount was excluded from their calculation since on trade done by his clients assessee earns brokerage and commission which is his main business and thus this interest is directly attributable to business income of the assessee which is within the meaning of ‘any particular income or receipt’ and it relates to earning of taxable income by the assessee and is allowable as such against the said income. This amount of interest the ITO has not excluded in his calculation which was to be allowed. Therefore balance amount of interest of Rs. 75, 74,007/- is only to be considered for purposes of Rule 8D. The average of total current assets is to be considered for the purposes of rule 8D where as the Assessing officer has taken it as net
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assets i.e. total assets less liabilities as shown in the balance sheet of the assessee. The average of total assets as per submission of the assessee is Rs.59,00,06,383/- and not Rs.8,16,37,220/.-
Moreover the word used in Rule 8 D is total asset not net asset. Rule 8D sub rule (ii) part C states:- The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year. The term ‘Total Assets’ means total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.
Keeping in view of the above facts, the Assessing Officer is therefore directed to rework the amount of disallowance u/s 14 A of the Act under the rule 8 D of the I.Tax I Rules, 1962 in accordance with law laid down by the Hon'ble Jurisdictional High Court in Maxoop's case as well as submission filed by the assessee. The appeal is allowed for' A statistical purposes.”
Aggrieved with such order of CIT(A) the revenue is in appeal before the Tribunal.
After hearing both the sides, we don’t find any infirmity with order of Ld. CIT(A). He has only directed the AO to rework the disallowance u/s 14A r.w. Rule 8D in the light of the decision of the Jurisdictional High Court in the case of Maxopp (supra). The decision of the Jurisdictional High Court is binding on the revenue. Therefore, the revenue should have no grievance. The ground raised by the revenue is accordingly dismissed. In the result the appeal filed by the assessee is allowed and the appeal filed by the revenue is dismissed. (Order Pronounced in the Open Court on 15/06/2017) Sd/- Sd/- [SUCHITRA KAMBLE] [R.K. PANDA] Judicial Member Accountant Member DATED: 15 .6.2017 SH/ Binita Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT
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ASSISTANT REGISTRAR
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