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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: Shri Mahavir Singh & Shri G Manjunatha
O R D E R Per G Manjunatha, AM : This appeal filed by the assessee is directed against the order of CIT(A)- 10, Mumbai dated 31-03-2013 and it pertains to AY 2004-05. 2. The brief facts of the case are that the original assessment in this case was completed on 21-12-2006 u/s 143(3), determining taxable income of Rs.1,08,99,893. In the original assessment, the AO has disallowed expenses claimed against short term capital gain like interest on borrowed capital, service tax and audit fees on the ground that the assessee has failed to establish nexus between the borrowed funds and the investment in shares.
The AO further observed that liability of other expenses like audit fees and service tax is not related to the investment activity of the assessee. The appeal filed by the assessee against the order of the CIT(A) has been set aside by the ITAT, with the direction to the AO to afford one more opportunity to the assessee to substantiate expenses with necessary evidence. In the second round of assessment, the AO has disallowed expenses claimed by the assessee against income from short term capital gain on the ground that the assessee has failed to establish nexus between loans and investment in shares. The relevant portion of the order of AO is extracted below:-
“5 N o t w i t h s t a n d i n g t h e o b s e r v a t i o n s / r e m a r k s o f t h e appellate authorities reproduced above ,since the assessment proceedings are quasi-judicial proceedings the assessee was given a long rope to prove his case The Tribunal has directed the assessing officer to give one more opportunity but in the interest of natural justice and fair play three opportunities on 11.02.2010 ,17.02.2010 and 20.02.2010 were given to the assessee to establish his case. But no new evidence or new submission was provided by the assessee. Had the assessee provided a new evidence mew submission it would have been possible to consider the entire issue afresh But since the assessee has not given neither any new evidence nor any new submission it is not possible to arrive at a new decision . However taking into consideration of the spirit of the order of the Tribunal the material produced was carefully examined After a careful perusal of the evidence produced before me the same is rejected as the assessee has failed to establish the nexus between the borrowed funds / interest payment and the investment in shares. Hence, the submission of the assessee in this regard is rejected and the addition made in the original assessment order dated 21.12.06 is confirmed.
6 In connection with the third issue the representative of the assessee produced the photo-copies of five share broker's bills dated 21.10.03 , photo- copy of ledger account of D-mat account charges, photocopy of the bill of accounting charges paid to Mr. Gulati CA for professional services The assessee has claimed that the service tax payments and D-mat charges, accounting charges paid to M R Gulati should be allowed as expenditure in the computation of Short term capital gain. The representative has stated that all the above expenditure are directly related to the earning of short term capital gain. In respect of the accounting charges paid to Mr Gulati CA the representative also submitted an alternative plea that if the expenditure is not allowed under the head "short term capital gain "the same needs to be considered for allowance under the head ' business income." The representative has not established that how the D'mat charges and the service tax mentioned in share brokers bill are directly related to the transfer of shares resulting in short term capital gain The D'mat charges and the share brokers bill for service tax are common expenditure incurred in relation to the entire gamut of the share transactions indulged in by the assessee and they do not have any direct link with the specific share transactions resulting in short term capital gain. The assessee has failed to establish the link .Mere production of five photocopies of five contract notes dated 21.10.03 and ledger account of D'mat charges is not sufficient to establish that the above expenditure is related to the STCG .Hence the claim of the assessee in this regard is rejected.
Aggrieved by the assessment order, the assessee preferred appeal before the CIT(A). Before the CIT(A), the assessee has filed elaborate written submissions. The assessee further contended that it has borrowed loans from various parties which is evident from the fact that loans has been credited to the bank account which are used for investment in shares. The assessee further contended that demat charges and service tax on brokers’ bill is paid
exclusively in connection with purchase and sale of shares. Therefore, the AO was incorrect in disallowing expenses against income from short term capital gain. The CIT(A), after considering relevant submissions of the assessee observed that except making repeated submissions which were putforth in earlier appellate proceedings before the CIT(A) as well as before ITAT, the assessee has not at all adduced any documents or evidence to substantiate its claim of interest expenditure as well as demat charges. It is important that the assessee should give evidence or documents to prove that such interest expenditure and demat charges are incurred for the purpose of earning the income which was subjected to tax. The CIT(A) further observed that inspite of several opportunities, the assessee could not adduce any such documents or evidence to justify expenses. Therefore, he considered it appropriate held that the AO was completely correct and justified in denying the claim of interest expenditure as well as demat charges. Aggrieved by the order of CIT(A), the assessee is in appeal before us.
We have heard both the parties, perused the material available on record and gone through the orders of authorities below. In the first round of litigation, the ITAT has set aside the issue to the file of the AO for fresh adjudication. The AO has rejected the explanations of the assessee with regard to the claim of interest expenditure and demat charges on the ground that the assessee has failed to establish nexus between borrowed funds and investment in shares. It is the contention of the assessee that it has borrowed funds from various parties to invest in shares which is evident from the fact that the loans borrowed has been routed through bank account from which the assessee has made payments for investment in shares. The assessee further contended that demat charges are directly linked to investment activity of the assessee which has been paid for maintaining demat account, therefore, there is a direct nexus between expenditure incurred towards demat charges and income generated from investment activity.
Having heard both sides, we find force in the arguments of the assessee for the reason that the assessee has filed a paper book containing various details of loans borrowed and investment in shares. On perusal of the details filed by the assessee, we find that the assessee has routed loans borrowed from his bank account which has been used for investment in shares.
Therefore, we are of the view that the AO was incorrect in disallowing interest paid on loans borrowed. Insofar as demat charges is concerned, the assessee has paid demat charges for maintaining portfolio investments which is having direct nexus with the income generation activity of the assessee. The assessee has filed details of payment of demat charges. In respect of service tax paid on purchase and sale of shares, the assessee has filed contract notes in support of payment of service tax. On verification of the details filed by the assessee, we find that the assessee has paid service tax on purchase and sale of shares.
Therefore, we are of the view that there is a direct nexus between expenditure incurred by the assessee and investment activity. Hence, we are of the view that the AO was incorrect in disallowing service tax and demat charges. The CIT(A), without appreciating the facts has simply upheld additions made by the AO. Hence, we set aside the order of CIT(A) and direct the AO to allow expenditure claimed by the assessee towards interest, service tax and demat charges.
In the result, appeal filed by the assessee is allowed. Order pronounced in the open court on 08th November, 2017.