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Before: Shri Mahavir Singh & Shri G Manjunatha
O R D E R Per G Manjunatha, AM : These two appeals filed by the revenue are directed against separate, but identical orders of the CIT(A)-9, Mumbai both dated 19-10-2015 for the assessment year 2011-12 and 2012-13. Since facts are common and issues are identical, these appeals were heard together and are disposed of by this common order, or the sake of convenience.
2. The assessee has raised common grounds of appeal for both the 2011-12 are extracted below:-
1. “"on the facts and in the circumstances of the case, the Ld. CIT(A) erred in directing the AO to recompute and restrict the disallowance u/s 14A to the extent 20% of disallowance made under Rule 8D(2)(ii) on the Stock where no such restriction have been mentioned.
2. "on the facts and in the circumstances of the case, the Ld. CIT(A) erred in allowing the appeal of the assessee regarding disallowance of Sub Brokerage and Commission amounting to Rs. 2,05,60,817/- for non deduction of TDS as Sub Brokerage and Commission comes under the preview of section 194H of the Act.”
By these grounds of appeal, the revenue has challenged two issues, viz.
(i) restriction of disallowance made u/r 8D(2)(ii) to 20%; and (ii) deletion of addition made by the AO towards disallowance of brokerage and commission u/s 40(a)(ia) of the Act.
The brief facts of the case are that the assessee is a company engaged in the business of securities and broking, filed its return of income for the assessment year 2011-12 on 12-09-2011 declaring Nil income. The case has been selected for scrutiny and statutory notices u/s 143(2) and 142(1) of the Act were issued. In response to the notices, the authorized representative of the assessee appeared from time to time and filed necessary details, as called for. The assessment was completed u/s 143(3) on 10-02-2014 determining disallowance of expenditure incurred in relation to exempt income u/s 14A of the Act, and disallowance of sub brokerage and commission u/s 40(a)(ia) of the Act, for failure to deduct tax at source u/s 194H of the Income-tax Act, 1961, disallowance on account of brokerage income and addition towards deemed speculation loss. Aggrieved by the assessment order, assessee preferred appeal before CIT(A).
Before the CIT(A), the assessee has filed elaborate written submissions to argue that the issue of disallowance u/s 14A is covered in favour of the assessee by the decision of ITAT, for the assessment year 2010-11. The assessee further submitted that the issue of disallowance of sub brokerage and commission expenses u/s 40(a)(ia) for failure to deduct tax at source is also covered by the decision of ITAT for AY 2010-11. Insofar as addition towards difference in brokerage and commission income is concerned, the assessee has filed a reconciliation explaining the difference quantified by the AO. The CIT(A), for the detailed discussion in his order dated 19-10-2015 restricted the disallowance worked out by the AO u/s 14A to 20% of the disallowance made by the AO by relying upon the decision of ITAT in assessee’s own case for earlier assessment year. As regards disallowance of commission and brokerage paid to sub brokers, the CIT(A) deleted the addition made by the AO dealing in securities is not covered u/s 194H. Insofar as addition made by the AO towards difference in brokerage and commission income, the CIT(A) observed that the assessee failed to explain the difference quantified by the AO with necessary evidence. Aggrieved by the order of CIT(A), the revenue is in appeal before us.
The first issue that came up for our consideration is restriction of disallowance u/s 14A to the extent of 20% of disallowance made u/r 8D(2)(ii) of IT Rules, 1962. The Ld.AR for the assessee submitted that the issue is covered in favour of the assessee by the decision of ITAT, in assessee’s own case for the assessment year 2010-11 in dated 29-04-2015, wherein the ITAT restricted the disallowance to be made u/r 8D(2)(ii) to 20% of the amount computed in respect of shares held as stock in trade. The relevant portion of the order is extracted below:-
3. “Before us, the Ld A.R submitted that the assessing officer was not correct in including the value of shares held as "stock in trade" for computing the Average value of investments. However, we notice that an identical issue was considered by a Co-ordinate Bench of the Mumbai Tribunal in the case of DOT V/s Damani Estates and Finance Pvt. Ltd in (AY-2008- 09) and the Tribunal, vide its order dated 17.7.2013, has taken the view that the disallowance computed under Rule 8D(2)(ii) qua the shares in stock-in-trade would be restricted to 20% of the amount computed under Rule 8D(2)(ii). The relevant portion of the “The second component, qua interest expenditure in r.8D(2)(ii), however, presents a problem in a case as the instant case. This is as the sub-rule, as would be readily seen, seeks to quantify the interest on the investments, income from which is not taxable, on a proportionate basis, and which though is not only understandable, but is as appropriate and justifiable as a general formula could be. However, in the instant case, shares, which yield the tax exempt dividend income, interest qua which is to be disallowed, being held as stock-in-trade, also yield share trading income, which is taxable. Therefore, to say that the entire interest relatable to the average share holding is to be attributed to the tax exempt dividend income would be patently incorrect on facts. That, in fact, the shares are bought and held primarily for share trading income, further accentuates the apparent incongruity of the situation arising on the mechanical application of r. 8D(2)(ii). Clearly, therefore, the amount as per r. 8D(2)(ii) would need to be scaled down, bifurcating the expenditure so arrived at between these two incomes. As regards the ratio of such scaling down, no hard and fast rule for the purpose would hold, each fact situation being different. However, considering that the dominant objective of the share holding, which in our view should be dispositive of the matter, is the share trading income, we propose a ratio of 20% toward the tax-exempt dividend income. One could argue that the percentage suggested by us is ad hoc or not scientific. We have already explained that an indirect expenditure, including by way of interest, has no direct relation with the income, much less its quantum, allocating it on the basis of the income generated or arising would not be appropriate, and neither does rule 8D support the same. Further, that in arriving at the suggested rate of 20%, we have been guided principally by the fact that the share trading is the dominant object of the share-holding. We also consider it pertinent to mention that though the average share-holding may be the same, the share composition, in view of the share trading activity, would vary continuously; the turnover for a year being easily in the range of 4 to S times the average shareholding. Accordingly, in arriving at the disallowance u/r. 8D, the amount as per r.
As regards the legal mandate for the adjustment aforesaid, we have already clarified of the manifestly incorrect, if not absurd results that would otherwise follow. In fact, in our view, the language of r. 8D(2)(ii) itself provides the mandate inasmuch as it prescribes or authorizes a disallowance only qua investment, income from which is not taxable, so that in limiting the amount worked out with reference to the total investment; the same also yielding taxable income, we have only sought to operationalize and implement the said rule. It would also be appreciated that not doing so would also violate the principle of only the net income (from any source) being subject to tax inasmuch as disallowance of the total interest as per r. 8D(2)(ii) would in effect bring the share trading income to tax without deduction of the interest expenditure allocable or attributable thereto. Needless to add that no adjustment would arise in respect of shares held as 'investments', so that the two parts would need to be separately computed, which is otherwise manifest in the computation itself."
Consistent with the view taken by the co-ordinate bench in the above said case, we direct the assessing officer to restrict the disallowance to be made under Rule 8D(2)(ii) of the IT Rules to 20% of the amount computed under that Rule in respect of Shares held as "stock in trade". The disallowance to be made under Rule 8D(2)(ii) in respect of Shares held as investment has to be computed in accordance with Rule 8D(2)(ii) only. In respect of the disallowance to be made under Rule 81D(2)(iii), the Co-ordinate bench has taken the view that the shares held as stock in trade should also be included in computing the Average value of investments. Hence, no interference is called for in the computation made by the AO under Rule 8D(2)(iii). In view of the above, the order of Ld CIT(A) shall stand modified in accordance with the discussion made supra. The assessing officer is accordingly directed to recompute the disallowance in terms of discussion made supra.”
In this view of the matter and being consistent with the view taken by the co- ordinate bench, we direct the AO to restrict the disallowance to be made u/r shares held as stock in trade.
The next issue that came up for our consideration is disallowance of sub brokerage and commission paid to sub brokers dealing in securities. The Ld.AR for the assessee submitted that the issue is covered in favour of the assessee by the decision of ITAT, in assessee’s own case for AY 2010-11 in order dated 13-04-2016, wherein the co-ordinate bench, under similar set of facts observed that commission or brokerage definition u/s 194H does not include any transaction in security as it has been specifically excluded from payment as stipulated in Explanation to section 194H of the I.T.
Act, 1961. Therefore, the assessee need not deduct TDS on sub brokerage and commission paid to brokers dealing in securities. The relevant portion of the order is extracted below:-
After considering the relevant finding given in the impugned orders and various decisions relied upon by the Ld. Counsel, we find from the orders that, assessee had paid sub-brokerage and commission to its agents for dealing with the securities, that is, in connection with the services rendered in the course of buying and selling of shares / securities. Explanation to section 194H defines the commission and brokerage as for the purpose of section 194 I-i in the following manner: "1 94H. Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D) or 8 & 141/Mum/2016 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..... P r o v i d e d . . . . . Explanation. —For the purposes of this section,- '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) Thus, commission or brokerage definition does not include 9. any transaction in security as it has been specifically excluded from payment as stipulated in Explanation to section 194H. There is nothing on record to prove that sub-brokerage has been paid for any other services other than relating to securities. Once that is so, we do not find any reason to deviate from the findings of the CIT(A) which in turn is based on the various decisions of the Tribunal, Accordingly, the ground raised by the revenue is dismissed.”
In this view of the matter and being consistent with the view taken by the co- ordinate bench in assessee’s own case for AY 2010-11, we direct the AO to delete addition made towards disallowance of sub brokerage and commission u/s 40(a)(ia) of the Act, for failure to deduct tax at source u/s 194H of the Act.
In the result, appeal filed by the revenue for AY 2011-12 is dismissed.
The facts and issues involved in this appeal are identical to ITA No.140/Mum/2016. Therefore, our findings recorded above in shall apply mutatis mutandis to the present appeal also.
Therefore, we dismiss the appeal filed by the revenue for the assessment year 2012-13 also.
In the result, both the appeals filed by the revenue are dismissed. Order pronounced in the open court on 27th October, 2017.