SHAREKHAN LTD,MUMBAI vs. ASST CIT CEN CIR 22, MUMBAI

order s dtd.27.06.2013 and 14.02.2014,of the CIT(A)-39,Mumbai the Assessing Officer(AO)and the assessee have filed cross appeals for the above mentioned two assessment years(AY.s.).Considering the fact that the issues involved in both the appeals are almost identical,we are adjudicating them by a single common order for the sake of convenience.Assessee-company is engaged in the business of share broking.Details of dates of filing of returns,returned incomes,dates of assessments etc.can be summarised as under: AY. ROI filed on Returned Income Asst.date Assessed income 2009-10 29.09.2009 37.94crore 23.12.2011 49.25crore 2010-11 06.10.2010 150.44crore 26.03.2013 156.99crore ITA/5581/Mum/2013,AY.-2009-10: 2.First ground of appeal filed by the AO deals with deleting the addition, amounting to Rs. 5. 48 crore,made by him towards bad debts. During the assessment proceedings, the AO found that the assessee had made a claim of Rs.5,48,62,845/- under the head bad debts claiming that the amount was receivable from the clients in the course of the business carried out. It was further claimed that due to disputes with the clients amount in question was no more receivable and was written off as bad debts. However the AO was not convinced and held that the amount claimed as bad debt had never been taken into account for computing the 5470+3/M/ (09-10&10-11) M/s. SharekhanLtd.

3.Next ground of appeal is about deleting the addition of Rs. 1.92 crore that was treated as speculative loss,under section 73 of the Act, by the AO. During the assessment proceedings, the AO found that assessee had claimed settlement loss of Rs.1,92,57,672/-. He directed the 5470+3/M/ (09-10&10-11) M/s. SharekhanLtd. assessee to show cause as to why the same should not be treated as speculation loss. In its reply the assessee contended that loss was on account of a trade,that due to disputes with the clients for the transactions it did not change the relation principle, that assessee for business consideration chose not to recover the losses, that the losses were in the course of business and should be allowed as such under section 28 of the Act. However, the AO rejected the claim made by the assessee and treated the transaction as speculation transaction in view of the Explanation to section 73 of the Act and made a disallowance of Rs. 1.92 crore. 3.1.Aggrieved by the order of the of the AO, the assessee preferred an appeal before the FAA.After considering the submissions of the assessee and the assessment order, the FAA held that the assessee had incurred losses due to the fact that certain clients did not own up the purchase of shares, that it had to take delivery and to sell the same, that the loss had risen from such incidents, that such loss did not arise from any purchase of the shares made by the assessee for itself,that there was no doubt about the genuineness of the losses. Referring to the order of his predecessor for the assessment year 2008 – 09, he allowed the appeal filed by the assessee. 3.2.During the course of hearing before us, the Authorised Representative(AR) and the Departmental Representative(DR) agreed that issue stands decided against the AO by the orders of the Tribunal for the A.Y.s 2007-08 and 2008-09(supra).We are reproducing the relevant portion of the order for the assessment year 2007-08 that deals with the issue before us and it reads as under: 8. XXX….. Applying explanation to section 73 of the Act Ld. AO has held such transaction as speculation transaction and in this manner a sum of Rs.2,32,77,523/- was disallowed. While allowing the relief Ld. CIT(A)has taken into consideration the fact that the assessee is one of the dominant retail stock broking house in India and is having a net work of 159 own branches and 1000 plus business partners across the country. The cliental of the assessee is over ten lacs retail customers and has a DP cliental of approximately ten lacs clients and it employs 3500 personnel operating in 360 cities nationwide. In view of these facts, Ld. CIT(A) has observed that there are chances of mistake which resulted into disown by the person in whose account such transaction has been entered . Keeping in view all these facts Ld. CIT(A) has held that explanation to section 73 would not be applicable in view of the decision of ITAT in the case of M/s. Parker Securities Ltd. vs. DCIT, 102 TTJ 235. Ld. CIT(A) has reproduced the relevant portion from the said decision and has granted impugned relief to the assessee. The Revenue is aggrieved, hence, has filed aforementioned ground. 8.1 Ld. DR relied upon the order passed by AO, as against that Ld. AR has relied upon the following decisions: 1. in Asst. CIT vs. IDFC SSKI Sec. Ltd. 2.102 TTJ 235 (Ahd-Tib) Parkar Securities Ltd. vs. Dy. CIT 3. 91 TTJ 57 (Del-Trib) Asst. CIT vs. Subhash Chand Shorewala 8.2 It was contended that Ld. CIT(A)did not commit any error in granting the relief to the assessee and aforementioned decisions support the case of the assessee.

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in that case read as under: “1.On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in allowing the loss of Rs.2,36,36,821/- as business loss even when the same is specifically covered under section 73 of the Act.

2. The appellant craves to leave to add, to amend and/or alter any of the grounds of appeal, if need be”” 9.1 The assessee placed reliance upon following decisions:

1. ITO vs. GDV Share & Stock Broking Services Ltd., 88 TTJ (Cal) 352

2. M/s.Parker Securities Ltd. vs. DCIT, 102 TTJ (Ahd) 235. 3.33 CCH 124 (Mum-Trib) HSBC Securities & Capital Markets India P. Ltd., vs. ACIT 4.139 R 149 (AP), CIT vs. Shah Pratapchand Nowpaji 5. 91TTJ 57 (Del-Trib) ACIT vs. Subhash Chandra Shorewala. 6.50 SOT 592 (Ahd-Trib) ITO vs. Rajiv Securities P. Ltd. After considering these decisions the Tribunal has held as under:

5. We have heard both the parties and their contentions have carefully been considered. Right from the assessment proceedings it was the case of the assessee that the impugned loss has occurred to the assessee in respect of error trade. Due to dispute with the clients, for the transaction, it does not change the relation of principal and the agent. The assessee for business consideration chooses not to recover the losses. These losses are in the course of business and should be allowed as such under section 28 of the Act. All these contentions of the assessee have been recorded in the assessment order in para 3.3. The AO has not brought any material on record to suggest that these contentions of the assessee are either false or incorrect. No material has also been brought on record that these losses are on account of assessee’s own trading in shares. If it is so, the loss accrued to the assessee will be governed by the aforementioned decisions of Tribunal where consistent view has been taken that loss occurred to share broker on account of client disowning transaction is business loss and not speculative loss. Therefore, we are of the opinion that Ld. CIT(A) did not commit any error in accepting the claim of the assessee. Accordingly, we decline to interfere and Departmental appeal on this ground is dismissed. 5.1 Before parting of the Departmental appeal it may be mentioned that amount stated by the Department in its grounds of appeal is wrongly mentioned as Rs.2,36,36,821/-, whereas the same is Rs.2,65,07,464/-. In view of the above discussions the Departmental appeal is dismissed. In the aforementioned decision both of us are parties. Therefore, following the aforementioned view we hold that Ld. CIT(A) has rightly decided the issue and we decline to interfere and this ground of the Revenue is dismissed. Respectfully, following the above order, we dismiss second ground raised by the AO.

4.Last ground of appeal is about disallowance made by the AO under section 14. A of the Act. In the assessment proceedings, the AO observed that the assessee had both taxable as well as exempt income, that it maintained consolidated accounts precluding the possibility of establishing one-to-one nexus between the expenditure and exempt income, that the assessee itself had disallowed Rs.13.25 lakhs.He directed the assessee to show cause as to why disallowance under section 14. A of the Act read with Rule 8D of the Income Tax Rules, 1962 (Rules) should not be made. Accordingly, he computed the disallowance at Rs.4,00,52,243/-, thereby adding back Rs. 3.87 crore (Rs. 4 crore (-) Rs. 13.25 lakhs).

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4.1. The assessee challenged the order of the AO before the FAA and stated that investments in shares was financed out of the interest-free fund available at its disposal, that there was not credit in income under the head interest, that interest-bearing funds were raised only for financing the clients, that such interest expenditure was allowable under section 36(1) of the Act,that provisions of rule 8D(2)(iii) were not applicable, that all the expenses debited to the profit and loss account were incurred for earning taxable income only, that it had made investment in subsidy companies, that the investments in research studies were made between the assessment year 2006-07, that it had already disallowed a sum of Rs. 13.25 lakhs. After considering the submission of the assessee and the assessment order, the FAA referred to the order for the assessment year 2008-09 of the then FAA. In that matter it was held that the assessee had invested its surplus fund for making investments, that the borrowed funds were not borrowed for the purpose of investing a mutual funds,that interest-bearing funds were borrowed for its business purposes and were used in the business operations only. He directed the AO to verify the working given by the assessee about investment in exempt income and to decide the disallowance of interest.He held that disallowance made by the assessee of Rs.13.25 lakhs was towards the interest with respect to investment in case of shares of subsidiary.He upheld the disallowance made by the AO under Rule 8D (2) (iii) of the Rules. 4.2. Before us, the AR argued that the reserves and surplus(Rs. 653.59 crore) was greater than the investment made during the year (Rs.12.26 crore),that there was net credit in the interest account,that the assessee had established direct nexus between interest received and interest paid, that dividend distribution tax had been paid in respect of dividend earned, that the dividends or not exempt income.He referred to the cases of HDFC Bank Ltd (383 ITR 529), Jivrajka Associates Private Ltd.(40CCH 424). 4.3. We have heard the rival submissions and perused the material before us. We find that the AO had disallowed and amount of Rs. 4,00,52, 243/-(under the head interest-2.84 crore and under the head 0.5% of investment-Rs. 1.15 crore), that the FAA,referring to the order for the assessment year 2008-09,had upheld the disallowance of Rs.1.15 crore, that he had directed the AO to recompute the disallowance made under the head interest expenditure.We find that similar issue had arisen in the AY.2008-09 (supra)also.The Tribunal had dealt the issue as under - “19. The AO has also made disallowance under Section 14A by invoking Rule 8D. By the impugned order CIT(A) deleted the disallowance on account of interest, however, he has confirmed the disallowance under Rule 8D 2 (iii) …..

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filed by the assessee is about disallowance of depreciation on BSE Card of Rs.2.35 lakhs.During the course of hearing before us,the AR fairly conceded that the issue stands decided against the assessee by the order of the Tribunal for the AY.2007-08 (supra).We find that the Tribunal had held as under:

2. Ground No.1 is against the addition upheld by Ld. CIT(A) in respect of depreciation claimed on BSE Membership Card. During the course of hearing, it was fairly conceded by Ld. AR that this issue is covered against the assessee by the decision of Hon’ble Bombay High Court in the case of CIT vs. Techno Shares and Stock Ltd. & Others, 323 ITR 69, wherein Hon’ble Bombay High Court has held that depreciation is not allowable on the BSE Membership Card as it does not fall in any of the categories specified in section 32(1) of the Income Tax Act 1961 (the Act). Therefore, after hearing both the parties we dismiss ground No.1 filed by the assessee.” Respectfully,following the above,we decide first ground of appeal against the assessee.

6.Next two grounds of appeal are about disallowance made u/s. 14. A of the Act.We have narrated the facts of the case in the earlier part of the order.We have held that there was no justification for making disallowance under the head interest expenditure.Following the same we decide ground no.2 in favour of the assessee. As far as ground no.3 i.e. disallowance under Rule 8D(2)(iii)is concerned it is found that the Tribunal has restored back the issue to the file of the AO for fresh adjudication while deciding the appeal for the AY.2008-09(supra).Following the same we direct the AO to decide the issue afresh,after affording a reasonable opportunity of hearing to the assessee. Ground no.3 is decided in favour of the assessee,in part.

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ITA/3027/Mum/2014-AY.2010-11: 7.Both the effective grounds of appeal

,raised by the AO,are identical to the first two grounds of the earlier year.Following our order for that year,we dismiss both the grounds. ITA/2729/Mum/2014-AY.2010-11: 8.First ground of appeal is about disallowance under section 14. A of the Act. Following our order for the earlier years we hold that no disallowance should be made under the head interest expenditure.We would like to restore back the matter to the file of the AO for deciding the issue of disallowance to be made under Rule 8D (2) (iii) of the Rules. He would afford a reasonable opportunity of hearing to the assessee. First ground is decided in favour of the assessee, in part. 9.The assessee did not press 2nd ground of appeal, hence, same stands dismissed as not pressed. 10.Next ground of appeal is about disallowance of education cess under section 40a(ii) of the Act,amounting to Rs.1.48 crore. Before us,the AR argued that assessee had not made any claim in the return, that a letter in that regard was furnished before the AO. 10.1.During the appellate proceedings, the FAA held that the allowablity or otherwise of any sum was subject to the provisions as stipulated in the Act, that there was no provision in the Act to allow the said claim of deduction.Finally,he upheld the addition of the disputed amount. 10.2.Before us,the AR stated that even if the amount in question was to be disallowed there should not be any addition that had been made by the AO at page 12 of his order. The DR left the issue to the discretion of the Bench. After considering the rival submissions, we are of the opinion that the AO was not justified in making the addition. We decide the 3rd ground accordingly. 11.Last ground of appeal deals with disallowance of lease provision, under section 40a (ia) of the Act, amounting to be 76.34 lakhs.The AR stated that details of rent were filed before the AO on 19/10/2012,that he did not call for further details regarding tax deducted at source, that tax deducted were paid within due date of filing of return, that assessee was ready to go back to the AO. The DR stated that matter could be decided on merits. Considering the above facts,we are of the opinion that matter should be restored back to the file of the AO for fresh adjudication. He would decide the issue after affording reasonable opportunity of hearing to the assessee. The assessee would submit the necessary details before the AO. Last ground is decided in favour of the assessee, in part.