ACIT CIR 4(2), MUMBAI vs. NETWORTH STOCK BROKING LTD, MUMBAI

The captioned appeal by revenue for Assessment Year [AY] 2009-10 assails order of Ld. Commissioner of Income Tax (Appeals)-8 [CIT(A)], Mumbai dated 31/08/2012 qua deletion of certain expenditure and disallowance u/s 40(a)(ia).

Briefly stated, the assessee was resident corporate assessee engaged in providing various financial services who e-filed its return of income for impugned AY on 29/09/2009 declaring total loss of Rs.12,65,32,695/-. The same was subjected to scrutiny assessment u/s 143(3) vide Assessing Officer [AO] order dated 27/12/2011 wherein the total income was determined at Rs.3,95,91,490/- after making certain disallowances. The assessee suffered net loss of Rs.4,12,42,406/- on account of ‘Share Trading activities and Arbitrage activities’ in the following manner:-

Another issue was related with disallowance u/s 40(a)(ia). The assessee paid a sum of Rs.1,92,88,405/- as ‘sub-brokerage charges’ but did not deduct TDS on these payments on the premises that no TDS was required to be deducted on these payments in terms of provisions of Section 194H. But not convinced, AO disallowed the same u/s 40(a)(ia). Aggrieved, the assessee preferred appeal before First Appellate Authority and raised similar contentions.

CIT(A) while holding that ‘inter-source set off’ was not permissible between speculative and non speculative activities simultaneously concluded that the assessee could not suffer such huge disallowance of business expenditure particularly when it was having single unified business activity. The assessee could not take benefit of ‘inter-source set off’ due to deeming fiction created by law u/s 73. He further observed that the expenses were nowhere in dispute and were incurred for business purposes of the assessee. Thereafter, he restricted the disallowance to 1% of ‘Head Office Expenditure’ of Rs.24,18,539/- incurred by the assessee. Regarding disallowance u/s 40(a)(ia), CIT(A) concurred with the view of the assessee that the transactions being dealing in securities, no TDS was required thereupon and hence deleted the disallowance. Aggrieved by the stand of CIT(A), the revenue is in appeal before us.

The Ld. DR while placing reliance on the stand of AO, contended that share / derivative trading was the main activity of the assessee and apportionment of expenses in the ratio of income earned from the two segments namely ‘speculative’ and ‘non-speculative’ was rightly done by the AO. These two activities were distinct and hence the correct results of these two segments were required to be ascertained separately to arrive at true profits of these distinct segments. Regarding sub-brokerage payments, it was contended that the assessee nowhere shown that the sub-brokerage charges paid by assessee were confined only ACIT Vs. M/s Networth Stock Broking Ltd. Assessment Year 2009-10 to dealing in securities and the claim of the assessee remains unverifiable which led to disallowance by AO. Per contra, the Ld. Counsel for Assessee [AR] contended that the assessee was engaged in single activity only and all expenditure was incurred for business purposes of the assessee and revenue nowhere disputed the same and therefore, even 1% disallowance sustained by CIT(A) is unjustified. The assessee duly accepted the finding of the CIT(A) and did not contest the same. The classification of income / loss earned by the assessee into ‘speculation’ and ‘non speculation’ arose only due to deeming fiction created by law but nevertheless, these transactions constitute single business activity of the assessee and hence, the assessee is entitled to claim all the expenditure incurred by it for business purposes. Qua TDS disallowance, the Ld. AR contended that the sub-brokerage charges have been paid to the sub-brokers to carry out transactions in securities and hence, not subjected to TDS as per clause (i) of explanation to Section 194H. He fairly submitted that the nature of the payments may be got verified by the lower authorities to settle the issue.

We have heard rival contentions and perused material available on record. We find that the nature or quantum of business expenditure is not in dispute but the only dispute is with regard to apportionment. Further, we find that the assessee earned income under the head ‘business income’ only and therefore, whatever transactions were carried out by him, whether speculative or non-speculative, constituted business of the assessee. In view of the same, whatever business expenditure were incurred by the assessee, the same were allowable to him. The income / loss of the assessee got classified under ‘speculative’ and ‘non- speculative’ only due to deeming fiction created by law. Therefore, we find strength in the argument of the Ld. AR so far as the apportionment of expenses is concerned. The Ld. CIT(A) estimated the expenses attributable to speculative activity @1% of head office expenditure by noting that these activities were carried out at the head office. Therefore, we find the same quite well-reasoned and therefore, see no reason to interfere with the same. This ground of revenue’s appeal is dismissed. Resultantly, the amount available to be ACIT Vs. M/s Networth Stock Broking Ltd. Assessment Year 2009-10 carried forward by the assessee under the head speculation loss shall be reworked by AO in tune with our findings.

Qua, disallowance u/s 40(a)(ia), the nature of payment is stated to be sub-brokerage charges and therefore, Section 194H being specific provision for ‘Commission or Brokerage’ applies to the assessee. We note that clause (i) of explanation to Section 194H carve out an exception with respect to commission / brokerage for dealing in securities. The assessee has contended that the sub-brokerage has been paid only towards dealing in securities whereas the AO attributed the same to other services as well. Therefore, while holding that TDS was not required to be deducted on sub-brokerage charges paid for dealing in securities in terms of clause (i) of explanation to Section 194H, we deem it fit to restore the matter back to the file of AO for limited purpose of verifying the nature of these expenses and allow the same, if incurred towards dealing in securities. The assessee is also directed to substantiate his claim forthwith and cooperate with the lower authorities failing which the AO shall be at liberty to dispose-off the same on the basis of material available on record in accordance with law. This ground of revenue’s appeal stands dismissed for statistical purposes.