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Income Tax Appellate Tribunal, “I”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM
O R D E R PER R.C.SHARMA (A.M): These are the cross appeals filed by the assessee and revenue against the order of CIT(A)-Mumbai, for the assessment year 2003-04 & 2004-2005, in the matter of order passed u/s.143(3) of the I.T.Act.
2 3817&4778/07 2. Rival contentions have been heard and record perused. Facts in brief are that the assessee is engaged in share broking business. During the year under consideration assessee claimed expenditure on account of incentive paid to the various concerns. In respect of incentive paid to ICICI Bank, the AO disallowed the same on the plea that ICICI Bank is coming within the purview of Section 40A(2)(b), therefore, he disallowed 95% of the total brokerage earned by the assessee.
By the impugned order the CIT(A) deleted disallowance to the extent of 50%, against which assessee is in further appeal before us.
It was argued by ld. Senior AR Mr. S.E.Dastur that similar incentive has been passed on by the assessee to other concerns, who are independent, therefore, it cannot be said that any excessive or unreasonable amount was given to ICICI Bank. He further contended that amount invested by ICICI Bank was Rs.310 crores as against investment made by other concerns i.e. Hotel Corporation of India Rs.60 crores and Bank of Baroda Rs.25 crores. He further submitted that incentive so passed by assessee was in the normal course of assessee’s business and was comparable with the commission passed on to the other independent concerns.
On the other hand, ld. DR relied on the order of lower authorities.
We have considered rival contentions and carefully gone through the orders of authorities below and found from record that out of incentives of Rs.62 lakhs received by assessee, assessee has passed on 95% amounting to Rs.58.90 lakhs to ICICI Bank and claimed the same 3 3817&4778/07 expenditure as business expenditure. We found that during the year the assessee had paid incentives on the investment made by the following parties out of its brokerage income on the bond issue of Rural Electrification Corporation of India Ltd. : Name of the Amount Brokerage Incentive Paid Balance Party Invested earned by by assessee to brokerage in assessee the party the hands of the assessee Hotel. Corpn. 60,00,00,000 12,00,000 11,40,000 60,000 of India Bank of Baroda 25,00,00,000 5,00,000 4,50,000 50,000 ICICI Bank 310,00,00,000 62,00,000 58,90,000 3,10,000 In justification of the transfer of the brokerage to the above parties, the assessee submitted before the AO that the incentive was paid by IBSL for High Value application and even after payment of incentives it managed to retain some brokerage. The incentive paid to all the 3 parties was at a comparable rate. But the AO did not accept the explanation of the assessee observing that out of the 3 parties to whom incentives had been passed by the assessee company, two i.e. Hotel Corporation of India and Bank of Baroda were third parties whereas ICICI Bank was a sister concern of the assessee company and belonging to the ICICI group falling under the same management. In view of payment of incentives of Rs.58.90 lakhs to M/s. ICICI Bank, provisions of Sec.40A(2)(b) were invoked. The assessee had passed on 95% of the total brokerage earned i.e. Rs.58.90 lakhs out of the total receipt of Rs.62 lakhs to M/s. ICICI Bank and claimed the said expenditure as a business expenditure. Nowhere the AO has brought on record any evidence in support of its contention that incentive so passed on to ICICI Bank was more than what 4 3817&4778/07 was paid by others for similar transaction. For making disallowance u/s.40A(2)(b) onus is on revenue to prove unreasonableness.
We also found that since the bonds were acquired by ICICI Bank (l- Bank) and aforesaid entities, which were financial institutions and not retail investors, there was no expenditure incurred by the assessee towards marketing in retail business. The pass on of such incentive was based on the market practice followed in assessee’s line of business. Incentive passed on to I-bank was duly offered to tax by that client in its return of income. As regards the reasonableness, the incentive passed on to I-Bank was comparable to other two independent entities. Therefore, the incentive paid to I-Bank was allowable u/s.37(1) of the Act. Thus, we do not find any merit in the action of CIT(A) for upholding the disallowance of 50%. The AO is directed to delete the entire disallowance so made.
The next grievance of assessee relates to disallowance of 25% on procurement expenses made to I-Bank on the plea that it is unreasonable and not incurred wholly and exclusively for the purpose of assessee’s business.
We have considered rival contentions. Ld. AR drew our attention to the order of Tribunal in assessee’s own case for the assessment year 2001-02 and 2002-03, wherein exactly similar issue was considered Tribunal in ITA No.3423/Mum/2010 & ITA No.4868/M/2010 and ITANo.6948/M/2005, order dated 13-9-2013. We had carefully gone through the order of Tribunal and found that exactly similar issue was dealt by the Tribunal in assessee’s own case and entire disallowance so 5 3817&4778/07 made by the AO was deleted. As the facts and circumstances during the year under consideration are same, respectfully following the order of the Tribunal in assessee’s own case, we direct the AO to delete the disallowance so made on account of procurement expenses.
The next grievance of the assessee relates to disallowance of software expenses of Rs.1,20,000/-. The issue under consideration is squarely covered by the decision of Hon’ble Bombay High Court in the case of Raychem RPG Ltd., 346 ITR 138 (Bom). Respectfully following the decision of Hon’ble Bombay High Court, we do not find any merit for disallowance of software expenses of Rs.1,20,000/- so incurred by assessee, which is essentially revenue in nature.
The last grievance of assessee relates to invoking Explanation to Section 73 and treating share trading loss as speculative loss.
Ld. AR fairly conceded that the issue has been decided by Hon’ble Bombay High Court in the case of Prasad Agents, 333 ITR 275, against the assessee. Accordingly we dismiss ground No.4 so raised by the assessee.
Common grievance has been raised by the revenue in assessment year 2003-04 & 2004-05. First grievance relates to deleting disallowance on account of depreciation on BSE membership card as business or commercial right of similar nature u/s.32(1)(ii), being intangible asset eligible for depreciation u/s.32(1)(ii). This issue is also covered by the order of Tribunal in assessee’s own case for assessment year 20001- 2001 in ITA No.4326/Mum/2004, order dated 9th May, 2007. The issue is 6 3817&4778/07 also covered by the decision of Hon’ble Supreme Court in the case of Techno Shares & Stocks Ltd., 327 ITR 323. Respectfully following the same, we do not find any infirmity in the order of CIT(A) for allowing assessee’s claim for depreciation on BSE Membership Card.
Ground with regard to deleting disallowance of incentive of 50% have already been dealt by us while discussing assessee’s appeal (i.e. ITA No.3767/Mum/2007), following the same reasoning, we direct the AO to allow 100% of the incentive payments so made. Accordingly, this ground of appeal
is dismissed.
15. Next grievance of the revenue relates to deleting 75% of procurement expenses made to I-Bank. We have already dealt with this issue while deciding ground No.2 in assessee’s appeal (i.e. ITA No.3767/Mum/2007). Following the same reasoning, we confirm the action of CIT(A) and direct the AO to allow 100% of procurement expenses.
16. Last grievance of revenue relates to CIT(A)’s conclusion that the transaction between the assessee company and ICICI Securities INC was at arm’s length and in accordance with provisions of TP rules.
17. We have considered rival contentions and found that the AO has disallowed client’s introduction fee paid to the ICICI (INC) (ISI) amounting to Rs.98,42,28,828/- on the plea that expenditure was not incurred for the purpose of assessee’s business. By the impugned order CIT(A) deleted the addition after having following observation :- “5.2 I have considered the submissions made by the appellant and perused the assessment order. ISI is an entity based in USA and 7 3817&4778/07 the appellant rendered the services abroad to clients developed by IS!. The AO made the disallowance of introductory fee u/s.40A(2(b) of the A6t treating ISI an associated concern. He has not given any specific details in support of his contention. He has observed in the assessment order that a similar disallowance made in A.Y. 2001-02 to a sister concern was confirmed by CIT(A). The perusal of CIT(A)'s order does not deal with any ground of appeal in which the issue of introductory fee paid to a concern abroad has been adjudicated upon. Actually, the AO totally overlooked the contention of the appellant made in its submissions filed during assessment proceedings and duly mentioned by the AO in the assessment order that the arrangement of payment of introduction fee between the appellant and l-Sec Inc. (ISI) was at arm's length and in accordance with the provision of Transfer Pricing Rules. If the AO felt that the transaction of introduction fee was between two associated concerns, one of them being based abroad and the amount of transaction was not commensurate with the market rate, he should have taken recourse to provisions of section 92CA of the Act and referred the matter to the Transfer Pricing Officer for making a fair assessment. In my view, the payment made to ISI was as per prevailing market conditions and it was within norms fixed by BSE. Therefore, the AO was not justified in making any disallowance out of introduction fee paid to ISI.” We have considered rival contentions and found from the record that ISI is an entity based in USA and assessee has rendered services abroad to clients developed by ISI. By invoking provisions of Section 40A(2)(b), the AO has made disallowance. However, the AO has not given any specific details in support of this disallowance. After giving detailed finding at para 5.2, the CIT(A) concluded that payment made to ISI was as per prevailing market conditions and it was within norms fixed by BSE. Accordingly, the AO was not justified in making disallowance out of introduction fee paid to ISI. The detailed findings so recorded by CIT(A) are as per material on record. Ld. DR has not brought any positive material on record to controvert the finding of CIT(A). Accordingly, we do not find any reason to interfere in the findings of CIT(A) resulting into deletion of disallowance out of introduction fee paid to ISI.