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Income Tax Appellate Tribunal, “B” BENCH: KOLKATA
Before: Shri Mahavir Singh, JM & Shri M. Balaganesh, AM]
Per Shri Mahavir Singh, JM: Both these appeals by assessee are arising out of separate orders of CIT(A), Central-II, Kolkata vide Appeal Nos. 256&257/CC-X/CIT(A)C-II/11-12 dated 02.08.2012. Assessments were framed by DCIT, Central Circle-X, Kolkata u/s. 153C/143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Years 2007-08 and 2008-09 vide his separate orders both dated 23.12.2011.
The only common issue in these two appeals of assessee is against the order of CIT(A) in restricting the disallowance made by AO in respect to rebate claimed by assessee u/s. 88E of the Act. The facts and circumstances are exactly identical in both the years and hence, we reproduce the grounds as raised in ITA No. 1447/Kol/2012 for AY 2007-08, which reads as under: “1. For that on the facts and in the circumstances of the case, the Ld. CIT(A) was not justified in sustaining the disallowance to the extent of Rs.2,66,654/- out of the total disallowance of Rs.6,87,921/- made by the Assessing Officer on account of rebate claimed by the assessee u/s. 88E.” 3. Briefly stated facts relating to this issue are that the assessee has claimed rebate u/s. 88E of the Act of Rs.38,23,686/- against the income from business of shares and securities which were chargeable to Securities Transaction Tax (STT). During the course of assessment proceedings, the assessee company filed tabular chart disclosing computation of segment wise profit from its income which are charged to STT and the profits which are not charged to STT. The AO finally disallowed credit for rebate u/s. 88E of the Act to the extent of Rs.6,87,921/- in respect to the claim made on account of clients’ turnover. The assessee in the calculation
2 ITA No.1446 & 1447/Kol/2012 Destiny Securities Ltd. AY 2007-08 & 2008-09 provided in the said tabular chart shown an amount of its turnover i.e. trading in shares and securities and transactions in F&O segment on its own. The said turnover was amounting to Rs.2850,35,79,582/-. The assessee also showed client’s turnover from where it has earned brokerage income and the said turnover was at Rs.4154,00,12,233/-. The assessee has also shown segment wise gross profit i.e. STT paid trading profit, interest income, brokerage income and dividend. The assessee reduced direct expenses related to STT paid trading profit and brokerage income from the gross profit. Further, it allocated the indirect expenses in the ratio of turnover. According to AO, certain expenses like rent, repairs and maintenance, electricity, director’s remuneration, staff welfare, auditor’s remuneration, travelling, miscellaneous expenses, depreciation etc. were claimed by the assessee exclusively against the brokerage income and on perusal of detail, the AO was not satisfied that the expenses both direct and indirect have been allocated on the basis of turnover whereas they ought to have been allocated on the basis of income arising from such turnover because the provision of section 88E of the Act requires rebate be allowed only to the extent of income arising out of such chargeable transaction of STT. Therefore, the AO after re-computing the same, made disallowance of rebate claimed u/s. 88E of the Act amounting to Rs.6,87,921/-. Aggrieved, assessee preferred appeal before CIT(A), who after considering the allocation of expenses restricted the disallowance at Rs.2,66,654/- by observing in para 5 as under:
“5. I have considered the submission of the appellant and perused the assessment order. I have also gone through the calculation made by the appellant as well as the AO for the purpose of rebate u/s 88E as per the assessment order. On going through the said calculation, I am of the opinion that neither the claim of the appellant is correct and nor the view taken by the AO to allow the credit of rebate u/s 88E of the Act is justifiable. On careful consideration of the facts, I am not inclined to agree with the claim of the appellant on two point i.e. allocation of expenditure on account of interest and allocation of certain indirect expenses like rent, repairs and maintenance, staff welfare, electricity and directors remuneration etc. etc. as attributable only to interest on FOR and the brokerage income respectively. There is no dispute on the fact that the appellant company was executing the transactions in shares and securities and F&O segment, both on behalf of its clients as well as its own account. Hence, whatever expenses were incurred by the appellant are attributable to this composite activity and, therefore, allocable to both STT and non STT paid receipts, unless an expenditure may be linked directly to a specific category of income. The appellant company cannot say that the FORs were taken out of the borrowed money only and that the benefit of such FORs was taken only to execute the transactions on behalf of its clients. Hence, I agree with the view of the AO that the payment of interest is allocable to both SIT paid and non STT paid income. Further, I find no force in the submission of the appellant that certain indirect expenses as mentioned above are deductible from non STT paid income only, because, in the case of composite business activities it cannot be said that such expenses are related to one activity only and not the other. On this point also I agree with the view of the AO that these expenses are allocable between both types of activities. However, I am of the opinion that the view taken by the AO that the expenses as per profit and loss account are allocable in the ratio of income from STT
3 ITA No.1446 & 1447/Kol/2012 Destiny Securities Ltd. AY 2007-08 & 2008-09
paid and non STT paid transactions, is not correct. In the case of composite business activities where the common or indirect expenses are required to be allocated amongst different categories of transactions, the most appropriate and plausible method of allocation is on the basis of turnover. In the case of composite business activities, amongst various types of receipts, it might be possible that an assessee have gross loss in place of gross profit in one or other activities. It does not mean that such an assessee has not incurred any indirect expenditure to achieve the turnover in which it has incurred the loss. If the indirect expenses are allocated on income criteria as done by the AO, it would mean that all the expenses were incurred only to achieve the turnover from where there is positive income and no expenditure is related to the negative income. I am of the opinion that this proposition is not correct and, therefore, all the indirect expenses are to be allocated on turnover criteria. In the case of appellant company, the ratio of turnover of non STT and STT paid transactions is 59% and 41% respectively. Hence, after deduction of direct expenses, the indirect expenses are to be deducted on the basis of aforesaid ratio to arrive on the net income to allow the rebate u/s 88E of the Act. In the course of appellate proceedings, the appellant company was asked to prepare the chart by allocating the indirect expenses on the basis of turnover. The said chart was submitted by the appellant and examined by the undersigned. The chart submitted by the appellant is as under: Destiny Securities Ltd. A.Y 2007-08
Particulars Non STT STT
Turnover 41540012233.63 28503579582.15
Ratio of Turnover 59% 41%
Allocation of Direct Expenses
Direct Expenses Non STT STT
Transaction Fees 714440
Vasat Expense 127750
Lease Line Expenses 153396
Client Intro fees 1712352
Pledge Charges 85978
Total 2079476 714440
4 ITA No.1446 & 1447/Kol/2012 Destiny Securities Ltd. AY 2007-08 & 2008-09
5 ITA No.1446 & 1447/Kol/2012 Destiny Securities Ltd. AY 2007-08 & 2008-09 In view of above, the AO is directed to allow credit of rebate u/s. 88E at Rs.35,01,403/- i.e. (Rs.1,16,49,947 / Rs.1,61,24,025) x Rs.48,46,092/-. The ground no.2 is partly allowed.” Aggrieved, now assessee is in appeal before Tribunal.
Before us Ld. Counsel for the assessee filed copy of Tribunal’s order in the case of M/s. Millennium Stock Broking (P) Ltd. Vs. DCIT, ITA No. 670/Kol/2011 & ITA No. 677/Kol/2011 & ITA No. 676/Kol/2011 for AYs 2006-07 and 2007-08 dated 29.09.2015 wherein the proportion of assessee’s own transaction was at 83% whereas transaction belonging to the clients was only 17%. He referred to para 4.2 of the Tribunal’s order, which reads as under: “He, accordingly, observed that the transactions were assessee's own transactions and only 17% were transactions belonging to the clients. Thus, he observed that the substantial portion of the transactions were assessee's own transaction and it was wrong for the ae to claim that it mainly maintain its establishment for its clients. He pointed out that out of the total expenses, other than the STT charges debited in the profit and loss account only the expenses for stamp duty charges amounting to Rs.22,31,939/- could be said to be fully related to client's transactions. All remaining expenses had been incurred both for assessee's own transactions as well as the transactions of the clients. Therefore, out of total expenses of Rs.1,66,63,904/-, the common expenses were at Rs.1,44,31,965/- (1,66,63,904 - 22,31,939) and these had to be apportioned between the STT and non-STT income which he allocated in the ratio 83% to 17% of the common expenses amounting to Rs.24,53,434/- related to non-STT income.”
Ld. Counsel for the assessee stated that the Tribunal has allocated 25% of establishment expenses towards assessee’s own transaction and 75% are allocated towards client’s transaction i.e. non STT income in respect of establishment expenses. The Tribunal has adjudicated this issue vide para 10.1 as under: “10.1. Ld. DR has submitted that merely because in subsequent year the AO has accepted 15% expenses towards STT transactions that cannot automatically be applied for current year. After considering submissions of both the parties and taking into consideration the explanation reproduced earlier, we are of the opinion that there is considerable force in the argument of Ld. Counsel of assessee that assessee could enter into own transactions even without having such huge infrastructure. However, it cannot be ignored that considering the volume of assessee’s transaction, some infrastructure was very much required. In our opinion, ends of justice would be met if 25% of the establishment expenses are allocated towards assessee’s own transactions and 75% are allocated towards client’s transaction (non STT income) in respect of establishment expenses. On other expenses there is no dispute.” 5. In view of this, ld. Counsel for the assessee stated that in the present case there is no dispute in regard to direct expenses whereas dispute is limited to indirect expenses and the nature of expenses are fixed and do not change with the volume of self business, hence should be apportioned over the core business of brokerage but Ld. Counsel for the assessee finally agreed for proportionate disallowance. In respect to interest on FD, ld. Counsel for the assessee stated that interest on FD is not made out of surplus fund but 100% of these FDs have been
6 ITA No.1446 & 1447/Kol/2012 Destiny Securities Ltd. AY 2007-08 & 2008-09 deposited with the Stock Exchange as margin money against which business of bunch clients and self was carried on. Qua this, ld. Counsel for the assessee filed complete chart in respect to FD interest and other interest income as well as indirect expenses. Finally, Ld. Counsel for the assessee stated that a proportionate disallowance in respect to transaction relating to brokerage can be attributed @ 5 to 10% at the best. Ld. Counsel for the assessee for this referred to assessment order and stated that assessee’s self transaction i.e. own transactions are only to the extent of 41% whereas brokerage/clients’ transactions are at 59%. In view of this ld. Counsel for the assessee argued that the disallowance of indirect expenses and disallowance in respect to interest income the disallowance of STT can be attributed at 5 to 10%. On the other hand, the Ld. Sr. DR also agreed that the issue can be decided in term of the decision of M/s. Millennium Stock Broking (P) Ltd., supra. 6. We have heard rival submissions and gone through facts and circumstances of the case. We find that the above facts are undisputed and only issue before us for our adjudication in this case is that how much percentage of disallowance of STT rebate is to be given. In view of the above facts as discussed above, the assessee’s self transactions are to the tune of 41% and brokerage/clients’ transactions pertained to 59%. The proposition of law laid down by this Coordinate bench in the case of M/s. Millennium Stock Broking (P) Ltd., supra, if we go by that then at the best revenue can disallow rebate u/s. 88E of the Act qua brokerage income at 10%, both on indirect expenses as well as interest. We order accordingly. 7. In the result, appeals of assessee are partly allowed. Order pronounced in the open court on 29.04.2016 Sd/- Sd/- (M. Balaganesh) (Mahavir Singh) Accountant Member Judicial Member
Dated : 29th April, 2016 Jd. (Sr. P.S.) Copy of the order forwarded to: 1. Appellant – Destiny Securities Ltd., 34A, Metcalf Street, Kolkata-700013. 2. Respondent – DCIT, C.C-X, Kolkata. 3. CIT(A) , Kolkata 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order, Asstt. Registrar.