Penalty paid by a registered broker is not a fine for any infringement of law and hence allowable- ITAT Mumbai

M/s Total Securities Ltd Vs DCIT (ITAT Mumbai) – It was held by the Tribunal that penalty paid by the assessee as a registered broker to the stock exchange for not complying with various obligations/requirements is not in the nature of infringment of any law as envisaged in Explanation to section 37 and the same is allowable as deduction being the expenses wholly and exclusively incurred by the assessee for the purpose of its business. A similar view has been taken by the Chandigarh Bench of ITAT in the case of Master Capital Service Ltd. Vs. DCIT 23 SOT 69 (Chd.) Respectfully following the said decision of the co-ordinate Bench of this Tribunal, we delete the dis allowance made by the A.O. and confirmed by the ld. CIT(A) on account of penalty paid by the assessee to stock exchange and allow ground No. 2 of assessee’ s appeal.

Whether penalty paid by a registered broker is not a fine for any infringement of law and hence allowable ?- Yes

Whether admission fee paid by the assessee to stock exchange for acquiring membership is revenue? – yes

Whether salary paid to directors can be disallowed on the ground that the assessee has failed to prove the genuineness of services rendered when similar payments have been allowed in subsequent years ? – Tribunal referred the matter back to A.O.

Whether payments made to arbitragers and jobbers is covered by 194C and hence the same is not allowable if TDS is not deducted?- No, same is not covered u/s. 194C

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES “I”

BEFORE SHRI D. MANMOHAN, V.P. AND SHRI P.M. JAGTAP, A.M.

ITA No. 7123/Mum/08
Assessment Year 2005-06

ITA No. 800/Mum/09
Assessment Year 2005 -06

ORDER

PER P.M. JAGTAP, A.M.

These two appeals, one filed by the assessee being ITA No. 7123/Mum/08 and other filed by the Revenue being ITA No. 800/Mum/09 are cross appeals which are directed against the order of ld. CIT(A) – IV, Mumbai dated 20.11.2008.

3. First, we shall take up the appeal of the assessee being ITA No. 7123/Mum/08, ground No. 1 of which relating to dis allowance of key man insurance premium made by the A.O. and confirmed by the ld. CIT(A) has not been pressed by the learned counsel for the assessee at the time of hearing before us. The same is accordingly dismissed as not pressed.

4. As regards ground No. 2, it is observed that the issue involved therein relating to dis allowance made by the A.O. and confirmed by the ld. CIT(A) on account of penalty of Rs.  7445/- paid by the assessee to stock exchange is squarely covered in favor of the assessee by several decisions of the Tribunal. In one of such decisions rendered in the case of ITO vs. GDB Share & Stock Broking Services Ltd. 88 TTJ (Kol) 352, it was held by the Tribunal that penalty paid by the assessee as a registered broker to the stock exchange for not complying with various obligations/requirements is not in the nature of infringment of any law as envisaged in Explanation to section 37 and the same is allowable as deduction being the expenses wholly and exclusively incurred by the assessee for the purpose of its business. A similar view has been taken by the Chandigarh Bench of ITAT in the case of Master Capital Service Ltd. Vs. DCIT 23 SOT 69 (Chd.) Respectfully following the said decision of the co-ordinate Bench of this Tribunal, we delete the dis allowance made by the A.O. and confirmed by the ld. CIT(A) on account of penalty paid by the assessee to stock exchange and allow ground No. 2 of assessee’ s appeal.

5. As regards ground No. 3, it is observed that the issue raised therein relating to dis allowance made by the A.O. and confirmed by the ld. CIT(A) on account of admission fees paid by the assessee to stock exchange amounting to Rs.  2,50,000/- is also covered in favor of the assessee, inter alia, by the decision of Hon’ble Delhi High Court in the case of Nesel Holdings P. Ltd. Vs. CIT 282 ITR 601 wherein it was held that payment of onetime non-refundable fees for obtaining membership of stock exchange does not result in an enduring benefit and the same is allowable as deduction being revenue expenditure. Hon’ble Madras High Court has also taken a similar view in the case of CIT vs. S. Venkat Subramaniyan 291 ITR 193 wherein it was held that payment of admission fee to acquire the membership card of the stock exchange and to carry on business on the floor of stock exchange is allowable as revenue expenditure. Respectfully following the these judicial pronouncements, we delete the dis allowance made by the A.O. and confirmed by the ld. CIT(A) on account of admission fees paid by the assessee to Bombay Stock Exchange and allow ground No. 3 of the assessee’s appeal.

6. Ground No. 4 relates to the dis allowance of  Rs.  4,57,500/- made by the A.O. and confirmed by the ld. CIT(A) u/s 40A(2)(b) being payment made by the assessee company to the relatives of his directors.

7. The payment claimed to be made by the assessee company on account of salary paid to six relatives of its directors aggregating to Rs.  4,57,500/- was disallowed by the A.O. on the ground that the assessee could not satisfactorily establish the services claimed to be rendered by the said relatives. The explanation offered on behalf of the assessee company that the said relatives were mainly looking after general administration was not found acceptable by the A.O. as he found that almost 80% of the work of the assessee company was on propriety account and the same was done by the jobbers and arbitragers. He also held that going by their qualifications and experience, the said relatives were not in a position to provide/render any meaningful services to the assessee company. The ld. CIT(A) also found that the nature of work stated to be undertaken by the said relatives was very vague. According to him, it was also highly improbable that the said relatives worked for the company only for the month of April, May & June in the year under consideration and did not render any services thereafter. He, therefore, confirmed the dis allowance made by the A.O. on this issue.

8. We have heard the arguments of both the sides and also perused the relevant material on record. One of the main contentions raised by the learned counsel for the assessee on this issue is that even in the subsequent years, the same relatives of the directors of the assessee company have rendered the services for which salary has been paid to them. He has contended that the said salary which is much more than the salary paid in the year under consideration has been allowed by the A.O. in the assessments completed u/s 143(3). He has invited our attention to the copy one of such orders passed by the A.O. for A.Y. 2006-07 placed on record before us to point out that no dis allowance on account of salary paid to relatives of the directors has been made therein. In our opinion, this is a crucial aspect having a direct bearing on the issue under consideration in as much as if the salary paid to the same relatives of the directors at higher rate in the subsequent years has been allowed by the A.O., there is no justifiable reason to doubt their capability to render the services in the year under consideration and to disallow the salary paid to them at lower rate. However, since this aspect put forth on behalf of the assessee for the first time before us requires verification, we deem it fair and proper and in the interest of justice to send this matter to the A.O. for such verification. Accordingly, the impugned order of the ld. CIT(A) on this issue is set aside and the matter is restored to the file of the A.O. with a direction to decide the same afresh after verifying the submission of the assessee that salary paid to the same relatives at higher rate has been allowed in the subsequent years. Ground No. 4 of the assessee’s appeal is accordingly treated as allowed for statistical purpose.

9. Now, we shall take up the appeal of the Revenue being ITA No. 800/Mum/09.

10. The first issue relating to assessee’s claim for rebate u/s 88E has been raised by the Revenue in ground No. 1 & 2 of this appeal which read as under:-

“1. On the facts and circumstances of the case and in law, the ld. CIT(A) erred in not recording reasons for admitting fresh evidences as required under Rule 46A(2).

2. On the facts and circumstances of the case and in law, the ld. CIT(A) erred in not allowing proportionate expenses incidental to jobbing for arising at net income eligible for rebate u/s 88E.”

11. During the year under consideration, the main activity carried on by the assessee company was jobbing and arbitrage in its own proprietary account. In the return of income, the assessee had shown total tax payable at Rs.  1,79,90,227/- on which a rebate of Rs.  1,53,30,239/- was claimed u/s 88E in respect of Securities Transaction Tax (STT). As the said rebate was allowable in respect of income derived from securities on which STT had been paid, the assessee was called upon by the A.O. to justify the deduction claimed u/s 88E by furnishing the necessary working. From the working so furnished by the assesse, it was noted by the A.O. that the arbitrage commission was not proportionate to arbitrage income. He therefore required the assessee to justify the allocation of expenses especially related to arbitrage activity. The assessee was also required by the A.O. to produce the books of account in order to substantiate its claim for allocation of expenses. According to the A.O., the assessee, however, failed to justify its claim for allocation of expenses and also failed to produce the books of account. He, therefore, proceeded to make his own working on the basis of material available on record before him and worked out the rebate admissible to the assessee u/s 88E amounting to Rs.  78,03,015.22 as against Rs.  1,53,30,239/- claimed by the assessee. The matter was carried before the ld. CIT(A) and it was submitted on behalf of the assessee before him that books of account had been duly produced before the A.O. during the course of assessment proceedings for his verification. The paper book containing pages 1 to 226 was also filed by the assessee as additional evidence before the ld. CIT(A) along with three computer CDs containing books of account. The said evidence was forwarded by the ld. CIT(A) to the A.O. for verification and comments. The A.O., however, did not submit any remand report to the ld. CIT(A) despite sufficient opportunity. The ld. CIT(A), therefore, proceeded to decide the issue in the light of additional evidence filed by the assessee as well as books of account produced before him and held that the assessee was entitled for rebate of Rs.  1,53,30,239/- u/s 88E for the amount of STT paid.

12. We have heard the arguments of both the sides and also perused the relevant material on record. The limited relief which is sought by the learned D.R. on this issue is that the same may be sent back to the A.O. in order to give him an opportunity to verify the claim of the assessee for rebate u/s 88E. He has submitted that the details called for by the A.O. in order to verify the claim of the assessee for rebate u/s 88E were not furnished by the assessee during the course of assessment proceedings despite sufficient opportunity. He has submitted that even the books of account were not produced by the assessee in order to enable the A.O. to verify its claim for rebate u/s 88E. He has submitted that all these details, however, were furnished by the assessee before the ld. CIT(A) for the first time and although the ld. CIT(A) forwarded the same to the A.O. seeking his remand report, the later could not submit the same within a short period of 5- 6 months given by the ld. CIT(A). He has contended that the A.O. thus has not got any effective opportunity to verify the additional evidence filed by the assessee for the first time before the ld. CIT(A) comprising of voluminous documents running into 226 pages. According to him, the A.O. also has not got the opportunity to verify the claim of the assessee for rebate u/s 88E from the books of account. He has contended that this is thus a fit case to give one more opportunity to the A.O. to verify the claim of the assessee for rebate u/s 88E in the light of additional evidence filed by the assessee. Although the learned counsel for the assessee has raised strong objection for sending this matter back to the A.O. for giving him an opportunity to verify the details and documents filed by the assessee before the ld. CIT(A) on the ground that such opportunity has already been afforded by the ld. CIT(A) to the A.O., we are of the view that it is a fit case to give an opportunity to the A.O. to examine the issue in the light of additional evidence filed by the assessee before the ld. CIT(A). It is manifest from the order of the A.O. that the relevant details specifically required by him to verify its claim for rebate u/s 88E were not filed by the assessee during the course of assessment proceedings. The assessee was also called upon by the A.O. to produce the books of account in order to substantiate the said claim, which it failed to do. Before the ld. CIT(A), the assessee, however, filed a paper book containing 226 pages as additional evidence and although the said evidence was forwarded by the ld. CIT(A) to the A.O. seeking his remand report thereon, the period effectively given by him to the A.O. for submitting the remand report was less than 6 months. Keeping in view the fact that the additional evidence filed by the assessee involved voluminous details and documents running into 226 pages and the same was required to be verified from the books of account of the assessee, we are of the view that the opportunity afforded by the ld. CIT(A) to verify the additional evidence cannot be regarded as sufficient and proper. According to us, the A.O. in the facts and circumstances of the case deserves one more opportunity to verify the claim of the assessee for rebate u/s 88E from the details furnished by the assessee before the ld. CIT(A) for the first time as well as the books of account maintained by the assessee. We, therefore, set aside the impugned order of the ld. CIT(A) on this issue and restore the matter back to the file of the A.O. with a direction to decide the same in the light of details and documents furnished by the assessee after necessary verification. The A.O. is also directed to afford sufficient opportunity to the assessee to substantiate its claim for the said rebate u/s 88E. Ground No. 1 & 2 of Revenue’s appeal are accordingly treated as allowed for statistical purpose.

13. In ground No. 3 & 4, the Revenue has challenged the action of the ld. CIT(A) in deleting the addition of Rs. 1.01 crores made by the A.O. u/s 40(a)(ia) on account of payments made to jobbers/ arbitragers for the failure of the assesse to deduct the tax at source.

14. The amount of Rs.  1,01,62,325/- paid by the assessee company to its arbitragers/jobbers was claimed as deduction. According to the A.O., the assessee was required to deduct tax at source from the said amount u/s 194C and since it had failed to comply with the said requirements, the amount of Rs. 1,01,62,325/- was disallowed by him u/s 40(a)(ia). The ld.CIT(A), however, deleted the said dis allowance accepting the contention of the assessee that the provisions of section 194C were not attracted to the transactions entered into by it with arbitragers/jobbers as the same were on principal to principal basis.

15. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that a similar issue has been decided in favour of the assessee by the co-ordinate Bench of this Tribunal in the case of DCIT vs. Asset Alliance Securities Pvt. Ltd. In ITA No. 1488/Mum/2009dated 16^th July 2010 after discussing all the relevant aspects in para No. 9 of its order which is reproduced below:

“The Revenue is in appeal. We have examined the facts and the rival contentions. Whereas the learned Senior DR strongly relied on the order passed by the AO and the statutory provisions, the basic contention of the assessee before us was that there was a joint venture between it and the jobbers / arbitragers to share the profits and losses arising on account of the dealings between them, that such an arrangement was on principal to principal basis, that therefore the jobber / arbitrager cannot be termed as a contractor for carrying out any work for the assessee and in these circumstances there was no question of invoking section 194C. It was explained that this was a business done by the assessee on its own account in the Stock Exchange and not for or on behalf of its clients for brokerage and for the purpose of trading in shares and securities in the Stock Exchange on its own account, the assessee entered into agreements with several jobbers / arbitragers with the understanding that the ultimate profit or loss in such trade would be divided between them equally. At our instance the learned representative for the assessee has filed copies of the agreements entered into with the jobbers / arbitragers. The agreements are in standard form. We may refer to the agreement with Mr Amit Zaveri, which is at page 23 of the paper Book. The preamble to the agreement states that Mr Amit Zaveri has shown his willingness to accept the agreement for dealing and trading in the Cash and F&O segment of NSE in accordance with the Rules prescribed by SEBI and that he has accepted to share the profit and loss in the transactions made by him on behalf of the assessee company as mutually agreed upon by the parties from time to time. Clause 1 of the agreement says that the assessee has given to the dealer (Mr Amit Zaveri) the right to trade in the Cash and F&O segment of the NSE. However, the overall supervision and control will be with the assessee. Clause 2 provides that Mr Amit Zaveri is authorized to trade and out of the net proceeds, whether profit or loss, from such dealing of shares and securities will be shared between the assessee and him in the ratio of 50 : 50. Clause 3 provides that all transactions, dealings and other formalities will be carried out in the name of the assessee only. Clause 4 provides that the assessee will be solely entitled to receive and keep any kind of dividend, interest and other corporate benefits during the course of transactions carried out by Mr Amit Zaveri. Clause 5 obliges the assessee to pay all margin monies to the Stock Exchange for the transactions carried out by Mr Amit Zaveri in the name of the assessee. More importantly it provides that “all applicable expenses will be deducted / added before the distribution of the profit / loss as agreed upon in clause 2 above”. Clause 6 says that the parties will abide by the Rules prescribed by NSE and SEBI and clause 7 provides for discontinuance of the agreement by giving one day’s notice. All the agreements filed before us are identically worded. It has been argued on behalf of the assessee on the basis of these agreements that there was a joint venture between it and the jobbers or arbitragers for trading in shares and securities in the Stock Exchanges on the company’s own account and the profits or losses on such trading were to be divided equally between the assessee and the concerned jobber or arbitrager. It was further represented before us that no expenditure or payment made to the jobber or arbitrager was claimed in the assessee’s books of account from which TDS had to be made and it was only the net income from the joint venture that was accounted for in the assessee’s books. In other words, the submission was that the payment to the jobbers and arbitragers was not debited to the assessee’s Profit and Loss Account at all and therefore there was no liability to deduct the tax. We called upon the assessee to prove this claim with reference to the accounts. The assessee filed the accounts and other details to establish its claim. We find from the papers submitted by the assessee in the form of three separate Paper Books that on 11^th March 2008 the assessee had explained the trading income of Rs.6,91,06,197/- appearing in Schedule “G” to the audited Profit and Loss Account and it was pointed out that out of the above trading income, jobbing income amounted to Rs.1,57,75,393/- and arbitrage income amounted to Rs.14,90,112/-. Out of the balance, the own trading income, which arose to the assessee apparently without the help of the jobbers / arbitragers, amounted to Rs.3,07,47,989/-. The balance of Rs.2, 10,92,703/- represented security transaction tax collected by the assessee. The total of the trading income formed part of the figure of Rs.10,38,05,456/- which was credited to the Profit and Loss Account for the year ended 31.03.2006 as “brooking, trading and depository income”. It was this figure which was explained in Schedule “G” to the accounts. The assessee again wrote a letter dated 11^th April 2008 to the AO explaining the jobbing / arbitrage income which was included in the figure of Rs.6,91,06, 196/-. In this letter it was submitted to the AO that the jobbing / arbitrage activity was carried out by the assessee in association with the jobbers / arbitragers in accordance with profit sharing agreements entered into with them. It was pointed out in this letter that the share of the jobbers and arbitragers were given to them and the details of such amounts had already been enclosed in the earlier dated 11^th March 2008. We have looked into the details filed by the assessee along with its letter dated 11^th March 2008 filed before the AO. The details have been given under the head “Details of jobbers / arbitragers along with income earned from jobbing and arbitrage activity”. The assessee has furnished the names of the jobbers, their Permanent Account Numbers and addresses. Similar details have also been given in respect of arbitragers. The gross amount received in respect of the business carried on by the assessee through the jobbers / arbitragers is also given, jobber-wise and arbitrager-wise, from which the share of the jobber / arbitrager has been deducted and the balance has been taken as the assessee’ s share of profit in the joint ventures. The total share of the jobber out of the gross receipts and paid to them comes to Rs.1,42,24,997/- and the total share paid to the arbitragers came to Rs.19,46,576/-. The aggregate of the two comes to Rs.1,61,71,573/- which is the amount that has been disallowed by the AO by invoking section 194C read with section 40(a)(ia) of the Act. The facts show that there were separate joint ventures entered into by the assessee with several jobbers / arbitragers and payments have been made to them under such agreements and the assessee’s share in the profits has been taken to the Profit and Loss Account. In these circumstances the provisions of section 194C are not attracted because in essence and substance the amounts paid to the jobbers or arbitragers did not in reality represent the expense of the assessee company but represented payment of the share of the jobbers / arbitragers under the agreement entered into with them. In such a case the assessee is right in saying that there was no question of deducting any tax at source. The above facts also establish that the relationship between the assessee and the jobbers / arbitragers was not of principal and agent but was that of principal to principal. Both had agreed to embark upon a joint venture to trade in shares and securities in the Stock Exchange and to share the profit / loss equally. We do not see how such payments can be termed as payments to contractors for any work to be carried out by them. We therefore uphold the finding of the CIT(A) that these payments do not attract section 194C and the assessee was not liable to deduct tax there from. Accordingly section 40(a)(ia) is also not applicable. The payments, in our view, were rightly all owed as deduction by the CIT(A). The grounds 7 to 10 are dismissed.”

16. Since the issue involved in the present case as well as all the material facts relevant thereto are similar, we respectfully follow the order of the Tribunal in the case of M/s Asset Alliance Securities Pvt. Ltd. (supra) and uphold the impugned order of the ld. CIT(A) deleting the addition made by the A.O. u/s 40(a)(ia) on account of payments made by the assessee to jobbers/arbitragers. Ground No. 3 & 4 of Revenue’s appeal are accordingly dismissed..

17. In ground No. 5 to 11, the Revenue has challenged the action of the ld. CIT(A) in deleting the dis allowance of Rs.  48,000/- made by the A.O. u/s 40(a)(ia) on account of V. SAT, Leaseline and transaction charges paid by the assessee to stock exchange.

18. In the P&L account filed along with its return, the amount paid to stock exchange on account of V SAT, Lease line and transaction charges was debited by the assessee company. According to the A.O., the said charges paid by the assessee to the stock exchange were for such services which were in the nature of technical services falling within the purview of Section 194J. He, therefore, held that tax at source ought to have been deducted by the assessee company from the payment made to the stock exchange for the said services as per the provisions of section 194J. Since the assessee had failed to deduct such tax, the A.O. held that the amount paid for the said services without deduction of tax at source was liable to be disallowed u/s 40a(ia). The matter was carried before the ld. CIT(A) who held that V SAT, Leaseline and transaction charges were actually in the nature of reimbursement of charges paid by the members of the stock exchange in lieu of infrastructure and trading facilities provided by the later. He held that the payment made by the assessee to the stock exchange on account of the said charges thus was not coming within the domain of “fee for technical services” and the same also not being for ‘any work’ done by NSE for the member broker, tax at source was not deductible there from u/s 194J. Accordingly, he deleted the dis allowance made by the A.O. on account of V SAT charges, lease line and transaction charges u/s 40a(ia) relying on the decision of Mumbai Bench of ITAT in the case of Kotak Securities Ltd vs. ACIT 318 ITR (AT) 258. Aggrieved by the order of the ld. CIT(A), the Revenue has preferred this appeal before the Tribunal.

19. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that this issue is squarely covered in favour of the assessee by the decision of co-ordinate Bench of this Tribunal in the case of Kotak Securities Ltd. (supra) relied upon by the ld. CIT(A) wherein it was held that stock exchanges do not render any managerial or technical services to its members in lieu of the payment of transaction charges etc. and since such payments are made by the member brokers mainly for the facilities provided by the stock exchange, the provisions of section 194 J are not applicable so as to make the brokers liable to deduct tax at source from the said payment. It was also held that the provisions of section 40a(ia) thus are not attracted so as to make any dis allowance on account of such charges. Respectfully following the said decision of the co-ordinate Bench of this Tribunal in the case of Kotak Securities Ltd. (supra), we uphold the impugned order of the ld. CIT(A) deleting the dis allowance made by the A.O. on account of V SAT charges, Lease line charges & transaction charges and dismiss ground No. 5 to 11 of this appeal filed by the Revenue.

20. In the result, appeal of the assessee is treated as partly allowed and the appeal of the Revenue is treated as partly allowed for statistical purpose.

Order pronounced on 31^st December, 2010.

Mumbai, dated 31^st December , 2010.