Brokers to deduct 10% tax on transaction charges for online trading, CIT vs. Kotak Securities Limited (Bombay High Court)- The object of introducing Section 40(a)(ia) as explained in the CBDT circular No. 5 dated 15/7/2005 is to augment compliance of TDS provisions in the case of residents and curb bogus payments. Moreover, though Section 194J was inserted with effect from 1/7/1995, till the assessment year in question that is AY 2005-06 both the revenue and the assessee proceeded on the footing that Section 194J was not applicable to the payment of transaction charges and accordingly, during the period from 1995 to 2005 neither the assessee has deducted tax at source while crediting the transaction charges to the account of the stock exchange nor the revenue has raised any objection or initiated any proceedings for not deducting the tax at source.
In these circumstances, if both the parties for nearly a decade proceeded on the footing that Section 194J is not attracted, then in the assessment year in question, no fault can be found with the assessee in not deducting the tax at source under Section 194J of the Act and consequently, no action could be taken under Section 40 (a)(ia) of the Act. It is relevant to note that from AY 2006-07 the assessee has been deducting tax at source while crediting the transaction charges to the account of the stock exchange though not as fees for technical services but as royalty. It is further relevant to note that it is not the case of the revenue that on account of the failure on the part of the assessee to deduct tax at source, the revenue has suffered presumably because, the stock exchange has discharged its tax liability for the assessment year in question. In any event, in the facts of the present case, in view of the undisputed decade old practice, the assessee had bonafide reason to believe that the tax was not deductible at source under Section 194J of the Act and, therefore, the assessing officer was not justified in invoking Section 40(a)(ia) of the Act and disallowing the business expenditure by way of transaction charges incurred by the assessee.
