THE issues before the Bench are - Whether STT is a tax collectible only from buyers and sellers of shares; Whether when STT is included in the brokerage income of the assessee, the same is to be excluded while computing total taxable income; Whether a broker is entitled to claim loss arising from error trade; Whehter when the assessee earns dividend income, disallowance of a part of expenditure is warranted as per Rule 8D and Whether when the assessee fails to deduct TDS on VSAT and leased line expenses, such expenditure is liable to be disallowed u/s 40(A)(ia). And the assessee's appeal was partly allowed.
Facts of the case
A) Assessee
The first dispute was regarding the disallowance of Security Transaction Tax. AO observed that any amount paid on account of STT was not allowable in view of provision of section 40(a)( ib ) inserted by the finance act, 2004. He also observed that there was a separate provision under section 88E to allow rebate on account of STT payments. He, therefore, disallowed the claim made by the assessee.
The assessee disputed the decision of AO and submitted before the CIT( A) that the assessee was a broker and, had paid STT on behalf of its clients which had been included in the brokerage income and therefore, assessee was entitled to claim deduction on account of STT. CIT( A), however, did not accept the contentions raised. He agreed with the AO that there was a specific provision for disallowance of STT under section 40(a )( ib ). Further, rebate under section 88E was allowable only in case of traders and not in case of investors and, therefore, no deduction was allowable in case of assessee. CIT( A) accordingly confirmed the disallowance made by the AO.
In appeal before the ITAT, the AR submitted that the assessee was only a broker, which was undertaking transactions on behalf of clients. Under the provisions of section 98 of Securities Transaction Act, STT was payable by buyer and seller of shares and not the broker. As per section 100 of the Act, collection and recovery of STT was the responsibility of stock exchange. Therefore, section 40(a )( ib ) was applicable only in case of buyer and seller of shares as the traders were entitled to claim rebate under section 88E. The counsel contended that the assessee was a broker, which had only collected the tax on behalf of the stock exchange and same had been included in the brokerage income and, therefore, corresponding deduction was required to be allowed while computing total income from the brokerage.
B) The second dispute was regarding disallowance of loss on account of error trade. The assessee had incurred loss on account of certain share transactions. The AO, therefore, asked the assessee to explain as to why loss should not be treated as speculation loss under provisions of Explanation to section 73. The assessee explained that the provisions of the said Explanation were applicable only in cases where tax avoidance was intended and not applicable to genuine transactions. But AO was not satisfied with assessee's contentions and therefore disallowed the claim of loss.
In appeal, the CIT( A) rejected the claim of the assessee of loss arising from error trades and accordingly confirmed disallowance made by AO. On next appeal to the tribunal, the AR submitted that it was not correct on part of the CIT( A) to state that the assessee had not made claim of error trade before the AO. He referred to the letter of the assessee addressed to the AO in which the assessee had enclosed details of error trades. The assessee had also given details of error trades as part of the written submission made before CIT( A). It was pointed out that while executing transactions on behalf of the clients, the employees of the assessee sometimes punched wrong code of the shares to be bought/sold, mentioned purchase contract in place of sale contract, mentioned wrong quantity etc. as a result of which clients did not accept the transactions and assessee had to own up these transactions which were squared up resulting into loss. The loss is only incidental to business loss and has to be allowed as business and provisions of section 73 will not apply. DR on the other hand placed reliance on the orders of authorities below.
C) The third dispute was regarding disallowance of expenses under section 14A of the Act. During assessment AO treated 5% of the dividend income as expenditures relating to exempt income. In appeal, CIT( A) observed that disallowance of expenses under section 14A was required to be made as per Rule 8D. CIT( A) accordingly directed the AO to make disallowance as per Rule 8D.
D) Assessee had claimed deduction on account of lease line charges, VSAT charges and transaction charges while computing total income. These expenses are of technical nature and thus TDS should be deducted on the same. As a result because of non deduction of TDS these should be disallowed. Assessee submitted that there is no technicality involved in rendering of these services and therefore these payments are not professional in nature. The AO, however, did not accept the contentions raised . It was observed by him that the highly sophisticated system and services provided by the stock exchanges involved specialized knowledge, experience and skill in the field of share trading. The AO, therefore, held that the payments made by the assessee were of the nature of fees for technical service, covered under section 40(a )( ia ). He therefore, disallowed the claim.
In appeal, the CIT(A) deleted the addition made by AO aggrieved by which revenue is in appeal before the Tribunal.
E) The issue was regarding disallowance on account of payment made by the assessee to the stock exchange for violation of bye laws of stock exchange. The assessee submitted that the stock exchanges were not statutory authorities and, therefore, violation of their bye-laws could not be considered as violation of law. The payment made by the assessee was only for breach of contractual obligation and therefore claim was allowable as deduction. The AO however had not accepted the explanation given. It was observed by him that under the provisions of Explanation to section 37(1), any expenditure incurred by the assessee for any purpose which is prohibited by law cannot be considered as expenditure incurred for the purpose of business or profession. He, therefore, disallowed the claim. In appeal CIT( A) observed that stock exchanges were not government or semi government bodies but were only companies and, therefore, the payment made for violation of their regulations could not be considered as payment prohibited by law or in connection with an offence. He, therefore allowed the claim aggrieved by which, the revenue is in appeal before the Tribunal.
Having heard the parties, the tribunal held that,
A) ++ the case of the assessee is that STT is not required to be collected or paid by a broker. It is the buyer or seller of shares who is required to pay STT under section 98 of STT Act. The collection and recovery of STT is the responsibility of stock exchanges under section 100 of the STT Act. The assessee had only collected STT on behalf of stock exchanges from the clients and the same was included in the brokerage income and therefore, while computing the total income, the STT is required to be excluded. The liability on account of STT is the liability of the clients of the assessee who are buying and selling shares and, therefore, the provisions of section 40(a )( ib ) will be applicable in those cases and it is because of this reason, the rebate under section 88E is also allowable in case of buyer/seller of shares. The assessee is only a broker who has collected STT on behalf of the stock exchanges and has paid the same to the latter. In our view, STT is required to be excluded while computing the income of the assessee from brokerage. Therefore in our view the authorities below are not justified in disallowing the claim of deduction on account of STT in case of the assessee. We accordingly set aside the order of CIT( A) and delete the addition made. ;
B) ++ the assessee is only a share broker who buys/sells shares on behalf of the clients. It has been argued that loss had occurred on those transactions undertaken on behalf of the clients in which there were errors and transactions were not as per orders booked by the clients. These purchases/sales executed on behalf of the clients are therefore, owned up by the assessee and these are squared up which has resulted into loss. Claim of the assessee that it had made claim of error trades before the AO as well as CIT( A) has to be accepted. However, it is also a fact that the claim of error trade has not been examined either by AO or CIT( A). A.R had no objection if the matter is restored to the file of AO for necessary verification. In our view the matter requires fresh examination and in case loss is found to have occurred on account of error trades conducted by assessee on behalf of clients, the claim has to be accepted as business loss in view of the decision of the Tribunal in the case of Parker Securities Ltd.We, therefore, set aside the order of CIT( A) and restore the issue to the file of AO for fresh order after necessary examination and after allowing opportunity of being heard to the assessee.
C) ++ the order of CIT(A) cannot be sustained in view of the judgment of HC in case of G odrej and Boyce Mfg. Co. vs. DCIT , in which it has been held that Rule 8D is applicable only from assessment year 2008-09 and that, in respect of prior years, the disallowance has to be made on a reasonable basis. In this case, the same issue had been considered by the Tribunal in assessment year 2004-05 and the Tribunal has reduced the disallowance to Rs. 2.00 lacs . The facts in this year are almost identical as no major distinguishing factors have been brought to our notice by DR. However, considering the inflation, in our view, it would be appropriate to disallow expenses relating to dividend income at Rs. 2 ,20,000 /-. We hold accordingly.
D ) ++ the issue of transaction charges is covered by the judgment of HC in case of CIT(A) vs. Kotak securities Ltd. HC in that case held that the transaction charges paid by the assessee were of the nature of fees for technical services. However, HC noted that both parties were under bonafide belief for nearly a decade that no tax was required to be deducted and, therefore, this being the first year the disallowance could not be made as the assessee was under the bonafide belief that the claim was allowable. The case of the assessee is identical as in this year also disallowance has been made for the first time. No distinguishing features have been brought to our notice by DR. We therefore, delete the disallowance made by AO on account of transaction charges and confirmed the order of CIT( A) . As regards VSAT and lease line charges it has to be allowed in view of the decision of the Tribunal in the case of Angel Stock Broking Ltd . in which the Tribunal noted that stock exchanges were not owners of technology to provide it for a fee to the prospective users. They were consumers of technology for which they had to get permission from DOT. Therefore, the payment could not be considered as fees for technical services. Respectfully following the decision of the Tribunal, we allow the claim of the assessee.
E) ++ the AO had treated the expenditure as payment for violation of law and disallowed the same under section 37(1). CIT( A) held that violation of regulations of stock exchanges did not amount to violation of law and therefore, allowed the claim. The view taken by the CIT(A) is supported by the decision of the Tribunal in case of Gold crest capital Market Ltd. in which it has been held that payment made by stock broker to stock exchange on account of unfair trade practice and un-business like conduct is not for violation of law and, therefore, cannot be disallowed under section 37(1). No contrary decision of the HC or SC has been brought to our notice. We therefore, see no infirmity in allowing the claim. The order of CIT( A) is therefore, upheld.
deals in securities. It is a broker and had collected security transaction tax (STT) on behalf of the stock exchange and same had been included in the brokerage income and, therefore, he desired that deduction for STT was required to be allowed while computing total income from the brokerage.
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