2022 (1) TMI 339 - AT - Income Tax

Addition on account of Client Code Modification - Addition on ground as assessee has shifted its profit to other clients or shifted loss to its sister concerns as alleged by the Special Auditors appointed by the Department - Assessee submitted that the assessee company is into such business wherein various i.e. more than thousands of orders are received and executed during the business hours of a single day and correspondingly the price of security/ shares etc. also fluctuates with every nano second therefore practically it can be understood that the punching of orders by the employees is always in a haste - CIT(A) deleted the addition on the ground that the volume of Client Code Modification occurred are within the permissible limit allowed by SEBI and the Exchange/SEBI has not found any violation of rules and regulations related to CCM and the CCM transactions are falling within the prescribed limit of less than 1% - HELD THAT - We do not find any infirmity in the order of the CIT(A) on this issue. We find identical issue had come up before the Tribunal in the case of group company namely M/s Jaypee Financial Services Ltd. 2019 (12) TMI 820 - ITAT DELHI as held the assessee is not a member of any exchange and cannot execute CCM and the transactions on account of CCM done by the group concerns are not found to be false or untrue and since SEBI or the stock exchange has not taken any action treating the transactions to be non genuine and volume of CCM occurred are within the permissible limit allowed by the SEBI therefore we are of the considered opinion that there is no perversity in the order of the CIT(A) deleting the addition. Accordingly the same is upheld and the grounds raised by the revenue are dismissed. - Decided in favour of assessee. Addition u/s 36(1)(iii) on interest - Assessee could not establish that the interest bearing fund borrowed by it is wholly and exclusively used in business - assessee could not establish the diversion of interest bearing fund to Shri Gaurav Arora and M/s Arora Timber Ltd. free of interest - HELD THAT - Since the facts of instant case are identical to the facts of the cases decided by the Tribunal in the case of sister concerns of the assessee 2020 (1) TMI 858 - ITAT DELHI therefore respectfully following the same we uphold the order of the CIT(A) on this issue and the grounds raised by the Revenue are dismissed. Addition u/s 14A r.w. Rule 8D - HELD THAT - It is an admitted fact that the assessee company has not earned any exempt income or dividend income during the year a fact brought on record by the AO himself. It has been held by the Hon ble Delhi High Court in the case of Cheminvest Ltd 2015 (9) TMI 238 - DELHI HIGH COURT that in absence of any exempt income disallowance under Section 14-A of the Act of any amount was not permissible. Also see MCDONALD S INDIA PVT. LTD. 2018 (11) TMI 1057 - DELHI HIGH COURT - Decided in favour of assessee. Deemed dividend addition u/s 2(22)(e) - advances in the nature of loan and advance has been received by the assessee from M/s Jaypee Capital Services Ltd. and the assessee company has more than 10% shareholding in Jaypee Capital Services Ltd. - CIT(A) deleted the addition made by the AO holding that the transactions in the client ledger account are transactions entered in the ordinary course of business and are relating to sale/purchase of shares/currency/derivatives only - HELD THAT - The account of the assessee is a running account i.e. on every day there are transactions of receipt and payment and therefore the payments made against the business transactions are outside the purview of section 2(22)(e) - See SHRI GAURAV ARORA 2019 (3) TMI 1289 - ITAT DELHI - The various decisions relied on by the ld. Counsel for the assessee also support his case to the proposition that the word advance which is in the nature of money transacted to give effect to a commercial transaction would not fall within the ambit of the provisions of section 2(22)(e) of the Act. In this view of the matter and in view of the detailed reasoning given by the CIT(A) on this issue we do not find any infirmity in his order. Accordingly the same is upheld and the ground raised by the Revenue on this issue is dismissed.

Summary

Issues Involved:
1. Client Code Modifications (CCM)
2. Disallowance of Business Expenses
3. Disallowance under Section 14A read with Rule 8D
4. Interest Expenses under Section 36(1)(iii)
5. Addition under Section 2(22)(e) for Deemed Dividend

Issue-Wise Detailed Analysis:

1. Client Code Modifications (CCM):
The AO made an addition of Rs. 8,74,367/- on the grounds of Client Code Modifications (CCM), alleging that the assessee shifted profits to other clients or shifted losses to itself from other clients, as reported by the Special Auditors. The CIT(A) deleted the addition, observing that the volume of CCM transactions was within the permissible limit allowed by SEBI, and no violation of rules and regulations was found by the Exchange/SEBI. The Tribunal upheld the CIT(A)'s decision, noting that the assessee is not a member of any exchange and cannot execute CCM. The Tribunal also referenced similar cases where CCM within 1% was considered normal and permissible.

2. Disallowance of Business Expenses:
The AO disallowed Rs. 6,36,885/- on account of hotel and staff welfare expenses due to the absence of documentary evidence. The CIT(A) confirmed this disallowance, stating that the appellant failed to produce bills/vouchers to substantiate the expenses. The Tribunal upheld the CIT(A)'s decision, agreeing that the payment through banking channels alone does not substantiate the allowability of the expenses incurred wholly and exclusively for business purposes.

3. Disallowance under Section 14A read with Rule 8D:
The AO made a disallowance of Rs. 1,77,82,267/- under Section 14A read with Rule 8D, despite the assessee not earning any exempt income during the year. The CIT(A) deleted the disallowance, referencing the decision of the Delhi High Court in Cheminvest Ltd. v. CIT, which held that no disallowance can be made under Section 14A if no exempt income is earned during the year. The Tribunal upheld the CIT(A)'s decision, noting that the assessee did not receive any dividend income during the year.

4. Interest Expenses under Section 36(1)(iii):
The AO disallowed Rs. 95,45,816/- out of total interest expenses, alleging that the borrowed funds were diverted to group concerns without charging any interest. The CIT(A) deleted the disallowance, observing that the assessee had sufficient own funds and free reserves, and the transactions with group concerns were regular business transactions. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's decisions in S.A. Builders Ltd. v. CIT and Hero Cycles (P.) Ltd. v. CIT, which support the allowability of interest expenses for advances given on account of commercial expediency.

5. Addition under Section 2(22)(e) for Deemed Dividend:
The AO made an addition of Rs. 19,34,21,760/- under Section 2(22)(e), treating certain payments as deemed dividends. The CIT(A) deleted the addition, holding that the transactions in the client ledger account were business transactions related to the sale/purchase of shares, currency, and derivatives, and thus outside the purview of Section 2(22)(e). The Tribunal upheld the CIT(A)'s decision, referencing the Delhi High Court's decision in CIT v. Creative Dyeing & Printing (P.) Ltd., which supports the view that business transactions are beyond the ambit of deemed dividend provisions.

Conclusion:
The Tribunal dismissed the appeal filed by the Revenue, upholding the CIT(A)'s decisions on all issues. The Tribunal's judgment emphasized the adherence to SEBI guidelines, the necessity of documentary evidence for business expenses, the non-applicability of Section 14A in the absence of exempt income, the commercial expediency of interest expenses, and the exclusion of business transactions from the scope of deemed dividends under Section 2(22)(e).