2012 (6) TMI 814 - AT - Income Tax

Addition u/s 40(e)(ia) - Allowability of expenses on account of VSAT leaseline depository and transaction charges paid to stock exchange - AO had made disallowance on the ground that these charges were of the nature of fees for technical services and therefore tax was required to be deducted which was not done by the assessee - Held that - VSAT and leaseline charges paid by assessee to stock exchange were merely reimbursement charges paid/payable by the stock exchange to department of telecommunications and therefore these did not have any income element and accordingly tax was not required to be deducted. Transaction charge as in earlier years i.e. assessment year 2005-06 and assessment year 2006-07 in which orders were made under section 143(3) no disallowance had been made. The assessment year 2007-08 was the first year in which disallowance was made this claim was not controverted by the ld. DR. Therefore following the judgment of Hon ble High Court in the case of Kotak Securities Ltd. ( 2008 (8) TMI 592 - ITAT MUMBAI) the disallowance of transaction charges in assessment year 2007-08 can not be up held. Thus order of CIT(A) deleting the addition on account of transaction charges is sustained. As regards depository charges fees have been paid to depository for maintaining the accounts of the shares in Demat forms and for dematerializing of shares. These do not require any technical services and therefore disallowance of depository charges has been rightly deleted by the CIT(A). - Appeal of revenue dismissed.

Summary

Issues:
Allowability of expenses on account of VSAT, leaseline, depository, and transaction charges paid to stock exchange.

Analysis:
The appeal by the revenue challenged the allowability of expenses on VSAT, leaseline, depository, and transaction charges paid to the stock exchange for the assessment year 2007-08. The AO disallowed the claim under section 40(a)(ia) as the charges were considered fees for technical services, requiring tax deduction. However, CIT(A) deleted the addition based on the decision in Kotak Securities vs. Addl. CIT (25 SOT 440) stating that stock exchanges do not provide managerial or technical services.

Regarding VSAT and leaseline charges, the issue was supported by the judgment of the Hon'ble High Court of Bombay in Angel Capital & Debit Market Ltd. case. The High Court held that these charges were reimbursement charges without any income element, thus tax deduction was not necessary. The order of CIT(A) deleting the disallowance for VSAT and leaseline charges was upheld.

For transaction charges, the High Court in the case of Kotak Securities Ltd. held that they constituted fees for technical services. However, since both parties had not deducted tax in previous years, the addition could not be sustained for the current year. As no disallowance was made in earlier years, the disallowance of transaction charges for the current year was not upheld.

Depository charges were deemed allowable as normal business expenditure since they were paid for maintaining accounts in Demat form. The disallowance of depository charges was rightly deleted by CIT(A), and the Tribunal confirmed this decision.

In conclusion, the appeal of the revenue was dismissed, and the order of CIT(A) was upheld based on the judgments and interpretations of the High Court and the specific nature of the charges involved.