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2016 (2) TMI 383 - ITAT MUMBAI

2016 (2) TMI 383 - ITAT MUMBAI - TMI - Disallowance of sub-brokerage - CIT(A) restricted the allowance to 50% as excessive and unreasonable within the meaning of Sec. 40A(2)(b) of the Act - AO disallowed the claim as assessee has not deducted TDS u/s. 194J - Held that:- Observation of the Ld. CIT(A) that “it is for the appellant to prove beyond all doubt that the payment made constituted the fair market value of the services received” is not justified since assessee has given instances where the .....

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IT(A) on this issue.

As we have upheld the order of the Ld. CIT(A) in holding that the sub-brokerage paid would fall under the provisions of Sec. 194H and not under the provisions of Section 194J, the provisions of Sec. 40A(2) have no application in the facts and circumstances of the case, we dismiss the Revenue’s appeal. - I.TA No. 1777/Mum/2015, I.TA No. 1669/Mum/2015, I.TA No. 5004/Mum/2015 - Dated:- 5-2-2016 - Shri C. N. Prasad, Judicial Member And Shri Rajesh Kumar, Accountant Me .....

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by the Ld. CIT(A)-9, Mumbai dt. 28.01.2015 pertaining to assessment year 2011-12 against the penalty order u/s. 271(1)(c) of the Act. Since issues are common in all these appeals, they were heard together and disposed of by this common order for the sake of convenience and brevity. ITA No. 1777/M/2015 - Assessee s appeal 2. The first issue in the appeal of the assessee is that the Ld. CIT(A) erred in restricting the allowance of sub-brokerage to 50% of the expenditure incurred and claimed by th .....

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5,020/-. While completing the assessment, the Assessing Officer disallowed sub-brokerage of ₹ 21,80,51,674/- paid by the assessee to Stock Holding Corporation of India Ltd., for the reason that assessee has not deducted TDS u/s. 194J of the Act. According to the AO, the payments made by the assessee to Stock Holding Corporation of India Ltd., being the sub-brokerage is nothing but fees for professional and technical services, therefore the provisions of Sec. 194J of the Act are attracted. .....

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ec. 194H of the Act. However, the AO disallowed the sub-brokerage paid holding that the provisions of Sec. 194J would attract to the said payments and since the assessee has not deducted any tax at source from such payments, he disallowed the sub-brokerage paid by the assessee. 4. On appeal, the Ld. CIT(A) accepted the contention of the assessee that the payments made by the assessee do not fall under fees for technical services u/s. 194J of the Act but the same would fall u/s. 194H of the Act w .....

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isions of Sec. 40A(2)(b) of the Act stating that there is excessive payment of sub-brokerage to the Stock Holding Corporation of India Ltd which is a holding company of the assessee. He submits that no exercise has been done by the lower authorities to say that the sub-brokerage paid by the assessee is excessive. Referring to page-47 of the Paper Book, it is the submission of the Ld. Counsel that several entities have paid sub-brokerage higher than 50% and in fact copy of documents stating that .....

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as per the agreement dated 3.11.2010. Therefore the Counsel for the assessee submits that it is not unusual that the subbrokerage payments range from 50 to 80% depending upon the market conditions. Referring to page-43 of the Paper Book, the Ld. Counsel for the assessee submits that a list of brokers sharing brokerage in the ratio between 60:40 to 80:20 was submitted before the lower authorities. Referring to page-47 of the Paper Book, it is the submission of the Ld. Counsel that no evidence ha .....

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he commission income and paid taxes hence it is Revenue neutral. Referring to the decision of Edwise Consultants Pvt. Ltd Vs DCIT In ITA No. 5376/M/2011 dated 14.10.2015, the Ld. Counsel for the assessee submits that following the Jurisdictional High Court decision in the case of CIT Vs Indo Saudi Services (Travel) Pvt. Ltd. (310 ITR 306), The Hon ble Bench held that no disallowance is to be made u/s. 40A(2) in respect of the payments made to related parties when there is no attempt to evade tax .....

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lared dividend and paid dividend distribution tax. 5.2. The Ld. Counsel for the assessee placing reliance on the decision of the Mumbai E Bench in the case of DCIT Vs S.J. Investment Agencies (P) Ltd., (146 ITD 691) submits that it has been held by the Mumbai Tribunal that the provisions of Sec. 194H have no application for the sub-brokerage paid in connection with the services rendered in the course of buying and selling of units of Mutual Funds or in relation to transactions relating to Mutual .....

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sive or unreasonable having regard to the market value of goods services or facilities for which the payment is made or the legitimate needs of the business of the assessee or the benefit derived by or accruing to him. The Ld. Counsel for the assessee submits that it is not brought on record by the lower authorities how the sub-brokerage paid by the assessee is excessive or unreasonable having regard to the market value of services or facilities for which the payment is made. Referring to the de .....

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uch direction, therefore, the provisions of Sec 40A(2) are not justifiably invoked in assessee s case. 6. The Ld. Departmental Representative vehemently supports the orders of the lower authorities. 7. We have heard both parties and perused the orders of lower authorities, case laws relied on and the material evidence placed before us. The assessee is a stock broker and a member of Stock Exchange carrying on the business of sale and purchase of share and securities in the name and style of SHCIL .....

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d fall under fees for technical services within the meaning of Sec. 194J of the Act. . 7.1. It was the contention of the assessee that the sub-brokerage paid to the sub-broker will fall u/s. 194H which is a specific provision for commission and brokerage but not under the provisions of Sec. 194J of the Act. Further it was submitted that the provisions of Section 194H are not attracted for the sub-brokerage paid on dealing with securities in view of the proviso which exempts such brokerage. Howev .....

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lowance to 50% of brokerage. According to him there is excess payment of sub-brokerage by the assessee. He held that it is for the assessee to prove beyond all doubt that the payment made constituted the fair market value of the services received. As far as the findings of the Ld. CIT(A) that the payments are attracted the provisions of Sec. 194H is concerned, we completely agree with the Ld. CIT(A) that since there is a specific provision dealing with commission and brokerage, the same would at .....

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40A(2)(b) are attracted and the sub-brokerage paid is in excess, we do not agree with the findings of the conclusions of the Ld. CIT(A). 7.3. In the course of the assessment proceedings as well as the appellate proceedings, the assessee very much contested that the payment of sub-brokerage is not unusual that it ranges more than 50%. The assessee also furnished list of sub-broking companies who paid sub-brokerage in the ratio of 60:40 and 80:20. The assessee also given an instance in the case o .....

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0-70 arrangement favouring the subbroker. d) A advertisement giving particulars of an entity, namely Kaonain Securities Pvt. Ltd., appearing on the internet, showing that they are willing to part with 70% by way of commission to a franchisee partner. e) Balance sheet of Interconnected Stock Exchange of India Ltd. to show that the said entity is paying sub-brokerage to the tune approximately 80% f) That the sub-brokerage is paid to Stock Holding Corporation of India Ltd. which is a highly profita .....

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(A) that it is for the appellant to prove beyond all doubt that the payment made constituted the fair market value of the services received is not justified since assessee has given instances where the sub-brokerage was paid at 70% of the commission received. Further a list of parties were submitted to show that the sub-brokerage paid was in the ratio of 60:40 and 80:20 depending on the market conditions. The lower authorities have not made any enquiries to disprove the submissions of the assess .....

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or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. The scheme requires the Assessing Officer to establish the fair market value of the services for which payment is made and any amount that he finds to have been paid by the assessee in excess of such fair market value of the services alone can be disa .....

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n the case of Batlivala & Karanai Vs ACIT ( 2 SOT 379), a coordinate bench of this Tribunal has observed as follows Section 40A(2) provides that where the Assessing Officer is of the view that expenditure incurred by the assessee, in respect of which payment is made to the specified persons, is excessive or unreasonable having regard to the market value of goods, services or facilities for which the payment is made, or the legitimate needs of the business of the assessee or the benefit deriv .....

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less there is a clear finding that the market value of the services taken from the sister concern is less than the price at which the services are obtained, there cannot be an occasion to apply the disabling provisions of section 40A(2). This exercise, therefore, necessitates a finding about the fair market value of such services. For this reason alone, the disallowance under section 40A(2) is inherently unsustainable in law on the facts of this case. 9. In the case of Aradhana Beverages & F .....

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Act relating to the computation of income under the had profits and gains of business or profession. Sub-Section 2(a) of Section 40A provides that where the assessee incurs any expenditure in respect of which payment has been made or is to be made to the persons specified in that Section and the AO is of opinion that such expenditure is excessive or unreasonable having regard to the market value of the goods, services or facilities for which the payment is made or the legitimate needs of busines .....

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profession or the benefit derived by the asessee or accruing to the assessee for payment, then so much of the expenditure as is so considered by the AO to be excessive or unreasonable shall not be allowed as a deduction. If the above conditions are fulfilled, the AO can disallow the expenditure to the extent he considers it excessive or unreasonable by the above objective standards or otherwise. The object, scope and effect of the introduction of Section 40A(2)(a) was explained by the Board in .....

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borne in mind that this provisions is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner, which will cause hardship in bonafide cases . 10. In the case of Edwise Consultants Pvt. Ltd Vs DCIT (supra), the Co-ordinate Bench of this Tribunal held as under: We have earlier noticed that all the directors are in charge of the entire operations of the assessee company and the financial/operational results o .....

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2009)(310 ITR 306), wherein the Hon ble Bombay High Court referred to the Circular issued by CBDT with regard to sec. 40A(2)(a) as under:- Under the CBDT Circular No. 6-P, dated 6th July, 1968 it is stated that no disallowance is to be made under section 40A(2) in respect of payments made to relatives and sister concerns where there is no attempt to evade tax. In the case before the Bombay High Court, the revenue was not in a position to show as to how the assessee therein evaded payment of tax .....

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