Centurn Broking Ltd ( Formerly Centrum ... vs Assessee

BEFORE HON'BLE S/SHRI H.L. KARWA, PRESIDENT AND B.R.BASKARAN (AM) सव ी एच.एल. कावा , अ य एवं बी.आर.बा करन, लेखा सद य आयकर अपील सं./I.T.A. No.3081/Mum/2012 ( नधा रण वष / Assessment Year : 2008-09)

Centrum Broking Ltd., बनाम/ Asstt. Commissioner of Income (Formerly Centrum Broking Tax,4(1), Vs. Pvt.Ltd.,), Mumbai. 5th Floor, Santacruz (E), Mumbai-400098

(अपीलाथ /Appellant) .. ( यथ / Respondent)

थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. :AABCA1498E

अपीलाथ ओर से / Appellant by Shri J D Mistry

यथ क$ ओर से/ Respondent by Shri Premanand J

सन ु वाई क$ तार(ख / Date of Hearing :30.12.2014 घोषणा क$ तार(ख /Date of Pronouncement : 20. 2.2015

आदे श / O R D E R

Per B.R.BASKARAN, Accountant Member:

The appeal filed by the assessee is directed against the order dated 01-12-2011 passed by Ld CIT(A)-9, Mumbai and it relates to the assessment year 2008-09.

2. The appeal is barred by limitation by 52 days. The assessee has moved a petition requesting the bench to condone the delay. It was stated therein that the income tax appeal matters were looked after by an official named Mr.Hemant Agarwal, who resigned after completion of hearing with Ld CIT(A). It was further stated that a staff named BipinKumar Pathak, who is in-charge of delivering of letters placed the appellate order in the table of Mr.Hemant Agarwal and hence the same remained unattended.

2 ITA. No3081/Mum/2012

Subsequently, when the director made enquiries about the appellate order, the above facts came to light and immediately thereafter, the present appeal has been filed. We heard Ld D.R. Having regard to the submissions made in the affidavit, we are of the view that there was reasonable cause for the assessee in filing this appeal belatedly. Accordingly, we condone the delay and admit the appeal for hearing.

3. The assessee is disputing following additions confirmed by the Ld CIT(A):-

(a) Disallowance of VSAT and Lease line charges u/s 40(a)(ia) of the Act.

(b) Disallowance of claim of set off of Loss arising in Cash segment against the profits in Future & Options.

(c) Disallowance of Mark to market loss on derivatives .

(d) Disallowance made u/s 14A of the Act.

4. The assessee company is a member of Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) and is engaged in the business of Share trading and stock broking. The AO completed the assessment by making various additions and the appeal filed by the assessee before Ld CIT(A) was partly allowed. Still aggrieved, the assessee has filed this appeal before us.

5. The first issue relates to the disallowance of VSAT and Lease line charges made by the AO by invoking the provisions of sec. 40(a)(ia) of the Act. The payment made by the assessee for VSAT and lease line charges paid to BSE/NSE was treated as "Fee for technical services" and since the assessee did not deduct tax at source either u/s 194C or u/s 194J, the AO disallowed the said claim. The Ld CIT(A), by placing reliance on the decision of Hon'ble Bombay High Court rendered in the case of CIT Vs. Kotak Securities Ltd (340 ITR 333), held that the above said payments would require tax deduction at source u/s 194J of the Act and accordingly confirmed the disallowance made u/s 40(a)(ia) of the Act.

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6. At the time of hearing, the Ld A.R submitted that this issue has been decided in favour of the assessee by the jurisdictional High Court in the case of The CIT Vs. M/s The Stock and Bond Trading Company (ITA No.4117 of 2010 dated 14.10.2011). A perusal of the said order shows that the High Court has followed its earlier decision rendered in the case of "The Income tax Commissioner, Mumbai City-4 Vs. Angel Capital & Debit Market Ltd in Income tax Appeal (L) No.475 of 2011 dated 28-07-2011 to hold that the there is no requirement to deduct tax at source from the payments made to NSE/BSE towards VSAT charges and Lease line charges. The ld. AR submitted that in the case of Kotak Securities Ltd, the Bombay High Court did not consider VSAT and lease-line charges issue. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete this addition.

7. The Ld A.R submitted that the issue relating to "Market to Market Loss on derivatives" is also covered by the decisions rendered by the Co- ordinate benches of Tribunal in the following cases:-

(a) DCIT Vs. Kotak Mahindra Investment Ltd (35 taxmann.com 225)

(b) Shri Ramesh Kumar Damai Vs. Addl CIT (ITA No.1443/Mum/2009)

(c) Edelweiss Capital Ltd Vs. ITO (8 taxmann.com 157)(Mum)

A perusal of the above said decisions would show that the Tribunal is consistently holding that the Market to Market loss on derivatives cannot be treated as a contingent liability and hence the same is to be allowed as deduction. Accordingly, we set aside the order of Ld CIT(A) on this issue and direct the AO to delete this addition.

8. With regard to the issue relating to the disallowance made u/s 14A of the Act, the Ld A.R submitted that the assessee's own funds were far in excess of investments and hence there is no requirement to make 4 ITA. No3081/Mum/2012

disallowance u/s 14A of the Act is required to be made. In this regard, he placed reliance on the decision of Hon'ble Bombay High Court rendered in the case of CIT Vs. HDFC Bank Ltd (ITA No.330 of 2012). On the contrary, the Ld D.R submitted that the decision rendered in the case of HDFC Bank Ltd would apply only in respect of disallowance of interest. The Ld D.R submitted that the AO did not disallow any portion of interest expenditure and he has disallowed only administrative expenses by applying the provisions of Rule 8D(2)(iii) of the IT Rules.

9. Admittedly, the AO has disallowed a sum of Rs.63,848/- in respect of Administrative expenses by applying the provisions of Rule 8D(2)(iii) of the Act. The decision rendered by the jurisdictional High Court in the case of HDFC Bank Ltd (supra) would cover only the interest disallowance that is required to be made u/s 14A of the Act. Before tax authorities, it appears that the assessee did not make any specific submissions against disallowance made u/s Rule 8D(2)(iii) relating to administrative expenses. Hence, we confirm the order of Ld CIT(A) on this issue.

10. The remaining issue relates to the disallowance of claim of set off of loss incurred in cash segment against the profit earned in F & O segment. The assessee incurred a loss of Rs.38,54,655/- in the cash segment of equity market and claimed set off of the same against the profit earned in Future & Options segment. The AO held that the Explanation given under sec 73 of the Act shall override the proviso to sec. 43(5) of the Act. It is pertinent to note that the provisions of sec. 43(5) define "Speculative transactions" and the proviso to that section provides certain exceptions. The Explanation to sec. 73 provides that where any part of the business of a company consists in the purchase and sale of shares of other companies, such company shall, for the purposes of sec. 73, be deemed to be carrying on a speculation business to the extent to which the business consists of 5 ITA. No3081/Mum/2012

the purchase and sale of shares. The above said Explanation given in se. 73 shall not apply to the following cases:-

(a) The company whose gross total income consists mainly of income which is chargeable under the heads "Interest on Securities", "Income from house property", "Capital gains" and "Income from other sources".

(b) The company whose principal business is the business of banking or granting of loans and advances.

We have already noticed that the AO expressed the view that the Explanation given in sec. 73 shall override the proviso sec, 43(5) of the Act and accordingly held that the loss incurred in the Cash segment of share trading should be treated as "Speculation loss". Accordingly, he rejected the claim of set off claimed by the assessee.

11. The Ld CIT(A) upheld the decision of the AO by observing that the assessee has deliberately managed the incurring of expenses in order to reduce the business income to lower than the amount of dividend income, even though the dividend income was offered under the head Business. He further placed reliance on the decision of the Tribunal in the case of KNC Shares & Securities (P) Ltd (ITA No.7420 & 6782/M/03 dated 22.8.2006), where in it was held that the assessee was not entitled to set off loss arising from purchase and sale of shares against income from brokerage.

12. The Ld A.R submitted that the loss incurred by the assessee in cash segment is covered by the exception given in clause (c) given in the proviso to sec. 43(5) of the Act. He further submitted that the profit earned in F & O segment is covered by the exception given in clause (d) of the proviso to sec. 43(5) of the Act. He further submitted that an identical issue was considered by the Kolkatta bench of Tribunal in the case of ITO Vs. M/s Arena Textiles & Industries Ltd (ITA No. 1019/Kol/2011 dated 29.12.2011) and the Tribunal has held that the transactions done by delivery as well as the transactions of derivatives are not hit by section 6 ITA. No3081/Mum/2012

43(5) of the Act. The Tribunal further held that the aggregation of share trading loss and profit from derivative transactions should be done before the application of the Explanation to section 73 of the Act.

13. The Ld A.R further submitted that the Hon'ble Bombay High Court has also held in the case of CIT Vs. Darshan Securities (P) Ltd that the while computing the Gross Total Income, the normal provisions of the Act must be applied and it is only thereafter, that it has to be determined as to whether the gross total income so computed consists mainly of income which is chargeable under the heads referred to in the Explanation to sec. 73 of the Act. The Ld A.R submitted that the view expressed by the Kolkatta bench of Tribunal with regard to the application of Explanation to sec. 73 has been thus upheld by the jurisdictional Bombay High Court.

14. Thus, we notice that the Hon'ble Bombay High Court has held that the Explanation to sec. 73 can be applied after computing the Gross total income, meaning thereby, the same shall not override the proviso to sec. 43(5) of the Act. Hence, as per the decision of Kolkatta bench of Tribunal in the case of M/s Arena Textiles & Industries Ltd (supra), the loss from cash segment can be set off against the profit from derivatives. Thus, after computing the Gross Total Income in the above said manner, the application of provisions of Explanation to sec.73 is required to be examined.

15. In view of the above, the approach of the AO as well as the Ld CIT(A) cannot be upheld. Hence, in our view, the application of Explanation to sec. 73 needs to be examined afresh by duly considering the methodology discussed above at the end of the AO. Before us, the Ld A.R raised a fresh contention, viz., the transactions of purchase and sale of shares in cash segment has been carried out merely as a hedge against the transactions carried out in F & O segment. Accordingly, he contended that the mere hedging cannot be considered as the business of buying and selling of 7 ITA. No3081/Mum/2012

shares. Accordingly he contended that the provisions of Explanation to sec. 73 shall not apply to hedging transactions. We are unable to agree with the said contentions of the Ld A.R. In our view, the Income tax Act is not concerned with the purpose or the objective of the assessee in carrying the transactions in Cash segment. What we see is that the assessee has purchased and sold the shares on delivery basis. According to the Ld A.R, the same falls in the category of "Arbitrage" and hence it will not fall in the category of "speculative transactions" as defined in sec. 43(5) of the Act due to exception given in clause (c) of the proviso to sec. 43(5). However, Explanation to sec. 73 is a deeming provision and hence its applicability has to be necessarily tested in the instant case.

16. Accordingly, we modify the order of Ld CIT(A) on this issue and restore the matter of applicability of Explanation to sec. 73 to the file of the AO with the direction to examine this matter afresh in the light of discussions made supra.

17. In the result, the appeal filed by the assessee is treated as partly allowed for statistical purposes.

The above order was pronounced in the open court on 20th Feb, 2015.

घोषणा खल ु े +यायालय म- .दनांकः 20th Feb, 2015 को क$ गई ।

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(एच.एल.कावा /H.L.KARWA) (बी.आर.बा करन/B.R.BASKARAN) या यक सद य /JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER

मुंबई Mumbai: 20th Feb,2015. व. न.स./ SRL , Sr. PS 8 ITA. No3081/Mum/2012

आदे श क त!ल"प अ#े"षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent. 3. आयकर आय3 ु त(अपील) / The CIT(A)- concerned 4. आयकर आय3 ु त / CIT concerned 5. 4वभागीय त न6ध, आयकर अपील(य अ6धकरण, मंब ु ई/ DR, ITAT, Mumbai concerned 6. गाड फाईल / Guard file. आदे शानुसार/ BY ORDER, true copy सहायक पंजीकार (Asstt. Registrar) आयकर अपील(य अ6धकरण, मंब ु ई /ITAT, Mumbai