The Mumbai bench of the Income Tax Appellate Tribunal (ITAT) held that the depositary charges should not be disallowed under section 14A read with rule 8D(2)(i) of the Income Tax Act,1961.
DAM Capital Advisors Limited, the appellant assessee was a company engaged in the business of share broking and was a member of the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) the activities of the assessee include providing equity research and stock broking services to institutional clients.
The assessee appealed against the order passed by the Commissioner of Income Tax (Appeals) for confirming the disallowance of Rs. 56,50,7527- under section 36(1)(iii) of the Income Tax Act and for the addition made towards the business loss and also for confirming the addition made by the Assessing Officer (AO) towards transfer pricing adjustments.
Hiro Rai / Ritu Punjabi, the counsels for the assessee contended that the depository charges disallowed by the assessing officer were not incurred towards earning the dividend income but were incurred in the normal course of business.
Also submitted that the expenses did not pertain to earning the dividend income and, therefore, cannot be considered for disallowance under rule 8D(2)(i) of the Income Tax Rules.
Abhishek Kumar Singh, the counsel for the department contended that the suo motu disallowance was not commensurate with the dividend income earned by the assessee and accordingly proceeded to make the disallowance under section 14A of the Income Tax Act.
The Bench observed that the depository charges are incurred for opening the Demat account which was a statutory requirement for the members of NSE / BSE. Therefore there was merit in the contention that the expense was incurred in the normal course of broking business and the depository charges should not be disallowed.
The two-member bench comprising Amit Shukla (Judicial) and Padmavathy (Accountant) held that the investments that are yielding exempt income only should be considered for disallowance and remanded the matter back to the assessing officer for re-computation of disallowance.
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