The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) observed that tax implications and neutrality of transaction play a pivotal role in determining applicability of under Section 40A(2)(a) of Income Tax Act, 1961.
The Securities Exchange Board of India ( SEBI ) faced scrutiny as a discretionary portfolio manager for institutional clients. The Assessing Officer disallowed significant fees, challenging SEBI’s financial transactions. Despite SEBI’s explanations, the appeal ensued. The Commissioner of Income Tax ( Appeals ) upheld the legitimacy of research fees, prompting SEBI’s challenge. The appeal sought to reverse the CIT(A)’s decision, emphasizing inquiry adequacy. The case underscored the intricate dynamics of tax disputes and the rigorous scrutiny applied by authorities to financial transactions in Indian listed securities.
On further appeal, the CIT(A) deleted both the additions. Aggrieved, the Revenue was in appeal before the Income-Tax Appellate Tribunal
The counsel for the assessee Niraj Seth argued that Section 40A(2)(b) of the Income Tax Act 1961 does not apply to the assessee. He contended that Section 40A(2)(a) of the Income Tax Act 1961 does not exist, especially when the payment is made to a subsidiary company. The counsel emphasized that the provisions of under Section 40A(2)(a) of the Income Tax Act 1961 cannot be invoked if the payment is to a subsidiary company, as the said provision is not applicable in such cases. Additionally, he pointed out that Section 40A(2)(b)(iv) of the Income Tax Act 1961 also does not apply to the current transaction, as it pertains to payments by the company, whereas in this case, the transaction is vice versa.
The counsel for the assessee asserted that the subsidiary company, M/s QAMS, is subject to the same tax rate. Therefore, he argued that there is no tax evasion in the process of research payments to the subsidiary company.
The two member bench of the tribunal comprising Rahul Chowdhury ( Judicial member ) and Om Prakash Kant ( Account member ) affirmed that even if it is assumed that the payment was excessive, the fact that the subsidiary has been taxed at the same rate makes it a tax-neutral exercise. This conclusion was drawn as there was no apparent case of tax evasion, leading to the deletion of the disallowance.
However, the bench observed that for the current year, there is a need for verification of the combined research fee expenses claimed by the assessee and subsidiary to determine any potential tax evasion. The issue in dispute was remanded to the Assessing Officer for a lawful decision.
The Revenue’s appeals were allowed for statistical purposes.
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