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IN THE INCOME TAX APPELLATE TRIBUNAL "I" BENCH, MUMBAI
, ,
BEFORE SHRI SANJAY ARORA, AM AND SHRI VIJAY PAL RAO, JM
./MA Nos. 367 & 368/Mum/2013
(Arising out of ITA Nos. 6559 & 6560/Mum/2006)
( / Assessment Years: 2002-03 & 2003-04)
Dy. CIT 4(1), ICICI Securities Ltd.
Room No. 640, 6th Floor, (Former M/s. ICICI Brokergae
Aayakar Bhavan, M. K. Road, / Services Ltd. & M/s. ICICI Web
Mumbai-400 020 Vs. Trade Ltd.)
ICICI Centre, H. T. Parekh Marg,
Churchgate, Mumbai-400 020
. / . /PAN/GIR No. AAACI 6284 P
(Applicant ) : (Respondent)
Applicant by : Smt. Parminder &
Shri N. Ashok Babu
Respondent by : Smt. Aarti Vissanji
/ : 12.09.2014
Date of Hearing
/
: 03.12.2014
Date of Pronouncement
/ O R D E R
Per Sanjay Arora, A. M.:
These are a set of two Miscellaneous Applications u/s.254(2) of the Income Tax
Act, 1961 (`the Act' hereinafter) by the Revenue arising out of the disposal of the
captioned appeals by it before the Tribunal for the assessment years (A.Ys.) 2002-03 and
2003-04. The subject matter of the applications being the same, these were heard
together, and are accordingly being disposed of vide a common order. The reference to
the figures, made for providing context, are for that pertaining to A.Y. 2002-03.
2
MA Nos. 367 & 368/Mum/2013
(A.Ys.2002-03 & 2003-04)
Dy. CIT vs. ICICI Securities Ltd.
2.1 It would be relevant to recount the background facts of the case. The assessee-
company, engaged in the business of share brokering, claimed expenditure in the sum of
Rs.497.52 lacs as marketing agent fees. The same involved payment to M/s.ICICI Capital
Services Ltd. at Rs.500/- for every new client account opened. This was towards
introduction of the client as well as completion of all the formalities in relation to the
opening of the new account. The payee, i.e., ICICI Capital Services Ltd., being under the
same management as the assessee company, the payment in the view of the Assessing
Officer (A.O.) was covered u/s. 40A(2)(b), so that the payment in order to be allowed
would have to satisfy the test of section 40A(2)(a). As the services of only two employees
was made available by the payee to the assessee for the purpose, which would in his view
have costed the payee Rs.3 lacs each, he considered the reasonableness of the expenditure
at Rs.10 lacs, i.e., including allowance for other incidental expenses toward
infrastructural facilities. Accordingly, the balance Rs.4,87,15,760/- was disallowed. In
appeal, the first appellate authority, being the Commissioner of Income Tax Appeals)-4,
Mumbai (`CIT(A)' for short) allowed further relief to the assessee, i.e., for 25% of the
amount claimed, restricting the disallowance thus to Rs.373.14 lacs. The facts for A.Y.
2003-04, the second consecutive year, are the same except for the amounts involved,
being at a disallowance of Rs.369.29 lacs by the A.O. and its restriction to Rs.184.65 lacs
by the ld. CIT(A), i.e., at 50% of the claim amount.
2.2 The Revenue has now moved miscellaneous applications for the relevant years,
stating that of the issued capital, represented by 300 lac equity shares of Rs.10/- each in
the assessee-company, 299.993 lac shares are held by ICICI Trusteeship Services Ltd. (as
trustee of ICICI Equity Fund) and 700 shares are held by nominees of ICICI Bank Ltd. It
is thus clear that M/s. ICICI Equity Fund is the main investor in the assessee-company,
holding 99.67% shares. Further, ICICI Equity Fund is a trust set up under the Indian
Trust Act, 1892 in March, 2000, and ICICI Bank Ltd. is the only investor in the said
Fund since inception (PB pg. 12). Further, ICICI Limited, ICICI Capital Services Ltd.
and ICICI Personal Financial Services stand merged with ICICI Bank Limited in
3
MA Nos. 367 & 368/Mum/2013
(A.Ys.2002-03 & 2003-04)
Dy. CIT vs. ICICI Securities Ltd.
pursuance of an order of the hon'ble High Court of Gujarat at Ahmedabad in Company
Petition No. 21 of 2002 connected with Company Application No. 360 of 2001 w.e.f. 30
March, 2002 (PB pgs. 13-17). On these grounds it is submitted that the finding by the
tribunal that the assessee is not related to the payee company in terms of section
40A(2)(b) is incorrect, so that the impugned order/s be recalled for removing the said
mistake apparent from the record, and the disallowance of the payment of marketing
agency fee, as confirmed by the tribunal, cancelled.
3.1 Before us, the ld. Departmental Representative (DR) would reiterate the
Revenue's case with reference to the various documents on record, viz., the assessee's
balance-sheet as on 31.03.2002 and 31.03.2003 (PB pgs. 3, 4); the certificate dated
10.09.2013 by ICICI Equity Fund and the order by the hon'ble Gujarat high court
approving the scheme of amalgamation vide its order dated 07.03.2002 (in Company
Application No. 21 of 2002 and 360 of 2001), so that the averments made by the Revenue
per its miscellaneous petition represent the correct facts and, further, were borne out by
the material on record.
3.2 The ld. Authorized Representative (AR) would, taking us through the relevant part
of the impugned order (para 15), state that even though admittedly the tribunal was of the
view that section 40A(2)(a) was not attracted in view of the non-substantiation of the
claim as to the satisfaction of section 40A(2)(b), it did not rest the matter there, but
proceeded to discuss the issue on merits as well, i.e., assuming that s. 40A(2)(b) stood
attracted. It has given a definite finding in the matter, stating that there was no whisper in
the assessment order about the charge for the relevant services being excessive or
unreasonable having regard to the fair market value of the services. The Revenue has not
impugned the said finding/s per its instant applications. Accordingly, even if it is
considered that there had been a mistake by the tribunal in holding as to the non-
application of section 40A(2)(b), the same would be of no moment in-as-much as
s.40A(2)(a) would in any case not apply in view of the said non challenge to the finding
of fact qua the said provision by the tribunal, made assuming the application of the said
4
MA Nos. 367 & 368/Mum/2013
(A.Ys.2002-03 & 2003-04)
Dy. CIT vs. ICICI Securities Ltd.
provision, i.e., non-satisfaction of s. 40A(2)(b) (in its view) notwithstanding. Further, the
order by the tribunal for A.Y. 2003-04 stands since confirmed by the hon'ble
jurisdictional high court, to which the matter was carried at the instance of the Revenue
(in ITA No. 1800 of 2011 dated 2.04.2014), placing a copy of the order by it on record.
The order by the tribunal having merged with that by the hon'ble jurisdictional high
court, no case for admitting the Revenue's application or disturbing the findings by the
tribunal would arise.
4. We have heard the parties, and perused the material on record.
The first issue that confronts us is whether there has been any mistake either of
fact or of law (or of both) in the impugned order, i.e., as claimed by the Revenue per its
instant applications. The Revenue, vide its instant applications, has impugned the
tribunal's finding with regard to the non-applicability of section 40A(2)(b) of the Act.
The relevant part of the impugned order, i.e., for A.Y. 2002-03 reads as under:
`14. We find force in the submission of the learned AR that section 40A is not
applicable as the assessee does not fall in category (b) of section of sub-section (2)
of section 40A of the Act. The learned AR referred page 14 of the papear book
reads as under:
"A SHARE CAPITAL
Authorised
40,000,000 Equity Shares of Rs.10/- each 400,000,000 400,000,000
Issued, Subscribed and Paid up
30,000,000 Equity Shares of Rs.10/- each 300,000,000 300,000,000
2,99,99,300 shares are held by ICICI Trusteeship Services Limited at the
trustee of ICICI Equity Fund and 700 shares are held by nominees of ICICI
Limited."
15. The learned AR with reference to above facts and from Explanation (b) of
sub section 2 of section 40A has clearly demonstrated that the assessee was not
having 20% shareholding; therefore, it does not fall in the persons referred in sub-
section (b) of section 40A of the Act therefore we are of the view that the AO is
not correct in applying section 40A(2) of the Act. On merits, we find...........'
[emphasis, ours]
5
MA Nos. 367 & 368/Mum/2013
(A.Ys.2002-03 & 2003-04)
Dy. CIT vs. ICICI Securities Ltd.
The basis of the said finding by the tribunal, as apparent, is the shareholding in the
assessee-company. However, the finding issued by it is with regard to the shareholding
by the assessee-company. The two are disparate and independent of each other. Section
40A(2)(b) enlists entities which are to be regarded as `specified persons' on the basis of,
inter alia, their substantial interest in the business or profession of the assessee.
Substantial interest, for the purpose of the provision, where the assessee is a company, is
to be reckoned on the basis of the beneficial ownership of shares carrying not less than
20% of their voting power at any time during the year. Firstly, therefore, it is not the
shareholding as at the year-end that alone is relevant, but that obtaining during the entire
year. Two, no finding qua the applicability of section 40A(2)(b) could be rendered in the
facts of the case without ascertaining the shareholding of ICICI Trusteeship Services
Ltd., holding almost the entire capital and, thus, the voting power in the assessee-
company. We have rather found the tribunal to have issued a finding as to the non-
applicability (of section 40A(2)(b)) on the basis of shareholding by the assessee-company
which is not a valid basis in terms of the provision. Further, there is no basis to presume
that there is a typographical error in the impugned order, and what was implied when it
said that the assessee was not having 20% shareholding was qua 20% shareholding in it,
i.e., the assessee-company. In fact, even assuming so would be of little consequence in-
as-much as there is no material on record to show the shareholding of the holding
company ICICI Trusteeship Services Ltd. (ICICI Equity Fund). The first appellate
authority had clearly held that the assessee, the payee, ICICI Cap. Services Ltd., and
ICICI Bank Ltd. are related concerns, to which the provision of section 40A(2)(b) are
clearly applicable. The said finding could only be disturbed or reversed on some factual
basis, which we find as absent. There is, accordingly, no basis for the tribunal to have
held that section 40A(2)(b) would apply qua the impugned payment/s to ICICI Capital
Services Ltd. (I-Caps), which thus cannot be said to be on a firm basis. It is trite law that
no court or tribunal can, vide its action or non action, cause prejudice to any party before
it. There has thus occurred a mistake in terms of section 254(2) of the Act. We may at
this stage also clarify that we are not going by the certificate by ICICI Equity Fund and
6
MA Nos. 367 & 368/Mum/2013
(A.Ys.2002-03 & 2003-04)
Dy. CIT vs. ICICI Securities Ltd.
the order by the hon'ble court (at PB pgs.12,13-17), being now produced before us by the
Revenue in-as-much as the same were not before the tribunal, nor have been shown to us
as having formed part of the tribunal's record. We accordingly admit the said mistake,
recalling the impugned order for deciding the question of the applicability of section
40A(2)(b) in terms of the said provision.
For A.Y. 2003-04, the tribunal, vide its' order dated 20.08.2010, issues no specific
finding in the matter. Rather, it proceeds to discuss the issue on merits, issuing definite
findings of fact per para 22 of its order, which have since been held by the hon'ble high
court as not giving rise to any substantial question of law. However, to the extent it
endorses the findings by the tribunal for A.Y. 2002-03, i.e., when it states that the
tribunal (for A.Y. 2002-03) has considered all the aspects of the matter, it stands inflicted
with the same infirmity as observed by us for A.Y. 2002-03, i.e., qua the legal issue
raised by the Revenue per its instant applications.
The impugned orders are accordingly recalled for the said limited purpose.
5. In the result, the miscellaneous applications are allowed.
Order u/s.254(1) (in ITA Nos. 6559 & 6560/Mum/2006)
6. We having heard the parties in the matter, proceed to the decide the issue raised by
the Revenue, and for which limited purpose the appeals stand recalled. Clause (a) of
Explanation below section 40A(2)(b) provides that a person shall be deemed to have
substantial interest in the business or profession carried on by a company if such person
is at any time during the previous year the beneficial owner of shares carrying not less
than 20% of the voting power. The Revenue has provided the shareholding in the
assessee-company as on 31.03.2000 to 31.03.2005 (PB pgs.1-11). Both as on 31.03.2002
and 31.03.2003, its' subscribed capital of 300 lac equity shares is held by ICICI
Trusteeship Services Ltd. (ICICI Equity Fund) to the extent of 299.993 lacs shares, with
the balance 700 shares being held by the nominees of ICICI Bank Ltd. The Equity Fund
has already issued a certificate dated 10.09.2013 that ICICI Bank Ltd. is the only investor
7
MA Nos. 367 & 368/Mum/2013
(A.Ys.2002-03 & 2003-04)
Dy. CIT vs. ICICI Securities Ltd.
therein, holding 100% of the unit capital of the Fund since inspection. Accordingly, both
the assessee and the payee companies are wholly owned subsidiaries of ICICI Bank Ltd.
In fact, the payee-company has itself merged with ICICI Bank Ltd. vide scheme of
amalgamation approved by the hon'ble high court of Gujarat vide its order dated
07.03.2002 effective 30.03.2002 (PB pgs.13-17). The assessee and the payee company
are thus clearly related parties within the meaning of section 40A(2)(b), so that the
provision of s. 40A(2)(a) is applicable for the relevant years qua the impugned payments.
The ld. AR, the assessee's counsel, on being so confronted did not dispute the same,
contending that this would though be of no consequence in-as-much as the tribunal has,
apart from its' finding with regard to the legal issue of the applicability of section
40A(2)(b), also rendered a finding on the merits of the disallowance u/s.40A(2)(a), and
which stands not impugned by the Revenue. In our view, even as this may be relevant
from the point of view of the assessee, is of little relevance for us in-as-much as that the
impugned orders have been recalled only for the limited purpose of rectifying the mistake
with regard to the legal issue afore-said, and toward the same passed an amended order/s.
We, accordingly, hold the payee company as a specified person u/s. 40A(2)(b) of the Act
for the relevant years. This order is to read be along with the impugned orders by the
tribunal, and shall to the extent inconsistent therewith, prevail. We decide accordingly.
7. In the result, the decision of the tribunal per its impugned orders shall remain
unchanged.
Order pronounced in the open court on December 03, 2014
Sd/- Sd/-
(Vijay Pal Rao) (Sanjay Arora)
/ Judicial Member / Accountant Member
Mumbai; Dated : 03.12.2014
. ../Roshani, Sr. PS
8
MA Nos. 367 & 368/Mum/2013
(A.Ys.2002-03 & 2003-04)
Dy. CIT vs. ICICI Securities Ltd.
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent
3. () / The CIT(A)
4. / CIT - concerned
5. , , / DR, ITAT, Mumbai
6. / Guard File
/ BY ORDER,
/ (Dy./Asstt. Registrar)
, / ITAT, Mumbai
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