Statement recorded u/s 132(4) without corroborative evidence could not fasten any liability
Statement recorded under section 132(4) of the Income Tax Act, 1961 is evidence but its reliability depends upon the facts of the case and particularly surrounding circumstances. Drawing inference from the facts is a question of law. Here in this case, all the authorities below have merely reached to the conclusion of one conclusion merely on the basis of assumption resulting intofastening of the liability upon the assessee. The statement on oath of the assessee is a piece of evidence as per section 132(4) of the Income Tax Act and when there is incriminatingadmission against himself, then it is required to be examined with due care and caution. In the judgment of Kailashben Manharlal Chokshi (supra), the Division Bench of Gujarat High Court has considered the issue in the facts of that case and found the explanation given by the assessee to be more convincing and that was not considered by the authorities below. Here in this case also, no specific reason has been given for rejection of the assessee's contention by which the assessee has retracted from his admission. None of the authorities gave any reason as to why Assessing Officer did not proceed further to enquire into the undisclosed income as admitted by the assessee in his statement under section 134(2) in fact situation where during the course of search, there was no recovery of assets or cash by the Department. This fact also has not been taken care of and considered by any of the authorities that in a case where there was search operation, no assets or cash was recovered from the assessee, in that situation what had prompted the assessee to makedeclaration of undisclosed income of Rs. 20 lacs. Mere reading of statement of assessee is not the assessment of evidentiary value of the evidence when such statement is self-incriminating. Therefore, we are of the considered opinion that in the present case, a wrong inference had been drawn by the authorities below in holding that there was undisclosed income to the tune of Rs. 20 lacs.
HIGH COURT OF JHARKHAND
Shree Ganesh Trading Co.
v.
Commissioner of Income-tax
Tax Case No. 8 of 1999
January 3, 2013
ORDER
1. The following questions of law have been referred to this Court under section 256(1) of the Income Tax Act, 1961 by the Income Tax Appellate Tribunal, Patna Bench, Patna:-
"1. Whether the statement on oath recorded on 24.9.87 u/s 132(4) of the Act will be governed by the said provision as it stood on 24.9.87 or as amended by insertion of the Explanation therein w.e.f 1.4.89?
2. Whether the statement on oath recorded on 24.9.87 is within the ambit and scope of section 132(4) as amended by insertion therein of the Explanation w.e.f 1.4.89 and consequently admissible in evidence in the assessment proceedings?
3. Whether the addition of Rs. 20 lakhs was proper and justified on the basis of the admission in the statement u/s 132(4) voluntarily made without there being any corroborative evidence of the existence of any such income in any tangible form?"
2. However, reference has been argued on the question no.1 only and it has been submitted that though the question has been formulated with respect to applicability of proviso to section 132(4), which came into force with effect from 1.4.1989, by Explanation it has been declared thatexamination of any person under sub-section (4) of section 132 may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income Tax Act, 1961, learned counsel for the assessee submitted irrespective of insertion of proviso, assuming for the sake of argument that there was statement under section 132(4) of the Act of 1961, even then such statement alone without corroborative evidence cannot fasten any liability upon the assessee and that admission made in the statement under section 132(4) solely cannot be the ground for holding the income of the assessee. Learned counsel for the assessee relied upon the Division Bench judgment delivered in the case of Kailashben Manharlal Chokshi v.CIT [2010] 328 ITR 411/[2008] 174 Taxman 466 (Guj.), wherein it has been held that retracted statement recorded under section 132(4) cannot be the basis for assessing undisclosed income of the assessee. In the above judgment, the Division Bench held that there must be some corroborative evidence to the admission.
3. Learned counsel for the Revenue vehemently submitted that it is easy for anybody to retract from the statement given under section 132(4) and therefore, if the same view is taken by this Court, that will permit the tax evaders to give statement under section 132(4) admitting liability of income without any coercion, duress or force and then retract from that statement. It is also submitted that even retraction requires some corroborative evidence and the assessee could have submitted his evidence to show that he had no such income as has been admitted in his statement under section 132(4) of the Income Tax Act.
4. We considered the submissions of the learned counsel for the parties and perused the reasons given in the impugned orders as well as reasons given in the case of Kailashben Manharlal Chokshi(supra).
5. It appears from the statement of facts that there was a search in the business premises of the petitioner's firm as well as in the residential premises of its partner, Shri Sheo Kumar Kejriwal, on 24th September, 1987. During the course of search, the statement of Shri Sheo Kumar Kejriwal had been recorded under section 132(4) of the Income Tax Act and in the statement, he stated that he was partner in the Ganesh Trading Company, i.e. the present assessee-firm in his individual status and that he surrendered Rs. 20 lacs for the assessment year 1988-89 as income, on which tax would be paid. He further stated that other partners would agree to the same; otherwise it would be his personal liability. However, in the returns filed after search, the income of Rs. 20 lacs surrendered by Shri Sheo Kumar Kejriwal was not declared by the assessee-firm. On being asked to explain the reason for not showing the surrendered amount in the returns, it was submitted by the assessee that declaration made by the partner was misconceived and divorced from real facts. It was contended that the declaration was made after persuasion, which, according to the learned counsel for the assessee, Shri Binod Poddar, in fact, was because of coercion exerted by the search officers. In explanation, it was submitted that the firm or the individual had no undisclosed income. The assessee's said retraction was not accepted by any of the authorities below on the ground that the statement given by the assessee appears to be voluntarily given statement disclosing undisclosed income of Rs. 20 lacs. According to the learned counsel for the assessee, Shri Binod Poddar, the Assessing Officer had full jurisdiction to proceed for further enquiry and could have collected evidence in support of alleged admission of undisclosed income of the assessee.
6. We are of the considered opinion that statement recorded under section 132(4) of the Income Tax Act, 1961 is evidence but its reliability depends upon the facts of the case and particularly surrounding circumstances. Drawing inference from the facts is a question of law. Here in this case, all the authorities below have merely reached to the conclusion of one conclusion merely on the basis of assumption resulting into fastening of the liability upon the assessee. The statement on oath of the assessee is a piece of evidence as per section 132(4) of the Income Tax Act and when there is incriminating admission against himself, then it is required to be examined with due careand caution. In the judgment of Kailashben Manharlal Chokshi (supra), the Division Bench ofGujarat High Court has considered the issue in the facts of that case and found the explanation given by the assessee to be more convincing and that was not considered by the authorities below. Here in this case also, no specific reason has been given for rejection of the assessee's contention by which the assessee has retracted from his admission. None of the authorities gave any reason as to why Assessing Officer did not proceed further to enquire into the undisclosed income as admitted by the assessee in his statement under section 134(2) in fact situation where during the course of search, there was no recovery of assets or cash by the Department. This fact also has not been taken care of and considered by any of the authorities that in a case where there was search operation, no assets or cash was recovered from the assessee, in that situation what had prompted the assessee to make declaration of undisclosed income of Rs. 20 lacs. Mere reading of statement of assessee is not the assessment of evidentiary value of the evidence when such statement is self-incriminating. Therefore, we are of the considered opinion that in the present case, a wrong inference had been drawn by the authorities below in holding that there was undisclosed income to the tune of Rs. 20 lacs.
7. In view of the above reasons, without answering the question about retrospective operation of the proviso to section 134(4), we are holding that the authorities below have committed error of law in drawing inference from the materials placed on record, i.e. admission of the assessee coupled with its retraction by the assessee. The Revenue may now proceed accordingly
enalty to be set aside if revenue accepts that Assessee is eligible for immunity u/s. 271(1)(c) although he is not eligible
The assessee's claim for immunity under Explanation 5 to section 271(1)(c) as not maintainable for three reasons. Firstly, due to the inapplicability of the provision for the relevant years; the due date for filing the return under section 139(1) having expired or elapsed as on the date of search; rather, much prior thereto. Secondly, for non-satisfaction of the condition of payment of tax andinterest by the due date of filing the return of income under section 153A in response to notice thereunder pursuant to search under section 132 or even the actual date of filing of the return thereunder. Thirdly, even if the Commissioner (Appeals) took a view that the extended period for thepayment of admitted demand is available, such a view, being in any case contentious and not free from debate, could not have been taken by him in the rectification proceedings under section 154.
However, the matter having been conceded to by the revenue during hearing, admitting to the assessee's case for the relevant years being squarely covered by Explanation 5 to section 271(1)(c), on the basis of said concession, the revenue's appeal is dismissed for both the years.
IN THE ITAT KOLKATA BENCH 'A'
Deputy Commissioner of Income-tax
v.
Sheo Kumar Kajaria
IT Appeal NoS. 1425-1426 (Kol.) of 2010
[Assessment years 2004-05 and 2005-06]
August 1, 2012
ORDER
Sanjay Arora, Accountant Member – This is a set of two Appeals by the Revenue contesting the Order u/s. 154 r.w.s. 250 of the Income-tax Act, 1961 ('the Act' hereinafter) dated 26-05-2010 by the Ld. Commissioner of Income-tax (Appeals)(Central)-III, Kolkata ('CIT(A)' for short) for the assessment years (A.Ys.) 2001-02 to 2006-07.
2. The brief facts of the case are that the assessee is a builder. Search and seizure operations in the group cases, including the assessee, u/s. 132 of the Act was conducted by the Department on 23-08-2006. Money, jewellery, investment and other valuables, aggregating to Rs. 121.29 crores, were found during the course of search from the assessee's residential premises, and duly recorded in the Panchnama. This was followed by a disclosure petition by the assessee on 21-10-2006, admitting an amounting of Rs. 590.63 lakhs as his undisclosed income for the block period, which was spread over A.Ys. 2001-02 to 2007-08, vide returns of income filed u/s. 153A r.w s. 139(1) of the Act, filed subsequently on 28-08-2007. The aggregate returned income was in fact at Rs. 603.39 lakhs on account of some additional disclosure for A.Y 2007-08. The assessments were made accordingly for each of the years u/s.153A r.w.s. 143(3) of the Act, i.e., on the basis of the income as originally returned u/s. 139(1), and the additional income as per the disclosure pursuant to the search, being dated 20/6/2008 for A.Ys. 2004-05 and 2005-06. The assessee having returned a higher income only on the basis of search, and the materials found thereat, penalty proceedings u/s. 271(1)(c) of the Act on the additional income offered vide the disclosure petition/returns u/s. 153A were also initiated for all the years, it appears, up to A.Y. 2005-06; it being trite that the penalty for concealment and/or furnishing inaccurate particulars of income u/s. 271(1)(c) of the Act is to be with reference to the income and its particulars as returned originally (refer: CIT v. Onkar Saran & Sons [1992] 195 ITR 1/62 Taxman 440 (SC)). Penalty under the said section was accordingly levied vide separate orders u/s. 271(1)(c) of even date i.e., 26-12-2008, for the A.Ys. 2001-02 to 2005-06. The assessee was, however, successful in first appeal for A.Ys. 2001-02 to 2003-04 on the basis of the applicability of Explanation 5 to section 271(1)(c) of the Act. The assessee had duly disclosed the manner in which the impugned income had been derived, as alsopaid tax and interest arising thereon. For A.Ys. 2004-05 and 2005-06, however, the assessee had not paid the full demand of tax and interest and, accordingly, clause-2 of Explanation-5 could not be said to be applicable. The appeal for these two consecutive years was therefore dismissed, allowing that for the initial three years, by the ld. CIT(A) vide his order dated 27-08-2009 (copy on record). The assessee subsequently moved a rectification petition before the ld. CIT(A) for the last two years, i.e., A.Y. 2004-05 and 2005-06, claiming that the entire demand for these years also stood paid prior to the date of the appellate order i.e., 27-08-2009. The assessee's claim was got verified by the ld. CIT(A) from the Assessing Officer (AO), who confirmed that no demand for the relevant years, i.e., A.Ys. 2004-05 and 2005-06, was outstanding as on 27-08-2009. On the basis of the saidconfirmation by the AO, vide his remand report dated 10-05-2010, the operating part of which stands reproduced by the ld. CIT(A) at page-3 of his order, he confirmed of a factual infirmity in his earlier order dated 27-08-2009, i.e., in-so-far as it relates to A.Ys. 2004-05 and 2005-06, and accordingly, issued a finding that the conditions of Explanation-5 to section 271(1)(c) of the Act, i.e., for availing immunity from penalty imposed under the Act, stood satisfied by the assessee for the A.Ys 2004-05 and 2005-06 as well. Reference was made to the decision by the hon'ble Supreme Court in the case of CIT v. Hero Cycles (P.) Ltd. [1997] 228 ITR 463/94 Taxman 271 and N. RajamoniAmma v.Dy. CIT [1990] 53 Taxman 331 (Ker.) for the purpose that the CIT had the authority to rectify a mistake in his order, either of fact or of law, as apparent from the record. The penalty for these years was, accordingly, deleted. Aggrieved, the Revenue is appeal before the Tribunal.
3.1 Before us, the ld. DR could not rebut the factual findings by the ld. CIT(A) per his impugned order. On the Bench specifically inquiring of him if all the conditions of Explanation 5 to sec. 271 (1)(c) stood met in the instant case, he confirmed it to be so, i.e., conceded to the applicability of clause (2) of Explanation 5 to sec. 271(1)(c) for the relevant years. The ld. AR, on the other hand, would submit that there is no basis whatsoever for the Revenue's challenge. The ld. CIT(A) had declined relief in the first instance only on the basis that the entire admitted demand had not been paid by assessee, which finding was factually incorrect. The first appellate authority had called for a remand report from the AO, and only on the latter's confirmation that no demand, either as to tax or interest thereon, for the relevant years was outstanding as on the date of the appellate order, i.e., on 27-08-2009, rectified the said order in relation to these years; the same clearly bearing a factual mistake in this regard.
3.2 The hearing was closed at this stage, pronouncing the result of these appeals by the Revenue against it; it being the common contention of both the parties that the provision of Explanation 5 to section 271(1)(c) stood attracted and satisfied in the instant case for the relevant years.
4. We have heard the parties, and perused the materials on record, including the assessment order; the penalty orders, as well as those by the appellate authorities in the first round, i.e., prior to the rectification by the ld. CIT(A) of his earlier order confirming the levy of penalty for the relevant years vide the impugned order. The tribunal is supposed to decide an issue/s arising before it on merits, applying the law to the given facts and circumstances, issuing specific finding/s of fact, where and to the extent required, of course, on the basis of the material on record and after hearing the parties to the list.
4.1 Explanation 5 to section 271(1)(c) reads as under:-
| "271(1) ** | ** | ** |
| Explanations 1 to 4 ** | ** | ** |
Explanation 5.- Where in the course of a search initiated under section 132 before the 1st day of June, 2007, the assessee is found to be the owner of any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilizing (wholly or in part) his income, -
(a) for any previous year which has ended before the date of the search, but the return of income for such year has not been furnished before the said date or, where such return has been furnished before the said date, such income has not been declared therein ; or
(b) for any previous year which is to end on or after the date of the search,
then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income, unless,-
(1) such income is, or the transactions resulting in such income are recorded,-
(i) in a case falling under clause (a), before the date of the search ; and
(ii) in a case falling under clause (b), on or before such date, in the books of account, if any, maintained by him for any source of income or such income is otherwise disclosed to the Chief Commissioner or Commissioner before the said date ; or
(2) he, in the course of the search, makes a statement under sub-section (4) of section 132 that any money, bullion, jewellery or other valuable article or thing found in his possession or under his control, has been acquired out of his income which has not been disclosed so far in his return of income to be furnished before the expiry of time specified in sub-section (1) of section 139, and also specifies in the statement the manner in which such income has been derived and pays the tax, together with interest, if any, in respect of such income."
A bare reading of the provision would exhibit that clause 2 of Explanation 5 section 271(1)(c), i.e., the provision under which the assessee seeks immunity, and which has been found applicable in the instant case by the first appellate authority, is applicable only to cases where the due date for furnishing the return of income u/s. 139(1) of the Act has not expired as on the date of search, which in the instant case is 23-08-2006. Though, the ld. counsel, in this regard, placed a copy of the order by the hon'ble jurisdictional high court in the case of CIT v. Ramesh Chand Goyal [in ITAT No.181 of 2010, dated 11-08-2010] on record during hearing, we do not think that the hon'ble court has answered the question of law raised before it, questioning the applicability of Explanation 5 to section 271(1)(c) of the Act to the years for which the time limit for filing the return of income u/s. 139(1) had expired as on date of search, as for the relevant years in the instant case, but only declined to admit the Revenue's appeal in view of the various findings of fact rendered by the tribunal in the matter. It is settled law that mere denial of admission (of appeal) does not amount to its acceptance on merits. As such, the said decision would be of little assistance to the assessee in the present case [refer, inter alia, S. ShanmugavelNadar v. State of Tamil Nadu [2003] 263 ITR 658 (SC).
4.2 Our second observation in the matter is that the admitted income-tax, together with interest, as per the provisions of Explanation 5 is to be paid, if not immediately after the statement/deposition u/s. 132(4), by the date of filing of the return of income u/s. 153A, i.e., for the purpose of framing the assessment thereunder, which is to mandatorily follow a search u/s. 132 or requisition u/s. 132A of the Act after 31-05-2003 in respect of the defined period, and under which section the assessments in the instant case have been framed. We have compared the figures of income-tax and interest liability as assessed, and the details of its payment for both the years, as mentioned in the appellate order dated 27-08-2009 (at para-3.3, pg.16), with that per the respective assessment orders u/s. 153A r.w.s. 143(3) of the Act dated 20-06-2008, to find the same as identical. Clearly, therefore, there has been, firstly, no error in recording the said figures by the ld. CIT(A) in his order dated 27-08-2009. Secondly, and more importantly, tax and interest to the extent mentioned in the assessment orders, i.e., at in his order Rs.13.33 lakhs and Rs. 20.17 lakhs for A.Ys. 2004-05 and 2005-06 respectively, was outstanding for payment as on the date of assessment, i.e., 20-06-2008. The same has admittedly been paid, i.e., to the extent of Rs. 9,20,284/- and Rs. 11,98,845/- for A.Ys. 2004-05 and 2005-06 respectively, subsequent to the assessment, and prior to the confirmation of penalty by the first appellate authority on 27-08-2009, though it is not clear whether the same stood paid by the date of penalty order (26-12-2008) or subsequent thereto. The balance demand of Rs. 4,12,461/- and Rs. 8,17,864/- for A.Ys. 2004-05 & 2005-06 respectively, observed as outstanding as on 27-08-2009 by the ld. CIT(A) vide his order of even date, is, thus, per se not incorrect. As it appears, demand (liability) to that extent stands 'discharged' on rectifications under section 154 being effected by the AO subsequent to the assessments. The rectification order would stand to be merged with the respective assessment order, and thus have the effect of reducing the outstanding liability as on the date of the assessment (20-06-2008). As such, therefore, liability on account of tax and interest, to the extent of Rs. 9,20,284/-and Rs. 11,98,845/- was outstanding for payment for A.Ys. 2004-05and 2005-06 respectively as on the date of the assessment (20-06-2008), if not the date of levy of penalty u/s. 271(1)(c) for the said years (26-12-2008). The statute, in our clear view, provides a time-limit up to the date of filing the return u/s. 153A of the Act for the same. Even if the ld. CIT(A) was of the view that an extended time period for the payment of the admitted demand (i.e., tax and interest) is available under Explanation 5, which of course did not find expression in his earlier order dated 27/8/2009, the question is: Could such a view at all be taken in rectification proceedings, and which in fact represents the Revenue's second ground before us? The decisions cited by the ld. CIT(A) in this regard (refer para 2 above), rather, answer this question firmly in the negative. Further, as clarified during the course of hearing on an earlier date (30-07-2012, whereat the ld. DR was specifically required to prepare himself and address the Bench on the issue of non-applicability of Explanation 5 in the instant case, and which is in substance the Revenue's grievance), the order by the tribunal (Kolkata "C" Bench) dated 26-12-2010 (in ITA No.1857 to 1859/Kol/2009, copy on record) would not operate to decide the issue qua applicability of Explanation 5 to section 271(1)(c) for the years under reference, i.e., A.Ys. 2001-02 to 2003-04. This is for the reason that the Revenue's appeal for the first three years (A.Ys. 2001-02 to 2003-04), was dismissed on account of low tax-effect u/s. 268A. Sub-section (3) of s. 268A precludes the assessee from contending that in such case the Income-tax Authority has acquiesced in the decision on the disputed issue. Reference in this regard may also be made to the decision in the case of S. ShanmugavelNadar (supra). As regards the years under reference in the instant case, i.e., A.Ys. 2004-05 and 2005-06, the assessee's appeals were dismissed by the tribunal, being infructuous. Clearly, no appeal by the assessee would survive after impugned order for the relevant years, deleting the penalty. The order by the tribunal would thus not have any bearing in the matter on the merits of the case.
5. Conclusion
In view of the foregoing, we find the assessee's claim for immunity under Explanation 5 to section 271(1)(c) as not maintainable for three reasons. Firstly, due to the inapplicability of the provision for the relevant years; the due date for filing the return u/s. 139(1) of the Act having expired or elapsed as on the date of search; rather, much prior thereto. Secondly, for non-satisfaction of the condition of payment of tax and interest by the due date of filing the return of income u/s. 153A in response to notice thereunder pursuant to search u/s. 132, or even the actual date of filing of the return thereunder; being, rather, only after the date of assessment/s. Thirdly, as aforesaid, even if the ld. CIT(A) held the view that the extended period for the payment of admitted demand is available, such a view, being in any case contentious and not free from debate, could not have been taken by him in the rectification proceedings u/s. 154 of the Act. So, however, the matter having been conceded to by the ld. DR during hearing, admitting to the assessee's case for the relevant years being squarely covered by Explanation 5 to section 271(1)(c), we, as aforesaid, on the basis of said concession, dismiss the Revenue's appeal for both the years. We decide accordingly (also refer paras 4.1 & 4.2).
6. In the result, both the appeals by the Revenue are dismissed.
S. 271(1)(c) No cannot be imposed if despite addition tax effect not changes
No penalty can be imposed u/s 271(1)(c) wherein though the addition has been made but the tax effect did not change with the amount of addition
Held: This was an appeal filed by the department against the penalty deleted by the Ld. CIT(A). The assessee is a software company claiming deduction u/s 10B of the Act. During the quantum proceedings, the then assessing officer disallowed the deduction claimed u/s 10B of the Act of Rs. 31,52,432/- on the ground that the approval granted to the assessee, which made entitled the assessee for deduction u/s 10B, had expired on 31/03/2005 i.e. the deduction u/s 10B of the Act was not available to assessee in the relevant year under consideration. The assessee had brought forward business losses of Rs. 41,63,125/- and after setting off these losses with the disallowance made, the net total income of the assessee come out to NIL.
The Assessing officer in penalty proceeding imposed the concealment penalty on disallowance made u/s 10B of the Act. The Ld. CIT(A) deleted the penalty on the ground that the deduction was claimed by the assessee on the basis of certificate issued by the Chartered accountant in Form 56G; the approval of 100% EOU expired after 31.03.2005 and assessee could not get extension of approval though it was undisputed fact that the assessee had made exports, received foreign exchange and claimed deduction u/s 10B; in the assessment order income assessed for the year under the normal provision of the act is Rs. 31,52,432/-, which is set off by the business loss of Rs. 41,63,125/- and after setting off of taxable income under normal provision became NIL; tax paid by the assessee u/s 115JB amounting to Rs. 2,62,702/- is exactly the same which is payable after the assessment u/s 143(3) of the Act. Therefore, it was a bonafide mistake on the part of the assessee.
The Hon'ble ITAT of Mumbai Bench passed the order confirming the order of Ld. CIT(A) and decided that the tax has been charged by the revenue on the basis of computation made u/s 115JB of the Act which is same as submitted by the assessee and no addition has been made by the then Assessing officer u/s 115JB of the Act. Thus, the Hon'ble Bench relying upon the judgment of Hon'ble Delhi high Court in the case of CIT Vs. Nalwa Sons Investments and dismissed the appeal filed by the Revenue.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
Software Element India P. Ltd,
Vs.
Department Of Income Tax
Date of Pronouncement – 24 January, 2013
ITA NO. 551/MUM/2012 (A.Y. 2006-07)
PAN: AAACT6258H
This is an appeal filed by the revenue. It is directed against the order passed by Ld. CIT(A)-6 Mumbai dated 04/11/2011 for assessment year 2006-07. The grounds of appeal raised by the revenue read as under:
"On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing relief to the assessee to the extent impugned in the grounds enumerated below:
1. on the facts and circumstances of the case and in law the Ld. CIT(A) erred in allowing assessee's appeal in spite of the fact that there was a deliberate act of evasion on the part of the assessee in spite of completion of tenure for claiming exemption u/s1OB not only for the current year but in subsequent year also, which could have been unnoticed had there been no scrutiny assessment during the current year.
2. On the facts and circumstances of the case and in law, the Ld. C1T(A) erred in allowing assessee's appeal on the basis that obtaining approval from concerned authority is a technical issue but on the contrary it is an essential criteria for claiming exemption u/s10B.
3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in allowing assessee's appeal when the assessee itself is not arguing the genuinity of AO's claim by withdrawing appeal in respect of the assessment order passed by him."
2. Assessment in the present case has been framed vide order dated 31/10/2010 passed under section 143(3) of the Income Tax Act, 1961(the Act).
3. The tax liability of the assessee has been computed under section 115JB of the Act as the income under section 115JB was more than the income assessable under the normal provisions of the Act. Both computations done by the AO in the assessment order are as under:
"Income As per return NIL
Add: on a/c. of disallowance u/s.10B 31,52,432 Revised Total Income 31,52,432 The assessee has business loss as follows:
AY 2002-03 Rs. 30,09,780/-
AY 2004-05 Rs. 8,66,300/-
AY 2005-06 Rs. 2,87,045/-
Total Rs.41,63,125/-
Hence, after set off pf the above losses, the total taxable income is NIL Assessee company is allowed to carry forward only balance loss after Adjustment of above. Computation of Income as per provisions of Sec.115JB of the Act. Net profit as per P&L A/c. 35,02,702/- Tax @ 7.5% 2,62,702/- Taxable u/s. 115JB is more than the normal provisions of the Act, Tax is charged as per Section 115JB of the Act."
4. Under normal provision, deduction under section 10B was disallowed on the ground that the approval granted to the assessee, which made entitled the assessee for deduction under section 10B had expired on 31/3/2005. Concealment penalty has been initiated by the department on the disallowance made under section 10B of 3 ITA NO. 551/MUM/2012(A.Y. 2006-07)) the Act. Ld. CIT(A) has deleted such concealment penalty on the ground that deduction was claimed by the assessee on the basis of certificate issued by Chartered Accountant in Form 56G; the approval of 100% EOU expired after 31/3/2005 and assessee could not get extension of approval; the assessee made exports, received foreign exchange and claimed deduction under section 10B; in the assessment order income assessed for the year under the normal provision of the Act is Rs.31,52,432/-, which is set off by the business loss of Rs.41,63,125/- and after set off of taxable income under the normal provisions become nil; tax paid by the assessee under section 115JB amounting to Rs.2,62,702/- is exactly the same which is payable after assessment under section 143(3) of the Act. Therefore, it was a case of bona fide mistake of the assessee and in this manner Ld. CIT(A) has cancelled the concealment penalty of Rs.11,00,136/-. The department is aggrieved, hence, in appeal.
5. After narrating the facts and relying upon the penalty order, it was pleaded by Ld. DR that assessee had filed inaccurate particulars of its income as there was no basis existed with the assessee to claim deduction under section 10B of the Act. The approval had expired. Therefore, the assessee has furnished inaccurate particulars of its income. Ld. CIT(A) was wrong in canceling the penalty. His order should be set aside and that of AO be restored.
6. On the other hand, it was pleaded by Ld. AR that there is no concealment on the part of the assessee. The assessment has been framed under section 115JB of the Act which is exactly as per the computation of income submitted by the assessee with reference to section 115JB of the Act. He submitted that addition, if any, made with respect to normal computation cannot be made as a ground for levy of concealment penalty as tax has been charged by the revenue on the basis of computation done under section 115JB of the Act. He in this regard relied upon the decision of Hon'ble Delhi High Court in the case of CIT vs. Nalwa Sons Investment Ltd. 327 ITR 543 (Del), wherein it has been held that when computation of income was made under section 115JB, and there was loss under the normal provision, concealment, if any, did not lead to tax evasion at all and, therefore, penalty under section 271(1)(c) of the Act could not be imposed. He submitted that department had preferred a SLP against the said order of the Hon'ble Delhi High Court and it has been dismissed by Hon'ble Supreme Court vide order dated 4/5/2012. He submitted before us a copy of the dismisal of SLP and a copy was also given to Ld. DR.
7. We have heard both parties and their contentions have carefully been considered. We have gone through assessment order and it is seen that tax has been charged by the revenue on the basis of computation made under section 115JB of the Act which is exactly same as submitted by the assessee. There was no addition whatsoever with reference to assessment under section 115JB of the Act. The normal assessment is nil subject to carry forward of certain losses which have not been fully set off. Both the computations have been reproduced in the above part of this order. Therefore, the ratio laid down in the aforesaid decision of Hon'ble Delhi High Court in the case of CIT vs. Nalwa Sons Investment (supra) will be squarely applicable. SLP filed against the said decision has also been dismissed. In this view of the situation we see no infirmity in cancellation of the penalty though for the reasons different from reasons given by Ld. CIT(A). Therefore, appeal is dismissed.
8. In the result, the appeal filed by the revenue is dismissed
Deductions available to Assessees having income from salaries
The Income Tax Act provides that on determination of the gross total incomeof an assessee after considering income from all the heads, certain deductions therefrom may be allowed. These deductions detailed in chapter VIA of theIncome Tax Act must be distinguished from the exemptions provides in Section 10 of the Act. While the former are to be reduced from the gross total income, the latter do not form part of the income at all.
The chart given below describes the deductions allowable under chapter VIA of the I.T. Act from the gross total income of the assessees having income from salaries.
| SECTION | NATURE OF DEDUCTION | REMARKS |
| 80CCC | Payment of premium forannuity plan of LIC or any other insurer Deduction is available upto a maximum of Rs. 10,000/- | The premium must be deposited to keep in force a contract for an annuity plan of the LIC or any other insurer for receiving pension from the fund. The Finance Act 2006 has enhanced the ceiling of deduction under Section 80CCC from Rs.10,000 to Rs. 1,00,000 with effect from 1.4.2007. |
| 80CCD | Deposit made by an employee in his pension account to the extent of 10% of his salary. | Where the Central Government makes any contribution to the pension account, deduction of such contribution to the extent of 10% of salary shall be allowed. Further, in any year where any amount is received from the pension account such amount shall be charged to tax as income of that previous year. The Finance Act, 2009 has extended benefit to any individual assesse, not being a Central Government employee. |
| 80CCF | Subscription to long term infrastructure bonds | Subscription made by individual or HUF to the extent of Rs. 20,000 to notified long term infrastructure bonds is exempt from A.Y. 2011-12 onwards. This deduction is discontinued wef A.Y. 2013-14. |
| 80D | Payment ofmedical insurance premium. Deduction is available upto Rs.15,000/ for self/ family and also upto Rs. 15,000/- for insurance in respect of parent/ parents of the assessee. In case of senior citizens, a deduction upto Rs.20,000/- shall be available under this Section. Insurance premiume of senior citizen parent/ parents of the assessee also eligible for enhanced deduction of Rs. 20000/- | The premium is to be paid by any mode of payment other than cash and the insurance scheme should be framed by the General Insurance Corporation of India & approved by the Central Govt. or Scheme framed by any other insurer and approved by the Insurance Regulatory & Development Authority. The premium should be paid in respect of health insurance of the assessee or his family members. The Finance Act 2008 has also provided deduction upto Rs. 15,000!- in respect ofhealth insurance premiumpaid by the assessee towards his parent/parents. w.e.f. 01.04.2011, contributions made to the Central Government Health Scheme is also covered under this section. |
| 80DD | Deduction of Rs.40,000/ - - In respect of (a) expenditure incurred on medical treatment, (including nursing), training and rehabilitation of handicapped dependent relative. (b) Payment or deposit to specified scheme for maintenance of dependent handicapped relative. W.e.f. 01 .04.2004 the deduction under this section has been enhanced to Rs.50,000/ - Further, if the dependent is a person with severe disability a deduction of Rs.1,00,000!- shall be available under this section | The handicapped dependent should be a dependent relative suffering from a permanent disability (including blindness) or mentally retarded, as certified by a specified physician or psychiatrist. Note: A person with severe disability means a person with 80% or more of one or more disabilities as outlined in section 56(4) of the "Persons with Disabilities (Equal opportunities, Protection of Rights and Full Participation) Act.," |
| 80DDB | Deduction of Rs.40,000/- in respect of medical expenditure incurred. W.e.f. 0 1.04.2004, deduction under this section shall be available to the extent of Rs.40,000/- or the amount actually paid, whichever is less. In case of senior citizens, a deduction upto Rs.60,000/- shall be available under this Section. | Expenditure must be actually incurred by resident assessee on himself or dependent relative for medical treatment of specified disease or ailment. The diseases have been specified in Rule 11DD. A certificate in form 10I is to be furnished by the assessee from a specialist working in a Government hospital. |
| 80E | Deduction in respect of payment in the previous year of interest on loan taken from a financial institution or approved charitable institution for higher studies. | This provision has been introduced to provide relief to students taking loans for higher studies. The payment of the interest thereon will be allowed as deduction over a period of upto 8 years. Further, by Finance Act, 2007 deduction under this section shall be available not only in respect of loan for pursuing higher education by self but also by spouse or children of the assessee. W.e.f. 01.04.2010 higher education means any course of study pursued after passing the senior secondary examination or its equivalent from any recognized school, board or university. |
| 80G | Donation to certain funds, charitable institutions etc. | The various donations specified in Sec. 80G are eligible for deduction upto either 100% or 50% with or without restriction as provided in Sec. 80G |
| 80GG | Deduction available is the least of(i) Rent paid less 10% of total incomeii. Rs.2000 per month iii. 25% of total income | (1) Assessee or his spouse or minor child should not own residential accommodation at the place of employment.(2) He should not be in receipt of house rent allowance.(3) He should not have a self-occupied residential premises in any other place |
| 80U | Deduction of Rs.50,000/- to an individual who suffers from a physical disability (including blindness) or mental retardation. Further, if the individual is a person with severe disability, deduction of Rs.75,000/- shall be available u/s 80U.W.e.f. 01.04.2010 this limit has been raised to Rs. 1 lakh. | Certificate should be obtained on prescribed format from a notified 'Medical authority'. |
| 80RRB | Deduction in respect of any income by way of royalty in respect of a patent registered on or after 01.04.2003 under the Patents Act 1970 shall be available as :-Rs. 3 lacs or the income received, whichever is less. | The assessee who is a patentee must be an individual resident in India. The assessee must furnish a certificate in the prescribed form duly signed by the prescribed authority alongwith the return of income. |
| 80QQB | Deduction in respect of royalty or copyright income received in consideration for authoring any book of literary, artistic or scientific nature other than text book shall be available to the extent of Rs. 3 lacs or income received, whichever is less. | The assessee must be an individual resident in India who receives such income in exercise of his profession. To avail of this deduction, the assessee must furnish a certificate in the prescribed form along with the return of income. |
| 80C | This section has been introduced by the Finance Act, 2005.Broadly speaking, this section provides deduction from total income in respect of various investments/ expenditures/payments in respect of which tax rebate u/s 88 was earlier available. The total deduction under this section is limited to Rs. 1 lakh only. |
The following investments/payments are inter alia eligible for deduction u/s 80C:-
| NATURE OF INVESTMENT | REMARKS |
| Life Insurance Premium | For individual, policy must be in the name of self or spouse or any child's name. For HUF, it may be on life of any member of HUF. |
| Sum paid under contract fordeferred annuity | For individual, on life of self, spouse or any child of such individual. |
| Sum deducted from salary payable to Govt. Servant for securing deferred annuity for self, spouse or child | Payment limited to 20% of salary. |
| Contribution made under Employee's Provident Fund Scheme | — |
| Contribution to PPF | For individual, can be in the name of self/spouse, any child & for HUF, it can be in the name of any member of the family. |
| Contribution by employee to a Recognised Provident Fund. | — |
| Subscription to any notified securities/notified deposits scheme. | — |
| Subscription to any notified savings certificates. | e.g. NSC VIII issue. |
| Contribution to Unit Linked Insurance Plan of LIC Mutual Fund | e.g. Dhanrakhsa 1989 |
| Contribution to notified deposit scheme/Pension fund set up by the National Housing Bank. | — |
| Certain payment made by way of instalment or part payment of loan taken for purchase! construction of residential house property. | Condition has been laid that in case the property is transferred before the expiry of 5 years from the end of the financial year in which possession of such property is obtained by him, the aggregate amount of deduction of income so allowed for various years shall be liable to tax in that year. |
| Subscription to units of a Mutual Fund notified u/s 1 0(23D) | — |
| Subscription to deposit scheme of a public sector company engaged in providing housing finance. | — |
| Subscription to equity shares! debentures forming part of any approved eligible issue of capital made by a public company or public financial institutions. | — |
| Tuition fees paid at the time of admission or otherwise to any school, college, university or other educational institution situated within India for the purpose of full time education. | Available in respect of any two children. |
| Any term deposit for a fixed period of not less than five years with the scheduled bank. | This has been included in Section 80C by the Finance Act 2006. |
| Subscription to notified bonds issued by NABARD | This has been included in Section 80C by the Finance Act 2007 and has come into effect from 1.4.2008. |
| Payment made into an account under the Senior Citizens Savings Scheme Rules, 2004 | This has been introduced by Finance Act, 2008 and shall come into effect from 1.4.2009. |
| Payment made as five year time deposit in an account under the Post Office Time Deposit Rules, 1981 | This has been introduced by Finance Act, 2008 and shall come into effect from 1.4.2009. |
It may be noted that the aggregate amount of deductions under sections 80C, 80CCC and 80CCD are subject to an overall ceiling of Rs.1 lakh.
IT : Expenditure incurred on education of son of director of a company for degree course, who was not employed by company at that point of time, could not be allowed as business expenditure
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[2012] 19 taxmann.com 22 (Mum.)
IN THE ITAT MUMBAI BENCH 'E'
Sunidhi Consultancy Services Ltd.
v.
Deputy Commissioner of Income-tax 4(2), Mumbai*
R.S. SYAL, ACCOUNTANT MEMBER AND VIJAY PAL RAO, JUDICIAL MEMBER
IT APPEAL NOS. 2887 & 3855 (MUM.) OF 2009
[ASSESSMENT YEAR 2006-07]
JANUARY 11, 2012
I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2006-07 - Whether any expenditure incurred by assessee-company for training and higher education of its employees for reaping benefit of said training and higher education, would be allowable as business expenditure under section 37(1) - Held, yes - Whether, however, expenditure incurred on education of son of director of assessee-company for a degree course, who was not employed by assessee-company at that point of time, could not be allowed as business expenditure - Held, yes [In favour of revenue]
II. Section 32 of the Income-tax Act, 1961 - Depreciation - Allowability of - Assessment year 2006-07 - Assessing Officer disallowed claim of assessee in respect of depreciation on BSE card - It was undisputed that after corporatisation of Bombay Stock Exchange, stock exchange membership was no more in existence and card holders had been issued 10000 shares of BSE of face value of Re. 1 each - Those card holders were also granted right to trade in stock exchange - It was undisputed that shares were not a depreciable asset and also independent from rights to trade; therefore, no depreciation was allowable - As regards right to trade, legislature made it clear that cost of acquisition of such a right was to be taken as nil and, thus, there was no question of any depreciation of an asset having no cost of acquisition - Whether in view of aforesaid, Assessing Officer was justified in rejecting assessee's claim for depreciation - Held, yes [In favour of revenue]
FACTS-I
The assessee-company incurred certain expenditure in respect of education and training of 'R', i.e., son of one of the directors of the company, abroad. It claimed deduction in respect of said expenditure under section 37(1). On being asked by the Assessing Officer, the assessee explained that the expenditure had been incurred in order to augment the future business as it had entered into an agreement with 'R' in terms of which assessee had to bear expenses of foreign education and in return 'R' had agreed to serve the assessee-company for a minimum period of five years after completion of the education. The Assessing Officer taking a view that expenses were personal in nature, rejected assessee's claim. On appeal, the Commissioner (Appeals) concurred with the action of the Assessing Officer.
On second appeal :
HELD-I
It is an undisputed fact that 'R' was not an employee of the assessee-company when he went for higher studies in USA. There is no dispute that if any expenditure is incurred by the assessee-company for the training and higher education of its employees for reaping the benefit of the said training and higher education then the said expenditure would be a business expenditure and allowable. It is clear that the decision for sending 'R' to USA for higher education was taken because he is the son of one of the directors of the assessee-company and not being the employee of the assessee-company. Even otherwise there is no such policy of the assessee-company to send its employees for training and higher education. This is only incident and it appears that the decision to bear the expenses for the education was taken with a view to claim the said expenditure by the assessee-company. Further, the assessee company is a fully family owned company and, therefore, the decision for bearing the expenses for higher education is deliberate exercise on the part of the assessee-company to claim the said expenditure as business expenditure. [Para 11]
In case in hand, the decision for sending the son of one of the director of the assessee was taken without being taken into employment of the assessee-company. The education of the children is sole and exclusive responsibility of the parent and cannot be mixed up with the business of the family owned company. Therefore, having entered into alleged agreement for incurring the expenses on the higher education and, thereafter, putting a condition of employment with the assessee-company subsequent to the completion of the education is a motivated act of shifting the education expenditure to the accounts of the assessee-company as there is no policy or past practice of sending employees for studies or training for reaping the benefit. [Para 13]
In the facts and circumstances of the instant case, where the director of the assessee-company interested to send his son for education and giving the colour as the education was for the interest of the assessee-company and, thus, claimed as an expenditure. Therefore, the agreement between the assessee and the son of the director cannot change the real intent behind the entire exercise of the arrangement made. [Para 15]
In view of the above, the expenditure for education of the son of the director of the assessee-company for a degree course, who was not employed by the asessee-company at that point of time, cannot be allowed as business expenditure. [Para 17]
In view of the above discussion, the expenditure on higher education of the son of the director, in the facts and circumstances of the case cannot be said to be wholly and exclusively for the purpose of the business of the assessee and without any extra commercial circumstance. Accordingly, there is no error or illegality in the orders of the lower authorities on this issue. [Para 18]
FACTS-II
For the relevant assessment year, the assessee's claim for depreciation on BSE card was disallowed by the Assessing Officer. On appeal, the Commissioner(Appeals) allowed the depreciation by following the order of earlier years.
On revenue's appeal :
HELD-II
It is to be noted that after corporatisation of the Bombay Stock Exchange, the stock exchange membership is no more in existence and the card holders have been issued 10,000 shares of BSE of face value of Re. 1 each. As per the scheme of demutualisation, the card ceased to exist and in lieu of membership, the card holder has been issued 10,000 shares of BSEL. As per section 55(2)(ab), the cost of the shares allotted to the card holders of a recognized stock exchange under a scheme of demutualization shall be the cost of acquisition of his original membership of the exchange. As per proviso to the said clause, the cost of the capital asset being trading or clearing rights of the recognized stock exchange acquired by a shareholder on allotment of equity or under the scheme of demutualization or corporatisation shall be deemed to be nil . [Para 20.2]
It is clear from the developments of BSE as well as from the amended provisions of the Act that after corporatisation of BSE and corresponding amendment in the relevant provisions of the Act, the membership card of the erstwhile BSE ceased to exist and the cost of shares of the recognized stock exchange allotted in lieu of the card under the scheme of demutualization shall be the cost of acquisition of original membership of the stock exchange; whereas the cost of the capital asset being trading or clearing rights of recognized Stock Exchange acquired under the said scheme shall be deemed to be nil . [Para 20.3]
Therefore, in the changed circumstances, it is pertinent to note that the rights to trade still vested with the original members even if the 10000 shares allotted under the scheme are transferred/sold by the member. Thus, it is clear that the allotment of 10000 shares is in addition to the rights of trading or clearing in the stock exchange and, hence two separate and distinct assets are acquired by the original members holding the membership card of the erstwhile stock exchange. Therefore, the transfer of such shares does not affect the rights of trading in the stock exchange, which still vested with the original member. [Para 21]
Since the shares are not a depreciable asset and also independent from the rights to trade; therefore, no depreciation is allowable. The right to trade though acquired in lieu of surrender of membership Card before corporatisation of BSE. However, when legislation amended the statute and made it clear that the cost of acquisition of right to trade would be nil, then there is no question of any depreciation of an asset having no cost of acquisition. Moreover, this amendment has been brought with a view to avoid a conflicting situation of apportionment of cost of membership card between the shares allotted and right to trade and clearing. Since the assessee has already claimed the depreciation on the acquisition cost of BSE card and the value of the BSE card has been shown at the written down value in the books of account; therefore, the only logical conclusion one can draw from post amendment statutory provisions is that the entire value of the BSE card as stands in the books of account of the assessee on the date of de-mutualisation of BSE would be assigned to 10000 shares allotted to such members. Accordingly, when the membership ceased to exist and in lieu of the card, new capital asset came into existence being 10000 shares as well as right to trade and clearing in the stock exchange and the acquisition cost of trade and clearing has been explicitly provided as nil by the statute then the entire cost of Membership as stands in the books of account of the assessee would be treated as cost of acquisition of 10000 shares which is not a depreciable asset. [Para 21.1]
As per clause (3) of Explanation 5 to section 32(2), if any short-fall of amount between the value realilsed and written down value of a particular asset, the same is allowable. [Para 22]
In the case in hand, the assessee received the shares in lieu of BSE Membership card then whatever written down value was standing in the books of account of the assessee has been received by the assessee by way of shares and therefore, no shortfall arises to be claimed as depreciation. [Para 22.1]
In view of aforesaid, this ground of appeal raised by assessee has to be rejected.
CASE REVIEW
CIT v. Hindustan Hosiery Industries [1994] 209 ITR 383 / 73 Taxman 521 (Bom.) andCIT v. R.K.K.R. Steels [2002] 286 ITR 378 / 250 ITR 769 (para 17) followed.
Sakal Paper (P.) Ltd. v. CIT [1978] 114 ITR 256 (Bom.); CIT v. Kohinoor Paper Products [1997] 226 ITR 220 / 92 Taxman 316 (MP) and Krishna Fabrications Ltd. v.Jt. CIT [2010] 192 Taxman 287 (Kar.) (para 17.1) distinguished.
Godrej Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 / 194 Taxman 203 (Bom.) (para 4), Prasad Agents (P.) Ltd. v. ITO [2011] 333 ITR 275 /[2009] 180 Taxman 178(Bom.) (para 7), Sakal Papers (P.) Ltd. v. CIT [1978] 114 ITR 256 (Bom.) (para 9.1),CIT v. R.K.K.R. Steels [2002] 258 ITR 306 /[2003] 131 Taxman 830 (Mad.) (para 9.2),Max Explotec (P.) Ltd. v. CIT [2006] 286 ITR 378/ 155 Taxman 247 (Kar.) (para 9.2),CIT v. Hindustan Hosiery Industries [1994] 209 ITR 383/ 73 Taxman 521 (Bom.) (para 9.2), Dr. S.N. Naik v. Asstt. CIT [2007] 104 ITD 516 (Pune) (para 9.2), CIT v.Kohinoor Paper Products [1997] 226 ITR 220 / 92 Taxman 316 (MP) (para 10),Krishna Fabrications Ltd. v. Jt. CIT [2010] 192 Taxman 287 (Kar.) (para 10), M. Subramaniam Bros. v. CIT [2001] 250 ITR 769/ 119 Taxman 600 (Mad.) (para 10.2),Techno Shares, & Stocks Ltd. v. CIT [2010] 327 ITR 323/ 193 Taxman 248 (SC) (para 20.2) and Sino Securities (P.) Ltd. v. ITO [2012] 134 ITD 321 /[2011] 16 taxmann.com 354 (Mum.) (para 20.4).
Hiro Rai for the Appellant. O.A. Mao for the Respondent.
ORDER
Vijay Pal Rao, Judicial Member - These cross appeals are directed against the order dated 24th March, 2009 of the CIT(A) for the Assessment Year 2006-07.
2. In ITA No. 2887/Mum/2009, the assessee has raised the following effective grounds:
"(i) The ld CIT(A) erred in confirming the addition made u/s 14A of Rs. 7,57,233/- as expenditure attributable to earning tax free dividend.
(ii) The ld CIT(A) erred in confirming the addition made of Rs. 97,54,233/- by treating the trading loss as speculation loss.
(iii) The ld CIT(A) erred in confirming the addition of Rs. 28,92,198/- on account of education & training expenses as personal expenses."
3. Ground no. 1 is regarding addition made u/s 14A of the I T Act.
4. We have heard the ld AR as well as the ld DR and considered the relevant material on records. Since the assessment year involved in the instant case is 2006-07 and Rule 8D is applicable only prospectively i.e. from Assessment Year 2008-09 as held by the jurisdictional Hon'ble High Court; therefore, the matter needs to go back to the file of the Assessing Officer for fresh adjudication in the light of the latest decision of the Hon'ble Jurisdictional High Court in the case ofGodrej Boyce Mfg Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/ 194 Taxman 203 (Bom.).
4.1 An identical issue was considered by the coordinate Bench of the Tribunal in assessee's own case in ITA No. 4513/Mum/2008 vide order dated 19th Nov 2010 in para 12 as under:
"12. We have heard the learned representatives of the parties and perused the material on record. We find that the disallowance u/s 14A shall be calculated in the light of latest judgment of the Hon'ble jurisdictional High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vide Income Tax Appeal No. 626 of 2010 and WP. of 758 of 2010, judgment dated 12.08.2010. Therefore, we remit the matter back to the file of the AO with a direction to compute the disallowance u/s 14A in the light of the judgment of the Jurisdictional High Court in the case of Godrej & Boyce Manufacturing Co. Ltd., after providing reasonable opportunity of to the assessee in the matter.
5. Accordingly, we restore this issue to the record of the Assessing Officer for fresh adjudication in the light of the decision cited supra and in accordance with law after giving due opportunity of being heard to the assessee.
6. Ground no. 2 is regarding addition by treating the loss as speculation loss.
7. We have heard the ld AR of the assessee as well as the ld DR and considered the relevant material on record. At the out set we note that this issue is covered against the assessee by the decision of the Hon'ble jurisdictional High Court in the case of Prasad Agents (P.) Ltd. v. ITO [2011] 333 ITR 275/[2009] 180 Taxman 178(Bom.) wherein the Hon'ble High Court while considering the explanation to sec. 73 of the I T Act has held in para 18 as under:
"18 In our opinion there can be no difference between the losses suffered in the course of trading by delivery and losses in terms of the book value. As long as the assessee is carrying on business of trading by way of purchase and sale of shares even if in respect of any financial year, there are no transactions and yet the company has stock-in-trade of shares, the book value will have to be considered for the purpose of considering the profit and loss in case of speculative business. There can be no doubt that the Explanation to section 73 cannot be read to mean only when there is a purchase and sale of shares in the course of the financial year. The Explanation will cover both shares which are stock-in-trade and shares which are traded in the course of the financial year for the purpose of considering the loss and profit for that year. The Tribunal, in our opinion, has correctly answered the issue by holding that the loss of profit on account of valuation amounts to revenue losses or revenue receipt. The second question, therefore, also will have to be answered against the assessee and in favour of the Revenue."
8. Accordingly, this ground is decided against the assessee and in favour of the revenue.
9. Ground no. 3 is regarding addition on account of foreign education expenditure of the son of the Director of the assessee company.
9.1 The Assessing Officer has noted that during the year education and scholarship payment was made for education and training of Mr Rishabh Parekh son of Mr Jayesh Parekh one of the directors of the assessee company. The assessee company has made a total payment of Rs. 28,92,198/- in this respect. The AO asked the assessee as to how this is allowable expenditure. The assessee contended before the Assessing Officer that the expenditure has been incurred in order to augment the future business as the assessee company has entered into an agreement with Mr Rishabh Parekh regarding higher studies i.eBachelor in General Studies in economics, USA and bearing the expenses on account of all the educational, travelling and incidental cost and in turn, Mr Rishabh Parekh will join the assessee company for a minimum period of five years after completion of the education in USA. Thus, the assessee's main contention before the Assessing Officer was that the expenditure is legitimate for the purpose of business of the assessee company. The assessee has relied upon the decision of the Hon'ble jurisdictional High Court in the case of Sakal Papers (P.) Ltd. v. CIT[1978] 114 ITR 256 (Bom.).
9.2 The Assessing Officer did not agree with the contention of the assessee and was of the view that all these expenses are personal in nature. The Assessing Officer relied upon the decision of the Hon'ble Madras High Court in the case ofCIT v. R.K.K.R. Steels (P.) Ltd. [2002] 258 ITR 306 /[2003] 131 Taxman 830 (wrongly mentioned in the assessment order as Hon'ble Karnataka High Court) as well as the decision in the case of Mac Explotec (P.) Ltd. v. CIT [2006] 286 ITR 378/ 155 Taxman 247. The Assessing Officer has also relied upon the decision of the Hon'ble jurisdictional High Court in the case of CIT v. Hindustan Hosiery Industries[1994] 209 ITR 383 / 73 Taxman 521 (Bom.) and the decision of the Pune Bench of the Tribunal in the case of Dr. S.N. Naik v. Asstt. CIT [2007] 104 ITD 516. Accordingly, the Assessing Officer disallowed the said expenditure of Rs. 28,91,198/-.
9.3 On appeal the CIT(A) concurred with the action of the Assessing Officer while passing the impugned order.
10. Before us, the ld AR has submitted that there is an agreement between the assessee company and Mr Rishab Parekh whereby Mr Rishab Parekh has agreed and undertaken to take the employment of the assessee company for at least five years after completion of the foreign education. Therefore, the expenditure incurred on the foreign education of Mr Rishab Parekh is for the benefit of the business of the assessee company. He has stressed on the point that Mr Rishab Parekh went to USA for higher education in economics, which is beneficial for the business of the assessee. He has referred clause 4 & 5 of the agreement placed at pages 3 & 4 of the paper book and submitted that if in the event of Mr Rishab Parekh making any default in respect of the agreement, he will reimburse to the assessee company the expenditure incurred under the said agreement. The ld AR thus attempted to distinguish the facts of the case in hand from those cases relied upon by the Assessing Officer and submitted that when Mr Rishib Parekh has joined the assessee company and now a Director, than the expenditure has come out for the purpose of the business of the assessee. He has also referred the details of the Directors and their children as reproduced by the CIT(A) in the impugned order in the form of chart and submitted that children of the other directors of the assessee company have also studied in USA; but the expenses were not borne by the assessee and only in the case of Mr Rishib Parekh, the expenditure was borne by the assessee company because there was an agreement with the parties. Thus, the ld AR has submitted that the higher education of Mr Rishib Parekh was an advantage and an asset for the assessee company. He has relied upon the following decisions:
10.1 He has pointed out that in the case of Hindustan Hosiery Industries (supra) there was no agreement in this respect. Therefore, the Hon'ble jurisdictional High Court has held that the expenses were not allowable whereas in the assessee's case, when there is an agreement, which has been duly performed by the parties, then the expenditure is allowable.
10.2 On the other hand, the ld DR has submitted that Mr Rishib Parekh was not an employee of the assessee company when he went for USA for higher education. Therefore, the expenditure incurred by the assessee company was not as per the policy of the assessee company but only because Mr Rishib Parekh is the son of one of the Directors of the assessee company; therefore, the expenditure is not for the purpose of the business of the assessee. The ld DR has supported the orders of the lower authorities as well as the decisions of the Hon'ble Madras High Court in the case of M. Subramaniam Bros. v. CIT [2001] 250 ITR 769/ 119 Taxman 600, in the case of R.K.K.R. Steels (P.) Ltd. (supra) and also the decision of the Hon'ble Jurisdictional High Court in the case of Hindustan Hosiery Industries (supra).
11. We have heard the rival contention as well as the relevant material on record. It is an undisputed fact that Mr Rishib Parekh was not an employee of the assessee company when he went for higher studies in USA. There is no dispute that any expenditure incurred by the assessee company for the training and higher education of its employees for reaping the benefit of the said training and higher education then the said expenditure would be a business expenditure and allowable. It is clear that the decision for sending Mr Rishib Parekh to USA for higher education was taken because he is the son of one of the directors of the assessee company and not being the employee of the assessee company. Even otherwise there is no such policy of the assessee company to send its employees for training and higher education. This is only incident and it appears that the decision to bear the expenses for the education of Mr Rishib Parekh, was taken with a view to claim the said expenditure by the assessee company. Further, the assessee company is a fully family owned company and therefore, the decision for bearing the expenses for higher education is deliberate exercise on the part of the assessee company to claim the said expenditure as business expenditure.
12. The Hon. Jurisdictional High Court in Hindustan Hosiery Industries (supra) has observed that the assessee was a family concern of a mother and her four sons, among whom Shri Vijaykumar Kejriwal was one. The assessee had taken Shri Vijaykumar Kejriwal as a partner in the firm almost at or about the same time when he was sent for higher studies to the U.S.A. The age of Shri Vijaykumar was 21 at the material time. While noting this fact the Hon'ble Jurisdictional High Court has held as under:
"We have gone carefully through the orders of the Income-tax Appellate Tribunal, the Commissioner of Income-tax (Appeals) and the Income-tax Officer. It is not possible to accept the submission of learned counsel for the assessee that the expenditure in question was incurred in relation to the business of the assessee-firm. We have no hesitation in recording our conclusion to the fact that the expenditure incurred by the assessee has no nexus with the business of the assessee. We agree with the conclusion arrived at by the Income-tax Officer and the Commissioner of Income-tax (Appeals).
In the light of the above discussion, we answer the question referred to us in the negative, i.e., in favour of the Revenue and against the assessee."
13. In case in hand, the decision for sending the son of one of the director of the assessee was taken without being taken into employment of the assessee company. The education of the children is sole and exclusive responsibility of the parent and cannot be mixed up with the business of the family owned company. Therefore, having entered into alleged agreement for incurring the expenses on the higher education and thereafter putting a condition of employment with the assessee company subsequent to the completion of the education is a motivated act of shifting the education expenditure to the accounts of the assessee company as there is no policy or past practice of sending employees for studies or training for reaping the benefit.
14. In the case of M. Subramaniam Bros. v. CIT [2001] 250 ITR 769/ 119 Taxman 600(Mad.), the Hon. Madras High Court after following the decision of the Hon'ble. Bombay High Court in the case of Hindustan Hosiery Industries (supra) has taken a similar view when the assessee firm founded by the father admitted his children even when they were minor to the benefit of the firm, the children continued their studies even after attaining the age of majority. One of the sons was sent abroad for further study could not be regarded as a deputation made by the firm of one of its partners in connection with the business of the assessee-firm. The Hon. High Court has observed it was in substance, only a step taken by the father who was naturally interested in giving the best possible education to his son, and had sent him abroad to get a higher degree after he completed his degree. An agreement that was drawn up was merely intended to give a colour of commercial expediency, and was rightly not relied upon by the Tribunal.
15. We find that the decision of the Hon'ble. Madras High Court is applicable in the facts and circumstances of the present case, where the director of the assessee company interested to send his son for education and giving the colour as the education was for the interest of the assessee-company and thus claimed as an expenditure. Therefore, the agreement between the assessee and the son of the director cannot change the real intent behind the entire exercise of the arrangement made.
16. In the case of R.K.K.R. Steels (P.) Ltd. (supra) the honorable High Court has followed the decision in the case of M. Subramaniam Bros. (supra) as under :
"The Tribunal …..
It was canvassed for the assessee before the Tribunal that the fact that Rajiv Rai was the son of the director of the company should not be held against him and the expenditure incurred on his training was in fact, an expenditure which was to the benefit of the company as he subsequently became a director.
If this logic were to be accepted, in every family owned business, all the expenditure incurred in bringing up the children who may later on be given a role in the business as partners or directors could be claimed as business expenditure incurred in training the prospective employees and directors of the business. The expenditure permissible for deduction is expenditure that is wholly and exclusively laid out for the purposes of the business. The expenditure which a father incurs out of his natural love and affection for his children in meeting the cost of their education cannot become a business expenditure merely because he is also the owner or a director of a business in which the son or daughter subsequently takes part."
17. In view of the above decision of the Hon'ble jurisdictional High Court as well as Hon'ble Madras High Court (supra), we are of the view that the expenditure for education of the son of the director of the assessee company for a degree course, who was not employed by the assessee company at that point of time, cannot be allowed as business expenditure.
17.1 The decision relied upon by the ld AR of the assessee are not applicable in the facts and circumstances of the case because in those cases, the expenditure was incurred on the son of the director of the assessee while they were already working as an employee of the assessee or the circumstances were so strong to establish that higher education was wholly for the purpose of the business of the assessee and there was no other option but to takeover the business of the assessee only by heir of the director.
18. In view of the above discussion, we find that the expenditure on higher education of the son of the director, in the facts and circumstances of the case cannot be said to be wholly and exclusively for the purpose of the business of the assessee and without any extra commercial circumstance. Accordingly, we do not find any error or illegality in the orders of the lower authorities on this issue.
19. In ITA No.3855/Mum/2009, the revenue has raised the following effective grounds:
"(i) On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in deleting the disallowance of Rs. 3,50,395/ (wrongly mentioned as Rs. 18,82,031) and Rs.15,82,031/- (wrongly mentioned as 3,50,395/-) on account of depreciation on BSE card and FEDAI membership respectively.
(ii) On the facts and in the circumstances of the case and in law, the CIT(A) erred in directing the Assessing Officer to allow retrospective deduction on account of gratuity though the deduction can be allowed only after approval for the same is received.
(iii) On the facts and in the circumstances of the case and in law the CIT(A) erred in deleting the addition made on account of penalty of Rs. 2,13,317/-on violation of the bye-laws of the stock exchange, which are statutory in character and thus amounted to infringement of law.
(iv) "On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of deduction of Rs. 1,50,000/-made on account of club membership charges, holding that the same should be allowed as business expenditure without appreciating the fact that the same are personal/capital in nature and were not expended wholly, exclusively and necessarily for the purpose of business of the assessee."
(v) On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the addition of Rs. 2,29,425 made in respect of membership fees paid to Dubai Gold and Commodity exchange treating the same as personal/capital expenditure without appreciating the fact that the payment in nature of advance of acquisition of membership of Dubai Stock Exchange is a capital expenditure and thus the loss arising out of this is a capital loss."
20. Ground no. 1 is regarding depreciation of BSE card and FEDAI membership.
20.1 We have heard the ld DR as well as the ld AR of the assessee and considered the relevant material on record. The Assessing Officer disallowed the depreciation of BSE card and Foreign Exchange Dealers Association of India (FEDAI). On appeal, the CIT(A) has allowed the depreciation by following the orders of earlier years.
20.2 Prior to assessment year under consideration the issue of depreciation on the BSE card was settled by the Hon'ble Supreme Court in the case of Techno Shares &Stocks Ltd. v. CIT [2010] 327 ITR 323 / 193 Taxman 248 . However, it is to be noted that after corporatisation of the Bombay Stock Exchange, the Stock Exchange Membership is no more in existence and the Card Holders has been issued 10000 shares of BSE of face value of Rs. 1/- each. As per the scheme of de-mutualisation, the card ceased to exist and in lieu of Member Ship, the Card Holder has been issued 10000 shares of BSEL. As per section 55(2)(ab), the cost of the shares allotted to the card holders of a recognized Stock Exchange under a scheme of demutualization shall be the cost of acquisition of his original Membership of the exchange. As per proviso to the said clause, the cost of the capital asset being trading or clearing rights of the recognized Stock Exchange acquired by a share holder on allotment of equity or under the scheme of demutualization or corporatisation shall be deemed to be nil.
20.3 It is clear from the developments of BSE as well as from the amended provisions of the Act that after corporatisation of BSE and corresponding amendment in the relevant provisions of the Income Tax Act, the Membership Card of the erstwhile BSE ceased to exist and the cost of shares of the recognized Stock Exchange allotted in lieu of the card under the scheme of demutualization shall be the cost of acquisition of original membership of the Stock Exchange; whereas the cost of the capital asset being trading or clearing rights of recognized Stock Exchange acquired under the said scheme shall be deemed to be nil.
20.4 The ld DR has relied upon the order of the coordinate Bench of the Tribunal in the case of Sino Securities (P.) Ltd. v. ITO [2012] 134 ITD 321 /[2011] 16 taxmann.com 354 (Mum.) whereas the ld AR has submitted that even after corporatisation of the BSE the assessee is entitled for depreciation on the block of assets because block of assets of the assessee comprising of BSE card as well as member ship of FEDAI is still exist. He has contended that when only the BSE card was ceased to exist after corporatisation of BSE whereas the membership of FEDAI remains as it is and the assessee is entitled for depreciation on the written down value of the block of assets irrespective of the fact that BSE card was no more in existence.
21. Therefore, in the changed circumstances, it is pertinent to note that the rights to trade still vested with the original members even if the 10000 shares allotted under the scheme are transferred/sold by the Member. Thus, it is clear that the allotment of 10000 shares is in addition to the rights of trading or clearing in the Stock Exchange and hence are two separate and distinct assets acquired by the original members holding the membership card of the erstwhile Stock Exchange. Therefore, the transfer of such shares does not affect the rights of trading in the stock exchange, which still vested with the original member.
21.1 Since the shares are not a depreciable asset and also independent from the rights to trade; therefore, no depreciation is allowable. The right to trade though acquired in lieu of surrender of Membership Card before corporatisation of BSE. However, when legislation amended the statute and made it clear that the cost of acquisition of right to trade would be nil, then there is no question of any depreciation of an asset having no cost of acquisition. Moreover, this amendment has been brought with a view to avoid a conflicting situation of apportionment of cost of Membership card between the shares allotted and right to trade and clearing. Since the assessee has already claimed the depreciation on the acquisition cost of BSE card and the value of the BSE card has been shown at the written down value in the books of account; therefore, the only logical conclusion one can draw from post amendment statutory provisions is that the entire value of the BSE card as stands in the books of account of the assessee on the date of de-mutualisation/corporatisation of BSE would be assigned to 10000 shares allotted to such members. Accordingly, when the membership ceased to exist and in lieu of the card, new capital asset came into existence being 10000 shares as well as right to trade and clearing in the Stock Exchange and the acquisition cost of trade and clearing has been explicitly provided as nil by the statute then the entire cost of Membership as stands in the books of account of the assessee would be treated as cost of acquisition of 10000 shares which is not a depreciable asset.
22. As per clause (3) of Explanation 5 to sec. 32(2), if any short fall of amount between the value realised and written down value of a particular asset, the same is allowable.
22.1 In the case in hand, the assessee received the shares in lieu of BSE Membership card then whatever written down value was standing in the books of account of the assessee has been received by the assessee by way of shares and therefore, no shortfall arises to be claimed as depreciation.
23. As regards the membership of FEDAI is concerned, despite specific query from the Bench about the status of the membership card of FEDAI; whether the same development/charges as taken place as in the case of membership card of BSE, the ld AR has expressed his inability to say anything and requested that the matter may be remanded to the record of the CIT(A) for consideration of all the relevant facts and decide the same.
24. As the relevant facts and development, if any in case of membership card of FEDAI is not available before us; therefore, in the interest of justice, we remand this issue to the record of the Assessing Officer to ascertain the necessary facts and decide the issue as per law in the light of the above observation.
25. Next issue is regarding claim of gratuity.
26. We have heard the ld DR as well as the ld AR and considered the relevant material on record. At the outset we note that this issue has been considered and decided by the Tribunal in assessee's own case for the AY 2005-06 in ITA No. 4513/Mum/2008 in para 16 as under:
"16. We have gone through the orders of the revenue authorities and perused the record. At the time of hearing, the learned counsel for the assessee has submitted that the assessee has received approval for its Trust from CIT videorder No. CIT-4/HQ/ Gratuity/ 2010-11/33, dated 10 and vide dated 19.04.2010 and Corrigendum No. CIT-4/HQ/Gratuity/7-S/2010-11/176, dated 0/08/2010 stating therein that the approval shall take effect from 23/02/2000. Copies of the said approvals are available on record. In view of the above, the payment made by the assessee to an approved Gratuity Trust, therefore, we confirm the order of CIT(A) in directing the AO to allow the deduction of gratuity payment of Rs. 1,47,526f- Thus, this ground of appeal of the revenue is dismissed."
26.1 Accordingly, we decide this issue in favour of the assessee and against the revenue and upheld the order of the CIT(A), qua this issue.
27. Next issue is regarding penalty on violation of bye-laws of Stock Exchange.
28. We have heard the ld DR as well as the ld AR and considered the relevant material on record. At the outset we note that this issue has been considered and decided by the Tribunal in assessee's own case for the AY 2005-06 in ITA No.4513/Mum/2008 in para 23 as under:
"23. The learned representatives of the parties agreed that this issue is covered by the decision of ITAT in assessee's own case for Assessment Year 2003-04 cited supra wherein the ITAT held that the Tribunal bad taken a view that penalty for short payment of margin money was a compensatory payment under rule of stock exchange which is allowable as revenue expenditure and the same is not penal in nature and for infraction of any law. The said view was taken in the following decisions:
1 ACIT v. Ramesh Damani, ITA No 5143/Mum/2006 (Mum)
3. Goldcrest Capital Markets Ltd. v. ITO, 2 ITR 355 (Mum)
23. Since the issue in the year under consideration is identical to that of Assessment Year 2003-04, we respectfully follow the decision of ITAT and in the light of that we confirm the order of CIT(A) on this count."
Accordingly, we decide this issue against the revenue.
29. Next issue is regarding claim of club membership charges.
30. We have heard the ld DR as well as the ld AR and considered the relevant material on record. At the outset we note that this issue has been considered and decided by the Tribunal in assessee's own case for the AY 2005-06 in ITA No. 4513/Mum/2009 as well as for AY 2004-05 in paras 19 & 21 as under:
"19. The learned representatives of the parties agreed that this issue is covered by the decision of the ITAT in assessee's own case for Assessment Year 2003-04 in ITA Nos. 5765/Mum/06 and 5414/Mum/06 vide order dated 6th August, 2010 wherein the ITAT held that "…….. As far as expenditure in acquiring corporate membership and expenses incurred in using club facilities are concerned, we are of the view that the same are business expenditure as has been held in the following cases:
4. Mr. Vimal B. Shah v. ITO in ITA No. 11 82/Mum/2006 (Mum)
5. ACIT v. Mr. Ramesh Damani, ITA No. 5143/Mum/2006(Mum)'
20. Since the issue under consideration is identical to that of Assessment Year 2003-04 decided by the ITAT, we respectfully follow the same and in the light of that we confirm the order of IT(A) in allowing the payment of Rs. 1,50,000/- made on account of club membership charges. Thus, this ground of appeal is dismissed."
30.1 Accordingly, we decide this issue against the revenue and in favour of the assessee.
31. Last issue regarding membership fee paid to Dubai Gold and Commodity exchange.
32. We have heard the ld DR as well as the ld AR and considered the relevant material on record. The assessee made an application to Dubai Gold and Commodity Exchange (DGCX) to act as a member and a broker. The assessee deposited a fee of Rs. 2,29,425/- as application fee, which was to be adjusted against the membership fee of US $ 150,000 (approx. Rs. 70 lacs). Subsequently, the assessee decided not to acquire the membership due to certain difficulties and therefore, the application money was forfeited. The assessee claimed the same as loss incidental to business. The Assessing Officer disallowed the claim of the assessee. On appeal, the CIT(A) allowed the claim of the assessee.
33. Having considered the rival contention and relevant material on record, we note that the membership expenditure is undoubtedly a capital in nature. The membership of DGCX was once for all and the expenditure would have an enduring benefit. Therefore, in case the assessee would have taken membership, the entire membership fee was to be treated as a capital expenditure. Therefore, forfeiture part of the membership fee cannot be allowed as revenue loss but the loss of capital. Accordingly, we set aside the order of the CIT(A) and restore the order of the Assessing Officer on this issue.
34. In the result, both the appeals are partly allowed for statistical purpose
IT : Where BSE was succeeded by BSEL and assessee, a membership card holder in BSE, was granted certain ownership and trading rights in BSEL, it was not entitled to depreciation on rights so acquired in BSEL
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[2011] 16 taxmann.com 354 (Mum.)
IN THE ITAT MUMBAI BENCH 'H'
Sino Securities (P.) Ltd.
v.
Income-tax Officer, Ward 4(2)(4)*
J. SUDHAKAR REDDY, ACCOUNTANT MEMBER AND VIJAY PAL RAO, JUDICIAL MEMBER
IT APPEAL NOS. 6264 AND 6394 (MUM.) OF 2009
[ASSESSMENT YEAR 2006-07]
NOVEMBER 23, 2011
Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance /Rate of - Assessment year 2006-07 - Assessee was a company engaged in business of trading in shares and share broking - In financial year 2000-01, assessee company purchased a membership card in cash segment and derivative segment from Bombay Stock Exchange, i.e., 'BSE' for a total consideration of Rs. 2.50 crores and claimed depreciation on same which was allowed - Subsequently, BSE, under scheme of 'Corporatisation' and 'Demutualisation', was succeeded by a company incorporated under Companies Act, 1956, under name and style 'Bombay Stock Exchange Limited' (for short 'BSEL') - Assessee, consequent to demutualization, had acquired two separate rights in new company BSEL, i.e., (i) ownership rights and (ii) trading rights - Ownership rights were given by issuing 10,000 shares of BSEL in name of assessee whereas, trading rights were subject to deposit of certain amount by assessee with BSEL - In course of assessment, Assessing Officer held that no part of original cost of BSE card could be attributed to right to conduct trading and, hence, assessee would not be entitled to claim of depreciation - Whether since ownership right gave assessee a right to participate in ownership of assets and management of BSEL, it was not a business and commercial right of similar nature under section 32(1)(ii) and, thus, assessee could not be allowed depreciation in respect of said right - Held, yes - Whether as regards trading right, even though said right was a commercial right, yet in view of fact that value of said right was equal to refundable deposit to be made by assessee with BSEL, it could not be depreciated when its value in reality did not come down - Held, yes - Whether in view of above, Assessing Officer was justified in denying depreciation to assessee - Held, yes [In favour of revenue]
FACTS
The assessee was a company engaged in the business of trading in shares and share broking. In the financial year 2000-01, the assessee company purchased a membership card in the cash segment and derivative segment from Bombay Stock Exchange ('BSE'), for a total consideration of Rs. 2.50 crores, and claimed depreciation on the same. Subsequently, BSE, under the scheme of 'Corporatisation' and 'Demutualisation', was succeeded by a company incorporated under the Companies Act, 1956, under the name and style 'Bombay Stock Exchange Limited' (for short 'BSEL'). The purpose for which the company was floated was to assist, regulate and control the business of buying, selling or dealing in securities as recognised stock exchange and segregation of ownership rights and management of the exchange from the trading rights of the members was contemplated. The assessee was granted 10,000 shares of the newly incorporated company BSEL, as it was an owner of BSE card. The assessee was also given trading rights in BSEL subject to certain deposits made by it. In course of assessment, the Assessing Officer held that no part of the original cost of BSE card could be attributed to the right to conduct trading and, hence, the assessee would not be entitled to the claim of depreciation. On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer.
On second appeal:
HELD
The first issue is, whether the assessee is entitled to depreciation on the WDV of the erstwhile BSE card after becoming a member of BSEL. The assessee, consequent to demutualization, has acquired two separate rights in new company BSEL. These rights are - (i) ownership rights and (ii) trading rights. [Para 21]
These assets are held as a consequence to the assessee being a BSE membership cardholder. [Para 22]
The question is whether this right, i.e. , 'the rights conferred upon the members as a BSE membership cardholder' which was held to be a depreciable asset, continues to be held in the same form by the assessee. This right as a BSE membership card holder has undergone a change consequent to corporatization and demutualization of BSE. The rights in question are not held in the same form. [Para 23]
From the material on record following conclusions can be drawn:
(i) BSE which was a voluntary, not for profit character of entity, got converted into a 'for profit' and corporate activity;
(ii) BSE membership card is cancelled and the twin rights that a holder of BSE cardholder had got separated into the following independent rights - (a ) ownership rights and (b) trading rights.
(iii) The previous rights of a BSE membership cardholder gets extinguished and in lieu thereof the BSE member acquires shares in BSEL and trading rights in BSEL;
(iv) Under section 47(xiiia), such extinguishment of rights and acquisition of shares and trading rights in BSEL is not regarded as transfer.
(v) That cost of acquisition of ownership rights and trading rights would have to be split and valued on transmission.
(vi) Trading rights are based on deposit system as opposed to card system;
(vii) The trading card system is replaced by the deposit system;
(viii) The money deposited by the member to obtain trading rights, is be considered as a deposit with stock exchange for trading purpose;
(ix) Value of ownership right shall be the share in the net assets and goodwill of the stock exchange;
(x) The value of deposit placed to obtain trading rights will be the value of the right to trade;
(xi) A trading member has to retain the deposit as long as he trades. If a trading member wishes to terminate his membership, he can demand refund of deposit. [Para 25]
Hence, it is clear that the asset of the assessee, as it existed while it was a BSE membership cardholder, is different from the assets held by the assessee after corporatization and demutualization of Stock Exchange, which resulted in the assessee becoming a shareholder in BSEL. [Para 26]
The ownership rights of the assessee gives it a right to participate in the ownership of the assets and management of the Stock Exchange. The assessee has been granted certain shares in BSEL at par. The assessee has disclosed them as investment. Rightly, the assessee has not claimed that the shares allotted in BSEL was a business and commercial right of similar nature under section 32(1)(ii). [Para 27]
Coming to the trading rights, the report of the Group on corporatization and demutualization of Stock Exchange fixed the value as equivalent to the deposit requirement. The trading right is a business and commercial rights of similar nature under section 32(1)(ii). [Para 28]
The business and commercial rights of similar nature held by the assessee as a holder of the membership card of the erstwhile BSE no longer exists. The same got extinguished. Hence, the Assessing Officer was right in holding that no depreciation can be granted on the written down value of the BSE membership card. At best, the claim for depreciation can be on a trading right of the members, which is newly acquired. [Para 29]
As noticed earlier, the group on corporatisation and demutualization of Stock Exchanges has suggested the manner of valuation of ownership rights and trading rights. It was recommended that the value of trading rights be fixed at the amount of deposit that was required for acquiring trading rights. The value of the BSE card to the extent allocable or attributable to ownership rights, can be said to have been transmitted by way of allotment of shares in BSEL. The value is to be determined by the underlying value of assets of BSEL or through some other approved method. [Para 30]
Coming to trading rights, we find that the value that can be assigned from out of the value of BSE card is only to the extent of deposit made. Trading right is no doubt a business or commercial right but its value is equivalent to the quantum of deposit. The assessee is entitled to refund of the deposit. When the value is equal to a refundable deposit, how can such value of refundable deposit be depreciated when the value in reality does not come down. If the refundable deposit is deducted from the value, then the present value of trading right is nil. Under these circumstances, there is no value to the trading in commercial right entitling the assessee for deduction by way of depreciation. Hence, no depreciation can be granted on this right. Thus, the finding of the revenue authorities had to be upheld. [Para 31]
Techno Shares & Stock Ltd. v. CIT [2010] 193 Taxman 248 (SC) (para 2), CIT v.Sodra Devi [1957] 32 ITR 615 (SC) (para 15), CIT v. Indian Bank Ltd. [1965] 56 ITR 77 (SC) (para 15), CIT v. Ajax Products Ltd. [1965] 55 ITR 741 (SC) (para 15), CIT v.Vegetable Products Ltd. [1973] 88 ITR 192 (SC) (para 16), Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81 / 194 Taxman 203 (Bom.) (para 33), ACIT v.Omniscient Securities (P.) Ltd. [IT Appeal No. 5538/Mum./2009, dated 16-3-2011] (para 36) and CIT v. Kotak Securities Ltd. [2011] 203 Taxman 86 / 15 taxmann.com 77 (Bom.) (para 39).
R.J. Vazirani for the Appellant. V.V. Shastri for the Respondent.
ORDER
J. Sudhakar Reddy, Accountant Member - These cross appeals are directed against the impugned order dated 23rd September 2009, passed by the Commissioner (Appeals)-VIII, Mumbai, for assessment year 2006-07.
2. Brief facts of the case are that, the assessee is a company and is engaged in the business of trading in shares and share broking. In the financial year 2000-01, the assessee company purchased a membership card in the cash segment and derivative segment from Bombay Stock Exchange (for short "BSE"), for a total consideration of Rs. 2,50,01,000, and claimed depreciation on the same. The allowability of the same is not in dispute in those years in view of the judgment of Hon'ble Supreme Court in the case of Techno Shares & Stock Ltd. v. CIT [2010] 193 Taxman 248 .
3. BSE, under the Scheme of "Corporatisation" and "Demutualisation", was succeeded by a company incorporated under the Companies Act, 1956, under the name and style "Bombay Stock Exchange Limited" (for short "BSEL"). The purpose for which the company was floated was to assist, regulate and control the business of buying, selling or dealing in securities as recognised stock exchange and segregation of ownership rightsand management of the Exchange from the trading rights of the members was contemplated. The assessee was granted 10,000 shares of the newly incorporated company BSEL, as he was an owner of BSE card. The Assessing Officer was of the view that the membership rights of the BSEL does not satisfy the conditions laid down under section 32(i)(b) of the Act for the reasons - (i) all the operations of BSE were taken over by BSEL w.e.f. 19th August 2005 and each holder of a BSE card given 10,000 shares of the newly incorporated company BSEL; (ii) according to the new scheme, a trading member may or may not be a shareholder and a shareholder may not be a trading member. Hence, he concluded that the trading rights of BSE card got extinguished. The Assessing Officer also observed that new persons can do trading in BSE based on a deposits kept with it, which is similar to the procedure followed by National Stock Exchange. Old members were given certain relaxation with respect to deposits, etc., for the purpose of trading. However, if the trading right is transferred by an erstwhile BSE member to a new member, these relaxations were withdrawn by BSEL. The transferee, in such cases, is a fresh member for all purposes. The Assessing Officer thus, concludes that there is neither any value nor any cost to this trading right; (iii) that the asset i.e., BSE card ceased to exist and the assessee could not continue to claim depreciation on the same on the ground that it still has trading rights; (iv) that BSE card was exchanged in lieu of 10,000 shares of BSEL plus its trading rights. The Scheme of "Demutualization" envisages separation of ownership from trading, and the accumulated reserves of BSE which was an AOP, were transferred to the members in the guise of shares issued at par value of rupees one per share in BSEL; (v) according to section 55(2)(ab) of the Income Tax Act, 1961 (for short "the Act"), cost of acquisition of shares has to be treated as the original cost of acquisition of membership rights and that cost of acquisition of the trading right shall be deemed to be nil; (vi) that most of the share brokers have treated the entire cost of membership of erstwhile BSE as a capital asset and have claimed depreciation under section 32(1)(ii) and such claims have been upheld by the Hon'ble Supreme Court; (vii) that the statute does not provide double deduction in respect of any expenditure incurred and under section 55(2)(ab), the cost of acquisition is treated as original cost, the written down value in the books of account due to grant of depreciation results in double benefit. Thus, the Assessing Officer, vide Para-3.14 of the assessment order, concluded as follows:-
"3.14 In this case, although the written down value as on the date of exchange of BSE Card with shares of BSEL and BSEL trading rights is Rs. 69,21,663. The assessee gets entitled to claim the original cost of the acquisition of membership of BSE i.e. Rs. 2,50,01,000/-. Therefore there accrues an excessive benefit to the extent of depreciation aimed and allowed by the ITAT in this year, although this will be realized in the year in which sale is made, In fact it is the direct consequence and incident following from the legal fiction enunciated by Section 55(ab)(supra). This tantamount to recovering back the allowance of depreciation allowed u/s.41(1)(a) of the Act, amounting to Rs. 1,80,79,337/- (Rs. 2,50,01,000- Rs. 6921663/-)."
4. Alternatively, the Assessing Officer held that no part of the original cost of BSE card can be attributed to the right to conduct trading and, hence, the assessee would not be entitled to the claim of depreciation. The Assessing Officer, at Para-3.18/Page-8 of the assessment order, concluded as follows:-
"3.18 In view of above discussion assessee is not entitled for claim of depreciation in this year also, therefore, the claim of depreciation on BSE card of Rs. 17,30,416 is disallowed for this year. A protective addition of Rs. 1,80,79,337 is being therefore made in this case, as depreciation is denied to the assessee. In case it is finally held that the depreciation on BSE card is allowable the said disallowance would be Rs. 2,50,01,000."
5. The Assessing Officer also made disallowances under section 14A as well as under section 40a(ia) of the Act and arrived at a total income of Rs. 2,60,41,151.
6. Aggrieved, the assessee carried the matter before the first appellate authority, wherein the Commissioner (Appeals), on the issue of addition on account of likely benefit the assessee would get in future under section 55(2)(ab), deleted the addition in view of the conduct of the assessee during the assessment year 2008-09, while selling 4,562 shares of BSEL.
7. Coming to depreciation on membership card, the judgment of Hon'ble Jurisdictional High Court was followed and the ground of the assessee was dismissed.
8. On the issue of disallowance under section 14A, the Commissioner (Appeals) confirmed the findings of the Assessing Officer.
9. Disallowance made under section 40a(ia) was deleted. Aggrieved, both, the assessee as well as the Revenue are in appeal before the Tribunal.
10. We have heard the learned Counsel, Mr. R.J. Vazirani, on bahalf of the assessee and the learned Departmental Representative, Mr. V.V. Shastri, on behalf of the Revenue. On a careful consideration of the facts and circumstances of the case and on perusal of the papers on record, we hold as follows:-
11. We first take up assessee's appeal in ITA no.6264/Mum./2009.
12. Ground no.1, reads as follows:-
"DEPRECIATION EXCHANGE
On the facts and circumstances of the case and in law, the Commissioner of Income Tax "Appeals-8", Mumbai (hereinafter referred as the 'CIT (A)') erred in confirming the action of the A. O. in disallowing the depreciation on the Membership Card of Bombay Stock Exchange.
DISALLOWANCE OF EXPENSES U/S 14A OF THE ACT
On the facts and circumstances of the case and in law, the CIT (A) erred in confirming the disallowance of Rs. 4,21,701/- u/s 14A of the Act, as per Rule 8D in respect of total dividend of Rs. 7,72,937/-received by the appellant."
13. On the issue of depreciation on membership card, the assessee relies on the judgment of the Hon'ble Supreme Court in Techno Shares & Stocks Ltd. ( supra). He submitted that the depreciation was allowed in the earlier years and once the same was held as allowable, the assessee is entitled to the claim, until such time the written down value becomes nil.
14. He submitted that section 55(2)(ab) of the Act, is only on the computation of income from capital gains and has no relevance as far as the grant of depreciation claimed by the assessee under section 32(1)(i) of the Act. Section 2(42A) sub-clause (2)(h)(ha) inserted by the Finance Act, 2003, w.e.f. 1st April 2004, stipulates that capital assets being equity shares allotted on demutualisation, the period of holding of the capital assets shall include the period for which the person was a member of BSE and that this section also is concerned with the computation of capital gain only. He contends that there appears to be a lacuna in the Act which unintentionally provided double benefit to the assessee. The Hon'ble Supreme Court has held that BSE membership card falls within the definition of intangible asset and is eligible for depreciation and whereas for the purpose of computation of capital gains, the original cost of membership is considered and the period of holding would be reckoned from the date of acquisition of the original BSE card. He submitted that the assessee gets double benefit.
15. However, learned Counsel pointed out that the assessee, in the present case, has not claimed any double benefit since it has offered short term capital gains of Rs. 2,37,17,383, in respect of 4,562 shares sold by them during the assessment year 2008-09 and instead of applying the provisions of section 55(2)(ab) r/w section 2(42A)(h)(ha), the assessee has taken the cost at rupees one per share and the period of holding as short term. He further submitted that the language of the statute is clear and unambiguous and, hence, provisions must be interpreted accordingly. He relied on the following case laws:-
16. Learned Counsel for the assessee also relied on the judgment of Hon'ble Supreme Court in CIT v. Vegetable Products Ltd. [1973] 88 ITR 192 , for the proposition that rule of beneficial construction to the assessee must be adopted.
17. On the disallowance under section 14A, learned Counsel submitted that the assessee is trading in shares and as such dividend received is a byproduct of this activity in dealing in shares and that the assessee has not incurred any direct or indirect expenditure for earning dividend and, hence, no disallowance should be made under section 14A.
18. Learned Departmental Representative relied on the orders of the authorities below and submitted that consequent to demutualization and corporatisation, the assessee was granted 10,000 shares in the new company BSEL, as well as a right to trade subject to fulfillment of certain conditions such as making deposits, etc. He emphasized that any person could trade in BSEL subject to payment of a deposit and the right of the assessee was not an exclusive right and it was not connected or linked with his being a shareholder in BSEL. Thus, he submitted that the entire stock of the BSE Card is attributable to the acquisition of 10,000 equity shares in BSEL and no part thereof can be assigned to the trading rights. He pointed out that the shares in BSEL had a high intrinsic value because of accumulated reserves and surplus. Hence, he submitted that the right of trading cannot be considered as having any value, much less written down value and, hence, question of grant of depreciation on such nil value does not arise. He relied on the provisions of section 55(2)(ab) of the Act.
19. On the issue of disallowance under section 14A of the Act, the learned Departmental Representative submitted that section 14A, does not provide for any exception and if exempt income is earned, the expenditure incurred in relation to income should also be excluded.
20. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the papers on record, as well as the case laws cited before us, we hold as follows:-
21. The first issue is, whether the assessee is entitled to depreciation on the WDV of the erstwhile BSE card after becoming a member of BSEL. The assessee, consequent to demutualization, has acquired two separate rights in new company BSEL. These rights are - (i) ownership rights and (ii) trading rights.
22. These assets are held as a consequence to the assessee being a BSE membership cardholder. The Hon'ble Supreme Court in Techno Shares & Stock Ltd. (supra) held that the BSE membership card conferred certain rights to the members in terms of rules and bylaws of BSE, as they stood during the relevant years, and that this was a business in commercial right. Paras-19 and 25 of the judgment of Hon'ble Supreme Court in Techno Shares & Stocks Ltd. (supra), reads as follows:-
"19. The next question is - whether the membership right could be said to be owned by the assessee and used for the business purpose in terms of Section 32(1)(ii). Our answer is in the affirmative for the reason that the Rules and the Bye-laws hereinabove indicate that the right of membership (including the right of nomination) vests in the Exchange only when a member commits default. Otherwise, he continues to participate in the trading session on the floor of the Exchange; that he continues to deal with other members of the Exchange and even has the right to nominate subject to compliance of the Rules. Moreover, by virtue of Explanation 3 to Section 32(1) (ii) the commercial or business right which is similar to a "licence" or "franchise" is declared to be an intangible asset. Moreover, under Rule 5 membership is a personal permission from the Exchange which is nothing but a "licence" which enables the member to exercise rights and privileges attached thereto. It is this licence which enables the member to trade on the floor of the Exchange and to participate in the trading session on the floor of the Exchange. It is this licence which enables the member to access the market. Therefore, the right of membership, which includes right of. Membership which is a "licence" or "akin to a licence" which is one of the items which falls in Section 32(1) (ii) of the 1961 Act The right to participate in the market has an economic and money value It is an expense incurred by the assessee which satisfies the test :::of. being a "licence" or "any other :business or commercial right of similar nature" in terms of Section 32(1)(ii).
24. Before concluding, we wish to clarify that our present judgment is strictly confined to the right of membership conferred upon the member under the BSE membership card during the relevant assessment years. We hold that the said right of membership is a "business or commercial right" which gives a non-defaulting continuing member a right to access the Exchange and to participate therein and in that sense it is a licence or akin to licence in terms of section 32(1)(ii) of the 1961 Act. That, such a right vests in the Exchange only on default/demise in terms of the Rules and Bye-laws of BSE, as they stood at the relevant time. Our judgment should not be understood to mean that every business or commercial right would constitute a "licence" or a "franchise" in terms of Section 32(1) (ii) of the 1961 Act." [Emphasis supplied]
23. The question before us is whether this right i.e., "the rights conferred upon the members as a BSE membership cardholder" which was held to be a depreciable asset, continues to be held in the same form by the assessee. The judgment of Hon'ble Supreme Court, as it is clear, does not extend to the current assessment year. This right as a BSE membership card holder has undergone a change consequent to corporatization and demutualization of BSE. The rights in question are not held in the same form.
24. To understand "corporatization" and "demutualization" of Stock Exchange, we extract certain portions of the group report for ready reference:-
"Report of the Group on
Corporatisation & Demutualisation of Stock Exchanges
1. Introduction
1.1 The Government had announced its proposal to corporatise the stock exchanges by which ownership, management and trading rights would be segregated from each other and legislative changes, if required, would be proposed accordingly to give effect to the corporatisation and demutualisation of stock exchanges. The Finance Minister has also emphasized in his Budget Speech for the year 2002-03 that this process would be completed during the course of the year to implement the decision to separate ownership, management and operation of the stock exchanges.
Demutualisation - the new governance structure
5.6 This redefinition of the roles and the new paradigm of competition, forced changes in the traditional governance structures of stock exchanges. Countries responded to these pressures by converting their traditional "not for-profit" stock exchanges into a "for profit" company. This process of transition from "mutually-owned" association to a company "owned by shareholders", in other words transforming the legal structure from a mutual form to a business corporation form and privatising the corporations so constituted, is referred to as demutualisation. Further, the company so constituted may choose to be a listed or an unlisted, closely held public company. The concept of demutualisation can be applied to any "non-profit" organisation or association as well.
5.7 Demutualisation involves the segregation of members' right into distinct segments, viz. ownership rights and trading rights. It changes the relationship between members and the stock exchange. Members while retaining their trading rights acquire ownership rights in the stock exchange, which have a market value, and they also acquire the benefits of limited liability. The shareholders in a corporatised stock exchange may be a diverse group, as members may decide to retain their shares or to sell them. Demutualisation however, does not insulate them from competition. A stock exchange whose management does not effectively work to maintain its position in the market may soon become a take-over target.
9.6 The Group noted that there are two parts to this transition. One, which involves the changing the voluntary not-for-profit character of the entity into a for-profit one (in some cases into a corporate body as well) and second, is the process of delinking of ownership of the entity by the members from their trading rights. The first would involve the manner in which assets would be transferred from the existing entities to the new corporate entity, wherever demutualisation has to be accompanied by corporatisation as in the case of BSE, ASE and MPSE.
9.7 The second would involve the allocation of these assets to the members. All stock exchanges, with the exception of the NSE, OTCEI and ICSEI have the concept of membership cards for their members. The twin rights of trading and an undivided interest in the ownership of the stock exchange are embedded in the membership card of a stock exchange. The transition to a demutualised stock exchange would involve the segregation of these twin rights into two separate and independent rights viz.
a. the right to participate in the ownership of the assets of the stock exchange, and
b. the right to trade on the stock exchange.
9.8 This decoupling of the two rights would have to be effected through the cancellation of the card against a consideration of creation of two assets or two rights - one, an interest in the assets of the stock exchange and the other interest in the trading right. The interest in the asset is created by issuance of shares in the new entity in lieu of the consideration of extinguishment of cards currently owned by the members in the mutual entity. Internationally also, stock exchanges have followed the same procedure for demutualisation. The manner in which the interest in the trading rights would be created is discussed in paragraphs 9.20 to 9.22 of this report.
9.9 At the point of time, when a trading right is acquired, and a share is allotted to a member of an stock exchange by virtue of which he acquires a membership privilege against the extinguishment of the previous right of membership, no transfer of assets effectively takes place and neither of the acquisitions should therefore be deemed to be a transfer within the meaning of the word in the Income Tax Act. However, at the point of sale of any of these two rights, capital gains tax would be attracted. This would also imply that the cost of acquisition would have to be split and valued. The manner in which this could be done has been elaborated in Paragraph 9.22 of this report.
Segregation of trading rights and ownership
9.19 For the purpose of segregation of ownership and trading rights, the Group examined the present systems of membership prevailing in the stock exchanges in the country. It was noted that except for NSE, which offers trading rights against deposits, all other stock exchanges have the concept of membership cards for their members. In some stock exchanges e.g. BSE, the trading right is exercised through the ownership of a trading card, which subject to BSE's approval can be transferred for a consideration. Cards can be sold by members and also by the stock exchange when new members are introduced.
9.20 The representations received by the Group from the stock exchanges, brokers' association and investors' association suggest that there are several advantages in the deposit system as opposed to the card system. The major advantages are:-
i. The deposit provides a valuable source of funding for the stock exchange, which needs to make large investments in technology.
ii. The deposit is considered as part of the deposit required by the member for his trading operations as also as part of his "net worth" unlike the card system where the amount invested by a member in the purchase of the card is not considered for either purpose. It neither forms a part of member's capital for the purpose of computing his base minimum capital, nor is it taken into account for exposure norms.
9.21 The Group noted from the representations received by it that the stock exchanges favoured the deposit system as opposed to the card or the seat system. The Group therefore recommends that-
(a) the trading card system be replaced by the deposit system wherein the money deposited by the member to obtain trading rights only, be considered as deposit with the stock exchange for trading purpose. While the Group favors the deposit system, it would like to leave the choice of adopting either the card or the deposit system to the stock exchanges; and
(b) the following procedures be adopted if the deposit system is accepted by an stock exchange for the purpose of segregation of the trading rights and ownership. As an illustration only, some figures have been assumed.
Members of an stock exchange currently own an asset viz. a card whose value can be assessed on two different parameters viz.:-
i. the market value of the card as evidenced by the actual transactions which have taken place in recent years.
ii. the fair value of the card derived by dividing the fair value of the stock exchange by the number of cards. This value can be determined by using some of the well-established bases like "the underlying asset" approach, the "income" approach etc. and the task can be entrusted to professional valuers.
iii. Based on the above, a value of the card can be determined.
The value of the card represents the aggregate value of two independent rights of the holder viz.
(a) the right to a share in the net assets and goodwill of the stock exchange and
(b) the right to trade on the stock exchange.
Since trading rights are in future to be made conditional on the placement of a deposit with the stock exchange and such deposit will also be collected from new members, the amount of such deposit may be considered as the value of the right to trade and the excess of the fair value of the card over that amount may be considered as the value of the right to share in the net assets and goodwill of the stock exchange.
Assuming purely for the purpose of illustration, that the value of a card is determined at Rs. 125 lakh and the amount of deposit at Rs. 75 lakh the value of the card can be apportioned as under :-
(a) | Value of share in net assets and goodwill of the stock exchange | Rs. 50 lakh | |
(b) | Value of trading rights | Rs. 75 lakh | |
| | Rs. 125 lakh |
The stock exchange will therefore issue to each member, on cancellation of the card, shares, which have an aggregate value of Rs. 50 lakh and a deposit receipt of Rs. 75 lakh. The shares may be issued at par or at premium as may be considered appropriate.
In the books of the stock exchange, the aggregate value of the shares issued and deposit receipts issued will represent the total consideration. The excess of total consideration over the book value of the net assets will represent goodwill and will be recorded as such. Goodwill will have to be written off over a specified period say 20 years.
A trading member can liquidate a part of his investment by selling all or part of the share capital. However, so long as he remains a trading member he has to retain the deposit.
If the member wishes to terminate his membership, he can demand refund of the deposit but in order to ensure the liquidity of the stock exchange, there should be an initial "lock-in" period of three years and thereafter such "lock-in" period as the stock exchange may stipulate to provide assurance against non-notified claims.
Relevant portion of the notification of SEBI in this regard is extracted below for ready reference:-
SECURITIES AND EXCHANGE BOARD OF INDIA
NOTIFICATION
Mumbai, the 20th May, 2005
SECURITIES AND EXCHANGE BOARD OF INDIA, MUMBAI
ORDER UNDER SECTION 4B (6) READ WITH SECTION 4B (7) OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 IN THE MATTER OF THE BSE (CORPORATISATION AND DEMUTUALISATION) SCHEME, 2005.
S. O. 684(E). 1.0 BSE (also known as 'The Stock Exchange, Mumbai') is an Association of Persons and a recognised stock exchange having its principal place of business at Phiroze Jeejeebhoy Towers, Dalal Street, Fort, Mumbai 400 001. It is required to be corporatised and demutualised under the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as 'the SC(R)A').
3. Incorporation of Bombay Stock Exchange Limited
3.1 The First Shareholders shall incorporate a public company limited by shares under section 12 of the Companies Act, 1956 in the name and style of "Bombay Stock Exchange Limited".
3.2 The First Shareholders shall each subscribe to and pay for 10,000 fully paid-up equity shares of the face value of Re. 1/- each for cash at par of Bombay Stock Exchange Limited.
8. Trading Rights
8.1 A Member or a Limited Trading Member of BSE, who is registered as a stock broker on the day preceding the Due Date shall become a Trading Member of the Cash Segment of Bombay Stock Exchange Limited on the Due Date;
8.2 A Member who is not registered as a stock broker on the day preceding the Due Date shall become a Trading Member of the Cash Segment of Bombay Stock Exchange Limited on being registered as a stock broker under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 within 3 months from the Due date.
8.3 A Trading Member and/or a Clearing Member of the Derivatives Segment of BSE on the day preceding the Due Date shall become a Trading Member and/or a Clearing Member of the Derivatives Segment of Bombay Stock Exchange Limited on the Due date.
8.4 After the Due Date, a person desirous of becoming a Trading Member of any segment of Bombay Stock Exchange Limited shall be admitted if he complies with requirements and brings in specified fees and deposits as specified in the Rules, Bye-laws and Regulations of Bombay Stock Exchange Limited.
8.5 Bombay Stock Exchange Limited shall, for the purpose of admitting any person as a Trading Member of a segment, follow uniform standards in terms of capital adequacy, deposits, fees etc. irrespective of mode of acquisition of trading right by that person:
Provided that different standards may be followed for admission of a person as a Trading Member who has acquired trading right by way of transmission;
Provided further that different standards may be followed for admission of Trading Members in different segments.
8.6 A Trading Member may surrender his membership of any segment to Bombay Stock Exchange Limited in the manner specified in the Rules, Bye-laws and Regulations of Bombay Stock Exchange Limited.
8.7 Trading Members of the Cash Segment of Bombay Stock Exchange Limited and the Clearing Members of the Derivatives Segment of Bombay Stock Exchange Limited shall clear and settle trades respectively till the clearing and settlement function is transferred to a recognized clearing corporation under clause 13.1 of this Scheme.
8.8 Irrespective of the date or mode of acquisition of trading right, the Trading Members in a segment of Bombay Stock Exchange Limited shall have uniform rights and privileges.
Provided that Bombay Stock Exchange Limited may, with the prior approval of SEBI, grant additional privileges to those Trading Members who were Members on the day preceding the Due Date.
8.9 Trading Members of Bombay Stock Exchange Limited on the Due Date shall continue to have the same rights and privileges in respect of their clients and constituents and other members arising out of or under any act, omission or contract or law, notification, order, direction, etc. as had accrued to them while being Members or Limited Trading Members of BSE or Trading Members and or Clearing Member of Derivative Segment of BSE on or before the Due Date.
8.10 Trading Members of Bombay Stock Exchange Limited shall be bound by all obligations and liabilities towards their clients and constituents, SEBI, BSE and other authorities or other persons arising out of or under any act, omission or contract or law, notification, order, direction, etc. while being Members or Limited Trading Members of BSE or Trading Members and or Clearing Members of Derivative Segment of BSE on or before the Due Date."
25. From the above, following conclusions can be drawn.
(i) BSE which was a voluntary, not for profit character of entity, got converted into a "for profit" and corporate activity;
(ii) BSE membership card is cancelled and the twin rights that a holder of BSE cardholder had got separated into the following independent rights - (a) ownership rights and (b) trading rights.
(iii) The previous rights of a BSE membership cardholder gets extinguished and in lieu thereof the BSE member acquires shares in BSEL and trading rights in BSEL;
(iv) Under section 47(xiiia), such extinguishment of rights and acquisition of shares and trading rights in BSEL is not regarded as transfer.
(v) That cost of acquisition of ownership rights and trading rights would have to be split and valued on transmission.
(vi) Trading rights are based as deposit system as opposed to card system;
(vii) The trading card system is replaced by the deposit system;
(viii) The money deposit by the member to obtain trading rights, is be considered as a deposit with stock exchange for trading purpose;
(ix) Value of ownership right shall be the share in the net assets and goodwill of the stock exchange;
(x) The value of deposit placed to obtain trading rights will be the value of the right to trade;
(xi) A trading member has to retain the deposit as long as he trades. If a trading member wishes to terminate his membership, he can demand refund of deposit.
26. Hence, it is clear that the asset of the assessee, as it existed while it was a BSE membership cardholder, is different from the assets held by the assessee after corporatization and demutualization of Stock Exchanges, which resulted in the assessee becoming a share holder in BSEL.
27. The ownership rights of the assessee gives it a right to participate in the ownership of the assets and management of the Stock Exchange. The assessee has been granted certain shares in BSEL at par. The assessee has disclosed them as investment. Rightly, the assessee has not claimed that the shares allotted in BSEL was a business and commercial right of similar nature under section 32(1)(ii) of the Act.
28. Coming to the trading rights, the report of the Group on corporatization and demutualization of Stock Exchange fixed the value as equivalent to the deposit requirement. The trading right is a business and commercial rights of similar nature under section 32(1)(ii) of the Act.
29. The business and commercial rights of similar nature held by the assessee as a holder of the membership card of the erstwhile BSE no longer exists. The same got extinguished. Hence, we are of the considered opinion that the Assessing Officer was right in holding that no depreciation can be granted on the written down value of the BSE membership card. At best, the claim for depreciation can be on a trading right of the members, which is newly acquired, which aspect we will discuss hereafter.
30. As we have noticed, the group on corporatisation and demutualization of Stock Exchanges has suggested the manner of valuation of ownership rights and trading rights. It was recommended that the value of trading rights be fixed at the amount of deposit that was required for acquiring trading rights. The value of the BSE card to the extent allocable or attributable to ownership rights, can be said to have been transmitted by way of allotment of shares in BSEL. The value is to be determined by the underlying value of assets of BSEL or through some other approved method.
31. Coming to trading rights, we find that the value that can be assigned from out of the value of BSE card is only to the extent of deposit made. Trading right is no doubt a business in commercial rights but value is equivalent to the quantum of deposit. The assessee is entitled to refund of the deposit. When the value is equal to a refundable deposit, how can such value of refundable deposit be depreciated when the value in reality does not come down. If the refundable deposit is deducted from the value, then the present value of trading right is nil. Under these circumstances, there is no value to the trading in commercial right entitling the assessee for deduction by way of depreciation. Hence, no depreciation can be granted on this right. Thus, we uphold the finding of the Revenue authorities. We now discuss the impact of the following sections:-
"55(2) For the purposes of sections 48 and 49, "cost of acquisition",-
(ab) In relation to a capital asset, being equity share or shares allotted to a shareholder of a recognised stock exchange in India under a scheme for demutualisation or corporatisation approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992, (15 of 1992) shall be the cost of acquisition of his original membership of the exchange.
Provided that the cost of a capital asset, being trading or clearing rights of the recognised stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualisation or corporatisation, shall be deemed to be nil.
2(42)(h) in the case of a capital asset, being trading or clearing rights of a recognised stock exchange in India acquired by a person pursuant to demutualisation or corporatisation of the recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation.
(ha) in the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualisation or corporatisation of a recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included the period for which the person was a member of the recognised stock exchange in India immediately prior to such demutualisation or corporatisation] 113c[(hb) in the case of a capital asset, being any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer free of cost or at concessional rate to his employees (including former employee or employees), the period shall be reckoned from the date of allotment or transfer of such specified security or sweat equity shares.
47(xiii) any transfer of a capital asset or intangible asset by a firm to a company as a result of succession of the firm by a company in the business carried on by the firm, or any transfer of a capital asset to a company in the course of demutualisation or corporatisation of a recognised stock exchange in India as a result of which an association of persons or body of individuals is succeeded by such company :]
Provided that-
(a) all the assets and liabilities of the firm [or of the association of persons or body of individuals] relating to the business immediately before the succession become the assets and liabilities of the company;
(b) all the partners of the firm immediately before the succession become the shareholders of the company in the same proportion in which their capital accounts stood in the books of the firm on the date of the succession;
(c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, in any form or manner, other than by way of allotment of shares in the company; and
(d) the aggregate of the shareholding in the company of the partners of the firm is not less than fifty per cent of the total voting power in the company and their shareholding continues to be as such for a period of five years from the date of the succession;
(e) the demutualisation or corporatisation of a recognised stock exchange in India is carried out in accordance with a scheme for demutualisation or corporatisation which is approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);]
47(xiiia) any transfer of a capital asset being a membership right held by a member of a recognised stock exchange in India for acquisition of shares and trading or clearing rights acquired by such member in that recognised stock exchange in accordance with a scheme for demutualisation or corporatisation which is approved by the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992);]
32. All these sections deal with computation of capital gains under Chapter-IV(E) i.e., sections 45 to 55A of the Act. In our considered opinion, these sections which are for the computation of capital gains, have no relevance on the allowability of depreciation. The argument of the assessee that it had taken the original cost of the share @ Rs. 1, while computing capital gain in a latter year, does not effect our decision. Thus, we uphold the order of the Assessing Officer as confirmed by the Commissioner (Appeals) wherein depreciation on membership card has been denied.
33. Coming to disallowance under section 14A, the argument of the assessee that this is incidental income and that it has not incurred any direct or indirect expenditure is not in accordance with law. The Hon'ble Jurisdictional High Court inGodrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/ 194 Taxman 203 (Bom.), has held that Rule-8D cannot be applied retrospectively. As in the current year, Rule-8D cannot be applied, we set aside the impugned order passed by the Commissioner (Appeals) and restore the matter back to the file of Assessing Officer for disallowing reasonable amount in accordance with law.
34. In the result, assessee's appeal is partly allowed.
35. We now take up Revenue's appeal in ITA no.6934/Mum./2009. Ground no.1, reads as follows:-
"1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 1,80,79,337/-made on account of protective addition on BSE Card.
2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in ignoring the provision of section 41(1) and 28(iv) of the Income-tax Act."
36. After hearing both the parties, we find that the issue is covered against the Revenue and in favour of the assessee by the decision of Mumbai "C" Bench of the Tribunal in ITA no.5538/Mum./2009, for assessment year 2006-07, in ACIT v.Omniscient Securities (P.) Ltd., order dated 16th March 2011, wherein the Tribunal, vide Para-10, dismissed the ground raised by the Revenue, which reads as follows:-
"10. We have considered the rival submissions. We find that the entire case of the AO is on the premise that in the event of sale of the shares which the assessee acquired on Corporatization and demutualization of BSE as a Company, the assessee would take the benefit of the provisions of section 55(2)(ab) of the Act and claim the cost of acquisition at the price at which the assessee originally paid for acquiring BSE Card ignoring the depreciation on the BSE Card which the assessee availed from the period of acquisition of the BSE Card till exchange of shares for the BSE Card. This apprehension of the AO which has been the basis of protective assessment made in the order of assessment is erroneous because the assessee has sold 6386 shares of BSE Ltd. out of 10000 shares of BEE Ltd., which it had got on Corporatization and demutualization of the BSE as a limited company, in the assessment year 2008-09. While computing capital gain on such transfer the assessee calculated its cost of acquisition on the basis of the written down value and Re.1 which had paid per share at the time of issue of shares by BSE Ltd. Thus the grievance of the revenue as projected by the AO is found to be non-existent in this case. With regard to the remaining shares of BSE Ltd. which the assessee holds the question of computation of capital gain would continue to be the same basis on which the assessee has computed capital gain in A.Y 2008-9. In view of the above we are of the view that the CIT(A) was justified in deleting the addition made by the AO. The order of the CIT(A) does not call for any interference. Consequently ground No.1 raised by the revenue is dismissed."
37. Keeping the aforesaid findings of the Tribunal in view, we dismiss the grounds raised by the Revenue.
38. Ground no.3, reads as follows:-
"3. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in giving relief on account of transaction charges as payments made on account of transaction charges are technical services within the purview of Sec. 194J and therefore liable for deduction of tax."
39. The Hon'ble Jurisdictional High Court in CIT v. Kotak Securities Ltd. [2011] 203 Taxman 86/ 15 taxmann.com 77 (Bom.), held that transaction charges paid to BSE is fees for technical services under section 194J. The Hon'ble Court reversed the decision of the Tribunal and held as follows:-
"The assessee's argument, based on Skycell Communications v. DCIT 251 ITR 53 (Mad), that the stock exchange does not render "managerial or technical services" is not acceptable because while in that case the subscriber had paid a fixed amount for the use of air time on the mobile phone and was not concerned with the technology or the services rendered by the managerial staff in keeping the cellular mobile phone activated, in the case of a stock exchange, there is direct linkage between the managerial services rendered and the transaction charges levied by the stock exchange. The BOLT system provided by the BSE is a complete platform for trading in securities. A stock exchange manages the entire trading activity carried on by its members and accordingly renders "managerial services". Consequently, the transaction charges constituted "fees for technical services" u/s 194-J and the assessee ought to have deducted TDS. However, on facts, because from 1995 to 2005 no tax was deducted and no objection was raised by the AO and because from AY 2006-07 onwards the assessee had deducted TDS, no disallowance u/s 40(a)(i) can be made for AY 2005-06."
40. Respectfully following the aforesaid judgment, we allow this ground raised by the Revenue.
41. In the result, Revenue's appeal is allowed in part.
42. To sum up, assessee's appeal as well as Revenue's appeal are partly allowed
GOODS AND SERVICE TAX REPORTS (GSTR) HIGHLIGHTS
F Burden on Department to establish article manufactured marketable or capable of being bought or sold in market : Siddharth Optical Disc P. Ltd. v. Union of India . . .468
F Existence of alternative remedy not bar against exercise of jurisdiction under article 226 : Siddharth Optical Disc P. Ltd. v. Union of India . . .468
F Where no allegation of grant of rebate of duty on ground of fraud, collusion, misstatement, etc., extended period of limitation cannot be invoked : Choice Laboratories Ltd. v. Union of India through Joint Secretary. . .492
F Circulars cannot override statutory provisions and deny right granted therein : KSJ Metal Impex P. Ltd. v. Under Secretary (Customs). . . .497
F Refund of excess anti-dumping duty subject to finalisation in terms of section 9A(2)(b) of Customs Tariff Act, 1975 : Enterprise International Ltd. v. Commissioner of Customs . . 506
F Court in writ jurisdiction cannot go into merits of discretion exercised by Settlement Commission : Seven Seas Petroleum P. Ltd. v. Customs and Central Excise Settlement Commission . . 517
F Provisions of Code of Civil Procedure applicable to appeals filed under Customs Act : Neptune Trade LInks P. Ltd. v. Commissioner of Customs . . .529
F Mistake committed by Department in not verifying genuineness of documents cannot be encashed by avoiding mandatory statutory interest : Neptune Trade LInks P. Ltd. v. Commissioner of Customs . . 529
F Department to establish existence of mutuality of interest or flow-back of funds for clubbing of clearance of holding and subsidiary companies : Commissioner of Central Excise and Customs v. Catalco Chemicals P. Ltd. . . .534
F Where delay of 697 days in filing appeal not sufficiently explained, appeal barred by limitation : Neeraj Jhanji v. Commissioner of Customs and Central Excise . . .539
F Fabric bleach classifiable under Heading 3402.90 : Commissioner of Central Excise v. Nirmal Dyechem . . 522
F Already approved classification list sought to be changed based on chemical examiner's report, no mala fides could be attributed to assessee inviting penal action : Commissioner of Central Excise v. Nirmal Dyechem . . .522
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