IT: Where assessee failed to produce any cash flow statement or any other material which could establish that borrowed funds had not been utilized for earning of exempt income, disallowance under section 14A was justified
IT: Depreciation on BSE card would no more be allowable on extinguishment of rights of members in lieu of shares
IT: Cost of acquisition of shares received in lieu of extinguishment of rights of BSE cardholder is to be computed by taking face value of shares plus written down value of BSE card
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[2013] 38 taxmann.com 387 (Mumbai - Trib.)
IN THE ITAT MUMBAI BENCH 'C'
Pavak Securities (P.) Ltd.
v.
Income-tax Officer -4(2)(3)*
B.R. MITTAL, JUDICIAL MEMBER
AND RAJENDRA, ACCOUNTANT MEMBER
AND RAJENDRA, ACCOUNTANT MEMBER
IT APPEAL NO. 1803 (MUM.) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
SEPTEMBER 13, 2013
I. Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-Tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income [Dividend] - Assessment year 2008-09 - Assessee, a share broker, earned exempted dividend income - It, however, did not make any disallowance under section 14A - Whether since assessee failed to produce any cash flow statement or any other material which could establish that borrowed funds had not been utilized for earning of exempt income, disallowance under section 14A was justified [Para 10] [In favour of revenue]
II. Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/rate of [Bombay Stock Exchange Card] - Assessment year 2008-09 - On corporatisation, erstwhile Bombay Stock Exchange (BSE) was succeeded by Bombay Stock Exchange Ltd. (BSEL) and rights of existing BSE members as card holder got extinguished on receiving 10,000 shares of BSEL - Whether depreciation on erstwhile BSE card could no more be allowed - Held, yes [Para 15] [In favour of revenue]
Section 55, read with section 45, of the Income-tax Act, 1961 - Capital gain - Cost of Acquisition [Shares] - Assessment year 2008-09 - Assessee had membership of erstwhile BSE - On corporatization of BSE, it received from BSEL 10,000 shares of face value of Re. 1 each - It sold 4562 shares and in computing long-term capital gains, claimed cost of acquisition of said shares at face value (being Re. 1 per share) plus proportionate written down value as on 31-3-2005 - Whether cost of acquisition as claimed by assessee was to be accepted - Held, yes [Para 15] [In favour of assessee]
FACTS - I
| ■ | The assessee, a share broker, earned dividend income which was claimed as exempt. | |
| ■ | The Assessing Officer made certain disallowance under section 14A in respect of earning said exempted dividend income. | |
| ■ | The Commissioner (Appeals) confirmed disallowance made by the Assessing Officer observing that the assessee had not maintained separate account of expenses incurred for earning exempt income. | |
| ■ | On second appeal: |
HELD - I
| ■ | There is no dispute to the fact that rule 8D is applicable to the assessment year under consideration i.e. assessment year 2008-09. There is also no dispute to the fact that the Commissioner (Appeals) has stated that the balance-sheet as on 31-3-2008 shows certain balances of own outstanding borrowed funds and therefore, the Commissioner (Appeals) has stated that it cannot be said that no borrowed funds had ever been utilized by the assessee for the purpose of making investment or undertaking transactions which yielded dividend income, which has been claimed as exempt. The assessee has not disputed the fact that it failed to produce any cash flow statement or any other material which could establish that borrowed funds had not been utilized for earning of exempt income as observed by the Commissioner (Appeals) in his order. The contention of the assessee that no satisfaction has been recorded by the Assessing Officer before invoking rule 8D, has no merits particularly when the Assessing Officer at the time of making the assessment confronted the assessee in respect of investment in shares and expenses claimed and particularly when the Assessing Officer asked the assessee as to why disallowance be not made under section 14A read with rule 8D in respect of the exempt dividend income. Hence, there was no reason to interfere with the order of the Commissioner (Appeals) to determine the amount of expenditure as per provisions of rule 8D for the exempt income. [Para 10] |
FACTS - II
| ■ | The assessee, a share broker, claimed depreciation on Bombay Stock Exchange (BSE) Card. | |
| ■ | The Assessing Officer considering the fact that in the assessment year 2006-07, membership rights of BSE got demutualized after corporatization of the BSE and the card holders on demutualization of the BSE got 10,000 shares of Bombay Stock Exchange Ltd. (BSEL) of face value of Rs.1 each. In view of above, the Assessing Officer stated that BSE card ceased to exists on demutualization and as per section 55(2)(ab), the cost of shares allotted to the card holders of the stock exchange under the Scheme of demutualization shall be cost of acquisition of the original membership of the exchange. In view of above, the Assessing Officer disallowed the claim of depreciation of the assessee on Bombay Stock Card. | |
| ■ | The Commissioner (Appeals) upheld the order of the Assessing Officer. | |
| ■ | On second appeal: |
HELD-II
| ■ | There is no dispute to the fact that the Bombay Stock Exchange was corporatized as per the scheme of 'Corporatization' and 'Demutualization' and the erstwhile Bombay Stock Exchange was succeeded by a company incorporated under Companies Act, 1956. The assessee was granted 10,000 shares of newly incorporated company viz Bombay Stock Exchange Limited (BSEL). Therefore, rights of the existing BSE member as card holders got extinguished and in lieu thereof BSE Members have acquired shares in BSEL and trading rights in BSEL. The amendment was also made by inserting clause (xiiia) to section 47 to state specifically that such extinguishment of right and acquisition of shares and trading rights of BSEL is not regarded as transfer. Correspondingly, an amendment was made by inserting section 55(2)(ab). | |
| ■ | From section 55(2)(ab), it is evident that on demutualization or corporatization of the Bombay Stock Exchange, the cost of acquisition of ownership right and trading rights have been split. The trading rights are based on deposit system and in the case of existing member its cost deemed to be nil. The entire value of Bombay Stock Exchange card, as stands in the books of account of the assessee on the date of demutualization of Bombay Stock Exchange would be assigned to the shares allocated to said members. Therefore, when the membership ceased to exists and in lieu of the card new asset came into existence i.e. 10,000 shares as well as rights to trade and clearing in the stock exchange and the acquisition of cost of trade and clearing has been provided to be nil as per proviso to section 55(2)(ab), the entire cost of membership as stands in the books of account of the assessee would be treated as cost of acquisition of 10,000 shares, which is not a depreciable asset. Hence, the claim of assessee to claim depreciation on demutualization or corporatization of the stock exchange of the Bombay Stock Exchange Card was not justified and legal. Therefore, the same was rightly denied by the Assessing Officer in the assessment year under consideration. [Para 15] |
CASES REFERRED TO
Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81/194 Taxman 203 (Bom.) (para 7), Goetze (India) Ltd. v. CIT [2006] 284 ITR 323/157 Taxman 1 (SC) (para 12), CIT v. Pruthvi Brokers and Shareholders (P.) Ltd. [2012] 349 ITR 336/208 Taxman 498/23 taxmann.com 23 (Bom.) (para 13), Sino Securities (P.) Ltd. v. ITO [2012] 134 ITD 321/[2011] 16 taxmann.com 354 (Mum.) (para 13) and Sunidhi Consultancy Services Ltd. v. Dy. CIT [2012] 50 SOT 223/19 taxmann.com 22 (Mum.) (para 13).
Sanjay R. Parikh for the Appellant. Prabhat Jha for the Respondent.
ORDER
B.R. Mittal, Judicial Member - The assessee has filed this appeal for assessment year 2008-09 against order of ld. CIT(A) dated 30.1.2012 on the following grounds :
| "1. | The learned Commissioner of Income Tax (Appeals) erred in confirming the income assessed by the assessing officer at Rs.2,69,41,570/- | |
| 2. | The learned Commissioner of Income Tax (Appeals) erred in confirming the action of the assessing officer in invoking Rule 8D and thereby disallowing Rs.2,34,139/- u/s 14A of the Income Tax Act, 1961. | |
| 3. | The learned Commissioner of Income Tax (Appeals) erred in law and in facts by confirming the Assessing Officer's contention in not accepting the revised long term capital gain on sale of shares of BSE Ltd. submitted during the course of assessment proceedings. | |
| 4. | The learned Commissioner of Income Tax (Appeals) was not justified in stating that the appellant's claim of lower long term capital gains on sale of BSE shares cannot be accepted if the claim is not made by revising the return of income; even though the claim of appellant may have merit. " |
3. Ground No.1 of the appeal is general and does not require any specific adjudication.
4. In respect of Ground No.2 of the appeal, the relevant facts are that the assessee is a registered share-broker on recognized stock exchange doing brokerage activities and also trading in shares.
5. In the assessment year under consideration, the assessee has earned dividend income amounting to Rs.46,5,118/- which is claimed as exempt. AO has stated that assessee has not made any disallowance u/s 14A of Income Tax Act, 1961 (the Act), in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. However, the assessee vide letter dated 7.12.2010 stated that investment was made by the assessee in new shares by paying the application money which remains outstanding pending allotment or refund. That the said application money cannot be considered as investment for the purpose of inclusion in the list of investment under rule 8D. However, the AO did not accept the contention of assessee and stated that as per balance sheet, total investment are at Rs.6,53,56,661/-. AO has stated that certain percentage of the expenses claimed by the assessee-company would definitely be attributable to tax free income earned by assessee as it is the common pool of human and financial resources which are being utilized to earn income in various form. AO after considering section 14A(2) of the Act and Rule 8D has calculated the disallowance at Rs.2,34,139/-. Being aggrieved, assessee filed appeal before the First Appellate Authority.
6. Before ld. CIT(A), on behalf of assessee, it was contended that it has not used any borrowed fund for acquisition of investment. It was contended that various administrative expenses and interest had been incurred not to earn dividend income but to run day to day business activity. That the activity of purchase and sale of shares form part of indivisible business of the assessee. Further, AO has not established nexus between the expenditure incurred with tax free income.
7. Ld. CIT(A) did not accept the said contention of assessee and justified the action of AO to invoke the provisions of Rule 8D to determine the quantum of expenses for disallowance u/s 14A with respect to earning of exempt income. Ld. CIT(A) stated that assessee has not maintained separate account of expenses incurred for earning of exempt income. He has stated that as the assessee had not maintained any separate records on account of expenditure having been incurred for earning of dividend income the AO blindly cannot be fastened with any burden to discover such expenditure of establishing nexus of such expenditure with exempt income. Ld. CIT(A) has stated that with effect from 1.4.2007 sub-section (2) of Section 14A has been inserted requiring the AO to determine such amount in accordance with such method as has been prescribed. Ld. CIT(A) has stated that Rule 8D has been made applicable from assessment year 2008-09 and referred the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v.Dy. CIT [2010] 328 ITR 81/194 Taxman 203. He has stated that assessee being a share-broker undertakes transactions of shares which includes those transactions which subsequently, yielded dividend income which is exempt. Ld. CIT(A) has vide para 3.5 of the said order confirmed action of the AO. Hence, assessee is in appeal before the Tribunal.
8. At the time of hearing, ld. AR submitted that the assessee had not made any investment in shares to earn dividend income. That the dividend received was incidental receipts in respect of shares purchased by the assessee during the course of its trading. He submitted that the authorities below applied Rule 8D of the Rules without recording the satisfaction as per Sub-Section (2) of Section 14 of the Act, that AO is not satisfied in respect of correctness of claim of assessee of the expenditure in relation to exempt income. He submitted that disallowance made by authorities below by applying Rule 8D should be deleted.
9. On the other hand, ld. DR supports the orders of authorities below and submitted that Rule 8D is applicable to the assessment year under consideration in view of decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg Co Ltd. (supra).
10. We have carefully considered the orders of authorities below and the submissions of ld. Representatives of the parties. We observe that the assessee received dividend income in the assessment year under consideration of Rs.4,65,118/-, which is exempt from tax. Admittedly, assessee has not made any disallowance on account of the expenditure relating to exempt income. On behalf of assessee, it was contended that said dividend income has been received in respect of shares, purchased by assessee during its share-broking transactions. The question is not as to whether the shares purchased were during the shares-broking transactions or for the purpose of investment. The question is as to whether the assessee is claiming exempt income and whether any expenditure has been incurred to earn the exempt income. There is no dispute to the fact that Rule 8D is applicable to the assessment year under consideration i.e. assessment year 2008-09. There is also no dispute to the fact that the ld. CIT(A) has stated that the balance-sheet as on 31.3.2008 shows certain balances of own outstanding borrowed funds and therefore, the ld. CIT(A) has stated that it cannot be said that no borrowed funds had ever been utilized by assessee for the purpose of making investment or undertaking transactions which yielded dividend income, which has been claimed as exempt. The assessee has not disputed the fact that it failed to produce any cash flow statement or any other material which could establish that borrowed funds had not been utilized for earning of exempt income as observed by ld. CIT(A) in his order. The contention of ld. AR that no satisfaction has been recorded by AO before invoking Rule 8D, according to us, has no merits particularly when the AO at the time of making the assessment confronted the assessee in respect of investment in shares and expenses claimed and particularly when the AO asked the assessee as to why disallowance be not made u/s 14A read with Rule 8D of the Act in respect of the exempt dividend income. Considering the facts of the case, and the reasonings as given by ld. CIT(A) in the impugned order, we do not find any reason to interfere with the order of ld. CIT(A) to determine the amount of expenditure as per provisions of Rule 8D for the exempt income. Hence Ground No.2 of the appeal taken by assessee is rejected by confirming the order of ld. CIT(A).
11. In respect of Ground Nos.3 and 4 of the appeal, the relevant facts are that the assessee acquired Membership of Mumbai Stock Exchange for the consideration of Rs.55 lakhs on 24.12.1999. The assessee claimed depreciation on stock exchange card of Rs.1,83,540/- in the assessment year under consideration. AO considering the fact that in the assessment year 2006-07, Membership rights of Bombay Stock Exchange (BSE) got demutualized after corporatization of the Bombay Stock Exchange and the card holders on demutualization of the Bombay Stock Exchange got 10000 shares of Bombay Stock Exchange Ltd. (BSEL) of face value of Rs.1 each. In view of above, AO stated that Bombay Stock Exchange card ceased to exists on demutualization and as per Section 55(2)(ab) of the Act, the cost of shares allotted to the card holders of the Stock Exchange under the Scheme of demutualization shall be cost of acquisition of the original membership of the Exchange. In view of above, AO disallowed the claim of depreciation of the assessee on Bombay Stock Card. Further, the assessee in the assessment year under consideration sold 4562 shares and determined the capital gain in the return of income as under :
| (i) | Proportionate cost of 4562 shares of BSE Ltd, in the hands of assessee | Rs.4,562/- |
| (ii) | Year of purchase in 2006-07 and it's Index is | 519 |
| (iii) | Year of sale is 2007-08 and it's index is | 551 |
| (iv) | Indexed cost of 4562 shares of BSE Ltd is | Rs.4,843/- |
| (v) | Sale proceed of 4562 shares of BSE Ltd is | Rs.2,37,22,400/- |
| (vi) | Taxable long term capital gain on sale of 4562 BSE Ltd shares is | Rs.2,37,17,557/- |
During the course of assessment proceedings, the assessee revised its statement of Long Term Capital Gain and worked out at Rs.2,31,39,956/-. The assessee stated that while filing the return of income the cost of acquisition was taken at Re.1 per share. Whereas in the revised working of Long Term Capital Gain, it has adopted the cost of acquisition as Rs.1 per shares + Written Down Value (WDV) of Bombay Stock Exchange as on 31.3.2005. AO did not accept the revision of capital gain. Being aggrieved, the assessee filed appeal before the First Appellate Authority.
12. Ld. CIT(A) after considering the submissions of the assessee confirmed the action of AO on the ground that assessee has not revised the Long Term Capital Gain on sale of Bombay Stock Exchange shares by revising the return of income and referred the decision of Hon'ble Bombay High Court in the case of Goetze (India) Ltd. v. CIT [2006] 284 ITR 323/157 Taxman 1. Hence, this appeal by the assessee.
13. Ld. AR submitted that the assessee claimed depreciation on the membership rights of Stock Exchange and even after insertion of section 55(2)(ab) of the Act, the assessee was of the view that depreciation could be claimed on the membership rights of the Bombay Stock Exchange, as no amendment to section 43(1) or section 43(6), were made. Ld. AR submitted that since claim of depreciation was withdrawn during the year under consideration and same was also disallowed in earlier years, the assessee, at the time of assessment proceedings, made a revised claim before AO by increasing cost of shares by WDV of the Stock Exchange card. He submitted that ld. CIT(A) has confirmed the action of the AO by relying on the decision of Hon'ble Apex Court in the case of Goetze (India) Ltd. (supra), but the said case is not applicable as the claim was itself before the AO and the assessee only made a revised claim as it found that earlier one was a wrong claim. He submitted that in view of decision of Hon'ble Jurisdictional High Court in the case of CIT v. Pruthvi Brokers and Shareholders (P.) Ltd. [2012] 349 ITR 336/208 Taxman 498/23 taxmann.com 23 (Bom), the appellate authorities had powers to entertain an additional claim. He submitted that the assessee had not allocated the WDV of the membership rights of the Stock Exchange card to the cost of shares and computed the Long Term Capital Gain in respect of shares sold by considering the cost of acquisition of shares i.e. Rs.1 per share. He submitted that the claim of depreciation has been withdrawn, and therefore, the claim by increasing cost of shares was made and the revised statement of Long Term Capital Gain was filed. Ld. AR referred the decision of ITAT, Mumbai in the case of Sino Securities (P.) Ltd. v. ITO [2012] 134 ITD 321/[2011] 16 taxmann.com 354, wherein it was held that the depreciation is not available on the erstwhile Bombay Stock Exchange Card after demutualization of the Stock Exchange and the said decision was followed by ITAT, Mumbai in the case of Sunidhi Consultancy Services Ltd. v.Dy. CIT [2012] 50 SOT 223/19 taxmann.com 22. Ld. AR submitted that the matter may be restored to the AO to consider the Long Term Capital Gains as there was no malafide intention in claiming depreciation on membership card after demutualization of the Stock Exchange and it is the evident that the assessee had not allocated to the cost the WDV of the membership card.
14. On the other hand, ld. DR submitted that assessee made wrong Long Term Capital Gain in the computation filed with the return of income and only on being pointed out by AO, the assessee revised the return. He submitted that assessee is a big shareholder and have the benefit of expert advice. He submitted that the assessee adopted the alternative claim by revising Long Term Capital Gain only when the depreciation on the stock exchange card claimed by the assessee was not entertained on account of corporatization of Bombay Stock Exchange as per Scheme of demutualization and the card ceased to exists.
15. We have considered the orders of authorities below, facts on record and the submissions of the ld. Representatives of the parties. There is no dispute to the fact that the Bombay Stock Exchange was corporatized as per the scheme of "Corporatization' and 'Demutualization' and the erstwhile Bombay Stock Exchange was succeeded by a company incorporated under Companies Act, 1956. The assessee was granted 10000 shares of newly incorporated company viz Bombay Stock Exchange Limited (hereinafter referred to as BSEL). Therefore, rights of the existing BSE member as card holders got extinguished and in lieu thereof BSE Members have acquired shares in BSEL and trading rights in BSEL. The amendment was also made by inserting clause (xiiia) to section 47 of the Act to state specifically that such extinguishment of right and acquisition of shares and trading rights of Bombay Stock Exchange Limited is not regarded as transfer. Correspondingly, an amendment was made by inserting section 55(2) (ab) of the Act which reads as under :
| "55. (1) For the ** | ** | ** |
| (2)** | ** | ** |
| (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;" |
From the above provision of section 55(2)(ab) of the Act, it is evident that on demutualization or corporatization of the Bombay Stock Exchange, in the case before us, the cost of acquisition of ownership right and trading rights have been split. The trading rights are based on deposit system and in the case of existing member its cost deemed to be nil. The entire value of Bombay Stock Exchange card, as stands in the books of account of the assessee on the date of demutualization of Bombay Stock Exchange would be assigned to the shares allocated to said members. Therefore, when the membership ceased to exists and in lieu of the card new asset came into existence i.e. 10000 shares as well as rights to trade and clearing in the stock exchange and the acquisition of cost of trade and clearing has been provided to be nil as per proviso to section 55(2)(ab) of the Act, 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. Hence, the claim of assessee to claim depreciation on demutualization or corporatization of the stock exchange of the Bombay Stock Exchange Card was not justified and legal. Therefore, the same was rightly denied by AO in the assessment year under consideration. Now the question arises as to whether the assessee was justified to allocate the WDV of the Bombay Stock Exchange card to the cost of acquisition during the course of assessment proceedings and is to be allowed or not. We are of the considered view that Long Term Capital Gain in respect of the shares has to be considered after assigning the WDV of the Bombay Stock Exchange Card to the cost of 10000 shares allocated to the assessee. It is observed that the assessee in the assessment year under consideration has sold 4562 shares, therefore, proportionate cost of said Bombay Stock Exchange card has to be assigned to the said shares while computing the Long Term Capital Gains. Hence, we hold that the ld. CIT(A), was not justified in not considering the revised Long Term Capital Gains on sale of shares. The said revised computation of Long Term Capital Gains filed by the assessee had to be considered to adjudicate the issue as per law. Hence, we set aside the orders of authorities below and restore this issue to the file of AO with a direction to compute Long Term Capital Gain by considering the cost of shares taking into account the WDV of the Stock Exchange card. Hence Ground Nos.3 and 4 of the appeal taken by assessee are allowed for statistical purposes by restoring the issue to the file of AO with a direction to compute Long Term Capital Gains as indicated above.
16. In the result, appeal of the assessee is allowed in part for statistical purposes.
USPRegards
Prarthana Jalan
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