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Income Tax Appellate Tribunal, “G”, BENCH MUMBAI
Before: SHRI S. RIFAUR RAHMAN & SHRI RAM LAL NEGI&
आदेश / O R D E R PER S. RIFAUR RAHMAN (A.M):
These cross appeals filed by the assessee, as well as the revenue are directed against order of the Commissioner of Income Tax (Appeals)-09, Mumbai, dated 10/10/2016 for the Assessment Year (AY) 2012-13. Since, the facts are identical and the issues are
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common, for the sake of convenience, these appeals were heard together and are disposed-off by this consolidated order.
The brief facts of the case relevant for the grounds raised by the department as well as the assessee are, that assessee filed its return of income on 28/09/2012, declaring total income of Rs. 4,43,97,360/-, the return was processed u/s 143(1) of the Income Ta x Act, 1961 (In short “Act”). Thereafter, the case was selected for scrutiny and notices u/s 143(2) and 142(1) were issued and served on the assessee, In response, The AR of the assesee appeared and filed relevant information as called for.
The assesee company is engaged in the business of share brokering and providing portfolio and management services.
DISALLOWANCES OF SUB- BROKERAGE CHARGES:-
During the assessment proceedings, the AO observed that assesee has paid sub brokerage charges of Rs. 14,98,66,431/-. The AO observed that in the earlier years also sub brokerage charges were disallowed due to non deduction of TDS and he observed that assessee company has paid huge sum of sub brokerage to its holding company i.e SHCIL and the quantum of payment of sub brokerage is 60% of the gross brokerage earned by the assessee and no TDS was deducted of such payments. He also observed that the business structure/arrangement with the holding company is not of a principle and agent relationship and holding company has only introduced clients and not provided any services with regard to buying or selling securities and AO opined that the services of the
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holding company did not fall under section 194H nor explanation to section 194H and he submitted that the transactions with holding company false under section194H of the I.T. Act. Accordingly, he made disallowance of Rs. 14,98,66,431/- as assessee has not deducted TDS on such payments and the above amount is added back to the total income of the assesse.
BAD DEBTS:-
The AO observed that assessee has claimed bad debts to the extent of Rs. 32,37,000/-, when the assessee was asked to explain the nature of bad debts, whether any legal proceedings have been initiated for recovery, any recoveries have been made in the earlier years or subsequent years, in response assessee filed following the reply.
“1) During the year under consideration the assessee company has debited an amount of Rs.32,37,000/- as Bad debts in its Books of Account. The background to the said debit is as under: The assessee started broking operations in July 2006. Its accounts were maintained first in “Match Software System” which was subsequently shifted to “Tally Software” and finally shifted to “LidhaDidha Software” During this period, the bank reconciliations were not prepared on a daily basis. The Board of the company in F.Y. 2008-09, instructed the Finance Department to carry out the bank reconciliation exercise afresh since inception. As reconciliation involved several hundred crores of rupees spread across multiple banks (Client Accounts), it took substantial time to carry out the same. Accordingly, depending, upon stages of completion of the work, the year as under: Year ended March 31, 2008-a provision of Rs.90 lacs was made on account of difference in reconciliation between Bank Book and Bank Statement (client Account). The said provision was disallowed in the return filed for AY 2008-09.
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Year ended March 31, 2009-Further reconciliations were carried out whereby the provision required stood at Rs.45,36,000/-. Therefore, the provision to the extent of Rs.44,64,000/- was reversed. Year ended March 31.2010-Further reconciliations were carried out whereby the provision required stood at Rs.32,37,000/-. Therefore, the provision to the extent of Rs.12,99,000/- was reversed. Year ended March 31, 2011-No further reconciliation took place. Therefore, the provision stood at Rs.32,37,000/-. Your Honour may please note that there is a clear cut demarcation between assessee’s own funds and its client’s funds. All across India cheques received from clients are deposited into the assessee’s clients’ bank account after entering all requisite on the pay in slip. The company followed up rigorously with its bank to know about the clients from whom money has been received but could not succeed any further. Due to non- availability of any further details, un-reconciled amounts remained pending in reconciliation which could not be reversed by either giving debit or credits to the respective clients as that could have led to wrong reversals, the assessee made a provision in March-2008 and disallowed the same and ultimately never claimed the relevant net debit of Rs.32.37 Lakhs. The assessee company waited for long time but when it realized that it was not possible to get any more details from bank, it wrote off the provision on account of difference in Bank reconciliation (416,32,37,000) in its books during F.Y. 2011-12. In the light of the facts stated above, we request you to please allow the said loss as a business loss u/s 28 of the Act.”
After considering the submissions of the assessee the AO observed that the amount written off is substantial, assessee failed to prove, when the said amount offered as an income and neither considered for taxation in the earlier years, nor filed any supporting records. Since, the assessee failed to substantiate and discharges onus in its claim to write off the bad debts. Therefore, the AO disallowed the claim of bad debts to the extent of Rs. 32.37 Lacs.
CESSATION OF LIABILITY:-
The AO observed that assesee has shown sundry creditors outstanding of Rs. 1,72,47,821/-, when the assessee was asked to submit age wise analysis of the sundry creditors, in response, the
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AO observed that an amount of Rs. 15,03,598/- ( which includes retention money of Rs. 14,371/-) was outstanding for more than one year as on 31/03/2012, when the assessee was asked to substantiate, assessee submitted vide letter dated 15/12/2014 and 09/02/2015 that assessee has made a payment of Rs. 57,247/- on 12/10/2012 and the balance outstanding of Rs. 15,46,351/- was not paid till date of finalization of the assessment proceedings. The AO observed that the Ld. AR of the assesee has submitted that a party wise explanation for creditors as on 31/03/2012, which are outstanding for more than one year and for the case of Shri Dilip Kulkarni, the assessee was asked to explain. the Ld. AR of the assessee in its letter dated 24/2/2015 stated that the amount has not been paid till date due to untimely demise of Shri Kulkarni and this is not possible to bring confirmation. Considering the above submissions, the AO came to the conclusion that there is absolutely no liability on the part of the assessee to pay the said amount.
Further, the AO observed that the assessee has treated the said expenditure as the capital expenditure and claimed depreciation amounting to Rs. 1,57,058/- during this year. Therefore, AO disallowed the depreciation claimed by the assessee during this year to the extent of cessation of liability, accordingly disallowed of Rs. 1,44,645/- and also reduced the closing WDV on the block of assets to the extent of Rs. 13,01,716/-.
SPECULATION LOSS:- 9. The AO observed that assessee has shown share trading loss of Rs. 3,34,353/-. The assessee was asked to explain why the loss from share trading should not be treated as speculation loss, as per
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explanation to section 73 of the Act. In response, assessee filed following submissions.
“ During the year under consideration, the assessee has done proprietary trading along with its broking business which comprises mostly in the F&O segment where it has incurred a loss of Rs.58,534/-, intra-day trading where it has made a gain of Rs.773/- and cash segment being delivery traders where it has incurred a loss of Rs.2,76,592/-. The delivery trades do not constitute a speculative transaction as per section 43(5). Further, F&O trades are not be deemed to be speculative transaction as per Notification No.02/2006 dated January 25,2006 issued by the CBDT. Copy enclosed. In light of what is explained above and based on the Board Circular, the assessee submits that the Explanation to section 73 should not invoked.
After considering the submissions of the assessee, the AO observed that the assessee’s case falls under explanation to section 73 and he, further observed that assessee is a share trader, as well as share broker, assessee is doing two different business, as well as distinct roles and since, assesee has two different roles to play and the explanation to section 73 has not specifically provided the distinction between the two and if the statue intended to give benefit to exclude such categories of persons or entity from the preview of explanation to section 73, it would have clearly mentioned it in the Act itself, by relying on the various case laws explained in his order, disallowed the speculation business loss with the extent of Rs. 2,75,819/- by segregating the loss between share trading and brokerage business.
Aggrieved with the above order, assessee preferred appeal before the Ld. CIT(A). After considering the submissions of the assessee, the Ld. CIT(A) deleted the additions made by the AO with respect to sub- brokerage charges paid by the assessee by relying
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on the decision of the co-ordinate bench in assessee’s own case for the AY 2010-11 and 2011-12.
With regard to bad debts, the Ld. CIT(A) observed that assessee submitted that the credits of Rs. 5,53,048/- were Written back and department must have taxed in the proceeding assessment year i.e. 2011-12. He observed that in principle, the assesee could not reconcile the figures of bad debts and could not prove that this debt was a trading debt. Accordingly, he reduced the disallowance of bad debts made by the AO to the extent of Rs. 5,53,048/-. Accordingly, he directed the AO to restrict the disallowance of bad debts to the extent of Rs. 26,83,952/-.
With regard to disallowance of depreciation and speculation loss, he sustained the disallowance made by the AO.
Aggrieved with the above order, revenue is in appeal before us, raising the following grounds of appeal. 1. “On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in not accepting the fact that the payment made to M/s. Stock Holding Corporation of India Ltd., being a holding company of the assessee falls within the preview of section 194J of the I.T.Act.” 2.” On the facts and in the circumstances of the case and in law, the Ld.CIT(A) further erred in not confirming the action of the AO that the payments of sub-brokerage paid by the assessee falls under section 194H of the I.T.Act.” 3. “On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the total sub-brokerage of Rs. 149866431/- incurred by the assesee.”
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“The appellant craves leave to amend or alter any ground or add new ground which may be necessary.
At the time of hearing, the Ld. AR of the assessee brought to our notice, in assessee’s own case, the co-ordinate bench of this Tribunal has adjudicated that the sub brokerage charges falls within the preview of section 194J and he submitted a copy of the above decisions relevant to the AY 2011-12 and further, he submitted that the Hon’ble Jurisdictional High Court has confirmed the findings of the ITAT in the department appeal filed before the High Court, the copy of the same is submitted before us.
Considering the rival submission and material available on record, we observed that Hon’ble High Court held as under:-
Section 194J pertains to deduction of tax at source on payment of fees for provisional and technical services. In comparison, Section 194H pertains to requirement of deduction of tax at source on payment of commission of brokerage. Relevant portion of Section 194H reads as under :- "Any person, not being an individual or a Hindu undivided family, who is responsible for paying, on or after the 1st day of June, 2001, to a resident, any income by way of commission (not being insurance commission referred to in section 194D ) or brokerage, shall, at the time of credit of such income to the account of the payee or at the time of payment of such income in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of [five] per cent: …….. Explanation—For the purposes of this section,— (i) “commission or brokerage" includes any payment received or receivable, directly or indirectly, by a person acting on behalf of another person for services rendered (not being professional services) or for any services in the course of buying or selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities; 6. In terms of this provision, therefore, any person responsible for paying to a resident any income by way of commission or brokerage
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would at the tune of crediting such income to the account of the payee or at the time of payment of such income whichever is earlier, deduct income tax at the rate of five percent. Explanation (i) below the said provision defines the term "commission or brokerage", for the purpose of the said Section, as to include any payment received or receivable by a person acting on behalf of another person for services rendered or for any services in the course of buying and selling of goods or in relation to any transaction relating to any asset, valuable article or thing, not being securities. The Tribunal on the basis of these statutory provisions correctly came to the conclusion that in view of specific provisions contained in Section 194H, the transaction would not come within the ambit of Section 194J and further that the above noted explanation makes a specific exclusion from the requirement of deducting tax at source in respect to payment of sub-brokerage. The CIT(A) and the Tribunal, therefore, correctly applied the statutory provisions and deleted the disallowance made by the Assessing Officer, No question of law arises. Income Tax Appeal is dismissed.”
By respectfully following the above decisions. We are inclined to dismiss the appeal filed by the revenue.
Coming to the assessee appeal, aggrieved with the Ld.CIT(A) order, assessee is in appeal before us raising the following grounds of appeal:
Both the lower authorities erred in not allowing deduction for Rs.32,37,000/- claimed under Section 28 as a trading loss or under Section 36 as a bad debt. The appellant submits the Assessing Officer be directed to allow the said amount of Rs.32,37,000/- as a deduction.
Both the lower authorities erred in disallowing depreciation of Rs, 144,635/- in respect of architects fees paid to Shri Dilip Kulkarni. The appellant submits the disallowance is unjustified and requires to be deleted.
Both the lower authorities erred in disallowing speculation Loss of Rs.2,75,819/-
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The learned Commissioner of Income Tax (Appeals) erred in not allowing credit for tax deducted at source on the basis of TDS Certificates. The Appellant submits that the Assessing Officer be directed to grant further credit for TDS for an amount of Rs.4,07,657/-
The learned Commissioner of Income Tax (Appeals) erred in not giving a clear direction for allowing credit on advance tax paid on 15th December, 2011 for Rs. 10,00,000.
At the time of hearing the Ld. AR of the assessee submitted that assessee does not prefer to press the grounds No.4 and 5. Accordingly, ground No. 4 and 5 are dismissed as not pressed.
With regard to Ground No.1 assessee has submitted as below:-
During the assessment proceedings, the assessee has submitted that the assesee debited in its Accounts an amount of Rs, 32,37,000/- as 'Bad debts written off. The Assessing Officer vide Notice under Section 142(1) dated 9th September, 2014, requested the assessee to furnish details in respect of bad debts claimed. The Assessee furnished a detailed explanation vide its letters dated 26th December, 2014 (pages 52 to 63 of compilation). 9th February, 2015 (pages 64 to 76 of compilation) and 24th February, 2015 (pages 77 to 87 of compilation).
The Assessee had debited an amount of Rs. 32,37.000/- in its books of accounts on account of bad debts/ trading loss. The background to the said debit is as under:
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The Assessee is a 100% subsidiary of Stock Holding Corporation of India Ltd. (a company formed and owned by 9 all India financial institutions) and started broking operations in July 2006. The Assessee has offices pan India and has several lakhs of clients spread all over India. Its accounts were maintained first in "Match Software System" which was subsequently shifted to "Tally Software" and finally shifted to "Lidha Didha Software" (a specialized broking software).
Because of the shifting of software’s, the bank reconciliations were not prepared on a regular basis. Therefore, the Board of the company, in the previous year relevant to A.Y 2008-09, instructed the Finance Department to carry out the bank reconciliation exercise afresh since inception.
As reconciliation involved several hundred crores of rupees spread across multiple banks (Client Accounts), it took substantial time to carry out the same. As the work progressed, the Assessee was able to reconcile several items and reduce the difference and consequently, the relevant provision:
• Year ended March 31, 2008 - a provision of Rs 90 lacs was made on account of difference in reconciliation between Bank Book and Bank Statement (client's Accounts). The said provision was disallowed in the return filed for A.Y.2008-09 [page 84 of compilation).
• Year ended March 31, 2009 - Further reconciliations were carried out whereby the provision required at year end stood at
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Rs.45,36,000/-. Therefore, the provision to the extent of Rs,44,64,000/- was reversed. Since the provision had been disallowed in the year of creation, the reversal was not taxed.
* Year ended March 31, 2010- Further reconciliations were carried out whereby the provision required stood at Rs32,37,000/-. Therefore, the provision to the extent of Rs. 12.99,000/- was reversed. Since the provision had been disallowed in the year of creation, the reversal was not taxed.
* Year ended March 31, 2011 - No further reconciliation was possible. Therefore, the provision stood at Rs.32,37,000/-.
This amount has been written off during the year under consideration. This difference has arisen because the balance in the bank account as per the Bank is less than the balance as per the Assessee's books of accounts. This has arisen because cheques deposited in the account have not been realized.
It is submitted that there is a clear cut demarcation between the Assessee's own funds and its client's funds. It maintains separate bank accounts for its own funds and its clients' related funds (pages 48 to 51 of the compilation). All across India cheques received from clients are deposited into the Assessee's client's bank accounts, after entering all requisite details on the pay-in-slip. The company followed up rigorously with its banks to know about the clients to whom the un-reconciled amounts related to, but could not succeed any further. Due to non-availability of any further details, the un-reconciled amounts remained pending in reconciliation which
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could not be reversed by cither giving debit or credits to the respective clients as that could have led to wrong reversals, the Assessee made a provision in March 2008. and disallowed the same and ultimately never claimed the relevant net debit of Rs.32.37 lakhs till the current year The Assessee company waited for a long time, but when it realized that it was not possible to get any more details from bank, the Assessee wrote off the residual provision on account of difference in Bank reconciliation of Rs.32,37,000/- in its books during F.Y 2011-2012.
The Assessee submitted the bank reconciliation statements of HDFC Bank and Axis Bank as on March 31, 2032, showing the difference in reconciliation amounting to Rs.32,37,000/-, to the Assessing Officer (pages 86-87 of the compilation) during assessment. The difference in reconciliation is on account of cheques shown as received from the clients but the funds have actually not been received as the cheque has not been realized. The Assessee had rigorously followed up with the bank to know the details of the clients and the reasons for the difference, but was unsuccessful, because it was difficult for the bank to trace the transactions and intimate the same lo the company.
The Assessing Officer disallowed the said sum on the ground that the claim of the Assessee remains unsubstantiated. The Assessing. Officer further stated that the Assessee failed to prove that the said amount had been offered as income in the earlier years.
The Assessee submits that it is an undisputed fact that the un- reconciled amounts relate to clients1 bank accounts. The Assessee
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is a broker. Therefore, the un-reconciled amount in the normal course of business would represent cheques received, but remaining uncleared for purchase of securities made behalf of the clients. This amount includes the purchase price of the security, as well as the brokerage element. Brokerage would be reflected as income of the respective year. Even if a part of a debt is reflected as income, the condition of section 36(2)(i) of the Income Tax Act stands fulfilled. In this regard, the Assessee places reliance on the following judgment of the Bombay High Court wherein it is held as under:
Shreyas S. Morakhia (342 ITR 285) (Bom.)
"The value of the shares transacted by the assesee as a stock broker on behalf of its client is as much a part of the debt as is the brokerage which is charged by the assessee on the transaction. The brokerage having been credited so the profit and loss account of the assessee, it is evident that a part of the debit is taken into account in computing the income of the assesses. The fact that the liability to pay the brokerage may arise, as contended by the Revenue, at a point in lime anterior to the liability to pay the value of the shares transacted would not make any material difference to the position. Both constitute a part of the debit which arises from the very same transaction involving the sale or as the case may be purchase of shares. Since both form a component part of the debt, the requirement of Section 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee. " Non identification of the particular client and the respective transaction giving rise to the
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Un-reconciled amount ii only because of the lack of information, but there has to be brokerage element involved in each client transaction fulfilling the test in section 36(2)(i) of the Act.
The Assessee submits in the alternative, even assuming the lower authorities are correct in disallowing bad debts written off. the loss is required to be allowed as a business loss under section 28. as the same has arisen in the normal course of carrying on broking business. The Assessee relies on the following decisions for the above proposition:
Harshad Choksi v CIT (349 ITR 250) (Bom.)
In the said case, the assessee a stock and share broker sought to write off an amount of Rs. 47.58 lakhs as bad debts, due to breach committed by three members of the Bombay Stock Exchange, The Assessing Officer held that the assesse was not entitled to claim the benefit of bad debts as the assessee had not satisfied the conditions precedent as provided under section 36(2), in as much as the amount had not been offered to tax in earlier years. The Tribunal agreed with the Assessing Officer.
On a question raised by the assessee, it was held by the Bombay High Court that Section 28 of the Act imposes a charge on the profits or gains of business or profession. The expression "Profits and gains of business or profession" is to be understood in its ordinary commercial meaning and the same does not mean total receipts. The Supreme Court in the matter of Badridas Daga v. CIT [1958] 34 ITR 10, has held that in assessing the amount of profits and gains
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liable to tax, one must necessarily have regard to the accepted commercial practice that deduction of such expenses and losses is to be allowed, if it arises in carrying on business and is incidental lo it.
The Bombay High Court also held that even if the deduction is not allowable as bad debts, the Tribunal ought to have considered the assessee’s claim for deduction as business loss. This is particularly so as there is no bar in claiming a loss as a business loss, if the same is incidental to carrying on of a business. The fact that condition of bad debts were not satisfied by the assessee would not prevent him from claiming deduction as a business loss incurred in the course of carrying on business as share broker.
For arriving the above findings, the Bombay High Court relied on its earlier findings in case of R.B. Rungta & Co. (50 ITR 233)
Badrids Daga v.CIT (34 ITR 10) (SC)
Section 36(1)(vii) of the Income-tax Act, 1961 [Corresponding to section l0(2)(xi) of the Indian Income-Tax Act. 1922] - Bad debts - Assessee was earning on business in money lending -Assessee's agen ‘C’ having power of attorney to operate its bank account, withdrew a huge amount and misappropriated it - Said amount was written off by Assessee in account as unrecoverable - However, Tribunal and High Court held that misappropriation by agent was not a trading loss, therefore, could not be allowed - Whether since, 'C’ was in charge of business, that he had authority to operate bank accounts, and that lie withdrew money in purported exercise of that
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authority, therefore, his action was referable to his character as agent, and loss resulting from misappropriation of funds by him would be a loss incidental to carrying on of business - Held, yes - Whether therefore, loss in question would be deducted in computing profits under section 10(1)-Held, yes.
It is therefore submitted that where a loss arises in the normal course of business, and the same has been claimed as bad debts, even if the conditions of section 36(2) are not fulfilled, the loss incurred which is incidental to the Assessee's business is to be allowed, in the alternative, as a business loss under section 28.
With regard to Ground No.2 assessee has submitted as below:-
The Assessing Officer vide Notice under Section 142(1) dated 9th September. 2014. requested the Assessee to furnish details in respect of creditors as on March 31, 2012 which were outstanding for more than one year and during the course of assessment proceedings the Assessee was asked to furnish details of amounts paid subsequently. The Assessee furnished a detailed explanation vide its letters dated 15th December, 2014 (pages 39 to 47 of compilation), 26th December, 2014 (pages 52 to 63 of compilation), 9lh February, 2015 (pages 64 to 76 of compilation) and 24th February. 201 5 (pages 77 to 87 of compilation) as under: "The assessee company gave a contract for interior work including electrical and networking installations to an architect Mr. Dilip
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Kulkurni. (proprietor of Dilip Kulkarni & Associates) during financial year 2010-11 to carry out the work in its leased premises situated in Mahape.
The cost of the contract was inclusive of the architectural fees of Mr. Dilip Kulkarni. Subcontractors had been appointed to carry out the necessary work Payments were to be made to such vendors/sub contractors based on work completion certificate issued by the architect find certain amounts were kept as retention money to be paid subsequently on final completion of work.
The amounts outstanding in respect of Architect's Fee* payable as on March 31,2012 was Rs.15,03,598/--. The above amounts were outstanding as the work completed has yet not been certified and the work that has already been completed is not fully to satisfaction of the assessee company. The assessee wanted rectification to be done before releasing his final payment.
Further, the proprietary business of Dilip Kulkarni & Associates is badly affected due to the unfortunate and untimely demise of the architect and proprietor. Mr. Dilip Kulkarni, as well as his daughter who was looking after the affairs his absence The assesse company is making several follow ups at regular intervals to get the work finalized and settle the bills in October 12, 2012 Rs,57,247/- (less TDS of Rs.5,725/- and retention money Rs 2,636/-) has been paid Bank statement evidencing the said payment is enclosed. An amount Rs. 1446,351/- is yet outstanding as on date as the full and final settlement is yet to be done.
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The interior work including electrical and networking installations were not completed to the satisfaction of the assessee company. The amount of Rs, 14,46,351/- was outstanding as the work completed has yet not been certified and the work that has already been completed is not as per the specification of the assessee company. However, the full and final settlement has not taken place."
The Assessing Officer refused to accept the Assessee's contention that the said amounts are yet payable, and has disallowed the depreciation claimed of Rs. 144,635/-. The Assessee submits the disallowance is- unjustified in fact, and in law.
It is submitted that it was not possible to bring Dilip Kulkarni's confirmation in view of his untimely demise.
The Assessing Officer disallowed depreciation of Rs.1,44,635/- on the ground that as the Assessee was unable to bring a confirmation of the outstanding amount and there was no liability on the part of the Assessee to pay back the said amount.
The Assessee submits that the Assessing Officer has failed to consider the following facts:
* The Assessee had given the contract to Dilip Kulkarni to carry out the work at its Mahape Office. The work which was completed by Dilip Kulkarni was not certified and the work which was completed was not as per the specifications of the
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Assessee company. The capitalization of the work has been accepted by the Revenue in A.Y. 2011-12
* The full and final settlement did not take place due to the untimely demise of Mr. Dilip Kulkarni.
* Owing to his untimely demise it was not possible to bring a confirmation for the amount outstanding from Dilip Kulkarni.
Effectively, Revenue has reduced the written down value of the assets on account of alleged reduction of liability. Reduction of a liability could, if at all, have relevance only in determination of actual cost in the first year of capitalization. In the present case, capitalization has been carried out in the previous year relevant to A.Y. 2011-12 wherein the amount of actual cost has been accepted. In the current year, we are concerned with the written down value of the block of assets on which deprecation is to be allowed. As per section 43(6)(c)(B) of the Act. written down value can be reduced only by moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year. Reduction in a liability would neither represent 'money's payable in respect of an asset\ nor is there a sale or discarding or demolition or destruction of any asset. The Assessee, therefore, submits that the written down value of the block of assets could not be adjusted in a later year, in view of the alleged reduction of liability to the contractor. In the course of hearing before the Tribunal, an issue was raised as to why the provisions of section 41(1) of the Act cannot be invoked in the present case. The Assessee submits that:-
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i) Firstly, it is not the case of the Assessing Officer or the CIT(A) and even the Ld. DR that provisions of section 41(1) are applicable. They are not wanting to assess the amount (W,D.Vr) of Rs. 14,46,351/- as income. Instead, they have reduced the written down value of the assets to grant deprecation on the lower amount.
ii) Further, for applying the provisions of section 41(1) of the Act, it has to be shown that the an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability. Depreciation is neither a loss nor an expenditure nor a trading liability, as held by the Apex Court in Nectar Beverages PVT Ltd. v. Dy. CIT reported in 314 1TR 314, It is also held therein that if the provisions of section 41(2) cannot be invoked, in view of non-fulfillment of conditions contained therein, it is not open to the Revenue to rely on section 41(1) for bringing an amount to tax.
iii) Also, as per the judgment of the High Court at Bombay in Mahindra and Mahindra Ltd. v. CIT reported in 261 ITR 501 and as subsequently affirmed by the Hon'ble Apex Court in 404 ITR 1, the provisions of section 41(1) of the Act cannot apply to a waiver of debt on capital account. In the present case, it is undisputed that the debt in favour of Mr. Dilip Kulkarni (contractor) was on a capital account.
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iv) Independent of section 41(1) of the Act, there is nothing in the Act enabling assessment of cessation of a liability as an income. In this regard, attention is invited to the judgment of the Bombay High Court in the case of Mohsin Rehman Penkar vrs CIT reported in 16 ITR 183
In view thereof, it is urged that the AO/CIT(A) were not justified in reducing the written down value by the amount of Rs., 14,46,351/- for the purposes of granting of depreciation. Nor could the said amount be brought to tax under section 41(1) of the Act.
With regard to Ground No.3, assessee has submitted as below:-
During the year under consideration, the assesse has done proprietary trading, wherein it has incurred a loss of Rs.2,76,592/-. The Assessing Officer allowed expenses to the tune of Rs. 3152/- and held the balance amount of Rs. 275819/- as speculative in nature by invoking Explanation below section 73.
The Assessee submits that the proprietary trading was delivery based, wherein actual delivery had taken place. These transactions do not constitute speculative transactions as per the provisions of section 43(5). The Assessee led Notification No.2/2006 dated January 25, 2006 issued by the CBDT before the Assessing Officer contending that the transaction was not speculative in nature. (page 88 of compilation).
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The Assessee relies on the circular issued by CBDT to state that where actual delivery has taken place, the transaction cannot be held to be speculative in nature. The Assessee submits that the Assessing Officer erred in invoking Explanation to section 73. CIT (A) upheld the order of the CIT(A) by holding that the Assessee was unable to show that the transactions were carried out on the notified stock exchanges. The Assessee submits that the transactions were carried out on NSE and BSE as can be observed at pages 62 and 63 of Compilation. Without prejudice and in the alternative, the speculation loss determined should be carried forward for set off in future.
On the other hand, Ld. DR supported the orders of lower authorities.
Considered the rival submissions and material placed on record. With regard to Ground No. 1, we notice that assessee has claimed bad debts as the assessee could not reconcile the amount received /receivable from the customers, who made the investment in the securities. But it is important to note that the business of the assessee is share trading and the assessee receives the funds for investment from the clients alongwith the commission for the services rendered by assessee. The assessee declares the commission as income from the business. The amount which assessee could not reconcile is the gross amount to be received or receivable from the clients. It is the composite responsibility or duty to collect the full charges of the securities to be invested alongwith the commission. The nature of the business demands that assessee has to handle the investment or capital portion of funds and it is in
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the nature of fiduciary duty. In case assessee could not complete the transaction, it is the responsibility of the assessee to refund the same and in case it is lost or not able to trace the funds, it is responsibility of the assessee to compensate to the client. This is direct responsibility and commitment of the business, in case, the funds received from the client is lost for some reason, the assessee has to compensate even though assessee is earning only portion of the above investment as income as commission. What is relevant is that the composite nature of transaction. Similarly the assessee in this case could not reconcile the balances received and receivable from the clients, but it is burden on the business carried on by the assessee due to composite nature of transaction. As held in the case of Shreyas S. Morakhia (supra), the Hon’ble Jurisdictional High Court has held that even though this transaction may not fall u/s 36(2)(i), but it will fall u/s 28 as business loss. Respectfully, following the above decision, we are inclined to allow the ground raised by the assessee.
With regard to ground no. 2, we notice that assessee entered interior work contract including electrical and networking installations with Mr. Dilip Kulkarni. The contract includes architect fees. The contract work was completed and cost were capitalized in the previous AY. Assesse has claimed depreciation in the earlier year as well as this AY under consideration. A portion of the architect fees payable to Mr. Dilip Kulkarni was pending to the extent of Rs. 14,46,351/- and due to untimely demise of Shri Dilip Kulkarni, the bills could not be settled due the work completed were not certified and absence of Shri Dilip Kulkarni. The assessee further submitted that the work completed are not as per specification. In our view, by
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referring to the above situation, this liability may not be settled because of unsatisfactory completion of the work and also the architect also not available to complete the certification. It amounts to non-existence of liability. The AO has reduced the written down value of the asset and reduced the depreciation claimed by the assessee. Now before us, assessee submits that as per section 43(6)(c)(B), WDV can be reduced only by moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year. The reduction in a liability would neither represent money’s payable in respect of an asset, nor is there a sale or discarding or demolition or destruction of any asset. But in our considered view, the portion of reduction of liability reduces the cost of the valuation of asset which was capitalized during the previous year. The reduction in the cost of asset represents the excess value of capitalization. There is due to non-settlement of liability. Since the excess capitalization leads to claim of excess depreciation which assessee is technically not eligible to claim. Therefore, the asset has to be re-adjusted in the present AY and the adjustment has to be made in the block of assets. As per the concept of block of assets, any reduction in the value of assets has to be adjusted first in the block of assets and then the depreciation to be calculated. This reduction of liability will fall in discarded category. Therefore, in our considered view, the action of the AO is justified, but only view is that he should have reduced only to the extent of actual pending liability of Rs. 14,46,351/-, not Rs. 15,03,598/-. Accordingly, ground raised by assessee is dismissed.
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With regard to ground no. 3, we notice that assessee has incurred share trading loss of Rs. 3,34,353/- but AO treated the above loss as speculative loss by referring to explanation to Section 73 of the Act. Before us, Ld. AR submitted that the majority of trading loss is incurred in carrying out the delivery based transactions. The transaction with delivery based is not speculation loss. After considering the submission, we are in agreement with the assessee that the loss incurred in delivery based will not fall under speculation transaction. Therefore, we are inclined to remit this issue back to the AO to verify the submission of the assessee and allow the loss to the extent of delivery based as trading loss and balance as speculation loss. Accordingly, this ground raised by the assessee is allowed for statistical purposes.
In the net result, the appeal filed by the revenue is dismissed and the appeal filed by the assessee is partly allowed.
Order pronounced in the open court on this 29/11/2019. Sd/- Sd/- (RAM LAL NEGI) (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated: 29/11/2019 Thirumalesh Sr.PS
Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. 6. Guard file.
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सत्यापित प्रतत //True Copy//
BY ORDER,
(Asstt. Registrar) ITAT, Mumbai