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Income Tax Appellate Tribunal, “J”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI SANDEEP GOSAIN, JM
आदेश / O R D E R PER R.C.SHARMA (A.M):
These are the appeals filed by assessee and revenue against the order of CIT(A)-39, Mumbai dated 03/10/2014 for the assessment year 2011-12 in the matter of order passed u/s.143(3) of the IT Act. 2. The following grounds have been taken by assessee:-
378/Mum/2015 M/s. Motilal Oswal Securities Ltd., Being aggrieved by the order of the Hon'ble Commissioner of Income Tax (Appeals) - 39, Mumbai, this appeal petition is submitted on the following grounds which it is prayed may be considered independently without prejudice to one another;
1. Disallowance U/S 14A 1.01) On the facts and circumstances of the case and in law, the learned CIT(A) erred in not appreciating that resort cannot be made to Rule 8D(I)(b) since the learned AO has failed to provide any cogent reasons for not accepting the disallowance of Rs 11,84,784/- already made by the appellant as reasonable. Thus enhancing disallowance u/ s 14A by resorting to the computational machinery of Rule 8D(2) is bad-in-law and needs to be deleted. 1.02) Without prejudice to the above and without admitting, on the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming that Rule 8D(2)(ii) are applicable to the appellant without appreciating that the investments were made from own funds. Thus disallowance of interest expense (excluding bank guarantee commission and processing charges) u/s 14A being bad-in-law needs to be deleted.
2. Disallowance of indexed cost of acquisition of Rs 28,91,234/- on sale of shares of BSE Ltd. On facts and circumstance of the case and in law, the learned CIT(A) erred in allowing indexation benefit on shares of BSE Ltd. from the date of acquisition of shares instead of the date on which the corresponding BSE Cards were acquired. The said shares were allotted to the appellant on account of conversion of BSE cards into shares pursuant to demutualization of stock exchange. Accordingly the disallowance of indexed cost of acquisition of Rs 28,91,234/- is bad-in-law and must be deleted.
3. The appellant company craves leave to add, to amend, alter/delete and/ or modify the above grounds of appeal on or before the final hearing.
2. The following grounds have been taken by revenue:- 1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the additions amounting to Rs.58,84,763/- on a/c. of bad debt, relying on the decision of the Hon'ble Bombay High Court in the case of Shreyas S. Morakhia ignoring the fact that the same was accepted by the Department only due to low tax effect.
378/Mum/2015 M/s. Motilal Oswal Securities Ltd., 2. "On the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in holding that the VSAT is a part of computer and hence eligible for depreciation @ 60% without appreciating the fact that VAST is essentially a part of wireless communication system through satellite which is exclusive from the computer systems and eligible for depreciation @ 25%. 3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition amounting to Rs.2,60,86,982/- without appreciating the fact that the AO has rightly treated the Vanda loss as speculative loss as per section 73 of the Act. 4. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition amounting to Rs.2,09,10,495/- on account of Mark to Market (MTM) loss without appreciating the fact that the AO has rightly treated it as. contingent in nature. 5. "On the facts in the circumstance of the case and in law, the Ld. CIT(A) has erred in allowing the depreciation on Customer Rights of Rs.54,06,776 even though the assessee is not eligible for the same as per section 32 of the Act.
6. The appellant craves leave to add, to amend and / or to alter any of the grounds of appeal
, if need be.
7. The appellant, therefore, prays that on the grounds stated above, the order of the CIT(A)-39, Mumbai may be set aside and that of the Assessing Officer restored.
We have heard the rival contentions and perused the record.
Facts in brief are that the assessee is engaged in stock broking having membership card of both BSE & NSE. During the year assessee had charged to the P&L A/c., bad debts written off amounting to Rs. 58,84,763/ -. It was stated before the A.O. that the write off is on account of the' client not being able to satisfy his, part of the contractual" obligation whereas the assessee 'has' to' satisfy his, part 'of the contractual obligation with the stock exchanges within two days subsequent' to the transaction' date. "The A.O. rejected the said explanation holding that the sums sought to be written off have never 378/Mum/2015 M/s. Motilal Oswal Securities Ltd., been taken into account for computing the income of the assessee, further, the amount is not allowable as business loss either. 5. By the impugned order, CIT(A) allowed assessee’s claim after having following observation:- 6.2 I have considered the matter and as per record, the said issue has been held in favour of the appellant in the earlier years. To quote from the for A.Y, 2007-08: "I have gone through the issue. The Hon'ble ITAT· Special Bench's decision in the case of Shreyas Morakhia -4 for A.Y. 1998-99 order dated 16.07.2010 is in favour of the appellant. The Hon'ble ITAT Special Bench has also held as follows:- 32. Keeping in view all the facts of the case and the legal position emanating from the various judicial pronouncements as discussed above, we are of the view that the amount receivable by the assessee, who is a share broker, from his clients against the transactions of purchase of shares on their behalf constitutes debt which is a trading debt. The brokerage/ commission income arising from such transactions very much form part of the said debt and when the amount of such brokerage/transaction has been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisfies the condition stipulated in sec. 36(2)(i) and the assessee is entitled to deduction u/ s. 36(1)(vii) by way of bad debts after having written of the said debts from his books of account as irrecoverable. We, therefore, answer the question referred to this Special Bench in the affirmative that is infavour of the assessee. 5.16) Respectfully following the Hon'ble Special Bench's decision, I hold that the appellant is entitled for. deduction of Rs.78,91,360/- as bad' debts u/s. 36(1 )(Vii) Of the IT Act. . The A O is directed to delete the addition. 6.3 . The said order of the ITAT has been subsequently upheld by the Hon'ble High Court of Bombay in the case of CIT vs. Shreyas S. Morarka (2012) 19 taxmann.com 64.
We have considered rival contentions and found that issue under consideration is covered by the decision of Hon’ble Bombay High Court 378/Mum/2015 M/s. Motilal Oswal Securities Ltd., in the case of CIT v Shreyas S. Morakhia (342 ITR 285) and CIT v. Bonanza Portfolio (320 ITR 178 (Del). SLP dismissed by Supreme Court in case of CIT v. Bonanza Portfolio (328 ITR 9(st)). Respectfully following the order of Bombay High Court, we do not find any infirmity in the order of CIT(A) for deleting the disallowance on account of the bad debts.
With regard to the issue of VSAT, the assessee claimed depreciation on VSAT at 60%. The A.O. had held that VSAT is a wireless communication device and does not form part computer system per se However, following the orders of the earlier years, the A.O. allowed depreciation at 25% thereby making a disallowance of Rs.14,56,213/- 8. By the impugned order, CIT(A) allowed the claim in favour of the assessee after having the following observation:- 7.2 I have considered the matter. The matter has been adjudicated in earlier years, similar issue was involved in A.Y. 2001-02 to A.Y. 2006-07, where the Hon'ble ITAT has allowed the claim in favour of the appellant. Also, similar issue has been allowed by the CIT(A) in A.Y. 2007 -08 to A.Y. 2010-11. Following the earlier years' Orders, including that of the jurisdictional ITAT in the case of the appellant, this ground is held in favour of the appellant. It is held that VSAT is entitled to depreciation at 60%.
CIT(A) has relied upon his order for A.Y.2007-08 to A.Y.2010-11. The issue is covered in favour of assessee vide orders of the Hon’ble Tribunal in assessee’s own case for A.Ys. 2007-08 in dated 21/01/2015 and A.Y.2008-09 to 2010-11 in ITA No.4581/Mum/2012, 7328/Mum/2011 and 6204/Mum/2013 dated 378/Mum/2015 M/s. Motilal Oswal Securities Ltd., 19/02/2016. Respectfully following the decision of the Tribunal in assessee’s own case, we do not find any infirmity in the order of CIT(A).
With regard to deleting the addition of Rs. 2,60,86,082/-, the assessee had incurred net loss on account of Vanda transaction, amounting to Rs. 2,60,86,982/-. According to the assessee, such loss incurred when the clients disowned the transaction undertaken by the Broker. This occurred when there might be trade errors while executing the orders by the Broker or the client might fail to satisfy its contractual obligation. Such obligation which the broker had to compulsorily undertake was transferred to Vanda / Error account which could result into net profit/loss. 11. By the impugned order, CIT(A) after following the orders of the earlier years held that Vanda loss of Rs.2,60,86,982/- is allowed as business loss after having the following observation:- 8.2 I have considered the matter. The' said matter had arisen in the' earlier years and had been' elaborately adjudicated upon in A.Y. 2007:08 to A.Y. 2010-11 by the CIT(A) drawing support from the decisions as cited. Since there is no change in the facts of the case as compared to the earlier years, following the above orders of earlier years, it is held that Vanda loss of Rs. 2,60,86,982/- is allowable as business loss. 12. CIT(A) has relied upon his order for A.Y.2007-08 to A.Y.2010-11. The issue is covered in favour of assessee vide orders of the Hon’ble Tribunal in assessee’s own case for A.Y.2007-08 in ITA No.168/Mum/2011 dated 21/01/2015 and A.Y.2008-09 to 2010-11 in ITA No.4581/Mum/2012, 7328/Mum/2011 and 6204/Mum/2013 dated 19/02/2016. Respectfully 378/Mum/2015 M/s. Motilal Oswal Securities Ltd., following the decision of the Tribunal, we do not find any infirmity in the order of CIT(A).
The assessee had incurred mark to market loss on open positions of Futures/Options contracts as on 31.03.2011. The assessee debited the same to the P&L A/c. and claimed as' part of net arbitrage income which is considered as business income ". However, the A.O. disallowed the loss. In the course of hearing of the appeal, the assessee submitted as follows: a. As per 'section 2(h) of the Securities Contract Regulation Act, 1956,' derivative is a security and has value. Thus, the very base on which the A.O. has disallowed the loss is invalid. b. The said loss arises due to difference between the spot price as on 31.3.2011 and the contract price. Thus, it is nothing but foreseeable loss as on 31.03.2011. It is quantified on the basis of the prevailing market prices, accordingly it is not contingent in nature. c. All the above open positions got actually squared off in subsequent months. d. Losses claimed in the year 2010-11 are not further claimed in year 2011- 12. e. As regards the allowability of the same, it is submitted that there are host of Court decisions wherein it is a settled issue that in the case of mercantile system of accounting all foreseeable losses must be allowed as deduction. This is also in accordance with the Accounting Standard notified u/ s. 145 of the Income tax Act which is obligatory on part of the assessee to follow in order to compute the total income. f. The appellant relies on the following decisions ;- CIT v. Woodward Governor India P. Ltd. 312 ITR 254 (SC) Rotork Control India P. Ltd. vs. CIT (2009) 314 ITR 62 DCIT vs. Bank of Bahrain I.T.No. 4404 & 1883/Mum/2004. 9.3. The appellant further submitted that the said losses' has been incurred in the course of the business of trading in shares 378/Mum/2015 M/s. Motilal Oswal Securities Ltd., wherein it hedges position in the 'cash segment with that in the futures segment. Accordingly, these losses would also not be considered as speculative in nature since hedging is specifically excluded from the ambit of the definition of "speculative transaction" vide section 43(5)(d). 13.1. The assessee further stated that both the decisions relied on by the A.O. has been dealt with by the Delhi High Court decision in the case of Woodward (supra). The said decision of the Delhi High Court has been upheld. by the Supreme Court in. CIT vs. Woodward Governor India P Ltd. 312 ITR 254 (SC). This is relied on by the assessee in the instant case. Lastly, the assessee relied on the orders of the CIT(A) for A.Y. 2009-10 and A.Y. 2010-11, wherein similar disallowances have been deleted.
By the impugned order CIT(A) held that the loss of Rs.2,09,10,495/- was held to be business loss u/s.28 after observing as under:-
9.3 I have considered the matter. The facts of the case are similar to that in A.Y. 2009-10 and A.Y. 2010-11. In view of the similarity of facts and relying on the earlier orders of the CIT(A), it is held that the case of the appellant is covered by the judgement of the Hon'ble Supreme Court in the case of Woodward Governor (Supra). In view of the said matter, the loss of Rs. 2,09,10,495/- is held to be business loss under s. 28.
We have considered rival contentions. From the order of the lower authorities we found that CIT(A) has relied upon his order for A.Y.2009-10 to A.Y.2010-11. The issue is covered in favour of assessee vide orders of the Hon’ble Tribunal in assessee’s own case for A.Y.2009-10 and 2010-11 as well as the decision of the Hon’ble Supreme Court in the case of CIT v. Woodward Governor 312 ITR 254. Respectfully following the order of the 378/Mum/2015 M/s. Motilal Oswal Securities Ltd., Hon’ble Supreme Court in case of Woodward Governor, we do not find any reason to interfere in the order of CIT(A) for deleting the loss claimed under the head ‘Mark to Market Loss’.
With regard to claim of depreciation on Customer Rights, we found that in A.Y.2007-08, the assessee had acquired customer rights aggregating to Rs.6,83,52,328/- from the following concerns in the course of its business acquisitions:- Name of the concern Cost of acquisition of customer rights acquired (Rs.) Peninsular Capital Markets Ltd., 5,18,82,328 Mr. M.K.Varghese (Prop. Of Capital 60,00,000 Deal & Share Broker) Mani Stock Brokers Ltd., 1,04,70,000 Total 6,83,52,328 17. The A.O. disallowed depreciation following the reasons mentioned in A.Y.2007-08 to A.Y.2010-11 wherein similar disallowance was confirmed. 15. By the impugned order CIT(A) observed that the facts in the case of assessee are similar to the facts in the case of Capital Markets (P) Ltd., DCIT 56 SOT, 32 and directed the AO to allow depreciation claim of Rs.54,06,776/-. The observation of CIT(A) is as under:- I have very carefully considered the matter. I find in the case of India Capital Markets (P) Ltd. vs. DCIT 56 SOT 32, the Hon'ble Mumbai ITAT had considered a similar matter. In the said case, the assessee, a share broker had purchased entire retail clientele business of a company for a certain consideration. The assessee therein booked these expenses as purchase of goodwill and claimed depreciation therein under. s. 32(1)(ii). It was held that the purchase of clientele business was a right 378/Mum/2015 M/s. Motilal Oswal Securities Ltd., which could be used as a tool to carry on business and therefore eligible for depreciation on the payments made, since it falls within the expression "any other business or commercial rights of similar matter" used in section 32(1)(ii) of the Income Tax Act, 1961. The facts in the case of the appellant being similar to the facts of the above cited case, the A.O. is directed to allow depreciation on the acquisition of customer rights. The depreciation claim of Rs. 54,06,776/- is accordingly allowed.
We have considered rival contentions. AO relied on his order for A.Y.2007-08. The issue is covered in favour of assessee vide orders of the Hon’ble Tribunal in assessee’s own case for A.Y.2007-08 in dated 21/01/2015 and A.Y.2008-09 to 2010-11 in ITA No.4581/Mum/2012, 7328/Mum/2011 and 6204/Mum/2013 dated 19/02/2016. Respectfully following the order of the Tribunal, we do not find any reason to interfere in the order of CIT(A) for allowing claim of depreciation on customer’s right.
In the appeal filed by assessee, the assessee is aggrieved for disallowance u/s.14A. 20. We have considered rival contentions and found that the own funds of assessee (Rs. 555.45 crores) are sufficient to cover up the value of investment (Rs. 41.07 crores) so no interest disallowing is required to be made u/ s 14A of the Act. With regard to administrative expenses, the issue is covered vide order of the Hon’ble Tribunal in assessee’s own case A.Y.s 2008-09 to 2010-11 in ITA No. 4581/Mum/2012, 7328/Mum/2011 and 6204/Mum/2013 dated 19.02.2016. The matter has been sent back to the file of Assessing Officer for deciding the issue in accordance with the direction given by the Hon’ble Tribunal in case of 378/Mum/2015 M/s. Motilal Oswal Securities Ltd., sister concern of the assessee wherein a similar working given by the assessee has been accepted by the Assessing Officer for A.Y.2009-10 to 2011-12. After going through the order of the Tribunal as well as consequential orders passed by the AO, in the case of sister concern for the A.Y.2009-10 to 2011-12, we do not find any justification for disallowance so made by the AO and confirmed by CIT(A). Accordingly AO is directed to delete the disallowance made in excess of Rs.11.84 lakhs. We direct accordingly. 21. Next grievance of assessee relates to disallowance of indexed cost of acquisition on sale of shares of BSE Ltd., We have considered rival contentions and found that he issue is covered in favour of assessee vide order of Hon'ble Tribunal in assessee's own case for A.Y.s 2008-09 to 2010-11 in ITA No. 4581/Mum/2012, 7328/Mum/2011 and 6204/Mum/2013 dated 19.02.2016. Respectfully following the order of the Tribunal in assessee’s own case, we do not find any merit for the disallowance of indexed cost of acquisition on sale of shares of BSE Ltd., 22. In the result, appeal of the Revenue is dismissed whereas appeal of the assessee is allowed in part, in terms indicated hereinabove.