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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
PER MAHAVIR SINGH, JM:
These cross appeals are arising out of the order of CIT (A)-9, Mumbai, in appeal No. CIT (A)-9/AC 4(2)/57 & 79/2011-12 even dated 14-02-2012 & 11-01- 2012. The Assessments were framed by ACIT, Circle 4(2), Mumbai, for the A.Y.
ITA No.3228,2268,3332&2288/Mum/2012 Networth Stock Broking Ltd.; 2007-08 & 2008-09
2007-08 & 2008-09 vide order dated 24-12-2009 & 12-12-2010 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
The first issue in assessee’s appeal in ITA No. 2288/Mum/2012 for the A.Y. 2008-09 is as regards to the order of CIT(A) confirming the disallowance of performance based incentive treating as bonus. For this assessee has raised following Ground No. 1: -
“1. That the learned C1T(A) erred in law and on facts in upholding the disallowance of performance linked incentive of Rs. 5,41,816/- payable to employees, wrongly treating it to be in the nature of 'bonus'..”
Briefly stated facts are that the AO disallowed a sum of Rs. 5,41,816/- being performance linked incentive for the reason that the sum has been paid after the due date of filing of return of income and in view of section 36(1)(ii) of the Act, it can be allowed only on payment basis. Apparently, the AO disallowed these expenses under section 43B of the Act, although it has not been mentioned. The CIT(A) also not consider the issue whether the performance linked incentive is in the nature of bonus or commission or it is a separate deduction claimed by the assessee. Aggrieved, now assessee is in appeal before Tribunal.
Before us, it was argued that the assessee is engaged in the business of broking, securities, financial product distribution, depository participation, portfolio management, marketing of insurance product and merchant banking. The assessee claimed before the lower authorities and even before us that during the under consideration, provision was made for payment of profit link incentive to 50 (fifty) employees. It was claimed that out of the sum of Rs. 5,41,807/- an amount of Rs.1,09,873/- paid and the balance amount of Rs.4,20,635/- was offered for tax in the assessment year 2010-11 on 31-12-2010. He also stated that the amount of Rs. 11,299/- is still outstanding. Learned Counsel before us stated that these details are available in assessee’s paper book at pages 52, 201 and 202. It was claimed that this amount of Rs.4,20,635/- has been offered for taxation in the return of income for Page 2 of 43
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A.Y. 2011-12. We find from page 201 of assessee’s paper book that these details were filed before CIT(A) in his return submission which reads as under: -
“It will be seen that the aforesaid amount was payable to 50 employees. However, only an amount of Rs.109873/- was paid (in cash Rs.75,550/- and by adjustment Rs.34323/- against the dues outstanding from the clients introduced by those employees and in respect of whom incentive was payable.) An amount of Rs.4,20,635/- was written back in the books of account in the financial year 2010-11 on 31.12.2010. The balance amount of Rs.11,299/- is still unpaid and it has not been written back either. Some part of the amount may not have been paid because the concerned employees might have left the job in the meantime. We confirm that the said amount of Rs.4,20,635/- has been offered for taxation in the return for assessment year 2011-12.”
In view of the above, we are of the view let the AO examined this fact whether the assessee has paid this amount of Rs.1,09,873/- and accordingly, decide this issue. Certainly, the AO will also verify whether the assessee has offered this amount of Rs.4,20,635/- for taxation in the return of income for A.Y. 2011-12 and in case this is offered then the AO will delete this addition from this year. The balance amount of Rs. 11,299/- is to be added to the returned income of the assessee. We direct the AO accordingly.
The next issue in this appeal of assessee in ITA No. 2288/Mum/2012 for the A.Y. 2008-09 is as regards to the order of CIT(A) confirming the disallowance of the expenses relatable to exempt income by invoking the provisions of section 14A of the Act read with rule 8D of the Income Tax Rules, 1962 (hereinafter the ‘Rules’). For this assessee has raised following ground No. 2:-
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“2.1 That the learned CIT(A) erred in law and on facts in confirming the disallowance under section 14A read with rule 8D when all the investments resulting into the non- taxable income was from non-interest bearing funds and especially the equity capital raised by the company during the year itself;
2.2 That the learned CIT(A) erred in law and on facts in confirming the disallowance u/s 14A without appreciating that the AO had singularly failed in establishing that the allocation of expenses made by the assessee was not correct and therefore his resort to rule 6D was unwarranted and unjustified.
2.3 That the learned CIT(A) erred in law and on facts in confirming the disallowance u/s 14A at Rs, l948912 whereas the AU had disallowed only an amount of Rs. 309883/-.
Briefly stated facts are that during the year under consideration the assessee has earned tax free dividend income of Rs.19,48,912/- (as noted by the AO) but the assessee clarified that the assessee has earned dividend income to the extent of Rs.12,98,536/- and for this he referred to page 40 of assessee’s paper book, wherein in schedule 10 the dividend income of mutual fund is disclosed at Rs. 12,87,463 and dividend of shares is at Rs. 11,073/-. We have verified that this fact and found that the actual dividend income is to the extent of Rs. 12,98,536/-. The assessee before us as well as before CIT(A) claimed that it is not incurred any expenditure for earning the dividend income and hence no amount has to be allocated to the dividend income but the AO disallowed a sum of Rs. 3,09,883/- under rule 8D (2)(iii) of the Rules by taking an amount equal to ½ percent of the average value of investment. Here also according to learned Counsel of the assessee the CIT(A) has wrongly mentioned that the disallowance made by AO at Rs.19,48,912/-. We have verified this fact and find
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that the AO has disallowed a sum of Rs.3,09,883/-. There is no issue of enhancement as noted from the order of CIT(A).
We have gone through the order of CIT(A) as well as that of the AO and noticed that the assessee could not establish the nexus between the investment in shares and interest free funds available with the assessee and that it was impossible to believe that out of common hotch potch funds, the entire capital would have gone into the investment in shares without a part of the shares going to the business and also it was not possible that the entire income would have been invested in shares and debentures and share application money. This is especially when the assessee himself was not sure as to how much of sum has been invested in the business. When this fact was confronted to the learned Counsel for the assessee he conceded that at best the disallowance made by AO amounting to Rs. 3,09,883/- could be sustained in the absence of evidences. In view of the above given facts and circumstances, we confirmed the disallowance but restricted to the extent of Rs.3,09,883/- as had been disallowed by the AO. This ground of the assessee’s appeal is dismissed subject to the above findings.
The next common issue in these cross appeals, in ITA No. 2288/Mum/2012 of assessee’s appeal and ITA No. 2268/Mum/2012 of Revenue’s appeal, is as regards to the issue of computation of long term capital gains by the assessee company on sale of shares under the scheme of capitalization and demutualization of BSE Ltd. in lieu of BSE membership card. For this assessee has raised following ground No. 3 and Revenue has raised following ground No.2:-
“Assessee’s Ground
3.1 That the learned CIT(A) erred in law and on facts in not allowing the benefit of indexation under the provisions of second proviso to section 48 in respect of cost of acquisition of BSE from the year in which the BSE membership was acquired by the appellant a restricting the benefit of indexation to FY 2005-06 only. Page 5 of 43
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Revenue’s Ground
(a) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing original cost of BSE card as cost of acquisition for purposes of computing capital gain on BSE shares.”
(b) Whether on the facts and in the circumstances in the case and in law, the ld. CIT(A) erred in ignoring that the assessee has already claimed depreciation on BSE card allowing original cost of BSE Card as cost of acquisition amounts to giving double deduction on same asset under two different provisions of the Act.
(c) Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in ignoring doubt deduction on same asset under two different provisions, is against the principles laid down the I.T. Act for computing income of the assessee.”
The assessee became member of erstwhile Bombay Stock Exchange in the year 2000-01 by paying Rs. 2,52,00,000/- to BSE. (wrongly mentioned by AO as 07- 10-2005). In the year 2005-06, the Bombay Stock Exchange was corporatized under a scheme of corporatization and demutualization under section 3 of Securities and Exchange Board of India Act, 1992. In consequence of such corporatization & demutualization, in addition to trading rights at the BSE, the assessee also got right to subscribe to 10000 equity shares of face value of Re.1/- at par on the basis of his holding the trading rights in erstwhile Bombay Stock Exchange. Those 10000 shares were subscribed by the assessee and were duly shown as an Investment in its books of account. During the previous year relevant to assessment year 2008-09, the BSE came with an open offer of purchase of those shares at Rs. 5200/- each. The company Page 6 of 43
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opted for such scheme and transferred 9123 shares for a consideration of Rs. 4,74,39,600/-. In the revised return, the assessee claimed that capital gains arising on transfer of those 9123 shares be treated as long term capital gains. The long term capital gains on transfer of those 9123 share were worked out as under:
Sale proceeds received on sale of shares as aforesaid 4,74,39,600/-
Less: Indexed cost of acquisition 3,26,04,450/-
(i) Cost of acquisition of BSE trading rights: 2,52,00,000 (as provided om section 55(2)(ab)) (ii) Subscription amount of shares 9,123
Working of Indexed cost
(I) 25200000 x 551 (Financial Year 2007-08) = 3,25,94,336 426 (FY 2000-01) +
(II) 9123 x 551 (FY 2007-08) = 10,114 497 (FY 2005-06) Total indexed cost of acquisition 3,26,04,450 Net long term capital gains Rs.1,48,35,150
The AO during the course of assessment proceedings observed that the assessee company has acquired the shares of BSE limited on 07-10-2005 after corporatization and demutualization of Bombay Stock Exchange in lieu of BSE Membership card. The AO also noted that the assessee has claimed depreciation on BSE Membership card since 2000. Accordingly, he adopted the written down value o the capital asset as the cost of acquisition for the purposes of computing capital gain and held the capital gain as short term capital gain amounting to Rs. 5,26,30,631/-. Aggrieved, assessee preferred appeal before CIT(A).
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The CIT(A) held that the gain on sale of shares of BSE be taxed as long term capital gains and also noted that the cost of acquisition of shares should be taken to be the cost of BSE card i.e. amounting to Rs.2.52 crores but CIT(A) held that the shares came into existence in financial year 2005-06 at the time of corporatization of BSE under the scheme of corporatization and demutualization under SEBI Act 1992. Therefore, he restricted the benefit of indexation from financial year 2005-06 instead of claimed by assessee from financial year 2000-01. Aggrieved against the order of CIT(A), both Revenue as well as assessee came in appeal before the Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, ld. Counsel for the assessee first of all filed copy of the scheme of corporatisation of BSE that is i.e. The BSE (Corporatisation and Demutualisation) Scheme, 2005. He took us through clause 2.6 wherein member is defined as under:-
“2.6 “Member” means a person who is a member of BSE as per the register of members maintained by BSE under Rule 64 of the Rules, Bye-Laws and “Regulations, 1957 and does not include a Limited Trading member of BSE.”
Further, He took us through the definition of shareholder trading member given in clause 2.11 & 2.12 as under:-
“2.11 “Shareholder” means a person who holds any equity share(s) of “ Bombay Stock Exchange Limited.
2.12 “Trading member” means a stock broker or trading member or clearing member of any segment of Bombay Stock Exchange Limited and registered with SEBI as such under the SEBI (Stock Brokers and Sub-Brokers) Regulations 1992:
Provided that Bombay Stock Exchange Limited shall not have clearing members after the clearing function is Page 8 of 43
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transferred to a recognized clearing corporation under clause 13.1 of this Scheme.”
Further, He took us through the scheme clause 5 whereby the allotment of shares of BSE LTD in lieu of corporatisation was made and relevant clause reads as under:
“5. Allotment of Shares of Bombay Stock Exchange Limited.
5.1 Every Member or his nominee, as the case may be, (other than the First Shareholder) as on the Record Date shall be entitled to 10,000 fully paid-up equity shares of the face value of Re.1/- each for cash at par of Bombay Stock Exchange Limited.
5.2 Every Member or his nominee, as the case may be, who has more than one membership card as one the Record Date, shall be entitled to additional 10,000 fully paid-up equity shares of face value of Re.1/- each for cash at par for every additional membership card held by him.”
Similarly, ld. Counsel for the assessee referred to trading rights allotted to assessee vide clause 8 of the scheme and the relevant clause reads as under:-
“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.”
Ld. Counsel for the assessee, in view of the above scheme of corporatisation of BSE, argued that most of the stock exchanges in India are AOP’s having the concept of membership cards for their members including BSE. According to him, the twin Page 9 of 43
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rights of trading and undivided interest in the ownership of the stock exchange are embedded in the membership card of a stock exchange and the process of corporatisation and demutualisation of stock exchange would involve segregation of these twin rights into two separate and independent rights as under: -
“(i) the right to participate in the ownership of assets of the stock exchange by issuance of shares in the new corporate body; and
(ii)the right to trade on stock exchanges.”
In view of the above, ld. Counsel argued that a new clause(ha) in explanation 1 to Section 2(42A) of the Act by the Finance Act 2003 w.e.f. 01/04/2004 have been inserted so as to provide that in the case of a capital asset being equity share, or trading or clearing rights of a stock exchange acquired by a person pursuant to demutualization or corporatisation of a recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included while calculating the period for holding of such assets the period, for which the person was a member of the recognised stock exchange immediately prior to such demutualization or corporatisation. Thus for calculating the period for holding of shares as well as trading/clearing rights acquired in the stock exchange consequent upon its corporatisation and demutualization, the period of holding of membership card by the member immediately prior to such corporatisation and demutualization shall also be included. According to him, for the purpose of adopting cost of acquisition Section 55 (2)(ab) is to be seen and the same reads as under:-
[(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 49[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
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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 demutualization or corporatisation, shall be deemed to be nil;]
Accordingly, ld. Counsel for the assessee argued that the provision of Clause (ab) in sub- Section 2 of Section 55 of the Act provides the meaning of cost of acquisition 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 of Corporatisation as approved by Securities and Exchange Board of India (SEBI) shall be the cost of acquisition of his original membership of the BSE LTD. Further, Clause (ab) has also provided that the cost of a capital asset being trading or clearing rights of a recognised stock exchange acquired by a shareholder who has been allotted equity shares or shares under such scheme of demutualization or corporatisation shall be deemed to be nil. In view of the above provisions ld. Counsel for the assessee stated that as per sub clause (ab) in relation to equity shares allotted to a shareholder under the scheme of corporatisation, the cost of acquisition for the purposes of Section 48 & 49 of Act shall be the cost of acquisition of his original membership of the exchange. It means, according to him, in the present case the assessee became member of BSE LTD in the year 2000 by paying a consideration of Rs.2.52 cores, the cost of acquisition of shares will be taken at Rs. 2.52 crores for 10000 shares allotted to it.
As regards to determination of holding period for the purpose of indexation benefit, ld. Counsel for the assessee argued that legislature inserted the provisions of Section 2 (42A) explanation 1(i)(ha) which states that in determining the period for which any capital asset is held by assessee: -
“(ha) in the case of a capital asset, being equity share or shares in a company allotted pursuant to demutualisation Page 11 of 43
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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.”
In view of the above provision, he finally stated legislature has expressed the deemed course of shares allotted on demutualisation of stock exchange u/s 55 (2)(ab) of the Act and the period of holding is expressed in sub clause (ha) to explanation 1(i) of section 2 (42A) of the Act. Hence, he urged the Bench to decide this issue in term of provisions of the Act.
On the other hand, ld. Sr. DR stated that the issue is covered against assessee by the order of Co-ordinate Bench in the case of Twin Earth Securities (P.) Ltd., vs. ACIT (2016) 158 ITD 764 (Mumbai – Trib.). He referred to the concluding para of the order, which reads as under:-
“The assessee company in the instant case has acquired membership of BSE for Rs.2,41,00,000/- on 10-07-2000 which is after 1.4.1998 and is an intangible asset as 'business or commercial right of similar nature' and is 'license' or 'akin to license' as stipulated u/s 32(1)(ii) of the Act and shall form part of block of intangible assets as defined u/s 2(11)(b) of the Act and shall be entitled for depreciation u/s 32 of the Act. The assessee company has prior to demutualization or corporatization of BSE, had in-fact claimed depreciation on the membership of BSE in the return of income filed with the Revenue which was allowed by the Revenue. The Section 50 of the Act is a special provision for computing capital gains in case of depreciable assets and in the instant case, the
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membership of BSE is depreciable asset being intangible asset u/s 32(1)(ii) of the Act on which the assessee company has in-fact claimed depreciation in the preceding year which was allowed by the Revenue. There is a need for harmonious construction of these relevant sections to arrive at the true mandate of the Act in this respect and the conflicts, if any needed to be accordingly resolved. Section 50 of the Act, inter-alia, stipulates that cost of acquisition for the purposes of computing capital gains shall be taken to be written down value of asset as at the beginning of the previous year. The Section 50 of the Act starts with a non-obstante clause and stipulate that notwithstanding anything contained in Section 2(42A) of the Act, the provisions of Section 48 and 49 of the Act shall be applied subject to the modifications as stipulated which , inter-alia, provides that cost of 12 ITA 2640/M/12 acquisitions shall be deemed to be written down value of the block of asset as at the beginning of the previous year and actual cost of any asset falling with the block of asset acquired during the previous year , for the purposes of computing capital gains which shall be deemed to be arising from the transfer of short-term capital assets . Thus, Section 50 of the Act clearly stipulate that the original cost of acquisition of the depreciable assets shall not be taken as cost of acquisition for the purposes of computing capital gains under the Act but the written down value as at the beginning of the previous year shall be deemed to be cost of acquisition of the depreciable asset. Further, benefit of indexation of cost of acquisition shall also not be available as provided u/s 48 of the Act because Section Page 13 of 43
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50of the Act being special provisions for computation of capital gain in case of depreciable asset has clearly stipulated that the provisions of Section 48 and 49 shall be applicable subject to the stipulated modifications u/s 50 of the Act and written down value of the block of asset at the beginning of the previous year shall , inter- alia be reduced from full value of consideration to arrive at capital gains which shall be deemed to be the capital gains arising from transfer of short- term capital assets meaning thereby that no benefit of cost inflation index as stipulated u/s 48 of the Act shall be allowed to taxpayer in case of depreciable asset , which proposition is further supported by a non-obstante clause in Section 50 which states that 'notwithstanding anything contained in clause (42A) of Section 2....' And Section 2(42A) of the Act defines short term capital asset and the period of holding relevant for determining the short term capital asset and Explanation 1 (ha) provides that in determining the period of holding for which any capital asset is held by the tax-payer, the capital asset being equity shares or shares in a company allotted in pursuance to the demutualization or corporatization of the recognized stock exchange in India as referred to in Section 47(xiii) of the Act, there shall be included the period for which the person was a member of the recognized stock exchange in India immediately prior to such demutualization or corporatization while Section 50 13 ITA 2640/M/12 clearly stipulate that the capital gains arising there-from shall be treated as arising from transfer of short term capital assets while Section 48 , inter-alia, provides that benefit of cost inflation index Page 14 of 43
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shall only be granted in case of long term capital gains arising from the transfer of a long-term capital assets . On the other hand Section 55(2)(ab) of the Act has explained, inter-alia, the meaning of cost of acquisitions and stipulated that cost of acquisition for purposes of Section 48 and 49 of the Act in relation to the capital asset , being equity share or shares allotted to a shareholder of a recognized stock exchange in India under a scheme of demutualization and corporatization approved by SEBI , shall be cost of acquisition of original membership of the exchange. While for capital asset being trading or clearing rights of the recognized stock exchange acquired by a shareholder who has been allotted equity share or shares under such scheme of demutualization or corporatization , shall be deemed to be nil, by virtue of provisions of Section55(2)(ab) of the Act. While by virtue of Special provisions as contained in Section 50 of the Act , Section 48 and 49 of the Act shall be applicable subject to such modification as stipulated by Section 50 of the Act, which inter-alia provides , that cost of acquisition shall be taken to be written down value as at the beginning of the previous year and it is well settled proposition that special provisions shall prevail on the general provisions because if a special provision is made on a certain matter, that matter is excluded from the general provision. Section 55(2)(ab) of the Act while referring to cost of acquisition of original membership of the exchange has to subjugate itself and cost of acquisition referred therein Section 55(2)(ab) of the Act for the purposes of Section 48 and 49 of the Act being cost of acquisition of original Page 15 of 43
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membership will mean thereby cost of acquisitions for the purposes of Section 48 and 49 as modified by Section 50 of the Act which shall be taken to be written down value as at the beginning of the previous year and as increased by actual cost of any additions during the previous year and not the original cost of membership paid by the assessee company in the year 2000 and 14 ITA 2640/M/12 secondly benefit of indexation shall also not be available to the assessee company till it got equity shares and trading rights on demutualization or corporatization on 10-10-2005 as the assessee company was claiming the depreciation u/s 32 of the Act on membership of BSE till it received 10000 equity shares of BSE Limited and trading rights of BSE Limited in the process of the demutualization and corporatization of BSE, in lieu of membership of BSE. Pursuant to demutualization or corporatization of BSE, the assessee company has got 10000 equity shares of BSE Limited and trading right of BSE Limited . Thus, the cost of acquisition of 10000 equity shares of BSE Limited shall be taken as written down value of the membership of the BSE as at the beginning of previous year i.e. 01.04.2005 while the cost of acquisition of trading rights of BSE acquired in demutualization or corporatization process shall be deemed to be nil , as per the mandate of Section 55(2)(ab) of the Act. The assessee company shall be entitled for working out cost of acquisition of 4562 shares of BSE Limited sold during the previous year on proportionate basis based on the number of shares sold calculated on the total written down value of the 10000 shares of BSE Limited so allotted on 10-10-2005. The Page 16 of 43
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assessee company shall not be entitled for claiming benefit of cost inflation indexation from the period 10-07- 2000 i.e. date of acquisition of membership of BSE till 10- 10-2005 i.e. when the 10000 equity shares are allotted by BSE Limited along with trading rights in BSE Limited, in lieu of membership of BSE. The assessee company on demutualization or corporatization of BSE Limited is holding 10000 equity shares of BSE Limited and trading right both as assets w.e.f 10-10-2005.The assessee company shall be entitled to claim benefit of cost inflation index on the sale of 4562 equity shares so sold in the previous year relevant to assessment year 2008-09, from the assessment year 2006-07 till the current assessment year i.e. 2008-09. We order accordingly.
We have heard rival contentions and gone through facts and circumstances of the case. Admitted facts are that the assessee acquired the membership of BSE in the year 2000 for a consideration of Rs. 2.52 Crs. The assessee was allotted 10000 shares on corporatisation of BSE LTD in the year 2005. The process of demutualisation of the stock exchange would involve segregation of these two twin rights into two separate and independent rights that is i.e. (i) the right to participate in the ownership of assets of the stock exchange by issuance of shares in the new corporate body, (ii) the right to trade on stock exchange. Thus, the membership card of BSE LTD was exchanged for the shares and also the right to trade on stock exchange. In order to make the process of de-mutualisation and corporatisation of stock exchange tax neutral, the amendments have been made in section 2 (42A) & section 55 (2)(ab) of the Act by the Finance Act 2003 w.e.f. 01/04/2004. The provision of clause (ab) in subsection (2) of section 55 of the Act provides the cost of acquisition in relation to a capital asset being equity share allotted to shareholders of a recognised stock exchange in India under the scheme of corporatisation approved by SEBI and that shall be the cost of acquisition of original membership of the exchange. It means that
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the assessee has paid a sum of Rs.2.52 crs to acquire the membership of the BSE, which will be the original cost of membership. Similarly, section 2(42A) explanation 1(i) sub clause (ha) provides that in case of a capital asset being equity share of a stock exchange acquired by person pursuant to de-mutualisation of a recognised stock exchange in India there shall be included while calculating the period of such asset the period for which the person was a member of the recognised stock exchange immediately prior to such de-mutualisation. In the present case, admittedly the assessee claimed depreciation on the membership of BSE from the year 2000 but will that effect the computation of capital gains arising out of sale of shares of BSE LTD by assessee in term of section 50 of the Act. We are of the view that the process of corporatisation of the stock exchange segregated these twin rights into two separate independent rights i.e. 1) the right to participate in the ownership of assets of the stock exchange by issuance of shares and to the right to trade on stock exchange. The provision of section 55(2) (ab) clearly define the course of acquisition and capital gain on sale of shares allotted on corporatisation of BSE LTD is to be computed accordingly. There is separate procedure given in the proviso to section 55(2) (ab) of the Act reg. cost of acquisition of capital asset being trading or clearing rights of a stock exchange acquired by a shareholder who has been allotted equity shares under the scheme de-mutualisation and the same shall be deemed to be nil.
Coming to the order of Co-ordinate Bench in the case of Twin Earth Securities (P) Ltd (supra), we find that the facts are exactly identical but the Bench was of the opinion that the membership card of BSE LTD being a depreciable asset, the cost of acquisition of the same is to be taken at the WDV of the membership card. On the issue of indexation also, the Bench observed that the benefit of indexation shall not be available to the assessee till it got equity shares on corporatisation on 10.10.2005. According to the Bench once the membership of BSE is depreciable asset being intangible asset u/s 32 (1)(ii) of the Act and hence the capital gain will be computed in view of the provision of Section 50 of the Act being a special provision. But, according to us the provision of Section 55(2)(ab) of the Act has explained the meaning of cost of acquisition in relation to capital asset being equity shares allotted
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to a shareholder of a recognised stock exchange in India under the scheme of corporatisation approved by SEBI, shall be the cost of acquisition of original membership of the exchange. According to us, neither there is scope for dilution of this provision nor can be interpreted in any other way except what is its literal meaning of this provision. The literal meaning section 55(2)(ab) of the Act is clear that the cost of acquisition of share allotted on corporatisation shall be the cost of acquisition of original membership of the exchange. It means that, in the present case, the assessee acquired membership of the card for a cost of Rs. 2.52 crs in the year 2000. This is the original cost of acquisition in a relation to equity share or shares allotted to a shareholder recognised stock exchange i.e. BSE LTD under the scheme of de-mutualisation and corporatisation as approved by SEBI and this original cost of acquisition of original membership will be the cost of acquisition for the purposes of computation of long term capital gain. As regards to the cost of acquisition in a relation to trading rights or clearing rights allotted to a shareholder recognised stock exchange that is i.e. BSE LTD under the scheme de-mutualisation and corporatisation as approved by SEBI will be taken as nil in view of the proviso to Section 55(2)(ab) of the Act for the purposes of computation of long term capital gain. According to us, section 55(2) (ab) of the Act applies to specified asset i.e. the shares received during the process of de-mutualisation of a recognized stock exchange as governed by this section although the BSE membership card is acquired before the relevant date. The provision of section 50(1) of the Act applies only to depreciable asset where the assessee does not or cannot exercise the option of substitution of fair market value. According to us, provision of section 50(2) of the Act applies to depreciable asset for arriving at the cost of acquisition when the assessee exercises option incases falling under section 49 of the Act. The provisions of section 50(2) of the Act are not exclusive but they are dependent upon certain conditions mentioned in section 49 of the Act. The only provision which gives an option in section 55(2) of the Act and not any other, hence, according to us it cannot be said that section 55(2) (ab) of the Act and section 50 of the Act operates in the same field. In this view of the matter, the principle of interpretation that a special provision prevails over general provision cannot be pressed into service and hence the conclusion is thus inevitable Page 19 of 43
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that section 50(1) of the Act only aims at preventing the grant of double deduction. Section 50 of the Act make section 48 and 49 of the Act subject to modification in section 50 but does not make the option under section 55(2)(ab) of the Act subject to section 50 of the Act. Thus, according to us, section 55(2)(ab) of the Act is the only source for adoption of cost of acquisition i.e. the original cost of acquisition in a relation to equity share or shares allotted to a shareholder of recognised stock exchange i.e. BSE LTD under the scheme de-mutualisation and corporatisation as approved by SEBI and this original cost of acquisition of original membership will be the cost of acquisition for the purposes of computation of long term capital gain.
According to us, there is no conflict between two provisions of sections i.e. section 50 and 55(2)(ab) of the Act. The provision of section 50 of the Act will not apply to these two twin rights i.e. (i) the right to participate in the ownership of assets of the stock exchange by issuance of shares in the new corporate body, (ii) the right to trade on stock exchange because these relates back to the original acquisition of BSE membership card in 2000 before the process of demutualisation or corporatisation of the BSE LTD. These two capital assets i.e. shares and trading or clearing rights of BSE LTD will be governed by the provisions of section 55(2)(ab) of the Act for the purposes of taking cost of acquisition and for the purposes of computing holding period for indexation u/s 48 of the Act is to be taken in term of section 2(42A) of the Act. We have gone through this provision and noticed that a new clause (ha) in explanation 1 to Section 2(42A) of the Act by the Finance Act 2003 w.e.f. 01/04/2004 have been inserted so as to provide that in the case of a capital asset being equity share, or trading or clearing rights of a stock exchange acquired by a person pursuant to demutualization or corporatisation of a recognised stock exchange in India as referred to in clause (xiii) of section 47, there shall be included while calculating the period for holding of such assets the period, for which the person was a member of the recognised stock exchange immediately prior to such demutualization or corporatisation. Thus for calculating the period for holding of shares acquired in the stock exchange consequent upon its corporatisation and demutualization, the period of holding of membership card by the member immediately prior to such corporatisation
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and de-mutualisation shall also be included. It means the legislature has clearly brought out the period of holding of shares acquired in the stock exchange consequent upon its corporatisation and demutualization, including the period of holding of membership card by the member immediately prior to such corporatisation and de- mutualisation for the purpose of computation of capital gains.
From the above discussion in regard to provision of Section 55(2)(ab) of the Act, wherein the meaning of cost of acquisition in the relation to capital asset, for the purposes of section 48 & 49 of the Act, being equity shares allotted to a shareholder of a recognized stock exchange in India under the scheme of de-mutualisation and corporatization as approved SEBI, shall be the cost of acquisition of original member of stock exchange i.e. the amount paid at the time of acquisition of membership card of stock exchange. The another capital asset being trading or clearing rights of stock exchange acquired by shareholder under such scheme of de-mutualisation and corporatization, the cost of acquisition shall be deemed to be nil by virtue of provision of section 55(2)(ab) of the Act. The provision of Section 55 (2)(ab) of the Act is a special provision for determining the cost of acquisition of capital asset being equity shares allotted to a shareholder of a recognized stock exchange in India under the scheme of de-mutualisation as approved by SEBI, whereas Section 50 is a special provision for computation of capital gains in case of depreciable assets. A specific provision was brought by inserting Clause (ab) in Section 55(2) of the Act by the Finance Act 2001 w.e.f. 01/04/2002 in respect of capital asset being equity shares allotted to a shareholder of a recognized stock exchange under the scheme of corporatization as approved by SEBI and this provision cannot be interpreted in any other way except that the cost of acquisition of capital asset will be taken as the cost of original member of stock exchange as acquired originally. In the present case before us, the assessee became member of BSE LTD in the year 2000 by paying a consideration of Rs. 2.52 crs and the cost of acquisition of shares will be taken at Rs. 2.52 crs for 10000 shares allotted to it. In term of explanation 1 Clause (ha) of Section 2(42A) of the Act as inserted by the Finance Act 2003, w.e.f. 01/04/2004 the period of holding of capital asset being shares allotted pursuant to corporatization of a
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recognized stock exchange in India, there shall be included period for which the person was a member of recognized stock exchange in India immediately prior to such corporatization. It means that the holding period for such shares will be from the period when the assessee became member of BSE. Here, in the present case, the assessee became member in the year 2000 and from the period the period of holding is to be considered for the purposes of holding of shares and computation of capital gains in terms of Section 48 & 49 of the Act. Accordingly, we partly reverse the order of CIT(A) and allow this issue of assessee’s appeal whereas the issue of Revenue’s appeal is dismissed.
The next issue in assessee’s ITA No. 2288/Mum/2012 is as regards to the order of CIT(A) confirming the action of the AO in disallowing the expenses of transaction charges paid to National Stock Exchange for non-deduction of TDS by invoking the provisions of section 40a(ia) of the Act. For this assessee has raised following ground No.4: -
“4.1 That the learned CIT(A) erred in law and on facts in enhancing the income of the assessee for the year by an amount of Rs. 1,49,19,582/- being payment of transaction charges to National Stock Exchange and Bombay Stock Exchange;
4.2 That the learned CIT(A) erred in law and on facts in holding that the nature of payment of transaction charges to National Stock Exchange and Bombay Stock Exchange was "fee for technical services" and hence the appellant was liable to deduct tax at source under section 194J of the Act.
4.3 That the learned CIT(A) committed an error of law in not holding that since the National Stock Exchange and Bombay Stock Exchange had included the transaction charges in their returned income and filed the return by Page 22 of 43
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30th September 2008, it should be presumed that the assessee's liability to deposit the tax before due date of filing of the return was discharged and no disallowance was called for.
4.4 That the learned CIT(A) erred in not taking into consideration the underlying rational of Bombay High Court judgement in the case of CIT Vs Kotak Securities Ltd. that in view of very long practice of the department to not to treat this failure to deduct TDS as a default, the provisions of section 40(a)(ia) r.ws. 194J should be invoked only after the first year from which the department started to treat the assessee in default as has also been held by Hon’ble ITAT in the case of DCIT (LTU) v. DICGC Ltd. (ITA Nos. 2361 & 2524/Mum/2011 dated 03.02.2012).”
Briefly stated facts are that the assessee during the previous year 2007-08 relevant to this assessment year 2008-09 paid transaction charges to NSE and BSE amounting to Rs.1,29,49,218/-and Rs.19,70,364/- respectively. The assessee has not deducted any TDS while making the above payments. According to the AO the transactions charges are in the nature of managerial services which constitutes fee for technical services under section 194J of the Act and hence, assessee is liable for TDS at the time of crediting of transaction charges to the account of the Stock Exchange. The CIT(A) also confirmed the action of the AO by following the decision of the Hon’ble Bombay High Court in the case of CIT v. Kotak Securities Ltd. (2012) 340 ITR 333 (Bom). Now, before us the learned Counsel for the assessee stated that this issue is settled by the Hon’ble Supreme Court in favour of the assessee and against the Revenue by the decision in the case of Kotak Securities Ltd. v. CIT (2016) 383 ITR 1 (SC), wherein it is held that services made available by Stock Exchanges for which transaction charges are paid by members of Stock Exchange are not services and that from member of Stock Exchange is necessary to carry out trading in Page 23 of 43
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securities in Stock Exchanges and such services do not amount to technical services in term of section 194J of the Act and assessee is not liable to deduct TDS on such payments made for such services. Once the issue is covered in favour of assessee by the decision of the Hon’ble Supreme Court in the case of Kotak Securities Ltd. (supra), we reverse the orders of lower authorities and allow this issue of assessee’s appeal.
Similar is the issue in assessee’s appeal in ITA No. 3332/Mum2012 for the AY 2007-08 wherein the CIT(A) has confirmed the disallowance made by AO by invoking the provisions of section 40(a)(ia) of the Act with respect to transaction charges paid to National Stock Exchange for non-deduction of TDS u/s 194J of the Act by holding that the payments are in the nature of technical services. Now, this issue is covered by the decision of the Hon’ble Supreme Court in the case of Kotak Securities Ltd. (supra) and taking a consistent view this issue is also allowed.
The next issue in Revenue’s appeal in ITA No. 2268/Mum/2012 for the assessment year 2008-09 is as regards the order of CIT(A) in deleting the disallowance of expenditure by the AO on account of the repair and maintenance holding the same as capital expenditure. For this Revenue has raised following ground No. 1
“1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in treating the expenditure on repairs and maintenance as capital expenditure.”
Briefly stated facts are that that assessee has debited a sum of Rs. 1,09,19,938/- in respect to repairs and maintenance of 50 branches/ offices of assessee all over India. The assessee before the AO claimed that this expenditure is on account of R and M expenses for maintenance of computers, computer software as an annual license fee for software like ODIN Diet (which is basic details for the share brokers), expense for maintenance of vehicles as also period payments to maintenance agencies for the premise taken on leave and license and day to day Page 24 of 43
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minor repairs of tiling, plastering, granite, false ceiling, doors, electrical fittings etc. The AO noted from the bills that the expenditure is also for partition, plastering, pending electrical fittings, doors, windows etc. Going by the nature of expenditure the AO treated the expenditure as capital nature but allowed depreciation at the rate of 10%. Aggrieved assessee preferred the appeal before CIT(A), who after considering the submissions of the assessee treated the expenses as Revenue in nature. Aggrieved now, Revenue is in second appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee has carried out repair work in respect of premises taken on leave and license basis for the purposes of opening office of the company in various cities and localities. When the premises are taken on hire, they are not necessarily in the shape in which business could be carried on efficiently. Therefore, the same are adapted, redesigned and refurnished for the smooth business operations of the assessee and also to ensure that they do not project a bad image of the business. During the year under consideration, the assessee incurred such expenses in respect of branches / offices at Chennai office, Coimbatore office, Salem office, Thane office & Vile Parle (Mumbai) office, Naragpura Ahmedabad office, Vijaywada Town branch office, Trivandrum office, Hyderabad office and Andheri (Mumbai ) office. Before us Ld Counsel argued that out of the aforesaid sum of crore, an amount of Rs 2,21,22,151 was paid for AMC charges for ODIN Diet license, Rs.21,37,816 was paid for Back office software maintenance charges, Rs.3,93,360/- was paid for maintenance of Server at Churchgate House (where assessee has an office), Rs. 1,94,000/- was paid for annual maintenance of EX-C Band V SAT, Rs 142727/- was for maintenance of vehicles, Further, an amount of 2,38113/- was paid for maintenance agency of premises at Mittal Tower, Mumbai, where also assessee had an office All these items themselves come Rs. 53,280167/-. We also find that the expenses incurred during the year redesigning, refurnishing and adaptation of the premises taken on leave & license were less than the earlier years. During the year following branch officers were opened / furnished against which the expenses incurred were as follows: -
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Chenncii office - expenses incurred- Rs. 241800/-
2 Coimbatore-II office - expenses - Rs.114200/-
3 Naranpura Ahmedabad -expenses - Rs.481918/-
Thane & Vile Porte Expenses Rs. 240000/-
Vijaywoda Town - expenses - Rs. 116307/-
Trivendrum office- Expenses - Rs. 259900/
Somojigudo Hyderabad expense Rs. 118090/-
Total expenses: Rs. 1708493/-
We find from the above that even if some smaller amounts are left out to be included, total expenses would not be more than Rs.18-19 lacs, which is not significant considering the number of branches which were refurnished. The assets like movable furniture or fixtures- like tables, EPBX, ACs main switch box etc. have already been capitalized, as noted by the CIT(A). We also find that the above offices were situated in premises taken on "Leave & License basis for periods of 11 months to 72 months. The details of the Leave License Agreement in respect of these premises were submitted along with copies of "Leave & License Agreements" in respect of 7 such places to highlight the fact that either all the fixtures made by assessee were to be removed at its cost or were, obviously, to be left to be enjoyed by the landlord. For all practically purposes, the expenses did not bring into existence any capital asset which we could transfer to some other place. No capital advantage accrued to the assessee company was only holder of right of user and not the owner. In view of the above facts we find that the CIT(A) deleted the disallowance by observing as under: -
“Under the circumstances, repairs and maintenance expenses in respect of routine repairs and current repairs has to be allowed because the assessee has not brought Page 26 of 43
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about any new asset and more importantly it was not the intention of the assessee to bring about any new capital assets. The expenses that were incurred by the assessee were towards maintenance of computers, annual maintenance of computer software, annual license fee, repairs and maintenance of vehicles as also annual maintenance charges for the premises taken on lease etc. Such expenditure would clearly fall within the expression of repairs as compared in Section 30(a)(1) and u/s 37 of the Act.
5.5.6 As for as the repairs of leased premises which were taken on lease in respect of assessee's outstation branches at Chennai, Coimbatore, Ahmedabad, Thane, Vijoyawada, Trivandrum and Hyderabad etc., the same is also allowable as repairs. The Legislature has mode a distinction between the expenditure incurred by a tenant for repairs of the premises and expenditure incurred by a person who is not a tenant towards "current repairs" to the premises. Whereas an owner may undertake expenses so as to even bring about new assets of capital nature, a tenant by the very nature as a tenant cannot incur expenditure for the purpose of creating new asset. Strong reliance is placed on the following decisions to allow assessee's claim of repairs and maintenance of Rs. 1003119,938/-.
1) CIT Vs. Hi Line Pens Ltd [306 JTR 182(Del)]
2) CIT Vs Kishenchand Chella Ram (I) Ltd. 13 ITR 385 (Mad)
3) Instalment Supply Put. Ltd Vs. CIT [149 ITR 52 (Del)] Page 27 of 43
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4) Allied Metal Products Vs. CIT 1137 ITR 689 P&HJ
5,) CIT Vs. Ooty Dasaprakash [237 ITR 902 (Mad)/
6) Kotak Securities Vs Addl. CIT (supra)
7) CIT Vs Escorts Finance Limited (2006) (Del) 205 CTR Del 574
8) CIT Vs Amway India Enterprises (supra)
5.5.7 Having regard to the facts and circumstances of the case and in the light of the aforesaid judicial decisions, the assessee’s claim of repairs and maintenance is allowed. Ground No. 4 is allowed.”
In view of the above facts and circumstances, we are of the view that the CIT(A) has rightly hold the expenses as Revenue in nature and allowed the claim of the assessee. We confirm the same this issue of Revenue’s appeal is dismissed.
Similar is the issue in ITA No. 3228/Mum/2012 for the assessment year 2007- 08 in Revenue’s appeal regarding disallowance of expenditure on repair and maintenance treated as capital expenditure amounting to Rs. 41,06,164/- . Since, the facts and circumstance are exactly identical in this year also, as in assessment year 2008-09, taking a consistent view, we dismiss this issue of Revenue’s appeal also.
The next issue in this appeal of Revenue is as regards to the order of CIT(A) deleting the disallowance of prior period expense of Rs.11,131/-.
We have heard rival contentions and gone through facts and circumstances of the case. We find that the CIT(A) has decided this issue by following the decision of Hon’ble Bombay High Court in the case of CIT v. Nagri Mills 33 ITR 681 (Bom) by observing that the said amount was incentive paid to an employee in August 2006 in respect of his performance in the preceding year. We find that the evaluation of employee was completed in financial year 2006-07 and the payment was also made Page 28 of 43
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in August 2006. Hence, the CIT(A) has rightly deleted the addition and we confirm the same.
The next issue in ITA No. 3228/Mum/2012 of Revenue’s appeal is as regards to the order of CIT(A) deleting the addition made by AO of unexplained cash credit under section 69 of the Act being clients credits outstanding. For this Revenue has raised following ground No. 3: -
“3. on the facts and in the circumstances of the case in and in law, the ld. CIT(A) erred in deleting the disallowance of Rs. 18,81,48,190/- made under section 69 as unexplained cash credit.”
Briefly stated facts are that the AO during the course of assessment proceedings notice from the accounts of the assessee that the assessee has pledged shares worth of Rs.18,81,48,190/- of various parties. The assessee was asked to identify the parties whose shares have been pledged also to obtained confirmations to prove their identity, genuineness and creditworthiness of the parties. According to AO, the assessee had not establish the sources of investment in shares and hence in the absence of any confirmation of the parties, identity and creditworthiness, he added the amount received in lieu of pledged shares worth of Rs. 18,81,48,190/- under section 69 of the Act. Aggrieved assessee preferred the appeal before CIT(A), the CIT(A) deleted the addition after considering the submissions of the assessee by observing in Para 5.9.2 to 5.9.12 as under: -
“5.9.2 The LAP, had elaborately discussed that the assessee in course of its business/ obtained from IL & FS Ltd (herein after known as ILFS) facilities against the securities held by it on account of its clients. Out of total available credit facility of ks.20 crores, the assessee actually utilized credit of Rs.18,53,57,733/- as on 31.03.2007. The LAO made on addition of RsJ8.81 crores under section .69 of the Act which actually is the value of shores offered as security to ILFS calculated after Page 29 of 43
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reducing 4070 margin. The LAR explained that as per Stock Exchange Rules and SEBI Guidelines, the stock brokers are expected to get the margin money from its clients against all sales arid purchase orders. Since the margin money requirements go up and down every day, active clients give margin in the form shares. Brokers in turn are allowed by the SEBI to pledge the said shares and raise money for margin requirements. The clients also permit the broker to retain the shares purchase by them through the broker as ‘margin’. Such margin are also utilized by brokers for pledging the same and raising money. As and when the client wants to sell any of its shares which are pledged by the broker, such shares are de pledged and necessary accounting entries are passed. This is universal practice observed by all stock brokers throughout length and width of this country. The LAP, also filled copy of relevant. Guidelines, It was explained that shares received from the client are in demand from and are received from the demat account of the clients whose accounts are required to provide the requisite margin. In the case of the present assessee there were large number of transactions pledged/de-pledged practically. As on the last date of the accounting year i.e. 31.03.2007 the market value of such pledge shores was raked at s.34.71 crores. After reducing pledge margin, (as per the SEBI norms r.w. lenders requirements) the security value was calculated by the assessee at Rs. 18.81 crores which has been added by the LAO. The LAR, further elaborated that the assessee maintained segregated records of the securities of the clients received in separate demat account. As per the SEBI Rules and Page 30 of 43
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SEBI Guidelines, the Know Your Client(KYC) norms were collected and the proof of identity of each client, genuineness of each clients transactions photograph and creditworthiness of the clients were available. Even each client was verified in person by assessee's employees, argued the LAR. The assessee had maintained complete details such as names and addresses of the client, client code, name of the scrip, scrip code, quantity, and value of the scrip etc. The said list runs into 54 pages containing details of 2061 clients. However, ignoring the submissions of the assessee and the voluminous and elaborate details of the client and the securities provided by such clients as margin, the LAO taxed such shares owned by clients which were placed with IFSL. He ignored the fact that KYC norms and procedure of the SEBI and Exchanges are very rigorous and are painstakingly implemented by the stock exchanges and inspected by the SEBI Frequent audit and inspection are carried out by the SEBI and stock exchanges and arty violation is punished severely.
5.9.3 The LAR vehemently argued that the disputed securities were owned by the clients and not by the assessee. They were available with the assessee against the debit balances of its clients, upon duly authorization by the clients to hold their securities for their future obligations and margins. The clients hold such securities as security against receivables from them or upon authorization from its clients. There is no evidence whatsoever that the assessee invested in these securities. These shares were received from the clients from their demant account and these are third party evidences
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(depository participant). There are written contracts with them authorizing the broker/assessee to pledge then for the purpose of margins. The LAO has not proved even in one case that the shares actually belonged to the assessee. It was submitted that the assessee and furnished confirmation letters from clients and it also filed complete details of all clients including their PAN, creditworthiness, assessment charges in order to prove the genuineness of the transactions. All these additional evidences were duly forwarded to the LAO for verification and report. The LAO has accepted the transactions in the remand report vide letter No. ACIT /Circle-(2)/ Remand Report/2011-12 dated 17.01.2012 except in the case of R Wadhwa Rcplics were not received from two other clients namely Shri Madhavrao Nundela and Shri C V Narayanan. The LAR had strongly contended that the assessee never invest any money in the shares and these shares were received from clients were kept in an earmarked demat accounts of the respective clients or were purchased on behalf of the clients.
5.9.4 The LAR vehemently argued that for making an addition u/s.69 of the Act, it is necessary for the LAO to prove that the investment was made by the assessee, the assessee had invested for acquiring of such assets and the source of such investment were not unexplained. In the present case, the disputed are not owned by the assessee but by the assessee's various clients as explained earlier in detail. Secondly, assessee has not invested in the shares and investment made by various clients. Thirdly, sources of such investments were property explained by the
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respective clients. Without prejudice, it was argued that .Section 69 can be invoked in respect of the assessee. In the present case, all these shares were duly recorded in the books of accounts of the clients as well as in the books of accounts of assessee. Even if it is argued that disputed shares were recorded but not the investment therein was not explained, it was contended that such shores were acquired by the assessee on behalf of the clients through regular mechanism of purchase through stock exchange and duly recorded and for this reason also, they could not have been added u/s.69 of the Act.
5.9.5 I find considerable force in the arguments of the LAR. Even the LAO in her remand report submitted vide No. ACIT Cir.4(2) Remand Report2011 -12 dated 17th January 2012 carried necessary exercise of verification and issued notice under section 133(6) of the Act to some clients selected by her. Out of the long list of notices issued by her, only one person, Mr. R Wadhwa has replied that he had not pledted any shares with ILFS, All other persons have confirmed that they have pledged their shares with the present assessee. Two persons replies were not received. When confronted by the LAO, the assessee vide letter' dated 06.01.2012 submitted the Ust of shares placed with ILFS as on 31.03.2007. The assessee also furnished list of shares placed on account of the previously mentioned .Shri R. Wadhwa, Shri Madhavrao Nandela and Shri C. V. Narayanan. The assessee also furnished before the LAO copies of KYC forms of these clients wherein voluntary authorization had been given by the clients to the assessee to pledge and unpleged the
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shares of clients depending upon the margin requirements. Therefore, such KYC forms and voluntary authorizations proved that those persons had pledged their shares. The LAO further issued notices u/s. 133(6) of the Act to the said ILES to furnish the list of shares placed by the assessee as on 31.03.2007. The said ILFS submitted a compete list of such shares. The LAO verified the said list and carried out random reconciliations in cases of 20 scripts with the statement of pledged shares submitted by the assessee. The LAO found the said list of the assessee in order. Therefore, no adverse inference could be drawn.
5.9.6 The LAP, had also argued that the assessee has been practicing pledging of shares held by it on account of its clients since last several years and also been carrying out in subsequent assessment years. The Department has been accepting this practice in every assessment year and has never made such on addition in the case of the assessee. Similarly, oil stock brokers of BSE & NSE have been consistently in the practice of accepting security of clients against margin or short payout requirements (T+5 basis). This well established practice of the trade is also permitted by the government/exchange regulation. The SEBI circular Nos. MRD/DOP/SE/Cir.11/2008 dated 17.04.2008 have clearly prescribed that stock brokers are expected to get the margin money from its clients against all sates and purchase orders in time. Since the margin money requirements go up and down every day, active clients give margin in the form of money as also shares of
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companies. The brokers in turn are allowed us per SEBI Guidelines to pledge the said shares and raise money for margin and short payout requirements (T+5 basis). No Assessing Officer has made such addition in any case of stock brokers. Even the same A.O. has not made similar addition in respect of other brokers assessed in his charge. Further, the same A.O. has not made similar addition in respect of the same assessee in other assessment years. Therefore, the impugned addition is a case of aberration and is an exception.
5.9.7 The assessee had also furnished copies of KYC of the clients with demt1 accounts of Shri R Wadhwa, Shri Mudhavrao Naridela and Shri C V Narayanuri before the LAO during the remand proceedings. The above facts have been acknowledged by the LAO in her remand report without adverse comments. The LAO has also stated that the details of shares pledged with ILFS tallied with the details of shares placed as proved by the ILFS. The assessee had also furnished the details of jurisdictional Assessing Officers of those clients whose shares / stocks in excess of Rs.2 lucs were pledged by those clients and were further pledged with ILF5 on the basis of which the LAO has made addition. The assessee has furnished the names, compete address, KYC detoik, PAN and even the designation of the jurisdictional Assessing Officers of its clients who invested in those shares and the said shares were pledged with the IFSL. If the doubts the creditworthiness of any of the clients, she is free to issue necessary intimations to their jurisdictional Assessing Officers.
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5.9.8 Hon'ble Bombay High Court in the case Sukhdayal Rambilas vs. CIT [1982] 136 ITR 414 (BOM-) held that where the assessee, his wife and sons are shareholders of private limited company, non acceptance of explanation of the source as regards allotment of shares to the wife and major children cannot lead to an addition to assessee's income. When it is contended on behalf of the revenue that the amount kept in fixed deposit, though it stood in the name of the guarantor, really belonged to the assessee firm, the burden will be on the Department to establish that the moneys belonged to the assessee firm. Where the same is not established by the Department, the said investments cannot be construed us assessee's income. Similar decision have been given by other Hon'ble High Courts as noted below :-
CIT vc Duva OiandJain Vaidhya (1975) 98 ITR 280(Alll)
Chandulal J Jaiswal vs UT (1992) 198 JTR 476 (Guj)
CIT vs SP Arunachalam (2000) 243 ITR 269 (Mad)
5.9.9 Hon’ble Kerala High Court in the case of CIT vs Majim Udma (2002) 242 ITR 133 (Kr) has held that burden of proving that the ostensible owner of property is not the real owner but is only a benamidar for another is on the taxing authorities.
5.9.10. Hon’ble Rajashthan High Court in the case of CIT vs. Surajmat Sardarmal (2006) 204 CTR 344 (Raj) held that assessee, a commission agent, having admittedly paid the profit arising from, certain transactions made by it on behalf of a party to said and accounted for the
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commission received by it without making claim for any speculation loss, addition was not justified.
5.9.11 Hon'ble Allahabad High Court in the case of CIT vs Salek Chand Agarwal (2008) 300 ITR 426(A 11 held that in the absence of any muterial to link the assessee with the advance/deposit appearing in his name in the books of accounts of a firm except the said credit entries, and in view of denial by the assessee that he made such advance/deposit with the firm and, provisions of Sec.69 are not attracted and, therefore the impugned addition was correctly deleted by the ITAT.
5.9.12. Having regard to the fact and circumstances of the case and for the reasons discussed in the preceding paragraphs, the addition made under section 69 as Unexplained investment is not sustainable and hence the same is reduced to Nil.
Grounds of appeal No. 13,14 & 15 are allowed.
Aggrieved, now Revenue is in appeal before us.
We have heard rival contentions and gone through the facts and circumstances of the case. We find that the assessee is engaged in the business of share broking on behalf of its clients. In the course of its business, assessee obtained from IL & FS Ltd. facilities against the securities held by it on account of its clients. Out of the total available credit facility of Rs. 20 crores, the assessee actually utilized credit of Rs. 18,53,57,733/- as on 31st March 2007. The AO has made an addition of Ps. 18.81 crore under section 69 as unexplained investment, (which actually is the value of shares offered as security to IL & FS calculated after reducing 40% margin). We noted that as per Stock Exchange and SEBI regulation, the stock brokers are expected to get the margin money from its clients against all sales and purchase orders. Since
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the margin money requirements go up and down every day, active clients give margin in the form of money as also shares of companies. The brokers in turn are allowed as per SEBI guidelines to pledge the said shares and raise money for margin requirements. Apart from the shares received from clients against margin money requirements, clients also permit the broker to retain the shares purchased by them through the Broker as 'margin', which are also utilized by brokers for pledging the same against raising money. As and when the client wants to sell any of its shares (which are pledged by the broker), they are de-pledged and necessary accounting entries are passed. This is practice in India. The sum and substance is that broker receives not only cash margin, but also securities as margin. This is the trade practice and is duly permitted by regulatory authorities, indulging SEBI. The highlight is that all the shares so received are in demat form and are received strictly only from the Demat account of the client whose account is required to provide the requisite margin. There are large number of transactions / instances of pledge and de-pledge, practically every day. As on the last day of the accounting year, i.e. 31.08.2007, the market value of such shares was Rs. 34.71 crores. After reducing the pledge margin (as per lender's norms), the security value was arrived at Rs.18.81 crores and the assessee was allowed to enjoy the credit facility of Rs. 18.53 crores. As per the SEBI/Stock Exchange directives on the subject, the assessee maintains complete segregated records of the securities of the clients received in a separate demat account. As per the Stock Exchange and SEBI Guidelines, the Know Your Client (KYC) norms are applicable to the assessee as per which the assessee has to collect the necessary documentary evidences for the proof of identity, genuineness of the clients. Further, as per the guidelines for in-person verification, the assessee also has to verify each client in person through its employees and maintain the records of the same. We find from the records that the assessee before the AO filed all the details of such clients whose securities were with it and were so pledged on the last day of the accounting year, along with complete details such as name and address of the client, client code, name of the scrip, scrip code, quantity and approximate value of the scrip, etc. The said list runs into 54 pages containing details of 2061 clients. We find that all these securities belonged to its clients obtained through their demat accounts Page 38 of 43
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or were purchased for them, duly complying with procedure prescribed by SEBI as also the Exchanges. But we find that the AO could not examine the voluminous and elaborate details of the clients and the securities provided by them as margin for the reason that these details were filed on 09.11.2009 and the assessment order was passed on 24.12.2009. Because of want of time the AO proceeded to make the addition of Rs. 18.81 crores.
We find that these securities did not belong to assessee but they were available with it against the debit balances of the clients or upon authorization by the clients to hold their securities for their' future obligations and margins. These securities are held by the assessee as a security against receivables from them or upon authorization from its clients. There is no evidence what so ever that the assessee invested in those securities. There are third party evidences (Depository Participant) that these shares were received from the respective clients from their demat accounts. There are written contracts with them authorizing the broker/assessee to pledge them for the purpose of margins. We also find that Ld AR admitted that sample confirmations from 31 customers have already been filed though not produced before the AO at assessment stage, for obvious reason of his insistence of filing confirmation letters from all of them The assessee has also filed full details of all such clients giving their permanent account numbers. It is also a fact that that assessee did not invest any money in those shares. These shares were received from the clients, or they were purchased on their behalf by the assessee through normal method and channels and duly recorded in the books of account, which are duty audited. Shares purchased on behalf of the clients were either paid for by them or they may have been on credit, but they were purchased and duly recorded in the books of account. The facts remains that those shares were purchased with the money and resources recorded in the books of accounts which have not been proved to be earlier bogus or sham. Sources of acquisition of these shares are duly explained. Shares received from clients were kept in a earmarked demat account of the assessee, they were received from the Demat accounts of the clients, or were purchased on behalf of the clients. Payments for such purchases, obviously and definitely recorded in the books of
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account of the assessee and therefore it cannot be said that acquisition of these shares were from undisclosed sources.
In view of the above facts and circumstances, we confirm the order of CIT(A) and this appeal of Revenue’s appeal is dismissed.
The next issue in ITA No.3332/Mum/2012 for the assessment year 2007-08 is as regards to the order of CIT(A) confirming the disallowance of depreciation of Bombay Stock Exchange card amounting to Rs.11,21,264/-.
We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the CIT(A) has disallowed the deprecation only on the issue that the BSE card is non-existent now for the reason due to demutualization or corporatization of BSE Limited, the deemed value will be nil under the specific proviso of section 55(2ab) of the Act. The CIT(A) recorded the following finding: -
“5.3.6 It is apparent that the appellant's case is covered by the provisions of section 43(6)(c )(i)(B) because the WDV in the case of any block of assets, the aggregate of WDVs of all assets falling within that block of assets at the beginning of the previous year and adjusted by the reduction of the moneys payable in respect of any asset falling within that block which is sold or during that previous year together with the amount of the scrap value, if any.
In the present case, firstly the BSE card never existed on any single day in the assessment year 2007-08 relevant to AY 2008-09.
Secondly, the WDV of relevant block of assets in financial year 2005-06 was to be adjusted by the reduction of moneys payable in respect of the said BSE Card which Page 40 of 43
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was transferred (or say surrendered) to the BSE Limited in FY 2005-06. Therefore, there is no question of allowing depreciation on non-existing asset (viz, non-existing BSE card) in FY 2007-08 relevant to AY 2008-09. As earlier. Stated, the trading or acquiring rights in the--case of -.the appellant, has been allotted along with equity shares or shares under the previously mentioned scheme of demutualization or corporatization of 85E Limited, shall be deemed to be Nil under the specific provisions of the proviso to section 55(2)(0b) of the Act.
53.9 Having regard to the facts and circumstances and in the light of specific provisions of the Act, the depreciation claimed, by. the appellant on non-existent BSE Card is not allowable in FY 2006-07 relevant to AY 2007-08. Such disallowance made by the LAO is confirmed. Secondly, there is no outgoing in relation to BSE card in the FY 2006-07 relevant to AY 2007-08, Since FY 2005-06, the BSE card has ceased to exist in accordance with the scheme of demutualization and corporatization of BSE card since 2005. Hence, there is no question of allowing any deferred expenditure or revenue expenditure.”
The learned Counsel for the assessee before us could not controvert finding of the CIT(A) and hence, this issue of assessee’s appeal is dismissed.
The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of prior period expenses of Rs. 4,21,224/-.
We find from the facts of the case that the CIT(A) has recorded a categorical finding on this aspect that the invoice for purchase of software worth Rs.4,21,224/- is dated 15-01-2006 and hence the same pertains to earlier assessment year 2006-07 and Page 41 of 43
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not to the relevant to the assessment year 2007-08. We have gone through the findings of CIT(A) recorded in Para 5.5 as under: -
As far as ground of appeal No. 6 is concerned, one invoice for purchase of software worth R. 4,21,224/- is FY 2006-07 relevant to AY 2007-08. The appellant is following mercantile system of accounting. Under the circumstances, disallowance of Rs.4,21,224/- is confirmed. Ground No.6 is dismissed.
Even now before us, the learned Counsel for the assessee could not controvert the findings of CIT(A) and hence this ground of the assessee’s appeal is dismissed.
The next issue in this appeal in ITA No. 3332/Mum/2012 of assessee for the assessment year 2007-08 is as regards to the disallowance of expenses relatable to exempted income by invoking the provisions of Section 14A of the Act read with rule 8D of the Rules amounting to Rs.8,25,663/-.
Briefly stated facts are that admittedly, the assessee earned tax free dividend income of Rs. 73,200/- but assessee has not allocated expenses incurred for earning the tax free income. It was the finding of the AO that the funds are invested in shares out of common pool of funds and financial resources which are utilized to earn income in various forms. Accordingly, the AO by invoking the section 14A of the Act read with rule 8D of the Rules disallowed the expenses relatable to exempted income at Rs. 8,25,663/-. The CIT(A) confirmed the same. Aggrieved, now assessee is in second appeal before the Tribunal.
At the outset, the learned Counsel for the assessee only made submission that rule 8D of the Rules will not apply in the present assessment year 2007-08 in view of the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (2010) 328 ITR 81 (Bom). Hence, he requested that the Tribunal is consistently applying 2 to 5 % of the exempted income and disallowing the same. We find that the plea of the assessee is quite reasonable and
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assessee has earned dividend income to the extent of Rs. 73,200/-. Hence, we restrict the disallowance at 5% of the exempted income. We direct the AO accordingly. This issue of assessee’s appeal is partly allowed.
In the result, the appeal of assessee in ITA No.3332/Mum/2012 and assessee’s appeal 2288/Mum/2012 for the AY 2007-08 and 2008-09 respectively are partly allowed and Revenue’s appeal in ITA No. 2268/Mum/2012 for the AY 2008-09 and 3228/Mum/2012 for AY 2007-08 are partly allowed.
Order pronounced in the open court on 10-03-2017.
Sd/- Sd/- (RAJESH KUMAR) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 10 -03-2017 Sudip Sarkar /Sr.PS
Copy of the Order forwarded to:
The Appellant 2. The Respondent. 3. The CIT (A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// Assistant Registrar ITAT, MUMBAI
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