2010 (10) TMI 1092 - AT - Income Tax

ITAT Mumbai: Assessee wins protective addition case on depreciation & disallowance of VSAT charges

The Appellate Tribunal ITAT Mumbai ruled in favor of the assessee in a case involving protective addition on depreciation and disallowance of VSAT and ... - 1. Issues Presented and Considered Whether depreciation claimed on Stock Exchange Membership Card is allowable under section 32 of the Income Tax Act, 1961. Whether the depreciation allowed in earlier years on the Stock Exchange Card constitutes a taxable benefit under section 28(iv) of the Income Tax Act, 1961, upon receipt of shares in the Stock Exchange Ltd. on demutualization. Whether the cost of acquisition of shares received on demutualization should be deemed as the original cost of the Stock Exchange Membership Card under section 55(2)(ab) for the purpose of capital gains computation. Whether the addition of depreciation amount previously allowed can be made as a protective addition under section 28(iv) pending final adjudication on the allowability of depreciation on the Stock Exchange Card. Whether VSAT charges and transaction charges paid to the Stock Exchange are deductible expenses under the Income Tax Act or are liable to disallowance under section 40(a)(1A) as fees for technical services without tax deduction at source. Whether payments to Stock Exchange for VSAT and transaction charges constitute fees for technical services attracting provisions of section 194J and consequent disallowance under section 40(a)(1A). 2. Issue-wise Detailed Analysis Issue 1: Allowability of Depreciation on Stock Exchange Membership Card under Section 32 Legal Framework and Precedents: Section 32 allows depreciation on tangible and intangible assets used for business. The Apex Court in a recent decision held that Stock Exchange Membership Cards constitute commercial rights and are eligible for depreciation. Court's Interpretation and Reasoning: The Court recognized the Stock Exchange Card as a commercial right enabling the stockbroker to conduct business through the exchange. The claim of depreciation was initially allowed by the appellate authority but was challenged by the Revenue. Application of Law to Facts: The assessee acquired the membership card for Rs. 2.88 crores and claimed depreciation. The Apex Court's ruling supports the allowability of depreciation on such an asset. Conclusion: Depreciation on the Stock Exchange Membership Card is allowable under section 32. Issue 2: Taxability of Previously Allowed Depreciation as Benefit under Section 28(iv) on Receipt of Shares on Demutualization Legal Framework and Precedents: Section 28(iv) taxes income or benefits arising in kind from business or profession. Section 55(2)(ab) provides for deemed cost of acquisition of shares received on exchange of certain assets. Section 47(xiiia) exempts transfer of stock exchange card for shares in corporatisation from capital gains tax. Precedents establish that specific provisions override general provisions. Court's Interpretation and Reasoning: The AO contended that since the cost of acquisition of shares is deemed as original membership cost, the depreciation allowed earlier constitutes a benefit chargeable under section 28(iv). The assessee argued that the transaction is governed by specific provisions (section 47(xiiia)) which exempt it from capital gains and that depreciation is an allowance, not income. The Court emphasized that section 28(iv) applies only to income arising from business and that the substitution of the card by shares does not confer any additional benefit but merely segregates the asset. Key Evidence and Findings: The assessee ceased claiming depreciation from AY 2006-07 and withdrew the claim. The shares received were at a notional value of Rs. 1 per share. The AO's view that the benefit accrues in the year of exchange was rejected by the Court. Application of Law to Facts: The deemed cost of acquisition under section 55(2)(ab) is a machinery provision for capital gains computation and does not create taxable income in the year of allotment. The transaction is a capital exchange, not a business income event. Section 47(xiiia) exempts the transaction from capital gains tax, negating the AO's claim. Treatment of Competing Arguments: The AO's protective addition was based on a hypothetical benefit arising from the difference between written down value and deemed cost. The Court rejected this as speculative and not constituting income under section 28(iv). Conclusion: Previously allowed depreciation on the Stock Exchange Card does not constitute taxable income under section 28(iv) upon receipt of shares on demutualization. The addition of Rs. 2,19,61,712 made on protective basis is deleted. Issue 3: Protective Addition of Depreciation Amount Previously Allowed Legal Framework and Precedents: Protective additions are recognized to safeguard revenue interest pending final adjudication. The Supreme Court has acknowledged protective assessments as valid procedural safeguards. Court's Interpretation and Reasoning: The AO made a protective addition of depreciation amount previously allowed, pending outcome of appeals on allowability of depreciation. The CIT(A) upheld the protective addition but directed that no demand be enforced on it. Application of Law to Facts: The Court noted that the department had not accepted depreciation claims in earlier years and appeals were pending before High Courts. Protective addition was made to guard against loss of revenue if depreciation was ultimately disallowed. Conclusion: Protective addition is valid as a procedural safeguard but no demand can be enforced on it until final adjudication. However, since the Court allowed the claim of depreciation, the protective addition is deleted. Issue 4: Deductibility of VSAT Charges and Transaction Charges Paid to Stock Exchange under Section 40(a)(1A) Legal Framework and Precedents: Section 40(a)(1A) disallows expenses where tax is required to be deducted at source under section 194J but is not deducted. Fees for technical services attract section 194J. Precedents establish that charges for use of facilities are not fees for technical services. Court's Interpretation and Reasoning: The Tribunal in the assessee's own earlier year and in other cases held that VSAT and transaction charges paid to Stock Exchanges are fees for use of facilities and not fees for rendering technical or managerial services. Stock Exchanges provide infrastructure and a platform for trading but do not render technical services to members. Key Evidence and Findings: The charges are for recovery of cost of infrastructure (VSAT, lease lines, BOLT system) and transaction fees based on volume. The Stock Exchange does not own or provide technical services but merely provides a trading platform. Application of Law to Facts: The payments are not fees for technical services under section 194J. Hence, no tax deduction at source obligation arises and no disallowance under section 40(a)(1A) is warranted. Treatment of Competing Arguments: The Revenue's contention that screen-based trading involves sophisticated technology and hence fees are for technical services was rejected as insufficient. The fact that services are available only to members does not convert the nature of payment into fees for technical services. Conclusion: VSAT charges amounting to Rs. 4,13,192 and transaction charges amounting to Rs. 67,12,842 paid to Stock Exchanges are deductible expenses. Disallowance under section 40(a)(1A) is deleted. Issue 5: Applicability of Section 194J and Section 40(a)(1A) to Payments Made to Stock Exchanges Legal Framework and Precedents: Section 194J mandates tax deduction at source on fees for professional or technical services. The explanation to section 9(1)(vii) clarifies the nature of fees chargeable. Precedents clarify that payments for use of facilities are distinct from fees for technical services. Court's Interpretation and Reasoning: The Court followed the Tribunal's decision that payments to Stock Exchanges for transaction and VSAT charges do not attract section 194J as they are not fees for technical or managerial services but payments for use of facilities. Application of Law to Facts: The payments do not create an obligation for tax deduction at source under section 194J. Consequently, disallowance under section 40(a)(1A) is not justified. Conclusion: Section 194J and section 40(a)(1A) provisions are not applicable to the payments made to Stock Exchanges for VSAT and transaction charges.