2014 (10) TMI 955 - AT - Income Tax

Tribunal decision: Share trading loss treatment upheld, bad debt claim allowed, penalty overturned

The Tribunal upheld the treatment of share trading loss as speculative and reduced the disallowance of expenses. It allowed the bad debt claim based on ... Non allowance of loss on sale of securities - Adhoc disallowance of expenses - Held that:- The Tribunal had decided the issue against the assessee while deciding the appeal for the earlier years as held there is no dispute that provisions of section 73 Explanation can be applied where a company deals in purchase and sale of shares of other companies. However there are two exceptions provided in the said Explanation and undisputedly the assessee does not fall -within the ambit of those two exceptions. The only argument of the learned counsel for the assessee is that such purchase and sale of securities were effected only for testing the working of the website to ensure that the same functions within any glitches. We do not find merit in such submission since the assessee is continuously carrying on the purchase and sale of shares as informed to us by the learned counsel for the assessee. Further, the assessee itself is showing such transactions as part of its business activity. Therefore, there is no reason to take any contrary view. In our view, the CIT(A) has rightly upheld the order of the Assessing Officer treating the same as speculation loss - Decided against assessee Disallowance of bad debts - Held that:- We find that after 01.04. 1989,the only requirement of writing off of bad debt is entries in the books of accounts by the assessee concerned. It has not to prove the justification of its action i.e.writing off,once it makes necessary entries in the P & L account. The Hon’ble Apex Court in the matter of T.R.F. Ltd. (2010 (2) TMI 211 - SUPREME COURT) had laid down the above basic principle and same is being followed by various Courts. Respectfully following the same we decide ground no.2 in favour of the assessee. Depreciation on BSE Membership Card - Held that:- We find that in the matter of Techno Shares and Stocks Ltd [2010 (9) TMI 6 - SUPREME COURT OF INDIA] has held - “on a consideration of the BSE rules, that the right of membership was a 'business or commercial right' and could be said to be owned by the assessee and used for business purposes in terms of section 32(1)(ii). The right of membership, which included the right of nomination, was a 'licence' or 'akin to a licence' which was one of the items which fell in section 32(1)(ii). The right to participate in the market had an economic and money value. It was an expense incurred by the assessee which satisfied the test of being a 'licence' or 'any other business or commercial right of similar nature' in terms of section 32(1)(ii).” - Decided against AO Addition of expenditure attributable to speculative business - AO had made a disallowance of ₹ 5 lakhs, that was reduced to ₹ 2.5 lakhs by the FAA - Held that:- While deciding the issue in the appeal filed by the assessee,we have held that the Tribunal had in the earlier years decided the issue of speculation loss against the assessee. But, reduction in disallowance made by the FAA was upheld by the Tribunal. Following the order of the Tribunal for the year 2003-04,we uphold the order of the FAA and decide ground no.2 against the AO. Disallowance of client Assistance Charges(CAC) paid to ICICI Bank - AO had disallowance as he was of the opinion that the payment was made to a party covered by the provisions of section 40(A)(2)(b) - Held that:- We find that he has not given the basis as how he arrived at the conclusion that ICICI Bank,the receiver of the payment,was a party covered by the provisions of the said section.For invoking the provisions of 40A regarding related party,it has to be proved that the assessee had incurred an expenditure by making payment to the person referred to in clause (b). We find that the AO had presumed that payment was made to related party.He has also not explained as how the payment was excess or unreasonable.For arriving at such a conclusion,he should have compared the case with similar type of cases and proved that the payment was above normal practice of the trade.He has not made any attempt to prove the fact.In these circumstances,in our opinion,the order of the AO was rightly reversed by the FAA. There is no yardstick mentioned by the AG or CIT(A) as to what is fair market value of the goods, services or facilities for which the payment is made. Further nothing has been brought on record to show that the expenditure in question was excessive or unreasonable considering legitimate needs of the business or profession of the assessee or benefit by or accruing to the assessee. The fact that the assessee has its own infrastructure or that it has incurred huge advertisement expenses cannot be a ground to make the disallowance. In fact, infrastructure pointed out by the Assessing Officer is only with regard to facilities of trading. The Assessing Officer has totally ignored the fact that the customers were procured only through network of ICICI Bank Ltd., across the country. The rendering of services by ICICI Bank Ltd., which have already set out above, contributed to the business of the assessee and payment of commission, in our view was fully justified. - Decided in favour of assessee. Disallowance of expenses on software development - Held that:- We find that as far as incurring of expenditure is concerned the AO has doubted it. He was of the opinion that same was of capital nature.From the records it is clear that the assessee had made payment to HCL Comnet Ltd. and CWIP amounting to ₹ 27,72,471/-,for development of software programme, but the project could not materialise,that no depreciation was allowed with regard to the payment in question. We are of the opinion that the expenditure incurred by the assessee was incurred for carrying out the business for the year under consideration and it suffered a loss in the transaction. - Decided in favour of assessee. Penalty u/s 271(1)(c) - assessee had treated share transaction under the business head,whereas the AO was of the opinion that same were covered by the provisions of section 73 - Held that:- Penalty as per the provisions of section 271(1)(c) is not automatic.Addition or disallowance during the assessment proceedings or their confirmation in appellate proceedings do not and should not result in invoking the penal provisions in a mechanical manner.Before imposing penalty for furnishing of inaccurate particulars it has to be seen that the claim made by the assessee was false or not bona fide. In the matter before us,the assessee had treated share transaction under the business head,whereas the AO was of the opinion that same were covered by the provisions of section 73.Thus,there were two possible views about the transaction in question and the assessee had followed one of the views.It is said that if a wrong claim is made by an assesse and explanation is offered then in the absence of a finding that the assessee had failed to prove such explanation was bona fide, no penalty can be imposed. - Decided in favour of assessee. Issues Involved:1. Non-allowance of loss on sale of securities and ad hoc disallowance of expenses.2. Disallowance of bad debts.3. Charging of interest under Section 234B and 234D.4. Depreciation on BSE Membership Card.5. Disallowance of Client Assistance Charges (CAC).6. Software development expenses.7. Levy of penalty under Section 271(1)(c).Detailed Analysis:1. Non-allowance of Loss on Sale of Securities and Ad Hoc Disallowance of Expenses:The assessee claimed a share trading loss of Rs. 24,97,985, which the AO treated as speculative loss under Explanation to Section 73 of the Income Tax Act. The AO also allocated expenses of Rs. 5,00,000 towards the speculative business. The CIT(A) upheld the AO's decision but reduced the disallowance to Rs. 2,50,000. The Tribunal, following its earlier decision in the assessee's own case for AY 2003-04, upheld the CIT(A)'s order, confirming the treatment of the loss as speculative and the reduced disallowance of expenses.2. Disallowance of Bad Debts:The AO disallowed the bad debt claim of Rs. 6,09,334, stating that the assessee failed to justify that the debts had become bad. The CIT(A) upheld the AO's decision, relying on case laws that required demonstration of the debt becoming bad. The Tribunal, however, reversed this decision, citing the Supreme Court's ruling in T.R.F. Ltd. and Vijaya Bank, which stated that the only requirement post-01.04.1989 was the writing off of the bad debt in the books of accounts. Hence, the Tribunal allowed the bad debt claim.3. Charging of Interest under Section 234B and 234D:This ground was deemed consequential and not adjudicated by the Tribunal.4. Depreciation on BSE Membership Card:The AO disallowed the depreciation claim on the BSE Membership Card, arguing that it did not suffer from wear and tear or obsolescence. The CIT(A) allowed the claim, following the Tribunal's earlier decision in the assessee's own case. The Tribunal upheld the CIT(A)'s decision, referencing the Supreme Court's judgment in Techno Shares and Stocks Ltd., which recognized the BSE Membership Card as a 'business or commercial right' eligible for depreciation under Section 32(1)(ii).5. Disallowance of Client Assistance Charges (CAC):The AO disallowed 50% of the CAC amounting to Rs. 10,33,98,497, paid to ICICI Bank, citing excessive and unreasonable payment under Section 40A(2)(b). The CIT(A) deleted the disallowance, stating that the AO did not substantiate the excessiveness of the payment. The Tribunal upheld the CIT(A)'s order, noting that the AO failed to prove that the payment was above normal trade practice and that the services rendered by ICICI Bank were justified. The Tribunal also referenced its earlier decision in the assessee's case for AY 2003-04.6. Software Development Expenses:The AO treated the software development expenses of Rs. 27.72 lakhs as capital in nature and disallowed the claim. The CIT(A) allowed the claim, noting that the software project did not materialize, and thus the expenditure was a business loss allowable under Section 28. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenditure was incurred in the course of business and resulted in a business loss.7. Levy of Penalty under Section 271(1)(c):The AO levied a penalty of Rs. 9.58 lakhs for furnishing inaccurate particulars of income concerning the disallowed share trading loss and bad debts. The CIT(A) upheld the penalty. The Tribunal reversed the CIT(A)'s order, stating that the assessee's claim was based on a bona fide interpretation of the law, and there were two possible views on the matter. The Tribunal emphasized that penalty under Section 271(1)(c) is not automatic and should not be imposed in cases of genuine differences in interpretation.Conclusion:The Tribunal partly allowed the assessee's appeal and dismissed the AO's appeal. The penalty appeal filed by the assessee was allowed.