TaxTMI 
TaxTMI 
2015 (1) TMI 966
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....of moneys payable to the appellant within the meaning of Explanation 4 to section 43(6) on demutualization of stock exchange, there is no cessation of the block of asset pertaining to the BSE Card. The disallowance being bad in law the same needs to be deleted. 2. Disallowance of Rs. 24,149/- being foreign exchange loss on forex on hand as on 31.3.2007 On the facts and circumstances of the case and in law, the learned CIT(A) erring in confirming disallowance of foreign exchange loss of Rs. 24,149/- by treating it as contingent in nature by not appreciating that the said loss is actually incurred as on 31.3.2007 on account of change in the foreign exchange rate on the unutilized foreign currency forming part of the working capital. The loss being a business expenditure u/s 37(1), the same needs to be allowed. 2.02 Without prejudice to the above, on the facts and circumstances of the case and in law, the learned CIT(A) erred in not allowing the said loss as business loss u/s 28. 3. Disallowance of non compete fees of Rs. 6,53,57,094/- 3.01 On the facts and circumstances of the case and in law, the learned CIT(A) erred in treating non compete fees of Rs. 6,53,57,094/- a....
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.... is a case of demutualization, as result of corporatization of BSE, the issue is covered from both the angles against the assessee, we, therefore, respectfully following the decision, sustain the orders of the revenue authorities. 10. Ground no. 1 is therefore, rejected. 11. Ground no. 2 pertains to disallowance of Rs. 24,149/-, being the foreign exchange loss on forex. 12. At the time of hearing, the AR submitted that the issue is covered by the decision of Hon'ble Supreme Court in the case of CIT vs Woodward Governor India Pvt Ltd reported in 312 ITR 254. The DR accepted the fact, but none the less supported the orders of the revenue authorities. 13. After hearing both the sides, and considering the accepted fact that the Hon'ble Supreme Court has decided the issue in favour of the assessee, we, therefore, following the ratio laid down by the Supreme Court, set aside the order of the CIT(A) on the issue and direct the AO to delete the addition of Rs. 24,149/-. 14. Ground no. 2 is thus allowed. 15. Ground no. 3 pertains to disallowance of non compete fee of Rs. 6,53,57,094/- and ground no. 4 pertains to disallowance of Rs. 1,70,88,082/- on customer rights. 16.....
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....Bombay High Court in the case of CIT vs Everest Advertising (supra) and also by the Mumbai ITAT in the case of Hidelberg Cement India Ltd. (supra) or an expense is made to acquire an asset giving enduring benefit to the assessee, in which case, it would be capital in nature. 23. Following the ratios laid down, we are of the considered opinion that the assessee deserves the allowance of Rs. 6,53,57,094/-. 24. We, therefore, set aside the order of the CIT(A) on this issue and direct the AO to delete the addition of Rs. 6,53,57,094/-. 25. Ground no. 3 is therefore, allowed. 26. Reverting to ground no. 4, the fact that the assessee acquired customers rights when it acquired the business, the assessee claimed the expenditure to be capital in nature and claimed depreciation. The revenue authorities denied the claim of depreciation holding the transaction of acquiring customers rights to be sham. 27. Before us, the AR placed reliance on the decision of "i) Hidelberg Cement India Ltd. vs Addl. CIT -31 DTR 582(Mum) - In this case non-compete fees was paid for a period of 1 year and the same was allowed as revenue expenditure. ii) CIT v Everest Advertising (Bombay High C....
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....rong clientele base of 3709 persons which itself show that 'AFC' was holding a strong repute in the eyes of its clients. Undoubtedly by purchase of rights to do the business with these 3709 clients the assessee has actually purchased the goodwill of 'AFC' [Para 15] Commercial rights gain significance in the commercial world as they represent a particular benefit or advantage or reputation built over a certain span of time and the customer associate with such assets. [Pam 17] It is not in doubt or dispute that purchase of the clientele business by the assessee from 'AFC' is a right which can be used as a tool to carry on the business. It can also be seen from the angle of purchase of entire marketing network by the assessee in 'AFC' Even if considered from this angle the assessee is eligible for depreciation on payment of Rs. 2.5 crores [Para 20]". 28. The AR, therefore, pleaded that being genuine expenditure incurred for the purposes of acquiring business, the depreciation has to be allowed to the assessee. 29. The DR submitted that the assessee had not given classification on the expenditure. 30. We have heard the arguments and have perused the orders & the case laws cite....
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.... though the assessee has not acquired any asset which can be depreciated with time. 6. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the depreciation on goodwill amounting to Rs. 13,12,500/- even though the assessee is not eligible for the same as per section 32 of the Act. 7. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the amount of Rs. 33,50,000/- claimed as business expenditure without appreciating the fact that the AO rightly held the same as capital expenses as the membership fees cannot be said to be used exclusively for the purposes of business 8. The appellant craves to leave to add, to amend and/or alter any of the grounds of appeal, if need be. 9. The appellant, therefore, prays that on the grounds stated above, the order of CIT(A)-39, Mumbai may be set aside and that of the Assessing Officer restored". 36. Ground no. 1 pertains to deletion of Rs. 78,91,360/- on account of bad debts. 37. In the assessment proceedings, the AO noticed that the assessee had claimed bad debts to the extent of Rs. 78,91,360/-. The AO called for an explanation on this is....
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....s of the same were already submitted to the AO and the same is submitted to me at pages 87 to 88 of the Paper Book. Thus the appellant states that the bad-debts of Rs. 78,91,360/- written off pertained to the brokerage income already credited to the profit and loss a/c in the relevant years and accordingly the write off of the bad-debts must be allowed u/s 36(1)(vii) as it satisfies the conditions of section 36(2)(i). 5.15 have gone through the issue. The Hon'ble ITAT Special Bench's decision in the case of Shreyas Morakhia ITA No. 3374/Mum/2004 for A.Y. 1998-99 order dt. 16.7.2010 is in favour of the appellant. The Hon'ble ITAT Special Bench has also held as follows:- "32. Keeping in view all the facts of the case and the legal position emanating from the various judicial pronouncements as discussed above, we are of the view that the amount receivable by the assessee, who is a share broker, from his clients against the transactions of purchase of shares on their behalf constitutes debt which is a trading debt. The brokerage/ commission income arising from such transactions very much form part of the said debt and when the amount of such brokerage/ transaction has....
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....T and in absence of any contrary decision or material brought on record by the AO, we sustain the order of the CIT(A), consequentially, rejecting the ground taken by the department. 48. Ground no. 2 is therefore rejected. 49. Ground no. 3 pertains to allowance of Vanda loss by the CIT(A). 50. The AO had treated the loss as speculation loss u/s 73. 51. Before the AO, the assessee explained "The assessee company has incurred net loss on account of Vanda transactions of Rs. 1,95,84,164/-. Kindly refer to submissions made vide letter dated 12/06/2009. Pages 1158 to 1161. During the course of last hearing your honour had asked for an explanation for allowability of Vanda loss as business loss u/s 28 & non- applicability of provisions of Explanation to section 73 to it In this regard, the assessee company submits as follows: The transactions of purchase/ sale of shares on own account is always demarcated from those which take place through Vanda account. This is explained as follows: a. In respect of the transactions of purchase/sell undertaken as a trader or investor on own account, the assessee company is considered as a separate client on par with other clients. T....
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....earning brokerage and not on its own account. After the said transactions are disowned by the clients, the broker has to purchase the shares from the market in order to satisfy the sale obligations of the client, (or) in case of purchase obligations the broker purchases the said shares and sells in the open market or auctions it. This may result into gains/ loss to the assessee company which is Vanda gain/loss. The brokerage chargeable to these transactions is recouped from the said gain/loss. Taxability of .gain /loss on Vanda account Now the question arises whether these trades on Vanda account resulting into gain/loss is normal business income/loss of its in the nature of speculative business vide Explanation to section 73A. a. Before discussing the issue it would be worthwhile to reproduce the Explanation to s. 73 which reads as under: 'Where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities income from house-property', 'Capital Gains' and 'Income from Other sources', or a company the principal business of which is the business of b....
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....o assessee. Thus the said loss arisen to assessee does not fall within the ambit of Explanation to s. 73. The loss occurred to assessee was in course of its business activity of brokerage. Reliance is placed on the decision in the case of ACIT v/s Subhash Chand Shorewala (2004) 91 TTJ (Del) 57. The head notes of the said decision and the conclusion is stated below: Loss---Speculative loss--Share broking business--Loss on account of client disowning transactions on anticipating loss---is business loss and not speculative loss. Held: Admittedly, the assessee, being in the business of broking would be facing situations wherein some of the clients do not own up the transactions on anticipating losses. In such situations, the consequential loss incurred by the assessee to honour the commitments is to be viewed a an integral part of carrying on of assessee's business and is, therefore, not liable to be judged as a speculation loss -----Dy.CIT vs S. C. Gupta (ITA No 2897/Del/1997, dt 271h May, 2003) followed; CIT vs Bhagwan Dass Rameshwar Dayal (1984) 42 CTR (Del) 200(1984) 149 ITR 387 (Del) relied on". 52. The AO disregarded the explanation of the assessee and observed, ....
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....explanation to section or not". The CIT(A), after considering the submissions of the assessee, deleted the addition as made by the AO. 55. Against this order of the CIT(A), the department is in appeal before the ITAT. 56. Before us, the AR submitted that the issue is covered by the decision as submitted before the revenue authorities. 57. The DR placed reliance on the order of the AO. 58. We have heard the rival contentions and have pursued the orders of the revenue authorities. The fact that the assessee has suffered a loss is not disputed. But the issue before us is, what is a vanda loss and whether vanda loss is a business loss or a speculative loss. 59. Vanda loss is a term used in share and/or community trading. In the course of trading in respect of the transactions of purchase/sell undertaken as a trader or investor or on own account, the assessee company is considered as a separate client on par with other clients by the stock exchange. This can be seen from the fact that the contract notes issued have a separate client identification number for each client. The transactions undertaken by the assessee company on its own as a trader/investor are characteriz....
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....arket or auctions it. This may result into gains/loss to the broker, which is termed as Vanda gain/loss. The brokerage chargeable to these transactions is recouped from the said gain/loss. 63. Taxability of gain/loss on Vanda transactions. Now the question may arises whether the transactions on Vanda account resulting into gain/loss, a normal business income/loss or it is in the nature of speculative business vide Explanation to section 73A. 64. Before discussing the issue it would be worthwhile to reproduce the Explanation to s. 73 which reads as under: Where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads 'Interest on securities income from house-property', 'Capital Gains' and 'Income from Other sources', or a company the principal business of which is the business of banking or grating of loans and advances consists in the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. Thus it is clear from the above provision that sale and purchase of shares of ot....
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....fall within the ambit of Explanation to s. 73. The loss occurred to assessee was in course of its business activity of brokerage. 68. Reliance is placed on the decision in the case of ACIT v/s Subhash Chand Shorewala (2004) 91 TTJ (Del) 57. The conclusion is stated below: Admittedly, the assessee, being in the business of broking would be facing situations wherein some of the clients do not own up the transactions on anticipating losses. In such situations, the consequential loss incurred by the assessee to honour the commitments is to be viewed an integral part of carrying on of assessee's business and is, therefore, not liable to be judged as a speculation loss. 69. The view has been taken Dy. CIT vs S. C. Gupta (ITA No 2897/Del/1997, dt 271h May, 2003) followed; CIT vs Bhagwan Dass Rameshwar Dayal 42 CTR 200 (Del) 149 ITR 387 (Del) and relied on by the assessee. 70. The issue also came up before the Ahmedabad Bench of ITAT, in the case of Parker Securities Ltd vs DCIT, reported in 102 TTJ 235 and in ITO vs Rijvi Securities (P) Ltd. reported in 50 SOT 592, wherein the coordinate Bench at Ahmedabad held it to be business loss and not a speculation loss. ....
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.... being no contrary factual aspect. 83. We, therefore, sustain the order of the CIT(A) and reject the ground as taken by the department. 84. Ground no. 6 is therefore, rejected. 85. Ground no. 7 pertains to allowance of membership fee of Rs. 33,50,000/-. 86. The AO had disallowed the membership fee paid, holding the same to be capital in nature. The CIT(A), reversed this finding of the AO. 87. Against this order of the CIT(A), the department is before the ITAT. 88. The AR submitted that the issue is covered by the various decisions of various fora, wherein coordinate Bench at Pune had allowed the claim of the assessee in the decision of ACIT vs Baphana Jewellers Pvt. Ltd. in ITA No. 65-66/Pune/2013 and by the decision of Hon'ble P & H sitting in full Bench "If an item of expenditure is to be considered capital in nature, the expenditure should bring into existence an asset or an advantage for the enduring benefit of a trade. Membership fee paid to a club does not bring into existence an asset or an advantage for the enduring benefit of the business. It is an expenditure incurred for the period of membership and is not long lasting. By subscribing to the membersh....