TaxTMI 
TaxTMI 
2015 (1) TMI 966
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....ning 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/- as capital expenditure by non appreciating that it did not r....
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....s 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. The facts are that during the year, the assessee acquired customer rights/assets from M/s P....
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....g 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 Court) - In this case non-compete fees was paid for a period of 3 years and the same was allowed as revenue expenditure. Sr. No. Case....
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.... 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 cited before us. The fact that the assessee acquired business of Peninsula is not disputed, therefore, the expenditure of acquisitions of customers rights also have to....
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....g 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 issue. The assessee vide letter dated 26.06.2009 submitted that as a broker, the assessee has to record the transaction and later on the amount is realized, T + 2 basis. But at times, the client is u....
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....me 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 been taken into account in computation of income of the assessee of the relevant previous year or any earlier year, it satisfies the condition stipulated in section 36(2)(i) and the assessee is entitled to deduction u/ s 36(1)....
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....ns 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. This can be seen from the fact 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 characterized by a unique separate identification numb....
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....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 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.' c. It is clear from the above provision that sale and purc....
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....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, "The assessee's argument is not acceptable. The assessee has tried to impart a new meaning to the provisions of the Statute and has interpreted and twisted the provisions to suit its own purpose. No where does the section make a distinction between losses incurred in purchase and sale in own account or a....
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....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 characterized by a unique separate identification number stated in the contract notes. In case of transactions undertaken on Vanda account, the said unique client identification number of the assessee company is not stated in the contract notes. The Vanda transactions are earmarked by separate Vanda account which may be either 'Institut....
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....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 other companies, within the ambit of the Explanation, must be carried out as an activity of business of purchase and sale in his own account and not for earning brokerage. To find out that the broker carried on purchase and sale of shares of other companies as its business, will have to be examined and the tests, which could determine such a s....
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....ons 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. 71. Since there is no contrary decision on the issue, we, therefore, respectfully following the above decisions, sustain the order of the CIT(A) and reject the ground as raised by the department. 72. Ground no. 3 is therefore, rejected. 73. Ground no. 4 pertain to disallowance made u/s 14A of Rs. 83,61,231/- by the AO and the CIT(A) held, "The Hon'ble Bombay High Cou....