2010 (12) TMI 1233 - AT - Income Tax

Loss incurred on account of share transactions - disallowed in the absence of any evidence - speculation loss and non-speculation loss - The assessee company has stated its business activities as mainly share and stock broking, investment and trading in shares and securities. So far as the addition of ₹ . 58,11,372/- on account of speculation loss is concerned, we find the AO elaborately discussed the reasons for such disallowance which has already been brought out in the facts of the case. So far as the share trading loss of ₹ 60,04,791/ is concerned, we find the reasons given by the AO is that the assessee did not furnish the movement of funds pertaining to the purchase of the shares. According to the AO from whatever details furnished by the assessee, it appears that the scrips in which the assessee incurred loss are the same scrips, which the group has manipulated the prices as found out by the JPC and SEBI report. It is the submission of the ld counsel for the assessee that the shares on which losses have been incurred are not the same scrips as per the report of the JPC and SEBI HELD THAT - We find before the CIT(A), it was argued that ₹ 58,11,372/- was added in the computation of income in order to arrive at th business income and further addition of ₹ 60,04,791/- was made on the ground that the loss was not genuine. Thus, there is double additions para 4 of the order of the CIT(A) . We find this aspect has not been decided by the CIT(A). It is also the case of the AO that the assessee has not explained the differences specifically in those cases where confirmations have not come or where confirmations are incomplete. Under these circumstances, we are of the considered opinion that the matter requires fresh adjudication at the leval of the Or on the basis of the various documents filed before him which appears to have not been properly examined by him. We, therefore, set aside the order of the CIT(A) and restore the matter to the file of the AO with the direction to decide the issue afresh and in accordance with law after giving reasonable opportunity of being heard to the assessee. We hold and direct accordingly. This ground of the assessee is accordingly allowed for statistical purpose. Disallowance on depreciation - membership rights of the Stock Exchange - HELD THAT - Since this issue was not argued in detail by either of the sides; therefore, in the interest of justice, we deem it proper to restore this issue back to the file of the AO with a direction to decide the issue afresh in the light of the decision of the Hon ble Supreme Court wherein it has been held that the assessee is entitled to depreciation on stock exchange membership card and in accordance with law. This ground of the assessee is accordingly allowed for statistical purpose. disallowance on account of bad debts - the evidences filed before the CIT(A) as additional evidence submitted that the same should have been admitted by him. He, accordingly, prayed that in the interest of justice the matter should be sent back to the file of the AO for fresh adjudication. HELD THAT - Considering the totality of the facts and circumstances of the case and in the interest of justice, we are of the considered opinion that the assessee should be given one more opportunity to substantiate its claim of bad debts. We, therefore, set aside the order of the CIT(A) and direct the AO to give one more opportunity to explain the allowability of bad debts of ₹ 1,49,62,136/-. The AO shall decide the issue afresh and in accordance with law after giving due opportunity of being heard to the assessee. We hold and direct accordingly. The ground taken by the assessee is accordingly allowed for statistical purpose. Claim for miscellaneous income as business income - HELD THAT - We are of the opinion that only sundry balance written back on account of provisions u/s 41(1) can be treated as business income and the rest of the items like interest, dividend, miscellaneous income, turnover charges collected, commission income, bank charges and de-mat charges etc. has to be treated as income from other sources . We hold and direct accordingly. This ground of the assessee is accordingly allowed partly.

Issues Involved:

1. Disallowance of loss on share transactions
2. Disallowance of depreciation on membership rights of the Stock Exchange
3. Non-adjudication of ground relating to disallowance of depreciation on computer systems, furniture, and office equipment
4. Disallowance of bad debts
5. Enhancement of income by withdrawing deduction of expenses and not allowing carry forward of business loss
6. Disallowance of penalty debited to the P&L account
7. Treatment of miscellaneous income

Issue-wise Detailed Analysis:

1. Disallowance of Loss on Share Transactions:
The assessee challenged the CIT(A)'s order upholding the AO's action in disallowing a loss of Rs. 60,04,791/- on share transactions. The AO issued multiple notices and questionnaires to the assessee, seeking detailed information on share transactions, but the assessee failed to provide the required details. The AO concluded that the losses were non-genuine, citing the involvement of the Ketan Parekh group in market manipulation. The CIT(A) upheld the AO's decision, noting the assessee's failure to rebut findings and provide necessary transaction details. The Tribunal remanded the matter to the AO for fresh adjudication, emphasizing the need for proper verification of the submitted documents.

2. Disallowance of Depreciation on Membership Rights of the Stock Exchange:
The assessee's claim for depreciation on membership rights of the Stock Exchange amounting to Rs. 18,28,125/- was disallowed by the CIT(A), referencing the Bombay High Court's decision in Techno Shares & Stocks Ltd. However, the Supreme Court reversed this decision, allowing depreciation on stock exchange membership cards. The Tribunal restored the issue to the AO for fresh adjudication in light of the Supreme Court's decision.

3. Non-adjudication of Ground Relating to Disallowance of Depreciation on Computer Systems, Furniture, and Office Equipment:
The CIT(A) failed to adjudicate the ground relating to the disallowance of Rs. 4,64,727/- as depreciation on computer systems, furniture, and office equipment. Both parties agreed that the issue should be restored to the CIT(A) for adjudication. The Tribunal directed the CIT(A) to adjudicate the issue after providing a reasonable opportunity to the assessee.

4. Disallowance of Bad Debts:
The AO disallowed Rs. 1,49,62,136/- claimed as bad debts, citing the assessee's failure to fulfill the provisions of section 36(2). The CIT(A) upheld this disallowance, noting the assessee's failure to provide justifiable reasons for entertaining additional evidence. The Tribunal, considering the totality of facts and in the interest of justice, remanded the matter to the AO for fresh adjudication, giving the assessee another opportunity to substantiate its claim.

5. Enhancement of Income by Withdrawing Deduction of Expenses and Not Allowing Carry Forward of Business Loss:
The CIT(A) enhanced the income by withdrawing the deduction of expenses and disallowing the carry forward of business loss, citing the lack of business activity due to SEBI's prohibition. The Tribunal, referencing a similar case (KNP Securities P Ltd), held that the assessee is entitled to claim various expenses debited in the P&L account and allowed the business loss incurred by the assessee, directing the AO to examine the admissibility and genuineness of the expenses.

6. Disallowance of Penalty Debited to the P&L Account:
The AO disallowed Rs. 3,750/- paid as a penalty to NSE for violation of its rules and regulations, treating it as a non-allowable expenditure. The CIT(A) upheld this disallowance. The Tribunal, referencing a similar case (Classic Shares & Stock Broking Services Ltd), held that the penalty paid to NSE is an allowable expenditure and directed the AO to allow the deduction.

7. Treatment of Miscellaneous Income:
The CIT(A) treated the miscellaneous income of Rs. 94,40,620/- as income from other sources, contrary to the assessee's treatment as business income. The Tribunal held that only sundry balance written back on account of provisions under section 41(1) can be treated as business income, while other items like interest, dividend, and miscellaneous income should be treated as income from other sources.

Conclusion:
The Tribunal remanded several issues to the AO for fresh adjudication, emphasizing the need for proper verification and adherence to legal precedents. The assessee's claims on various grounds were partly allowed for statistical purposes, with directions for reassessment in accordance with the law.

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