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2010 (2) TMI 762 - AT - Income TaxDepreciation - intangible asset - under section 32(1)(ii) - payment was made to retiring partners in lieu of right title and interest in the assessee s firm - Held that - There is nothing in the agreement that the outgoing partners cannot do any business. There is nothing in the agreement that by making payments to the partners the assessee will create any tangible or intangible asset in the books of account - Assessee has simply passed debit entry and credit entry in respective accounts in the books of account and therefore it is not a case where the assessee has created any asset on which depreciation in view of the provisions of section 32(1)(ii) is allowable. Disallowance under section 36(1)(ii) - interest paid on loans borrowed and utilized for payment to retiring partners - The payment of Rs. 4.50 crores was made from the funds of the firm as per clauses of agreement vide the retirement deed. The amount was not credited to the continuing partners accounts but was debited to the funds of the firm. The continuing partners have taken a conscious view that retiring partners should be paid for safeguarding the interests of the firm and for the purpose of better commercial expediency. Accordingly the payments were made to the retiring partners out of the funds borrowed by the firm or from the funds available with the firm. Therefore in our considered view the payments to the partners were for the purpose of commercial expediency and therefore deduction is allowable under section 36(1)(ii) of the Act Derivatives and future option transactions - Business losses or not - Assessment year 2004-05 and assessment year 2005-06 - The Special Bench decision of the Tribunal in the case of Shree Capital Services Ltd. v. Asstt. CIT (2009 -TMI - 59828 - ITAT CALCUTTA ) has held that the term derivatives in which underlying asset is share will fall within the meaning of commodity used in section 43(5) - It has been further held that if it is to held that the transaction in derivatives does not fall in section 43(5) it may make clause (d) and the Explanation thereto below section 43(5) introduced by the Finance Act 2005 to be redundant - The Special Bench has also held that clause (d) of proviso to section 43(5) is prospective in nature and will be effective from the date on which the legislature made it effective i.e. 1-4-2006 and will be applicable to the assessment year 2006-07 onwards - Restore the finding of the Assessing Officer for both the years. Trading purchases made in shares during assessment year 2000-01 as sham - The Assessing Officer disallowed loss claimed on the Appellant on extinction of the shares of the above Companies as a consequence of Simple Exit System (SES) introduced under the Companies Act 1956 - Appellant was dealer in shares including the shares in the above 4 Companies apart from shares in other unlisted Companies - These four companies having become defunct over a period of years between 1st April 1999 and December 2003 they availed of the scheme under Simple Exit System and became extinct during the year under appeal - This became a total loss to the Appellant on account of trading in shares and claimed a loss of Rs. 98, 66, 092 being the value included in opening stock of shares - Find that there is no material to show that the Company Law Department treated the Application by these Companies for SES as bogus or mala fide.n the contrary the Appellant has placed material on record that the name of these Companies were struck off - Decided in favour of assessee. Disallow notional interest - purchases of trading stock purchased has been held to be sham - The CIT(A) deleted the disallowance by holding that the same has been computed based on interest paid to Bank during the year - The CIT(A) further noted that the claim of loss in purchase of shares in 2000-01 had been held as genuine and therefore from this angle also the disallowance was not justified. Carry forward of loss - Assessee submitted that the loss was allowable to be carried forward as per provisions of law - Any loss claimed under long-term capital gain/loss cannot be set off under any other head of income as the same has to be set off against capital gain/loss and therefore as per provisions of law the same is liable to be carried forward. Accordingly confirm the finding of CIT(A) in this regard also - Therefore the Assessing Officer was directed to allow carry forward of the loss as per provisions of law.
Issues Involved:
1. Claim of depreciation on intangible assets under Section 32(1)(ii) of the Income Tax Act. 2. Deductibility of interest paid on loans borrowed for payment to retiring partners under Section 36(1)(ii) of the Income Tax Act. 3. Treatment of derivatives and future options transactions as speculative or business losses under Section 43(5) of the Income Tax Act. 4. Allowability of business loss due to extinction of shares held as stock-in-trade. 5. Allowability of carry forward of long-term capital loss. Detailed Analysis: 1. Claim of Depreciation on Intangible Assets: The assessee claimed depreciation on an intangible asset created by paying Rs. 4.5 crores to retiring partners, arguing it was entitled to depreciation under Section 32(1)(ii). The Assessing Officer (AO) rejected this claim, stating no intangible asset was created in the books of account and the claim was an afterthought since it was not made in the original or revised return. The CIT(A) upheld the AO's decision, citing the Supreme Court decision in Geotze India Ltd. v. CIT, which mandates claims to be made via revised returns. The Tribunal also rejected the claim, referencing the Bombay High Court decision in CIT v. Techno Shares & Stocks Ltd., which clarified that not all business or commercial rights qualify for depreciation under Section 32(1)(ii). The Tribunal concluded that the payment to retiring partners did not create any asset, tangible or intangible, and thus, depreciation could not be claimed. 2. Deductibility of Interest Paid on Loans: The AO disallowed the interest paid on loans borrowed for payments to retiring partners, arguing it was not for business expediency. The CIT(A) partly allowed the claim for one year based on calculation errors. The Tribunal, however, allowed the assessee's claim, stating the payments were made from the firm's funds for commercial expediency, thus qualifying for deduction under Section 36(1)(ii). 3. Treatment of Derivatives and Future Options Transactions: The AO treated losses from derivatives and future options as speculative losses, citing Section 43(5) and ruling that the amendment excluding such transactions from speculative transactions was prospective from 1-4-2006. The CIT(A) disagreed, citing ITAT's decision in SSKI Investors Services (P.) Ltd., which treated such transactions as non-speculative. The Tribunal reversed the CIT(A)'s decision, aligning with the Special Bench decision in Shree Capital Services Ltd. v. Asstt. CIT, which held that derivatives in shares fall under "commodity" in Section 43(5) and the amendment is prospective. 4. Allowability of Business Loss Due to Extinction of Shares: The AO disallowed the claim of business loss due to the extinction of shares, arguing the transactions were with group concerns and lacked genuine business purpose. The CIT(A) allowed the loss, noting the shares were accepted as trading stock in earlier assessments and became worthless due to the companies becoming defunct. The Tribunal upheld the CIT(A)'s decision, finding no material to disprove the genuineness of the transactions. 5. Allowability of Carry Forward of Long-Term Capital Loss: The AO did not allow the carry forward of long-term capital loss. The CIT(A) directed the AO to allow it as per law, noting the claim was timely filed. The Tribunal affirmed this, stating long-term capital loss must be carried forward as per legal provisions. Conclusion: The appeals resulted in mixed outcomes, with the Tribunal allowing the assessee's claim for interest deduction but rejecting the depreciation claim and speculative loss treatment. The Tribunal upheld the CIT(A)'s decisions on the business loss due to share extinction and carry forward of long-term capital loss, while reversing the CIT(A)'s decision on derivatives and future options transactions.
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