2011 (6) TMI 467 - AT - Income Tax

Depreciation - BSE Membership card - intangible asset - section 32(1)(ii) - Held that -Depreciation is allowable on the cost of the Membership Card u/s 32(1)(ii) of the Income Tax Act. See Techno Shares and Stocks Ltd. Vs The Commissioner of Income Tax IV(2010 - TMI - 77379 Supreme Court of India). Decided in favor of the assessee. Disallowance of penalty u/s 37 of the Act-Business expenditure--Held that -Penalty/fine paid to SEBI for violation of regulations regarding procedures to be followed for entering into share transaction were just compensatory in nature and there is no infringement of any law. Decided against the Revenue. Bad Debts-Share broker -Held that - The amount receivable by the 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 forms part of the said debt and when the amount of such brokerage/commission 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)(vii) by way of bad debts after having written of the said debts from his books of account as irrecoverable. Decided in favor of assessee. Credit of Total TDS on Gross Dividend-Net Dividend taxed in hands of Assessee-Share Broker-Held that - What is to be assessed is the income derived from dividend. Out of the total dividend shown as income ,the assesse has refunded a part of dividend to the clients which have been rightfully reduced from his income and thereby it had offered net dividend amount for taxation along with TDS. Therefore, the total of TDS as well as the net dividend was shown as income. Decided in favor of the assessee. Losses in Speculation business-Share Broker- Rule of consistency to be followed--Held that -Although principles of res judicata do not apply to Income Tax proceedings since every A.Y. is separate and distinct, However, Revenue cannot take a different view for a particular year and Rule of Consistency should be followed .Assessee should be allowed to set off loss on sale of investments against profit on shares. See CIT vs. Gopal Purohit CIT (2010 - TMI - 35188 Bombay High Court).Decided in favor of the assessee. Advances not recoverable written off- Held that -Non-recovered debt cannot be treated as a bad debt u/s 37(1)(vii) of the Act since the amount has not been offered for taxation in any earlier years as income of the assessee. .Further, the amount also cannot be allowed as business loss since the same relates to a different assessment year and does not relate to the impugned assessment year. Decided against the assessee.

Summary

Issues Involved:
1. Depreciation on BSE/NSE Stock Exchange Membership Card
2. Disallowance of penalty/fine paid to BSE/NSE
3. Addition of bad debts
4. Credit for TDS on dividend income
5. Set off loss on sale of investments against gain in shares
6. Addition of advances not recoverable written off
7. Addition of software expenses

Detailed Analysis:

1. Depreciation on BSE/NSE Stock Exchange Membership Card
The Revenue challenged the deletion of the addition of Rs. 3,16,582/- for depreciation on BSE/NSE Stock Exchange Membership Card. The Tribunal found that the issue is covered in favor of the assessee by the Hon'ble Supreme Court's decision in Techno Shares and Stocks Ltd., which held that depreciation is allowable on the cost of the Membership Card under Section 32(1)(ii) of the Income Tax Act, 1961. Therefore, the Revenue's ground was dismissed.

2. Disallowance of Penalty/Fine Paid to BSE/NSE
The Revenue contested the deletion of Rs. 17,217/- disallowed by the A.O. for penalty/fine paid to BSE/NSE. The CIT(A) deleted the disallowance, stating that the payments were compensatory and not for any infringement of law. The Tribunal upheld this view, referencing a similar decision in the assessee's own case for A.Y. 2002-03, and dismissed the Revenue's ground.

3. Addition of Bad Debts
The Revenue disputed the deletion of Rs. 6,59,780/- added by the A.O. as bad debts. The CIT(A) relied on a Tribunal decision in DCIT vs. V. Vrijlal Lallubhai & Sons to delete the addition. The Tribunal found the issue covered in favor of the assessee by the Special Bench decision in Shreyas S. Morakhia, which held that amounts receivable by a share broker from clients are trading debts and eligible for deduction under Section 36(1)(vii) after being written off as irrecoverable. The Revenue's ground was dismissed.

4. Credit for TDS on Dividend Income
The Revenue challenged the CIT(A)'s direction to allow TDS credit of Rs. 1,15,585/- when only Rs. 79,150/- of the corresponding dividend income was assessed in the assessee's hands. The Tribunal upheld the CIT(A)'s order, noting that the assessee had refunded the remaining dividend to clients and thus correctly claimed the TDS credit. The Revenue's ground was dismissed.

5. Set Off Loss on Sale of Investments Against Gain in Shares
The assessee contested the CIT(A)'s confirmation of the A.O.'s action in not setting off a loss on the sale of investments of Rs. 41,35,004/- against a gain in shares of Rs. 37,30,171/-. The CIT(A) upheld the A.O.'s view that such losses are governed by specific provisions for capital assets and cannot be set off against business income. The Tribunal, however, found that the matter required fresh adjudication by the A.O., considering the principle of consistency and whether the Revenue had accepted similar treatment in previous years. The issue was restored to the A.O. for fresh adjudication.

6. Addition of Advances Not Recoverable Written Off
The assessee challenged the addition of Rs. 7,96,255/- as bad debts. The A.O. and CIT(A) disallowed the claim, noting non-compliance with Section 37(1)(vii) r.w.s. 36(2) and that the loss did not pertain to the relevant assessment year. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the assessee's ground.

7. Addition of Software Expenses
Both parties agreed that the issue of Rs. 43,642/- on account of software expenses required fresh adjudication. The Tribunal restored the issue to the A.O. for fresh adjudication in light of the Special Bench decision in Amway (India) Ltd., directing the A.O. to decide in accordance with law after giving due opportunity to the assessee.

Conclusion:
Both the appeals were partly allowed for statistical purposes. The Tribunal directed fresh adjudication on specific issues while upholding the CIT(A)'s decisions on others. The order was pronounced on 15.06.2011.