2012 (12) TMI 723 - AT - Income Tax

Allocation of expenditure between the brokerage business and trading - Speculation Loss Held that - Upholding the allocation of expenditure between the two lines of business, only 5% of the expenditure be allocated against the income from trading in shares in the Assessee s own name (speculation income) and the balance against the brokerage business Income. In this expenses of Kakinada Branch should be excluded. The same ratio will be applicable to depreciation as well. The balance expenditure should be set off against the brokerage income. As Assessee had earned profits in the business of trading in shares in their own name and there is no carried forward speculation losses to be set off. Profit from trading in shares in Assessee s own name is to be treated as speculative profits - ground of appeal of the Assessee is treated as partly allowed. Trade credit accounts under sec 68 - Held that - Assessee has to prove the identity of the creditors, genuineness of the transaction and capacity of the creditors. The onus is on the assessee to substantiate it s claim and the assessee has not discharged the same. Accordingly, in the interest of justice The issue set aside to the file of the AO directing assessee to substantiate its claim - in favour of assessee for statistical purposes. Software expenses - Capital vs. Revenue expense - Held that - Expenditure incurred for upgradation of software with new regulations of SEBI and not for acquiring any new software - revenue in nature and not Capital as no new asset is created - in favour of assessee.

Summary

Issues involved:
1. Allocation of expenditure between brokerage income and trading in shares
2. Addition of trade credit accounts under sec 68
3. Treatment of software expenses as revenue or capital expenditure

Issue 1: Allocation of expenditure between brokerage income and trading in shares
The appellant had two lines of business - dealing in shares on behalf of clients (brokerage income) and trading in shares on its own account. The Assessing Officer (AO) allocated expenditure between the two businesses based on turnover percentages. The ITAT had previously directed 5% of expenditure to be allocated against trading in shares in the appellant's own name. The AO treated the profit from trading in shares as speculative, but the ITAT found the allocation to be academic. The ITAT upheld the expenditure allocation but directed 5% to be attributed to trading in shares in the appellant's name, excluding Kakinada Branch expenses. The remaining expenditure was to be set off against brokerage income.

Issue 2: Addition of trade credit accounts under sec 68
The AO added Rs. 40,76,167 under sec 68 for unconfirmed creditors. The appellant provided explanations for each creditor, including inability to obtain confirmation letters due to various reasons. The CIT(A) rejected the appellant's claims, stating that sufficient time was given to obtain confirmation letters, and the submitted letters lacked evidentiary value. The ITAT found that credits from earlier years could not be treated as unexplained cash credit of the current year. The issue was set aside for the appellant to substantiate its claims before the AO.

Issue 3: Treatment of software expenses
The appellant claimed software expenses as revenue, but the AO and CIT(A) treated them as capital expenses, allowing depreciation. The appellant argued that the expenses were for software maintenance, not acquisition of new software. The ITAT held that for expenditure to be considered capital, the appellant must acquire ownership of an asset. As the expenses were for software upgrades to comply with SEBI regulations, not for new software acquisition, they were deemed revenue expenses. The ITAT allowed the appellant's appeal on this issue.

In conclusion, the ITAT partly allowed the appeal for statistical purposes, addressing each issue comprehensively and providing detailed analysis and directions based on legal principles and previous judgments.