2015 (6) TMI 168 - AT - Income Tax

Depreciation on the BSE Membership card disallowed - Held that - This issue is covered against the assessee by the decision of Hon ble Bombay High Court in the case of CIT vs. Techno Shares and Stock Ltd. & Others, 2009 (9) TMI 18 - BOMBAY HIGH COURT wherein held that depreciation is not allowable on the BSE Membership Card as it does not fall in any of the categories specified in section 32(1) of the Income Tax Act 1961 (the Act). - Decided against assesse. Non compete fee - whether non-compete right is intangible asset eligible for depreciation? - Held that - AR has expressed his satisfaction only with grant of depreciation as has been allowed by Ld. CIT(A)and also in view of the fact that Ld. DR could not cite any decision to contradict that proposition, we are of the opinion that Ld. CIT(A) did not commit any error in holding that assessee was entitled to get depreciation on the amount paid by it as non-compete fee. Accordingly, we decline to interfere in such decision of Ld. CIT(A). - Decided against assesse and revenue. Disallowance of bad debts written off in the P&L account - Held that - The brokerage having been credited to the P&L account of the assessee, it was evident that a part of the debt was taken into account in computing the income of the assessee. The fact that the liability to pay brokerage may arise at a point in time anterior to the liability to pay the value of the shares transacted would not make any material difference to the position. Both constitute a part of the debt which arises from same transaction involving the sale or, as the case, purchase of shares. Since both form a part of component of debt, the requirement of section 36(2)(i) are fulfilled, where a part thereof is taken into account in computing the income of the assessee. Therefore, it was held that assessee is entitled to deduction by way of bad debt under section 36(1)(viii) r.w.s. 36(2) in respect of amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients - Decided against revenue. Bad debts as trading loss being unrecoverable from the clients - Held that - Right from the assessment proceedings it was the case of the assessee that the impugned loss has occurred to the assessee in respect of error trade. Due to dispute with the clients, for the transaction, it does not change the relation of principal and the agent. The assessee for business consideration chooses not to recover the losses. These losses are in the course of business and should be allowed as such under section 28 of the Act. The AO has not brought any material on record to suggest that these contentions of the assessee are either false or incorrect. No material has also been brought on record that these losses are on account of assessee s own trading in shares. If it is so, the loss accrued to the assessee will be governed by the aforementioned decisions of Tribunal where consistent view has been taken that loss occurred to share broker on account of client disowning transaction is business loss and not speculative loss. Therefore, we are of the opinion that Ld. CIT(A) did not commit any error in accepting the claim of the assesse - Decided against revenue. Disallowance u/s 14A r.w.r. 8D - assessee earned dividend income which was claimed to be exempt under section 10(33) - held that - There is no infirmity in the order passed by Ld. CIT(A) vide which he has directed the AO to recompute the disallowance in view of the submissions of the assessee as well as the decision of Hon ble Bombay High Court in the case of Godrej &Boyce Mfg. Co. Ltd.(2010 (8) TMI 77 - BOMBAY HIGH COURT). - Decided against revenue.

Issues Involved:
1. Depreciation claim on BSE Membership Card.
2. Disallowance of advances given for customizing software.
3. Non-compete fees treated as capital expenditure.
4. Deletion of additions by Ld. CIT(A).
5. Treatment of Vanda loss and trading loss as speculative loss.
6. Allowance of depreciation on non-compete fees.
7. Disallowance under section 14A.

Issue-wise Analysis:

1. Depreciation Claim on BSE Membership Card:
The assessee's appeal on the depreciation claim for the BSE Membership Card was dismissed. The decision was based on the precedent set by the Hon'ble Bombay High Court in CIT vs. Techno Shares and Stock Ltd., which held that BSE Membership Cards do not qualify for depreciation under section 32(1) of the Income Tax Act, 1961.

2. Disallowance of Advances for Customizing Software:
The assessee did not press this ground during the hearing, leading to its dismissal.

3. Non-compete Fees Treated as Capital Expenditure:
The assessee's payment of non-compete fees was treated as capital expenditure by the AO. The CIT(A) allowed depreciation on this amount, considering it as a commercial right. The assessee suggested three possibilities: treating it as revenue expenditure, allowing depreciation, or amortizing it over three years. The tribunal upheld the CIT(A)'s decision to allow depreciation, citing decisions from various cases, including Real Image Tech Pvt. Ltd. and Medicon Technologies Ltd., which recognized non-compete rights as intangible assets eligible for depreciation.

4. Deletion of Additions by Ld. CIT(A):
The Revenue's appeal against the deletion of additions amounting to Rs. 1,20,25,288 was dismissed. The CIT(A) had relied on the decision of the Special Bench in Shreyas S. Morakhia, which was upheld by the Hon'ble Bombay High Court. The court recognized that the value of shares transacted by the assessee as a stockbroker was part of the debt, fulfilling the requirements of section 36(2)(i).

5. Treatment of Vanda Loss and Trading Loss as Speculative Loss:
The CIT(A) allowed relief on the trading loss of Rs. 2,32,77,523, which the AO had treated as speculative under section 73. The CIT(A) considered the operational scale and network of the assessee, concluding that the losses were business losses, not speculative. The tribunal upheld this view, referencing similar decisions in cases like IDFC SSKI Securities Ltd. and Parker Securities Ltd., which treated such losses as business losses.

6. Allowance of Depreciation on Non-compete Fees:
The tribunal confirmed the CIT(A)'s decision to allow depreciation on non-compete fees, recognizing it as a commercial right. The Revenue's ground against this decision was dismissed, and the assessee's request to treat it as revenue expenditure was also rejected, maintaining the depreciation allowance.

7. Disallowance under Section 14A:
The AO applied Rule 8D to disallow Rs. 36,14,810 under section 14A. The CIT(A) followed the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT, which stated Rule 8D was not applicable for the assessment year 2007-08. The CIT(A) directed a reasonable disallowance, and the tribunal found no error in this approach, dismissing the Revenue's ground.

Conclusion:
The appeal filed by the assessee was partly allowed, and the appeal filed by the Revenue was dismissed. The tribunal upheld the CIT(A)'s decisions on most grounds, emphasizing adherence to precedents and reasonable interpretations of the Income Tax Act. The order was pronounced in the open court on 15/05/2015.

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