2015 (6) TMI 392 - AT - Income Tax

Depreciation on the BSE Membership card - Held that - This issue is covered against the assessee by the decision 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 assessee. Disallowance of non-compete fee - 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. - Decided in favour of assessee. Bad debts written off in the P&L account - CIT(A) allowed claim - Held that - The value of the shares transacted by the assessee as stock broker on behalf of his clients was as much a part of the debt as was charged brokerage by the assessee on the transaction. 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 - CIT(A) allowed claim - 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. All these contentions of the assessee have been recorded in the assessment order. 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 assessee.- Decided against revenue. Disallowance u/s 14A - applicability of Rule 8D - 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.

Summary

Issues Involved:

1. Depreciation on BSE Membership Card
2. Disallowance of Advances for Customizing Software
3. Non-Compete Fees as Capital Expenditure
4. Deletion of Additions by CIT(A) Based on Shreyas S. Morakhia Case
5. Vanda Loss and Trading Loss as Speculative Loss
6. Depreciation on Non-Compete Fees
7. Disallowance of Expenses under Section 14A

Issue-wise Detailed Analysis:

1. Depreciation on BSE Membership Card:
The assessee's claim for depreciation on the BSE Membership Card amounting to Rs. 24,20,059/- was dismissed. The decision was based on the Hon'ble Bombay High Court ruling in CIT vs. Techno Shares and Stock Ltd., which held that depreciation is not allowable on the BSE Membership Card as it does not fall under any categories specified in 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 as Capital Expenditure:
The assessee paid non-compete fees to various parties totaling Rs. 26,62,000/-. The AO treated this expenditure as capital expenditure. The CIT(A) allowed depreciation on this amount, treating the non-compete right as a commercial right eligible for depreciation. The Tribunal upheld this decision, referencing cases such as 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 CIT(A) Based on Shreyas S. Morakhia Case:
The CIT(A) deleted the additions amounting to Rs. 1,20,25,288/- based on the decision in Shreyas S. Morakhia, which was upheld by the Hon'ble Bombay High Court. The Tribunal found no infirmity in the CIT(A)'s decision, thus dismissing the Revenue's ground.

5. Vanda Loss and Trading Loss as Speculative Loss:
The AO treated a loss of Rs. 2,32,77,523/- as speculative under section 73 of the Act. The CIT(A) allowed this loss as a business loss, considering the nature of the assessee's extensive stock broking business and the possibility of errors in client transactions. 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, not speculative losses.

6. Depreciation on Non-Compete Fees:
The CIT(A) allowed depreciation on non-compete fees, treating them as intangible assets. The Tribunal upheld this decision, agreeing with the CIT(A) and referencing supportive case laws. The Revenue's contention that non-compete fees should not be depreciated was dismissed.

7. Disallowance of Expenses under Section 14A:
The AO disallowed Rs. 36,14,810/- under Rule 8D for expenses related to earning exempt income. The CIT(A), following the Bombay High Court decision in Godrej & Boyce Mfg. Co. Ltd., held that Rule 8D was not applicable for the assessment year 2007-08 and directed the AO to make a reasonable disallowance under section 14A. The Tribunal found no infirmity in this direction and upheld the CIT(A)'s decision.

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, including the treatment of non-compete fees, the deletion of additions based on the Shreyas S. Morakhia case, and the disallowance under section 14A. The Tribunal also agreed with the CIT(A) on treating Vanda and trading losses as business losses, not speculative losses.