2019 (9) TMI 936 - AT - Income Tax

Non allowance of depreciation on stock exchange card - whether BSE Card is not an asset? - HELD THAT - Above issue is covered by the decision of co-ordinate bench in the case of Sino Securities (P.) Ltd. vs. ITO 2011 (11) TMI 535 - ITAT MUMBAI wherein it was held that BSE Card is not an asset of the nature referred under Section 32(1)(ii) of the Act and thus, depreciation on the said asset is not allowable. Thus, issue is covered against the assessee and in favour of the Revenue Disallowance of Client Assistance Charges and Client Maintenance Charges paid by the assessee to ICICI Bank Ltd. - expenses for expansion of business or excess payment - HELD THAT - On perusal of the working of Client Assistance Charges, we find that it is not the cost per location, per branch which has increased, but the number of branches served by the Bank has increased, which has lead to increase in expenditure which fact the AO has ignored while passing the assessment order. Further, we find that the turnover of the assessee for the year under consideration has substantially increased to ₹ 269.58 Crores as compared to assessment year 2005-06 wherein turnover was ₹ 154.31 Crores and assessment year 2004-05 wherein the turnover was ₹ 95.09 crore. Thus, the increased cost of client assistance is justified by the corresponding increase in revenues of the assessee. No merit in the observation made by the AO in the assessment order. Increase in client assistance cost is justified by the corresponding increase in turnover and moreover, the increase in cost was due to the fact that the Bank had served more locations as compared to the preceding year, which can be termed as an expansion of business and not excess payment, as sought to be made out by the Assessing Officer. We accordingly set aside the order of CIT(A) and direct the Assessing Officer to allow the entire Client Assistance Charges paid by the assessee to Bank. Disallowance towards Client Maintenance Charges - related party payment in terms of Section 40A(2)(b) - AO disallowed the expenditure in this year stating that the same is not incurred wholly and exclusively for the purpose of business - HELD THAT - Expenditure incurred by the assessee was very much for the purpose of business of the assessee and rather, these services are vital for running the business of the assessee. As regards various other contentions raised by the AO in the assessment order, we find that the same have been extensively dealt with by our co-ordinate bench while allowing the appeal of the assessee for assessment year 2004-05 2014 (10) TMI 955 - ITAT MUMBAI wherein it was held that ICICI Bank Ltd. does not fall in the definition of related party in terms of Section 40A(2)(b) of the Act. Thus, following the precedent, the contentions of the Assessing Officer are not again discussed here - set-aside the order of the CIT(A) and direct the Assessing Officer to delete the addition. Disallowance u/s 14A r.w.r. 8D - HELD THAT - Admittedly, the own funds of assessee are higher than the investment made by the assessee. The Hon ble Bombay High Court in the case of Reliance utilities Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT has held that if the own interest free funds of the assessee are higher than the amount of investment, then it should be presumed that the investment has been made out of the own funds and no disallowance of interest expenditure should be made. We hereby set-aside the order of CIT(A) and direct the Assessing Officer to delete the addition made in this ground. Rule 8D was inserted in the statute w.e.f. assessment year 2008-09 and in the case of CIT vs. Essar Techholdings Ltd. 2018 (2) TMI 115 - SUPREME COURT held that Rule 8D is prospective in operation and cannot be applied to any assessment year prior to assessment year 2008-09. We, in the present case, are concerned with assessment year 2006-07, which is prior to assessment year 2008-09, the provisions of Section 8D of the Act are not applicable for the year under consideration. Thus, we hold that invoking of Rule 8D of the Rules in the instant year is not permissible - Decided in favour of assessee Disallowance of Bad debts - assessee failed to submit details of bad debts and justification for its write-off - HELD THAT - We find that in assessment year 2004-05, on same issue, the Tribunal has allowed the appeal of the assessee as find that after 01.04.1989, the only requirement of writing off of bad debt is entries in the books of accounts by the assessee concerned. It has not to prove the justification of its action i.e. writing off, once it makes necessary entries in P L account. The Hon ble Apex Court in the matter of T.R. F.. Ltd. 2010 (2) TMI 211 - SUPREME COURT had laid down the above basic principal and same is being followed by various Courts. Addition on account of depreciation allowed in the earlier years on BSE membership card - treating it as a benefit flowing to the assessee in the current year on protective basis for the reason that assessee has been allotted shares of BSE Ltd. pursuant to it holding BSE membership card - apprehension of the Assessing Officer is that the assessee may claim cost of BSE membership card as expenditure while computing the Capital Gains at the time of sale of shares of BSE Ltd. - HELD THAT - No addition can be made merely on an apprehension that the assessee may take a double benefit in future. Assessment of income has to be made on the basis of real income theory and not on the basis of any perceived future contingent happening. Moreover, in the instant case, it has been factually explained by the assessee that at the time of sale of part shares of BSE Ltd. in assessment year 2008-09, assessee has claimed cost of shares at ₹ 1 and has not derived any double benefit as apprehended by the AO and thus, addition on protective basis is not warranted. CIT(A) has rightly analysed the fact-position that assessee has not derived any double benefit and accordingly, deleted the addition made by the Assessing Officer. We thus uphold the order of the CIT(A), and accordingly Revenue fails on this Ground. Excess claim of Deprecation - AO computed notional depreciation for assessment years 2000-01 and 2001-02 and re-computed the revised WDV of the assets in this year and allowed Depreciation on the same and disallowed the excess Deprecation. At the time of hearing, both the parties agreed that this issue is covered in favour of the assessee by way of the order of the Tribunal in assessee s own case for assessment year 2005-06 2015 (2) TMI 1252 - ITAT MUMBAI Non-deduction of TDS on transaction charges under Section 40(a)(ia) - TDS was not deducted on payment made to Stock Exchanges - HELD THAT - It is pertinent here to refer to the decision of the Hon ble Supreme Court in the case of CIT vs. Kotak Securities Ltd. 2016 (3) TMI 1026 - SUPREME COURT wherein it was held that transaction charges are in the nature of payments made for facilities provided by the Stock Exchange and no TDS on such payments would, therefore, be deductible under Section 194J of the Act - we hereby uphold the order of CIT(A). Accordingly, this Ground of appeal raised by the Revenue is dismissed. Addition on account of mark to market loss on outstanding derivative contract - CIT(A) allowed the loss - HELD THAT - We find that the above issue is fully covered in favour of the assessee by the decision of Hon ble Supreme Court in the case of Woodward Governor India P. Ltd 2009 (4) TMI 4 - SUPREME COURT Accordingly, we do not find any infirmity in the order of the CIT(A) and thus we uphold the decision of CIT(A) on this issue.

Summary

Issues Involved:
1. Non-allowance of depreciation on stock exchange card.
2. Disallowance of client assistance charges and client maintenance charges.
3. Disallowance under Section 14A.
4. Disallowance of bad debts.
5. Interest under Section 234B and 234D.
6. Addition under Section 28(iv) on account of depreciation on BSE Membership Card.
7. Addition of ?2,35,929/- for excess claim of depreciation.
8. Addition under Section 40(a)(ia) for non-deduction of TDS on transaction charges.
9. Addition for mark-to-market losses on open interest in derivative transactions.

Detailed Analysis:

1. Non-allowance of Depreciation on Stock Exchange Card:
The assessee's claim for depreciation on the Stock Exchange Card amounting to ?29,49,800 was disallowed by the Assessing Officer and upheld by the CIT(A), citing the decision of the Hon’ble Bombay High Court in the case of CIT vs. Techno Shares & Stock Limited. The assessee conceded that the issue was covered against them by the decision of the co-ordinate bench in Sino Securities (P.) Ltd. vs. ITO, which held that BSE Card is not an asset under Section 32(1)(ii) of the Act, and thus, depreciation is not allowable. Consequently, this ground of appeal was dismissed.

2. Disallowance of Client Assistance Charges and Client Maintenance Charges:
The assessee paid ?1,09,54,85,747 to ICICI Bank Ltd. for client servicing charges, out of which ?62,73,03,785 was disallowed by the Assessing Officer. The CIT(A) upheld the disallowance. The Tribunal found that the increase in client assistance costs was justified by the corresponding increase in turnover and the number of branches served by the Bank. It was also noted that the Tribunal had allowed similar expenditures in previous years. Therefore, the Tribunal set aside the CIT(A)’s order and directed the Assessing Officer to allow the entire Client Assistance and Maintenance Charges.

3. Disallowance under Section 14A:
The assessee claimed that no disallowance should be made under Section 14A as the investments were made out of its own funds. The Assessing Officer invoked Rule 8D and disallowed ?25,29,860, which was upheld by the CIT(A). The Tribunal noted that the assessee had sufficient own funds and followed the decision of the Bombay High Court in Reliance Utilities & Power Ltd., which held that if own funds exceed the investment, no disallowance of interest expenditure is warranted. Additionally, Rule 8D was not applicable for the year under consideration as it was effective from AY 2008-09. Thus, the Tribunal deleted the addition.

4. Disallowance of Bad Debts:
The Assessing Officer disallowed bad debts of ?13,90,390 on the grounds that the assessee failed to establish that the debts had become bad. The CIT(A) upheld the disallowance. The Tribunal, following the decision in T.R.F. Limited vs. CIT, held that the only requirement is the actual write-off of bad debts in the books of account. Since the bad debts were written off, the Tribunal allowed the claim and deleted the addition.

5. Interest under Section 234B and 234D:
The Tribunal did not specifically address this issue in the detailed analysis provided.

6. Addition under Section 28(iv) on Account of Depreciation on BSE Membership Card:
The Assessing Officer made a protective addition of ?1,23,00,800, considering the depreciation allowed in earlier years as a benefit under Section 28(iv). The CIT(A) deleted the addition, noting that the assessee had not claimed a higher cost of acquisition for the BSE shares and offered higher capital gains. The Tribunal upheld the CIT(A)’s decision, stating that no addition can be made based on an apprehension of future double benefit.

7. Addition of ?2,35,929/- for Excess Claim of Depreciation:
The Assessing Officer recomputed the WDV of assets by considering notional depreciation for AY 2000-01 and 2001-02. The CIT(A) deleted the addition, and the Tribunal upheld this decision, following its earlier order in the assessee’s case for AY 2005-06.

8. Addition under Section 40(a)(ia) for Non-deduction of TDS on Transaction Charges:
The Assessing Officer disallowed ?3,21,50,353 paid to Stock Exchanges for non-deduction of TDS. The CIT(A) deleted the addition, relying on the Tribunal’s decision in Kotak Securities Ltd. The Tribunal upheld the CIT(A)’s decision, following the Supreme Court’s ruling in CIT vs. Kotak Securities Ltd., which held that transaction charges paid to Stock Exchanges are not fees for technical services and no TDS is required.

9. Addition for Mark-to-Market Losses on Open Interest in Derivative Transactions:
The Assessing Officer disallowed ?65,600 as notional loss. The CIT(A) allowed the loss, relying on the Supreme Court’s decision in CIT vs. Woodward Governor India P. Ltd. The Tribunal upheld the CIT(A)’s decision, following the Supreme Court’s ruling.

Conclusion:
The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed. The Tribunal directed the Assessing Officer to allow the Client Assistance and Maintenance Charges, delete the disallowance under Section 14A, allow the claim of bad debts, and uphold the CIT(A)’s decisions on other issues.