2020 (12) TMI 392 - AT - Income Tax

Depreciation u/s 32 on the membership card - assessee in the present case is a limited company and engaged in the business of stock broking - assessee was not in the possession of stock exchange card in the year under consideration - depreciation claimed by the assessee on the intangible asset being membership card of the stock exchange is not allowable - CIT (A) who deleted the addition - HELD THAT - As decided in own case 2015 (11) TMI 1368 - ITAT AHMEDABAD co-ordinate bench of the tribunal in case of assessee s sister concern s case M/s. Edelweiss Stock Broking Ltd. 2015 (10) TMI 917 - ITAT AHMEDABAD grants identical depreciation relief. We also draw support therefrom for allowing the impugned depreciation claimed. This ground is accepted. - Decided in favour of assessee. Addition being depreciation allowance, interest and insurance expenses relating to vehicles though the assessee was not the owner of such vehicles - AO disagreed with the contention of the assessee by observing that the assessee failed to substantiate based on documentary evidence that it had dominion over the vehicles and such vehicles were used for the purpose of the business - HELD THAT - Exclusive possession, right to exclude others from enjoyment of the assets, full control over the assets, right to retain possession and defend the same are some of the basic and important characteristics of the ownership which would entitle a person to claim benefit of depreciation allowance under Section 32 of the Act. Admittedly, the assessee enjoys all such benefits with respect to such vehicles. It is because the assessee has incurred the cost for the purchase of the vehicles, it is paying the instalments of the car loans, regularly paying the wealth tax on such vehicles, bearing the running and maintenance expenses. Assessee cannot be denied the benefit of depreciation merely on the reasoning that it is not the legal owner of such vehicles. we note that the assessee has claimed repair and maintenance expenses with respect to such vehicles which were also allowed by the Revenue. Thus it is inferred that such vehicles were used for the purpose of the business of the assessee - assessee is eligible for interest and insurance expenses incurred by it with respect to such vehicles. As alleged that the assessee has minimized the tax payable to the RTO by registering the vehicles in the name of the individual directors. In this regard, we note that there is no denial under the Motors Registration Act to register the vehicles in the name of the individual directors. The action taken by the assessee for registry the vehicles in the name of individual directors was within the framework of the provisions of law. Accordingly, we are of the view that this cannot be a ground to reject the claim of the assessee. In view of the above and after considering the facts in totality, we do not find any infirmity in the order of the Learned CIT (A). Addition of interest expenses under the provisions of Section 36(1)(iii) - AO disregarded the contention of the assessee by observing that the assessee failed to substantiate the fact that it has provided loans and advances for the purpose of its business activities - HELD THAT - As decided in own case 2015 (11) TMI 1368 - ITAT AHMEDABAD CIT (A) prepares a party-wise tabulation qua loans as incurred in reimbursement of expenses. He finds the same to have been incurred in business purposes as per case law of S A Builders vs. CIT, 2006 (12) TMI 82 - SUPREME COURT as having business expediency element embedded therein. Addition u/s 14-A read with rule 8D - HELD THAT - As decided in own case 2015 (11) TMI 1368 - ITAT AHMEDABAD when there is no net interest expenditure upon setting off interest credited to P L account, no part of interest debited is to be disallowed as attributable to earning of exempt income. The Revenue does not point out any exception thereto. We accordingly delete the interest disallowance under Rule 8D(2)(ii) -. Coming to administrative expenses disallowance under Rule 8D(2)(iii), the assessee fails to dispute correctness thereof since the impugned assessment year is 2008- 09. This latter disallowance figure is confirmed. - Decided partly in favour of assessee. Disallowing the expenditure representing NSE penalty - HELD THAT - As decided in own case 2015 (11) TMI 1368 - ITAT AHMEDABAD CIT(A) allowed deduction as relying on GDB SHARE AND STOCK BROKING SERVICES LIMITED. 2003 (8) TMI 169 - ITAT CALCUTTA-C Addition of bad debts as the conditions specified under Section 36 (2) - AO disregarded the contention of the assessee by observing that the deduction on account of bad debts can be admitted only upon the fulfilment of the condition specified under Section 36(1) (vii) r.w.s 36(2) - HELD THAT - These entries are mainly in the nature of vatav kasar. Some of them are less than of ₹ 10,000/- even. The Assessing Officer observed that there was no material on record to prove the same to have been actually become bad. And also that the assessee had offered only brokerage sums as its income u/s 36(2) of the Act in profit and loss account. He accordingly made the impugned disallowance of this bad debts claim. Addition on account of Saudafer loss - HELD THAT - Loss does not relate to the activity of sale/purchase of shares by the assessee for itself, then the provisions of explanation to Section 73 of the Act cannot be applied. Hence, the ground of appeal of the Revenue is dismissed whereas the ground of appeal of the assessee is allowed. Re-compute the capital gain with indexation from the FY 2005- 06 - assessee acquired old BSE membership card in the year 1995-96 at cost of ₹ 2,75,01,000/- and not claimed any depreciation on such membership card as it was acquired prior to 1st April 1998 - Whether the cost of acquisition of the BSE shares should be calculated in accordance with the original cost of acquisition of the BSE membership card under Section 55(2)(ab) or the written down value be adopted under Section 50? - Whether the relevant year for calculating indexed cost of acquisition should be the year of original acquisition of the BSE membership, i.e., year 1995-96/2000-01 or the year of allotment of shares in the BSE in lieu of membership, i.e., year 2005-06? - HELD THAT - Both the membership card in seriatim. Regarding the first membership card of the BSE acquired in the year 1995-96, we note that the assessee has not claimed any depreciation thereon. Therefore, the same is outside the purview of the provision of Section 50 of the Act i.e. special provision for computation of capital gain in case of depreciable assets. It is because such membership card was not depreciable assets. Thus, the original cost incurred by the assessee on the acquisition of such membership card shall be taken as the cost of acquisition as defined under Section 55(2)(ab) of the Act Regarding the second membership card of the BSE acquired in the year 2000-01 , we note that the assessee has claimed depreciation thereon - Therefore, it appears that the same is subject to the provision of Section 50 of the Act i.e. special provision for computation of capital gain in case of depreciable assets which provides that written down value of the block of assets at the beginning of the previous year shall be reduced from the sale consideration. Provisions of Section 50 of the Act cannot be applied for the year under consideration. Indeed, the assessee is availing double benefit, firstly, by way of depreciation and secondly by way of claiming the deduction of the original cost of acquisition of the membership card under Section 55(2)(ab) of the Act. But the issue before us is limited to the cost of acquisition of the membership card as provided under section 55(2)(ab) of the Act. As per this section, the original cost should be takes as the cost of acquisition while determining the income under the head capital gain. What should be the period of holding for computing the capital gain with respect to shares acquired by the assessee upon the conversion of both membership cards of the BSE - AR has not brought anything on record suggesting that the assessee has accept the indexation benefit from AY 2006-07 on account of misunderstanding of the provisions of law or wrong advice of the consultant or it was against the spirit of the provisions of law. Accordingly, we decline to interfere in the order of the ld. CIT-A. Hence, the grounds of appeal of the revenue and the assessee are dismissed. Addition made by the AO on account of mismatch in ITS/26AS - HELD THAT - The onus lies upon the assessee to justify based on the documentary evidence that it has not received any income from M/s Rajyog Share and stockbrokers Ltd for ₹ 8,678/- but the assessee failed to discharge its onus. Thus in the absence of any documentary evidence, we do not find any infirmity in the order of the authorities below. Hence, the ground of appeal of the assessee is dismissed. Expenses incurred on the purchase of the mobiles - Revenue or capital expenditure - revenue has treated the mobile phones as part of the plant and machinery and accordingly it allowed the depreciation thereon at the rate of 15% - HELD THAT - The word plant' according to section 43(3) includes ships, vehicles, boats, scientific apparatus and surgical equipment. Nowhere, does it specify mobile phones. Of course, it may be argued that plant is an inclusive definition, not an exhaustive one. But, then plant would include anything which can be comprehended within it's ordinary meaning. No one would ordinarily consider mobile phone to be a plant. When we come to the second part, which calls mobile phone as machinery, what is the definition of machinery in Income-tax Act? Well, the word machinery itself has not been defined in the Act. So, it has nowhere been defined that mobile phone is machinery. Accordingly, in the absence of any specific entry in the appendix-1 of the Act, we are of the view the assessee is eligible for claiming the impugned expenses as revenue in nature. Hence, we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Thus the ground of appeal of the assessee is allowed TDS u/s 194J - payment made to the stock exchange on account of Non-deduction of TDS - HELD THAT - We hold that there was no obligation on the part of the assessee to deduct tax at source. Consequently, the provisions of Section 40(a)( ia) were also not attracted and, therefore, the disallowance made was to be deleted. Hence the ground of appeal of the assessee is allowed. TDS u/s 194I - Disallowance on the payment made to the stock exchange on account of VSAT and lease line charges - HELD THAT - The issue for deducting the TDS on the payment made to the stock exchange on account of VSAT charges and lease line charges is no longer res integra by virtue of the order of the ITAT Mumbai in the case of Destimoney Securities Private Ltd 2017 (8) TMI 714 - ITAT MUMBAI - we hold that the assessee was not subject to the provisions of TDS under Section 194-I of the Act as alleged by the authorities below. Accordingly no disallowance on account of non-deduction of TDS is warranted. Disallowance of brokerage expenses on the reasoning that the registration certificate of broker was not produced - HELD THAT - The amount of brokerage expenses can be claimed as deduction provided it was incurred in the course of the business. AR at the time of hearing has not brought anything on record suggesting the nature of services rendered by such brokerage. Besides the above, the payment was made against the violation of the rules of the SEBI, therefore we are of the view that payment is not eligible for deduction under the provisions of Section 37 of the Act. Accordingly we uphold the finding of the Ld. CIT (A). Hence, the ground of appeal of the assessee is dismissed. Disallowance of the expenses under Section 14A read with rule 8D cannot exceed the amount of exempted income. Hence, the ground of appeal filed by the revenue is dismissed.

Summary

Issues Involved:
1. Depreciation on Membership Card
2. Depreciation, Interest, and Insurance on Vehicles
3. Disallowance of Interest Expenses under Section 36(1)(iii)
4. Disallowance under Section 14A read with Rule 8D
5. Disallowance of Penalty Expenses under Section 37
6. Disallowance of Bad Debts under Section 36(2)
7. Treatment of Saudafer Loss
8. Computation of Capital Gain with Indexation
9. Mismatch in Income as per ITS/26AS
10. Treatment of Mobile Phone Expenses
11. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Membership Fees and VSAT Charges
12. Disallowance of Brokerage Expenses
13. Levy of Interest under Section 234B
14. Initiation of Penalty Proceedings under Section 271(1)(c)

Detailed Analysis:

1. Depreciation on Membership Card:
The Revenue challenged the deletion of the addition made by the AO for depreciation claimed on the stock exchange membership card under Section 32 of the Act. The CIT (A) and Tribunal upheld the assessee's claim based on the Tribunal's decision in the assessee’s own case for AY 2008-09, where it was established that the stock exchange membership card is an eligible asset for depreciation.

2. Depreciation, Interest, and Insurance on Vehicles:
The AO disallowed depreciation, interest, and insurance expenses on vehicles not registered in the assessee’s name. The CIT (A) and Tribunal allowed the claim, noting that the assessee was the beneficial owner and incurred all related costs. The Tribunal emphasized that ownership for depreciation purposes includes beneficial ownership, not just legal registration.

3. Disallowance of Interest Expenses under Section 36(1)(iii):
The AO disallowed interest expenses on the grounds that interest-free loans were given to sister concerns. The CIT (A) and Tribunal deleted the disallowance, noting that the assessee had sufficient interest-free funds to cover the advances, following the principle that if interest-free funds exceed the interest-free advances, no disallowance is warranted.

4. Disallowance under Section 14A read with Rule 8D:
The AO made a disallowance under Section 14A read with Rule 8D. The CIT (A) and Tribunal restricted the disallowance to the amount of exempt income earned by the assessee, following judicial precedents that disallowance under Section 14A cannot exceed the exempt income.

5. Disallowance of Penalty Expenses under Section 37:
The AO disallowed penalty expenses paid to stock exchanges. The CIT (A) and Tribunal allowed the expenses, noting that such penalties were for procedural delays and not for any infraction of law, thus allowable under Section 37.

6. Disallowance of Bad Debts under Section 36(2):
The AO disallowed bad debts claimed by the assessee. The CIT (A) and Tribunal allowed the claim, citing the Supreme Court’s decision in TRF Ltd. vs. CIT, which held that it is sufficient if the bad debt is written off as irrecoverable in the accounts of the assessee.

7. Treatment of Saudafer Loss:
The AO treated Saudafer loss as speculative. The CIT (A) partially upheld this view but allowed losses related to the futures and options segment as non-speculative. The Tribunal fully allowed the assessee’s claim, noting that the losses were related to the assessee’s clients and not its own trading activities.

8. Computation of Capital Gain with Indexation:
The AO computed capital gains by indexing the cost from FY 2005-06. The CIT (A) and Tribunal directed the AO to compute the gains by considering the original cost of acquisition of the BSE membership card and providing indexation from the year of acquisition.

9. Mismatch in Income as per ITS/26AS:
The AO added income based on ITS/26AS mismatch. The CIT (A) deleted most of the additions except for a small amount where the assessee failed to provide evidence. The Tribunal upheld this view.

10. Treatment of Mobile Phone Expenses:
The AO treated mobile phone expenses as capital expenditure. The CIT (A) allowed depreciation on these expenses, but the Tribunal held that mobile phones should be treated as revenue expenditure due to their rapid obsolescence.

11. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Membership Fees and VSAT Charges:
The AO disallowed expenses for non-deduction of TDS. The CIT (A) upheld the disallowance. The Tribunal, relying on the Supreme Court’s decision in Kotak Securities Ltd., held that such payments are not fees for technical services and thus not subject to TDS under Section 194J.

12. Disallowance of Brokerage Expenses:
The AO disallowed brokerage expenses paid to an unregistered broker. The CIT (A) upheld the disallowance, noting that the payment violated SEBI rules. The Tribunal agreed, emphasizing that expenses violating legal provisions are not allowable.

13. Levy of Interest under Section 234B:
The CIT (A) dismissed the ground regarding the levy of interest under Section 234B. The Tribunal found no merit in the ground as it was consequential to the main issues.

14. Initiation of Penalty Proceedings under Section 271(1)(c):
The CIT (A) dismissed the ground challenging the initiation of penalty proceedings. The Tribunal upheld this view, noting that the initiation of penalty proceedings is not appealable at this stage.

Conclusion:
The Tribunal largely upheld the CIT (A)’s decisions, providing relief to the assessee on most grounds while dismissing the Revenue’s appeals. The Tribunal emphasized the principles of beneficial ownership, sufficiency of interest-free funds, and the necessity of evidence for claims. The decisions were aligned with judicial precedents, particularly in the treatment of depreciation, bad debts, and disallowances under Section 14A.