2012 (11) TMI 811 - AT - Income Tax

Disallowance in respect of VSAT charges paid to Stock Exchange For non-deduction of TDS u/s 40(a)(ia) AO had disallowed the claim holding that the payment made were not for use of standard equipments but also involved technical services Held that - Following the decision in case of KOTAK SECURITIES LTD. (2008 (8) TMI 592 - ITAT MUMBAI) holding that VSAT, and leaseline charges, were reimbursement of expenses to the stock exchanges for use of standard facilities and transaction charges were not disallowable. Delete the addition. In favour of assessee Penalty u/s 37 - Addition on account of on account of short delivery charges, failure to raise requisite margin money, non-timely deposit of margin money paid to stock exchange AO treat it as penalty - Held that - Following the decision in case of Master Capital (2007 (2) TMI 241 - ITAT CHANDIGARH-A) that amount paid by the assessee, a share broker to the NSE for violation of trading beyond the exposer limit, late submission .of margin certificate and delay in making deliveries of shares due to deficiencies were deductible as a business expenditure, as the amount was paid during the course of business of the assessee s business and there was no infraction of law. In favour of assessee Disallowance of Bad debts u/s 36 Bad debts in relation to the value of shares transacted by the assessee as a stock broker on behalf of his clients AO argued that bad debt can be allowed only to the extent brokerage earned on the transactions Held that - Following the decision in case of Shri Shreyas S. Morakhia (2012 (3) TMI 103 - BOMBAY HIGH COURT) that the brokerage having been credited to the P&L 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 the 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 the very same transaction involving the sale or, as the case may be, purchase of shares. Since both form a component part of the debt, the requirements of Sec. 36(2)(i) are fulfilled where a part thereof is taken into account in computing the income of the assessee. Therefore, the assessee was entitled to deduction by way of bad debts under section 36(1)(vii) read with section 36(2) in respect of the amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients. Issue decides in favour of assessee Cost of acquisition of share of BSE - Corporatisation and demutualization - Assessee claim depreciation on BSE Card till A.Y. 2005-06 Claim original cost of the Card as the cost of acquisition for the purpose of calculating LTCG and cost indexation benefit which was claimed by taking the cost in 1999-2000 AO argued that the assessee was not entitled to claim of double deduction on the same asset under two provisions of IT Act. - CIT(A) has held that cost of acquisition of shares should be taken only at Rs.7500/- in the year 2005-06 and the other cost which is WDV of the shares as on 1/04/2005 should not be added to the cost and thus he has computed the long term capital gain at Rs. 3,86,91,391/ Held that - Following the decision in case of Omniscient Securities (P) Ltd. (2011 (3) TMI 896 - ITAT, MUMBAI) that while computing capital gain on such transfer the AO has calculated its cost of acquisition on the basis of the written down value and Re.1 which had paid per share at the time of issue of shares by BSE Ltd. Therefore, we hold that the AO had rightly computed the capital gain and CIT(A) has wrongly calculated the long term capital gain in the hands of assessee. Appeal in favour of assessee

Summary

Issues Involved:
1. Enhancement of income under the head 'capital gains'.
2. Restriction of acquisition cost of shares of BSE Ltd.
3. Deletion of disallowance of VSAT charges and technical services penalty charges.
4. Deletion of addition on bad debts.

Issue-wise Detailed Analysis:

1. Enhancement of Income under the Head 'Capital Gains':
The assessee challenged the enhancement of income under 'capital gains' from Rs. 3,73,06,900/- to Rs. 3,86,91,391/- by the CIT(A). The CIT(A) restricted the acquisition cost of shares of BSE Ltd. received in lieu of the BSE Membership Card to the allotment money, ignoring the depreciated cost of acquisition of the BSE Card. The Tribunal found that the AO had rightly computed the capital gain at Rs. 3,73,06,900/- and that the CIT(A) had wrongly calculated it at Rs. 3,86,91,391/-. Therefore, the Tribunal set aside the order of the CIT(A) and restored the AO's computation.

2. Restriction of Acquisition Cost of Shares of BSE Ltd.:
The assessee argued that the acquisition cost should consider the depreciated cost of the BSE Membership Card. The AO had provided indexation benefit from A.Y 2005-06, and the CIT(A) held that the cost of acquisition should only be Rs. 7500/-. The Tribunal referred to a similar case (ACIT vs. Omniscient Securities Pvt. Ltd.) where it was held that the cost of acquisition should include the written down value of the BSE Card. Thus, the Tribunal upheld the AO's computation, rejecting the CIT(A)'s enhancement.

3. Deletion of Disallowance of VSAT Charges and Technical Services Penalty Charges:
The revenue challenged the deletion of disallowance of Rs. 22,02,508/- for VSAT charges and Rs. 5,79,137/- for penalty charges paid to NSE. The Tribunal found that the issue of VSAT charges was covered in favor of the assessee by the decision in HSBC Securities & Capital Market (India) Pvt. Ltd. vs. Addl.CIT, where such charges were considered reimbursements for standard facilities, not fees for technical services. Regarding penalty charges, the Tribunal referred to the Delhi High Court decision in CIT vs. Prasad & Co., which held that penalties for late deposits and other violations during business operations were deductible as business expenditures. Therefore, the Tribunal confirmed the deletion of both disallowances.

4. Deletion of Addition on Bad Debts:
The revenue contested the deletion of the addition on bad debts amounting to Rs. 3,00,10,302/-. The AO disallowed the bad debts, arguing that only the brokerage part of the debt could be allowed under section 36(2) of the Income Tax Act. The CIT(A) deleted the addition, following the Special Bench decision in Shreyas S. Morakhia, which was confirmed by the Bombay High Court. The Tribunal upheld the CIT(A)'s decision, stating that both the brokerage and the value of shares transacted by the stockbroker constituted a part of the debt, fulfilling the requirements of section 36(2)(i).

Conclusion:
The Tribunal dismissed the revenue's appeal and allowed the assessee's appeal, thereby confirming the AO's computation of capital gains and the deletion of disallowances and additions as per the CIT(A)'s order.