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2015 (1) TMI 966 - AT - Income TaxDisallowance of depreciation on BSE Card - Held that - Keeping in view that now it is a case of demutualization, as result of corporatization of BSE, the issue is covered from both the angles against the assessee as relying on decision of Sino Securities (P) Ltd. vs ITO 2011 (11) TMI 535 - ITAT MUMBAI - Decided against assessee. Disallowance of the foreign exchange loss on forex - Held that - Considering the accepted fact that the Hon ble Supreme Court in the case of CIT vs Woodward Governor India Pvt Ltd 2009 (4) TMI 4 - SUPREME COURT has decided the issue in favour of the assessee, we, therefore, set aside the order of the CIT(A) on the issue and direct the AO to delete the addition of ₹ 24,149/-. - Decided in favour of assessee. Disallowance of non compete fee and customer rights - Held that - An expense may be capital in nature or revenue in nature, but, to ascertain the nature, there is no fixed criteria. But the judicial fora has taken one manner to ascertain the distinction. If the expense is for short term benefit, it could be allowed as a revenue expenditure or an expense is made to acquire an asset giving enduring benefit to the assessee, in which case, it would be capital in nature view which has been taken by the Hon ble Bombay High Court in the case of CIT vs Everest Advertising 2015 (1) TMI 968 - BOMBAY HIGH COURT . Thus the assessee deserves the allowance. - Decided in favour of assessee. Disallowance of customer rights - Held that - Once it is seen that the expenditure has been incurred for acquiring the business, we cannot hold that acquisition of customer rights are bogus. We, therefore, hold that the expenditure as such was genuine. Once the expense has been accepted by us to be genuine, it would fall within the inclusions of section 32(1)(ii). - Decided in favour of assessee. Disallowance of Bad debts - CIT(A) deleted the addition - Held that - Bad-debts of ₹ 78,91,360/- written off pertained to the brokerage income already credited to the profit and loss a/c in the relevant years and accordingly the write off of the bad-debts must be allowed u/s 36(1)(vii) as it satisfies the conditions of section 36(2)(i). - Decided against revenue. Allowance of Vanda loss - AO had treated the loss as speculation loss u/s 73 - Held that - Explanation to s. 73 is attracted only when part of the business of the assessee company consists of the purchase and sale of shares of other companies and in that situation only such dealings in shares is deemed to be carrying on a speculative business. It must be noticed that any kind of venture will not fall within the definition of business . The venture or adventure will have to be In the nature of trade, commerce or manufacture. Thus, there is lack of ingredient called business in the sale and purchase done by the assessee of shares for which net loss has occurred to assessee. Thus the said loss arisen to assessee does not fall within the ambit of Explanation to s. 73. The loss occurred to assessee was in course of its business activity of brokerage. - Decided against revenue. Disallowance made u/s 14A - Held that - As relying on Godrej & Boycee Manufacturing Co. Ltd. Vs DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT Rule 8D is not applicable for this assessment year, at the same time, it is held that reasonable disallowance should be made u/s 14A of the Act. - restore the issue to the AO to compute the disallowance as per the provisions of section 14A(2) . - Decided in favour of revenue for statistical purposes. Allowance of membership fees - Held that - If an item of expenditure is to be considered capital in nature, the expenditure should bring into existence an asset or an advantage for the enduring benefit of a trade. Membership fee paid to a club does not bring into existence an asset or an advantage for the enduring benefit of the business. It is an expenditure incurred for the period of membership and is not long lasting. By subscribing to the membership of a club, no capital asset is created or comes into existence. By such membership, a privilege to use facilities of a club alone, are conferred oil assessee and that too for a limited period. Such expenses are for running the business with a view to produce the benefits to the assessee. Consequently, it cannot be treated as capital asset. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of depreciation on BSE Card. 2. Disallowance of foreign exchange loss. 3. Disallowance of non-compete fees. 4. Disallowance of depreciation on customer rights. 5. Deletion of additions on bad debts. 6. Allowance of depreciation on VSAT. 7. Treatment of Vanda loss. 8. Disallowance under Section 14A. 9. Depreciation on non-compete fees. 10. Depreciation on goodwill. 11. Allowance of membership fee. Issue-wise Detailed Analysis: 1. Disallowance of Depreciation on BSE Card: The assessee, a stockbroker, claimed depreciation of Rs. 24,58,957 on the BSE Card, which was disallowed by the AO. The CIT(A) confirmed the disallowance, citing the demutualization of BSE, which changed the nature of the asset. The ITAT upheld the CIT(A)'s decision, referencing Sino Securities (P) Ltd. vs ITO, determining that the demutualization resulted in the cessation of the block of assets. 2. Disallowance of Foreign Exchange Loss: The assessee claimed a foreign exchange loss of Rs. 24,149, which was disallowed by the AO as contingent in nature. The CIT(A) upheld the disallowance. However, the ITAT, referencing the Supreme Court decision in CIT vs Woodward Governor India Pvt Ltd, ruled in favor of the assessee, directing the AO to delete the addition. 3. Disallowance of Non-Compete Fees: The assessee treated non-compete fees of Rs. 6,53,57,094 as revenue expenditure. The CIT(A) treated it as capital expenditure. The ITAT, referencing decisions in Hidelberg Cement India Ltd. vs Add. CIT and CIT vs Everest Advertising, determined that since the non-compete fee was for one year, it should be treated as revenue expenditure and directed the AO to delete the addition. 4. Disallowance of Depreciation on Customer Rights: The assessee claimed depreciation on customer rights amounting to Rs. 1,70,88,082. The revenue authorities disallowed it, treating the transaction as sham. The ITAT, referencing India Capital Markets P Ltd. v DCIT and SKS Micro Finance Ltd v DCIT, held that customer rights fall within the inclusions of section 32(1)(ii) and directed the AO to allow the depreciation. 5. Deletion of Additions on Bad Debts: The AO disallowed bad debts of Rs. 78,91,360 claimed by the assessee. The CIT(A) allowed the claim, referencing the ITAT Special Bench decision in Shreyas Morakhia. The ITAT upheld the CIT(A)'s decision, noting the Bombay High Court's acceptance of the Special Bench's decision in Shreyas S Morakhia. 6. Allowance of Depreciation on VSAT: The CIT(A) allowed depreciation on VSAT, treating it as part of the computer system. The ITAT upheld this decision, referencing prior decisions in the assessee's own cases for earlier assessment years. 7. Treatment of Vanda Loss: The AO treated Vanda loss of Rs. 1,95,84,164 as speculative loss under section 73. The CIT(A) treated it as business loss. The ITAT upheld the CIT(A)'s decision, referencing decisions in ACIT v/s Subhash Chand Shorewala and Parker Securities Ltd vs DCIT, determining that Vanda transactions are integral to the brokerage business and not speculative. 8. Disallowance under Section 14A: The CIT(A) directed the AO to make a reasonable disallowance under Section 14A, following the Bombay High Court guidelines in Godrej & Boyce Mfg. Co. Ltd. vs DCIT. The ITAT upheld this direction, remanding the issue to the AO for computation as per the guidelines. 9. Depreciation on Non-Compete Fees: Since the ITAT held the non-compete fee to be revenue in nature in the assessee's appeal, the issue of depreciation on non-compete fees became infructuous, and the ITAT rejected the ground raised by the department. 10. Depreciation on Goodwill: The CIT(A) allowed depreciation on goodwill. The ITAT upheld this decision, referencing the Supreme Court decision in CIT vs Smiffs Securities Ltd., confirming the allowance of depreciation on goodwill. 11. Allowance of Membership Fee: The AO disallowed the membership fee of Rs. 33,50,000, treating it as capital expenditure. The CIT(A) reversed this finding. The ITAT upheld the CIT(A)'s decision, referencing decisions in ACIT vs Baphana Jewellers Pvt. Ltd. and Otis Elevators Co (India) Ltd. vs CIT, determining that membership fee is revenue expenditure. Conclusion: - Assessee's appeal in ITA 168 of 2011 stands partly allowed. - Revenue's appeal in ITA 1029 of 2011 stands partly allowed.
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