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TMI Blog2008 (8) TMI 592X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee claimed depreciation at 25 per cent. On the written down value (WDV) of the BSE membership card. The assessee submitted before the Assessing Officer that, without the membership right of the BSE, it could not carry on its business as a share broker. The membership right was a plant or tool of trade. In this regard, the assessee referred to the definition of "plant" as given in section 43(3) of the Act and pointed out before the Assessing Officer that the definition is an inclusive definition; and would therefore include whatever apparatus is used by a businessman for carrying on his business. The assessee also pointed out that even intangible things like ideas and designs contained in a book could be determined as "plant". Since, membership card was an apparatus used by the broker for carrying on his business and a tool in the trade of the businessman for permanent employment in his business, it should be considered as plant eligible for depreciation. The assessee placed reliance on several decisions of the hon' ble High Courts and the hon'ble Supreme Court. Some of which were as follows: CIT v. Sri Krishna Bottlers P. Ltd. [1989] 175 ITR 154 (AP) ; CIT v. Technico En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capable of diminishing in value; and therefore, it is not a depreciable asset. He also held that the purchase consideration of a membership card not only enables a person, the right of trade but also right in management and to an undivided share in ownership of the exchange and its profits. Therefore, the value of the card represents the combination of the above three rights and not just the right to trade. On appeal by the assessee, the learned Commissioner of Income-tax (Appeals) confirmed the order of the Assessing Officer by following his decision on an identical issue in the assessee' s own case in the assessment years 2002-03 to 2004-05 ; hence, the aforesaid ground of appeal by the assessee before the Tribunal. We have heard the submissions of learned counsel for the assessee and the learned Departmental representative on this issue. The Income-tax Appellate Tribunal, Mumbai Bench, in the case of Techno Shares and Stocks Ltd. v. ITO [2006] 101 TTJ (Mum) 349 (I. T. A. No. 778 (Mum.) of 2004), dated January 4, 2006 had considered the question of allowing depreciation on membership card of BSE and has held that membership ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Peninsular Capital Market Ltd. v. Asst. CIT [2008] 19 SOT 421, wherein the hon' ble Cochin Bench has observed that the value of the membership card is known to fluctuate; and therefore, it is not correct to say that the same is not capable of depreciating in value. In the aforesaid decision, the Bench has also held that the membership card of the stock exchange is an intangible asset eligible for depreciation under section 32(1)(ii) of the Act. Other two conditions referred to above namely ownership of the membership card and use by the assessee for the purpose of business cannot be disputed in the present case. Another argument of the learned Departmental representative was that the membership right is not an asset ; and therefore it cannot be owned by the assessee. On this issue, we find that the Special Bench of the Chennai Tribunal in the case of R. M. Valliappan v. Asst. CIT [2006] 287 ITR (AT) 203 and the Income-tax Appellate Tribunal, Special Bench, Delhi in the case of Jagan Nath Sayal v. Asst. CGT [2000] 72 ITD 1 have also held that the membership card is an asset. It is also seen that the Bombay Bench of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he delivery of shares or payment to the stock exchange. The claim of the assessee for bad debt written off partly arises out of the assessee having to make good the delivery of shares for shares sold, payment for purchase made on behalf of the clients. The assessee accounts only for brokerage income in the books of account and does not account for value of the transaction of sale or purchase made on behalf of the client. Under section 36(1)(vii) read with section 36(2) of the Act, it is a condition to claim deduction on account of bad debt that the amount written off as bad debt should have been taken into account while computing income of the assessee. According to the Assessing Officer, this condition was not satisfied in the case of the assessee because the assessee accounts only for income from brokerage and not the value of shares sold or purchased on behalf of a client and therefore, the condition mentioned in section 36(2) was not satisfied and therefore the claim was rejected by the Assessing Officer. The assessee made an alternative claim under section 28 of the Act on the basis that this loss is incidental to business of the assessee and should be allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be accepted. The claim is therefore clearly allowable under section 28 of the Act. We, therefore, direct that the deduction as claimed by the assessee be allowed. The third issue that arises for consideration is with regard to action of the Revenue authorities in disallowing sum of Rs. 5,17,65,182 on account of transaction charges paid by the assessee to stock exchange by invoking the provisions of section 40(a)(ia) of the Act. As already stated, the assessee carries on business as a share broker. In course of its business it pays what is called transaction charges to various stock exchanges. For providing trading facilities to its members, stock exchanges levy transaction charges. The assessee as a member of stock exchange, paid the aforesaid sum to various stock exchanges. Transaction charges are levied on the basis of volume of turnover of the members on its online trading system. According to the Assessing Officer, stock exchanges were providing technical services to the assessee ; and the transaction fee paid by the assessee is nothing but a fee paid for rendering technical services ; and therefore, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 44AA or of this section ; (b) ` fees for technical services' shall have the same meaning as in Explanation 2 to clause (vii) of sub-section (1) of section 9 ;" The provisions of section 9(1)(vii) Explanation 2 is as follows : " Explanation 2.-For the purposes of this clause, ` fees for technical services' means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head ` Salaries' ." As can be seen from Explanation 2, the fees for technical services means any consideration for rendering any technical service. The Explanation does not by itself throw any light on what is a technical service. Two things are, however, clear from the setting of section 9(1)(vii) read with Explanation 2, viz, (i) That there should be an agreement to engage/utilise technical service and a person undertaki ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son hires a taxi to move from one place to another, he uses a product of science and technology, viz., an automobile. It cannot on that ground be said that the taxi driver who controls the vehicle, and monitors its movement is rendering a technical service to the person who uses the automobile. Similarly, when a person travels by train or in an aeroplane, it cannot be said that the railways or airlines' s rendering a technical service to the passenger and, therefore, the passenger is under an obligation to deduct tax at source on the payments made to the railway or the airline for having used it for travelling from one destination to another. When a person travels by bus, it cannot be said that the undertaking which owns the bus service is rendering technical service to the passenger and, therefore, the passenger must deduct tax at source on the payment made to the bus service provider, for having used the bus. The electricity supplied to a consumer cannot, on the ground that generators are used to generate electricity, transmission lines to carry the power, transformers to regulate the flow of current, meters to measure t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the automobile, the railway, the aeroplane, consumption of electrical energy, etc. Such facilities which when used by individuals are not capable of being regarded as technical service cannot become so when used by firms and companies. The facility remains the same whoever the subscriber may be individual, firm or company. ` Technical service' referred in section 9(1)(vii) contemplates rendering of a ` service' to the payer of the fee. Mere collection of a ` fee' for use of a standard facility provided to all those willing to pay for it does not amount to the fee having been received for technical services." The above observations of the hon' ble Madras High Court are clearly applicable to the facts of the present case. The learned Commissioner of Income-tax (Appeals) in coming to the conclusion that transaction charges are in the nature of FTS has held that the functions performed by the stock exchanges are of a managerial nature. The functions listed by the learned Commissioner of Income-tax (Appeals) in this regard are : (a) Stock exchanges provide services for risk management and surveillance to the member trader. This reasoning of the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come-tax (Appeals) further has gone on to hold that even if a doubt exists by way of abundant caution TDS should have been made. This in our view is not a proper approach. The liability to deduct tax at source in given facts and circumstances either exists or does not exist. There cannot be any legal obligation by way of abundant caution. To call a payment as fees for technical services it should have been paid in consideration for rendering by the recipient of payment of any (a) managerial service (b) technical or consultancy services ; the stock exchanges merely provide facility for its members to purchase and sell shares, securities etc., within the framework of its bye laws. In the event of dispute if provides a mechanism for settlement of disputes. It regulates conditions subject to which a person can be a member and when and in what circumstances membership can be transferred, cancelled, suspended etc. The exchange provides a place where the members meet and transact business. The transaction fee paid is on the basis of volume of transaction effected by a member. The stock exchanges do not re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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