M/S. NETWORTH STOCK BROKING LTD, MUMBAI V. THE ITO 4(2)(1), MUMBAI

ITA 1887/MUM/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6293 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-11-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 18-11-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 25-03-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P N DEVADASAN
• Assessee Lawyers: NIKUNJ GADA
• Keywords: Capital asset; Depreciation; Bad and doubtful debts; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI B BENCH BEFORE SHRI T.R.SOOD, ACCOUNTANT MEMBER & SHRI VIJAY PAL RAO, JUDICIAL MEMBER I.T.A.NO.1887/MUM/2009 - A.Y 2005-06 M/S NETWORTH STOCK BROKING LIMITED, 5, CHURCHGATE HOUSE, 2 ND FLOOR, 32/34 VEER NARIMAN ROAD, FORT, MUMBAI 400 001 PAN: AAACN 1184 F VS. INCOME TAX OFFICER 4(2)(1), MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI NIKUNJ GADA. RESPONDENT BY : SHRI P.N.DEVADASAN. O R D E R PER T.R.SOOD, AM: IN THIS APPEAL, VARIOUS GROUNDS HAVE BEEN RAISED, BUT AT THE TIME OF HEARING, LD. COUNSEL OF THE ASSESSEE SUBMIT TED THAT ONLY FOUR DISPUTES ARE INVOLVED WHICH ARE AS UNDER: 1. DEPRECIATION ON BSE CARD. 2. DISALLOWANCE ON ACCOUNT OF SOFTWARE EXPENSES BY TRE ATING THE SAME AS CAPITAL EXPENSES. 3. CONFIRMATION OF DISALLOWANCE OF BAD DEBTS AND 4. CONFIRMATION OF DISALLOWANCE AGAINST TRANSACTION CH ARGES AND FEE FOR TECHNICAL AND MANAGERIAL SERVICES PAID TO STOCK EXC HANGE WITHOUT DEDUCTION OF TAX. 2. GROUND NO.1 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT THIS ISSUE CAME UP FOR CONSIDERATION BEFORE THE HON'BLE SUPREME COURT IN CIVIL APPEAL NOS.7780-7781 OF 2010 IN THE CASE OF T ECHNO SHARES & STOCKS LTD. VS. CIT [COPY OF THE ORDER HAS BEEN FIL ED ON RECORD], WHEREIN IT WAS HELD THAT DEPRECIATION WAS ALLOWABLE ON THE COST OF 2 MEMBERSHIP CARD OF BSE U/S.32(1)(II). RESPECTFULLY FOLLOWING THE SAID DECISION, WE HOLD THAT ASSESSEE IS ENTITLED TO DEPR ECIATION ON BSE MEMBERSHIP CARD. ACCORDINGLY, WE SET ASIDE THE ORDE R OF THE CIT[A] AND REMIT THE MATTER BACK TO THE FILE OF THE AO WIT H A DIRECTION TO ALLOW THE DEPRECIATION. 3. GROUND NO. 2: AFTER HEARING BOTH THE PARTIES, WE FIND THAT DUR ING ASSESSMENT PROCEEDINGS AO NOTICED THAT ASSESSEE HAD INCURRED SOFTWARE EXPENSES. HE OBSERVED IN PARA 5.2 AS UNDER : 5.2 IN RESPECT OF THIS, THE ASSESSEE WAS ASKED TO FURNISH AN EXPLANATION AS TO WHY THE ABOVE EXPENSES SHOULD NOT BE TREATED CAP ITAL EXPENDITURE AND CLAIM OF IT AS REVENUE EXPENDITURE SHOULD NOT BE DI SALLOWED. THE ASSESSEE HAS SUBMITTED THAT THE SAME ARE ALLOWABLE AS REVENUE EX PENDITURE AS NO ENDURING BENEFIT HAS ACCRUED TO THE ASSESSEE. THE CONTENTION OF THE ASSESSEE HAS BEEN CONSIDERED AND IS FOUND TO BE UNACCEPTABLE. IT IS T O BE NOTED THAT, EXPENDITURE ON PURCHASE OF COMPUTER AND HARD DISKS ARE NOT IN T HE NATURE OF REVENUE EXPENDITURE DUE TO THE FACT THAT COMPUTER HARDWARE ARE PUT INTO USE AS CAPITAL ASSET AND HAVE ENDURING USE WHICH IS NOT LIMITED TO A PARTICULAR YEAR. THEREFORE, THERE IS NO BASIS TO ALLOW EXPENSES INCU RRED FOR ACQUIRING HARDWARE AS REVENUE EXPENDITURE. THE SAME HAS TO BE TREATED AS CAPITAL EXPENDITURE AND DEPRECIATION IS TO BE ALLOWED AS PE R RULES. FURTHER IT MAY BE NOTED THAT AS PER THE I.T.RULES, FOR A.Y 2005-06, D EPRECIATION AT THE RATE OF 60% IS TO BE ALLOWED IN RESPECT OF COMPUTER. IN VIE W OF THE ABOVE, THE ASSESSEES CLAIM OF EXPENDITURE ON PURCHASE OF COMP UTER AS REVENUE EXPENDITURE IS FOUND TO BE NOT ALLOWABLE AND ACCORD INGLY, TREATED AS CAPITAL EXPENDITURE AND DISALLOWED. THUS, THE AMOUNT OF DIS ALLOWANCE ON THIS ACCOUNT COMES TO ` `` ` .40,53,674/-. HOWEVER, SINCE IT IS IN THE NATURE OF CAPITAL ASSET, THEREFORE, THE SAME IS ADDED BACK TO THE BLO CK OF ASSETS AND DEPRECIATION IS ALLOWED @ 30% [SINCE THE DATE OF PU RCHASE OF THE LICENSE IS AFTER 1-10-04] WHICH COMES TO ` `` ` .13,36,102/-. HENCE, NET ADDITION OF ` `` ` .27,17,572/- IS MADE TO THE TOTAL INCOME OF THE ASS ESSEE. IT SEEMS AO HAD CONFUSED SOME OF THE ITEMS AS HE HA S OBSERVED THAT EXPENDITURE ON HARDWARE IN THE FORM OF PURCHASE OF COMPUTER HARD DISK ARE NOT IN THE NATURE OF REVENUE EXPENDITURE. 4. ON APPEAL, LD. CIT[A] CONFIRMED THE DISALLOWANCE BY OBSERVING THAT NOW COMPUTER SOFTWARE HAS BEEN INCLUDED IN THE APPENDIX I W.E.F. 1-4-2003 BY TWENTY FOURTH AMENDMENT OF THE RULES, 2 002 THEREBY 3 ALLOWING 60% DEPRECIATION ON COMPUTER SOFTWARE. SIN CE AO HAD ALREADY ALLOWED DEPRECIATION, HE CONFIRMED THE DISA LLOWANCE. 5. BEFORE US LD. DR STRONGLY SUPPORTED THE ORDERS O F THE LOWER AUTHORITIES. 6. ON THE OTHER HAND, LD. COUNSEL OF THE ASSESSEE S UBMITTED THAT THESE ITEMS OF EXPENDITURES MAINLY RELATED TO ANNUA L MAINTENANCE CHARGES AND HE ALSO FILED A LIST DETAILING THE EXPE NDITURE. THEREFORE, SAME SHOULD NOT BE TREATED AS CAPITAL EXPENDITURE. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY AND IT SEEMS THAT AO HAS NOT PROPERLY EXAMINED THE ISSUE BECAUSE HE HAS OBSERVED THAT THE EXPENSES RELATED TO PURCHASE OF COMPUTER A ND HARD DISK, WHEREAS THE CLAIM OF THE ASSESSEE IS THAT THIS IS A N EXPENDITURE ON SOFTWARE AND THAT TOO IN THE FORM OF ANNUAL MAINTEN ANCE CHARGES. NO DOUBT, EVEN SOFTWARE EXPENSES HAVE TO BE TREATED AS CAPITAL EXPENDITURE BECAUSE OF THE AMENDMENT IN APPENDIX I WHICH ALLOWS DEPRECIATION AT 60% ON SOFTWARE ALONG WITH THE COMP UTER, WHICH MEANS THIS ITEM HAS TO BE TREATED AS CAPITAL EXPEND ITURE. BUT, IF THE EXPENDITURE IS MERELY ON ANNUAL MAINTENANCE CHARGES , THEN IT CANNOT BE TREATED AS CAPITAL EXPENDITURE. THEREFORE, WE SE T ASIDE THE ORDER OF THE LD. CIT[A] AND REMIT THE MATTER BACK TO THE FIL E OF THE AO FOR RE- EXAMINATION OF THE ISSUE AFTER PROVIDING AN ADEQUAT E OPPORTUNITY TO THE ASSESSEE. 8. GROUND NO.3 : AFTER HEARING BOTH THE PARTIES WE FIND THAT BAD DEBTS HAVE BEEN NOT ALLOWED BY THE LOWER AUTHORITIE S BECAUSE, 4 ACCORDING TO THE AO, ASSESSEE HAS NOT FULFILLED THE CONDITION REGARDING SHOWING THAT THE DEBT HAS REALLY BECOME BAD AND ALS O HAS NOT COMPLIED WITH THE PROVISIONS OF SEC.36(2). 9. BEFORE US, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT AFTER THE AMENDMENT TO SEC.36(1)(VII) W.E.F. 1-4-1989 IT IS N O MORE A REQUIREMENT OF LAW THAT IT SHOULD BE PROVED THAT TH E DEBT HAS REALLY BECOME BAD. MERELY WRITING OFF OF THE SAME IS SUFFI CIENT. IN THIS REGARD HE RELIED ON THE DECISION OF THE HON'BLE SUPREME CO URT IN THE CASE OF TRF LTD. VS. CIT 323 ITR 397. AS FAR AS REQUIREMENT OF SEC.36(2) IS CONCERNED, THIS ISSUE HAS BEEN RECENTLY DECIDED BY THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DY. CIT VS. SHRI SHR EYAS S.KORAKHIA I.T.A.NO.3374/MUM2004 DATED 16 TH JULY, 2010. 10. ON THE OTHER HAND, LD. DR RELIED ON THE ORDERS OF THE LOWER AUTHORITIES. 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND FIND FORCE IN THE SUBMISSIONS OF LD. COUNSEL OF THE ASSE SSEE. THE HON'BLE SUPREME COURT IN THE CASE OF TRF LTD. VS. CIT [SUPR A] HAS OBSERVED AS UNDER: AFTER THE AMENDMENT OF SECTION 36(1)(VII) OF THE I NCOME TAX ACT, 1961, WITH EFFECT FROM APRIL 1, 1989, IN ORDER TO OBTAIN A DEDUCTION IN RELATION TO BAD DEBTS, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE: IT IS ENOUGH IF THE BAD D EBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. THE SUPREME COURT ACCORDINGLY REMANDED THE MATTER T O THE ASSESSING OFFICER TO EXAMINE, SOLELY TO THE EXTENT OF WRITE OFF, WHET HER THE DEBT OR PART THEREOF WAS WRITTEN OFF IN ACCOUNTS OF THE ASSESSEE. 5 SINCE IN THE CASE BEFORE US THE DEBT HAS ALREADY BE EN WRITTEN OFF, THEREFORE, THERE WAS NO NEED TO PROVE THAT SAME HAS REALLY BECOME BAD. 12. AS FAR AS THE ASPECT OF COMPLIANCE OF SEC.36(2) IS CONCERNED, THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DY . CIT VS. SHRI SHREYAS S.KORAKHIA [SUPRA] HAS HELD AS UNDER: 32. KEEPING IN VIEW ALL THE FACTS OF THE CASE AND THE LEGAL POSITION EMANATING FROM THE VARIOUS JUDICIAL PRONOUNCEMENTS AS DISCUSSED ABOVE, WE ARE OF THE VIEW THAT THE AMOUNT RECEIVABL E BY THE ASSESSEE, WHO IS A SHARE BROKER, FROM HIS CLIENTS AGAINST THE TRANSACTIONS OF PURCHASE OF SHARES ON THEIR BEHALF CONSTITUTES DEBT WHICH IS A TRADING DEBT. THE BROKERAGE/COMMISSION INCOME ARISING FROM SUCH TRANSACTIONS VERY MUCH FORMS PART OF THE SAID DEBT AND WHEN THE AMOUNT OF SUCH BROKERAGE/COMMISSION HAS BEEN TAKEN INTO ACCOUNT IN COMPUTATION OF INCOME OF THE ASSESSEE OF THE RELEVA NT PREVIOUS YEAR OR ANY EARLIER YEAR, IT SATISFIES THE CONDITION STI PULATED IN SECTION 36(2)(I) AND THE ASSESSEE IS ENTITLED TO DEDUCTION U/S.36(1)(VII) BY WAY OF BAD DEBTS AFTER HAVING WRITTEN OF THE SAID DEBTS FROM HIS BOOKS OF ACCOUNT AS IRRECOVERABLE. WE, THEREFORE, ANSWER THE QUESTION REFERRED TO THIS SPECIAL BENCH IN THE AFFIRMATIVE THAT IS IN FAVOUR OF THE ASSESSEE. FOLLOWING THE ABOVE DECISION, WE ARE OF THE VIEW TH AT THE BAD DEBT SHOULD BE ALLOWED AND, THEREFORE, WE SET ASIDE THE ORDER OF THE LD. CIT[A] AND DIRECT THE AO TO ALLOW THE BAD DEBT. 13. GROUND NO.4 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT THE ISSUE REGARDING ALLOWANCE OF EXPENDITURE ON ACCOUNT OF FEE FOR TECHNICAL SERVICES AND TRANSACTION CHARGES FOR NON DEDUCTION OF TDS IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISI ON OF THE CO- ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF KOTAK SECURITIES LTD. VS. ADDL. CIT 124 TTJ (MUM) 241, WHEREIN IT WAS HELD TH AT SUCH PAYMENTS ARE BASICALLY PAYMENTS FOR USE OF FACILITIES PROVID ED BY STOCK EXCHANGE 6 AND NOT FOR ANY SERVICES. RESPECTFULLY FOLLOWING TH IS DECISION, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE. 14. IN THE RESULT, APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 24 TH DAY OF NOVEMBER, 2010. SD/- SD/- (VIJAY PAL RAO) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI:24 TH NOVEMBER, 2010. P/-*