THE DCIT 4(1)(1), Mumbai V. M/S. CLSA INDIA LTD., Mumbai

ITA 2930/MUM/2008

• Counselvise Citation: 293019914 RSA 2008
• Duration Of Justice: 3 year(s) 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 20-09-2011
• Assessment Year: 1999-2000
• Appeal Filed On: 30-04-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ALEXANDER CHANDY
• Keywords: Share purchase agreement; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C MUMBAI BEFORE SHRI B.R. MITTAL (JUDICIAL MEMBER) AND SHRI B. RAMAKOTAIAH (ACCOUNTANT MEMBER) ITA NOS.2930 & 31/MUM/2008 ASSESSMENT YEARS- 1999-2000 & 2000-01 THE DCIT-4(1), AAYAKAR BHAVAN, MUMBAI-400 020 VS. M/S. CLSA INDIA LTD., 8F,DALAMAL HOUSE, 221, NARIMAN POINT, MUMBAI-400 021 PAN-AAACC 2262K (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI ALEXANDER CHANDY RESPONDENT BY: SHRI NITESH JOSHI & SHRI MOHIT KHANDELWAL DATE OF HEARING : 20.09.2011 DATE OF PRONOUNCEMENT: 28.9.2011 O R D E R PER B.R. MITTAL, JM : THE DEPARTMENT HAS FILED THESE TWO APPEALS AGAINST ORDERS OF LD. CIT(A) BOTH DT.8.2.2008 FOR ASSESSMENT YEARS 1999-2 000 AND 2000-01. SINCE FACTS AND GROUNDS OF APPEAL OF ASSESSMENT YEAR 1999 -2000 IS IDENTICAL TO GROUNDS NO. 1 & 2 OF APPEAL OF ASSESSMENT YEAR 2000 -01, WE HEARD THESE APPEALS TOGETHER AND DISPOSE OFF THE SAME BY A COMM ON ORDER FOR THE SAKE OF CONVENIENCE. 2. BEFORE WE CONSIDER GROUNDS NO. 1 & 2 OF BOTH APP EALS OF ASSESSMENT YEAR UNDER CONSIDERATION, IT IS RELEVANT TO STATE T HAT IN THE APPEAL FOR ITA NOS. 2930 & 31/M/08 2 ASSESSMENT YEAR 2000-01, THE AMOUNT OF RS. 25,78,08 2/- MENTIONED IS NOT CORRECT AND THE CORRECT AMOUNT IS RS. 15,84,078/- WHICH HAS BEEN DELETED BY LD. CIT(A) OF ADDITION MADE BY AO. 3. THE RELEVANT FACTS GIVING RISE TO GROUNDS OF APP EAL OF ASSESSMENT YEARS 1999-2000 AND GROUNDS NO. 1 & 2 OF APPEAL OF ASSESS MENT YEAR 2000-01 ARE THAT ASSESSEE IS A SHARE BROKER. FOR THE ASSESSMEN T YEAR 1999-2000, ASSESSEE CLAIMED LOSS ON ACCOUNT OF SHORTAGE IN STO CK IN TRADE WRITTEN OFF RS. 25,78,082/-. DURING THE COURSE OF ASSESSMENT PROCE EDINGS, ASSESSEE STATED THAT IT IS THE PRACTICE OF ASSESSEE-COMPANY TO REVI EW THE POSITION OF STOCK PERIODICALLY AND WRITE OFF USELESS/UNSALEABLE STOCK . THE ASSESSEE FILED ITS SUBMISSION BEFORE THE AO VIDE LETTER DT. 12 TH SEPTEMBER, 2005 FOR BOTH ASSESSMENT YEARS UNDER CONSIDERATION. HOWEVER, AO DID NOT ACCEPT THE CLAIM OF ASSESSEE ON THE GROUND THAT ASSESSEE COULD NOT SUBSTANTIATE THE SAID LOSS (ES) FOR BOTH ASSESSMENT YEARS UNDER CONSIDERA TION BY EXTERNAL EVIDENCE AND THE AO STATED THAT THE LOSS (ES) CLAIMED BY ASS ESSEE IS MERELY ON ESTIMATED BASIS. HENCE, AO DISALLOWED THE CLAIM OF LOSS OF RS. 25,78,082/- FOR ASSESSMENT YEAR 1999-2000 AND RS. 15,84,078/- F OR ASSESSMENT YEAR 2000-01 AND ADDED TO THE TOTAL INCOME OF THE ASSESS EE. BEING AGGRIEVED ASSESSEE FILED APPEALS BEFORE LD. CIT(A). 4. ON BEHALF OF THE ASSESSEE, IT WAS CONTENDED THAT IN THE PRE-DEMAT PERIOD, WHERE LARGE NUMBER OF SHARE TRANSACTIONS WE RE TAKING PLACE, AS IN THE CASE OF ASSESSEE, THE LOSS OF STOCK WAS NOT VERY UN COMMON. IT WAS CONTENDED THAT WRITE OFF OF BAD STOCK OF RS. 0.26 C RORES IS ONLY 0.0047% OF TOTAL TURNOVER OF RS. 5,448.82 CRORES IN ASSESSMENT YEAR 1999-2000 AND 0.0009% OF TOTAL TURNOVER OF RS. 1784.09 CRORES I N ASSESSMENT YEAR 2000- 01. IT WAS ALSO CONTENDED THAT DETAILS OF STOCKS L OST WERE ALSO FURNISHED BEFORE THE AO AND ALSO FURNISHED BEFORE LD. CIT(A). 5. THE LD. CIT(A) AFTER CONSIDERING THE ACCOUNTING POLICY OF THE ASSESSEE COMPANY OF WRITING OFF OF THE SHARE LOST AND ALSO WRITING BACK THE RECOVERIES ITA NOS. 2930 & 31/M/08 3 OF SHARE LOST OVER THE PERIOD HAS HELD THAT THE SAM E IS REQUIRED TO BE ALLOWED AS BUSINESS LOSS U/S. 28 OF THE I.T. ACT OF BOTH ASS ESSMENT YEARS UNDER CONSIDERATION AND DELETED THE DISALLOWANCE MADE BY AO. HENCE DEPARTMENT IS IN FURTHER APPEAL BEFORE THE TRIBUNAL. 6. DURING THE COURSE OF HEARING, LD. DEPARTMENTAL R EPRESENTATIVE SUBMITTED THAT ASSESSEE COULD NOT SUBSTANTIATE THE LOST ESTIMATED BY IT AND NO DETAILS WERE FILED BY THE ASSESSEE OF THE STOCKS CL AIMED TO BE LOST BEFORE THE AO. HE FURTHER SUBMITTED THAT CASES CITED BY ASSES SEE BEFORE AO, THE DETAILS WHICH ARE MENTIONED BY AO IN THE RESPECTIVE ASSESSM ENT ORDERS AT PAGE-4 FOR ASSESSMENT YEAR 1999-2000 AND AT PAGE-5 OF ASSESSME NT YEAR 2000-01 WERE NOT RELEVANT AS IN THE SAID CASES, THE CONCERNED AS SESSEES WERE MANUFACTURING BUSINESS AND NOT IN SHARE BUSINESS HE NCE REVALUATION OF STOCK MADE IN THE SAID CASES VIZ CIT VS TATA IRON & STEEL CO. LTD. (1977) 106 ITR 363 (BOM), ITO VS HINDUSTAN AERONAUTICS LTD. (1988 ) 31 TTJ 95 (BANG), MILTON CYCLE INDUSTRIES LTD. VS DCIT (1996) 54 TTJ 380 (DEL) AND ITO VS MYSORE SUGAR CO. LTD. (1984) 10 ITD 842 (DEL) HAVIN G NO MARKETABILITY WAS ALLOWED AS A DEDUCTION. HE SUBMITTED THAT LD. CIT( A) HAS ALLOWED THE CLAIM OF ASSESSEE MAINLY ON THE GROUND THAT THE WRITE OF F OF LOSS WAS SMALL AS COMPARED TO TURNOVER OF THE ASSESSEE COMPANY BUT TH IS COULD NOT BE A GROUND TO ALLOW CLAIM OF ASSESSEE IN THE LINE OF BU SINESS OF THE ASSESSEE PARTICULARLY WHEN NO DETAILS OF LOSSES WERE FILED B Y THE ASSESSEE BEFORE AO. 7. ON THE OTHER HAND, LD. AR SUBMITTED THAT ASSESSE E FILED A DETAILED REPLY BEFORE THE AO FOR BOTH ASSESSMENT YEARS UNDER CONSIDERATION. HE SUBMITTED THAT AO HIMSELF HAS MENTIONED THE DATE OF LETTER OF THE ASSESSEE I.E. 12.9.2005. LD. AR FILED COPIES OF SAID LETTER S DT. 12.9.2005 OF BOTH ASSESSMENT YEARS UNDER CONSIDERATION BEFORE US AND SUBMITTED THAT ANNEXURE TO THAT LETTER NOT ONLY CONTAINS A DETAILED WRITE U P TO JUSTIFY THE WRITE OFF OF THE LOSS BUT ALSO ENCLOSED LIST OF SHARES IN RESPEC T OF WHICH AGGREGATE AMOUNT OF RS. 25,78,082/- FOR ASSESSMENT YEAR 1999-2000 AN D RS. 15,84,078/- IN RESPECT OF ASSESSMENT YEAR 2000-01 WERE WRITTEN OFF . HE SUBMITTED THAT LOSS ITA NOS. 2930 & 31/M/08 4 IS AN ACTUAL ONE AS WRITTEN OFF BY THE ASSESSEE FOR BOTH ASSESSMENT YEARS UNDER CONSIDERATION AND THE ORDERS OF LD. CIT(A) AR E JUSTIFIED. 8. WE HAVE CAREFULLY CONSIDERED THE ORDERS OF AUTHO RITIES BELOW AND THE SUBMISSIONS OF LD. REPRESENTATIVES OF BOTH PARTIES AND CONTENTS OF LETTERS BOTH DT. 12 TH SEPTEMBER, 2005. WE OBSERVE THAT ASSESSEE HAS STA TED IN THE SAID LETTERS THE REASONS TO ARRIVE AT THE AMOUNT OF RS. 25,78,082/- FOR ASSESSMENT YEAR 1999-2000 AND AMOUNT OF RS. 15,84,0 78/- FOR ASSESSMENT YEAR 2000-01 CLAIMED IT AS LOSS (ES). WE CONSIDER IT PRUDENT TO REPRODUCE THE REASONS AS STATED BY ASSESSEE IN THE SAID LETTERS, WHICH WAS ADMITTEDLY FILED BEFORE AO AS WELL, WHICH READS AS UNDER: ANY TIMES CLIENTS OR THE EXCHANGE RETURN THE STOCK TO THE COMPANY DUE TO REASONS SUCH AS TRANSFEROR SIGNATURE DIFFERS, FORGED/FAKE SHARE CERTIFICATES ETC. IN ABSENCE OF C OUNTER PARTY OR IN CASE WHERE THE EXCHANGE DO NOT RECTIFY THE STOCK, T HE COMPANY NEEDS TO RECTIFY BAD STOCK FOR OUR CLIENT/EXCHANGE. TO AVOID SUDDEN IMPACT ON THE COMPANYS PROFIT AND LOSS ACCOUNT DUE TO THESE UNFORESEEN CIRCUMSTANCES, THE COMPANY MAKES PROVISION FOR SUCH UNEXPECTED LOSS AGAINST THE INCO ME ON REGULAR BASIS @ 0.01% OF TURNOVER SO THAT SUCH LOSS COULD BE CORR OBORATED AGAINST THE INCOME OF THE BUSINESS OF THE CORRESPONDING YEA R. THIS PROVISION IS DISALLOWED IN THE COMPUTATION OF INCOME FOR INCOME- TAX PURPOSES. THE COMPANY ALSO PHYSICALLY VERIFY STOCK PERIODICAL LY AND RECONCILE THE SAME WITH BOOK STOCK AND PENDING OBJE CTION/SETTLEMENT OBLIGATION. SHORTAGE IDENTIFIED DURING THIS PROCESS IS WRITTEN OFF AFTER VARIOUS EFFORT TO TRACE THE SAME. FURTHER, IT IS THE PRACTICE OF THE COMPANY TO REVIE W THE POSITION OF STOCK PERIODICALLY AND WRITE-OFF USELESS/UNSALEA BLE STOCK. SUCH STOCK IS ACCORDINGLY NOT WRITTEN OFF IMMEDIATELY ON A CAS E-TO-CASE BASIS BUT AFTER DUE VERIFICATION AND ANALYSIS. THIS AMOUNT OF STOCK ACTUALLY WRITTEN OFF IS CLAIMED AS EXPENDITURE INCURRED DURI NG THE COURSE OF CARRYING ON THE BROKING BUSINESS. ITA NOS. 2930 & 31/M/08 5 IN RESPECT OF BAD STOCK, THE PROCEDURE FOLLOWED WAS BROADLY THAT AFTER THE COMPANY OBJECTION MEMO WAS RECEIVED, THE MATTER WAS HANDED OVER TO THE SETTLEMENT (COMPANY OBJECTIONS) DEPARTMENT OF THE COMPANY, COMPRISING OF A TEAM OF 20 PEOPLE, WHI CH DEALT WITH SUCH CASES. THEREAFTER, THIS DEPARTMENT MADE ATTEMP TS TO RECTIFY THE STOCK THROUGH INTER ALIA LODGING A COMPLAINT WITH T HE EXCHANGE. IN CASE THE EXCHANGE DID NOT ADMIT THE CLAIM (COMPANY MEMO OUTDATED, DELIVERY DETAILS STATEMENT NOT TRACEABLE, DELIVERIN G MEMBER STAMP NOT AFFIXED ETC.) OR IT WAS NOT WORTHWHILE TO LODGE A C LAIM, THE COMPANY ITSELF ATTEMPTED TO RECTIFY THE STOCK BY INTER ALIA CONTACTING THE SHAREHOLDER OR BROKER DIRECTLY. SUCH EFFORTS BY TH E COMPANY TOOK PLACE OVER A PERIOD OF TIME AND IT IS NOT PRACTICAL LY POSSIBLE TO HAVE EXTERNAL EVIDENCE TO SUBSTANTIATE SUCH EFFORTS OF T HE COMPANY. 9. WE ALSO OBSERVE THAT ASSESSEE HAS ALSO IN THE AN NEXURE TO ABOVE LETTER (ES) HAD GIVEN DETAILS OF SHARES AND THE AMOUNT WRI TTEN OFF AGAINST EACH SCRIPT. ON PERUSAL OF THE SAME, WE ARE OF THE CONS IDERED VIEW THAT THE CONTENTION OF LD. DR THAT ASSESSEE COULD NOT FILE T HE DETAILS BEFORE THE AO AS TO HOW THE LOSS WAS ESTIMATED FOR BOTH ASSESSMENT Y EARS UNDER CONSIDERATION HAS NO MERIT. WE OBSERVE THAT ASSESSEE HAS MADE TH E ANALYSIS OF THE SITUATION AND ONLY AFTER ARRIVING TO THE CONCLUSION THAT STOCK HAD BECOME WORTHLESS/AMOUNT WAS NOT RECOVERABLE AND THEREAFTER THE BUSINESS DECISION HAD BEEN TAKEN BY THE ASSESSEE TO WRITE OFF OF THE SAME IN THE ASSESSMENT YEARS UNDER CONSIDERATION. WE OBSERVE THAT DEPARTME NT HAS NOT DISPUTED THE OBSERVATION OF LD. CIT(A) THAT ASSESSEE COMPANY IS CONSISTENTLY FOLLOWING THE ACCOUNTING POLICY OF WRITING OFF OF THE SHARE LOST AND ALSO WRITING BACK THE RECOVERIES OF SHARE LOST OVER THE PERIOD. CONSIDER ING THE ABOVE FACTS AND IN THE ABSENCE OF ANY CONTRARY MATERIAL BROUGHT ON REC ORD BY DEPARTMENT, WE ARE OF THE CONSIDERED VIEW THAT ORDERS OF LD. CIT(A ) IS JUSTIFIABLE FOR BOTH ASSESSMENT YEARS UNDER CONSIDERATION. THEREFORE WE UPHOLD THE SAME BY REJECTING THE GROUNDS OF APPEAL FOR ASSESSMENT YEAR 1999-2000 AND GROUNDS NO. 1 &2 OF APPEAL FOR ASSESSMENT YEAR 2000-01. 10. IN GROUND NO. 3 OF APPEAL FOR ASSESSMENT YEAR 20 00-01, THE DEPARTMENT HAS DISPUTED ORDER OF LD. CIT(A) TO DELE TE THE DISALLOWANCE OF PENALTY PAID TO STOCK EXCHANGE TO RS. 10,00,000/-. ITA NOS. 2930 & 31/M/08 6 11. THE ASSESSEE PAID A SUM OF RS. 10,00,000/- TO N ATIONAL SECURITIES CLEARING CORPORATION LTD. (HEREIN AFTER REFERRED TO NSCCL) AS LATE FEE CHARGES. ON BEHALF OF ASSESSEE, IT WAS CONTENDED T HAT THE SAID PENALTY WAS PAID IN RESPECT OF PROCEDURAL DELAY IN DELIVERY OF SHARES AND NOT IN RESPECT OF INFRACTION OF LAW. HOWEVER, AO DID NOT ACCEPT THE SAID CONTENTION OF THE ASSESSEE. HE OBSERVED THAT PENALTY CAN BE LEVIED B Y NSCCL BECAUSE OF THE FAULT OF THE ASSESSEE ITSELF FOR CONTRAVENTION OF C ERTAIN RULES AND REGULATIONS AS FRAMED BY IT IN TERMS OF THE GUIDELINES ISSUED B Y SEBI. THEREFORE, THE AMOUNT PAID BY THE ASSESSEE FOR SUCH CONDUCT COULD NOT BE REGARDED AS WHOLLY LAID OUT FOR THE PURPOSE OF BUSINESS BECAUSE THE INCURRENCE OF SUCH EXPENSE HAS NOT BEEN NECESSITATED BY THE BUSINESS B UT BY THE CONDUCT OF ASSESSEE. THEREFORE, AO DISALLOWED THE SAID AMOUNT OF RS. 10,00,000/- AND ADDED TO THE INCOME OF ASSESSEE. BEING AGGRIEVED, A SSESSEE FILED APPEAL BEFORE LD. CIT(A). 12. ON BEHALF OF THE ASSESSEE, LETTER OF NSCCL DT. 28 TH MARCH, 2000 WAS PRODUCED BEFORE LD. CIT(A). IT WAS STATED THAT THE SAID LETTER WAS ALSO PRODUCED BEFORE THE AO. LD. CIT(A) HAS REPRODUCED THE CONTENT OF THE SAID LETTER AT PARA 6.1 OF THE IMPUGNED ORDER WHEREIN IT IS STATED INTER ALIA THAT THE ASSESSEE WAS ASKED BY NSCCL TO PAY LATE FEE CHARGES @ 0.5% OF THE DELIVERY VALUE OF THE SECURITIES, SUBJECT TO A MAXIMUM OF RS . 10,00,000/-. THEREFORE, ASSESSEE PAID THE SAID SUM OF RS. 10,00,000/- TO NS CCL AS LATE FEE CHARGES IN RESPECT OF SHARES OF VSNL. THE LD. CIT(A) CONSIDER ING THE ABOVE FACTS DELETED THE DISALLOWANCE OF RS. 10,00,000/- MADE BY AO. HENCE, DEPARTMENT IS IN APPEAL BEFORE THE TRIBUNAL. 13. AT THE TIME OF HEARING, LD. DEPARTMENTAL REPRES ENTATIVE PLACED RELIANCE ON THE ORDER OF AO AND WHEREAS LD. AR JUST IFIED THE ORDER OF LD. CIT(A) AND ALSO SUBMITTED THAT SIMILAR ISSUE HAD BE EN CONSIDERED BY ITAT, CHANDIGARH BENCH IN THE CASE OF MASTER CAPITAL SERV ICES LTD. VS DCIT (2007) 108 TTJ (CHD) 389 WHEREIN IT WAS HELD THAT FINE PAI D FOR DELAY IN MAKING DELIVERY OF SHARES DUE TO DEFICIENCIES IN THE DOCU MENTS LIKE NON-MATCHING OF SIGNATURES ETC. CANNOT BE CONSIDERED AS PENAL IN NA TURE. IT WAS HELD THAT FINE ITA NOS. 2930 & 31/M/08 7 PAID ON ACCOUNT OF IRREGULARITIES CANNOT BE CONSIDE RED PAYMENT WHICH IS PENAL IN NATURE. BUT IT IS THE PAYMENT DUE TO IRREGULARIT IES AND IS IN THE REGULAR COURSE OF BUSINESS. HENCE THE SAME IS ALLOWABLE. 14. ON CONSIDERATION OF SUBMISSIONS OF LD. REPRESEN TATIVES OF THE PARTIES, ORDER OF AUTHORITIES BELOW AND THE ORDER OF ITAT CH ANDIGARH BENCH (SUPRA), WE HOLD THAT THE SAID PAYMENT OF RS. 10,00,000/- PA ID BY ASSESSEE IS NOT ON ACCOUNT OF VIOLATION/INFRACTION OF STATUTORY LAW BU T IS ONLY ON ACCOUNT OF IRREGULARITIES COMMITTED BY ASSESSEE IN THE REGULAR COURSE OF ITS BUSINESS. HENCE THE SAME IS ALLOWABLE AS REVENUE EXPENDITURE TO THE ASSESSEE. THEREFORE, WE UPHOLD THE ORDER OF LD. CIT(A) AND RE JECT GROUND NO. 3 OF THE APPEAL TAKEN BY DEPARTMENT. 15. IN THE RESULT, BOTH APPEALS FILED BY DEPARTMENT FOR ASSESSMENT YEARS 1999-2000 AND 2000-01 ARE DISMISSED. ORDER PRONOUNCED ON THIS 28 TH DAY OF SEPTEMBER, 2011 SD/- SD/- ( B. RAMAKOTAIAH) (B.R. MITTAL ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 28 TH SEPTEMBER, 2011 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR C BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NOS. 2930 & 31/M/08 8 DATE INITIALS 1. DRAFT DICTATED ON: 20.9.2011 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 22.09.2011 SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: SR. PS/PS 6. ORDER PRONOUNCED ON: SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: SR. PS/PS 9. DATE ON WHICH FILE GOES TO AR 10. DATE OF DISPATCH OF ORDER: