BAKLIWAL SECURITIES P. LTD, MUMBAI V. DCIT RG 4(1), MUMBAI

ITA 3585/MUM/2010

• Counselvise Citation: 358519914 RSA 2010
• Duration Of Justice: 1 year(s) 3 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-08-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 04-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 06-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P C MAURYA
• Assessee Lawyers: ANIL J SATHE; MANDAR TELANG
• Keywords: Capital asset; Business income; Depreciation; Cost of acquisition

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B : MUMBAI BEFORE SHRI D.K. AGARWAL, (JUDICIAL MEMBER) AND SHRI RAJENDRA SINGH,(ACCOUNTANT MEMBER) ITA NO.3585/MUM/2010 ASSESSMENT YEAR : 2006-07 M/S. BAKLIWAL SECURITIES PVT. LTD. 19/21, AMBALAL DOSHI MARG, 63, BOMBAY MUTUAL CHAMBERS, FORT,MUMBAI-400023 ..( APPELLANT ) P.A. NO. (AABCB 3107 H) VS. DY. COMMISSIONER OF INCOME TAX RANGE-4(1), MUMBAI. ..( RESPONDENT ) APPELLANT BY : SHRI ANIL J. SATHE & SHRI MANDARTELANG RESPONDENT BY : SHRI P. C. MAURYA DATE OF HEARING : 09.08.2011 DATE OF PRONOUNCEMENT : . AUGUST, 2011 O R D E R PER RAJENDRA SINGH (AM). THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST T HE ORDER DATED 25.03.2010 OF CIT(A) FOR THE ASSESSMENT YEAR 2006- 07. THE DISPUTES RAISED IN THIS APPEAL RELATE TO ALLOWABILITY OF DEPRECIATI ON ON BSE CARD, ADDITION UNDER SECTION 28(IV) AND DISALLOWANCE OF EXPENSES U NDER RULE 8D OF THE INCOME TAX RULES. ITA NO.3585/M/10 A.Y: 06-07 2 2. WE FIRST TAKE UP THE ISSUE RELATING TO ADDITION OF RS .71,69,336/- UNDER THE PROVISIONS OF SECTION 28(IV). UNDER THE S AID PROVISIONS, THE VALUE OF ANY BENEFIT OR PERQUISITE WHETHER CONVERTIBLE INTO MONEY OR NOT ARISING FROM BUSINESS OR THE EXERCISE OF PROFESSION IS ASSESSABL E AS BUSINESS INCOME. THE ASSSESSEE IN THE RELEVANT YEAR WAS A MEMBER OF BOMB AY STOCK EXCHANGE (BSE). THE BSE DURING THE YEAR WAS DEMUTUALISED AND ALL THE ASSETS AND LIABILITIES OF BSE WERE TAKEN OVER BY BSE LTD. (BSE L) W.E.F. 19.08.2005. UNDER THE SCHEME, EACH MEMBER WAS ALLOTTED 10000 SH ARES OF FACE VALUE OF RS .1 BESIDES BEING ALLOTTED TRADING RIGHTS OF STOCK E XCHANGE. PARALLEL AMENDMENTS WERE ALSO MADE IN THE INCOME TAX ACT TO DEAL WITH THE SITUATION ARISING CONSEQUENT TO DEMUTUALIZATION. CLAUSE (XI) WAS INSERTED IN SECTION 47 WHICH PROVIDED THAT ANY TRANSFER OF THE CAPITAL ASS ET BEING MEMBERSHIP OF RECOGNIZED STOCK EXCHANGE TO A COMPANY IN EXCHANGE OF SHARES ALLOTTED BY THE COMPANY TO THE TRANSFEROR BEFORE 31.12.1998 WOU LD NOT BE REGARDED AS TRANSFER. CLAUSE (XII) OF SECTION 47 ALSO PROVIDED THAT ANY TRANSFER OF CAPITAL ASSET TO A COMPANY IN THE COURSE OF DEMUTULISATION OR CORPORATISATION OF RECOGNIZED STOCK EXCHANGE AS A RESULT OF WHICH AN A SSOCIATION OF PERSONS OR BODY OF INDIVIDUALS IS SUCCEEDED BY SUCH COMPANY WI LL NOT BE TREATED AS TRANSFER SUBJECT TO CERTAIN CONDITIONS MENTIONED IN THE SAID PROVISIONS. FURTHER, UNDER SECTION 55(2)(AB), THE COST OF ACQUI SITION OF SHARES ALLOTTED TO SHAREHOLDERS OF RECOGNIZED STOCK EXCHANGE IN INDIA UNDER A SCHEME OF DEMUTULISATION OR CORPORATISATION APPROVED BY SEBI SHALL BE THE COST OF ACQUISITION OF THE ORIGINAL MEMBERSHIP OF THE EXCHA NGE AND THE COST OF TRADING OR CLEARING RIGHTS OF THE RECOGNIZED STOCK EXCHANGE ACQUIRED BY THE SHAREHOLDER SHALL BE DEEMED TO BE NIL. 2.1 THE AO OBSERVED THAT THOUGH THE ASSESSEE HAD ACQUIRED THE SHARES IN BSEL IN EXCHANGE OF BSE MEMBERSHIP CARD, THE TRANSACTION COULD NOT BE CONSIDERED FOR THE PURPOSE OF CAPITAL GAIN, AS THE SAME IS NOT REGARDED AS TRANSFER UNDER THE PROVISIONS OF SECTIO N 47(XI) AND, THEREFORE, THE PROVISIONS OF SECTION 50 AND 45 WERE NOT APPLIC ABLE IN CASE OF THE ASSESSEE IN THE RELEVANT YEAR. HOWEVER THE AO FURTHE R OBSERVED THAT THE ITA NO.3585/M/10 A.Y: 06-07 3 ASSESSEE HAD BEEN ALLOWED DEPRECIATION ON THE BSE C ARD AMOUNTING TO RS .71,69,336/- TILL ASSESSMENT YEAR 2005-06 AND, THER EFORE, THE ASSESSEE HAD DERIVED BENEFIT TO THAT EXTENT DURING THE RELEV ANT YEAR IN WHICH THE DEMUTULISATION TOOK PLACE AS THE COST OF ACQUISITIO N OF THE SHARES FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAINS WOULD BE TH E ORIGINAL COST OF BSE CARD. THOUGH THE ACTUAL BENEFIT TO THE ASSESSEE WOU LD ARISE IN THE YEAR IN WHICH SHARES WERE SOLD AND THE CAPITAL GAIN IS COMP UTED BUT THE BENEFIT HAD ACCRUED TO THE ASSESSEE IN THE RELEVANT YEAR. AO FU RTHER OBSERVED THAT THE ISSUE REGARDING ALLOWABLILITY OF DEPRECIATION ON TH E BSE CARD WAS DEBATABLE AND THE MATTER WAS PENDING IN DISPUTE AND, THEREFOR E, ADDITION UNDER SECTION 28(IV) IN THIS YEAR COULD BE MADE ONLY ON PROTECTIV E BASIS. HE THEREFORE, ADDED THE SUM OF RS .71,69,336/- AS INCOME OF THE ASSESSEE UNDER SECTIO N 28(IV). 2.2 IN APPEAL, CIT(A) AGREED WITH THE AO THAT THE BENEFIT ON ACCOUNT OF DEPRECIATION HAD ACCRUED TO THE ASSESSEE THIS YEAR IN WHICH THE EXCHANGE OF CARD HAD TAKEN PLACE WITH THE SHARES TH OUGH THE BENEFIT COULD BE REALIZED LATER. IT WAS ALSO OBSERVED BY HIM THAT THE PROTECTIVE ASSESSMENT FOR THE PURPOSE OF INCOME TAX WAS RECOGNIZED BY HON BLE SUPREME COURT IN THE CASE OF LALJI HARIDAS VS. ITO (43 ITR 387). HE, T HEREFORE, CONFIRMED THE ADDITION MADE BY THE AO AGGRIEVED BY WHICH THE ASSE SSEE IS IN APPEAL BEFORE THE TRIBUNAL. 2.3 BEFORE US, THE LD. AUTHORISED REPRESENTATIVE F OR THE ASSESSEE ARGUED THAT UNDER THE PROVISIONS OF SECTION 47(XIII ) EXCHANGE OF BSE CARD WITH SHARES IN BSEL WAS NOT A TRANSFER AND, THEREFO RE, NO BENEFIT HAD BEEN RECEIVED BY THE ASSESSEE. IT WAS POINTED OUT THAT T HE BENEFIT ON ACCOUNT OF FULL ORIGINAL COST OF BSE CARD WOULD ARISE ONLY IN THE YEAR WHEN THE SHARES ARE TRANSFERRED WHILE COMPUTING THE CAPITAL GAIN. THE A DDITION MADE THIS YEAR WAS NOT JUSTIFIED. IT WAS ALSO SUBMITTED THAT INCOM E UNDER SECTION 28(IV) COULD NOT BE ASSESSED ON ACCRUAL BASIS AND HAD TO B E TAXED ON ACTUAL RECEIPT BASIS. HE PLACED RELIANCE ON THE DECISION OF HYDERABA D BENCH OF THE TRIBUNAL IN THE CASE OF KNB INVESTMENTS (P) LTD. VS. ACIT (7 9 ITD 238) (HYD) IN ITA NO.3585/M/10 A.Y: 06-07 4 WHICH IT WAS HELD THAT FOR TAXABILITY OF A SUM UNDE R SECTION 28(IV), THE BENEFIT MUST BE INCOME IN CHARACTER, AND IT SHOULD ARISE IN THE RELEVANT PREVIOUS YEAR. THE ACCRUAL OF THE INCOME WAS NOT RELEVANT IN CONTEXT OF SECTION 28(IV). HE ALSO REFERRED TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF RUPEE FINANCE & MANAGEMENT (P) LTD. VS. ACI T (120 ITD 539) IN SUPPORT OF THE CASE. THE LD. DR ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND PLACED RELIANCE ON THE FI NDINGS GIVEN IN THE RESPECTIVE THE ORDERS. 2.4 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING ADDITION ON AC COUNT OF ANY BENEFIT ACCRUING TO THE ASSESSEE DUE TO EXCHANGE OF BSE MEM BERSHIP CARD WITH SHARES OF BSE LTD. DUE TO DE-MUTUALISATION OR CORPO RATISATION OF BSE DURING THE YEAR. THE BSE WAS CORPORATISED ON 19.8.2005 AN D EACH MEMBER WAS ALLOTTED 10,000 SHARES OF FACE VALUE OF RS.1/- IN E XCHANGE OF BSE CARD. UNDER THE PROVISIONS OF SECTION 55(2)(AB), THE COST OF AC QUISITION OF SHARES ALLOTTED TO THE SHARE HOLDERS WILL BE THE COST OF ACQUISITIO N OF THE ORIGINAL MEMBERSHIP OF THE EXCHANGE AND THE COST OF TRADING RIGHTS ACQU IRED BY THE SHARE HOLDER WILL BE NIL. SINCE DEPRECIATION HAD BEEN ALLOWED IN RESPECT OF THE BSE CARD, THE AO TOOK THE VIEW THAT BENEFIT TO THAT EXTENT HA D ACCRUED TO THE ASSESSEE IN THE YEAR OF CORPORATIZATION AS FULL COST OF BSE CARD WILL BE ALLOWED AS DEDUCTION WHILE COMPUTING THE CAPITAL GAIN IN THE Y EAR OF SALE OF SHARES. THOUGH THE BENEFIT WOULD ARISE IN THE YEAR OF SALE OF SHARES, AUTHORITIES BELOW HAVE TAKEN THE VIEW THAT BENEFIT HAD ACCRUED TO THE ASSESSEE IN THE YEAR OF EXCHANGE OF BSE CARD WITH BSE SHARES. ACCO RDINGLY THE AMOUNT OF TOTAL DEPRECIATION ALLOWED TO THE ASSESSEE RS .71,69,336/- HAS BEEN ASSESSED AS INCOME OF THE ASSESSEE UNDER SECTION 28(IV). THE ISSUE IS WHETHER THE PROVISIONS OF SECTION 28(IV) CAN BE APPLIED ON THE FACTS OF THE CASE. 2.5 SECTION 28(IV) PROVIDES THAT VALUE OF ANY BENEF IT OR PERQUISITE WHETHER CONVERTIBLE INTO MONEY OR NOT ARISING FROM BUSINESS OR THE EXERCISE OF PROFESSION IS ASSESSABLE AS BUSINESS INCOME. IT IS THUS CLEAR THAT ONLY THE VALUE OF ANY BENEFIT OR PERQUISITE ARISING DURING T HE YEAR FROM THE EXERCISE OF ITA NO.3585/M/10 A.Y: 06-07 5 BUSINESS OR PROFESSION CAN BE ASSESSED UNDER SECTIO N 28(IV). IN THIS CASE, THE BENEFIT WOULD ARISE ONLY IN THE YEAR WHEN THE S HARE IS SOLD AND CAPITAL GAIN IS TAXED. THIS ASPECT HAD ALSO BEEN CONSIDERE D BY THE HYDERABAD BENCH OF THE TRIBUNAL IN KNB INVESTMENTS (P) LTD. (SUPRA) , IN WHICH IT WAS HELD THAT FOR TAXABILITY OF A SUM UNDER SECTION 28(IV), THE B ENEFIT MUST BE OF INCOME IN CHARACTER AND IT SHOULD ARISE IN THE RELEVANT PREVI OUS YEAR. THE BENCH ALSO HELD THAT ACCRUAL OF INCOME WAS NOT RELEVANT IN THE CONTEXT OF SECTION 28(IV). THE AUTHORITIES BELOW HAVE TAXED THE INCOME THIS YE AR ON THE BASIS OF ACCRUAL WHICH IN VIEW OF THE HYDERABAD BENCH OF THE TRIBUNAL (SUPRA) IS NOT CORRECT. NO CONTRARY DECISION OF THE HON'BLE JURISDICTIONAL H IGH COURT OR THE APEX COURT HAS BEEN BROUGHT TO OUR NOTICE. THEREFORE, R ESPECTFULLY FOLLOWING THE DECISION OF THE HYDERABAD BENCH OF THE TRIBUNAL WE H OLD THAT NO ADDITION CAN BE MADE TO THE TOTAL INCOME UNDER THE PROVISIONS OF SECTION 28(IV) ON ACCOUNT OF EXCHANGE OF BSE CARD WITH BSE SHARES IN THE YEAR OF CORPORATIZATION. WE, THEREFORE, SET ASIDE THE ORDE R OF THE CIT(A) AND DELETE THE ADDITION MADE. 3. THE SECOND DISPUTE IS REGARDING ALLOWABILITY OF DEPRECIATION ON BSE CARD. THE BSE CARD AS POINTED OUT EARLIER WAS C ONVERTED INTO SHARES OF BSEL ON DEMUTULISATION / CORPORATIZATION OF STOCK E XCHANGE ON 19.08.2005. THE ASSESSEE FOR THE RELEVANT YEAR I.E. 2006-07 CLA IMED DEPRECIATION OF RS .3,34,600/- ON BSE CARD. 3.1 THE AO OBSERVED THAT UNDER THE PROVISIONS OF S ECTION 32(1) DEPRECIATION WAS ALLOWABLE ON CERTAIN INTANGIBLE AS SETS SUCH AS KNOW-HOW, PATENTS, COPYRIGHT, TRADEMARK, ETC. BSE CARD WAS NO T SUCH AN ASSET AND DEPRECIATION WAS NOT ALLOWABLE THOUGH ASSESSEE HAD BEEN CLAIMING THE SAME ON THE STRENGTH OF THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF TECHNO SHARES & STOCKS LTD. VS. ITO (101 TTJ (MU M.) 349) THE AO ALSO OBSERVED THAT IN SO FAR AS ASSESSMENT YEAR 2005-06 WAS CONCERNED, THE ISSUE OF DEPRECIATION WAS ONLY ACADEMIC AS BSE WAS DEMUTULISED THAT YEAR AND THE ASSESSEE HAD BEEN ALLOTTED SHARES IN LIEU O F THE BSE CARD. FURTHER ITA NO.3585/M/10 A.Y: 06-07 6 UNDER PROVISIONS OF SECTION 55(2)(AB), THE COST OF ACQUISITION OF SHARES WAS DEEMED TO BE THE ORIGINAL COST OF ACQUISITION OF BS E CARD AND THE COST OF ACQUISITION OF TRADING RIGHTS BY THE ASSESSEE WAS D EEMED TO BE NIL. THEREFORE, BSE CARD HAD BEEN EXTINGUISHED DURING TH E YEAR AND NO DEPRECIATION WAS ALLOWABLE TO THE ASSESSEE. THE AO ACCORDINGLY DISALLOWED THE CLAIM OF DEPRECIATION. IN APPEAL, CIT(A) FOLLOW ING THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF M/S. TECHNO SHARES AND STOCK LTD. (323 ITR 69) HELD THAT DEPRECIATION ON BSE CARD WAS NOT ALLOWABLE AND ACCORDINGLY HE CONFIRMED THE DISALLOWANCE MADE BY T HE AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL . 3.2 BEFORE US THE LD. AR FOR THE ASSESSEE SUBMITT ED THAT THE ISSUE REGARDING ALLOWABILITY OF DEPRECIATION ON THE STOCK EXCHANGE CARD WAS SETTLED BY THE JUDGMENT OF HON'BLE SUPREME COURT IN THE CAS E OF M/S. TECHNO SHARES AND STOCKS LTD. (327 ITR 323) IN WHICH IT WAS HELD THAT THE STOCK EXCHANGE CARD WAS AKIN TO ANY BUSINESS OR COMMERCIAL RIGHT A ND, THEREFORE, DEPRECIATION WAS ALLOWABLE. THE LD. DR ON THE OTHER HAND, PLACED RELIANCE ON THE ORDER OF THE AO. 3.3 WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MATTER CAREFULLY. THE DISPUTE IS REGARDING ALLOWABILITY OF DEPRECIATION ON THE BSE CARD CIT(A) HAS CONFIRMED THE DISALLOWANCE OF DEPRE CIATION MADE BY AO FOLLOWING THE JUDGMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF M/S. TECHNOSHARES AND STOCK LTD. (SUPRA) IN WHICH IT HAS BEEN HELD THAT DEPRECIATION IS NOT ALLOWABLE ON THE BSE CARD. HOWE VER, THE VIEW TAKEN BY HONBLE BOMBAY HIGH COURT HAS NOT BEEN UPHELD BY TH E HON'BLE SUPREME COURT WHO HAVE HELD IN THE CASE OF M/S. TECHNOSHARE S AND STOCK LTD. (327 ITR 323) THAT STOCK EXCHANGE CARD IS AKIN TO ANY BU SINESS OR COMMERCIAL RIGHT AND DEPRECIATION HAS THEREFORE TO BE ALLOWED IN CASE OF THE ASSESSEE. HOWEVER, SINCE DURING THE YEAR BSE, CARD WAS EXCHANG ED WITH SHARES WHICH AMOUNTS TO SALE OF THE CARD, DEPRECIATION HAS TO BE CALCULATED UNDER THE PROVISIONS OF SECTION 43(6)(C). THIS ASPECT HAS NOT BEEN EXAMINED BY THE ITA NO.3585/M/10 A.Y: 06-07 7 AUTHORITIES BELOW. WE, THEREFORE, RESTORE THIS IS SUE TO THE FILE OF THE AO FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION A ND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESSEE. 4. THE THIRD DISPUTE IS REGARDING THE DISALLOWANCE OF EXPENSES UNDER RULE 8D. THE AO NOTED THAT THE ASSESSEE HAD D ECLARED DIVIDEND OF RS .2,48,095/- WHICH WAS EXEMPT FROM INCOME TAX. HE, TH EREFORE, DISALLOWED THE EXPENSES RELATING TO THE DIVIDEND INCOME AND SU CH EXPENSES WERE CALCULATED ON THE BASIS OF RULE 8D WHICH CAME TO RS .1,36,567/-. IN APPEAL, THE CIT(A) FOLLOWING THE DECISION OF THE SPECIAL BE NCH OF THE TRIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD. (119 TTJ 289) HELD THAT RULE 8D HAD RETROSPECTIVE APPLICATION AND WOULD APPLY TO AL L PENDING ASSESSMENTS. ACCORDINGLY HE CONFIRMED THE DISALLOWANCE MADE BY T HE AO AGGRIEVED BY WHICH THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL . 4.1 WE HAVE HEARD BOTH THE PARTIES, PERUSED THE RE CORDS AND CONSIDERED THE MATER CAREFULLY. THE DISPUTE IS REG ARDING DISALLOWANCE OF EXPENSES IN RELATION TO DIVIDEND INCOME WHICH WAS E XEMPT FROM TAX. UNDER THE PROVISIONS OF SUB SECTION (2) AND SUB SECTION ( 3) OF SECTION 14A, THE DISALLOWANCE OF EXPENSES IN RELATION TO EXEMPT INCO ME ARE TO BE MADE ON THE BASIS OF METHOD PRESCRIBED BY THE GOVERNMENT. THE GOVT. HAS SINCE PRESCRIBED METHOD IN FORM OF RULE 8D. THE AUTHORIT IES BELOW HAVE TAKEN THE VIEW THAT RULE 8D HAS RETROSPECTIVE APPLICATION WHI CH HAS NOT BEEN UPHELD BY THE HONBLE BOMBAY HIGH COURT WHO IN THE CASE OF GO DREJ BOYCE MANUFACTURING CO. LTD. (234 CTR 1) HAVE HELD THAT R ULE 8D WOULD APPLY FROM ASSESSMENT YEAR 2008-09. THE HONBLE HIGH COURT HAS HELD THAT IN RELATION TO PRIOR PERIOD, THE DISALLOWANCE OF EXPENSES BOTH DIRECT AND INDIRECT HAS TO BE MADE ON REASONABLE BASIS. WE, THEREFORE, SET AS IDE THE ORDER OF THE CIT(A) AND RESTORE THE MATTER TO THE FILE OF THE AO FOR PASSING A FRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF THE JUD GMENT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURIN G CO. LTD.(SUPRA), AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSESS EE. ITA NO.3585/M/10 A.Y: 06-07 8 5. IN THE RESULT, APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 30.8.2011. SD/- SD/- (D.K. AGARWAL) (RAJENDRA SINGH ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 30.8.2011. JV. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR B BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.