M/S. PHOENIX SHARE & STOCK BROKERS P.LTD., MUMBAI V. THE INCOME TAX OFFICER 4(2)(4), MUMBAI

ITA 5649/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1174 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 28-06-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 16-10-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AJIT K SINHA
• Assessee Lawyers: S C TIWARI
• Keywords: Recovery proceedings; Depreciation; Opportunity of being heard; Cost of acquisition
• Section: 40(a)(ia); 32; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH C,MUMBAI BEFORE SHRI D.K. AGARWAL (JM) & SHRI R.K. PANDA (AM ) I.T.A.NO.5649/MUM/2009 (A.Y. 2006-07) M/S. PHOENIX SHARE & STOCK BROKERS P.LTD., 2, KAMANWALA CHAMBERS, 3 RD FLOOR, SIR PM RD., FORT, MUMBAI-400 001. PAN: AABCP6371P VS. INCOME-TAX OFFICER-4(2)(4), AAYKAR BHAVAN, M.K. ROAD, MUMBAI-4020. APPELLANT RESPONDENT I.T.A.NO.59 38/MUM/2009 (A.Y. 2006-07) INCOME-TAX OFFICER-4(2)(4), AAYKAR BHAVAN, M.K. ROAD, MUMBAI-4020. VS. M/S. PHOENIX SHARE & STOCK BROKERS P.LTD., 2, KAMANWALA CHAMBERS, 3 RD FLOOR, SIR PM RD., FORT, MUMBAI-400 001. PAN: AABCP6371P APPELLANT RESPONDENT ASSESSEE BY SHRI S.C. TIWARI. DEPARTMENT BY SHRI AJ IT K. SINHA O R D E R PER R.K. PANDA, AM : THESE ARE CROSS APPEALS THE FIRST ONE FILED BY THE ASSESSEE AND SECOND ONE FILED BY THE REVENUE AND ARE DIRECTED AGAINST THE O RDER DATED 19-08-2009 OF THE CIT(A)-IV, MUMBAI, RELATING TO ASSTT. YEAR 2006-07. ITA NO.5938/MUM/2009: (BY REVENUE): 2. IN GROUND OF APPEAL NO. 1, THE REVENUE HAS CHAL LENGED THE ORDER OF CIT(A) IN DELETING THE DISALLOWANCE MADE BY THE AO IN RESP ECT OF VSAT & TRANSACTION CHARGES U/S.40(A)(IA) OF THE I.T. ACT. ITA NOS.5649-5938/M/09 PHOENIX SHARE & STOCK BROKERS 2 2.1 THE FACTS OF THE CASE, IN BRIEF, ARE THAT THE A O DISALLOWED NSE/BSE TRANSACTION CHARGES & VSAT CHARGES AMOUNTING TO RS .8,58,347/- ON THE GROUND THAT NO TAX HAS BEEN DEDUCTED AT SOURCE FROM THESE PAYMENTS AND THEREFORE THE PROVISIONS OF SEC. 40(A)(IA) ARE APPLICABLE. 2.2 IN APPEAL, THE CIT(A), FOLLOWING THE ORDER IN T HE CASE OF THE ASSESSEE FOR ASST. YEAR 2005-06 AND THE DECISION OF THE TRIBUNAL IN THE CASE OF M/S. KOTAK SECURITIES LTD. REPORTED IN 25 SOT 440, DELETED TH E ADDITION. AGGRIEVED WITH SUCH ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFO RE US. 3. BOTH THE PARTIES FAIRLY CONCEDED BEFORE US THAT THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBU NAL IN THE CASE OF M/S. KOTAK SECURITIES LTD. REPORTED IN 124 TTJ 241 (BOM.). IN VIEW OF THE ABOVE, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 4. IN GROUND OF APPEAL NO. 2, THE REVENUE HAS CHALL ENGED THE ORDER OF CIT(A) IN DELETING THE ADDITION MADE ON ACCOUNT OF PENALTY OF RS.1,17,600/- PAID TO STOCK EXCHANGE ON VIOLATION OF THE BYE-LAWS OF THE STOCK EXCHANGE. 4.1 THE FACTS OF THE CASE, IN BRIEF, ARE THAT THE A O DISALLOWED AN AMOUNT OF RS.1,17,600/- BEING THE CLAIM MADE BY THE ASSESSEE ON THE GROUND THAT THE EXPLANATION TO SEC. 37 IS APPLICABLE ON ACCOUNT OF PENALTY PAID TO THE STOCK EXCHANGE FOR VIOLATION OF THEIR BYE-LAWS. 4.2 IN APPEAL, THE CIT(A) DELETED THE DISALLOWANCE ON THE GROUND THAT STOCK EXCHANGES ARE NOT GOVT. OR SEMI-GOVT. BODIES BUT AR E COMPANIES AND, THEREFORE, PAYMENTS MADE TO SUCH COMPANIES FOR VIOLATION OF TH EIR REGULATIONS ARE NOT EXPENDITURE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. THEREFORE, INVOCATION OF EXPLANATION TO SEC. 37 F OR SUCH PAYMENT IS NOT CORRECT. AGGRIEVED WITH SUCH ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US. ITA NOS.5649-5938/M/09 PHOENIX SHARE & STOCK BROKERS 3 5. AFTER HEARING BOTH THE SIDES, WE FIND THE TRIBUN AL IN ASSESSEES OWN CASE FOR ASST. YEAR 2004-05 VIDE ITA NO.5141/M/06 ORDER DATED 06-11-2008 HAS RESTORED THE ISSUE TO THE FILE OF THE AO FOR FRESH ADJUDICATION WITH CERTAIN OBSERVATIONS/DIRECTIONS. FOLLOWING THE SAME RATIO, WE RESTORE THE MATTER BACK TO THE FILE OF AO FOR FRESH ADJUDICATION OF THIS ISSUE IN THE LIGHT OF THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE CITED ABOVE. THE GROUND RAISED BY THE REVENUE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.5649/MUM/2009: (BY ASSESSEE) : 6. THE ONLY EFFECTIVE GROUND RAISED BY THE ASSESSEE READS AS UNDER : THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ER RED IN CONFIRMING THE PROTECTIVE ASSESSMENT OF ALLEGED INC OME OF RS.21,050,390/- UNDER SECTION 41(1)(A) OF THE ACT O N DEMUTUALIZATION OF BSE CARD AS PER THE SCHEME OF BO MBAY STOCK EXCHANGE. 6.1 THE FACTS OF THE CASE, IN BRIEF, ARE THAT THE A SSESSEE COMPANY IS A STOCK BROKER DEALING IN SHARES AND SECURITIES. THE AO, DU RING THE COURSE OF ASSESSMENT PROCEEDINGS, OBSERVED THAT THE ASSESSEE CLAIMED A S UM OF RS.16,47,403/- TOWARDS DEPRECIATION ON THE MEMBERSHIP RIGHT OF BOM BAY STOCK EXCHANGE LTD. THE AO DISCUSSED THE PROVISIONS OF SEC. 32 AND WAS OF THE OPINION THAT THE MEMBERSHIP RIGHT OF THE BOMBAY STOCK EXCHANGE LTD. DOES NOT SATISFY THE ABOVE CONDITIONS AS MENTIONED IN SEC. 32. HE ACCORDINGLY CONFRONTED THE ASSESSEE TO JUSTIFY ITS CLAIM. NOT BEING SATISFIED WITH THE EXP LANATION GIVEN BY THE ASSESSEE AND HOLDING THAT SINCE THE BSE WAS BEING DEMUTUALI SED IN THIS YEAR, THE ISSUE OF DEPRECIATION ON BSE CARD IS ONLY ACADEMIC IN NATURE . HE NOTED THAT THE ASSTS OF ERSTWHILE AOP THE BOMBAY STOCK EXCHANGE WERE TAK EN OVER BY BSEL. ALL THE OPERATIONS OF BSE WERE TAKEN OVER BY BSEL W.E.F. 19 -08-2005 AND EACH HOLDER OF THE BSE CARD WAS GIVEN 10,000 SHARES OF THE NEWLY I NCORPORATED COMPANY. HE ITA NOS.5649-5938/M/09 PHOENIX SHARE & STOCK BROKERS 4 DISCUSSED THE IMPACT OF THE ABOVE DEMUTUALIZATION, ANALYSED THE NOTIFICATION DATED 20-05-2005 OF SEBI, TRADING RIGHTS OF THE MEM BERS, DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SU RAT COTTON SPG. & WVG. MILLS LTD. REPORTED IN 202 ITR 932 AND CAME TO THE CONCLU SION THAT THE ASSESSEE IS NOT ENTITLED FOR CLAIM OF DEPRECIATION IN THIS YEAR. HE FURTHER NOTED THAT THE ASSESSEE HAS ALREADY WITHDRAWN DEPRECIATION FOR THIS YEAR B Y REVISING ITS RETURN. HOWEVER, HE MADE A PROTECTIVE ADDITION OF RS.2,10,50,390/- S INCE THE ASSESSEE HAS BENEFITED BY AN EXTENT OF RS.2,10,50,390/- AS A RE SULT OF THE DEMUTUALIZATION AS AGAINST THE COST OF ACQUISITION OF THE STOCK EXCHAN GE CARD DEEMED TO BE AT RS.2,76,00,000/-. HE FINALLY HELD THAT IN CASE IT I S FINALLY HELD THAT DEPRECIATION ON BSE CARD IS ALLOWABLE, THE SAID DISALLOWANCE SHOULD BE RS.2,76,00,000/-. 6.2 IN APPEAL, THE LD. CIT(A) CONFIRMED THE PROTECT IVE ADDITION BY HOLDING AS UNDER : 1.1 THE A.O. HAS MADE PROTECTIVE ADDITION ON AC COUNT OF THE FACT THAT THOUGH THE A.O. IS DISALLOWING DEPRECIATION ON BSE CARD, RELIEF IS BEING ALLOWED T O THE APPELLANT BY HONBLE ITAT AND THE DEPARTMENT HAS PREFERRED APPEAL TO BOMBAY HIGH COURT AND THE APPEA L AT HIGH COURT IS PENDING. THE A.O. OBSERVED THAT THE L EGAL FICTION ENUNCIATED BY SECTION OF SECTION 55(AB) TANTAMOUNT TO RECOVERING BACK THE ALLOWANCE OF DEPRECIATION ALLOWED U/S. 41(1)(A) AMOUNTING TO RS.90,42,236/- AND THOUGH TRANSFER OF SHARES ALLOTT ED BY BSE HAS NOT TAKEN PLACE IN THE CURRENT YEAR BUT THE FACT REMAINS THAT SINCE THE EXCHANGE HAS TAKEN PLACE IN THE RELEVANT YEAR, THE BENEFIT OF SECTION 55 (AB) ACCRU ES IN THIS YEAR, ALTHOUGH IT MAY BE REALIZED LATER. THE PROTECTIVE ADDITION WAS, THEREFORE, MADE BY A.O. IN CASE OF THE APPELLANT, WHO HAS CLAIMED THE DEPRECIATION AND THE SAME BECOMES SUBSTANTIVE IN CASE IT IS FINALLY HELD THAT DEPRECIATION IS PERMISSIBLE TO THE APPELLANT A ND HE CLAIMS THE ORIGINAL COST OF MEMBERSHIP OF BSE AS I TS COST OF ACQUISITION. 1.2.1 THE FACT IS BEYOND DISPUTE THAT TWO DEDUCTION OF ONE EXPENSE CANNOT BE CLAIMED OR ALLOWED. THE PROTE CTIVE ASSESSMENT HAS BEEN RECOGNIZED FOR THE PURPOSE OF INCOME-TAX ACT BY THE SUPREME COURT IN THE CASE OF LALJI HARIDAS VS. ITO 43 ITR 387, SO THAT THE REVENUE MAY NOT ITA NOS.5649-5938/M/09 PHOENIX SHARE & STOCK BROKERS 5 BE IRRETRIEVABLY LOST, IF THE FINAL OUTCOME OF DISP UTE IS DIFFERENT AND SUCH PARALLEL OF THE PROTECTIVE ASSES SMENT ARE, THEREFORE, PERMISSIBLE IN LAW. IN CASE OF PROT ECTIVE ASSESSMENT HOWEVER, RECOVERY OF TAX IS NOT POSSIBLE AS HAS BEEN HELD BY JAGANNATH BAWRI VS- CIT 234 ITR 4 64 AND CIT VS- SMT. SARASWATI DEVI 212 ITR 445 (RAJASTHAN). 1.2.2 PROTECTIVE ASSESSMENT TO PROTECT THE INTERE ST OF REVENUE AND TO ENSURE THAT TWO DEDUCTIONS ARE NOT ALLOWED WITH RESPECT TO ONE EXPENSE, IS PERFECTLY L EGAL AND ACTION OF THE A.O. IS, THERE, FOUND TO BE VALID . 1.2.3 THOUGH THE AO HAS OBSERVED IN THE ASSESSMEN T ORDER AT PAGE 9 THAT THE DEMAND IS NOT ENFORCEABLE BUT DESPITE THAT, IT WAS SUBMITTED BY THE APPELLANT, TH E AO HAS ADJUSTED THE DEMAND AGAINST THE REFUND. AS THE DEMAND OF A PROTECTIVE ADDITION CANNOT BE ENFORCED, THE AO IS DIRECTED NOT TO ENFORCE THE DEMAND TILL THE PROTECTIVE ADDITION BECOMES SUBSTANTIAL. AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE US. 7. THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF TECHNO SHA RES & STOCK BROKERS REPORTED IN 224 CTR 337,WHEREIN IT HAS BEEN HELD THAT DEPREC IATION IS NOT ALLOWABLE ON BSE MEMBERSHIP CARD. HE SUBMITTED THAT THE ARGUMENT OF THE AO EMANATES FROM SEC. 55(2)(AB) PROVIDING FOR SUBSTITUTION OF COST O F ACQUISITION OF ERSTWHILE MEMBERSHIP CARD FOR THE COST OF ACQUISITION OF NEW LY ALLOTTED SHARES OF BSE LTD. THIS TAKES PLACE BY OPERATION OF LAW WHEN THE ASSES SEE HAS NO HAND IN IT. HE SUBMITTED THAT NO PROFITS OR GAINS HAVE ARISEN TO T HE ASSESSEE DURING THE YEAR UNDER ASSESSMENT. HE SUBMITTED THAT CAPITAL GAINS, IF ANY, ARISING TO THE ASSESSEE ON TRANSFER OR EXCHANGE OR EXTINGUISHMENT OF THE ER STWHILE BSE MEMBERSHIP CARD ARE SPECIFICALLY EXCLUDED FROM THE PURVIEW OF SEC. 45 BY VIRTUE OF NEWLY INSERTED SEC.47(XIIIA). THERE DOES NOT ARISE THE QUESTION OF ANY GAINS TO THE ASSESSEE ON ALLOTMENT OF SHARES IN BSEL BECAUSE DURING THE PREV IOUS YEAR ONLY ALLOTMENT OF SHARES HAS TAKEN PLACE. HE SUBMITTED THAT PROFITS D O NOT ARISE ON ACQUISITION OF AN ASSET BUT ONLY WHEN AN EXISTING ASSET IS SOLD OR OTHERWISE TRANSFERRED. ITA NOS.5649-5938/M/09 PHOENIX SHARE & STOCK BROKERS 6 CHALLENGING THE PROVISIONS OF SEC. 41(1)(A) APPLIED BY THE AO, HE SUBMITTED THAT THESE PROVISIONS WILL APPLY WHEN THE FOLLOWING COND ITIONS ARE MET : 1) THERE IS AN ALLOWANCE OR DEDUCTION MADE IN THE ASSESSMENT FOR ANY YEAR IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIA BILITY INCURRED BY AN ASSESSEE. 2) SUCH ASSESSEE HAS OBTAINED IN CASH OR IN ANY OTHER MANNER ANY AMOUNT IN RESPECT OF SUCH LOSS OR EXPENDITURE OR SO ME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSA TION THEREOF. HE ACCORDINGLY SUBMITTED THAT IN RELATION TO LOSS O R EXPENDITURE ALLOWED TO AN ASSESSEE IN ANY ASSESSMENT YEAR THERE SHOULD BE REC EIPT OF CASH OR OF AN AMOUNT IN ANY OTHER MANNER. HE SUBMITTED THAT THE A SSESSEE HAS NOT RECEIVED ANY CASH NOR ANY AMOUNT IN ANY OTHER MANNER IN RESP ECT OF DEPRECIATION ALLOWED TO THE ASSESSEE IN THE PAST. 7.1 AS REGARDS REMISSION OR CESSATION OF A TRADING LIABILITY, HE SUBMITTED THAT NO SUCH QUESTION ARISES IN THE CASE OF THE ASSESSEE BECAUSE ON GRANT OF DEPRECIATION ALLOWANCE TO THE ASSESSEE ON ITS BSE M EMBERSHIP CARD NO TRADING LIABILITY HAS BEEN CREATED. IT WOULD BE THUS SEEN T HAT THE PROVISIONS OF SEC. 41(1)(A) DO NOT APPLY AT ALL. 7.2 AS REGARDS THE PROVISIONS OF SEC. 28(IV), HE SU BMITTED THAT THERE SHOULD BE ANY BENEFIT OR PERQUISITE ARISING FROM THE BUSINESS OF THE ASSESSEE. ACCORDING TO HIM, SHARES ALLOTTED TO THE ASSESSEE IN NEWLY INCOR PORATED BSEL DO NOT AMOUNT TO ANY BENEFIT BECAUSE THERE IS NO ADDITION OF ANY VALUE TO OR ENLARGEMENT OF THE ASSESEES EXISTING RIGHTS IN BOMBAY STOCK EXCHANGE ON ACCOUNT OF ALLOTMENT OF SHARES OF BSE. THE PROVISIONS OF SEC. 28(IV) ALSO T HEREFORE CANNOT BE PRESSED INTO SERVICE. ITA NOS.5649-5938/M/09 PHOENIX SHARE & STOCK BROKERS 7 7.3 HE SUBMITTED THAT IN VIEW OF THE FOREGOING DISC USSION, IT WOULD BE SEEN THAT THERE IS NO INCOME CHARGEABLE TO TAX ARISING T O THE ASSESSEE ON ACCOUNT OF TRANSFER, EXCHANGE OR EXTINGUISHMENT OF THE ASSESEE S MEMBERSHIP CARD OF ERSTWHILE BSE. HE ACCORDINGLY SUBMITTED THAT THE A DDITION MADE BY THE AO BE DELETED AND THE GROUNDS OF APPEAL TAKEN BY THE ASSE SSEE BE ALLOWED. 8. THE LD. D.R., ON THE OTHER HAND, SUPPORTED THE O RDER OF THE A.O. 9. AFTER HEARING BOTH THE SIDES, WE FIND THAT THE M ATTER RELATING TO ALLOWABILITY OF DEPRECIATION ON STOCK EXCHANGE CARD IS AGAINST T HE ASSESSEE BY THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT. WE FIND THE ORDER OF THE CIT(A), AS ADMITTED BY BOTH THE SIDES, IS A VERY CRITIC ONE A ND DOES NOT DEAL WITH THE ISSUE AT HAND PROPERLY. ALTHOUGH THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT FULL FACTS ARE AVAILABLE AND THE MATTER SHOULD BE DECIDE D HERE ITSELF, HOWEVER, WE ARE NOT CONVINCED WITH THE ARGUMENTS MADE BY THE LD. CO UNSEL FOR THE ASSESSEE. WE FIND THE CIT(A) HAS NOT AT ALL CONSIDERED THE VARIO US ARGUMENTS PUT FORTH BEFORE HIM. IN OUR OPINION, THE MATTER REQUIRES FRESH ADJ UDICATION AT THE LEVEL OF THE AO. WE, THEREFORE, DEEM IT PROPER TO RESTORE THE MA TTER BACK TO THE FILE OF AO WITH A DIRECTION TO DECIDE THE ISSUE AFRESH AND IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. THE GROUND TAKEN BY THE ASSESSEE IS ACCORDINGLY AL LOWED FOR STATISTICAL PURPOSES. 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES, WHEREAS THE APPEAL FILED BY T HE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THE 09TH DAY OF JULY, 2010. SD/- SD/- (D.K. AGARWAL) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 09 TH JULY , 2010. NG: ITA NOS.5649-5938/M/09 PHOENIX SHARE & STOCK BROKERS 8 COPY TO : 1. ASSESSEE. 2.DEPARTMENT. 3 CIT(A)-IV,MUMBAI. 4 CIT-4,MUMBAI. 5.DR,C BENCH,MUMBAI. 6. MASTER FILE. (TRUE COPY) BY ORDER, ASST.REGISTRAR, ITAT, MUMBAI. ITA NOS.5649-5938/M/09 PHOENIX SHARE & STOCK BROKERS 9 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 28-06-10 SR.PS/ 2 DRAFT PLACED BEFORE AUTHOR 01-07-10 SR.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/ 6. KEPT FOR PRONOUNCEMENT ON SR.PS/ 7. FILE SENT TO THE BENCH CLERK SR.PS/ 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER