M/S. ICICI SECURITIES LTD(EARLIER KNOWN AS ICICI BROKERAGE SER.LTD)(IN THE CASE OF ERSTWHILE ICICI WEB TRADE LTD WHICH WAS MERGED WITH ICICI BROK.SER.LTD), MUMBAI V. THE DY.C.I.T.,RANGE 4(1), MUMBAI

ITA 6304/MUM/2008

• Counselvise Citation: 630419914 RSA 2008
• Duration Of Justice: 5 year(s) 11 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-10-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 16-10-2014
• Assessment Year: 2004-2005
• Appeal Filed On: 24-10-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KISHAN VYAS
• Assessee Lawyers: DATTA BHOSALE
• Keywords: Capital asset; Depreciation; Transfer pricing; Fair market value; Speculation loss; Wrong claim; Bad and doubtful debts; Difference of opinion; Commercial expediency; Onus to prove
• Section: 32; 28; 234B

Judgement Text

1 , INCOME TAX APPELLATE TRIBUNAL,MUMBAI - I BENCH. . . , , . . BEFORE S/SH.H.L.KARWA,PRESIDENT AN D RAJENDRA,ACCOUNTANT MEMBER ./ ITA 6304/MUM/2008 ! ! ! ! ' ' ' ' / ASSESSMENT YEAR 2004-05 M/S. ICICI SECURITIES LIMITED ICICI BANK LTD.,LAXMI TOWERS 2 ND FLOOR,BKC,BANDRA(EAST) MUMBAI-400051 PAN:AACI6284P ! V/S. DCIT -4 (1) 640,AAYKAR BHVAVAN, M K ROAD,MUMBAI-20 ./ ITA 6529/MUM/2008 ! ! ! ! ' ' ' ' / ASSESSMENT YEAR 2004-05 DCIT -4 (1) 640,AAYKAR BHVAVAN, M K ROAD,MUMBAI-20 ! V/S. M/S. ICICI SECURITIES LIMITED ICICI BANK LTD.,LAXMI TOWERS 2 ND FLOOR,BKC,BANDRA(EAST) MUMBAI-400051 ./ ITA 500/MUM/2012 ! ! ! ! ' ' ' ' / ASSESSMENT YEAR 2004-05 M/S. ICICI SECURITIES LIMITED ICICI BANK LTD.,LAXMI TOWERS 2 ND FLOOR,BKC,BANDRA(EAST) MUMBAI-400051 ! V/S. DCIT -4 (1) 640,AAYKAR BHVAVAN, M K ROAD,MUMBAI-20 ( #$ / APPELLANT) ( %&#$ / RESPONDENT) ASSESSEE BY :SHRI.DATTA BHOSALE REVENUE BY : SHRI KISHAN VYAS ! ' () / DATE OF HEARING : 16-1 0 -2014 *+' ' () /DATE OF PRONOUNCEMENT : 22 -1 0 -201 4 ! ! ! ! , 1961 ' '' ' 254(1) (,( (,( (,( (,( -. -. -. -. ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA,AM- -/ -/ -/ -/ , ! ! ! ! : CHALLENGING THE ORDER DATED OF CIT(A)-,MUMBAI THE A SSESSING OFFICER(AO)AND THE ASSESSEE HAVE FILED CROSS APPEALS.ONE MORE APPEAL,RELATED WI TH PENALTY PERTAINING TO THE SAME YEAR AND ARISING OUT OF ORDER FOR THE YEAR UNDER CONSIDERATI ON,HAS BEEN TAKEN UP FOR ADJUDICATION PURPOSES. ITA 6304/MUM/2008: THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEA L: (A)RE: NON ALLOWANCE OF LOSS ON SALE OF SECURITIES RS.24,91,985 ADHOC DISALLOWANCE OF EXPENSES RS. 2,50,000[PARA 2 OF THE CIT(A) ORDER] [2]THE CIT(A) ERRED IN CONFIRMING THE LOSS ON SALE OF SECURITIES OF RS.24,97,985 AS A SPECULATION LOSS APPLYING THE EXPLANATION TO SECTION 73 OF INCO ME TAX ACT, 1961. [3]THE CIT(A) ERRED IN CONFIRMING THE DISALLOWANCE OF ADHOC EXPENSES OF RS.2,50,000 TREATING THE SAME AS INCURRED TOWARDS THE SPECULATION BUSINE SS. (B)RE: DISALLOWANCE OF BAD DEBTS [4]ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE A ND LAW , CIT(A)ERRED IN DISALLOWING THE BAD DEBTS OF RS. 6,09,334 CLAIMED BY US ON THE GROUND T HAT APPELLANT HAD FAILED TO ESTABLISH THAT THE 6304/MUM/08ICICIBSL 2 DEBTS HAD BECOME BAD AND THUS WRONGLY WRITTEN OFF T HE SAME. 5]THE CIT (A) OUGHT TO HAVE APPRECIATED AS UNDER: 1.THE APPELLANT HAS AN ELABORATE INTERNAL SYSTEM FO R WRITE OFF OF BAD DEBTS AND ONLY WHEN THE DEBTS ARE IRRECOVERABLE THE SAME ARE WRITTEN OFF TH ROUGH BAD DEBTS 2.THE APPELLANT ALL THROUGH OUT IN THE PRECEDING YE ARS HAS CONSISTENTLY FOLLOWED THIS METHOD OF WRITE OFF. 3.WHETHER A PARTICULAR DEBT IS IRRECOVERABLE WOULD BE LEFT TO THE PRUDENCE AND JUDGMENT OF THE APPELLANT. (C)RE: INTEREST UNDER SECTION 234B AND INTEREST U/S 234D [6]THE CIT(A) ERRED IN NOT ADJUDICATING THE GROUND REGARDING CHARGING IF INTEREST UNDER SECTION 234B AND 234D OF THE ACT HOLDING THAT THE SAME IS N OT APPEALLABLE. (D)GENERAL [7]THE APPELLANT CRAVES LEAVE AND RESERVES ITS RIGH TS TO VARY, AMEND ALTER AND/OR ADD TO THE GROUNDS OF APPEAL AND TO PRODUCE SUCH ORAL AND DOCU MENTARY EVIDENCE AND FILE SUCH COMPILATION OF DOCUMENTS AS MAY BE NECESSARY AT THE TIME OF HEA RING OF THE APPEAL. ITA /6529/MUM/2008: THE GROUNDS OF APPEAL FILED BY THE AO READ AS UNDER : ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN RELYING ON ITATS DECISION IN THE CASE OF M/S. TECHNO SHARES & STOCKS LTD., AS IN THAT CASE, I.WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE TRIBUNAL WAS CORRECT IN HOLDING THAT, THE MEMBERSHIP OF BOMBAY STOCK EXCHAN GE IS A CAPITAL ASSET EVEN THOUGH AS PER THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F STOCK EXCHANGE AHMEDABAD VS. ACIT;& BOMBAY HIGH COURT IN THE CASE OF THE STOCK EXCHANGE BOMBAY VS. V.S. KANDALGAONK -AR ACIT AND OTHERS (261 ITR 577); MEMBERSHIP OF THE STOCK E XCHANGE IS ONLY A PERSONAL PRIVILEGE GRANTED BY THE STOCK EXCHANGE TO THE MEMBER. II.WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE HONBLE TRIBUNAL FAILED TO CONSIDER THAT THE BASIC INGREDIENTS OF OWNERSHIP AR E NOT PRESENT IN THE BSE MEMBERSHIP CARD & THEREFORE THE ASSESSEE CANNOT CLAIM TO BE ITS OWNER FOR THE PURPOSE OF CLAIMING DEPRECIATION ON THE SAME. III.WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE HONBLE TRIBUNAL WAS CORRECT IN HOLDING THAT THE BSE CARD IS AN INTANGIB LE ASSET WITHIN THE DEFINITION OF SEC 32(1)(II) OF THE INCOME TAX ACT, WHEN THE PERSONAL PERMISSION G RANTED THE BSE IS NOT A DESCENDENT OF COMMON ANCESTRY OR AKIN TO KNOW-HOW COPYRIGHT, PAT ENTS TRADEMARKS FRANCHISES IN ORIGIN, NATURE AND QUALITY BUT FAR AWAY FROM INTANGIBLE ASSETS MEN TIONED IN SECTION 32(1)(II) OF THE INCOME TAX ACT. IV.WHETHER ON THE FACT AND CIRCUMSTANCES OF THE CA SE AND IN LAW THE TRIBUNAL WAS CORRECT IN HOLDING THAT THE MEMBERSHIP CARD OF BOMBAY STOCK EX CHANGE IS ENTITLED TO DEPRECIATION OF RS. 52.44 LACS WITHOUT CONSIDERING WHETHER IT REALLY SU FFERS FROM DIMINUTION IN ITS VALUE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE CIT(A) ERRED IN RESTRIC TING THE DISALLOWANCE AT 50% I.E. RS. 2,50,000/- AS AGAINST THE TOTAL DISALLOWANCE OF RS. 5,00,000/ MADE BY THE AO ON ACCOUNT OF EXPENDITURE ATTRIBUTABLE TO SPECULATIVE BUSINESS. 3.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN RESTRICTING DISALLOWANCE OF CLIENT ASSISTANCE CHARGES AMOUNTING TO RS.10,33,98,497/-PAID TO ICICI BANK INSPITE OF THE FACT THAT THE ASSESSEE COMPANY HAS I TS OWN INTERNET BASED TECHNOLOGY WITH THE HELP OF WHICH BROKERAGE SERVICES ARE PROVIDED ON A PLATF ORM CALLED ICICI DEMAT .COM. 4.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN RESTRICTING DISALLOWANCE OF CLIENT ASSISTANCE CHARGES AMOUNTING TO RS.10,33,98,497/-PAID TO ICICI BANK INSPITE OF THE FACT THAT THE ASSESSEE COMPANY HAS I TS OWN INFRASTRUCTURE FACILITIES REQUIRED FOR THE PURPOSE OF THE BROKING BUSINESS HAVING ITS OWN MEMB ERSHIP CARD OF STOCK EXCHANGE AND ITS OWN OFFICE PREMISES ETC. 5.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE 6304/MUM/08ICICIBSL 3 DISALLOWANCE OF CLIENT ASSISTANCE CHARGES AMOUNTING TO RS.10,33,98,497/- PAID TO ICICI BANK WITHOUT APPRECIATING THE FACT THAT THE ASSEESSEE FA ILED TO SUBSTANTIATE THAT THE PAYMENTS ARE MADE AT MARKET RATE AND ARE NOT EXORBITANT AND EXCESSIVE . 6. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) FAILED TO APPRECIATE THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF SHATRUNJAY DIAMOND (2003) 261 ITR 258 (BOM). 7. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE ID C.I.T(A) HAS ERRED IN HOLDING THAT THE SOFTWARE EXPENSES INCURRED BY THE ASSESSEE IS A BUSINESS LOSS ALLOWABLE U/.S.28 WITHOUT APPRECIATING THE FACT THAT THE EXPENSES WERE INCURR ED FOR DEVELOPMENT OF SOFTWARE WHICH IS CLEARLY OF CAPITAL NATURE. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE IMPUGNED ORDER OF THE LD.CIT(A) IS CONTRARY TO LAW AND CONSEQUENTLY ON ME RITS IT DESERVES TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 9.THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. THE AO ALSO FILED THE FOLLOWING REVISED GROUNDS OF APPEAL: ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE OF CLIENT ASSISTANCE CHARGES WITHOUT A PPRECIATING THE FACT THAT THERE WAS A NO EFFECTIVE AGREEMENT FOR THE SERVICES PROVIDED DURIN G THE YEAR UNDER CONSIDERATION AS THE AGREEMENT DATED 04.06.2004 CANNOT VALIDATE SERVICES PROVIDED DURING THE PERIOD 01.04.2003 TO31 .03.2004 2.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD.CIT(A) FAILED TO APPRECIATE THE FACT THAT THE ASSESSEE HAS FAILED TO DISCHARGE ITS PRIMARY ONUS WHETHER THE PAYMENT MADE TO ICICI BANK LTD.FOR CLIENT ASSISTANCE CHARGES IS AT ARMS LENGTH PRICE OR NOT. 3.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE IMPUGNED ORDER OF THE LD.CIT(A) IS CONTRARY TO LAW AND CONSEQUENTLY MERITS TO BE SET A SIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 4.THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. ITA 500/MUM/2012: FOLLOWING GROUNDS OF APPEAL WERE FILED BY THE ASSES SEE,ABOUT THE PENALTY LEVIED U/S.271(1)(C) OF THE ACT: (A)RE: LEVY OF PENALTY UNDER SECTION 271(1)(C) ON T AX SOUGHT TO BE EVADED ON DISALLOWANCE ON ACCOUNT OF SHARE TRADING LOSS. [2]ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE CIT(A) ERRED IN CONFIRMING THE ACTION OF THE DEPUTY COMMISSIONER OF INCOME-TAX-4(1 ),MUMBAI (THE DCIT) OF LEVYING PENALTY U/S 271(1)(C) OF THE ACT ON THE ALLEGED GROUND THAT THE APPELLANT HAD FURNISHED INACCURATE PARTICULARS OF INCOME AND HAD NOT PROVIDED PROPER E XPLANATION IN SUPPORT OF ITS CLAIMS. [3]THE CIT(A) FAILED TO APPRECIATE THAT NO PENALTY CAN BE LEVIED ON ISSUES ON WHICH TWO VIEWS ARE POSSIBLE AND THAT THERE HAS BEEN NO CONCEALMENT OF INCOME OR FILING OF INACCURATE PARTICULARS OF INCOME AT THE TIME OF INCOME AT THE TIME OF FILING OF RETURN AS WELL AS THE TIME OF ASSESSMENT PROCEEDINGS. [4]THE APPELLANT THEREFORE PRAYS THAT THE PENALTY L EVIED UNDER SECTION 21(1)(C) OF THE ACT BE DELETED. GENERAL [5]THE APPELLANT CRAVES LEAVE AND RESERVES ITS RIGH TS TO VARY, AMEND ALTER AND/OR ADD TO THE GROUNDS OF APPEAL AND TO PRODUCE SUCH ORAL AND DOCU MENTARY EVIDENCE AND FILE SUCH COMPILATION OF DOCUMENTS AS MAY BE NECESSARY AT THE TIME OF HEA RING OF THE APPEAL. 6304/MUM/08ICICIBSL 4 2. THE ASSESSEE COMPANY HAS A WEBSITE PROVIDING INTERN ET BASED SERVICES TO THE INVESTORS TO EXECUTE AND SETTLE THEIR ORDER/TRADES IN SECURITIES ON STOCK EXCHANGE.IT FUNCTIONS AS A SERVICE PROVIDER, OFFERING CLIENT SERVICING AND MARKETING F OR VARIOUS FINANCIAL PRODUCTS OFFERED ONLINE. THE ASSESSEE IS A MEMBER OF BOTH NSE AND SSE AS A B ROKER.IT FILED ITS RETURN OF INCOME ON 29.10. 2004 DECLARING INCOME OF RS.9,76,34,310/-.THE AO FI NALISED THE ASSESSMENT U/S.143(3)OF THE ACT,ON 28.12.2006,DETERMINING THE INCOME OF THE ASS ESSEE AT RS.32,23,11,800/-. ITA 6304/MUM/2008: 2.1. FIRST GROUND OF APPEAL FILED BY THE ASSESSEE,IS ABO UT NOT ALLOWING LOSS OF RS.24.97 LAKHS AND AD HOC DISALLOWANCE OF RS. 2,50,000/-.DURING THE AS SESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD SHOWN SHARE TRADING LOSS OF RS.24,97,9 85/-. THE ASSESSEE WAS DIRECTED TO SUBMIT ITS EXPLANATION AS TO WHY SHARE TRADING LOSS SHOULD NOT BE TREATED AS SPECULATIVE LOSS IN VIEW OF THE PROVISIONS OF EXPLANATION TO SEC. 73 OF THE ACT.THE AO ALSO DIRECTED THE ASSESSEE TO EXPLAIN WHY PROPORTIONATE EXPENSES SHOULD NOT BE ALLOCATED TO S HARE TRADING TRANSACTION WHILE DETERMINING SPECULATION LOSS.VIDE ITS LETTER DATED 06.01.2006 T HE ASSESSEE FILED ITS REPLY.AFTER CONSIDERING THE SAME THE AO HELD THAT THE ASSESSEE COMPANY WAS ENGA GED IN SHARE TRADING BUSINESS AND THE BUSINESS OF SHARE-BROKING,THAT IT WAS NOT MATERIAL WHETHER THE BROKING ACTIVITY WAS DONE WITH THE HELP OF COMPUTER SOFTWARE WHICH ENABLED THE CLIENTS OF THE ASSESSEE TO DIRECTLY PURCHASE/SELL SHARES IN THE MARKET OR THE ASSESSEE WAS PHYSICALLY DOING THE PURCHASE AND SALE OF THE SHARES ON BEHALF OF ITS CLIENTS,THAT AS A TRADER IN SHARES T HE ROLE OF THE ASSESSEE WAS QUITE DIFFERENT FROM IT S ROLE AS A SHARE-BROKER,THAT WHEN THE ASSESSEE COMPA NY WAS TRADING IN SHARES THE SHARES WERE OWNED BY IT AND IT WAS LIABLE FOR ANY PROFIT OR LOS S MADE BY IT ON TRADING OF SUCH SHARES,THAT THE ASSESSEE WAS TAKING ITS OWN DECISION REGARDING PROF IT AND LOSS WHICH WAS GOING TO ACCRUE TO IT, THAT IT WAS ACQUIRING TWO DIFFERENT AND DISTINCT RO LES,THAT THE BASIC DIFFERENCE BETWEEN THOSE TWO ROLES COULD NOT BE MISSED OR MISUNDERSTOOD.REFERRIN G TO THE PROVISIONS OF SECTION 73 OF THE ACT, THE HELD THAT LOSS INCURRED ON SALE AND PURCHASE OF SHARE HAD TO BE DEEMED AS SPECULATION LOSS, THAT THE ASSESSEE ITSELF HAD SHOWN THE LOSS AS LOSS ARISING FROM TRADING OPERATIONS AS EVIDENT FROM AUDITED P & L ACCOUNT,THAT THE CLAIM OF THE ASSESSE E THAT THEIR TRANSACTIONS WERE ENTERED INTO ONLY FOR THE PURPOSE OF TESTING THE WEB-SYSTEM WAS NOT ACCEPTABLE. HE FURTHER HELD THAT DETERMINATION OF SHARE TRADING LOSS WAS NOT POSSIBL E WITHOUT ALLOCATING EXPENSES WHICH WERE INVARIABLY INCURRED FOR SHARE TRADING ON PROPRIETOR Y ACCOUNT.INVOKING THE PROVISIONS OF EXPLANATION 2 TO SECTION 28 OF THE ACT,HE HELD THAT SPECULATION BUSINESS SHOULD BE SEPARATED FROM NON-SPECULATION BUSINESS.HE RELIED UPON THE JU DGMENT OF EASTERN AVIATION AND INDUSTRIES LTD.(208 ITR 1023)DELIVERED BY HON'BLE CALCUTTA HIG H COURT AND HELD THAT THE PROPOR -TIONATE EXPENDITURE ATTRIBUTABLE TO THE SPECULATIVE TRANSAC TION,OUT OF THE TOTAL EXPENDITURE CLAIM OF THE ASSESSEE,WAS TO BE ESTIMATED AT RS.5,00,000/-. IN VIEW OF THE ABOVE, THE TOTAL SHARE TRADING LOSS OF THE ASESSEE WAS DETERMINED AT RS. 29,97,985/- + 5,00,000/-) WAS HELD TO BE SPECULATIVE LOSS IN VI EW OF EXPLANATION TO SECTION 73 OF THE ACT AND THE SAME IS PERMITTED TO BE CARRIED FORWARD AND MAY BE SET-OFF WITH SPECULATIVE INCOME IN FUTURE. 2.2. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND THE ASSESSMENT ORDER,HE HELD THAT IN THE EARLIER ASSESSMENT YEAR HIS PREDEC ESSOR HAD DECIDED THE IDENTICAL ISSUE AGAINST THE ASSESSEE,THAT PROVISIONS OF EXPLANATION TO SECTION 73 WERE APPLICABLE TO THE TRANSACTION.HE CONFIRMED THE ORDER OF THE AO. HOWEVER,HE RESTRICTE D THE DISALLOWANCE TO HALF I.E.TO RS.2.5 LAKHS. 6304/MUM/08ICICIBSL 5 2.3. BEFORE US,THE AUTHORISED REPRESENTATIVE(AR) STATED THAT THE TRIBUNAL HAD DECIDED THE ISSUE AGAINST THE ASSESSEE WHILE DECIDING THE APPEAL FOR THE EARLIER YEARS.WE FIND THAT ADJUDICATING THE APPEAL FOR THE AY.2003-04(ITA6560/MUM/2006/,DATED 2 0.08.2010)THE TRIBUNAL HAD HELD AS UNDER: 9.WE HAVE HEARD THE RIVAL SUBMISSIONS. IDENTICAL I SSUE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE IN A.Y. 2001-02 IN ITA NO. 2972 /MUM/05 AND THIS TRIBUNAL HELD AS FOLLOWS AFTER HEARING BOTH THE PARTIES, WE DO NOT FIND MER IT IN THE GROUND RAISED BY THE ASSESSEE. THERE IS NO DISPUTE THAT PROVISIONS OF SECTION 73 EXPLANATIO N CAN BE APPLIED WHERE A COMPANY DEALS IN PURCHASE AND SALE OF SHARES OF OTHER COMPANIES. HOW EVER THERE ARE TWO EXCEPTIONS PROVIDED IN THE SAID EXPLANATION AND UNDISPUTEDLY THE ASSESSEE DOES NOT FALL -WITHIN THE AMBIT OF THOSE TWO EXCEPTIONS. THE ONLY ARGUMENT OF THE LEARNED COUNSE L FOR THE ASSESSEE IS THAT SUCH PURCHASE AND SALE OF SECURITIES WERE EFFECTED ONLY FOR TESTING T HE WORKING OF THE WEBSITE TO ENSURE THAT THE SAME FUNCTIONS WITHIN ANY GLITCHES. WE DO NOT FIND MERIT IN SUCH SUBMISSION SINCE THE ASSESSEE IS CONTINUOUSLY CARRYING ON THE PURCHASE AND SALE OF S HARES AS INFORMED TO US BY THE LEARNED COUNSEL FOR THE ASSESSEE. FURTHER, THE ASSESSEE ITSELF IS S HOWING SUCH TRANSACTIONS AS PART OF ITS BUSINESS ACTIVITY. THEREFORE, THERE IS NO REASON TO TAKE ANY CONTRARY VIEW. IN OUR VIEW, THE CIT(A) HAS RIGHTLY UPHELD THE ORDER OF THE ASSESSING OFFICER TREATING THE SAME AS SPECULATION LOSS. 10.IN VIEW OF THE ABOVE, ACTION OF THE REVENUE AUTH ORITIES IN TREATING A SUM OF RS. 81,942/- AS SPECULATIVE LOSS IS UPHELD. THE LEARNED COUNSEL FOR THE ASSESSEE, HOWEVER, SUBMITTED THAT IN THIS YEAR, LOSS WAS INCURRED EVEN IN RESPECT OF CERTAIN TRANSACTIONS DONE ON BEHALF OF THE CLIENTS, WHICH THE ASSESSEE HAD TO ULTIMATELY TAKE IN ITS ACCOUNT BECAUSE OF THE ERRORS COMMITTED BY THE ASSESSEE IN CORRECTLY CARRYING OUT THE TRANSACTIONS ON BEHAL F OF THE CLIENTS. IN OUR VIEW, EVEN THIS ASPECT WIL L NOT MAKE ANY DIFFERENCE AND EXPLANATION TO SECTION 73 WILL APPLY EVEN TO SUCH TRANSACTIONS. AS FAR AS EXPENSES INCURRED IN CARRYING ON TRANSACTION WHI CH RESULTED IN SPECULATIVE LOSS ARE CONCERNED, LEARNED DR SUBMITTED THAT THE ~SSES5ING OFFICER HAS GIVEN VALID BASIS NAMELY TURNOVER TO MAKE THE IMPUGNED DISALLOWANCE HE DREW OUT ATTENTION TO THE DECISION OF CIT(A) AND SUBMITTED THAT HE HAS GIVEN NO REASONS FOR REDUCING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. HE THEREFORE SUBMITTED THAT THE DISALLOWANCE MADE BY THE ASSESSI NG OFFICER SHOULD BE RESTORED AS IT WAS MADE ON AN ACCEPTABLE BASIS. II.WE HAVE CONSIDERED HIS SUBMISSIONS AND ARE OF TH E VIEW THAT THE ORDER OF LEARNED CIT(A) ON THIS ISSUE DOES NOT CALL FOR ANY INTERFERENCE. THE LEARN ED CIT(A) HAD TAKEN INTO CONSIDERATION ALL ACTIVIUES INVOLVED IN SHARE BROKING ON BEHALF OF TH E CLIENTS BY THE ASSESSEE, VIZ., IDENTIFICATION OF SHARES TO BE TRADED, VALUATION OF SHARES IN THE MAR KET, TRANSACTION COST IN PURCHASE AND SALE OF SHARE AND COST OF UTILIZATION OF FUNDS DEPLOYED FOR THE SHARE TRADING ACTIVITY. KEEPING IN MIND THESE PARAMETER5~ LEARNED CILIA) THOUGHT IT FIT TO REDUCE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER TO RS. 1,85,943/-. WE ARE THEREFORE OF THE VIEW THA T ACTION OF LEARNED CIT(A) CANNOT BE SAID TO BE WITHOUT ANY BASIS. CONSEQUENTLY,ORDER OF LEARNED CI T(A) IS CONFIRMED ON THIS ISSUE ALSO. THUS, GROUND NO, A OF THE ASSESSEE AND GROUND 2 OF THE RE VENUE ARE DISMISSED. RESPECTFULLY,FOLLOWING THE ABOVE,WE DECIDE FIRST EF FECTIVE GROUND(GOA.1-3)AGAINST THE ASSESSEE. 3. SECOND EFFECTIVE GROUND(GOA-4&5)IS ABOUT BAD DEBTS. DURING THE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE COMPANY HAD WRITTEN OFF BAD DEBTS OF RS.6,09,334/-.HE,VIDE HIS LETTER DATED 15.11.2006,DIRECTED THE ASSESSEE TO SUBMIT D ETAILS OF BAD DEBTS AND ITS JUSTIFICATION. AS PER THE AO,THE ASSESSEE DID NOT FILE ANY JUSTIFICATION. AS A RESULT,HE DISALLOWED THE BAD DEBT CLAIM OF THE ASSESSEE OF RS.6,09,334/- MADE BY THE ASSESSEE U/S. 36(1)(VII) R.W.S. 36(2) OF THE ACT. 3.1. IN THE APPELLATE PROCEEDINGS, THE FAA HELD THAT THE ASSESSEE HAD FAILED TO ESTABLISH THAT THE DEBTS HAD BECOME BAD,THAT CERTAIN RECOVERIES WERE U NDERWAY,THAT MERELY BECAUSE THE DEBT HAD BEEN WRITTEN OFF THE SAME WAS NOT ALLOWABLE,THAT TH E ASSESSEE MUST DEMONSTRATE THAT THE DEBT HAD 6304/MUM/08ICICIBSL 6 BECOME BAD.HE RELIED UPON THE CASES OF SOUTH INDIA SURGICRL CO.LTD.(287ITR62),KASHMIR TRADING CO.(291ITR 228).FINALLY,HE CONFIRMED THE OR DER OF THE FAA. 3.2. BEFORE US,AR RELIED UPON THE JUDGMENT OF T.F.R.LTD. (230CTR14)AND VIJAYA BANK(323ITR 166).DR STATED THAT ISSUE COULD BE DECIDED ON MERIT S. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT AFTER 01.04. 1989,THE ONLY REQUIREMENT OF WRITING OFF OF BAD DEB T IS ENTRIES IN THE BOOKS OF ACCOUNTS BY THE ASSESSEE CONCERNED.IT HAS NOT TO PROVE THE JUSTIFIC ATION OF ITS ACTION I.E.WRITING OFF,ONCE IT MAKES NECESSARY ENTRIES IN THE P & L ACCOUNT.THE HONBLE APEX COURT IN THE MATTER OF T.F.R. LTD. (SUPRA)HAD LAID DOWN THE ABOVE BASIC PRINCIPLE AND SAME IS BEING FOLLOWED BY VARIOUS COURTS. RESPECTFULLY FOLLOWING THE SAME WE DECIDE GROUND NO .2 IN FAVOUR OF THE ASSESSEE. 4. NEXT GROUND OF APPEAL PERTAINING TO CHARGING OF INT EREST U/S.234 OF THE ACT IS CONSEQUENTIAL IN NATURE,AS PER THE ASSESSEE.THEREFORE,SAME IS NOT BE ING ADJUDICATED. ITA /6529/MUM/2008: 5. THE FIRST GROUND OF APPEAL FILED BY THE AO DEALS WI TH BSE MEMBERSHIP CARD.DURING THE ASSESSMENT PROCEEDINGS THE AO FOUND THAT THE ASSESS EE HAD CLAIMED DEPRECIATION OF RS. 52,44, 089/- ON NSE MEMBERSHIP CARD AND BSE MEMBERSHIP CAR D.THE ASSESSEE WAS ASKED TO SUBMIT ITS EXPLANATION AS TO WHY THE CLAIM OF DEPRECIATION SHOULD NOT BE DISALLOWED.AFTER CONSIDERING THE REPLY OF THE ASSESSEE,THE AO HELD THAT DEPRECIA TION WAS A TOOL TO MEASURE THE ACTIVE LIFE OF AN ASSET OWING TO ITS USE AND OBSOLESCENCE DURING THE GIVEN PERIOD,THAT THE OBJECT OF PROVIDING FOR DEPRECIATION WAS TO SPREAD THE EXPENDITURE INCURRED ON THE ASSETS OVER ITS ACTIVE LIFE TIME,THAT IN THE CASE OF BSE MEMBERSHIP CARD THERE WAS NO OBSOLE SCENCE, WEAR AND TEAR, OR DIMINUTION IN THE VALUE BY ITS USAGE,THAT THERE COULD BE VARIATI ON IN THE MARKET PRICE OF THE CARD FROM YEAR TO YEAR,THAT THE USAGE PERIOD OF THE CARD WAS INDEFINI TE AND HAD NO LIMITS,THAT THE CLAIM OF DEPRECIATION ON MEMBERSHIP CARD DID NOT FALL WITHIN THE MEANING OF SECTION 32 OF THE ACT,THAT THE FLUCTUATION IN THE PRICE COULD NOT BE EQUATED W ITH DIMINUTION IN VALUE,THAT ASSETS, WHOSE COST FLUCTUATED DEPENDING ON THE MARKET FORCES COULD NOT BE TREATED AS DEPRECIABLE ASSET.REFERRING TO THE MATTER OF VINAY BUBNA (155 CTR 519),HE HELD THA T THE MEMBERSHIP OF A STOCK EXCHANGE WAS NOT A FRANCHISE AS NO SOLE RIGHT OF ENGAGING IN THE BUSINESS OF SHARE TRADING AND BROKERAGE WAS BEEN GIVEN TO A PARTICULAR MEMBER,THAT THE MEMBERSH IP WAS NOT A LICENSE,THAT EVEN WITHOUT THE MEMBERSHIP OF THE STOCK EXCHANGE SHARE TRADING AND SHARE BROKING WAS LEGALLY PERMISSIBLE,THAT EVEN UNDER THE NEW PROVISIONS OF SEC.32, DEPRECIATI ON COULD NOT BE HELD TO BE ALLOWABLE ON THE MEMBERSHIP OF THE STOCK EXCHANGE. 5.1. IN THE APPELLATE PROCEEDINGS,THE FAA,FOLLOWING THE ORDER OF THE TRIBUNAL DELIVERED IN THE ASSESEES OWN CASE FOR THE AY.2001-02(ITA4326/MUM/- 4,DATED 09.05.2007)HELD THAT IT WAS ENTITLED TO CLAIM DEPRECIATION ON THE BSE CARD. BEFORE US,DR STATED THAT ISSUE WAS DECIDED IN FAVOU R OF THE ASSESSEE BY THE ORDER OF THE HONBLE BOMBAY HIGH COURT IN ASSESSEES OWN CASE,THAT THE H ONBLE COURT HAD FOLLOWED THE JUDGMENT DELIVERED BY THE HONBLE APEX COURT IN THE MATTER O F TECHNO SHARES AND STOCKS LTD.(327ITR 323).DR LEFT THE MATTER TO THE DISCRETION OF THE BE NCH. 5.2. WE HAVE HEARD THE RIVAL SUBMISSIONS.WE FIND THAT IN THE MATTER OF TECHNO SHARES AND STOCKS LTD.(SUPRA)THE HONBLE SUPREME COURT HAS HELD AS UN DER: ON A CONSIDERATION OF THE BSE RULES, THAT THE RIGH T OF MEMBERSHIP WAS A 'BUSINESS OR COMMERCIAL RIGHT' AND COULD BE SAID TO BE OWNED BY THE ASSESSEE AND USED FOR BUSINESS PURPOSES IN TERMS OF SECTION 32(1)(II). THE RIGHT OF MEMBERS HIP, WHICH INCLUDED THE RIGHT OF NOMINATION, 6304/MUM/08ICICIBSL 7 WAS A 'LICENCE' OR 'AKIN TO A LICENCE' WHICH WAS ON E OF THE ITEMS WHICH FELL IN SECTION 32(1)(II). THE RIGHT TO PARTICIPATE IN THE MARKET HAD AN ECONO MIC AND MONEY VALUE. IT WAS AN EXPENSE INCURRED BY THE ASSESSEE WHICH SATISFIED THE TEST O F BEING A 'LICENCE' OR 'ANY OTHER BUSINESS OR COMMERCIAL RIGHT OF SIMILAR NATURE' IN TERMS OF SEC TION 32(1)(II). RESPECTFULLY,FOLLOWING THE ABOVE,WE DECIDE GROUND N O.1 AGAINST THE AO. 6. NEXT GROUND OF APPEAL IS ABOUT RESTRICTING THE DISA LLOWANCE AT 50% I.E. RS. 2,50,000/- AS AGAINST THE TOTAL DISALLOWANCE OF RS. 5,00,000/ MADE BY THE AO ON ACCOUNT OF EXPENDITURE ATTRIBUTABLE TO SPECULATIVE BUSINESS.DURING THE ASSESSMENT PROCEEDI NGS,AS DISCUSSED IN PARAGRAPH 2 TO 2.3 OF OUR ORDER,THE AO HAD MADE A DISALLOWANCE OF RS.5 LAKHS, THAT WAS REDUCED TO RS.2.5 LAKHS BY THE FAA.WHILE DECIDING THE ISSUE IN THE APPEAL FILED BY THE ASSESSEE,WE HAVE HELD THAT THE TRIBUNAL HAD IN THE EARLIER YEARS DECIDED THE ISSUE OF SPECU LATION LOSS AGAINST THE ASSESSEE. BUT,REDUCTION IN DISALLOWANCE MADE BY THE FAA WAS U PHELD BY THE TRIBUNAL.FOLLOWING THE ORDER OF THE TRIBUNAL FOR THE YEAR 2003-04,WE UPHOLD THE ORDER OF THE FAA AND DECIDE GROUND NO.2 AGAINST THE AO. 7. THIRD GROUND OF APPEAL DEALS WITH DISALLOWANCE OF C LIENT ASSISTANCE CHARGES(CAC),AMOUNTING TO RS.10,33,98,497/-,PAID TO ICICI BANK.REVISED GRO UNDS OF APPEAL ALSO PERTAIN TO THE SAME ISSUE.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUN D THAT THE ASSESSEE HAD CLAIMED CAC OF RS.20.67 CRORES FOR THE YEAR UNDER CONSIDERATION.HE DIRECTED THE ASSESSEE TO FILE EXPLANATION IN THIS REGARD,VIDE HIS LETTER DATED 15/11/2006.AFTER CONSIDERING THE REPLY OF THE ASSESSEE,THE AO HELD THAT THE PAYMENT WAS MADE ONLY TO ICICI BANK L TD. WHO WAS A PARTY SPECIFIED U/S 40(2)(B) OF THE ACT,THAT M/S. ICICI WEBTRADE LTD.HAD BEEN FO RMED FOR THE SPECIFIC PURPOSE OF PROVIDING INTERNET BASED BROKING SERVICES IN CONSIDERATION OF WHICH IT WOULD BE CHARGING BROKERAGE FROM ITS CLIENTS,THAT THE ASSESSEE COMPANY WAS IN POSSESSION OF ITS OWN INTERNET BASED TECHNOLOGY WITH THE HELP OF WHICH THESE BROKERAGE SERVICES WERE PROVIDE D ON A PLATFORM CALLED ICICI DEMAT.COM.,THAT IT WAS NOT AT ALL DEPENDING ON M/S. ICICI BANK LTD. AS FAR AS THE TECHNOLOGY WAS CONCERNED,THAT THE ASSESSEE WAS HAVING ITS OWN MEMB ERSHIP CARD OF VARIOUS STOCK EXCHANGES,THAT IT HAD OWN OFFICE PREMISES AND HAD OWN STAFF HEADED BY FULL TIME DIRECTORS,THAT FOR ALL PRACTICAL PURPOSES ASSESSEE WAS AN INDEPENDENT BROKING OUTFI T HAVING ITS OWN COMPLETE INFRASTRUCTURE FACILITIES ALONGWITH ITS OWN TECHNOLOGY AND SPECIAL ISED MANPOWER, THAT ASSESSEE COMPANY HAD ITSELF ARRANGED A MASSIVE ADVERTISING CAMPAIGN NATI ONWIDE TO CREATE MASS AWARENESS AMONG THE INDIAN PUBLIC IN ADDITION TO THE HUGE EXPENDITURE C LAIMED BY THE SAID COMPANY IN THE EARLIER YEARS,THAT THE ASSESSEE HAD FURTHER FAILED TO SUBST ANTIATE THAT THE PAYMENT HAD BEEN MADE TO ICICI BANK LTD.AT MARKET RATE,THAT IT WAS NOT IN-EXORBITA NT/EXCESSIVE,THAT THAT THERE WAS MORE THAN 554 FOLD INCREASE IN THE EXPENDITURE AS COMPARED TO EAR LIER YEAR.RELYING UPON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF SHATRUNJAY DIAMOND (261 ITR 258 (BOM)HE HELD THAT IT WAS THE DUTY OF THE ASSESSEE TO SUBSTANTIATE THA T PAYMENT TO PARTIES SPECIFIED U/S. 40A(2)(B) WERE REASONABLE AND NOT EXORBITANT AND EXCESSIVE,TH AT THE ASSESSEE HAD FAILED TO DISCHARGE ITS ONUS TO PROVE THAT PAYMENT MADE WAS REASONABLE AND NOT EXCESSIVE AND INEXORBITANT,THAT IT HAD PAID CHANNEL COMMISSION OF RS.583.58 LACS TO VARIOU S PARTIES,THAT THE EXPENDITURE WAS NOTHING BUT OF SIMILAR NATURE AS CARRIED OUT BY THE ICICI B ANK LTD.,THAT THE PAYMENT MADE TO ICICI BANK LTD.WAS NOT JUSTIFIABLE AT ALL,THAT 50% OF AMOUNT P AID TO ICICI BANK LTD.TOWARDS CAC WAS REASONABLE, THAT BALANCE 50% WAS EXCESSIVE AND INEX ORBITANT.ACCORDINGLY,HE DISALLOWED RS.10,33,98,497/-,(BEING 50% OF RS.20,67,96,993/-), U/S.40A(2)(B) OF THE ACT. 7.1. DECIDING THE APPEAL FILED BY THE ASSESSEE,THE FAA H ELD THAT THE ASSISTANCE CHARGE PAID BY THE APPELLANT, AS PER SERVICE PROVIDER AGREEMENT DATED 4.6.2004 WAS BASED ON COST PER PERSON, PER 6304/MUM/08ICICIBSL 8 BRANCH, PER ANNUM FOR METRO, URBAN AND SEMI URBAN B RANCHES OF THE SERVICE PROVIDER, THAT WHERE BUSINESS POTENTIAL WAS CONSIDERED LOW THE CHARGES W ERE FIXED AT RS.75,000/- PER LOCATION PER ANNUM IRRESPECTIVE OF THE LOCATION,THAT NOTHING HAD BEEN BROUGHT OUT BY THE AO TO ESTABLISH THAT THE PAYMENT OF CLIENT ASSISTANCE CHARGE FROM THE AP PELLANT TO ICLCL BANK WAS EXCESSIVE EXCEPT FOR THE GENERAL COMMENT BY HIM THAT 50% OF THE CHAR GES WERE EXCESSIVE AND EXORBITANT,THAT THE CAC BY THE ASSESSEE WERE PAID TO ICICI BANK ON PROP ER AND COMMERCIAL BASIS AS EXPLAINED BY THE APPELLANT VIDE ITS LETTER DATED 4.2.2008,THAT WHOLE OF THE EXPENDITURE WAS ALLOWABLE,THAT THERE WAS NO SOUND BASIS APPLIED BY AO FOR RESTRICTING TH E DISALLOWANCE TO 50% OF THE EXPENSES CLAIMED.FINALLY,THE FAA DELETED THE ADDITION OF RS. 10,33,98,497/-. 7.2. BEFORE US,THE DR ARGUED THAT THERE WAS NO AGREEMENT FOR THE PERIOD UNDER CONSIDERATION FOR THE PAYMENT OF CAC,THAT PAYMENT MADE BY THE ASSESSE E WAS HIT BY THE PROVISIONS OF SECTION 40(A)(2) (B)OF THE ACT.AR SUPPORTED THE ORDER OF TH E FAA AND RELIED UPON THE ORDERS OF THE TRIBUNAL FOR THE YEAR 2002-03 AND 2003-04. 7.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE AO HAD DISALLOWANCE AS HE WAS OF THE OPINION THAT THE PAYMENT WAS MADE TO A PARTY COVERED BY THE PROVISIONS OF SECTION 40(A)(2)(B) OF THE ACT.WE FIN D THAT HE HAS NOT GIVEN THE BASIS AS HOW HE ARRIVED AT THE CONCLUSION THAT ICICI BANK,THE RECEI VER OF THE PAYMENT,WAS A PARTY COVERED BY THE PROVISIONS OF THE SAID SECTION.FOR INVOKING THE PRO VISIONS OF 40A REGARDING RELATED PARTY,IT HAS TO BE PROVED THAT THE ASSESSEE HAD INCURRED AN EXPENDI TURE BY MAKING PAYMENT TO THE PERSON REFERRED TO IN CLAUSE (B).WE FIND THAT THE AO HAD P RESUMED THAT PAYMENT WAS MADE TO RELATED PARTY.HE HAS ALSO NOT EXPLAINED AS HOW THE PAYMENT WAS EXCESS OR UNREASONABLE.FOR ARRIVING AT SUCH A CONCLUSION,HE SHOULD HAVE COMPARED THE CASE WITH SIMILAR TYPE OF CASES AND PROVED THAT THE PAYMENT WAS ABOVE NORMAL PRACTICE OF THE TRADE. HE HAS NOT MADE ANY ATTEMPT TO PROVE THE FACT.IN THESE CIRCUMSTANCES,IN OUR OPINION,THE ORDE R OF THE AO WAS RIGHTLY REVERSED BY THE FAA. WE FURTHER FIND THAT WHILE DECIDING THE APPEAL FOR THE AY.2003-04,THE TRIBUNAL HAS DEALT ALMOST ALL THE ISSUE THAT HAVE BEEN RAISED BY THE AO IN TH E ORIGINAL AS WELL AS IN THE REVISED GROUNDS OF APPEAL.HERE,WE WOULD LIKE TO REPRODUCE THE ORDER FO R THE AY.2003-04 AND SAME READS AS UNDER: 12.GROUND NO. B RAISED BY THE ASSESSE AND GROUND NO. 3 RAISED BY THE REVENUE CAN BE CONVENIENTLY DECIDE TOGETHER. THESE GROUNDS READS A S FOLLOWS ASSESSEES GROUND (B)DISALLOWANCE OF MARKETING AGENCY FREES PAID RS.1 ,84,64,577/-LEARNED CIT(A) ERRED IN RESTRICTING DEDUCTION FOR MARKETING AGENT FEES PAID TO ICICI BANK LTD. TO RS. 1,84,64,577/-AGAINST THE CLAIM OF APPELLANT AT RS. 3,69,29,155/- AS PER PROVISIONS OF SECTION 40A(2FLA) OF THE ACT. LEARNED CIT(A) OUGHT TO HAVE APPRECIATED THAT ICICI BANK LTD. DOES NOT COME WITHIN THE PURVIEW OF SECTION 40A(2FLB) OF THE ACT. REVENUES GROUND 3(I)ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LEARNED CIT(A) ERRED IN ALLOWING 50% OF THE EXPENDITURE CLAIMED BY THE ASSESSEE AS MARKE TING AGENCY FEE PAID TO ICICI BANK THROUGH LEARNED CIT(A} ACCEPTED IN PRINCIPLE THAT THE PAYME NT WAS A DEVICE TO SIPHON AWAY THE PROFIT OF THE ASSESSEE COMPANY. 3(II)ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, LEARNED CIT(A) ERRED IN ALLOWING AN EXPENDITURE OF 50% OF THE SAID CLAIM WHILE THE ASSE SSEE COMPANY HAD ALREADY PAID A SUBSTANTIAL AMOUNT AS CUSTOMER CHARGES AND IN SHARING OF PROFIT WHICH WOULD SUFFICE TO MEET THE ADEQUATE COMPENSATION FOR THE SERVICES. 13.WE HAVE ALREADY SEEN THAT THE ASSESSEE WAS ENGAG ED IN THE BUSINESS OF SHARE BROKING AND SUCH BUSINESS WAS DONE BASICALLY THROUGH INTERNET. THE A SSESSEE HAD CLAIMED THAT IT HAD PAID MARKETING AGENCY FEES OF RS. 4,07,04,169/-. THE ASSESSEE ENTE RED INTO AN AGREEMENT WITH ICICI CAPITAL SERVICES LTD., WHICH WAS LATER ON TAKEN OVER BY M/S . ICICI BANK LIMITED. THERE WAS AN AGREEMENT 6304/MUM/08ICICIBSL 9 BETWEEN THE ASSESSEE AND ICICI CAPITAL SERVICES LTD . BY WHICH ASSESSEE AGREED TO PAY TO M/S. ICICI CAPITAL SERVICES RS. 75/- PER ACCOUNT SOURCED THROUGH IT. BESIDES THE ABOVE, THE ASSESSEE ALSO AGREED TO PAY 50% OF NET BROKERAGE INCOME EARNED FR OM ALL THE CUSTOMERS SOURCED THROUGH ICICI CAPITAL SERVICES LIMITED. THE ASSESSEE SUBMITTED TH AT IN THIS REGARD IT HAD FURNISHED AN AGREEMENT DATED 18.0.2001 WITH LCLCL BANK LTD., WHICH WAS LAT ER AMENDED ON 7.4.2001. AS PER THE AGREEMENT ICICI RANK LTD., AGREED TO PROVIDE FOLLOWING SERVIC ES TO THE ASSESSEE I)SETTING UP FOR BRANCH SALES EXECUTIVES (USE) II)TRAINING FILED FORCE ABOUT THE PRODUCT, COMPETIT ION, DOCUMENTATION AND SELLING TECHNIQUES TO ENABLE THEM TO MARKET THE E-BROKING ACCOUNTS TO PRO SPECTIVE CUSTOMERS. III)ORGANIZING MICRO MARKETING INITIATIVES LIKE CON DUCTING ROAD SHOWS, CORPORATE PRESENTATIONS ETC. IV)THE BSE APPROACH THE CUSTOMERS AND COMPLETE THE ACCOUNT OPENING FORMALITIES BY COLLECTING NECESSARY DOCUMENTATION AND FILING UP OF FORMS. V)THE FORMS ARE VERIFIED AND SENT TO ~WTLS OFFICE AT MUMBAI. VI)IN CASE OF REJECTION BY THE COMPANY ON ACCOUNT O F INCOMPLETE DOCUMENTATION OR OTHERWISE THE FORMS ARE SENT BACK TO THE BRANCHES WHO IN TURN ASK THE USE TO COMPLETE THEM AND SEND THEM BACK TO IWTLS OFFICE AT MUMBAI. VII)ALL QUERIES PERTAINING TO PRE ACCOUNT OPENING L IKE STATUS OF APPLICATIONS, PROGRESS IN ACCOUNT OPENING ETC. IS HANDLED BY THE BRANCHES IN CONSULTA TION WITH IWTL. ICICI BANK BRANCHES ARRANGE FOR FRANKING OF THE ACCOUNT OPENING FORMS. THE PEOP LE IN THE BRANCHES ARE CONSTANTLY TRAINED SO THAT THEY ARE UP TO DATE ON THE NEW FEATURES AND PRODUCT S OF ICICI DIRECT.COM. VIII)ALL POST ACCOUNT OPENING QUERIES/COMPLAINTS LI KE ACCOUNT LOCKED, FUND ALLOCATION, PROBLEMS WITH THE SITE ETC. IX)ICICI BANK BRANCHES ARRANGE FOR DISPATCHING CONT RACT NOTES TO THE CUSTOMERS AT THEIR ADDRESSES. X)CALL ON THE CUSTOMERS REGULARLY TO MAINTAIN RELAT IONSHIP AND ALLOW THEM TO TRADE THROUGH THE WEBSITE PROVIDED BY IWTL AT THE BRANCH IF THERE IS A CONNECTIVITY PROBLEM. 14.THE ASSESSEE FURTHER POINTED OUT THAT IT HAD NOT ENGAGED ANY OTHER AGENTS. THE ASSESSEE ALSO EXPLAINED THAT INTERNET BASED TRADING IS RELATIVELY A NEW CONCEPT AND AWARENESS OF THE SAME HAS TO BE CREATED AMONG THE PUBLIC AT LARGE. THE ASSESSEE ALSO POINTED OUT THAT EVEN AFTER A DEMAT ACCOUNT AND CLIENTS ACCOUNT IS OPENED FOR TRADING, CLIENTS GENERALLY HAVE MANY QUERIES WHICH COULD BE ANSWERED ONLY BY ICLCL BANK THROUGH ITS NETWORK OF BRANCHES ACROSS THE COUNTRY. THE ASSESSEE THEREFORE SUBMITTED THAT FEES PAID TO ICICI BANK WE RE REASONABLE TAKING INTO ACCOUNT NUMBER OF ACCOUNT SOURCED AND SERVICED BY THE BANK. THE ASSES SING OFFICER, HOWEVER, WAS OF THE VIEW THAT THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT WOUL D APPLY. THE SAID PROVISION READ AS FOLLOWS WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPE CT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (II) OF THIS SUB-SECTION, AND THE ASSESSING OFFICER IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UN REASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES F OR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF T HE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITU RE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. 15.THE ASSESSING OFFICER FIRST FOUND THAT THE ASSES SEE AND ICICI BANK LTD. WERE RELATED PERSONS WITHIN THE MEANING OF SEC.40-A(2)(B) OF THE ACT.THE REAFTER THE ASSESSING OFFICER GAVE THE FOLLOWING FINDINGS A) THE ASSESSEE WAS IN POSSESSION OF ITS OWN INTERN ET BASED TECHNOLOGY WITH THE HELP OF WHICH, IT CAN CARRY ON BUSINESS OF BROKERAGE SERVICE. B) IT HAS ITS OWN INFRASTRUCTURE FACILITIES REQUIRE D FOR THE PURPOSE OF BROKING BUSINESS NAMELY MEMBERSHIP CARD OF VARIOUS STOCK EXCHANGES, ITS OWN OFFICE PREMISES, ITS OWN STAFF HEADED BY FULL TIME DIRECTORS. C) ASSESSEE HAD DONE MASSIVE ADVERTISING CAMPAIGN N ATION WIDE TO CREATE MASS AWARENESS AMONG THE INDIAN PUBLIC; AND IN THIS REGARD, IT HAD INCURRED HUGE EXPENDITURE OF 6304/MUM/08ICICIBSL 10 1,38,36,660/-. THE ASSESSEE HAS INCURRED HUGE EXPEN SES IN THIS REGARD IN THE PAST AND THE SAME WAS ALLOWED AS A DEDUCTION FOR THE REASON THAT SUCH EXPENSES WOULD PROMPT INVESTING COMMUNITY TO ENROLL THEMSELVES AS CLIENTS OF THE AS SESSEE. THOSE EXPENSES ALSO CREATED ASSESSEES OWN BRAND EQUITY. 16.THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HA D PAID A SUM OF RS. 35,91,150/- WHICH WAS THE PAYMENT AT ITS. 75/- PER ACCOUNT OUTSOURCED THROUGH ICICI BANK LTD. IN ADDITION TO THE ABOVE, THE ASSESSEE HAD CLAIMED A SUM OF RS. 3,69,29,155/- BEI NG 50% OF THE NET BROKERAGE. ACCORDING TO THE ASSESSING OFFICER, GENERALLY RECIPIENT OF SUCH BROK ERAGE UNDERTAKES ENTIRE GAMUT OF ACTIVITIES RIGHT FROM THE SOURCING OF NEW CLIENTS UPTO THE SETTLEMEN T OF THE TRANSACTION INCLUDING DELIVERY, PAYMENT AND ALSO BEARING THE RISK ELEMENT INVOLVED IN THE S HARE MARKET TRANSACTION IN THE CASE OF DEFAULT BY ANY OF THE CLIENTS. THE ASSESSING OFFICER FOUND THAT THE ICICI BANK WAS NOT SHOULDER ING ANY SUCH RESPONSIBILITY. FOR ALL THE ABOVE REASONS, THE ASSESSING OFFICER HELD THAT THE PAYMEN T OF 50% OF THE NET BROKERAGE RECEIVED BY THE ASSESSEE OF ITS. 3,69,29,155/~ WAS UNREASONABLE, EX CESSIVE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICE PROVIDED BY ICICI BANK LTD. THE ASSESSI NG OFFICER, HOWEVER, ALLOWED DEDUCTION OF RS. 35,91,150/- WHICH WAS PAYMENT OF ITS. 75/- PER ACCO UNT INTRODUCED BY ICICI BANK LTD. 17.ON APPEAL BY THE ASSESSEE, LEARNED CIT(A) REDUCE D THE DISALLOWANCE MADE BY THE ASSESSING OFFICER FROM ITS. 3,69,29,155/- TO ITS. 1,84,64,577 /-. 18.AGGRIEVED BY THE ORDER OF LEARNED CIT(A) IN NOT DELETING THE ENTIRE DISALLOWANCE, ASSESSEE HAS RAISED GROUND NO. (B) BEFORE THE TRIBUNAL. AGGRIEVE D BY THE ORDER OF LEARNED CIT(A) IN REDUCING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER, THE REVENUE HAS PREFERRED GROUND NO. 3 BEFORE THE TRIBUNAL. 19.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IN A.Y . 2002-03 IN ITA NO. 6559 & 7 035/MUM/06, SIMILAR ISSUE HAD COME UP FOR CONSIDERATION BEFORE THE TRIBUNAL AND THIS TRIBUNAL HELD AS FOLLOWS 13. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF T HE PARTIES AND PERUSED THE RECORD. THE ADMITTED FACTS OF THE CASE OF THE AO ARE U/S 40A OF THE ACT, WHICH READS AS UNDER: 40A. EXPENSES OR PAYMENTS NOT DEDUCTIBLE IN CERTAIN CIRC UMSTANCES..(1) THE PROVISIONS OF THIS SECTION SHALL HAVE EFFECT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISION OF THIS ACT RELATING TO THE COMPUTATION O F INCOME UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION. (2)(A) WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUS E (B) OF THIS SUB-SECTION, AND THE ASSESSING OFFICER IS OF OPINION THAT SUCH EXPENDITU RE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVI CES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. (B)THE PERSONS REFERRED TO IN CLAUSE (A) ARE THE FO LLOWING, NAMELY:-EXPLANATION,.~FOR THE PURPOSES OF THIS SUB-SECTION, A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A BUSINESS OR PROFESSION, IL- (A) IN A CASE WHERE THE BUSINESS OR PROFESSION IS C ARRIED ON BY A COMPANY, SUCH PERSON IS, AT ANY TIME DURING THE PREVIOUS YEAR, THE BENEF ICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) CARRYING NOT LESS THAN TWENTY PER CENT, OF THE VOTING POWER; AND (B) IN ANY OTHER CASE, SUCH PERSON IS, AT ANY TIME DURING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PER C ENT, OF THE PROFITS OF SUCH BUSINESS OR PROFESSION. 14.WE FIND FORCE IN THE SUBMISSION OF THE LEARNED A R THAT SECTION 40A IS NOT APPLICABLE AS THE ASSESSEE DOES NOT FALL IN CATEGORY (B) OF SECTION O F SUB-SECTION (2) OF SECTION 40A OF THE ACT. THE LEARNED AR REFERRED PAGE 14 OF THE PAPER BOOK READS AS UNDER:- A SHARE CAPITAL 6304/MUM/08ICICIBSL 11 AUTHORISED 40,000,000 EQUITY SHARES OF RS. 10/- EACH 400,000,000 400.000.000 ISSUED, SUBSCRIBED AND PAID UP 30,000,000 EQUITY SHARES OF RS. 10 EACH 300,000,000 300.000,000 2,99,99,300 SHARES ARE HELD BY ICICI TRUSTEESHIP SE RVICES LIMITED AT THE TRUSTEE OF ICICI EQUITY FUND AND 700 SHARES ARE HELD BY NOMINEES OF ICICI L IMITED. 15.THE LEARNED AR WITH REFERENCE TO ABOVE FACTS AN D FROM EXPLANATION (B) OF SUB SECTION 2 OF SECTION 40A HAS CLEARLY DEMONSTRATED THAT THE ASSES SEE WAS NOT HAVING 20% SHAREHOLDING; THEREFORE, IT DOES NOT FAIL IN THE PERSONS REFERRED IN SUB-SECTION (B) OF SECTION 40A OF THE ACT THEREFORE WE ARE OF THE VIEW THAT THE AO IS NOT COR RECT IN APPLYING SECTION 40A (2) OF THE ACT. ON MERIT, WE FIND THAT THE EXPENDITURE IS NOT GENUINE AS THE AG HIMSELF HAS ACCEPTED PART AMOUNT AND ALLOWED THE SAME. IT IS NOT THE CASE OF THE AO THAT EXPENDITURE WAS INCURRED WITHOUT ANY SERVICES RENDERED.THE REQUIREMENT OF SECTION 40A(2) IS THAT ASSESSEE RECORDS ANY EXPENDITURE AND SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REG ARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES, FACILITIES, THEN THE AO IS EMPOWERED TO D ISALLOW EXCESS OR UNREASONABLE PORTION OF THAT EXPENDITURE. IN THE CASE UNDER CONSIDERATION, THE A O DID NOT EVEN WHISPER ABOUT EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE SERVICES. THEREFORE, THE AO HAS WRONGLY INVOKED SECTION 40A (2) OF THE ACT. THE CIT (A) IS INCORRECT IN UPHOLDING THE ORDER OF THE AG. THERE ARE NO SUBSTANCE IN DRS SUBMISSIONS THAT THE AG HAS EXAMINED ONLY REASONABLENESS OF THE EXPENDITURE BUT HE FAILED TO EXAMINE WHETHER IT IS WHOLLY AND EXCLUSIVELY FOR THE BUSINESS AND ABOUT COMMERCIAL EXPEDIENCY OF THE EXPENDITURE, BEC AUSE THE AG HIMSELF ALLOWED THE PART AMOUNT. SINCE IT IS NOT A CASE THAT FALLS U/S 40A OF THE AC T, WE ARE OF THE CONSIDERED VIEW THAT THE ORDERS OF THE REVENUE AUTHORITIES CANNOT BE SUSTAINED AND IN THE LIGHT OF THAT THE ADDITION SUSTAINED BY THE CIT(A) IS HEREBY DELETED. GROUNDS NOS. 6 & 7 OF THE ASSESSEES APPEAL IS ALLOWED AND GROUND NO.2 OF THE REVENUE IS DISMISSED. 20. LEARNED OR, HOWEVER, SUBMITTED THAT AS FAR AS A PPLICABILITY OF PROVISIONS OF SECTION 40A(2)(B) VIZ., THAT THE ASSESSEE AND ICICI BANK LTD., WERE R ELATED PARTIES WITHIN THE MEANING OF THE SAID SECTION, THERE HAS BEEN NO OBJECTION RAISED BY THE ASSESSEE EITHER BEFORE THE ASSESSING OFFICER OR BEFORE THE LEARNED CIT(A); AND THEREFORE IT WAS SUB MITTED BY HIM THAT THE ISSUE SHOULD BE SENT BACK TO THE ASSESSING OFFICER FOR FRESH EXAMINATION BECA USE THE TRIBUNAL IN THE AFORESAID ORDER HAS HELD THAT THE ASSESSEE AND ICICI BANK LTD. WERE NOT RELA TED PARTIES WITHIN THE MEANING OF SEC.40- A(2)(B) OF THE ACT. AS FAR AS MERITS OF THE ADDITIO N MADE BY THE ASSESSING OFFICER ARE CONCERNED, LEARNE D DR REITERATED THE STAND OF THE ASSESSING OFFICER AS CONTAINED IN THE ASSESSMENT ORDER. 21.LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHER HA ND RELIED ON THE ORDER OF TRIBUNAL AND REITERATED THE STAND OF THE ASSESSEE AS WAS TAKEN BEFORE THE R EVENUE AUTHORITIES. 22.WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, IN OUR VIEW THE TRIBUNAL HAS CONSIDERED ALL ASPECTS OF THE MATTER IN THE AFORESAID DECISION AND REASONS GIVEN BY THE TRIBUNAL FOR DELETING THE ADDITION ON MERITS WILL EQUALLY APPLY TO THE PRESENT ASSESSM ENT YEAR ALSO. IN OUR VIEW, SERVICES RENDERED BY THE ASSESSEE HAVE NOT BEEN DISPUTED BY THE ASSESSIN G OFFICER. IN THE PRESENT YEAR THROUGH ICICI BANK LTD. 47,882 CUSTOMERS HAD BEEN INTRODUCED AS A SSESSEES CUSTOMERS. THERE HAS BEEN INCREASE IN BROKERAGE INCOME FROM RS. 11.92 CRORES IN A.Y. 2 002-03 TO RS. 24.09 CRORES IN A.Y. 2003-04. IT IS THUS CLEAR THAT INCREASE IN THE BROKERAGE INCOME IS AS A RESULT OF INCREASE IN NUMBER OF CUSTOMERS SOURCED BY ICICI BANK LTD. IN OUR VIEW, T HERE IS NO YARDSTICK MENTIONED BY THE AG OR CIT(A) AS TO WHAT IS FAIR MARKET VALUE OF THE GOODS , SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE. FURTHER NOTHING HAS BEEN BROUGHT ON RECORD TO SHOW THAT THE EXPENDITURE IN QUESTION WAS EXCESSIVE OR UNREASONABLE CONSIDERING LEGITIMATE NE EDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR BENEFIT BY OR ACCRUING TO THE ASSESSEE. THE FACT THAT THE ASSESSEE HAS ITS OWN INFRASTRUCTURE OR THAT IT HAS INCURRED HUGE ADVERTI SEMENT EXPENSES CANNOT BE A GROUND TO MAKE THE 6304/MUM/08ICICIBSL 12 DISALLOWANCE. IN FACT, INFRASTRUCTURE POINTED OUT B Y THE ASSESSING OFFICER IS ONLY WITH REGARD TO FACILITIES OF TRADING. THE ASSESSING OFFICER HAS TO TALLY IGNORED THE FACT THAT THE CUSTOMERS WERE PROCURED ONLY THROUGH NETWORK OF ICICI BANK LTD., A CROSS THE COUNTRY. THE RENDERING OF SERVICES BY ICICI BANK LTD., WHICH HAVE ALREADY SET OUT ABOV E, CONTRIBUTED TO THE BUSINESS OF THE ASSESSEE AND PAYMENT OF COMMISSION, IN OUR VIEW WAS FULLY JU STIFIED. WE FIND NO GROUND TO TAKE CONTRARY VIEW ON THIS ISSUE. RESPECTFULLY,FOLLOWING THE ABOVE ORDER OF THE TRIBU NAL,WE DECIDE EFFECTIVE GROUND NO 3 AND THE REVISED GROUNDS OF APPEAL AGAINST THE AO. 8. LAST GROUND OF APPEAL FILED BY THE AO IS ABOUT SOFT WARE DEVELOPMENT.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THAT THE ASSESSEE HAD INCU RRED EXPENDITURE OF RS.27.72 LAKHS.AFTER OBTAINING EXPLANATION OF THE ASSESSEE IN THAT REGAR D,HE DISALLOWED THE PAYMENT MADE TOWARDS DEVELOPMENT OF SOFTWARE WHICH COULD NOT BE MATERIAL ISED BY HOLDING THAT THE PAYMENT WAS MADE FOR DEVELOPMENT OF SOFTWARE WHICH WAS CAPITAL IN NA TURE. 8.1. THE ASSESSEE FILED AN APPEAL BEFORE THE FAA AND MAD E SUBMISSIONS BEFORE HIM.IT WAS ARGUED THAT IT HAD WRITTEN OFF THE EXPENDITURE DURING THE YEAR ON ACCOUNT OF THE SOFTWARE WAS NOT FUNCTIONAL DUE TO TECHNICAL PROBLEMS,THAT SOFTWARE EXPENSES WERE NOT CAPITAL IN NATURE,THAT THEY DID NOT GIVE ANY ENDURING BENEFIT ESPECIALLY IN THE FAST CHANGING TECHNOLOGY IN THE FIELD OF SOFTWARE AND THEY NEEDED REPLACEMENTS TO MEET THE E XIGENCIES OF BUSINESS.AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE,FAA HELD THAT THE PAYME NTS WERE MADE BY THE ASSESSEE TO HCL COMNET LTD. AND CWIP AMOUNTING TO RS.27,72,471/-,TH AT THE AO HAD GIVEN A FINDING THAT THE PAYMENT WAS TOWARDS DEVELOPMENT OF SOFTWARE,THAT TH E PAYMENTS HAD BEEN MADE BY THE ASSESSEE WHICH HAD NOT MATERIALISED IN CREATION OF A NEW ASS ET AND THE DEPRECIATION CLAIM OF THE APPELLANT WAS ALSO NOT ALLOWABLE,THAT THE EXPENDITURE OF RS.2 7,72,471/- WAS INCURRED IN COURSE OF THE BUSINESS,THAT IT HAD SUFFERED A LOSS WHICH WAS A BU SINESS LOSS ALLOWABLE U/S.28 OF THE ACT.HE DELETED THE ADDITION OF RS.27,72,471/-. 8.2. BEFORE US,THE DR SUPPORTED THE ORDER OF THE AO AND THE AR RELIED UPON THE ORDER OF THE FAA. WE HAVE HEARD THE RIVAL SUBMISSIONS.WE FIND THAT AS FAR AS INCURRING OF EXPENDITURE IS CONCERNED THE AO HAS DOUBTED IT.HE WAS OF THE OPINION THAT SA ME WAS OF CAPITAL NATURE.FROM THE RECORDS IT IS CLEAR THAT THE ASSESSEE HAD MADE PAYMENT TO HCL COMNET LTD. AND CWIP AMOUNTING TO RS.27,72,471/-,FOR DEVELOPMENT OF SOFTWARE PROGRAMM E,BUT THE PROJECT COULD NOT MATERIALISE,THAT NO DEPRECIATION WAS ALLOWED WITH REGARD TO THE PAYM ENT IN QUESTION.WE ARE OF THE OPINION THAT THE EXPENDITURE INCURRED BY THE ASSESSEE WAS INCURR ED FOR CARRYING OUT THE BUSINESS FOR THE YEAR UNDER CONSIDERATION AND IT SUFFERED A LOSS IN THE T RANSACTION.THEREFORE,CONFIRMING THE ORDER OF THE FAA,WE DECIDE LAST GROUND OF APPEAL AGAINST THE AO. ITA 500/MUM/2012: 9. AFTER THE DISPOSAL OF APPEAL BY THE FAA FOR THE YEA R UNDER CONSIDERATION,THE AO ISSUED A FRESH NOTICE U/S.271(1)(C)OF THE ACT ON 10.03.2010 REQUIR ING THE ASSESSEE TO SHOW CAUSE AS TO WHY PENALTY UNDER THE SAID SECTION SHOULD NOT BE LEVIED FOR THE FOLLOWING TWO ITEMS: I.SHARE TRADING LOSS DISALLOWED(RS.24,97,985/-)AND DISALLOWANCE OF EXPENSES(RS.2.5 LAKHS). II.BAD DEBTS(RS.6,09,334/-). VIDE ITS REPLY DATED 24.03.2010,THE ASSESSEE ARGUED THAT THE LOSS OF RS.24.97 LAKHS HAD BEEN INCURRED ON PURCHASE AND SALE OF SHARES,THAT IT WAS A NORMAL BUSINESS LOSS SUFFERED BY IT,THAT THE MUMBAI TRIBUNAL HAD IN THE CASE OF HSBC SECURITIES & CAPITAL MARKET (INDIA)PVT.LTD. (ITA/ 6304/MUM/08ICICIBSL 13 3386/M/2001 ),HELD THAT SHARE TRADING LOSS HAD TO B E TREATED AS NORMAL BUSINESS LOSS,THAT MERE REJECTION OF A CLAIM COULD NOT LEAD TO THE CONCLUSI ON THAT THE ASSESSEE HAD FILED INACCURATE PARTICULARS OF INCOME,THAT THE EXPLANATION OFFERED BY IT WAS NEITHER FALSE NOR UNSUBSTANTIATED,THAT THE CLAIM MADE BY IT WAS BONAFIDE,THAT NO PENALTY S HOULD BE LEVIED.THE AO,AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE,HELD THAT IT HAD INCURR ED LOSSES IN TRANSACTION OF TRADING OF SHARES,THAT EXPLANATION TO SECTION 73 WAS APPLICABLE TO THE ISS UE,THAT IT SHOULD HAVE TREATED THE LOSS AS SPECULATIVE LOSS AND SHOULD NOT ADJUSTED AGAINST TH E BUSINESS LOSS,THAT IT HAS REDUCED THE TAX INCIDENCE,THAT IN THAT MANNER IT HAD FILED INACCURA TE PARTICULARS OF INCOME.FINALLY, HE LEVIED PENALTY OF RS.9.58 LAKHS FOR FILING INACCURATE PART ICULARS. 9.1. IN THE APPELLATE PROCEEDINGS THE FAA HELD THAT THE ASSESSEE HAD NOT VOLUNTARILY OFFERED THE DISALLOWANCE OF RS.24,97,985/- FOR TAXATION,THAT IT HAD OFFERED AN EXPLANATION THAT WAS FALSE AND NON BONA FIDE, THAT PROVISIONS OF EXPLANATION 1 TO SECTION 271(1) WERE APPLICABLE TO THE FACTS OF THE CASE.FINALLY, HE UPHELD THE ORDER OF THE AO. 9.2. BEFORE US,THE AR STATED THAT IT IS A MATTER WHERE T WO VIEWS WERE POSSIBLE,THAT THERE WAS DIFFERENCE OF OPINION BETWEEN THE AO AND THE ASSESS EE ABOUT THE CLAIM,THAT PENALTY SHOULD NOT BE LEVIED IN SUCH CASES,THAT ON INACCURATE PARTICULAR WERE FILED.DR SUPPORTED THE ORDER OF THE FAA. WE HAVE HEARD THE RIVAL SUBMISSIONS.IT IS ONE OF TH E SETTLED PRINCIPLES OF TAX JURISPRUDENCE THAT PENALTY AS PER THE PROVISIONS OF SECTION 271(1)(C) IS NOT AUTOMATIC.ADDITION OR DISALLOWANCE DURING THE ASSESSMENT PROCEEDINGS OR THEIR CONFIRMA TION IN APPELLATE PROCEEDINGS DO NOT AND SHOULD NOT RESULT IN INVOKING THE PENAL PROVISIONS IN A MECHANICAL MANNER.BEFORE IMPOSING PENALTY FOR FURNISHING OF INACCURATE PARTICULARS IT HAS TO BE SEEN THAT THE CLAIM MADE BY THE ASSESSEE WAS FALSE OR NOT BONA FIDE.IN THE MATTER B EFORE US,THE ASSESSEE HAD TREATED SHARE TRANSACTION UNDER THE BUSINESS HEAD,WHEREAS THE AO WAS OF THE OPINION THAT SAME WERE COVERED BY THE PROVISIONS OF SECTION 73.THUS,THERE WERE TWO POSSIBLE VIEWS ABOUT THE TRANSACTION IN QUESTION AND THE ASSESSEE HAD FOLLOWED ONE OF THE V IEWS.IT IS SAID THAT IF A WRONG CLAIM IS MADE BY AN ASSESSE AND EXPLANATION IS OFFERED THEN IN TH E ABSENCE OF A FINDING THAT THE ASSESSEE HAD FAILED TO PROVE SUCH EXPLANATION WAS BONA FIDE, NO PENALTY CAN BE IMPOSED.IN OUR OPINION,IN THE APPEAL BEFORE US,IT IS CLEAR THAT THE EXPLANATION W AS NOT FOUND TO BE NON GENUINE.THEREFORE, CONSIDERING THE PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE,WE ARE REVERSING THE ORDER OF THE FAA AND DECIDING THE EFFECTIVE GROUND OF APPEAL IN FAVOUR OF THE ASSESSEE. AS A RESULT,APPEAL FILED BY THE ASSESSEE STANDS PAR TLY ALLOWED AND APPEAL FILED BY THE AO STANDS DISMISSED.PENALTY APPEAL FILED BY THE ASSESSEE IS A LLOWED. 0(1 !2( 3 -4 ' , . 5 6 ' ( 78 9 !2( ) 3 -4 ' , !6 ' ( 78 . !2( 3 -4 ! ' 6 ' ( 78 . ORDER PRONOUNCED IN THE OPE N COURT ON 22.10.2014 . -. ' *+' : 22.10.2014 + ' , . SD/- SD/- (H.L.KARWA/ . . ) ( / RAJENDRA) PRESIDENT/ -/ -/ -/ -/ /ACCOUNTANT MEMBER / MUMBAI, ;-! /DATE: 22.10.2014 6304/MUM/08ICICIBSL 14 -. -. -. -. ' '' ' %(< %(< %(< %(< =<'( =<'( =<'( =<'( / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / #$ 2. RESPONDENT / %&#$ 3. THE CONCERNED CIT(A)/ > ? , 4. THE CONCERNED CIT / > ? 5. DR ITAT,I BENCH,MUMBAI/ <@, %(! , . . . - . 6. GUARD FILE/ , 0 . &<( %( //TRUE COPY// -.! / BY ORDER, A / 7 DY./ASST. REGISTRAR , /ITAT, MUMBAI.