TMI Blog2010 (2) TMI 762X X X X Extracts X X X X X X X X Extracts X X X X ..... that retiring partners should be paid for safeguarding the interests of the firm and for the purpose of better commercial expediency. Accordingly, the payments were made to the retiring partners out of the funds borrowed by the firm or from the funds available with the firm. Therefore, in our considered view, the payments to the partners were for the purpose of commercial expediency and therefore deduction is allowable under section 36(1)(ii) of the Act Derivatives and future option transactions - Business losses or not - Assessment year 2004-05 and assessment year 2005-06 - The Special Bench decision of the Tribunal in the case of Shree Capital Services Ltd. v. Asstt. CIT (2009 -TMI - 59828 - ITAT CALCUTTA ) has held that the term "derivatives" in which underlying asset is share will fall within the meaning of "commodity" used in section 43(5) - It has been further held that if it is to held that the transaction in derivatives does not fall in section 43(5), it may make clause (d) and the Explanation thereto below section 43(5) introduced by the Finance Act, 2005, to be redundant - The Special Bench has also held that clause (d) of proviso to section 43(5) is prospective in natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent. ORDER R.K. Gupta, Judicial Member. These are four appeals by the assessee and the department against the orders of CIT(A) relating to assessment years 2004-05 and 2005-06. 2. We will first take up the assessee's appeals for both of the years under consideration. 3. The first common ground in both the years is directed against the orders of the CIT(A) in not entertaining the ground with regard to claim of depreciation of Rs. 1,12,50,000 for assessment year 2004-05 and Rs. 84,34,500 for assessment year 2005-06 on intangible asset of Rs. 4.5 crores under section 32(1)(ii) of the Act. 4. The brief facts of the case are that in the course of assessment proceedings the assessee made a claim that a sum of Rs. 4.50 crores paid to retiring partners, namely, Rajkumar Aggarwal and Rajkumar Aggarwal HUF, in terms of family agreement dated 3-5-2002 read with retirement deed dated 3-5-2002 during the assessment year 2003-04. The assessee claimed that the payment made gave rise to an intangible asset and thus it was entitled to depreciation under section 32(1)(ii) of the Act. It was argued that the amount was paid in lieu of right, title and interest in the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings and so the assessee had made the claim during the assessments proceedings. Therefore, the claim was allowable. However, the CIT(A) was not satisfied with the explanation of the assessee. He also was in agreement with the observation of the Assessing Officer that the claim was not made in the original return or in revised return. Such a claim ought to have been made by means of revised return if something remained to be claimed in the original return. Reliance was placed on the decision of the Supreme Court in the case of Geotze India Ltd. v. CIT [2006] 284 ITR 323/157 Taxman 1 wherein it had been held that no claim could be entertained by the Assessing Officer if the same was not made by revised return. The CIT(A) also agreed with the conclusion and finding of the Assessing Officer regarding the merits of the issue and accordingly held that the Assessing Officer had rightly held that no intangible assets were created in the books of the firm by this payment and the assessee firm was under no obligation to pay these amounts for any benefit of the firm. 6. Now, before the Tribunal, the contentions raised before the lower authorities were reiterated by the ld. A.R. of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not entitled to depreciation. In other words, the expression 'business or commercial rights of similar nature' clearly shows that all business or commercial rights are not entitled to depreciation. Therefore, construing the expression 'licences' widely so as to apply to all licences/permissions and all business or commercial rights would be ex facie contrary to express intention of the legislature. Accordingly, the alternative argument of the assessees that the BSE card is a business or commercial rights and therefore entitled to depreciation is liable to be rejected, because what section 32(1)(ii) of the Act contemplates is the business or commercial rights relating to intellectual properties and not all categories of business or commercial rights. Since the BSE card is not a business or commercial right relating to intellectual property rights depreciation cannot be allowed on the BSE card. 34. Strong reliance was placed by the counsel for the assessees on the decision of the Apex Court in the case of Scientific Engineering House (P.) Ltd. v. CIT [1985] 49 CTR 386 : [1986] 157 ITR 86 (SC) in support of their contention that wider meaning should be given to the expression 'l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not satisfy the conditions of section 32(1)(ii) of the Act. The right, title and interest retained by the assessee, in our considered view, are not of similar commercial rights used in section 32(1)(ii) of the Act. The expression "business or commercial rights of similar nature" clearly shows that all business or commercial rights are not entitled to depreciation. This is not a licence similar to what is contemplated under section 32(1)(ii) for claiming depreciation. The assessee has made payment to partners just to avoid litigation, etc. The right, title and interest in the present case remain with the firm as the retiring partners cannot claim any right, title or interest of the on going firm. Retaining the right, title and interest of the firm does not create any asset tangible or intangible for the purpose of claiming any depreciation. There is nothing in the agreement that the outgoing partners cannot do any business. There is nothing in the agreement that by making payments to the partners the assessee will create any tangible or intangible asset in the books of account. As rightly noted by the Assessing Officer, the assessee has simply passed debit entry and credit entry in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed the claim of the assessee as the calculation by the Assessing Officer was not proper. 12. The ld. A.R. of the assessee, who appeared before the Tribunal, stated that payment to the retiring partners was a commercial purpose as per agreement entered into between the continuing partners and outgoing partners. The Assessing Officer has held that the payment to the partners was not a liability of the firm. However, how it was not a liability of the firm was not explained. It was stated this was the liability of the continuing partners but the continuing partners have to make the same from the business funds of the firm and not from their own capital. The payment made to retiring partners was not credited to the continuing partners account but was debited from the firm's funds. Therefore, this was a commercial liability of the firm and not of the partners. An alternative submission was also made that if these contentions are not accepted, then the computation of disallowance made by the Assessing Officer and confirmed by the CIT(A) is not correct. 13. On the other hand, the ld. D.R. has placed strong reliance on the orders of the authorities below. 14. After considering the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .) Ltd. [2003] 262 ITR 417/127 Taxman 369 (Mad.). He, therefore, rejected the assessee's contention and assessed the same as speculative loss by observing that the loss in transaction of derivates and future options was substantive in nature. 17. Similarly, the claim of the assessee for the assessment year 2005-06 was also rejected by the Assessing Officer. 18. The assessee preferred appeals before the CIT(A) for both the years. Detailed submissions were made. The CIT(A), after considering the case and taking into consideration the contention of the assessee and placing reliance on the decision of ITAT in the case of Dy. CIT v. SSKI Investors Services (P.) Ltd. [2008] 113 TTJ (Mum.) 511, held that derivatives are rights to buy or sell a share at a future date and cannot be delivered in the conventional sense of delivery. Therefore, the assessee cannot be asked to perform the impossible. The CIT(A) further observed that when someone sells a derivative contract and another person buys, there is a constructive delivery and the rights of the seller are automatically transferred to the buyer through the mechanism of stock exchange. Therefore, it cannot be said that the goods in ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Special Bench as it was not raised before it. Accordingly, it was submitted that if these contentions could have been brought to the knowledge of the Special Bench, then, probably, the judgment of the Special Bench would have been different. 21. We have heard the rival submissions and considered them carefully. After considering the submissions and perusing the material on record, we find that the issue is squarely covered by the decision of the Special Bench of ITAT in the case of Shree Capital Services Ltd. (supra). We note that all the aspects raised by the ld. A.R. have already been examined by the Special Bench. The amended provisions with effect from 1-4-2006 have also been taken into consideration and found that they are prospective in nature. Whatever issues that have been stated by the ld. A.R. above, in our considered view, are mere extension of the arguments already considered by the Kolkata Special Bench of ITAT in detail. 22. The Kolkata Special Bench of ITAT has held that the term "derivatives" in which underlying asset is share will fall within the meaning of "commodity" used in section 43(5). It has been further held that if it is to held that the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirements of Assessing Officer, the assessee has filed detailed reply. However, the Assessing Officer, after examining the reply, finalized the assessment by holding that the shares held in all the private limited companies and other public limited companies unlisted were held to be part of trading stock, the purchases so made were held to be genuine, though the Assessing Officer disallowed a sum of Rs. 51,39,190 under section 40A(2) of the Act out of the above mentioned purchases for the assessment year 2000-01. The action of the Assessing Officer was confirmed by the CIT(A) and ITAT. These shares continued to be part of trading stock upto the assessment year 2003-04 and accepted to be trading stock in scrutiny assessment made for assessment years 2001-02 to 2003-04. These companies subsequently became defunct companies. During the year under appeal, under the Companies Act, 1956, a scheme for weeding out defunct companies known as Simple Exit Scheme was introduced. These companies availed of the said scheme and got extinct during this year and corresponding shares got extinct and became a total loss. The assessee accordingly claimed business loss of Rs. 98,66,092. The Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not appreciate that the shares were purchased on 1-4-1999 beginning of assessment year while speculation loss was suffered much after that date. She could not have drawn an adverse inference in this year while the same could have been considered during assessment year 2000-01 both of the assessee and the 4 companies. The purchase of trading shares and speculation loss by the assessee and 4 companies have been accepted as such. She could not have reopened completed matters during this year to treat the said transactions as sham to buttress her stand for disallowing the loss. Besides the above he has relied upon the written submissions filed on 6-9-2007 reading as under : (i) The appellant claimed business loss of Rs. 98,66,092 on account of extinction of 4 Private Limited Companies held as stock in trade since assessment year 2000-01 and accepted as such in all the scrutiny assessments from assessment years 2000-01 to 2003-04. The Assessing Officer could not have readjudicated the matter during the year under appeal as the same did not warrant for consideration during this year as brought to the notice of the Department in the course of assessment by flouting rule of law. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) was satisfied with the explanation of the assessee. Accordingly, he directed the Assessing Officer to allow the loss claimed by the assessee. 27. The ld. D.R. placed reliance on the order of the Assessing Officer. 28. On the other hand, the ld. Assessing Officer of the assessee placed reliance on the order of the CIT(A). 29. After considering the submissions and perusing the material on record, we find that the findings of the CIT(A) are findings of fact which remain uncontroverted. The following findings have been recorded by the CIT(A) vide para 9.5 of his order : "9.5 I have carefully considered the facts of the case, reasoning of the Assessing Officer and the submissions of the ld. Authorised Representative of the appellant. I have perused the Assessment Order and reasons assigned by the Assessing Officer for treating the trading purchases made in shares during assessment year 2000-01 as sham during the year under appeal. The Assessing Officer has therefore disallowed loss claimed on the Appellant on extinction of the shares of the above Companies as a consequence of Simple Exit System (SES) introduced under the Companies Act, 1956. It is an established fact that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore trading stock. Now when the stock value has become zero due to extinction of these companies, the resultant business loss has to be allowed. Accordingly, I hold that loss claimed as above is genuine and the Assessing Officer is directed to allow the loss of Rs. 98,66,092." As stated above, these findings of CIT(A) remain uncontroverted. Therefore, we see no reason to interfere with the same. Accordingly, the finding of the ld. CIT(A) is confirmed. 30. The next issue is against directing the Assessing Officer to delete the disallowance of interest of Rs. 10,35,940 paid on purchases of Rs. 98,66,092. 31. The Assessing Officer has disallowed a sum of Rs. 10,35,940 on notional basis out of interest in conformity with his finding that trading stock purchased during the assessment year 2000-01 has been held to be sham during the year under consideration. The CIT(A) deleted the disallowance by holding that the same has been computed based on interest paid to Bank during the year. The CIT(A) further noted that the claim of loss in purchase of shares in 2000-01 had been held as genuine and therefore from this angle also the disallowance was not justified. Accordingly, he del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is ground of the department is allowed for the year under consideration also. 37. In ground Nos. 2 3, the department is objecting the direction to the Assessing Officer to allow set off of loss from derivatives (speculation) against speculative income of the assessee and record a proper finding in respect of carry forward of speculation loss together with brought forward speculation loss of assessment year 2000-01 and also in respect of carry forward of long-term capital loss of Rs. 11,87,224 brought forward from assessment year 2004-05. 38. In respect of both the issues, the CIT(A) set aside the matter to the file of Assessing Officer to record a proper finding of carry forward of speculation loss and capital loss after verifying the record and also by taking into account that derivative loss has been held as not speculative in nature. 39. We have already decided the issue in respect of derivative loss transaction by which the order of Assessing Officer has been restored. If there is any speculation loss, the same has to be set off against speculative income, if any, as per provisions of law, and still there is any speculative loss and/or any long-term capital loss remains ..... X X X X Extracts X X X X X X X X Extracts X X X X
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