TMI Blog2015 (1) TMI 966X X X X Extracts X X X X X X X X Extracts X X X X ..... nue expenditure or an expense is made to acquire an asset giving enduring benefit to the assessee, in which case, it would be capital in nature view which has been taken by the Hon’ble Bombay High Court in the case of CIT vs Everest Advertising [2015 (1) TMI 968 - BOMBAY HIGH COURT]. Thus the assessee deserves the allowance. - Decided in favour of assessee. Disallowance of customer rights - Held that:- Once it is seen that the expenditure has been incurred for acquiring the business, we cannot hold that acquisition of customer rights are bogus. We, therefore, hold that the expenditure as such was genuine. Once the expense has been accepted by us to be genuine, it would fall within the inclusions of section 32(1)(ii). - Decided in favour of assessee. Disallowance of Bad debts - CIT(A) deleted the addition - Held that:- Bad-debts of ₹ 78,91,360/- written off pertained to the brokerage income already credited to the profit and loss a/c in the relevant years and accordingly the write off of the bad-debts must be allowed u/s 36(1)(vii) as it satisfies the conditions of section 36(2)(i). - Decided against revenue. Allowance of Vanda loss - AO had treated the loss as specul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve been filed by the assessee and the department against the order of CIT(A) 39, Mumbai, dated 29.11.2010. ITA No. : 168/Mum/2011 : Assessee Appeal : 2. The following grounds have been raised by the assessee: Being aggrieved by the order of the Hon ble Commissioner of Income Tax (Appeals) -39, Mumbai, this appeal petition is submitted on the following grounds which it is prayed may be considered independently without prejudice to one another; 1. Disallowance of depreciation on BSE Card ₹ 24, 58,957/- On the facts and circumstances of the case and in law the learned CIT(A) erring in confirming disallowance of ₹ 24,58,957/- relating to depreciation of BSE Card without appreciating that in the absence of moneys payable to the appellant within the meaning of Explanation 4 to section 43(6) on demutualization of stock exchange, there is no cessation of the block of asset pertaining to the BSE Card. The disallowance being bad in law the same needs to be deleted. 2. Disallowance of ₹ 24,149/- being foreign exchange loss on forex on hand as on 31.3.2007 On the facts and circumstances of the case and in law, the learned CIT(A) erring in confirming disa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. vs ACIT, reported in 25 SOT 440 (Mum) and also on the case of RM Valliappan vs ACIT, reported in 104 TTJ 756 (Mad-SB), wherein it was held that transfer of Membership of Stock Exchange Card is transfer of capital asset, liable to capital gains. 7. The issue in question has changed, that BSE was corporatized in financial year 2005-06, wherein its members were allotted 10000 BSE shares of face value of Re l/-, which means that now the assessee was holding shares, acquired as a result of demutualization. 8. The AR, at the time of hearing fairly submitted that the issue of demutualization has been held against the assessee, taking in view the decision of Sino Securities (P) Ltd. vs ITO, reported in 134 ITD 321 (Mum). 9. Keeping in view that now it is a case of demutualization, as result of corporatization of BSE, the issue is covered from both the angles against the assessee, we, therefore, respectfully following the decision, sustain the orders of the revenue authorities. 10. Ground no. 1 is therefore, rejected. 11. Ground no. 2 pertains to disallowance of ₹ 24,149/-, being the foreign exchange loss on forex. 12. At the time of hearing, the AR submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 582, the Mumbai ITAT considering the period to be one year, allowed the same to be revenue. The AR also relied on the decision of CIT vs Everest Advertising in ITA No. 6539 of 2010, the Hon ble Bombay High Court considering the non-compete fee for three years allowed the expense to be revenue in nature. 21. The DR placed reliance on the decisions of the revenue authorities. 22. We have heard the arguments and have pursued the cases cited before us. An expense may be capital in nature or revenue in nature, but, to ascertain the nature, there is no fixed criteria. But the judicial fora has taken one manner to ascertain the distinction. If the expense is for short term benefit, it could be allowed as a revenue expenditure that is the view which has been taken by the Hon ble Bombay High Court in the case of CIT vs Everest Advertising (supra) and also by the Mumbai ITAT in the case of Hidelberg Cement India Ltd. (supra) or an expense is made to acquire an asset giving enduring benefit to the assessee, in which case, it would be capital in nature. 23. Following the ratios laid down, we are of the considered opinion that the assessee deserves the allowance of ₹ 6,53,57,094/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed as a tool to carry on the business by the assessee. Merely because the assessee showed the payment to be on account of goodwill in the books of account, no adverse inference could he drawn against it. [Para 14] Goodwill in stock market Even assuming that the payment has been made for the purchase of goodwill of company 'AFC , it has to be accepted that in this line of business the goodwill of the broker is paramount. Because of certain stray in incidences which have taken place in the stock market which have shaken the confidence of the public at large in the past, the investors always depend upon the good will of the broker because no investor would like to burn his fingers by the unscrupulous activities undertaken by certain fraudulent broker. The company AFC had a strong clientele base of 3709 persons which itself show that AFC was holding a strong repute in the eyes of its clients. Undoubtedly by purchase of rights to do the business with these 3709 clients the assessee has actually purchased the goodwill of AFC [Para 15] Commercial rights gain significance in the commercial world as they represent a particular benefit or advantage or reputation built over a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is exclusive from the computer systems and eligible for depreciation @ 25%. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition amounting to ₹ 1,95,84,164/- without appreciating the fact that the AO has rightly treated the Vanda loss as speculative loss as per section 73 of the Act. 4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in directing the AO to disallow the expenses u/s 14A as per the directions of the Hon'ble Bombay High Court in the case of M/s. Godrej Boyce Mfg. Co. Ltd. Vs. DCIT which is not accepted by the Department. 5. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the depreciation on the non- compete fees even though the assessee has not acquired any asset which can be depreciated with time. 6. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing the depreciation on goodwill amounting to ₹ 13,12,500/- even though the assessee is not eligible for the same as per section 32 of the Act. 7. On the facts and in the circumstances of the case a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Ltd vs DCIT (2006) 102 TTJ 235 (Ahd.) . 38. The AO negated the claim of the assessee and also mentioned in the order that the decision in the case of Bonanza Portfolio Ltd. is a latest decision by the Hon ble Delhi High Court and it is not known as to whether the department has accepted the same. The AO relying on the decision of coordinate Bench of ITAT, Mumbai in the case of India Infoline Securities Ltd vs ACIT in ITA No. 2584/Mum/2006, who after considering the arguments of the assessee, denied the claim of the assessee. 39. The assessee approached the CIT(A), who after considering the argument the assessee observed, without prejudice to the above arguments, the appellant submitted that the brokerage earned during last 3 years in respect of the said parties aggregated to ₹ 1,43,10,195/-. Details of the same were already submitted to the AO and the same is submitted to me at pages 87 to 88 of the Paper Book. Thus the appellant states that the bad-debts of ₹ 78,91,360/- written off pertained to the brokerage income already credited to the profit and loss a/c in the relevant years and accordingly the write off of the bad-debts must be allowed u/s 36(1)(vii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the coordinate Bench of Mumbai, meaning whereby that the AO did not accept the decision of a higher judicial authority. Be it as may, the issue has now been decided by Hon ble Bombay High Court as well, accepting the ratio laid down by the Special Bench at Mumbai, in the case of Shreyas S Morakhia (supra). In such a circumstance, we sustain the order of the CIT(A) and as a consequence reject the ground as raised by the department. 45. Ground no. 1 is therefore, rejected. 46. Ground no. 2 pertains to allowance of depreciation or VSAT. 46. At the time of hearing, the AR submitted that the issue is covered by the orders of the coordinate Benches at Mumbai in assessee s own cases in assessment years 2001-02, 2005-06 2006-07 (copies of orders enclosed). 47. Respectfully following the decisions of the ITAT and in absence of any contrary decision or material brought on record by the AO, we sustain the order of the CIT(A), consequentially, rejecting the ground taken by the department. 48. Ground no. 2 is therefore rejected. 49. Ground no. 3 pertains to allowance of Vanda loss by the CIT(A). 50. The AO had treated the loss as speculation loss u/s 73. 51 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... error in executing the orders by the broker (or) the client may fail to satisfy its contractual obligations. Also, there can be instances that there may be error on executing an order by the broker itself due to which the said transaction would be disowned by the broker. e. However, since the broker (ie the assessee company ) is primarily responsible for trade undertaken on behalf of its clients it has to compulsorily satisfy those obligations. In fact, in the absence of fulfilling those obligations the assessee may have been treated to be in default and thus could be debarred from carrying on its activities as a broker of shares. These obligations which the broker has to compulsorily undertake are transferred to Vanda account. f. Thus it can be seen that Vanda transactions are undertaken in the course of the business of earning brokerage and not on its own account. After the said transactions are disowned by the clients, the broker has to purchase the shares from the market in order to satisfy the sale obligations of the client, (or) in case of purchase obligations the broker purchases the said shares and sells in the open market or auctions it. This may result into gains/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for Institutions is already submitted. Also sample copy of the Sauda Book and contract notes was submitted during the course of hearing. b. The above details prove that these transactions were not intended to be on own account of the assessee company. Explanation to s. 73 is attracted only when part of the business of the assessee company consists of the purchase and sale of shares of other companies and in that situation only such dealings in shares is deemed to be carrying on a speculative business. It must be noticed that any kind of venture will not fall within the definition of business . The venture or adventure will have to be In the nature of trade, commerce or manufacture. Thus, there is lack of ingredient called business in the sale and purchase done by the assessee of shares for which net loss has occurred to assessee. Thus the said loss arisen to assessee does not fall within the ambit of Explanation to s. 73. The loss occurred to assessee was in course of its business activity of brokerage. Reliance is placed on the decision in the case of ACIT v/s Subhash Chand Shorewala (2004) 91 TTJ (Del) 57. The head notes of the said decision and the conclusion is sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 53. The AO, therefore, disallowed the claim of Vanda loss of ₹ 1,95,84,164/-. 54. Against this order, the assessee approached the CIT(A), before whom it reiterated the submissions made before the AO. The CIT(A), after considering the detailed submissions, held, I have gone through the issue. The appellant's business is to earn income as a broker of stock exchanges.. The appellant has incurred loss due to the fact that certain clients did not own up the purchase of shares and as a result, the appellant has to take delivery and to sell and loss has arisen from such incidents. The losses have not arisen from any purchase of shares made by the assessee for itself. In the appellant's case, (there is no dispute about the genuineness of the losses. The issue involved is whether such loss is a speculation loss in view of explanation to section or not . The CIT(A), after considering the submissions of the assessee, deleted the addition as made by the AO. 55. Against this order of the CIT(A), the department is in appeal before the ITAT. 56. Before us, the AR submitted that the issue is covered by the decision as submitted before the revenue authorities. 57. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the client. 61. However, since the broker is primarily responsible for transactions undertaken on behalf of its clients, it has to compulsorily satisfy those obligations. In the absence of fulfilling the obligations, it is the broker who may be treated to be in default and thus, could be debarred from carrying on its activities as a broker of shares. These obligations which the broker has to compulsorily undertake are transferred to Vanda account. 62. Thus Vanda transactions are undertaken in the course of the business of earning brokerage and not on its own account. After the said transactions are disowned by the clients, the broker has to purchase the shares from the market in order to satisfy the sale obligations of the client, or in case of purchase obligations the broker purchases the said shares and sells in the open market or auctions it. This may result into gains/loss to the broker, which is termed as Vanda gain/loss. The brokerage chargeable to these transactions is recouped from the said gain/loss. 63. Taxability of gain/loss on Vanda transactions. Now the question may arises whether the transactions on Vanda account resulting into gain/loss, a normal busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e copy of the Sauda Book and contract notes during the course of hearing. The details bring out the inference that these transactions were not intended to be on own account of the assessee company. Explanation to s. 73 is attracted only when part of the business of the assessee company consists of the purchase and sale of shares of other companies and in that situation only such dealings in shares is deemed to be carrying on a speculative business. It must be noticed that any kind of venture will not fall within the definition of business . The venture or adventure will have to be In the nature of trade, commerce or manufacture. 67. Thus, there is lack of ingredient called business in the sale and purchase done by the assessee of shares for which net loss has occurred to assessee. Thus the said loss arisen to assessee does not fall within the ambit of Explanation to s. 73. The loss occurred to assessee was in course of its business activity of brokerage. 68. Reliance is placed on the decision in the case of ACIT v/s Subhash Chand Shorewala (2004) 91 TTJ (Del) 57. The conclusion is stated below: Admittedly, the assessee, being in the business of broking would be facin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 76. Ground no. 5 is claim of depreciation on non compete fee. 77. In the appeal filed by the assessee in ITA No. 168/Mum/2011, we have held the non compete fee to be revenue in nature. In such a circumstances, the issue becomes infructuous here. As a result, we reject the ground as raised by the department. 78. Ground no. 5 is therefore, rejected. 79. Ground no. 6 pertains to allowance of depreciation on goodwill. 80. The AR submitted that the issue is covered by the decision of the Hon ble Supreme Court in the case of CIT vs Smiffs Securities Ltd., reported in 348 ITR 302. 81. The DR accepted that the issue is covered by the decision of Hon ble Supreme Court. 82. Since the issue is covered, we do not find any reason to deviate from the order of the Hon ble Supreme Court in the case of Smiffs Securities (supra) as there being no contrary factual aspect. 83. We, therefore, sustain the order of the CIT(A) and reject the ground as taken by the department. 84. Ground no. 6 is therefore, rejected. 85. Ground no. 7 pertains to allowance of membership fee of ₹ 33,50,000/-. 86. The AO had disallowed the membership fee paid, holding the same to be capi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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