TMI Blog2007 (7) TMI 332X X X X Extracts X X X X X X X X Extracts X X X X ..... P. Ltd. - Rs. 24,90,085 3. Out of these, the assessee did not press in respect of the sum of Rs. 45,000 in the account of M/s. Nikil Traders. As to Ramachandra Rane, the assessee explained that he was Peon of the assessee whose services had been terminated as he was found to have stolen some share certificates. The ld. Assessing Officer did not accept the assessee's contention because no police case was filed against Shri Ramachandra Rane and the amount in question had not been shown as income of the assessee in any of the assessment orders and, therefore, the requirements of section 36(2) were not satisfied. On the same basis, the ld. CIT(A) upheld the disallowance. During the course of hearing before us the ld. counsel for the assessee argued that the Assessing Officer had not doubted the genuineness of the transaction. His objection as to why police case was not filed impinged upon the assessee's discretion as to how to carry out his business. The conduct of the assessee was based on the commercial expediency. As to the objection in relation to provisions of section 36(2) the assessee argued that if the claim could not be allowed as bad debt, it could be allowed as business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Special Court under the Special Court Ordinance, 1992. The ld. Assessing Officer has however not allowed assessee's claim for the reason that even after M/s. Dhanraj Mills had been notified by the Special Court, the assessee continued to have transactions with the party. Secondly, the assessee was having both loan account and trading account. In any case the amounts written off had not been offered for tax as income in any of the previous years including the current year. The ld. Assessing Officer inquired of the assessee as to whether any amount had subsequently been recovered to which the assessee submitted that subsequent events were not relevant and were to be dealt with separately. The ld. Assessing Officer held that assessee's claim failed because the amounts had not been assessed as income at any point of time. Even otherwise the assessee's claim was pre-mature until the final verdict of the Special Court. The loss to the assessee, if any, would be ascertained as and when the assets of Dhanraj Mills were distributed by the Custodian. He, therefore, disallowed entire deduction of Rs. 24,90,085. 5. During the course of hearing before the ld. CIT(A) the assessee submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 992. No further amounts were received thereafter. There was a balance of Rs. 5,12,650 in the trading account and after adjustment of the same the balance amount of Rs. 24,90,085 became irrecoverable. That was because M/s. Dhanraj Mills Pvt. Ltd. was declared notified party under Special Court Act. There was a huge income-tax liability of 183 crores as against total capital of Rs. 10 lakhs of that party. The ld. counsel argued that there was no force in the contention of the Assessing Officer that the assessee had continued to have dealings with M/s. Dhanraj Mills even after the later was notified. He pointed out that under the rules of Bombay Stock Exchange, badla transaction had to be compulsorily carried out. The assessee had not entered into any fresh transaction with M/s. Dhanraj Mills after 31-3-1992. The entries in the books of account of the assessee for financial year 1992-93 related to compulsory carry over of all transactions and adjustment entries made in respect of earlier Badla transactions. 7. As to the second objection of the ld. Assessing Officer that M/s. Dhanraj Mills was notified on 29-5-1992, the ld. counsel argued that notification was culmination of the proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as not accepted as the assessee had failed to show that it had been carrying on regular money lending business. Thereupon the assessee had filed a miscellaneous application being MA No. 262/Mum./2003. The assessee then referred to the balance sheet as on 31-3-1993 and pointed out that there were loans, advances and deposits given to the extent of Rs. 1,84,88,369 that was supported by a list of loans advanced. The Tribunal observed that during the course of hearing, it was not pointed out that there were two amounts of Rs. 1,84,88,369 and Rs. 2,68,15,381 of which Rs. 83,27,012 was in fact net balance. The Tribunal, therefore, held that there was no mistake that could be said to be apparent from the record. The ld. counsel argued that the decision of Tribunal for assessment year 1993-94 was not applicable because in that year, the assessee had failed to produce complete facts. As against that for assessment year before us Annexure B to the balance sheet enlisted the particulars of loans and advances amounting to Rs. 1,44,67,020 as given at page 7 of the paper book. The profit and loss account disclosed the income of Rs. 12,35,988 as at pages 8 and 9 of the paper book. 10. The ld. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... force in the contention of the assessee that the order of Tribunal for assessment year 1993-94, did not constitute a precedent because full facts of the assessee were not presented before the Hon'ble Tribunal. This aspect is born out from the order of the Tribunal dated 5-12-2003 in MA No. 262/Mum./2003. On such facts it is incumbent upon us to decide the case before us on the basis of facts of the case as presented instead of mechanically following the outcome of the Tribunal Order for assessment year 1993-94. The authority in this respect may be seen in the judgment of Hon'ble Supreme Court in the case of CIT v. Brij Lal Lohia Mahabir Prasad Khemka [1972] 84 ITR 273. As to the argument of revenue that the amounts in question have not been assessed as income of the assessee in any assessment order, it is settled position that any business loss of revenue in nature incurred by the assessee on account of non-recovery of debts has to be allowed as deduction if not as bad debt under section 36(1)(vii) then as business loss under section 28 of the Act. As to the argument that write off on the part of the assessee is premature, the same is not at all justified. To argue that loss aris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf of clients while the second account comprised of transactions carried out on own account. The transaction of purchase and sale of shares of Bangalore Stock Exchange did not figure in any of those two accounts. The assessee explained that Mr. M.L. Gopal Shetty was having a running account with the assessee and the sum of Rs. 3,30,000 paid to him for purchase of one share of Bangalore Stock Exchange was credited to his account. As on 31-3-1990 there was a debit balance of Rs. 10,01,288 in that account that included the aforesaid sum of Rs. 3,30,000 also. The ld. Assessing Officer held that all sundry debtors shown in the books of account of the assessee represented business assets and not capital assets. Therefore, profit arising on sale of such business asset should be taxed under the head "Profits and gains of business or profession". If the assessee wanted to show the purchase of shares of Bangalore Stock Exchange as investment in a capital asset, he should have then shown the purchase under the head 'Investments' in his books of account. Such investments should have been offered for wealth tax purpose for assessment year 1991-92, but that was not done. Thus the fact of the mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion represented a capital asset Proviso to section 42(A) was not attracted. The share was having unique features that distinguished it from what was ordinarily understood as a share. Such share, if sold before 36 months of acquisition represented sale of a short-term capital asset resulting into short-term capital gains. Based on such reasoning the ld. CIT(A) rejected the assessee's ground of appeal. 14. During the course of hearing before us on 29-8-2006 the ld. counsel for the assessee argued that by no means the share could be treated as stock in trade as held by the ld. Assessing Officer. The share was essential to entitle the holder to carry on business of broker in Bangalore Stock Exchange. The share was, therefore, a capital asset and not stock in trade. The assessee was certainly not in the business of buying and selling stock exchange memberships. At the time of acquisition, the assessee's intention was to expand its share broker business. As that intention could not materialize the share was sold. Thus what the assessee purchased and sold was a capital asset. The ld. Assessing Officer was not justified in deciding this issue on the basis of his interpretation of the ent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M.L. Gopal Shetty dated 15-3-1990 stated that the assessee would be put as the vendor's nominee in possession of the vendor's share broking business and that the vendor would assign that business including the tenancy of the office, furniture, telephone to the assessee. We, therefore, fixed the case for further hearing and the same was heard on 15-12-2006 and 21-12-2006. During the course of further hearing of this appeal the learned counsel for the assessee explained that there was no such thing as Membership Card as far as Bangalore Stock Exchange at the material time was concerned. Bangalore Stock Exchange had been incorporated and was a company while Bombay Stock Exchange and Ahmedabad Stock Exchange were Association of Members. Bangalore Stock Exchange comprised of shareholders while Bombay Stock Exchange and Ahmedabad Stock Exchange comprised of its members. The learned counsel extensively referred to Memorandum of Association and Articles of Association of Bangalore Stock Exchange and pointed out that only a shareholder of Bangalore Stock Exchange could carry on share braking business in Bangalore Stock Exchange. A share in Bangalore Stock Exchange did not ipso facto entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... included it in stock in trade nor in investments as far as the books of account are concerned. Thus entries in the books of account did not support the case of revenue either. Moreover entries made by the assessee in the books of account do not determine the chargeability of tax that is fixed by law and not by the accountant of the assessee. It is the correct nature of the transaction that is required to be seen. Reference in this respect is invited to Hon'ble Supreme Court judgments in Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1. We also see no logic in the inference drawn by the ld. CIT(A) that right to do business was on a par with the trading assets of the assessee. In law a profit-making apparatus is always treated as a capital asset. It is not the case of the revenue that the assessee was engaged in the business of trading in stock exchange memberships. It cannot, therefore be, denied that the assessee acquired a capital asset and as the same was sold by the assessee, there is transfer of a capital asset chargeable to tax under the head "Capital gains". The point at issue, therefore is whether or not proviso to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... action and that showed that only paper entries had been created. The ld. Assessing Officer recorded the statement of Shri S.S. Kulkarni, Sr. Finance Manager of the client. Admittedly that statement was recorded by the Assessing Officer prior to having the knowledge of assessee's transaction with Lupin Laboratories. In that statement Shri Kulkarni stated that in all its share transactions that company had earned profit and no loss and that nature of the transactions was speculation transaction. The ld. Assessing Officer found that profit of Rs. 44,20,875 was given to Lupin Lab by way of paper transactions. Corresponding loss was incurred by the following parties: (1) Rajkumar Bothra - Rs. 30,66,000 (2) K. Motiram Vakil - Rs. 13,18,250 (3) Assessee - Rs. 1,53,300 20. The ld. Assessing Officer accepted that the losses were incurred by Rajkumar Bothra and K. Motiram Vakil as those parties had furnished confirmations. As to the loss incurred by the assessee, the ld. Assessing Officer held that as those were paper transactions only and not genuine transactions, the assessee's loss was to be disallowed entirely. Even if, the transactions were treated genuine transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the parties concerned. 23. On consideration of the matter, we find that the ld. Assessing Officer has not been able to establish that Shri. K. Motiram Vakil was merely a name lender and the transactions in question did not take place. The ld. CIT(A) has expressed doubt because some of the shares belonging to 'B' category though he admits that the transactions could be squared up if purchase and sale was made within the same settlement period. On consideration of the matter, we are of the view that the alternate claim of the assessee that the losses be allowed as speculative transactions has been kept aside without adequate material. It is true that these transactions were incurred without actual delivery but from that the Assessing Officer could not draw inference that the transactions were not genuine. We, therefore, see considerable force in the contention of the assessee that the loss claimed should be treated as speculative loss. We, therefore, restore the issues relating to the assessee's claim of loss of Rs. 1,53,500 and Rs. 9,00,710 to the file of the ld. Assessing Officer for decision afresh. He should examine whether apart from non-delivery of scripts is there any mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute a power of attorney in favour of his nominee for conducting the business. In view of the above, the Assessing Officer was of the opinion that the appellant had taken over the business of Mr. Shetty for Rs. 3,30,000. It was argued by the appellant that the Bangalore Stock Exchange was a limited company and to become a member of the Stock Exchange, a share of the said exchange had to be bought which was bought for Rs. 3,30,000 on 15-3-1990. However on account of restriction of dual membership (the appellant was already a member of BSE), the appellant could not become a member of Bangalore Stock Exchange and, therefore, he sold the said shares for Rs. 17,00,000 on 18-12-1991 resulting in longterm capital gain on sale of said share. (Period of holding being more than 12 months). The Assessing Officer looked into the treatment given by the appellant, in his books of account, as far as purchase and sale of said share of Bangalore Stock Exchange was concerned. He found that the appellant had shown the purchase of Bangalore Stock Exchange card under the head 'Sundry debtors' in the books of Shri Mahesh J. Patel (wherein purchase and sale of shares held in stock in trade were recorded), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le. The very fact that the assessee could not become a member of Bangalore Stock Exchange because of the restriction of multiple membership places such a share in a distinct category not akin with those of the shares treated in the Stock Exchange. The share in Bangalore Stock Exchange was an asset from the exploitation of which the assessee was deriving income and was not stock in trade. Thus, it was submitted that the share having been purchased prior to 31-3-1990 and sold after 31-3-1991 was a longterm capital asset and the gain arising therefrom was a long-term capital gain and that it was neither a business profit nor a short-term capital gain. I have carefully considered the submissions of the learned representative, I agree with the authorized representatives that the holding of a share in the Bangalore Stock Exchange gives the holder the right to act as a share broker in the stock exchange and to have a source of income. I also agree with the appellant that the nature of entries made by the appellant in the books of account maintained by it is not relevant to determine the character of a particular receipt. What is relevant is the true nature and quality of the receipt as he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cise Ground No. 2 (letter dated 6-10-2004) which reads as under:- "The ld. CIT (A) has erred in law and in facts in rejecting the claim of the appellant that the gains of Rs. 13,70,000 out of sale of shares of Bangalore Stock Exchange constituted long-term capital gain on sale of shares." 4. At the time of hearing before us, on behalf of the assessee, Shri Vijay Mehta appeared and reiterated the submissions made before the ld. CIT(A), which are contained in para 13 of the proposed order of my learned Brother. The ld. counsel for the assessee also pointed out that the predominant objective of the agreement executed on 15-3-1990 with Shri M.L. Gopala Setty was to acquire the share of Bangalore Stock Exchange Ltd., and rights of trading attached to it. He submitted that even though the business rights are attached with the share, what have been acquired is share. If the Legislature wanted to treat such assets differently, they would have provided so as it has been done vide section 27(iii) of Income-tax Act and section 4(7) of Wealth-tax Act. In support of this, he strongly relied on the decision of the Hon'ble Gujarat High Court in the case of Anilaben Upendra Shah. The counsel f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted that the decision of the Hon'ble Gujarat High Court in the case of Anilaben Upendra Shah relied by the ld. counsel for the assessee supports the view of the revenue that Stock Exchange Card is not share but right to carry on the business in the Stock Exchange. The assessee has purchased the right to carry on share broking business along with the tenancy of the office, furniture, telephone, etc., therefore, period of holding the surplus as "Long-term capital gain" required as per section 2(42A) of the Income-tax Act is 36 months and not 12 months as claimed by the assessee. The ld. D.R. contended that the aim and object of buying the running business of Shri M.L. Gopala Setty was different than acquiring a share, therefore, the order of the ld. CIT(A) on this issue be upheld. 8. After considering the aforesaid submissions, I found considerable force in the submissions made by the ld. D.R. First of all I may point out that the ground raised by the assessee is mis-conceived because the gain of Rs. 13,70,000 arose from sale of business of share broking along with tenancy right, furniture and telephone, etc. and not shares of Bangalore Stock Exchange Ltd., as stated in the concis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thousand only) after 1-4-1990 in Bangalore Stock Exchange through the First Party when the First Party can withdraw his deposit of cash and shares. 5. The Party of the First Part shall, on the request of Mr. M.J. Patel or his nominee make an application to Bangalore Stock Exchange to have his membership transferred to the Party of the Second Part or his nominee. 6. If, in the unlikely event of the transfer not being acceptable to Bangalore Stock Exchange, the party of the First Part shall enter into any arrangement for the effective 'transfer' of the membership by such modus operandi as may be specified by the Party of Second Part. 7. In the event, the agreement cannot be put into effect, the parties hereto shall as far as possible be restored to status quo ante. In witness whereof the parties hereto have set their hands to his agreement on the day, month and year first above mentioned. Witness: Sd/Party of First Part Sd/ V.S. Prasannakumar 4th Lane, Subramanyampura, Bangalore-61. Sd/- Party of Second Part' 9. From the perusal of clause 2 of the aforesaid agreement, it is clear that the First Party namely Mr. M.L. Gopal Setty agreed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were signed in favour of Venkatachalan by Mr. Gopal Setty. 11. The price paid by the assessee includes tenancy right which is a capital asset. The 'transfer' of tenancy right is a capital asset within the meaning of section 45 of the Income-tax Act as held by Hon'ble the Supreme Court in the case of A. Gasper v. CIT [1991] 192 ITR 382. Therefore, any gain arising on transfer of tenancy right is subject to capital gain under section 45 of the Income-tax Act, 1961. 12. Apart from the above, from the perusal of agreement, it is clear that the assessee has acquired the right to carry on the business as a stock broker and not share in a joint stock company. Under the Income-tax Act, various sections such as section 2(42A) Explanation 2, section 55(2)(aa), section 112(1) Explanation all adopt the definition of 'security' under Securities Contracts (Regulation) Act, 1956 (herein called 'SCRA') and, therefore, this definition has significance even under the Income-tax Act. Similarly, section 2(45AA) of the Companies Act also adopts the same definition of "securities". The definition of "security" is contained in section 2(h) of Securities Contracts (Regulation) Act, which include: ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound to be invalid. In coming to the conclusion, the Hon'ble Supreme Court followed the decision Vinay Bubna v. Stock Exchange, Mumbai [1999] 97 Compo Cas. 874 where it was held to be not an asset of the member and that exercise of any power under the same actually vested in the Stock Exchange. 14. The ITAT Mumbai 'D' Bench vide order dated 4-1-2006 in the case of Techno Shares Stocks Ltd. v. ITO [2006] 101 TTJ (Mum.) 349, took the view that Stock Exchange Card is an intangible asset within the definition of section 32 of the Income-tax Act and the assessee is entitled for depreciation on stock exchange card. A person can hold the shares either as stock-in-trade or as an investment. There is no provision to allow depreciation on shares of Joint Stock Company, whereas on Stock Exchange Card, depreciation has been allowed by the Coordinate Bench of the Tribunal in the case of Techno Shares Stock Ltd. The ITAT Ahmedabad Bench 'A' in the case of V.G. Gajjar V. Dy. CIT [2005] 93 ITD 624 has held that Membership Card of Stock Exchange is an asset within the meaning of section 2(e) of Wealth-tax Act. In this decision, the Co-ordinate Bench observed that Stock Exchange Card is a prop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal is accordingly rejected. 18. In respect of other grounds, I fully agree with the proposed order of my learned brother. REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Since there is a difference of opinion between us in relation to the assessee's ground of appeal No. 2 we refer the following points of difference to the Hon'ble President for nominating Third Member so that the points of difference may be decided according to the opinion of the majority of the Members of the Appellate Tribunal:- "Whether on the facts and in the circumstances of the case the Accountant Member is justified that profits or gains arising to the assessee from the transaction with Shri R.M. Venkatachalam are chargeable to tax as long-term capital gain or the Judicial Member is justified that the same are assessable as the short-term capital profits?" THIRD MEMBER ORDER Per G.E. Veerabhadrappa, Vice President.- There being a difference of opinion between the Members constituting the Division Bench, the Hon'ble President has referred, under section 255(4) of the Income-tax Act, 1961, the following point of difference to me as a Third Member to resolve the controversy: "Whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the only point at issue, therefore, was whether or not the proviso to section 2(29B) read with section 2(29A) applies. If the assessee's case is covered by the proviso the gains are chargeable to tax as long-term capital gains. If the proviso does not apply the gains will have to be charged to tax as short-term capital gains. According to the learned Accountant Member, the proviso is attracted if the asset is sold is share held in the company. Prima facie, according to him, the assessee had held shares in Bangalore Stock Exchange, which was a limited company, the share was sold by the assessee. The assessee held the share for more than 12 months and therefore, the assessee has rightly claimed the sum in question chargeable to tax as long-term capital gains. However, the learned Judicial Member did not agree with this issue and he was of the view that the shares are different from membership of a recognized Stock Exchange. According to him the membership of a recognized Stock Exchange gives a membership to do business within the premises of the stock exchange and what has been acquired and sold by the assessee is such rights of membership. According to him they are not shares. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d have gone through the orders of the leaned Accountant Member as also the learned Judicial Member and the facts of the case. The assessee has also filed the copy of the agreement which he has entered with Shri M.L. Gopal Shetty, the Vendor, on 15-3-1990, wherein he has agreed to purchase the business including the tenancy of the office, furniture, telephone for a consideration of Rs. 3,30,000. The recital therein shows that the assessee was interested in extending his business activity to Bangalore Stock Exchange Limited. What has been purchased by the assessee is definitely not stock in trade but a capital asset. The assessee is not in the business of purchase and sale of membership in the Stock Exchanges. What was purchased and sold by the assessee is only capital asset, the transfer of which gives rise to income under the head 'Capital gains'. 6. The provisions relevant to decide the issue in question before me are extracted below: "2(29A) 'Long-term capital asset' means a capital asset which is not a short-term capital asset" "2(29B) 'Long-term capital gain' means capital gain arising from the transfer of a long-term capital asset" "2( 42A) 'Short-term capital asset' m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one were to carry on a share broking activity in Bangalore Stock Exchange Ltd., he is required to acquire the share in Bangalore Stock Exchange Ltd., and that could only be acquired from an existing holder. For that reason the share of Bangalore Stock Exchange carry considerable prices. Although the share has a face value of Rs. 250, it was purchased at a price of Rs. 3,30,000 and sold for a price of Rs. 17 lakhs. Although the agreement dated 15-3-1990 between the assessee and Shri M.L. Gopala Shetty mentions that the assessee has acquired the ongoing business along with the tenancy right of office, furniture, telephone etc. The assessee has filed an affidavit stating that what was purchased and sold was mainly share in the Bangalore Stock Exchange Ltd. and no other asset were sold. The share in the Bangalore Stock Exchange Limited can be compared with a membership of a Co-operative Housing Society. The Member of a Co-operative Housing Society only owns the shares in that society. The right to enjoy or derive from, any amount or building belonging to the Co-operative Housing Society is merely an incidental right flowing from the ownership of the shares. A Member of a Co-operative H ..... X X X X Extracts X X X X X X X X Extracts X X X X
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