Sharekhan Ltd, Mumbai vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL "H " BENCH, MUMBAI सव ी आई.पी.बंसल, या यक सद य. एवं ी राजे , लेखा सद य के सम BEFORE SHRI I.P. BANSAL, JM AND RAJENDRA, AM

आयकर अपील सं./I.T.A. No.9065/MUM/2010 ( नधा रण वष / Assessment Year : 2007-08

M/s. Sharekhan Ltd., बनाम/ The ACI T, CC - 22, 10 t h Floor, Beta Building, Ithink Vs. Aaykar Bhavan, MK Road, Corporate Campus, Kanjur Mumbai 400 020 Village Road, Kanjur Marg(E), Mumbai 400 016.

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAECS 5096H (अपीलाथ /Appellant) .. ( यथ / Respondent)

ITA NO.1027/MUM/2011 A.Y.2007-08 The ACI T, CC - 22, बनाम/ M/s. Sharekhan Ltd., Aaykar Bhavan, MK Road, 10 t h Floor, Beta Building, Ithink Vs. Mumbai 400 020 Corporate Campus, Kanjur Village Road, Kanjur Marg(E), Mumbai 400 016.

थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : AAECS 5096H (अपीलाथ /Appellant) .. ( यथ / Respondent)

Revenue by Shri Hiro Rai Assessee by Shri Sanjay Punglia सन ु वाई क" तार$ख / Date of Hearing : 05/05/2015 घोषणा क" तार$ख /Date of Pronouncement : 05/05/2015

आदे श / O R D E R

PER I.P.BANSAL, J.M:

These are cross appeals and are directed against order passed by Ld. CIT(A) dated 29/11/2010 for assessment year 2007-08. Grounds of appeal read as under:

2 आयकर अपील सं./I . T . A . N o . 9 0 6 5 / M U M / 2 0 1 0 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8 आयकर अपील सं./I . T . A . N o . 1 0 2 7 / M U M / 2 0 1 1 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8

Assessee's Grounds of appeal:

1. Under the facts and circumstances of your appellant, the Learned CIT(A) has erred in confirming the addition made by the Learned A.O. of Rs. 24,20,059/- being claim of depreciation on the BSE Membership card. 1.01. the Learned CIT (A) has erred in holding that the trading rights of BSE card were, therefore, extinguished and the new shareholder were given trading rights without consideration.

1.02. The Learned CIT (A) erred in stating that, there is neither any value of this new trading right, nor any cost. .

1.03. The Learned CIT (A) failed to appreciate that the actual cost of original membership card, is to be assigned to the new membership card. 1.04. The Learned CIT (A) is in error while stating that it was not possible to allocate the consideration paid by the assessee towards these rights separately.

2. Under the facts and the circumstances of your appellant, the Learned CI'T (A) has erred in confirming the addition made by Learned A.O. in disallowing the advances given for customizing the software Rs. 5,05,000/.-

2.01. Without prejudice to the above grounds of appeal, the Learned CIT (A) has erred in stating that no details on the software scrap have been submitted by the assessee.

2.02.Without prejudice to the ground No 2 & 2.0], the Learned CIT (A) has erred in rejecting our alternate claim to allow software scrap of Rs. 5,05,000/- as a expenses u/s 37 or business loss u/s 28/29 of the Income Tax Act, 1961

3. Under the facts and the circumstances of your appellant, the Learned CIT (A) has erred in confirming the addition made by Learned A.O. on account of disallowance of the Non compete fees paid Rs. 26,62,000/-, and treating the same as a capital expenditure.

3.01.The Learned CIT (A) failed to appreciate the submission made by your appellant, about the allow ability of the non compete fees paid to various sub broker.

Revenue's Grounds of Appeal:

1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the additions amounting to Rs. 1,20,25,2881 - relying on the decision of the Hon'ble ITAT Spl. Bench in the case of Shreyas S Morakhia ignoring the fact that the same is not accepted by the Department.

2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition amounting to Rs.2,23,77,5231- without appreciating the fact that the AO has rightly treated the Vanda loss & trading loss as speculative loss a per section 73 of the Act.

3. On the facts and in the circumstances of the case and In law, the Ld. CIT(A) has erred in allowing the depreciation to the non- compete fees even 3 आयकर अपील सं./I . T . A . N o . 9 0 6 5 / M U M / 2 0 1 0 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8 आयकर अपील सं./I . T . A . N o . 1 0 2 7 / M U M / 2 0 1 1 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8

though the assessee has not acquired any asset which can depreciate with time.

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 reasonably and not in accordance with Rule 80 of the I.T. Rules 1962.

Assessee's Appeal & Ground No.3 of Revenue's Appeal:

2. Ground No.1 is against the addition upheld by Ld. CIT(A) in respect of depreciation claimed on BSE Membership Card. During the course of hearing, it was fairly conceded by Ld. AR that this issue is covered against the assessee by the decision of Hon'ble Bombay High Court in the case of CIT vs. Techno Shares and Stock Ltd. & Others, 323 ITR 69, wherein Hon'ble Bombay High Court has held that depreciation is not allowable on the BSE Membership Card as it does not fall in any of the categories specified in section 32(1) of the Income Tax Act 1961 (the Act). Therefore, after hearing both the parties we dismiss ground No.1 filed by the assessee.

3. Apropos Ground No.2, the same was not pressed by Ld. AR, therefore, the same is dismissed being not pressed.

4. Apropos ground No.3, this ground is common with the Revenue's ground No.3. During the year under consideration assessee has paid non-

compete fee to the following parties:

S.No. Name of the Paryty Amount 1. Shailesh Tanna 112,000 2. Paras Popat 500,000

3. Vignaharth Investment & Finance Co Pvt. 500,000 Ltd.

4. Nexus Security 300,000 5 Kuber Securities 50,000

6. R Anilkumar 100,000

7. Samyak Consultancy 300,000

8. J Arun 300,000

9. V L Associates 300,000

10. Rajaram Muthukumar 200,000 4 आयकर अपील सं./I . T . A . N o . 9 0 6 5 / M U M / 2 0 1 0 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8 आयकर अपील सं./I . T . A . N o . 1 0 2 7 / M U M / 2 0 1 1 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8

TOTAL 2,662,000

The aforementioned amount was claimed as revenue expenditure on the ground that assessee had been regularly paying sub-brokerage to these parties and details of sub-brokerage paid to these parties in the last three years was also submitted and it was claimed that these expenditure should be allowed as revenue expenditure. The AO did not accept such submission of the assessee and treated such expenditure as capital expenditure. Before Ld. CIT(A) one of the alternative contention was that if the expenditure is treated as capital expenditure then depreciation may be allowed upon the same. Ld. CIT(A) has examined various clauses of the agreement entered into by the assessee for non competition and after considering the submissions of the assessee has arrived at a conclusion that in view of the decision of Special Bench in the case of Techmseh vs. Addl. CIT, ITA No.3759/Del/2003 A.Y. 1998-99 order dated 30.07.2010 the case of the assessee cannot be accepted for allowability of this expenditure as revenue expenditure. He observed that non-compete right acquired by the assessee is commercial right, therefore, in view of the decision of ITAT Chennai in the case of Medicon Technology Ltd 122 TTJ 394 the depreciation is allowable on the amount paid as non-compete fee. The assessee in its grounds of appeal claimed that the same be allowed as revenue expenditure as against that Revenue in its grounds of appeal agitated the decision of Ld. CIT(A) vide which it has been held that assessee is entitled to get depreciation.

4.1 Ld. AR submitted that there can be three possibilities, one is to allow expenditure as revenue expenditure; second possibility is to allow depreciation and third possibility is to amortize the expenditure into three years and allow the same as 1/3rd in each year. He submitted that the period of non-compete fee is three years, therefore, it will require amortization. He submitted that assessee is satisfied if depreciation is 5 आयकर अपील सं./I . T . A . N o . 9 0 6 5 / M U M / 2 0 1 0 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8 आयकर अपील सं./I . T . A . N o . 1 0 2 7 / M U M / 2 0 1 1 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8

granted. For claiming depreciation on amount paid as non-compete fee Ld. AR relied upon the following decisions.

1. 264 CTR 187 (Mad) Pentasoft Technologies Ltd. vs. DCIT

2. 19 ITR 483 (Mum-Trib) Ind Global Corporate Finace Pvt. Ltd. vs. ITO 3.120 TTJ 983 (chen-Trib) Asstt. CIT v. Real Image Tech. P. Ltd.

4. 122 TTJ 394 (Hen-Trib) ITO v. Medicrop Technologies India Ltd.

4.2 On the other hand, it was submitted by Ld. DR that payment made by the assessee as non-compete fee is capital in nature. He submitted that though the same is capital in nature but no depreciation should be allowed as non-compete fee has not been considered as capital asset for the purpose of grant of depreciation in section 32 of the Act.

5. We have heard both the parties and their contentions have carefully been considered. We have also gone through the decisions relied upon by Ld.AR. While allowing depreciation Ld. CIT(A) has relied upon the decision of ITAT Chennai in the case of Medicon Technologies Ltd(supra) and Real Image Tech Pvt. Ltd.(supra). In the case of Real Image Tech Pvt. Ltd,. it has been held that commercial rights comes into existence whenever the assessee make payment for non-compete fee and after obtaining non- compete right, the assessee can develop and run his business without bothering about competition and, therefore, non-compete right is intangible asset eligible for depreciation. In the case of Orchid Chemicals and Pharmaceuticals Ltd., 131 ITD 385, which relied was upon by Ld. AR for the purpose of amortization, it has been held that since the non-compete agreement was for a period of four years, the same was directed to be allowed as revenue expenditure over a period of four years.

5.1 In this view of the situation, as Ld. AR has expressed his satisfaction only with grant of depreciation as has been allowed by Ld. CIT(A)and also in view of the fact that Ld. DR could not cite any decision to contradict that 6 आयकर अपील सं./I . T . A . N o . 9 0 6 5 / M U M / 2 0 1 0 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8 आयकर अपील सं./I . T . A . N o . 1 0 2 7 / M U M / 2 0 1 1 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8

proposition, we are of the opinion that Ld. CIT(A) did not commit any error in holding that assessee was entitled to get depreciation on the amount paid by it as non-compete fee. Accordingly, we decline to interfere in such decision of Ld. CIT(A). The Revenue's ground as well as assessee's ground on this issue are dismissed.

REVENUES'S APPEAL:

6. Apropos ground No.1, the only grievance of the Revenue in this ground is that Ld. CIT(A) has erred in allowing relief on the basis of decision in the case of Shreyas S. Morakhia Special Bench (Mum) as the same is not accepted by the Department. Now it is the case of Ld. AR that Hon'ble Bombay High Court has upheld the said decision of Special Bench in the appeal filed by the Revenue and reference was made to the decision in the case of CIT vs. Shreyas S.Morarkia, 342 ITR 285(Bom).

6.1 Ld. AO disallowed a sum of Rs.1,18,82,970/-, Rs.90,035 and Rs.52,283/-,which were claimed as bad debts written off in the P&L account. Ld. CIT(A) allowed the same on the basis of Special Bench decision in the case of Shreyas S. Morarkhia (supra). Against the aforementioned decision of Special Bench, the Revenue took up the matter in further appeal before Hon'ble Bombay High Court and it was held that the value of the shares transacted by the assessee as stock broker on behalf of his clients was as much a part of the debt as was charged brokerage by the assessee on the transaction. The brokerage having been credited to the P&L account of the assessee, it was evident that a part of the debt was taken into account in computing the income of the assessee. The fact that the liability to pay brokerage may arise at a point in time anterior to the liability to pay the value of the shares transacted would not make any material difference to the position. Both constitute a part of the debt which arises from same transaction involving the sale or, as the case, purchase of shares. Since 7 आयकर अपील सं./I . T . A . N o . 9 0 6 5 / M U M / 2 0 1 0 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8 आयकर अपील सं./I . T . A . N o . 1 0 2 7 / M U M / 2 0 1 1 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8

both form a part of component of debt, the requirement of section 36(2)(i) are fulfilled, where a part thereof is taken into account in computing the income of the assessee. Therefore, it was held that assessee is entitled to deduction by way of bad debt under section 36(1)(viii) r.w.s. 36(2) in respect of amount which could not be recovered from its clients in respect of transactions effected by him on behalf of his clients.

7. In this view of the situation, after hearing both the parties, we found no infirmity in the relief granted by Ld. CIT(A), therefore, Ground No.1 of the Revenue's appeal is dismissed.

8. Apropos Ground No.2, it may be mentioned here that the relief allowed by Ld. CIT(A) is a sum of Rs.2,32,77,523/-. However, in the ground of appeal there is a typing error and the amount has wrongly been written as Rs.2,23,07,523/-. This amount was debited under the head bad debts as trading loss being unrecoverable from the clients. In response to query raised by the AO it was submitted that such loss accrued to the assessee as a result of errors caused by time pressure which resulted in wrong punching of client's identity code / wrong execution of trade. It was submitted that the loss was incurred in the course of carrying on business and should be allowed as business loss. The AO did not accept such explanation of the assessee. According to AO once the client has disowned the transaction, then the assessee steps into the shoes of client and it is in the interest of the assessee that the transaction is squared off at the earliest and the losses, if any, are minimized. The AO observed that assessee did not establish this fact and the transactions were settled beyond reasonable time, therefore, losses have been incurred which implied that the assessee was working for a opportune moment, where transaction would result into a profit. The loss was only as a result of business of the assessee of purchase and sale of shares. Applying explanation to section 73 of the Act Ld. AO has held such transaction as speculation transaction and in this manner a sum of Rs.2,32,77,523/- was disallowed. While allowing the relief Ld. CIT(A) 8 आयकर अपील सं./I . T . A . N o . 9 0 6 5 / M U M / 2 0 1 0 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8 आयकर अपील सं./I . T . A . N o . 1 0 2 7 / M U M / 2 0 1 1 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8

has taken into consideration the fact that the assessee is one of the dominant retail stock broking house in India and is having a net work of 159 own branches and 1000 plus business partners across the country. The cliental of the assessee is over ten lacs retail customers and has a DP cliental of approximately ten lacs clients and it employs 3500 personnel operating in 360 cities nation wide. In view of these facts, Ld. CIT(A) has observed that there are chances of mistake which resulted into disown by the person in whose account such transaction has been entered . Keeping in view all these facts Ld. CIT(A) has held that explanation to section 73 would not be applicable in view of the decision of ITAT in the case of M/s. Parker Securities Ltd. vs. DCIT, 102 TTJ 235. Ld. CIT(A) has reproduced the relevant portion from the said decision and has granted impugned relief to the assessee. The Revenue is aggrieved, hence, has filed aforementioned ground.

8.1 Ld. DR relied upon the order passed by AO, as against that Ld. AR has relied upon the following decisions:

1. ITA No.3756/Mum/2012 in Asst. CIT vs. IDFC SSKI Sec. Ltd. 2.102 TTJ 235 (Ahd-Tib) Parkar Securities Ltd. vs. Dy. CIT

3. 91 TTJ 57 (Del-Trib) Asst. CIT vs. Subhash Chand Shorewala

8.2 It was contended that Ld. CIT(A)did not commit any error in granting the relief to the assessee and aforementioned decisions support the case of the assessee.

9. We have heard both the parties and their contentions have carefully been considered. In the case of ACIT vs. IDFC SSKI Securities Ltd. (supra), similar ground was raised by the Revenue. The ground raised in that case read as under:

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"1.On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in allowing the loss of Rs.2,36,36,821/- as business loss even when the same is specifically covered under section 73 of the Act.

2. The appellant craves to leave to add, to amend and/or alter any of the grounds of appeal, if need be""

9.1 The assessee placed reliance upon following decisions:

1. ITO vs. GDV Share & Stock Broking Services Ltd., 88 TTJ (Cal) 352

2. M/s.Parker Securities Ltd. vs. DCIT, 102 TTJ (Ahd) 235. 3.33 CCH 124 (Mum-Trib) HSBC Securities & Capital Markets India P. Ltd., vs. ACIT 4.139 R 149 (AP), CIT vs. Shah Pratapchand Nowpaji

5. 91TTJ 57 (Del-Trib) ACIT vs. Subhash Chandra Shorewala. 6.50 SOT 592 (Ahd-Trib) ITO vs. Rajiv Securities P. Ltd.

After considering these decisions the Tribunal has held as under:

5. We have heard both the parties and their contentions have carefully been considered. Right from the assessment proceedings it was the case of the assessee that the impugned loss has occurred to the assessee in respect of error trade. Due to dispute with the clients, for the transaction, it does not change the relation of principal and the agent. The assessee for business consideration chooses not to recover the losses. These losses are in the course of business and should be allowed as such under section 28 of the Act. All these contentions of the assessee have been recorded in the assessment order in para 3.3. The AO has not brought any material on record to suggest that these contentions of the assessee are either false or incorrect. No material has also been brought on record that these losses are on account of assessee's own trading in shares. If it is so, the loss accrued to the assessee will be governed by the aforementioned decisions of Tribunal where consistent view has been taken that loss occurred to share broker on account of client disowning transaction is business loss and not speculative loss. Therefore, we are of the opinion that Ld. CIT(A) did not commit any error in accepting the claim of the assessee. Accordingly, we decline to interfere and Departmental appeal on this ground is dismissed.

5.1 Before parting of the Departmental appeal it may be mentioned that amount stated by the Department in its grounds of appeal is wrongly mentioned as Rs.2,36,36,821/-, whereas the same is Rs.2,65,07,464/-. In view of the above discussions the Departmental appeal is dismissed.

In the aforementioned decision both of us are parties. Therefore, following the aforementioned view we hold that Ld. CIT(A) has rightly decided the 10 आयकर अपील सं./I . T . A . N o . 9 0 6 5 / M U M / 2 0 1 0 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8 आयकर अपील सं./I . T . A . N o . 1 0 2 7 / M U M / 2 0 1 1 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8

issue and we decline to interfere and this ground of the Revenue is dismissed.

10. Apropos Ground No.4, the assessee earned dividend income of Rs.1.26.78,000/-, which was claimed to be exempt under section 10(33) of the Act. Applying Rule 8D AO disallowed asum of Rs.36,14,810/-. Ld. CIT(A) following the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd., vs. DCIT, 328 ITR 81 (Bom) has held that Rule 8D is not applicable to assessment year 2007-08. He further held that a reasonable disallowance is required to be made and he has directed the AO to make disallowance under section 14A keeping in view the guidelines issued by Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT(supra).

11. On this issue, we have heard both the parties and after considering their submissions, we are of the opinion that there is no infirmity in the order passed by Ld. CIT(A) vide which he has directed the AO to recompute the disallowance in view of the submissions of the assessee as well as the decision of Hon'ble Bombay High Court in the case of Godrej &Boyce Mfg. Co. Ltd.(supra). We decline to interfere and this ground of the Revenue is dismissed.

12. In the result, the appeal filed by the assessee is partly allowed and appeal filed by the Revenue is dismissed.

Order pronounced in the open court on 15/05/2015 आदे श क" घोषणा खल ु े यायालय म+ ,दनांकः 15/05/2015 को क" गई ।

Sd/- Sd/- राजे (RAJENDRA) आई.पी.बंसल (I.P.BANSAL)

लेखा सद य /ACCOUNTANT MEMBER या यक सद य /JUDICIAL MEMBER मंब ु ई Mumbai; ,दनांक Dated 15/05/2015 11 आयकर अपील सं./I . T . A . N o . 9 0 6 5 / M U M / 2 0 1 0 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8 आयकर अपील सं./I . T . A . N o . 1 0 2 7 / M U M / 2 0 1 1 ( नधा रण वष / A s s e s s m e n t Y e a r : 2 0 0 7 - 0 8

आदे श क त"ल#प अ$े#षत/Copy of the Order forwarded to :

1. अपीलाथ / The Appellant

2. यथ / The Respondent.

3. आयकर आय0 ु त(अपील) / The CIT(A)-

4. आयकर आय0 ु त / CIT

5. 1वभागीय त न3ध, आयकर अपील$य अ3धकरण, मब ुं ई / DR, ITAT, Mumbai

6. गाड फाईल / Guard file.

आदे शानस ु ार/ BY ORDER, स या1पत त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मबंु ई / ITAT, Mumbai व. न.स.Vm , Sr. PS