Income Tax Appellate Tribunal - Mumbai
S.S. Kantilal Ishwarlal Securities ... vs Department Of Income Tax on 25 February, 2002
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'A' MUMBAI
BEFORE SHRI P.M. JAGTAP(AM) AND SMT. ASHA VIJAYARAGHAVAN (JM)
ITA No. 2641/Mum/2002
Assessment year- 1997-98
The ACIT 4(2)(2), M/s. S.S. Kantilal Ishwarlal
Aayakar Bhavan. Securities Ltd.,
Mumbai-400 020 3/A, Khatau Bldg.,
Vs. A.D. Modi Marg,
Fort,
Mumbai-400 023
PAN-AAACK 1586E
(Appellant) (Respondent)
Appellant by: Shri Vijay Shankar
Respondent by: Shri Hiro Rai
ORDER
PER ASHA VIJAYARAGHAVAN (JM) This appeal preferred by the Revenue is directed against the order dated 25.2.2002 passed by the ld. CIT(A)-IV for the Assessment Year 1997-98.
2. The first ground raised by the Revenue reads as follows:
"On the facts and in the circumstances of the case and in law the CIT(A) erred in allowing software expenses as revenue expenditure.
3. The Assessing Officer held that the Computer software is integral part of computer while computer is being claimed as capital asset. The AO further held that computer software being integral part of computer cannot be treated otherwise. Hence the same is treated as capital expenditure.
2 ITA No. 2641/M/024. The assessee contested that the addition on the ground that software has a very limited life and therefore there is a constant need to update. The AR contended that since the software which needs to be updated repeatedly gets outdated also very fast as such it cannot be treated as capital asset.
5. The Ld. CIT(A) allowed the software expenses as revenue expenses.
6. Aggrieved, Revenue is in appeal before us.
7. We heard both the parties. We set aside this issue to the file of the AO to decide the same in the light of the ITAT Special Bench decision in the case of DCIT Vs Amway India Enterprises 301 ITR 129 (Del) after giving an opportunity to the assessee.
8. The 2nd, 3rd and 4th grounds raised by the Revenue read as under:
2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in allowing Rs. 42,82,000/- as business loss.
3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in accepting the nexus of investment in Canexpo Unit to his business activity and thereby allowing the loss on sale of such units as business loss.
4. On the facts and in the circumstances of the case and in law, the CIT(A) erred in saying that explanation to Sec. 73 will not apply on the sale of Canexpo and BOI units (shares)."
9. The AO, has observed that loss of Rs 42,82,000/- has arisen due to transactions in units of Bank of India and Canexpo. The AO held that units are also in the nature of shares and hence the sale of units attracts 3 ITA No. 2641/M/02 the provisions of explanation to sec. 73 of the IT Act. Further the AO has held that the units have been shown under the head "Investment" in the balance sheet, therefore, the same are to be treated as long term capital loss and the same cannot be set off against the business income. Accordingly he disallowed the claim of the Assessee for setting off the loss of Rs. 42,82,000/- against business income.
10. In the appeal before the Ld. CIT(A), the assessee stated that the AO's contention that units of mutual fund are also in the nature of shares is not correct. The assessee also submitted that the explanation to Sec 73 applies to shares of companies. Unit of mutual funds are not shares nor is a mutual fund a company. The act also clearly brings out that shares do not include units u/s 2(42A) which defines short term capital assets, According to the proviso to the said section the holding period for shares had been reduced to 12 months w.e.f. 1.4.88. A specific amendment was made w.e.f. 1.4.95 in the said proviso to provide that even for the units the holding period would be 12 months. If shares included units there would not be a separate amendment and one amendment which has been carried out w.e.f. 1.4.88 would have been served the purpose but a separate amendment has been carried out in respect of units. Hence units and shares are two different entities. Assessee further relied on the decision of Kerala High Court in the case of Apollo Tyres Ltd 237 ITR 706.
11. The assessee further contended that assessee is engaged in the brokerage business. It is not engaged in trading or investment activity. The assessee is empanelled as a broker with Canbank Investment Management services Ltd and has made investments in Canexpo on their request. In the course of hearing before the AO, the assessee has submitted a letter dated 4th July 1994 from Canbank Investment Management Services Ltd., to the director of the assessee regarding the 4 ITA No. 2641/M/02 assessee's empanelment as broker. This letter referred to the assessee's letter dated 20th April 94. The date of investment is 18.5.94 which clearly suggests that the investment has been made in Canexpo at the instance of Canbank and is made in the course of business. The assessee relied on Supreme Court's decision in the case of Patnaik & Co. 161 ITR 365 and Bombay High Court's decision in the case of Gannon Dunkerley & Co. Ltd 119 ITR 595. The assessee further stated that this investment has been shown in the balance sheet as trade investment but it does not mean that loss incurred on account of this investment has to be treated as capital loss. In this regard, the assessee placed reliance upon the decision of Supreme Court in the case of Investment Ltd vs CIT 77 ITR 533.
12. After considering the contentions of the assessee, the Ld. CIT(A) allowed the assessee's claim by observing as under:
" I have gone through the submissions of the assessee and also the order of the AO.As regards the units whether they are in the nature of shares I cannot support the view of the AO. In this regard. The explanation to sec 73 was inserted with a specific object i.e. to curb the device sometimes resorted to but business houses controlling group of companies to manipulate and reduce the taxable income of the companies under their control. From the object it is clear that for the application of the said explanation and to do the activity of purchase and sell of shares, it is necessary that shares so dealt it must be shares of other companies as the shares confer certain privilages on the share holders such as to participate in the affairs of the company right to elect board of Directors and right to approve accounts etc. No such rights are conferred on the unit holders. Hence the AO's view that units are in the nature of shares cannot be accepted. As regards the loss on account of sale of units which according to the assessee should be treated as trading loss. The Supreme Court decision in the case of Patnaik & Co. Ltd clearly applies to the assessee's case. The facts of the case are briefly as under:
The assessee who dealt in automobiles and spare parts has subscribed to certain government securities. The assessee sustained a loss of Rs 53,550/- while selling them and claimed that 5 ITA No. 2641/M/02 the loss was revenue loss. The appellate Tribunal found that having regard to the sequence of event and close proximity of the investments with the receipt of government orders for motor vehicles the conclusion was inescapable for investment was in order to further sale of the assessee and his business and that the investment was made by the way of commercial expediency for the purpose of the carrying on the business and therefore the loss suffered by the assessee on the sale of investment was the revenue loss. While agreeing with the findings of the Tribunal the Supreme Court has also held where government bonds or securities are purchased by the assessee with a view to increase the business with the Govt. or of the object of retaining the goodwill of the authorities for the purpose of business the loss incurred on sale of such bonds and securities is allowable as business loss.
Thus further the argument of the assessee is also well supported by Bombay High Court's decision in the case of Gannon Dunkerley & Co. Ltd. In the instant case also from the sequence of event it could be seen that the assessee made investment in Cannexpo in anticipation of assessee being appointed as a broker for this financial institution. Further it is also noticed that the assessee has never made such investments in the past. The sole object of making this investment appears to be to earn the goodwill of the financial institution of whose is going to be the broker of a financial institution of this magnitude. I am sure assessee would have earned substantial income in the form of brokerage. The loss incurred amounting to about Rs 40 lakhs sale into insignificance in comparison with the profits made by the assessee as a broker of financial institution. The assessee's act has been solely guided by the principles of commercial expediency One should not take an abstract or academic view of what is proper expenditure laid out or expended wholly and exclusively for the purpose of one's business. What is required to be seen whether the expenditure was part of the process of profit making and the expenditure must be incidental to the business and must be necessitated and justified by commercial expediency. Thus the loss incurred by the assessee on sale of Cannexpo has been incurred during the course of the business as the investments were made by way of commercial expediency and the same is allowed as revenue loss.
As regards the observations of the AO that the assessee has shown the sale under the head investments is the balance sheet the Supreme Court's decision in the case of investment Ltd. Comes to assessee's rescue. The Supreme Court has observed that though the stock is mentioned as investment the loss on account of such investment could be treated as business loss. Nomenclature alone 6 ITA No. 2641/M/02 could not change the nature of the activity or loss incurred by the assessee. It is also well established that loss incurred by the assessee in the course of his business activity otherwise springs directly from his business activity, is held to be trading loss then question as to whether loss is on account of sale of investment of sale of stock in trade does not arise at all. Hence, the amount of Rs. 42,40,000/- which has been incurred on the sale of Canexpo units is treated as business loss."
13. Aggrieved the revenue is on appeal before us.
14. We heard both the parties. As held by the Ld. CIT(A), units cannot be considered as shares. The Apex Court in the case of Appollo Tyres Ltd (255 ITR 273) have held that loss on sale of UTI units is not speculation loss as units are not shares of a company. Hence the loss arising from sale of Canexpo units cannot be considered as speculation loss under Proviso to sec 73.
15. The next issue is whether the loss on sale of the Canexpo units can be considered as a business loss. The Ld. CIT(A) has brought out that investment in the CanExpo units is closely linked to the assessee being appointed as a broker to M/s. Canbank Investment Management services Ltd., and the conclusion that can be drawn is that the assessee had made the investment in anticipation of being appointed as a broker by that institution, from which the assessee would be earning income. The decision of the Apex Court in the case of Patnaik & Co Ltd (161 ITR 365), in that case the assessee, an automobile dealer, purchased Govt securities for obtaining a preferential treatment from the govt. The Apex Court held that this investment was out of commercial expediency for betterment of the business and hence the loss arising from the sale of the same would constitute a business loss. Again the Apex Court in the case of Sri Venkata Sathyanarayana Rice Mill Contractors Co (223 ITR
101)held that contribution made to District Welfare Fund, in the hope of getting a License or permit is an expenditure incurred for the purpose of 7 ITA No. 2641/M/02 business out of commercial expediency. Applying the same yardsticks, the investment made by the assessee can be classified as an investment made out of commercial expediency for betterment of his business. Hence, as per the ratio of the Apex Court (supra), the loss arising from sale of the same is to be allowed as a business loss. It is immaterial whether the assessee classified the same as investment. The reason for this investment is to gain the goodwill of the institution therefore commercial expediency required this investment which was made with anticipation that the assessee may be appointed as a broker to that institution. The loss on sale of the Canexpo units is a business loss because the investment has been made for the betterment of the business and does not depend on its classification in the books of accounts.
16. The fifth ground of appeal raised by the Revenue reads as follows:
"On the facts and in the circumstances of the case and in law, the CIT(A) erred in allowing the loss of Rs. 17,16,550/-"
17. The Ld. Counsel for the assessee explained before us that the business loss of Rs. 5,40,960/- is in connection with transaction entered with M/s. Porecha Bros. M/s. Porecha Bros. is also BSE member. In the course of carrying on business of BSE member, assessee received various shares from above party. However, in the course of getting shares transferred, it was found that various shares were defective or bad delivery for various reasons. Secondly, the Porecha Bros. were not fulfilling their commitment and/or making default on various counts. In such dealing, outstanding could not be recovered were written off as business loss.
18. Similarly negotiation with Krishna B. Aggarwal for Rs. 11,75,590/- was also explained by the Ld. Counsel for the assessee. M/s. Krishna B. 8 ITA No. 2641/M/02 Aggarwal is also BSE Member, with whom the assessee had entered into contract to purchase shares of Dhampur Sugar. The selling party is M/s. India Liberalisation Fund. In the course of execution of deal, the buying broker M/s. Krishna B. Aggarwal disowned the transactions, for the reasons known to them and refused to honour the commitment. Ultimately, the assessee had to take recourse to recover the amount by adjusting the credit balance in their ground concern and by selling the stock. In the process what was shortfall, the same was written off as business loss.
19. We find that this issue is covered by the Mumbai Special Bench decision in the case of DCIT Vs Shreyas S. Morakhia (2010) 42 DTR (Mum)(SB) 320 and the Supreme Court decision in the case of TRF Ltd. Vs CIT, Ranchy (2010) TIO-15-SC-IT . Hence we dismiss the revenues appeal on this issue.
In the result the appeal filed by the Revenue is partly allowed.
Order pronounced on this 9th day of March, 2011 Sd/- Sd/-
(P.M. JAGTAP) (ASHA VIJAYARAGHAVAN)
Accountant Member Judicial Member
Mumbai, Dated 9th March, 2011
Rj
Copy to :
1. The Appellant
2. The Respondent
3. The CIT-concerned
4. The CIT(A)-concerned
5. The DR ' A' Bench
True Copy
By Order
Asstt. Registrar, I.T.A.T, Mumbai
9 ITA No. 2641/M/02
Date Initials
1 Draft dictated on: 3.03.2011 Sr. PS/PS
2. Draft placed before author: 3.03.2011 ______ Sr. PS/PS
3. Draft proposed & placed before _________ ______ JM/AM
the second member:
4. Draft discussed/approved by _________ ______ JM/AM
Second Member:
5. Approved Draft comes to the Sr. _________ ______ Sr. PS/PS PS/PS:
6. Kept for pronouncement on: _________ ______ Sr. PS/PS
7. File sent to the Bench Clerk: _________ ______ Sr. PS/PS
8. Date on which file goes to the _________ ______ Head Clerk:
9. Date on which file goes to AR
10. Date of dispatch of Order: _________ ______