Income Tax Appellate Tribunal - Ahmedabad
Anagram Stock Broking Ltd.,, Ahmedabad vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL AT
AHMEDABAD
AHMEDABAD "B"BENCH
Before Shri G.D. Agarwal, Vice-President (AZ) and
Shri Mahavir Singh, Judicial Member
ITA No.521 & 1001/ Ahd/2005
[Asstt.Year: 2001-02]
Anagram Stock Broking Ltd. -vs- ACIT, Circle-3,
801, Sakar-I, Opp. Nehru Bridge, 5 t h Floor Insurance Bldg.
Ashram Road, Ahmedabad Income-tax Circle, Ashram Rd.
P AN No. AABCA2916K Ahm edabad-380014
ACIT, Circle-3 -vs- Anagram Stock Broking Ltd.
Ahm edabad 801, Sakar-I, Opp. Nehru Bridge
Ashram Road, Ahm edabad
(Appellant) (Respondent)
ITA No.774/Ahd/2006
& C.O. No.134/ Ahd /2006
(a/o ITA No.774/Ahd/2006)
[Asstt. Year: 2002-03]
ACIT, Circle-3 -vs- Anagram Stock Brokering Ltd.
Ahm edabad 901, Sakar-I, Opp. Gandhigram
Station, Ahm edabad
Anagram Stock Broking Ltd. -vs- ACIT, Circle-3
901, Sakar-I, Op. Gandhigram Ahmedabad
Rly. Station, Ahmedabad
(Appellant) (Respondent)
ITA No.1889/ Ah d/2007
& C.O. No.204/ Ahd /2007
(a/o ITA No.1889/Ahd/2007)
[Asstt Year: 2004-05]
ACIT, Circle-3 -vs- Anagram Stock Broking Ltd.
Ahm edabad 901, Sakar-I, Opp. Gandhigram
Rly. Station, Ahmedabad
ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06
&CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05
ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 2
Anagram Stock Broking Ltd. -vs- ACIT, Circle-3
Nr. Commerce Six Roads, Ahmedabad
Navrangpura, Ahmedabad
P AN No. AABCA9956F
(Appellant) (Respondent)
IT A No.1002/ Ahd/2005 &
CO No.156/ Ahd/2005
(a/o. ITA No.1002/Ahd/2005)
IT A No.2315/ Ahd/2006
and CO No.282/Ahd/2006
(a/o. ITA No.2315/Ahd/2006
[Asstt.Year: 2001-02]
ACIT, Circle-3 -vs- Anagram Securities Ltd.
Ahm edabad 901, Sakar-1, Nr. Gandhigram
Rly. Station, Opp. Nehru Bridge,
Ahmedabad-380 009
PAN No. AABCA2916K
Anagram Securities Ltd. -vs- ACIT, Circle-3
901, Sakar-I,Nr. Gandhigram Ahmedabad
Rly. Station, Opp. Nehru Bridge,
Ahm edabad
ACIT, Circle-3, -vs- Anagram Stock Brokering Ltd.
Ahm edabad 901 Sakar-I, Opp. Gandhigram
Rly. Station, Ahmedabad
PAN No. AABC A2916K
Anagram Stock Broking Ltd. -vs- ACIT, Circle-3, Ahmedabad
901, Sakar-I, Opp Gandhigram
Rly Station, Ahm edabad
IT A No.755/Ahd/2007
[Asstt. Year: 2003-04]
ACIT, Circle, 3 -vs- Anagram Stock Brokers Ltd.
Ahm edabad 901, Sakar-1, Opp. Gandhigram,
Rly. Station, Ahmedabad
PAN No. AABC A2916K
(Appellant) (Respondent)
Revenue by : Shri K.Madhusudan, SR-DR
Assessee by: Shri P.M. Mehta, AR
ORDER
ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 3 PER BENCH;-
Out of these seven appeals - six by Revenue, one appeal and four Cross Objections (COs) by assessee, are arising out of orders of Commissioner of Income-tax (Appeals)-IX & VII, Ahmedabad in appeals Nos. CIT(A)-IX/Cir-3/96/04-05, CIT(A)-VII/Cir-3/40, 187, 97, 58/2005-06/04 /05/ 2006-07 by different dates 03-01-2005, 04-01-2005, 22-08-2006 & 02-01- 2006. The assessments were framed by ACIT Circle-3, Ahmedabad u/s.143(3) of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') vide his orders dated 31-03-2004, 31-03-2005 and 29-12-2006 for assessment years 2001-02, 2002-03 and 2004-05 respectively.
At the outset, it is to be mentioned that these appeals were heard partly on 14- 09-2010 and partly on 15-09-2010, arising out of same group, hence, these are decided by this consolidated order.
2. First common issue in appeal and COs of assessee in ITA No.521/Ahd/2005, CO No.134 & 156/Ahd/2006, is as regards loss claimed on account of diminution in value of stock, loss on sale of stock and stock-in- trade written off. The ground raised are common in all and the facts being identical, we will take up the ground as raised in ITA No.521/Ahd/2005 for assessment year 2001-02, and decide the issue, which reads as under:-
"1. In law and in the facts as well as circumstances of the appellant's case, the CIT(A) has grossly erred in upholding the action of the Assessing Officer invoking the Explanation to Section 73 and making the addition for the losses arising from the following transactions is a speculative loss:-
(a) Diminution in value of stock in trade Rs.10,28,423
(b) Loss in sale of stock in trade Rs. 2,29,730 © Stock in trade written off Rs. 85,444 Total: Rs.13,43,597 ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 4
3. The brief facts leading to the above issue are that Assessing Officer during the course of assessment proceedings noted that the assessee is in the business of share broking and has claimed loss on account of "saudafer" transaction and claimed this loss as incidental to the business and not accrued on account of assessee's investments rather, it arises out of trade of clients and the loss should not be treated as speculation loss but the Assessing Officer noted the fact that the assessee was having stock-in-trade of Rs.12.61 lakh at the beginning of the year and the closing value was at Rs.7.92 lakh and in view of this, he rejected the claim of the assessee and in the absence of any proof regarding clients alleged disputes as regards to treating of this loss as arising from assessee's trading in shares and stock. The assessee explained that Section 73 of the Act would not be applicable to such losses. Aggrieved, assessee preferred appeal before CIT(A) and CIT(A) confirmed the action of Assessing Officer vide para-4.3 of his appellate order, relying on the decision in assessee's own case for assessment year 1998-99 as under:-
"4.3 I have carefully considered the above issue. On perusal of the claim, provisions of section 73 and its explanation I find that appellant's case is clearly attracting the said provisions and accordingly the assessing officer was justified in holding above three amounts viz. diminution in value of stock, loss on sale of stock in trade and write off of stock in trade as speculation losses. The appellant's business is that of brokerage of share and therefore, loss in transaction arising as a result of purchase and sale of shares resulting into losses to the appellant would be considered as speculation losses in view of the above explanation to section 73. I also find that this issue arose in appellant's own case for A.Y. 1998-99 and ld. CIT(A)-VII vide order dated 31.1.2003, upheld the action of the A.O to treat the loss as speculative. He also held that this loss could not be allowed to be set off against other income. Following the appellate order for A.Y 98-99, these grounds stand dismissed."
Aggrieved, now assessee came in second appeal before the Tribunal. ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 5
4. Before us Ld. Counsel for the assessee, Shri P.M. Mehta stated that the authorities below have failed to appreciate that these items resulting into losses were arisen on account of saudafer transaction and therefore it was part of assessee's brokerage business. According to him, the loss arising from saudafer transaction not at all attributable to the sale and purchase of shares by the assessee-company and therefore Explanation to Section 73 is not applied. On the other hand, Ld. SR-DR, Shri K. Mudhusudan fully supported the orders of lower authorities.
5. After hearing both the sides, we find that none of the authorities below have recorded the factual finding in respect of the fact that whether the transactions on which loss arising is out of assessee's own account of shares or on account of clients account. In the absence of any factual finding, we set aside this issue to the file of Assessing Officer to verify these facts and accordingly decide the issue afresh.
Similar are the facts in all abovementioned appeal and COs, hence taking a consisting view, we set aside this common issue in all appeal and COs, to the file of Assessing Officer as indicative above and this common issue of assessee's appeal and COs are allowed for statistical purposes.
6. The next common issue in assessee's appeal in ITA No.521/Ahd/2005 and CO No.156/Ahd/2005 is against the order of CIT(A) in upholding the part of disallowance of bad debts. Since this common issue is also arisen in Revenue's appeals in ITA No.1001-1002/2005 for assessment year 2001-02, hence while dealing with the Revenue's appeals, we will decide this common issue.
7. The next common issue in ITA No.521/Ahd/2005 and CO No.156/Ahd/2005 of assessee's and Revenue's appeal in ITA No.1002/Ahd/2005 is as regards to the disallowance of claim of unpaid turnover fee payable to Stock Exchange Board of India (SEBI in short) by ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 6 invoking the provision of Section 43B of the Act. For this, assessee has raised following ground No.3:-
"3. In law and in the facts as well as circumstances of the appellant's case, the CIT(A) has grossly erred in upholding the disallowance of Rs.34,84,933 being the unpaid turnover fees payable to SEBI invoking the provisions of Section 43B of the I.T. Act when he ought to have deleted the a. In not doing so, he has failed to appreciate that the SEBI fees are not taxes coveredu/s.43B of the I.T. Act."
Since the facts are identical and common in all these appeals, we will take the facts in assessment year 2001-02 of assessee's appeal in ITA No.521/Ahd/2005 and decide the issue.
8. The brief facts are that Assessing Officer during the course of assessment proceedings noticed that the assessee has debited SEBI turnover fees at Rs.43,39,933/- but has not made payment and transferred the same to SEBI turnover fees payable account at Rs.37,29,832/-. The assessee claimed that this amount has been claimed as deduction in view of provision of Section 43B of the Act. The Assessing Officer noted that the assessee has not made payment of SEBI fee till the date of filing return at Rs.34,84,933/- and accordingly he disallowed the same. Aggrieved, assessee preferred appeal before CIT(A) and CIT(A) confirmed the action of Assessing Officer by giving following finding in para-6.2 of his appellate order:-
"6.2 I have considered the above submissions and the observations of the A.O. in the assessment order. It is not in dispute that SEBI is a government or authority which charges from the brokers turnover fees and brokers are required to pay the same as per the Rules and regulations of the SEBI. Under the circumstances I agree with the assessing officer that such payment would be allowed in terms of section 43B on actual payment only, within the year or within the period upto which the return is to be filed. The appellant has relied upon the decision of the ITAT Mumbai in the case of Reliance Shares and Stock Broking Pvt. Ltd. But in the said case also it is held that recoverable part of the SEBI fees would not attract section 43B but the remaining portion would attract section 43B of the Act. The appellant could not furnish any evidence that such fees forms the recoverable part. Under this circumstances the addition of Rs.3729832/- made u/s.43B by the ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 7 assessing officer is confirmed as the same can be allowed on payment basis only."
Aggrieved, now assessee is in second appeal before Tribunal.
9. We have heard rival contentions and gone through facts and circumstances of the case. We are in full agreement with the lower authorities that deduction of SEBI turnover fee is to be allowed only on actual payment. We find that CIT(A) has given a categorical finding that the deduction of payment u/s.43B on account of SEBI turnover fee is allowable on actual payment basis only. Accordingly, we confirm the findings of lower authorities but subject to one direction that this is allowable in the year of actual payment. The Assessing Officer will verify the same, after providing reasonable opportunity of being heard to assessee. This common issue is set aside to the file of Assessing Officer as indicated above and allowed for statistical purposes.
10. The next common issue in Revenue's appeals in ITA No.1001- 1002/Ahd/2005 as well as assessee's appeal in ITA No.521/Ahd/2005 is as regards the facts are as under:-
ITA No.1001/Ahd/2005 (Revenue's appeal)"1.The CIT(A) has erred in law and on facts in
i) allowing bad debts of Rs.26,46,875/-"ITA No.1002/Ahd/2005 (Revenue's appeal)
"1. The CIT(A) has erred in law and on facts in
i) allowing bad debts of Rs.3,88,722/- business loss."ITA No.521/Ahd/2005 (assessee's appeal)
2. In law and in the facts as well as circumstances of the appellant's case, the CIT(A) has grossly erred in upholding the disallowance of Rs.1,89,327 under the head Bad debts when no such disallowances is called for more particularly when complete details of such amount written off has been furnished. This Hon'ble Tribunal may, therefore, be pleased to hold that there is no justification for upholding the ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 8 disallowance of Rs.1,89,327 claimed by the appellant as bad debts and direct the deletion thereof."
11. The facts being exactly identical in these appeals and CO, we will take up the facts from Revenue's appeal in ITA No.1001/Ahd/2005. The brief facts are that the assessee claimed bad debts amounting to Rs.28,36,202/- and assessee has filed details in respect of bad debts as under:-
Sr.No. Name of the Parties Amount Rs.
1. Anand C Thakkar 5,85,882
2. Avinash Iyapan 1,30,034
3. VTVS Raju 2,83,815
4. Navmee Securities P. Ltd. 16,96,781
5. Others 8,55,606
35,52,118
The Assessing Officer during the course of assessment proceedings noted that it is doing mainly brokerage and speculating in shares. He further noted that the assessee had opened many accounts in the name of its clients and purchasers and also sold shares in the names of clients under the Membership card of Ahmedabad and National Stock Exchanges and charged brokerage accordingly. The AO further noted from the accounts of various persons in the books of assessee that bad debts had arisen on account of earning of brokerage only, as it is not engaged in the trading of shares in these accounts. According to Assessing Officer, the purchase and sales of transaction appearing in the ledgers were not the sale and purchase of the assessee itself but transaction of such parties on which it has earned income by way brokerage only. Accordingly he held that the conditions laid down as per provision of Sec.36(2) were not satisfied and he disallowed the claim of bad debt. Aggrieved, assessee preferred appeal before CIT(A). Before CIT(A) it had filed complete details and in view of details, CIT(A) allowed the claim of assessee by giving following finding in para-5.2 of his appellate order:-
ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 9 "5.2 I have considered the submissions of the appellant on the above issue. The appellant had claimed an amount of Rs.35.52 lacs as bad debts. The assessing officer has rejected the above claim mainly for the reasons that the impugned amount is not credited to the profit and loss account but only amount credited is brokerage income. He has also held that the alternate claim for allowing the amount as business loss u/s.28(1) is not admissible in respect of the items disallowed by him, on the ground that the assessee has to prove that the amount had become non-recoverable or was not likely to be recovered in future.
On the other hand the appellant had claimed that it is the business of the appellant to buy and sell shares on behalf of the clients from which it earns income by way of brokerage. Thus, transactions are carried out in the course of business. The loss arising on such transaction is directly attributable to the business. In support of these arguments the appellant has relied upon various cases which are considered.
On consideration of submissions I find that the jurisdictional High Court decision in the case of Abdul Razak & Company is most relevant in the said case wherein it was held as under:-
'Held, on the facts, that the Tribunal had overlooked the statements of the assessee and the debtor-firm where it had been clearly stated that these advances were asked for and made in fact, having regard to the commercial relations between the parties and the commercial relations were admittedly of principal and commission agents. The Tribunal was not justified in holding that the advance to M/s. M.P was not in the ordinary course of business of the assessee-firm. The debt owed by M/s. M.P. was one which sprang directly from the business of the assessee and was allowable as a bad debt and consequently, therefore, as a trading loss under s.28(1).' ITAT, Ahmedabad in the case of Ashok Kumar Lalitkumar reported in 53 ITD Page 326 has clearly held that in the case of share brokers, the claim of bad debt u/s.36 could not be allowed, but the same can be considered as business/trading loss. The A.O's action is upheld in principle.
On perusal of the details filed I find that the appellant had in so far as the amount receivable from VTVS Raju and Navmee Securities is concerned, specifically explained that the amount is not recoverable and the appellant had filed criminal complaint for bounce of cheques received from the VTVS Raju. However the amount is still not recovered. Similarly in the case of Navmee Securities the appellant has initiated recovery proceedings but the ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 10 said party has not made the payment. In respect of the said party in the case of Anagram Securities Ltd. a group concern of the appellant, the assessing officer himself has allowed the claim of business loss in respect of the amount recoverable from the said party. Therefore, these two amounts are clearly admissible as business loss as facts of these are identical, and the assessing officer is directed to allow deduction for the said two amounts. In so far as the other amounts of Rs.8,55,605/- recoverable by the appellant are concerned, on perusal of the details made available I find that these are very small amounts which are not received. Wherever the amounts are received in the subsequent year, it is a payment and it is credited by the appellant in the relevant accounts. Therefore, such amounts are admissible as business loss. Such amount is of Rs.483415/-. The balance amount of Rs.3,72,189/- is debit balances in difference accounts like repairs, electricity expenses etc. written off by the appellant and therefore the same are admissible, except the amount of loans of Rs.189327/- written off by the appellant for which no proper details are available. In my view it is not the business for the appellant of granting of loans. Therefore, to the extent of Rs.1,89,327/- the disallowance is confirmed and balance disallowance of Rs.26,46,875/- is allowed as business loss. The appellant gets relief of Rs.26,46,875/-."
Aggrieved, both assessee as well as Revenue came in appeal before Tribunal.
12. We have heard rival contentions and gone through the facts and circumstances of the case. We find that the assessee has filed complete details in respect of disallowance of following bad debts:-
"i) VTVS Raju 2,83,815
ii) Navmee Securities Pvt. Ltd. 16,96,781
iii) Others 8,55,606
Total 28,36,202"
The assessee has filed explanation in respect of first party i.e. VTVS Raju, who is a registered client with Hyderabad Branch of assessee-company and carrying on business of purchase & sale of shares through assessee. The assessee has submitted details of amount outstanding, which is written off as irrecoverable as under:-
"Date Bill Settlement no. Amount ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 11 1-3-01 ZGA48 344016 23-3-01 zGA51 38371 382387 Less: Amount received 72172 Credit Balance in Anagram Stock Broking Ltd. (adjusted 3-3-01) 26400 Net amount written off 283815 The assessee has also submitted ledger copy of account, which clearly reveals that party has failed to make payment before the date of paying to BSE and assessee has given various reminders but the client failed to make payment of assessee's dues and on persistent follow up the client also issued cheques drawn on UTI Bank Ltd. bearing No.419690 for Rs.2,85,000/- on 28- 02-2001 which was returned unpaid. Accordingly, the said amount of Rs.2,83,815/- was written off as bad debts on 31-03-2001 after adjusting the credit balance in Anagram Securities Ltd., a group company.
As regards to another party, Navmees Securities Pvt. Ltd, was registered as client with Hyderabad Branch of assessee-company and had been carrying its business of purchase & sale of shares through assessee-company and placing order for purchase & sale of shares on under client code 137099. The same is as under:-
"Date Bill Settlement no. Amount
12-10-00 ZGA28 1846136
Less: ZGA29 (19-10-00) 149355
Net amount written off 1696781
The assessee filed ledger copy of the account of the party and from the same it is note that the party has failed to make payment before the due date and the assessee has to pay to BSE and similarly the assessee has tried to cover the said amount from the said party and for this a legal notice was served upon the clients through Ld. counsel Shri Himanshu T Patel dated 19-12-2000 but the party has not made any payment and in respect of other balance written off the assessee's plea that all the balances have arisen due to trading ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 12 activities carried out by the company on instructions of the client in the normal course of business and filed copies of ledger accounts of clients. The amounts of margins have been adjusted to the outstanding balances and shares held as margin have been sold off by the company and the amount realized has been adjusted against the amount outstanding. Only the balance left over has been written off as irrecoverable. The adjustment of margin money towards outstanding balances itself suggests that the company had made due efforts for the recovery of the outstanding amount. However, amounts of non- recovery had been written off as bad debts and for this copy of detailed reports of the branch managers received by the Head officer through e-mails are made available to lower authorities. In view of the above sated detailed submissions with necessary evidences, it is clear that the assessee had discharged its onus to prove the said claim as bad debts which is allowable u/s.36(1)(vii) of the Act. Even otherwise this issue is now covered in favour of assessee by the judgment of Hon'ble Supreme Court in the case of TRF Limited v CIT (2010) 323 ITR 397 (SC) and in the case of Vijaya Bank v. CIT And Another (2010) 323 ITR 166 (Supreme Court). We find that the Assessing Officer had made the disallowance on the ground that the assessee has not produced sufficient evidence to show that reasonable steps were taken to recover the debt. However, there is no dispute that the above amount was duly written of in the assessee's books of account. On the above facts the decision of Hon'ble Apex Court in the case of T.R.F. Limited (supra) would be squarely applicable wherein, their Lordships held as under:
"After the amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable : it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee."
As regards to the claim of the assessee of bad debts Rs.1,89,327/-, the CIT(A) has given a categorically finding that no proper details are made available and moreover the business of the assessee is not that of giving ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 13 loans, the bad debts cannot be allowed. Accordingly, we confirm the order of CIT(A) and this common issue of both the parties are dismissed.
Similar the facts are in Revenue's appeal in ITA No.1002/Ahd/2005 and assessee's appeal in ITA No.521/Ahd/2005, hence, taking a consistent view we allow the claim of assessee.
13. The next common issue in these appeals of Revenue in ITA No.1001- 1002/Ahd/2005 and ITA No.774/Ahd/2006 is as regards to disallowance of software expenses as revenue expenses deleted by CIT(A). The facts and circumstances are exactly identical in all the two assessment years. We will take up the facts from the Revenue's appeal in ITA No.1001/Ahd/2005 which is a lead matter, as under:-
ITA No.2001/Ahd/2005 Revenue's appeal"ii) allowing software expenses of Rs.73,10,170/- as revenue expenses."ITA No.1002/Ahd/2005
ii) allowing software expenses of Rs.43,78,080/- as revenue expenses"
ITA No.774/Ahd/20062) The Ld. CIT(A) has erred in law and on facts of the case in deleting that Software expenses of 1072400/-."
14. The brief facts are that the assessee has claimed software expenses as revenue expenditure at Rs.73,10,170/- and claimed that it had incurred expenses on purchase of CTCL software and treated the same as revenue expenditure. The Assessing Officer during the course of assessment proceedings noted that the assessee treated this as deferred revenue expenditure in its books of account, whereas claimed the same as revenue expenditure while filing return of income. The Assessing Officer has stated that computer is defined variously and he has reproduced definitions of computer. He stated that physical component from which the computer is construed is hardware and CPU of a computer needs program (software) for ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 14 the computer. It is stated that anything that can be stored electronically is software and the storage devices and displayer devices are hardware. He has stated that software is often divided into two categories i.e. system software and application software and this software is nothing but license granted by the creator of a programmer, which can be done on the computer for the purpose of arriving at desired result. According to him, Section 32(1)(II) provides depreciation on "know-how, patents, copy rights, trade marks, license, franchises or any other business or commercial rights of similar nature being intangible assets acquired on or after first April 1998". Therefore according to him there is not scope for any other introspection with regard to software expenses being in the nature of license, other than being treated as intangible assets. Therefore, the software expenses claimed by the assessee are treated as capital expenditure. He has further referred to the nature of CTCL software and stated that it is computer to 'computer log on' and its function is merely establishing the linkage between the two functioning hard wares and the pricing of the same is based on number of user license that a purchaser requires. It is stated that basically it is a user license and therefore, held that the various decisions relied upon the assessee are of no help. The assessing officer has therefore, disallowed the claim for Rs.73,10,170/- and at the same time allowed depreciation thereon at Rs.11,23,236/-. Aggrieved, assessee preferred appeal before CIT(A), who allowed this expenditure as revenue by giving following findings in para-7.2 of his appellate order as under:-
"7.2. I have considered the above submissions and the observations of the A.O n the assessment order. I find that software purchased only aids in better management and conduct of business and becomes part of earring process. This in itself is not an advantage of enduring nature considering the rapid technological advances being made. Any expenditure which does not have permance and is incurred to met fast changing technology, would be revenue in nature as held by the Hon'ble Supreme Court in the case of Alembic Chemical Works Ltd. Vs. CIT 177 ITR page 377. The apex court in the case of Empire Jute Co. Ltd. vs. CIT reported in 124 ITR page 1 has held that if advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of business to be carried on ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 15 more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be revenue in nature. Thus, software expenses of the appellant who is engaged in share broking business has to be treated as revenue expenditure in view of these decisions. The Bombay ITAT in the case of CEAT Tyres vs IAC in ITA no.6994/Bom/88 has held software expense to be revenue in nature. Similar view has been taken by Delhi ITAT and Chandigarh ITAT. A similar view has been taken by the ITAT, Ahmedabad Bench in the case of Lubi Electricals (P) Ltd. in ITA No.122 of 1992 decided in March, 1997, where software expenses were allowed as revenue expenditure.
Therefore, I direct the assessing officer to allow the claim of software expense of Rs.73,10,70/- as revenue expenditure. As a result, depreciation granted at Rs.11,23,2436/- is directed to be withdrawn."
Aggrieved, Revenue filed appeal before Tribunal.
15. We have heard rival submissions and gone through the facts and circumstances of the case. We find from the facts of the case that the assessee has claimed software expenses as revenue expenditure at Rs.73,10,170/- and claimed that it had incurred expenses on purchase of CTCL software. We find that the Assessing Officer has discussed the composition of computer by stating that physical component from which the computer is construed is hardware and CPU of a computer needs program (software) for the computer and anything that can be stored electronically is software and the storage devices and displayer devices are hardware. The AO divided the software into two categories i.e. system software and application software and this software is nothing but license granted by the creator of a programmer, which can be done on the computer for the purpose of arriving at desired result. The Ld. SR-DR supported the order of the AO by stating that Section 32(1)(II) provides depreciation on "know-how, patents, copy rights, trade marks, license, franchises or any other business or commercial rights of similar nature being intangible assets acquired on or after first April 1998" and therefore software expenses being in the nature of license, other than being treated as intangible assets are to be treated as capital expenditure. The Ld-SR-DR further referred to the nature of CTCL software and stated that it is computer to 'computer log on' and its function is merely establishing the linkage between the two ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 16 functioning hard wares and the pricing of the same is based on number of user license that a purchaser requires. It is stated that basically it is a user license and therefore, held that the various decisions relied upon the assessee are of no help. We find that the arguments made by the Ld-SR-DR and reasons recorded by the AO in the assessment order will not help to the Revenue as this software purchased by the assessee is for the purpose of smooth running of the computers and better management and conduct of business. This expenditure was incurred for the purchase of software which only aids in better management and conduct of business and becomes part of earning process. This in itself is not an advantage, of enduring nature considering the rapid technological advance being made. Any expenditure which does not have permanence and is incurred to meet fast changing technology and the same would be revenue in nature. This issue is squarely covered by the decision of the Delhi Bench of ITAT in the case of Amway India Enterprises v DCIT (2008) 301 ITR (AT) 1 (Delhi). We find that in this case the ITAT has held as under:
"There cannot be any specific or precise test, which can be applied conclusively or universally for distinguishing between capital and revenue expenditure. The cardinal rule is that the question whether a certain expenditure is on capital or revenue account should be decided from the practical and business view point and in accordance with sound accountancy principles and this rule is of special significance in dealing with expenditure on expansion and development of business.
Three tests generally applied to decide the nature of expenditure as to whether it is capital or revenue, are the test of enduring benefit, the ownership test and the functional test. Applying these tests, expenditure is treated as capital expenditure either when it results in acquisition of a capital asset by the assessee as owner thereof or when it results in accrual of an advantage of enduring nature to the assessee in the capital field. If the expenditure results merely in acquisition or creation of asset without the assessee becoming the owner thereof, it cannot be said that the expenditure is a capital expenditure. The coming into existence of an asset as a result of incurring expenditure alone thus is not sufficient to treat the said expenditure as of capital nature unless the asset coming into existence is also owned by the assessee.
Expenditure can be treated as capital expenditure only when it results in accrual of an advantage of enduring nature to the assessee in the capital field. The relevant tests applied to determine the nature of expenditure in such a situation are the functional test and the test of enduring benefit. An advantage is to be considered as of enduring benefit if the benefit accruing is ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 17 not of a transient nature but is of such durability as to justify it being treated as a capital asset.
On the question whether computer software was goods, the Supreme Court in Tata Consultancy Services [20041 271 1TR 401 took into account the view of American courts on the issue as well as its own decision rendered in the case of Associated Cement Co. [2001] 124 STC 59 in the context of 1 the Customs Act wherein the definition of the term "goods" given was not as wide or exhaustive as the definition of the term "goods" in the A. P. Tax Act, to hold that software, whether customised or non-customised, satisfies all the attributes of being a "goods" and as such, is capable of being bought and sold and becomes an object of trade and commerce can only lead to the conclusion that purchase of such disc is acquiring a tangible asset. If the disc, tape or floppy or other electronic medium in which the software is stored is by itself goods, then the assessee who acquires the same, acquires a tangible asset. Computer software has not .been defined in the Income-tax Act, 1961, but in Note 7 to Appendix I to the Income-tax Rules, 1962, it has been explained to include computer programme recorded on any disc, tape, perforated media or other information storage device. Therefore computer software (whether in canned form or un-canned form) is goods and a tangible asset by itself. The question whether an assessee by purchase of a disc containing software has purchased a. capital asset or not should not. therefore, be viewed from the angle of acquisition of any copyright or any of the bundle of rights comprised in such copyright. An assessee purchasing such a software becomes the owner thereof."
TATA CONSULTAN CY SERVICES V. STATE OF ANDHRA PRADESH [2004] 137 STC 620; [2004] 271 ITR 401 (SC) followed.
"But the question whether expenditure for acquisition of computer software or revenue cannot be decided on the basis of the ownership test alone from the point of its utility to a businessman and how important and or functional role it plays in his business, because of the peculiar nature of a computer software and its possible use in different areas of business. The fact that generally computer software is acquired on a licence by itself will not be sufficient to conclude that the expenditure is revenue expenditure, if it is found that the expenditure operates to confer a benefit in the capital field. On the other hand, some computer software may have a very economic life so as to be treated as capital expenditure, though owned by an assessee.
For ascertaining as to whether expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee right to use the software becomes relevant; Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 18 satisfied. The period of advantage in the context of computer software should not be viewed from the point of view of different assets or advantage like tenancy or use of know-how because software is a business too enabling a businessman's ability to run his business.
The nature of the advantage which the assesses derives has to be seen in a commercial sense. Software normally functions as a too enabling business to be carried on more efficiently. The scope, power, longevity of such a tool and its centrality to the functions of the business will all bear on its treatment.
Where the assessee-company is engaged in the business of software development as well as running a training centre to impart specialized training to the students in software technology, f the software is used in such business to impart training to the students, it would be part of the profit-making apparatus of the assessee and consequently expenditure on software, capital.
Where the said software helps in compression of size of e-mails and it includes licences for 150 users and it is limited to facilitate merely an effective and fast communication in order to increase in its organizational efficiency it cannot be treated as forming part of the profit-making apparatus, of the assessee. On the other hand, if such software is being used by an assess engaged in the business of placement agency where the applications from per- sons seeking jobs .are invited through e-mail and are also forwarded to t concerned clients through e-mail, it may form part of the profit-making apparatus of the assessee's business of placement agency and can be treated as capital asset.
As a general rule the more expensive the computer software the more it a likely to be a central too! of the business and the more enduring is likely to its effect adding to the profit earning apparatus, if there is associated cap expenditure like purchase of new computer equipment for running the ware developed under a project, it can be considered as capital expenditure. This is especially the case where the new hardware is not merely desirable necessary for this purpose.
Similarly the degree of change intended in the way operations are carried out as a result of the computer software, for example, savings in the number, and changes in the location, of staff used to 'provide services to customers will have a bearing. The more radical the changes, the more likely that the expenditure will be capital. These changes are likely to be most radical when operations previously carried on manually are computerized.
The presence of an element of upgrading will not necessarily cause the expenditure in question to be capital.
With effect from April 1, 1999, computers were treated as a different class of asset falling within the description of plant and depreciation was allowed at 60 per cent. With effect from April 1, 2003, computer software was also ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 19 included along with computers. The amendment is prospective. It is not clarificatory for the reason that computer and computer software are two different items of assets. If the Legislature wanted to allow depreciation at 60 per cent, with effect from April 1, 1999, on computer software, it would have said so specifically by making the provisions retrospective. Depreciation can be allowed at 25 per cent, under section 32W(i) read with Appendix I, Part A, Division 111(1) to the Income-tax Rules, 1962 and with effect from April 1, 2003, computer software having been classified as a tangible asset under the heading "Plant" in Appendix Ito the Rules, is entitled to depreciation at 60 per cent."
16. We find that the Revenue has relied on the decision of this Tribunal Delhi Bench in the case of Escorts Ltd. v. ACIT (2007) 104 ITD 427 (Del), wherein the expenditure on software is considered as capital in nature by holding that where the assessee acquires ERP business software with unlimited users of licence and expenditure incurred on acquisition of software by way of outright purchase is to be considered as capital in nature. But in the present case, the facts are entirely different and it is not the allegation of the Revenue from the Assessing Officer's stage till now that the assessee has acquired this software for unlimited user of licence and this is outright purchase. The Revenue also relied on the decision of Hon'ble Rajasthan High Court in the case of CIT v. Arawali Constructions Co.(P) Ltd. (2003) 259 ITR 30 (Raj) but the facts in that case are also in regard to distinguishable as in that case the software was an outright purchase of computer programme which relates to technical "know-how".
17. We find that the Assessing Officer has not given any finding as to the fact that whether expenditure on computer software gives an enduring benefit to an assessee, the duration of time for which the assessee right to use the software becomes relevant. Accordingly we are of the view that in case the software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter or say less than 2 years, it may be treated as revenue expenditure. Hence, we find that the CIT(A) has recorded a categorical finding that the software programme without which the computer cannot work and with the advancement of technology, the programme ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd.Page 20 changes during short period and this change is requirement of the business of the assessee i.e. share broking. Accordingly, we uphold the findings of CIT(A) and this issue of Revenue's appeal is dismissed.
Similar are the facts in Revenue's appeals in ITA No.1002/Ahd/2005 and ITA No.774/Ahd/2006, hence, taking a consistent view we dismiss the common issue.
18. The next common issue in Revenue's appeal in ITA No.1001/Ahd/2005 is as regards to the order of CIT(A) in deleting the addition on deemed dividend made by Assessing Officer u/s.2(22)(e) of the Act. For this, Revenue has raised the following grounds No.(iii) & iv):-
"iii) in holding that the on of Rs.8,32,000/- is not taxable as deemed dividend u/s.2(22)(e).
iv) in admitting the additional evidence without following the procedure prescribed in Rule 46A."
19. The brief facts are that the Assessing Officer during the course of assessment proceedings noticed from the balance-sheet filed by assessee that it had received unsecured loan of Rs.8.23 lakh from M/s.Lalbhai Reality Ltd. Accordingly, the assessee was required to explain as to why the same should not be treated as deemed dividend in its hands. Accordingly, AO made addition on deemed dividend u/s.2(22)(e) amounting to Rs.8.32 lakh. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) deleted the addition by giving following finding in para-10.2:-
"10.2 I have considered the above submissions. It is noticed that for considering the loans given by the company to its shareholders or directors u/s. 2(22)(e) one has to see that the shareholder or director holds stipulated percentage of shares of the company. Only after this condition is satisfied such loans can be considered as deemed dividend in the case of shareholder. On perusal of the details of shareholders of Lalbhai Reality Pvt. Ltd it is seen that the appellant does not hold any share of the said company and accordingly sec.2(22)(e) is not applicable and therefore, the addition made by the assessing officer is not justified and is deleted."
ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 21
20. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that Ld. Counsel for the assessee stated that Assessing Officer during the course of assessment proceedings added a sum of Rs.8.32 lakh by invoking the provisions of Section 2(22)(e). We find that the Assessing Officer has reproduced in the assessment order whole provision of Section 2(22)(e) and from there it is obvious that for bring to tax as deemed dividend many conditions and parameters are laid down in the statute itself. It is unfortunate that without showing that these conditions or any one of them applies to the case the assessment order has straight away brought it to tax. According to us this approach adopted in the assessment order is totally unwarranted and invoking of this deeming provision against the assessee the statutory provisions laid down in the provisions should be shown to be applicable to the case without which the provisions cannot be applied. We find the fact that the assessee-company had taken unsecured loan of Rs.8.32 lakh which was incorporated in Schedule-4 of the balance-sheet as loans from assessee-company and the details of loan are contained in the relevant entry showing it as loan from Lalbhai Reality Finance Pvt. Ltd. The first and foremost thing emerging from the balance-sheet of the creditor is that it has absolutely no reserves; on the other hand there is an opening debit balance of more than Rs.7.29 crores and closing balance of more than Rs.8.19 crore in the "profit and loss account". So it is not a case of the assessee-company having free reserves in its balance-sheet for giving any loan. Further even the other condition of the debtor having substantial share holding in the creditor company is not satisfied in so far as the list of the equity share holders of the Lalbhai Reality Finance Pvt. Ltd. for assessment year 2001-02 as follows.
Sr. Name of shareholders No. of shares
No.
1. Arpan Reality Pvt. Ltd. 3018020
2 Tapti Machines Pvt. Ltd. 1004390
ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 22 3 Peligan Packers Pvt. Ltd. 1004390 4 Pawan Singh 100 5 Rajender Sing Verma 100 Total 5027000 Thus, the addition has been made without looking into the facts and figures and further more the facts and figures shows that the statutorily prescribed conditions in section 2(22)(e) are not satisfied this particular item of Rs.8.32 lakh is not at all caught by the mischief of Section 2(22)(e) of the Act. Accordingly, the CIT(A) has rightly deleted the addition and we confirm the deletion. This common issue of revenue's appeal is dismissed.
21. The next common issue in Revenue's appeals in ITA No.774/Ahd/2006, ITA No.755/Ahd/2007 and ITA No.1889/Ahd/2007 is as regards to the order of CIT(A) in deleting the disallowance of interest. Since the common issue in all the three appeals of Revenue are similar on facts and circumstances, we will discuss the common issue raised by Revenue in dealing with ITA No.774/Ahd/2006 for assessment year 2002-03, which is a lead matter, as under:-
"1. The ld. CIT(A) has erred in law and on facts of the case in deleting that Disallowance of interest of Rs.21,61,258/-"
22. The brief facts relating to the common issue are that Assessing Officer during the course of assessment proceedings noticed that the assessee has made loans and advances to following concerns. According to Assessing Officer these are non-interest bearing advances made by assessee:-
"(i) Loan to associate company : Rs. 10,000,000/-
(ii) Loans to other associate companies: Rs.1,12,51,316/-
(iii) Loans to others : Rs. 31,86,247/-"
Before the Assessing Officer, assessee claimed that no disallowance can be made on account of loans and advances for non interest-bearing funds as all the loans were taken for the purpose of business and even interest free funds ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 23 were available and out of these interest free funds advances were made. According to Assessing Officer, assessee has made advances of Rs.1.54 crores to associate concern, on which no interest was charged. Accordingly, he calculating interest @ 14% and made disallowance relying on the decision of Hon'ble Kerala High Court in the case of CIT v. V.L. Baby And Co. (2002) 254 ITR 248 (Kel). Aggrieved, assessee preferred appeal before CIT(A).
23. Before CIT(A) assessee has explained that assessee-company and following interest funds available with it as under:-
Amount (Rs) Share Capital 8,00,000,700 Share Application money pending 3,50,00,000 allotment Reserves and surplus 3,00,00,000 Total 13,50,00,700 Less: Debit balance of Profit & Loss 3,31,56,141 account Grand Total 10,18,44,556 Loans to group concerns as mentioned Particulars by AO.
1,54,37,563 Further, assessee also explained before CIT(A) that the loans to associate concerns are for the purpose of business as under:-
Sr.No Particulars Amount Rs.
1. Arvind Mills Limited 14,585.00
2. Arvinid Brand Onlinie Limited 1,28,082.67
3. Lalbhai Realty Fin 9,88,3.75
4. Engram Online Limited 27,61,516.76
5. Arvind Clothing Limited 1,59,012.99
6. Odissi Securities Limited 23,000.00
7. Angram Securities Loan Account 81,55,236.71
Total 1,21,51,317.88
ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 24 The assessee explained that the advances to Arvind Mills Ltd., Arvind Brand Online Ltd, Lalbhai Realty and Arvind Clothing Limited were during the course of business and as such payments were made on behalf of the said parties for incurring expenses and for example, he explained that Anagram Securities loan as under:-
In this connection appellant submits that it has been doing the trading of shares on behalf of clients on the BSF and said clients are also doing trading on NSE through Anagram Securities Limited which holds membership in national Stock Exchange (NSE), The appellant has maintained day-to-day account with Anagram Securities limited for the transactions made with said parties because many times clients makes single payments to either appellant or Anagram Securities for transactions made in NSE and BSE terminals and thereby each company transfers the amount collected from clients on behalf of other company passing necessary journal entries through said account. It can be seen from the said account that balance of Rs.89,11,179 had been created because appellant had transferred debit balances of clients accounts pertaining to Anagram Securities limited to said party on 30/03/2002 and 31/03/2002 by passing journal entries. Further, Anagram Securities limited had also transferred amount pertaining to appellant by passing entries in the said accounts."
The CIT(A) after considering the explanation of the assessee deleted the addition by giving following findings in para-4.2 of his appellate order:-
"4.2 I have considered the submissions made and I have also gone through the various details filed and the case laws on the subject. If the entire details of these addition are noticed, it is found that out of these a sum of Rs.31,25,000 is on account of stock exchange margin which the assessee has to pay if he has to carry on the business of stock broking.
Naturally, on this amount no interest would be payable by the stock exchange and this advance is purely for running the business. Similarly, there could be no interest chargeable on TDS recoverable, advance for expenses, salary payable and other receivables on account of share broking business. Thus no interest at all is chargeable on the alleged "loan to others" amounting to Rs.31,86,247/-. It is also noticed that the AO has worked out interest on the last day's balance without realizing the fact that interest should have been calculated on day to day balances. If interest is worked out o that basis, the assessee would have to pay interest to Arvind Mills Ltd. Arvind Brand Online Limited, Lalbhai Realty Finance, Arvind Clothing Ltd and Anagram Online Ltd instead of receiving any interest. The major amount of advance is in ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 25 respect of Anagram Securities loan account. So far as the account of Anagram Securities is concerned, the balance has arisen on account of transfer of debit balance of clients accounts on 30.3.2001 and 31.3.2002. These amounts are recoverable from assessee's clients and normally on such receivables no interest is charged. Therefore, if these accounts are considered in proper perspective, in fact no interest was chargeable by the assessee. Apart from that it is noticed that no nexus has been made between interest bearing loans and these advances. As against that assessee has interest fee funds of well over Rs.10 crores. In such circumstances, the ITAT Ahmedabad Bench in the case of Torrent finances vs. ACIT held that proportionate disallowance of interest could not be made. Considering the above facts, disallowance made by the AO is directed to be deleted."
Aggrieved, Revenue came in appeal before Tribunal.
24. We have heard the rival contentions and gone through the facts and circumstances of the case. We find that the assessee was having interest free funds available with it to the tune of Rs.13,50,00,700/- as interest free fund in the shape of share capital, share application money pending allotment and reserves surplus. The assessee has advanced as alleged by the Assessing Officer to the tune of Rs.1.54 crores as interest free advances, which is without prejudice to our further discussion. We find that the loan to associate company at Rs.10 lakh on behalf of Engram Online Limited. to Tata Consultancy Services was for the services and same amount has been debited to advances to sister Engram Online Limited. The assessee has field copies of agreement before us also in assessee's paper book and this deposit / payment is for the business purposes and as per business agreement made between the parties. As regards to the balances of Arvind Mills Ltd. Arbind Brand Online Ltd., Lalbhai Reality and Arvind Clothing Ltd., the assessee had incurred expenditure on behalf of these parties and debited their accounts with respective amounts. We find that no borrowed funds were used for such payments and no monetary loans had been given to make such payments on behalf of these parties rather this payment is during the course of business and no disallowance can be made on this account.. As regards to Anagram ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 26 Securities loans of Rs.89,11,179/-, the assessee has been doing the trading of shares on behalf of clients with BSC and NSC through Anagram Securities Ltd., which holds Membership with NSC and assessee maintained day-to-day account with these concerns for the transaction made with the said parties because many a times clients make single payment for the transaction made in NSC and BSC terminals. Accordingly, both these i.e. each company transferred the amount collected from the clients on behalf of other company passing necessary journal entries in the accounts. This is a purely business transaction and requirement of business and not interest free loans. As regards to margin cash on stock exchange as the assessee is engaged in the stock broking activity on BSC and as per the requirement the assessee has to margin deposits for making transactions. This margin deposit is nothing but value of transaction entered by assessee on BSC to the value of transaction entered as per prescribed limit. This is a purely business transaction and nothing to do with loans or deposits. Further, we are in full agreement with the order of CIT(A) that no interest disallowance can be made on the above transactions and accordingly, we confirm the order of CIT(A) deleting the addition. This issue of the Revenue's appeal is dismissed.
Similar are the facts in Revenue's appeals in ITA No.755/Ahd/2007 and ITA No.1889/Ahd/2007, hence, taking a consistent view we dismiss the common issue.
25. The only issue in this appeal of Revenue in ITA No.2315/Ahd/2006 is as regards to the order of CIT(A) deleting the penalty levied by Assessing Officer u/s.271(1)(c) of the Act amounting to Rs.20,25,85/-.
26. We find that the Assessing Officer has levied the penalty in respect of following items:-
"a) Bad debt Rs.26,46,875/-
b) Deferred revenue expenses on software Rs.73,10,170/-
ITA No.521 & 1001-02/Ahd/05, 774/Ahd/06 & 1889/Ahd/07, 2315/A/06 &CO 134/Ahd/06 & 204/Ahd/07 & 282/Ahd/06 A.Ys. 01-02, 02-03 & 04-05 ACIT Cir-3, A'bd v. Anagram Stock Broking Ltd/Anagram Securities Ltd. Page 27
c) Unsecured loan treated as deemed dividend Rs.8,32,000/-"
We find that these additions were deleted by CIT(A) and now in this order we have confirmed the deletion by CIT(A) on the above three items, on which penalty was levied. Since the quantum additions have been deleted by the Tribunal now in this order, the penalty under dispute u/s.271(1)(c) of the Act cannot survive and accordingly the order of CIT(A) deleting the penalty is confirmed. The appeal of Revenue is dismissed.
27. In the result, assessee's appeal in ITA No.521/Ahd/2005 and CO 134 & 156/Ahd/2006 are partly allowed for statistical purposes. Revenue's appeals in ITA No.1001-1002/Ahd/2005, ITA No.774 & 2315/Ahd/2006 and ITA No.755 , & 1889/Ahd/2007 are dismissed Order pronounced on this day of 1st Oct, 2010 Sd/- Sd/-
(G.D.Agarwal) (Mahavir Singh)
(Vice President) (Judicial Member)
Ahmedabad,
Dated : 01/10/2010
*Dkp
Copy of the Order forwarded to:-
1. The Assessee.
2. The Revenue.
3. The CIT(Appeals)-IX, Ahmedabad
4. The CIT concerns.
5. The DR, ITAT, Ahmedabad
6. Guard File.
BY ORDER,
/True copy/
Deputy/Asstt.Registrar
ITAT, Ahmedabad