DCIT Vs Edelweiss Financial Advisors Ltd (ITAT Ahmedabad)
Conclusion: Stock exchange membership card was not an eligible asset u/s 32 and thus, addition made by AO on account of depreciation on the intangible asset being membership card of the stock exchange was to be deleted.
Held: Assessee was engaged in the business of stockbroking. AO during the assessment proceedings found that the membership card of the stock exchange held by assessee had been demutualized/corporatized into the shares in the earlier year 2005-06. As such assessee was not in the possession of a stock exchange card in the year under consideration. Accordingly, AO was of the view that the depreciation claimed by assessee on the intangible asset being membership card of the stock exchange was not allowable under the provisions of Section 32. Accordingly, AO disallowed the same and added to the total income of assessee. It was held that stock exchange membership card was not an eligible asset u/s 32 as held in M/s. Tech nosh 3 res and Stocks Ltd. Vs.CIT 193 Taxman 248. Therefore, the addition made by AO on account of depreciation on the intangible asset being membership card of the stock exchange was to be deleted.
FULL TEXT OF THE ITAT JUDGEMENT
In this bunch of appeals two appeals have been filed by the Assessee and two appeals have been filed by the Revenue for A.Ys. 2010-11, 2011-12 2012-13 which are arising from the order of the CIT(A)-10, Ahmedabad orders dated 11.12.2015, in the assessment proceedings under Section 143(3) of the Income Tax Act, 1961 (in short “the Act”).
2. The Revenue has raised the following grounds of appeal:
“1. That the ld. CIT(A) has erred in law and on the facts by deleting addition of depreciation on membership card without appreciation the fact that condition u/s 32 of the I. T. Act, 1961 is not fulfilled on the said depreciation.
(2) That the ld. CIT(A) has erred in law and on the facts by deleting addition of depreciation, interest and insurance on vehicle amounting to Rs. 29,64,082/- by ignoring the fact that the assessee failed to prove the ownership of these vehicles as well as use of those assets wholly and exclusively for the business purpose.
(3) That the ld. CIT(A) has erred in law and on the facts by deleting addition of Rs. 1,12,972/- made by AO as disallowance of interest without appreciating the fact that conditions laid down in Section 36 of the I. T. Act, 1961, are not fulfilled by the assessee.
(4) That the ld. CIT(A) has erred in law and on the facts by deleting addition of Rs. 24,75,967/- made by the AO u/s 14A without considering the fact that the AO has rightly disallowed the same u/s 14A after considering the provisions of Rule 8D, which is not fulfilled in the assessee’s case.
(5) That the ld. CIT(A0 has erred in law and on the facts by deleting addition of Rs. 1,51,201/- made by the AO as disallowance of expenditure for payment of penalty without appreciating the fact that the conditions of provisions u/s. 37 are not fulfilled by the assessee.
(6) That the ld. CIT(A) has erred in law and on the facts by deleting addition of Rs. 1,18,89,628/- made by the AO as disallowance of deduction of Bad Debts by ignoring the fact that the condition of provisions of Section 36(2) are not satisfied in the assessee’s case.
(7) That the ld. CIT(A) has erred in law and on the facts by allowing the contention of assessee for verification of part disallowance of Rs. 17,02,013/- made by the AO as disallowance of Saudafer Los by ignoring the fact that whole Saudafer Loss claimed by the assessee was Speculation Loss within the meaning of explanation to Section 73 of the I. T. Act, 1961.
(8) That the ld. CIT(A) has erred in law and on the facts in directing to recompute the Capital Gain by ignoring the fact that the AO has rightly computed the Capital Gain as per provision of Section 48 of the I. T. Act, 1961 for indexing the cost from F.Y. 2005-06 when the BSE shares were allotted and first held by the assessee.”
3. The first issue raised by the Revenue is that Learned CIT(A) erred in deleting the addition made by the AO for Rs.79/- on account of depreciation claimed under Section 32 of the Act on the membership card despite the conditions for claiming the depreciation were not satisfied.
4. The facts in brief are that the assessee in the present case is a limited company and engaged in the business of stock broking. The AO during the assessment proceedings found that the membership card of the stock exchange held by the assessee has been demutualized/corporatized into the shares in the earlier year 2005-06. As such the assessee was not in the possession of stock exchange card in the year under consideration. Accordingly, the AO was of the view that the depreciation claimed by the assessee on the intangible asset being membership card of the stock exchange is not allowable under the provisions of Section 32 of the Act. Accordingly, the AO disallowed the same and added to the total income of the assessee.
5. Aggrieved assessee preferred an appeal to the Learned CIT (A) who deleted the addition made by the AO by observing as under:
“7.3 I have carefully considered the Assessment Order and submission filed by Appellant. The Assessing Officer has made disallowance of depreciation on Ahmedabad Stock Exchange Membership Card relying on decision of Hon’ble Mumbai ITAT in the case of Sino Securities Pvt. Limited whereas Appellant has relied upon decision of Hon’ble Ahmedabad ITAT in the case of Edelweiss Stock Broking Limited for A.Y. 2006-07 which is merged with Appellant Company and Appellant’s own case for A.Y. 2008-09 decided by Hon’ble Ahmedabad ITAT on 6th November, 2015.
On careful consideration of entire facts, the issue raised by Assessing Officer is covered in favour of Appellant by decision of Hon’ble Ahmedabad ITAT in Appellant’s own case for A.Y. 2008-09 (ITA No. 1531 and 1718/Ahd/2011) wherein Hon’ble ITAT vide its order dated 6th November, 2015 has held as under:
“13. The Assessee’s next ground raised in the instant appeal challenges disallowance of depreciation on Ahmedabad Stock Exchange card of Rs. 141/- made in the course of assessment and affirmed in the lower appellate proceedings. Both the lower authorities hold that stock exchange membership card is not an eligible asset u/s 32 of the Act as held by hon ‘ble Bombay high court in M/s. Tech nosh 3 res and Stocks Ltd. Vs.CIT 193 Taxrnan 248. The CIT(A) observes that the hon’ble apex court has reversed the above stated decision as reported in 327ITR 323 with a rider that the same relates to Bombay Stock Exchange card only. He reproduces relevant, portion of this judgment as well. However, the Revenue fails to point out any distinction between the Assessee’s Ahmedabad Stock Exchange card and relevant features of Bombay Stock Exchange card. Nor such a distinction is forthcoming from hon’hle apex court decision. We find that a co-ordinate bench of the tribunal in case of Assessee’s sister concern’s case M/s. Edelweiss Stock
Broking Ltd. Vs. CIT, ITA No. 1168/Ahd/2011decided on 11.07.2014 for AY 2006-07grants identical depreciation relief. We also draw support therefrom for allowing the impugned depreciation claimed. This ground is accepted.”
Following the decision of Hon’ble Ahmedabad 1TAT 1 appellant’s own case., disallowance of depreciation made by Assessing Officer for Rs.79 is deleted. This ground of appeal is allowed.”
6. Being aggrieved by the order of the Learned CIT-A, the Revenue is in appeal before us.
7. The Learned DR before us vehemently supported the order of the AO whereas the Learned AR before us filed a Paper Book running from pages 1 to 231 and submitted that the Tribunal in the own case of the assessee has allowed the depreciation in ITA No. 1718/AHD/2011 vide order dated 6-112015 for the assessment year 2008-09. The Learned AR vehemently supported the order of the Learned CIT (A).
8. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that the Tribunal in the own case of the assessee in ITA No. 1718/AHD/2011 for the Assessment Year 2008-09 vide order dated 6th November 2015, involving identical issue has decided the matter in favor of the assessee. The relevant extract of the order is reproduced as under:
“13. The assessee’s next ground raised in the instant appeal challenges disallowance of depreciation on Ahmedabad Stock Exchange card of Rs.141/- made in the course of assessment and affirmed in the lower appellate proceedings. Both the lower authorities hold that stock exchange membership card is not an eligible asset u/s 32 of the Act as held by hon’ble Bombay high court in M/s. Technoshares and Stocks Ltd. Vs. CIT 193 Taxman 248. The CIT(A) observes that the hon’ble apex court has reversed the above stated decision as reported in 327 ITR 323 with a rider that the same relates to Bombay Stock Exchange card only. He reproduces relevant portion of this judgment as well. However, the Revenue fails to point out any distinction between the assessee’s Ahmedabad Stock Exchange card and relevant features of Bombay Stock Exchange card. Nor such a distinction is forthcoming from hon’ble apex court decision. We find that a co-ordinate bench of the tribunal in case of assessee’s sister concern’s case M/s. Edelweiss Stock Broking Ltd. Vs. CIT, ITA No. 1168/Ahd/2011 decided on 11.07.2014 for AY 2006-07 grants identical depreciation relief. We also draw support therefrom for allowing the impugned depreciation claimed. This ground is accepted.
14. This leaves us with assessee’s last substantive ground challenging Section 40(a)(ia) of Rs.1,02,39,903/- arising from non-deduction of TDS qua payments made of NSE lease line charges, NSE VSAT charges and MTNL expenses. There is no dispute that the assessee has not deducted TDS on these payments. We have given our thoughtful consideration to the rival contentions. The assessee inter alia invites our attention to Section 40(a)(ia) second proviso introduced by the Finance Act, 2012 w.e.f. 01.04.2013. It refers to case law of Rajeev Kumar Agarwal vs. ACIT, ITA No.337/Agra/2013 decided on 29.05.2013 (authored by one of us Pramod Kumar, Accountant Member) as considered by a recent decision of hon’ble Delhi high court in CIT vs. Ansal Landmark Townships Pvt Ltd, (377 ITR 635), upholding the same after reproducing the operative part in extempore to the effect that when a deductor-assessee is not an assessee in default u/s 201(1), it is deemed that it has deducted and paid the tax on such sums on the date of filing of return of income by the concerned payee as referred in the above stated proviso. The co-ordinate bench as well as hon’ble Delhi high court have accordingly applied the above stated proviso with retrospective effect by holding it as a curative one. The Revenue is unable to dispute correctness thereof. We accordingly remit this issue back to the Assessing Officer for carrying out necessary verification regarding related payments having been taken into account by the concerned payees in computing their income. The assessee’s other arguments disputing applicability of TDS provision shall be readjudicated as per law. This ground is treated as allowed for statistical purposes. This assessee’s appeal ITA No.1718/Ahd/2011 is partly allowed.”
9. The Learned DR at the time of hearing has not brought anything on record contrary to the finding of the ITAT, as discussed above, suggesting that there was the change in the facts and circumstances or under the provisions of law. Hence, there being is no change in the facts and circumstances viz a viz under the provisions of law, we confirm the order of the ld. CIT-A in view of the order of this tribunal in the own case of the assessee (supra). Accordingly we direct the AO to delete the addition made by him. Hence the ground of appeal of the Revenue is dismissed.
10. The next issue raised by the Revenue is that the Learned CIT-A erred in deleting the addition made by the AO amounting to Rs. 29,64,082/- being depreciation allowance, interest and insurance expenses relating to vehicles though the assessee was not the owner of such vehicles.
11. The assessee in the year under consideration has claimed depreciation and incurred expenses on interest /insurance aggregating to Rs. 29,64,082/-with respect to certain vehicles which were not registered in its name. However, it was contended by the assessee that it is the beneficial owner of such vehicles as the loan was taken by it and accordingly the instalment of such loan was also born by it which is evident from the books of accounts.
11.1 The assessee also submitted that the provisions of Section 32 of the Act requires that the assets must be owned by the assessee which does not mean that the vehicles has to be registered in the name of the assessee under the Motors Vehicles Act.
12. However, the AO disagreed with the contention of the assessee by observing that the assessee failed to substantiate based on documentary evidence that it had dominion over the vehicles and such vehicles were used for the purpose of the business.
13. Furthermore, the AO also found that the purpose of registering the vehicles in the name of individual directors was to avoid the tax payable to the RTO. In fact, the amount of tax payable to the RTO is much lesser if the vehicles are registered in the name of the individuals instead of corporate bodies. Accordingly, the AO was of the view that the revenue authority cannot become a party by allowing the benefit of tax payable by the assessee to the RTO. Accordingly, the AO disallowed the claim of the assessee for the depreciation, interest expenses and insurance expenses aggregating to ₹ 29,64,082/- and added to the total income of the assessee.
14. Aggrieved assessee preferred an appeal to the Learned CIT (A). The assessee before the Learned CIT-A submitted that the payment for the purchase of the car was paid by it. The cars were shown in the balance sheet as fixed assets. The repayment of the car loan was made by it. All the expenses such as running and maintenance expenses of the vehicles were incurred by it which are duly reflected in the books of accounts. The assessee also contended that it has paid wealth tax on such vehicles in its wealth tax returns. In view of the above the assessee submitted that the beneficial ownership of the vehicles vest with it and these cars were used for the purpose of the business. Accordingly, the depreciation allowance, insurance and interest expenses cannot be denied to it.
15. The Learned CIT (A) after considering the submission of the assessee found that assessee has used its own funds for the purchase of the vehicles viz a viz the repayment of the loan obtained for the purchase of the vehicles was made by it and these vehicles were duly reflected in the balance sheet as assets. Similarly, running and maintenance expenses on such vehicles were incurred by the assessee which were also allowed by the revenue. Thus what is suggested is that the vehicles were used for the purpose of the business. The Learned CIT (A) also found that the assessee is paying the wealth tax on such cars which evidences that the assessee is the beneficial owner of these cars. Accordingly, the Learned CIT (A) was of the view that the assessee cannot be denied the benefit of depreciation, insurance and interest expenses incurred on the vehicles merely on the reasoning that these vehicles were registered in the name of the individual directors. Accordingly the Learned CIT (A) allowed the ground of appeal of the assessee.
16. Being aggrieved by the order of the Learned CIT (A), the Revenue is in appeal before us.
17. Both the Learned DR and the AR before us vehemently supported the order of the respective authorities below as favorable to them.
18. We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that claim of the assessee for the depreciation allowance, interest and insurance expenses on the vehicles were rejected by the AO for the following reasons:
i. The assessee was not the owner of the vehicles as these were registered in the name of individual directors under the registration of Motor Registration Act.
ii. The assessee failed to substantiate based on the documentary evidence that these vehicles were used for the purpose of the business.
iii. The assessee by way of registering the vehicles in the name of individual directors instead of in its own name has avoided the legitimate tax due to the RTO under the Motors Registration Act.
20. The provisions of Section 32 of the Income-tax Act, 1961 grants depreciation allowance to the assessee who is ‘owner’ of specified assets (building, plant and machinery, furniture and fixtures, etc.) and these assets are used during the relevant previous year for the purposes of its business/profession. Therefore, the ownership of asset is one of the important requirements to be entitled for depreciation allowance. The Section, however, does not define the term ‘owner’ as such for the purposes of grant of depreciation allowance. The moot question that arises for consideration from a perusal of Section 32 of the Act is as to who can be said to be the ‘owner’ of assets for the purpose of Section 32 of the Act. The controversy in various judicial interpretations is as to the true meaning of the word ‘owner’ within the meaning of Section 32 of the Act. Whether Section 32 contemplates the registered/legal owner as such or it refers to a person who can exercise the rights of owner in his own right and not on behalf of others. To our understanding, the owner must be a person who can exercise rights of the owner not on the behalf of the owner but in his own right. In other words exclusive possession, right to exclude others from enjoyment of the assets, full control over the assets, right to retain possession and defend the same are some of the basic and important characteristics of the ownership which would entitle a person to claim benefit of depreciation allowance under Section 32 of the Act. Admittedly, the assessee enjoys all such benefits with respect to such vehicles. It is because the assessee has incurred the cost for the purchase of the vehicles, it is paying the instalments of the car loans, regularly paying the wealth tax on such vehicles, bearing the running and maintenance expenses. Thus in our considered view the assessee cannot be denied the benefit of depreciation merely on the reasoning that it is not the legal owner of such vehicles. In holding so we draw support and guidance from the order of this tribunal in case ITO vs. Electro Ferro Alloys Ltd. reported in 25 taxmann.com 458 where it was held as under:-
“22. 2 In the present case it is not disputed that investment was made by the assessee in purchase of the motor car. It is shown as asset in the balance-sheet of the company. If expenditure for running the vehicle was incurred by the assessee, the assessee is de facto owner of the vehicle. It is not disputed that it was used for the purpose of business of the assessee company. The hon’ble Rajasthan High Court in the case of CIT v. Mohd. Bux Shokat Ali (No. 2) [2002] 256 ITR 357 (Raj) held that where vehicle was purchased by the firm used by it for the purpose of its business but it was registered in the name of one of the partners then the firm would be entitled to depreciation on vehicle. The hon’ble Delhi High Court in the case of CIT v. Basti Sugar Mills Co. Ltd. [2002] 257 ITR 88 (Delhi) held that where vehicle was owned and used by the assessee but no registration was done in its name then the assessee would still be entitled to depreciation on such vehicle. Therefore, the assessee has right to claim depreciation thereon. This ground of the Revenue is accordingly rejected.”
21. Regarding the 2nd question as discussed above, we note that the assessee has claimed repair and maintenance expenses with respect to such vehicles which were also allowed by the Revenue. Thus it is inferred that such vehicles were used for the purpose of the business of the assessee. Accordingly we are of the view that the assessee is eligible for interest and insurance expenses incurred by it with respect to such vehicles.
22. Moving to question No. 3 wherein it was alleged that the assessee has minimized the tax payable to the RTO by registering the vehicles in the name of the individual directors. In this regard, we note that there is no denial under the Motors Registration Act to register the vehicles in the name of the individual directors. The action taken by the assessee for registry the vehicles in the name of individual directors was within the framework of the provisions of law. Accordingly, we are of the view that this cannot be a ground to reject the claim of the assessee. In view of the above and after considering the facts in totality, we do not find any infirmity in the order of the Learned CIT (A). Hence the ground of appeal of the Revenue is dismissed.
23. The third issue raised by the Revenue is that the Learned CIT-A erred in deleting the addition made by the AO for Rs. 1,12,972/- on account of interest expenses under the provisions of Section 36(1)(iii) of the Act.
24. The AO during the assessment proceedings found that the assessee on one hand has been incurring interest expenses on the borrowed fund and on the other hand it has advanced money to its sister concern without charging any interest on such advances. Accordingly, the AO proposed to make the disallowance attributable to such loans and advances.
25. The assessee in response to show cause notice vide letter dated 22nd March 2013 submitted that the loans and advances were given to the sister concerns in the course of the business. Similarly in some of the cases, there was no advance provided to the sister concern in the year under consideration. The assessee, without prejudice to the above, also submitted that its own fund as on 31st March 2010 exceeds the amount of loans and advances. Therefore, it can be presumed that the assessee has provided interest free loans and advances to the sister concern out of its own fund without using any interest-bearing fund.
26. In view of the above the assessee contended that there cannot be any disallowance on the amount of loans and advances provided to the sister concerns without charging any interest thereon.
27. However, the AO disregarded the contention of the assessee by observing that the assessee failed to substantiate the fact that it has provided loans and advances for the purpose of its business activities. Accordingly, the AO worked out the proportionate amount of interest expenses attributable to such interest-free loans and advances amounting to Rs.1,12,972/- and disallowed the same under Section 36(1)(iii) of the Act by adding to the total income of the assessee.
28. Aggrieved assessee preferred an appeal to the Learned CIT (A) who has deleted the addition made by the AO by observing as under:
“ On careful consideration of entire facts it is observed that issue regarding disallowance of proportionate interest is covered in favour of Appellant by decision of Hon’ble Ahmedabad ITAT in Appellant’s own case for A.Y. 2008-09 (ITA No. 1531/Ahd/2011) wherein Hon’ble ITAT vide its order dated 6th November, 2015 has held as under:
3. We come to the lower appellate proceedings now. The CIT(A) prepares a party-wise tabulation qua loans in question of Rs.32,03,147/- as incurred in reimbursement of expenses. He finds the same to have been incurred in business purposes as per case la w of S A Builders vs. CIT, 288 ITR 01 (SC) as having business expediency element embedded therein. The Revenue’s arguments strongly support Assessing Officer’s action. It transpires from the case file that Assessee’s interest free funds as on 31.03.2008 read a figure of Rs, 1,25,83,17,835/- in the nature of share capital, reserves and surplus etc. It files tribunal’s order in its own case for AY 2004-05 in ITA No.1890/Ahd/2007 decided on 19.12.2008 deciding the very issue in its favour in identical circumstances. We follow suit in these facts and reject this Revenue’s ground as well.”
It is pertinent to note that Hon’ble Supreme Court in case of Hero Cycles (P.) Ltd vs. Commissioner of Income-Tax (Central), Ludhiana [vide Civil Appeal No.: 514 of 2008] dated 05/11/2015, held as under:
Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the Commissioner of Income-Tax (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its Directors.
On the basis of aforesaid discussion, the present appeal is allowed, thereby setting aside the order of the High Court and restoring that of the Income Tax Appellate Tribunal.”
It is observed that during the year under consideration the Appellant has own funds of Rs. 81,80,68,508 as against interest free advances of Rs 36,63,056 hence following the decision of Hon’ble Ahmedabad ITAT and decision of Hon’ble Supreme Court referred supra, disallowance made by Assessing Officer under Section 36(1)(iii) for Rs.1,12,972 is deleted. This ground of appeal is allowed.”
29. Being aggrieved by the order of the Ld. CIT-A, the Revenue is in appeal before us.
30. Before us, both the Learned DR and the AR vehemently supported the order of the authorities below as favourable to them.
31. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset we note that the Tribunal in the own case of the assessee in ITA No. 1718/AHD/2011 for the Assessment Year 2008-09 vide order dated 6th November 2015, involving identical issue has decided the matter in favor of the assessee. The relevant extract of the order is reproduced as under:
“3. We come to the lower appellate proceedings now. The CIT (A) prepares a party-wise tabulation qua loans in question of Rs.32,03,147/-as incurred in reimbursement of expenses. He finds the same to have been incurred in business purposes as per case law of S A Builders vs. CIT, 288 ITR 01 (SC) as having business expediency element embedded therein. The Revenue’s arguments strongly support Assessing Officer’s action. It transpires from the case file that assessee’s interest free funds as on 31.03.2008 read a figure of Rs. 1,25,83,17,8357- in the nature of share capital, reserves and surplus etc. It files tribunal’s order in its own case for AY 2004-05 in ITA No.l890/Ahd/2007 decided on 19.12.2008 deciding the very issue in its favour in identical circumstances. We follow suit in these facts and reject this Revenue’s ground as well.”
32. The Learned DR at the time of hearing has not brought anything on record contrary to the finding of the ITAT as discussed above suggesting that there was any change in the facts and circumstances or under the provisions of law. Hence, there being no change in the facts and circumstances viz a viz under the provisions of law, we confirm the order of the Ld. CIT-A in view of the order of this tribunal in the own case of the assessee (supra). Accordingly, we direct the AO to delete the addition made by him. Hence, the ground of appeal of the Revenue is dismissed.
33. The next issue raised by the Revenue is that the Learned CIT-A erred in deleting the addition made by the AO under the provisions of Section 14-A read with rule 8D of Income Tax Rule amounting to Rs. 24,75,967/- only.
34. The assessee during the assessment proceedings contended that it has not incurred any expense against the dividend income of Rs. 10,52,162/- in the year under consideration. As per the assessee, its own funds exceeds the amount of investment which evidences that no borrowed fund was utilized for the purpose of the investment. Accordingly, the question of disallowing any interest expense does not arise under Rule 8D of Income Tax Rule.
35. Assessee similarly further contended that the dividend has been directly credited in the bank account and therefore it has not incurred any administrative expenses for the earning of such dividend income.
36. However, the AO disregarded the contention of the assessee by observing that the assessee has not furnished any day to day fund flow statement suggesting that the borrowed fund has not been utilized in the impugned investments. Accordingly, the AO invoked the provisions of Section 14A read with rule 8D of income tax rule and made the disallowance as under:
