ITAT MUMBAI BENCH ‘F’
HSBC Securities & Capital Markets (India) (P.) Ltd.
Assistant Commissioner of Income-tax, Circle-4(1)
IT Appeal NOS. 6762 & 7135 (MUM.) OF 2005
C.O. No. 186 (mum.) of 2006
[ASSESSMENT YEAR 2002-03]
OCTOBER 31, 2012
B. Ramakotaiah, Accountant Member
These are cross appeals for the assessment year 2002-03 against the orders of the CIT (A)-IV, Mumbai dated 5.10.2005 and the cross objection on one of the issue by assessee.
2. We have heard the learned Counsel and the learned DR in detail and the learned Counsel also placed on record paper book and a chart indicating the grounds and the decisions relied upon by assessee including the Coordinate Bench orders in assessee’s own case.
ITA No. 6762/Mum/2005
3. In this appeal assessee has raised six grounds.
4. Ground No.1 pertains to the disallowance under section 14A. Assessee has shown dividend income of Rs. 3,53,85,721/- which was claimed as exempt under section 10(33). AO estimated 5% of the dividend income as expenditure attributable to earning such tax free dividend income considering both direct and indirect expenses incurred by assessee. Accordingly he arrived at the disallowance of Rs. 16,69,286/- being 5% of the dividend income. The same was confirmed by the CIT (A) differing from the orders of his predecessor in A Y 2001-02.
5. The learned Counsel submitted that the ITAT in A Y 2004-05 and 2005-06 has determined the reasonable amount at a lump sum amount of about Rs. 2 lakhs and accordingly he has no objection if proportionate amount was disallowed but not at the ratio adopted by AO.
6. The learned DR however, submitted that by the order of the ITAT in 2001-02, amount of 5% has been confirmed.
7. We have examined the issue and the details placed on record. In A Y 2001-02, the dividend income was only Rs. 4,91,884/- and an amount of Rs. 24,594/- was disallowed and was confirmed by the ITAT. However, in the later years based on the fact that amount of dividend was earned from only one company to an extent of Rs. 3.30 crores, coordinate Bench considered that it was reasonable estimate disallowance at Rs. 2.00 lakhs as assessee has not borrowed any funds, nor there is any finding that any interest is attributable to earning the dividend income. Facts are similar in this year and large amount of Dividend was earned from one company alone. In view of this, respectfully following the decision of the Coordinate Benches in assessment years 2004-05 and 2005-06, the disallowance is restricted to an amount of Rs. 2.00 lakhs. Ground is partly allowed.
8. Ground Nos.2 & 3 pertain to the claim of bad debts/loss, the claims which have been made without prejudice to one another.
9. AO in the assessment order disallowed the amount stating that a debt unless it has become bad, cannot be allowed under section 36(1)(vii) and no loss can be allowed unless the same has crystallized applying the principles and depending on the decision of the ITAT in the case of Thermite Corporation disallowed entire amount of Rs. 3,36,147/-. The CIT (A) after considering the submissions of assessee, however, allowed an amount of Rs. 71,942/-being the amount written off given as advance to one of the employees which could not be recovered and with reference to the balance amount, he confirmed AO’s action.
10. The facts relating to the bad debts are that assessee had the following amounts written off in the books of account:
Name of the party
|Team Asia Greaves Semi-conductor Ltd||
|Williamson Tea Holdings PLC||
|Bad delivery debtors||
(A) With reference to Team Asia Semiconductor Ltd, it was the submission that assessee was retained by the client as an Advisor to assist in raising private equity for expansion. Assessee was to be paid 4% of the investment proceeds received from private equity investors by the client, subject to a maximum success fee of USD 6,50,000 which was inclusive of upfront fee and out of pocket and other expenses. Assessee billed a total of Rs. 3,03,70,000/- upto 31st March,2002 out of which only an amount of Rs. 70,00,000/- were received during the year ended on 31.3.2002. As the balance amount was not received and the client expressed his inability to pay the amount being a sick company, assessee wrote off the balance amount. There is no dispute with reference to the write off of the amount in the Profit & Loss A/c.
(B) With reference to the Williamsons Tea Holdings Plc. assessee was mandated as an exclusive advisor to protect the interest of Williamson Tea Holdings in India in the Williamson Magor group in response to business interest by Khaitan family in India. In consideration for the services assessee was entitled to a monthly retainer fee of USD 50,000 subject to a minimum of USD 2,50,000. All out of pocket expenses are to be reimbursed. In the course of service assessee paid professional fees to various legal advisors on behalf of the client totaling to Rs. 13,99,689/-. Further travel expenses and other miscellaneous expenses were also claimed to an extent of Rs. 15,01,569/-. Since the client was not satisfied with the services rendered by assessee, it refused to reimburse the said expenses. Therefore, assessee wrote off the amount.
(C) With reference to the bad delivery debtors, assessee being a stock broker claimed bad delivery debtors amounting to Rs. 87,02,430/- as bad debts. These amounts are due from the brokers of the selling parties for claims of the clients on account of dividend or bonus shares receivable from the sellers. As these claims are not honoured by the said brokers, assessee had to pay all its clients to settle their due and wrote off the amount due from selling parties brokers by charging them to the Profit & Loss A/c. It was the claim of assessee that such write off is in the regular course of the business.
11. After considering the above facts and perusing the orders of AO and the CIT (A), we are of the opinion that the amounts are to be allowed as bad debts. Consequent to the amendment to the provisions of section 36(1)(vii), it is not required to establish that the debt has become bad. This issue was decided by the Hon’ble Supreme Court in the case of TRF Ltd. v. CIT  323 ITR 397wherein it was held that after 1.4.1989 it is not necessary for assessee to establish that the debt in fact has become irrecoverable. It is enough if bad debt is written off as irrecoverable in accounts of assessee. Following the above principles, there is no dispute with reference to the amounts receivable from the Team Asia Semiconductor Ltd and Williamsons Tea Holdings PLC that these amounts were taken into account as income in earlier years and was written off as irrecoverable. With reference to the third item of bad delivery debtors, assessee being a stock broker, the amounts payable to the clients in the business is also considered as “taken into account” under the provisions of section 36(2) and any non-recovery can be claimed as bad debt. This issue was considered by the Special Bench of the ITAT in the case of Dy. CIT v. Shreyas S. Morakhia  40 SOT 432 (Mum.) which was upheld by the Hon’ble Bombay High Court in the case of CIT v. Shreyas S. Morakhia  206 Taxman 32in Appeal No.89 of 2011. In view of this we direct AO to allow the amounts as bad debts as claimed. Grounds are considered allowed.
12. Ground No.4 pertains to claim of software expenses. Assessee spent an amount of Rs. 21,59,151/- towards various license fees paid for acquiring software for running its computers. Assessee claimed the same as revenue expenditure. AO was of the view that the software expenses gave an enduring benefit; therefore, they are capital in nature. Accordingly he allowed 25% depreciation by capitalizing the said amount and making addition of difference of Rs. 16,19,363/-. The CIT (A) upheld part of the amount relying on the decision of the Hon’ble Rajasthan High Court in the case of CIT v. Arawalli Construction Co. (P.) Ltd. 259 ITR 30. It was the contention that assessee has not obtained any enduring benefit and only paid license fee for utilizing the same in existing computers. Accordingly the expenditure is revenue in nature. Assessee relied on the following decisions:
(i) CIT v. Varinder Agro Chemical Ltd.  309 ITR 272 (Punj. & Har.)
(ii) CIT v. Asahi India Safety Glass Ltd.  15 taxmann.com 382.
(iii) CIT v. Raychem RPG Ltd . 21 taxmann.com 507 (Bom.)
(iv) Dy. CIT v. Mahindra Reality & Infr. Developers (ITA No.1160/Mum/2010)
(v) Diageo India (P.) Ltd v. Dy. CIT 47 SOT 252 (Mum.)
(vi) Amway India Enterprises v. Dy. CIT  111 ITD 112/21 SOT 1(Delhi) (SB).
13. Considering the nature of the expenditure as seen from annexure-A to the submissions before the CIT (A), even though the expenditure may give an enduring benefit, since no asset has been created by paying license fees for utilization of the software, we are of the opinion that the expenditure is allowable as revenue expenditure. The principles laid down in the above cases relied on by assessee supports the above contentions. Accordingly AO is directed to allow the claim of license fee on software expenditure claim of Rs. 21,51,151/- as revenue expenditure and consequently withdraw the depreciation allowed on the said amount. Ground is considered allowed.
14. Ground No.5 pertains to the issue of software expense amounting to Rs. 40,60,000/-. Assessee did not press the ground as assessee itself claimed it as capital expenditure in the return of income and the issue whether depreciation will be allowed at 60% or 25% was contested separately. Therefore, this ground is treated as withdrawn.
15. Ground No.6 pertains to interest under section 234B, 234C and 234D. AO is directed to recalculate the interest while giving effect to this order and also keeping in mind the amendments made to the provisions of section 234B by the Finance Act, 2012. With these directions the appeal is considered partly allowed.
16. In the result appeal No.6762/Mum/2005 is partly allowed.
17. This is a Revenue appeal in which the Revenue has contested three issues in the grounds of appeal.
18. Ground No.1 pertains to the issue of disallowance of interest made under section 36(1)(iii) on the interest free advances out of interest bearing funds to the group companies. AO in the order has stated that though assessee has claimed financial charges of Rs. 3,55,60,000/-, it has not charged interest on the following advances/investments.
Balance as on 31.3.2002(Rs.)
|HSBC Investment bank PLC||
|HSBC Securities (Delhi) Ltd.||
|HSBC Asset Management (I) Ltd.||
On the reason that the amounts were advanced out of the borrowed funds on which assessee paid 15.8% interest, AO worked out the disallowance at Rs. 26,77,452/- under section 36(1)(iii). The CIT (A) deleted the same holding that assessee has more capital and reserves than what was advanced to the sister concerns and following his order in A Y 2001-02 he deleted the said disallowance. Revenue is aggrieved.
19. It was fairly admitted that in AY 2001-02 the issue was restored to the file of AO for examination afresh as directed in Para 17 of the order in ITA No.6894/Mum/2004:
“17. We have heard the rival submissions and perused the material on record. AO has categorically found that interest free advances to assessee’s related concerns are out of interest bearing HSBC overdraft account, on which assessee had claimed deduction of interest in its Profit & Loss A/c. This finding of AO has not been dislodged by the learned CIT (A). On the other hand, he held that AO has failed to establish the nexus between interest bearing funds and interest free advances. We find from the orders of authorities below that the issue has not been considered from the point of commercial expediency which is the proposition laid down by the decision of the Hon’ble Supreme Court in the case of S.A. Builders reported in 288 ITR 1 (SC). The Hon’ble Supreme Court held as under:
“In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the income-tax authorities have approached the matter from an erroneous angle. In the present case, assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) as interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency”.
18. Since authorities below have not considered the question of commercial expediency in advancing the loan to the subsidiary concern necessarily in the light of the decision of the Hon’ble Supreme Court cited supra, we deem it appropriate to remit this issue back to the file of the AO to decide the matter afresh in the light of the dictum laid down by the Hon’ble Supreme Court in the case of S.A. Builders (Supra). Therefore, this ground of the revenue is allowed for statistical purposes”
20. Respectfully following the above since the CIT (A) also followed the order for the A Y 2001-02 while giving relief, in the interest of justice we restore the issue to the file of AO to examine the facts afresh. AO is also directed to examine the amount of advance as the amounts stated in the assessment order as advances to sister concern was only an amount of Rs. 14,76,000/-, whereas the interest on the above amount at 15.8% was worked out at Rs. 26,77,452/-. AO is directed to state the correct amount advanced to sister concern and give the working in case the amounts are indeed advanced out of the borrowed funds. The findings in A Y 2001-02 will have a bearing on this issue. Therefore, AO is directed to keep this also in mind. Assessee should be given due opportunity to support its contentions. With these directions the issue in Ground No.1 is restored to the file of AO for fresh consideration.
21. Ground No.2 is on the issue of penalty levied by the Stock Exchange. The claim is an amount of Rs. 1,15,663/- on account of payment made to the stock exchange for violation of byelaws of the Stock Exchange. Assessee submitted that the Stock Exchanges are not statutory authorities and therefore, violation of their byelaws could not be considered as violation of law and is only a breach of contractual obligation and therefore, claim is allowable as a deduction. AO however, was of the opinion that the penalty paid violates the provisions of section 37(1) and therefore, the same cannot be allowed as business deduction. The CIT (A) allowed the amount stating that the Stock Exchanges are not government or semi-government bodies and the payments are only for technical violation of regulations which cannot be considered as payment prohibited by law or in connection with an offence. The Revenue is aggrieved by this.
22. Similar issue was considered in favour of assessee in A Ys 2003-04 and 2005-06 by the Coordinate Bench of the ITAT copies of which were placed on record. This issue is now directly covered by the decision of the Hon’ble Bombay High Court in the case of CIT v. Angel Capital & Debit Market Ltd. in ITA No.475 of 2011 dated 28th July, 2011 wherein the Hon’ble High Court held that the amount paid as penalty to stock exchanges was on account of irregularities committed by assessee clients and such payments were not on account of infraction of law and hence allowable as business expenditure. Hon’ble High Court upheld the ITAT finding on this issue in the case of CIT v. Stock and Bond Trading Company in ITA No.4117 of 2010 dated 14th October, 2011, and held as under:
“3. As regards the second question is concerned, the finding of fact recorded by the CIT (A) and upheld by the ITAT is that the payments made by assessee to the Stock Exchange for violation of their regulation are not an account of an offence or which is prohibited by law. Hence, the invocation of explanation to section 37 of the Income Tax Act 1961 is not justified. In our opinion, in the facts and circumstances of the present case, no fault can be found with the decision of the ITAT. Accordingly, the second question cannot be entertained”.
23. In view of this, we do not see any reason to disturb the findings of the CIT (A) and reject the ground of the Revenue.
24. Ground No.3 pertains to the issue of allowance of an amount of Rs. 4,34,400/- paid as software expenditure as revenue expenditure.
25. This issue was discussed in Ground No.4 of assessee’s appeal above. Out of the total amount of Rs. 21,51,151/-, the CIT (A) considered an amount of Rs. 17,24,751/- as capital in nature while allowing Rs. 4,34,400/- as revenue in nature. The Revenue is contesting the above findings of the CIT (A). Since we have already decided that the entire expenditure for software licenses is revenue in nature, there is no need for disturbing the findings of the CIT (A) who correctly allowed the amount of Rs. 4,34,400/- as revenue expenditure. Accordingly the ground is rejected.
26. In the result, Revenue appeal No.7135/Mum/2005 is partly allowed for statistical purposes.
C.O.No.186/Mum/2006 (Arising from ITA No.7135/Mum/2005)
27. Assessee claimed in the C.O. the issue of depreciation on computer software at 60% as against 25% allowed by AO. Assessee claimed an amount of Rs. 40,60,000/- as capital expenditure and claimed depreciation at 60% thereon in the computation of income. AO however, was of the view that assessee has purchased specific software license for use of Ritechoice Spectrum-2000 which is only a license and accordingly treating it as ‘intangible asset’ allowed depreciation at 25% as per depreciation schedule. Further he was of the view that since assessee did not utilize for the full period to claim deduction at 25%, he allowed 50% thereof as assessee capitalized w.e.f. 31.12.2001 and accordingly added back an amount of Rs. 35,62,650/- being excess depreciation claim on software purchase. Assessee being aggrieved along with the disallowance of software expenses (Ground 4 in assessee appeal) contested before the CIT (A) that the entire amount of Rs. 40,60,000/-was allowable as revenue expenditure. There is no dispute before the CIT (A) with reference to the rate of depreciation. The CIT (A) noted that assessee had acquired a software known as Ritechoice Spectrum 2000 from Ritechoice for Rs. 40,60,000/- comprising the basic price of Rs. 24,25,000/-, customization of Rs. 7,35,000/- and implementation of Rs. 4,00,000/-. He further noted that this software is used for back office accounting and settlements by HSBC for handling stock broking. The CIT (A) however, considering the issue whether the said expenditure is revenue or capital in nature upheld AO’s opinion that purchase of this software cannot be considered as revenue in nature. In the present cross objection assessee is contesting the action of AO stating that the correct depreciation is to be allowed at 60%.
28. We have heard the learned Counsel and the learned DR. We notice from the depreciation schedule applicable for A Y 2002-03 that there is no specific heading for software expenses as part of computer. The schedule in Part-A (III)(2B) contains only computers at 60%. With effect from AY 2003-04 onwards Part III (5) was modified as under:
“(5) Computers including computer software 60%
(see Note 7 below Table) “.
Note 7 states that the computer software means any computer programme recorded on any disk, tape or any other information storage device. As seen from the facts of the case, assessee has purchased specific software which was not supplied along with the computer. Therefore, the purchase of specific software for use in the business cannot be included as part of computers and since there is no specific item of computer software in the depreciation schedule for the impugned A Y 2002-03, we are of the opinion that AO is correct in treating the computer software as a license and allowing depreciation at 25%. As stated earlier, assessee also has not contested the issue before the CIT (A) with reference to the rate of depreciation. In view of this, we are of the opinion that AO has correctly determined the rate of depreciation at 25% for this year. The reliance by assessee on the depreciation schedule in the later year cannot help its case as the said 60% on computer software has become part of the depreciation schedule from A Y 2003-04 onwards.
29. In the result cross objection No.186/Mum/2006 filed by assessee is dismissed. Assessee’s Appeal in ITA No. 6762/Mum/2005 is partly allowed and Revenue Appeal in ITA No. 7135/Mum/2005 is partly allowed for statistical purposes.