1. There being a difference of opinion between the Members constituting the Division Bench, the Hon'ble President has referred, under Section 255(4) of the I.T. Act, 1961, the following point of difference to me as a Third Member to resolve the controversy: Whether, on the facts and in the circumstances of the case, the Accountant Member is justified that profits or gains arising to the assessee from the transaction with Shri R.M. Venkatachalam are chargeable to tax as long term capital gain or the Judicial Member is justified that the same are assessable as the short term capital profits? 2. The assessee is an individual and is a member of the Bombay Stock Exchange. He is a share broker. With a view to expand his business he wanted to acquire the membership of Bangalore Stock Exchange Limited.
The membership of Bangalore Stock Exchange Limited can only be obtained by being a shareholder of that stock exchange, which was incorporated as a company. Therefore, he acquired the business of one Shri Shri Gopal Shetty, who held share in Bangalore Stock Exchange Ltd., on 15.3.1990 for Rs. 3,30,000/- along with the business assets of said Shri Gopal Shetty. However, the assessee could not get the SEBI's permission to trade in more than one exchange which is reportedly required. When the assessee could not get the said permission, he sold the said business of Shri Gopal Setty on 18.12.1991 to Shri R.M.Venkatachalam for Rs. 17 lakhs. It was the argument of the assessee that the only intention in making the purchase of the business of the business of the assessee was to acquire the share in Bangalore Stock Exchange Ltd., as according to him there was no other asset worth the name acquired from Shri Goptal Setty. The share carried the membership right in stock exchange and permitted its holder to trade therein.
According to the assessee what was virtually sold was the share in Stock Exchange. As it was sold after a gap of more than one year the assessee claimed the profit arising from the sale of share as long term capital gains within the meaning of Section 2(29B) read with Section 2(29A) and Section 2(42A) of the Income-tax Act. This claim was not accepted by the learned CIT(A) and the assessee was in appeal before the Tribunal.
3. The learned Accountant Member appreciated the facts that the assessee was not engaged in the business of trading in Stock Exchange memberships and what has been acquired and sold is a capital asset chargeable to tax under the head 'capital gains'. The profit making apparatus is always treated as a capital asset. What was acquired and sold by the assessee, according to him was only such apparatus and a capital asset and the only point at issue, therefore, was whether or not the proviso to Section 2(29B) read with Section 2(29A) applies. If the assessee's case is covered by the proviso the gains are chargeable to tax as long term capital gains. If the proviso does not apply the gains will have to be charged to tax as short-term capital gains.
According to the learned Accountant Member, the proviso is attracted if the asset is sold is share held in the company. Prima facie, according to him, the assessee had held shares in Bangalore Stock Exchange, which was a Limited Company, the share was sold by the assessee. The assessee held the share for more than 12 months and therefore, the assessee has rightly claimed the sum in question chargeable to tax as long term capital gains. However, the learned-Judicial Member did not agree with this issue and he was of the view that the shares are different from membership of a recognized Stock Exchanges. According to him the membership of a recognized Stock Exchange gives a membership to do business within the premises of the stock exchange and what has been acquired and sold by the assessee is such rights of membership.
According to him they are not shares. He agreed that what is purchased and sold is a capital asset but since it is held for a period less than 36 months, according to the learned Judicial Member, the Commissioner of Income-tax(Appeals) was right in holding that the sum in question are assessable to tax as short term capital gains. This has resulted in a point of difference which is referred to me.
4. I have heard both the sides and have also perused the materials placed before me. The learned counsel for the assessee has filed before me the photo-copy of the share certificate bearing No. 33 issued by the Bangalore Stock Exchange Limited, in favour of Shri M.L. Gopal Shetty.
He has also filed copy of the Share Transfer Form which Shri M.L Gopal Shetty has executed. All these, according to the learned counsel for the assessee, show that what the assessee had acquired is a share in Bangalore Stock Exchange Limited. The assessee has not acquired any membership right of the Stock Exchange which only confers him the right to trade on the floor of the Exchange. The ownership of share in Bangalore Stock Exchange Ltd., was a pre-requisite to trade on the floor of the Exchange. The learned counsel for the assessee contended that the right to trade on the floor of the exchange is equal to ownership right of share plus something else. Although the assessee acquired the right of ownership in share, he could not acquire the right to trade on the floor of the Stock Exchange. Since the assessee could not acquire the right to trade on the floor of the Stock Exchange (known as membership or membership card), he had sold the share. The learned counsel for the assessee pointed out that in the circumstances of the case the assessee had never acquired any right to trade on the floor of the Exchange and there is no question of selling any such right which would be called the business rights. In support of the contentions, the learned counsel for the assessee strongly relied on the decision of the Hon'ble Gujarat High Court in the case of CIT v.Anilaben Upendra Shah . He has also relied upon the order and findings of the learned Accountant Member. On the other hand, the learned Departmental Representative strongly relied on the discussions in the order of the Judicial Member as also the findings recorded in his order to support the impugned order of the learned CIT(A).
5. I have carefully considered the rival conditions and have gone through the orders of the leaned Accountant Member as also the learned Judicial Member and the facts of the case. The assessee has also filed the copy of the agreement which he has entered with Shri M.L. Gopal Shetty, the Vendor, on 15th March 1990, wherein he has agreed to purchase the business including the tenancy of the office, furniture, telephone for a consideration of Rs. 3,30,000/-. The recital therein shows that the assessee was interested in extending his business activity to Bangalore Stock Exchange Limited. What has been purchased by the assessee is definitely not stock in trade but a capital asset.
The assessee is not in the business of purchase and sale of membership in the Stock Exchanges. What was purchased and sold by the assessee is only capital asset, the transfer of which gives rise to income under the head capital gains.
6. The provisions relevant to decide the issue in question before me are extracted below: 2(29A) 'Long term capital asset' means a capital asset which is not a short-term capital asset 2(29B) 'long term capital gain' means capital gain arising from the transfer of a long-term capital asset 2(42A) 'Short term capital asset' means a capital asset held by an assessee for not more than thirty-six months immediately preceding the date of its transfer.
Provided that in the case of a share held in a company or any other security listed in a recognized stock exchange in India or a unit of the Unit Trust of India established under the Unit Trust of India Act 1963 (52 of 1963) or a unit of a Mutual Fund specified under Clause (23D) of Section 10 (or a zero coupon bond), the provisions of this clause shall have effect as if for the words "thirty-six months", the words "twelve months" had been substituted.
The sum and substance of the aforesaid provision is that if a capital asset is in the nature of share or security specified in the proviso to Section 2(42A) that will give rise to long-term capital gains if the same is held by the assessee for more than 12 months immediately preceding the date of transfer. The assessee in this case has purchased the asset on 15.3.1990 and sold the same on 18.12.1991. Hence, the capital asset is held for approximately 21 months. If one were to hold the asset in question as a share then it gives rise to a long-term capital gain. If the asset is not the share then it will give rise to a short-term capital gain. For determining what is the nature of the asset held by the assessee, it is necessary for me to go into the structural aspects of the Bangalore Stock Exchange Limited. It is explained to me that the Bombay Stock Exchange is formed as an Association of Persons whereas the Bangalore Stock Exchange Limited is incorporated as a company under the Companies Act, 1956. A certificate of incorporation issued by the Registrar of Companies, Bangalore on 03.04.1962 clearly shows that the Bangalore Stock Exchange Limited is incorporated as a Limited Company under the Companies Act 1956. The authorised capital of the company is Rupees one lakh divided into 400 shares of Rs. 250/- each. One of the requirements of doing the activity in Bangalore Stock Exchange is first to acquire a share in the Bangalore Stock Exchange Limited. A share in the Bangalore Stock Exchange Limited did not ipso facto entitle the share holder to carry on a share broking activity in Bangalore Stock Exchange Limited. The membership of Bangalore Stock Exchange Ltd., is to be obtained in accordance with clauses 3 & 4 of the Articles of Association of Bangalore Stock Exchange Limited. If one were to carry on a share broking activity in Bangalore Stock Exchange Ltd., he is required to acquire the share in Bangalore Stock Exchange Ltd. and that could only be acquired from an existing holder. For that reason the share of Bangalore Stock Exchange carry considerable prices. Although the share has a face value of Rs. 250/-, it was purchased at a price of Rs. 3,30,000/- and sold for a price of Rs. 17 lakhs. Although the agreement dated 15.3.1990 between the assessee and Shri M.L. Gopala Shetty mentions that the assessee has acquired the ongoing business along with the tenancy right of office, furniture, telephone etc. The assessee has filed an affidavit stating that what was purchased and sold was mainly share in the Bangalore Stock Exchange Ltd. and no other asset were sold. The share in the Bangalore Stock Exchange Limited can be compared with a membership of a Co-operative Housing Society. The Member of a Co-operative Housing Society only owns the shares in that society. The right to enjoy or derive from, any amount or building belonging to the Cooperative Housing Society is merely an incidental right flowing from the ownership of the shares. A Member of a Co-operative Housing Society cannot sell all his shares in a co-operative housing society and still retain any interest in any property, whether land and building, belonging to the Co-operative Society and allotted/let out to the member. Similarly, a member of a Co-operative Housing Society to whom a flat or land allotted cannot transfer such land or building without selling the shares held by him. Hence, when the question comes up for consideration as to which is the relevant date, while computing the capital gains tax in case of transfer of his shares by a person who is a member in a co-operative housing society, the relevant date would be the date on which the member acquires the shares in the co-operative housing society and the date on which the member had sold his shares in the said Co-operative society. Identical issue arose before the Hon'ble Gujarat High Court in the case of CIT v. Anilaben Upendra Shah , wherein a flat was allotted to that assessee by the society in November 1979. The possession of the flat was handed over by the said society to the assessee only in October 1981. Thereafter the assessee entered into an agreement to sell the flat on October 8, 1982 and in performance of such contract the assessee sold the flat on December 4, 1982. The question arose whether the assessee derived a short-term capital gains or long term capital gains; at that relevant point of time it would be a long term capital gains; the asset is held for 36 months; otherwise it is a short-term capital gains. The Hon'ble Gujarat High Court appreciated the fact that the assessee acquired the shares in a co-operative housing society by allotting the flat in the year 1979 and she transferred those shares in December 1982 and come to a conclusion that the shares were held for more than 36 months and accordingly the gains in question were long, term capital gains. In other words, the Gujarat High Court considered the period of holding of the shares and not the period of the possession of the flat for the purpose of arriving at the nature of capital gains. In my opinion, the decision of the Hon'ble Gujarat High Court in CIT v. Anilaben Upendra Shah (supra) entirely answers the point in dispute before me. By no stretch of imagination it can be said that what the assessee sold was not share held in a company. Once that is so, the requirement of proviso to Section 2(42A) are fully met. It must also be appreciated that the assessee could not for various reasons acquire any significant right to do brokerage business in Bangalore Stock Exchange. The learned counsel for the assessee has demonstrated before us that the ownership right of share plus something else has to be done for acquiring the licence to do business in Bangalore Stock Exchange. That something else extra was never acquired by the assessee and what was sold was only a share certificate held by the assessee in Bangalore Stock Exchange Limited. In my view the share of Bangalore Stock Exchange answers the description of shares held in a company within the meaning of proviso to Section 2(42A). The period of holding such share was more than twelve months and therefore satisfy the condition laid down in Section 2(29A) of the Act and the gains arising therefrom is clearly in the domain of long term capital gains assessable to tax. On this line of reasoning, I entirely agree with the views of the learned Accountant Member.
7. The matter will now be placed before the regular Bench to dispose of the appeal in conformity with the majority opinion.
1. Since there is a difference of opinion between us in relation to the assessee's ground of appeal No.2 we refer the following points of difference to the Hon'ble President for nominating Third Member so that the points of difference may be decided according to the opinion of the majority of the Members of the Appellate Tribunal.: Whether on the facts and in the circumstances of the case the Accountant Member is justified that profits or gains arising to the assessee from the transaction with Shri R.M. Venkatachalam are chargeable to tax as long term capital gain or the Judicial Member is justified that the same are assessable as the short term capital profits?T.K. Sharma S.C. TiwariJudicial Member Accountant Member 1. This appeal has been filed by the assessee on 20.2.1997 against the order of the ld. CIT(A), Central IV, Mumbai dated 30.12.96 in the case of assessee in relation to asssessment order Under Section 143(3) for A.Y 92-93.
2. In this appeal, the grounds as originally taken by the assessee were subsequently substituted by assessee's letter dated 6.10.04 so as to file concise grounds of appeal as required under Appellate Tribunal Rules. The ground of appeal No. 1 is directed against disallowance of the assessee's claim of deduction on account of debts/loans and advances written off to the extent of Rs. 26,50,168/-. Out of the assessee's claim the ld. AO did not accept the following amounts: 3. Out of these, the assessee did not press in respect of the sum of Rs. 45,000/- in the account of M/s. Nikil Traders. As to Ramchandra Rane, the assessee explained that he was Peon of the assessee whose services had been terminated as he was found to have stolen some share certificates. The Ld. AO did not accept the assessee's contention bee ause no police case was filed against Shri. Ramachandra Rane and the amount in question had not been shown as income of the assessee in any of the assessment orders and therefore the requirements of Section 36(2) were not satisfied. On the same basis, the ld. CIT(A) upheld the disallowance. During the course of hearing before us the ld. Counsel for the assessee argued that the assessing officer had not doubted the genuineness of the transaction. His objection as to why police case was not filed impinged upon the assessee's discretion as to how to carry out his business. The conduct of the assessee was based on the commercial expediency. As to the objection in relation to provisions of Section 36(2) the assessee argued that if the claim could not be allowed as bad debt, it could be allowed as business loss suffered by the assessee in the ordinary course of his business. In support of that contention, the ld. counsel of the assessee placed reliance on the Supreme court Judgement reported in 155-ITR 152(SC) and certain Tribunal decision as mentioned in the synopsis filed by the assessee.
On consideration of the matter, we see considerable force in these contentions of the ld. counsel. It is settled legal position that any loss arising to the assessee in the revenue field on account of non recovery of business debts are allowable as deduction even if they do not fall in the category of Section 36(2)(i). We do not see force in the argument of the ld. AO that the assessee should have made a police complaint inorder to be eligible for deduction. We, therefore direct deduction of the sum of Rs. 36,725/- as claimed by the assessee. As to Shri Amritlal Bajaj, he also was a member of Delhi Stock Exchange and was regularly dealing with the assessee. After his death, certain amounts could not be recovered from him. The ld. AO did not allow the deduction for want of evidence. The ld. CIT(A) concurred with the view taken by the ld. AO. During the course of hearing before us the ld.Counsel for the assessee stated that the transactions with Amritlal & Co. were duly recorded in the books of account of the assessee. Nothing adverse or contrary had been brought on record by the assessing officer. The ld. Counsel also placed reliance on the decision of the ITAT, Special Bench in the case of Oman International Bank 100 ITD 285(Mum)(SB). On consideration of the matter we are of the view that as the assessee's transactions with this party were recorded in the books of account and all details pertaining to the debt in question could be found there, the ld. AO is not justified in holding that there was no evidence as to bad debt. In the absence of any information/material to the contrary, the assessee's claim of deduction could not be rejected.
We therefore direct deduction of the sum of Rs. 78,358/-.
4. We now come to the main dispute relating to write off of the sum of Rs. 24,90,085/- in the account of M/s. Dhanraj Mills Pvt. Ltd. The ld.AO has noted that M/s. Dhanraj Mills Pvt. Ltd. and its Director T.B.Ruia have been notified by the Special Court under the Special Court Ordinance 1992. The ld. AO has however not allowed assessee's claim for the reason that even after M/s. Dhanraj Mills had been notified by the Special Court, the assessee continued to have transactions with the party. Secondly, the assessee was having both loan account and trading account. In any case the amounts written off had not been offered for tax as income in any of the previous years including the current year.
The ld. AO inquired of the assessee as to whether any amount had subsequently been recovered to which the assessee submitted that subsequent events were not relevant and were to be dealt with separately. The ld. AO held that assessee's claim failed because the amounts had not been assessed as income at any point of time. Even otherwise the assessee's claim was pre-mature until the final verdict of the Special Court. The loss to the assessee, if any, would be ascertained as and when the assets of Dhanraj Mills were distributed by the Custodian. He therefore, disallowed entire deduction of Rs. 24,90,085/-.
5. During the course of hearing before the ld. CIT(A) the assessee submitted that any loss arising to the assessee in the ordinary course of its business was allowable deduction. Hence, if the assessee's claim was not allowed under Section 36(2) the same could be allowed Under Section 37(1) or as business loss. The treatment given by the assessee in his books of account was in accordance with Accounting Standards prescribed by the Institute. M/s. Dhanraj Mills had after being notified communicated to the assessee its inability to repay any amount. There was huge demand of Rs. 183 crores against the meager capital of Rs. 10 lakhs of the party. The recovery of the income tax dues was on priority and therefore there was no scope of any funds being left for distribution among other creditors. The ld. CIT(A) held that assessee's claim was not allowable because the business of the assessee was as a Share Broker in Mumbai Stock Exchange. The amounts advanced to M/s. Dhanraj Mills in the loan account could not therefore be treated as business loan advanced by the assessee. Money lending was not the business conducted by the assessee. If the assessee had advanced loan to give financial accommodation to a 3rd party, the interest earned on such advances was only a consequence of advancing of loan without any business necessity. The business of the assessee could be carried on even if such money was not lent. The ld. CIT(A) therefore held that the loss incurred by the assessee was a capital loss. For that purpose he placed reliance on Tribunal decisions in ITA No.5266/Bom/95 and ITA No. 763/BOM/1992. Secondly, even if certain outstanding debt related to unpaid purchase price of shares that could not be treated as debt written off within the meaning of Section 36(2) because the assessee declared only brokerage income and selling price did not belong to the assessee but to the assessee's client. For that reason also the requirements of Section 36(2) were not satisfied. The ld. CIT(A) therefore rejected the assessee's grounds of appeal in relation to Dhanraj Mills.
6. During the course of hearing before us, the ld. Counsel refered to paper book pages 31 to 41 and pointed out that the assessee was having regular trade dealing with M/s. Dhanraj Mills. The assessee had advanced to this party a sum of Rs. 25 lakhs on 23.1.92 and another sum of Rs. 14 lakhs on 24.1.92. Out of these amounts, a sum of Rs. 9,10,000/- was received on 11.2.92. No further amounts were received thereafter. There was a balance of Rs. 5,12,650/- in the trading account and after adjustment of the same the balance amount of Rs. 24,90,085 became irrecoverable. That was because M/s. Dhanraj Mills Pvt. Ltd. was declared notified party under Special Court Act. There was a huge income tax liability of 183 crores as against total capital of Rs. 10 lakhs of that party. The ld. Counsel argued that there was no force in the contention of the assessing officer that the assessee had continued to have dealings with M/s. Dhanraj Mills even after the later was notified. He pointed out that under the rules of Bombay Stock Exchange, badla transaction had to be compulsorily carried out. The assessee had not entered into any fresh transaction with M/s. Dhanraj Mills after 31.3.1992. The entries in the books of account of the assessee for financial year 92-93 related to compulsory carry over of all transactions and adjustment entries made in respect of earlier Badla transactions.
7. As to the second objection of the ld. AO that M/s. Dhanraj Mills was notified on 29.5.1992, the ld. Counsel argued that notification was culmination of the proceedings going on against the party. In any case, the assessee had been notified much before the accounts of the assessee for financial year 91-92 were finalized and closed. There was no point in carrying forward these amounts to the next financial year when it had already become known that M/s. Dhanraj Mills had been notified. In support of this argument the ld. counsel referred to paper book page 1 and pointed out that the audit report for financial year 91-92 was dated 24.6.1993. The ld. counsel strongly relied upon the judgement of the Hon'ble Calcutta High Court reported in 245 ITR 724 (Cal.) and the decision of Mumbai Special Bench reported in 100 ITD 285 (Mum)(SB). The ld. Counsel argued that there was no force in the contention of the AO that the debt had not become bad as the special court had not given final verdict and the assets of M/s. Dhanraj Mills had not been distributed. He argued that it was totally impracticable to hold that amounts could not be written off till such time the last penny was distributed. That aspect of the matter had been taken care of by the decision of ITAT special bench in the case of Oman International Bank (Supra).
8. As to the argument of the ld. CIT(A)that the loss in the case of the assessee was a capital loss, the ld. counsel argued that the assessee was into money lending business for quite some time. He referred to the balance sheet of the company as on 31.3.1992 and pointed out that as on 31.3.92 the assessee had given loans to the parties on interest amounting to Rs. 1,44,67,020/-. For financial year 91-92, the assessee had shown income by way of interest on loan amounting to Rs. 12,35,958/-. He argued that on such facts it was ridiculous to state that the assessee was not engaged in the business of money lending. The contention of the CIT(A) that the amounts had been advanced by the assessee to M/s. Dhanraj Mills as a stray transaction of financial accommodation to a 3rd party was factually incorrect. The assessee was indeed in the business of earning interest income on lending money at a large scale.
9. The ld. counsel for the assessee stated that for assessment year 93-94, the decision of ITAT'D' Bench, Mumbai dated 26.2.2003 in ITA No.3710/Mum/1997 was against the assessee. He referred to para 9 of that order and pointed out that the assessee's claim was not accepted as the assessee had failed to show that it had been carrying on regular money lending business. Thereupon the assessee had filed a miscellaneous application being MA No. 262/Mum/2003. The assessee then referred to the balance sheet as on 31.3.1993 and pointed out that there were loans, advances and deposits given to the extent of Rs. 1,84,88,369/- that was supported by a list of loans advanced. The Tribunal observed that during the course of hearing, it was not pointed out that there were two amounts of Rs. 1,84,88,369/- and Rs. 2,68,15,381 of which Rs. 83,27,012 was infact net balance. The Tribunal therefore held that there was no mistake that could be said to be apparent from the record. The ld. counsel argued that the decision of Tribunal for A.Y 1993-94 was not applicable because in that year, the assessee had failed to produce complete facts. As against that for assessment year before us Annexure B to the balance sheet enlisted the particulars of loans and advances amounting to Rs. 1,44,67,020/- as given at page 7 of the paper book. The profit and loss account disclosed the income of Rs. 12,35,988/- as at page 8 & 9 of the paper book.
10. The ld. DR strongly relied upon the observations of the CIT(A) particularly as given in the first paragraph at page 9. In so far as the trade debts were concerned, the same were in the nature of share purchase price payable by the debtor to the seller and not the assessee who was only a broker. For that reason, provisions of Section 36(2) did not apply as to the loan amounts given. The assessee was not in regular business of money lending. This point had also been decided against the assessee by the Tribunal for A.Y 1993-94. The ld. DR strongly emphasized that the assessee had not obtained licence to carry out money lending business and therefore the assessee could not be treated to have carried out any business of money lending. During the course of hearing, we asked the Ld DR to point out the provisions of law that were contravened by the assessee or because of them the assessee could not be treated to have carried out the business of financing loans for the purpose of earning of interest income. No such provisions have been brought to our notice.
11. We have carefully considered the rival submissions. There is force in the contention of the revenue that unpaid purchase prices of shares of M/s. Dhanraj Mills did not fulfill the requirement of Section 36(2)(i) because what the assess offered to tax was brokerage income and the assessee was not engaged in purchase and sale of shares. At the same time the fact remains that the bad debt of such nature is an integral part of the business that the assessee carried on. As a broker, the assessee was responsible for satisfaction of debt of seller in the event of the purchaser defaulting. The loss has therefore arisen in the ordinary course of business of brokerage. As to the loan account the facts pointed before us speak for themselves. The argument of the ld. CIT(A) that the assessee had carried out only stray activities of financial accommodation to 3rd party is not correct. The assessee was engaged in advancing money with a view to earn interest income. During the year itself, the assessee received interest income of Rs. 12,35,958/-. The amounts advanced by loan as on 31.3.92 amount to Rs. 1,44,67,020. These amounts were advanced to a number of parties as specified at page 7 of the assessee's paper book. The assessee has been carrying out similar activities in earlier years and subsequent years.
We see force in the contention of the assessee that the order of Tribunal for assessment year 93-94, did not constitute a precedent because full fact of the assessee were not presented before the H'ble Tribunal. This aspect is born out from the order of the Tribunal dated 5.12.2003 in MA No. 262/Mum/2003. On such facts it is incumbent upon us to decide the case before us on the basis of facts of the case as presented instead of mechanically following the outcome of the Tribunal Order for A.Y.93-94. The authority in this respect may be seen in the judgement of Hon'ble Supreme Court in the case of CIT v. Brijlal Lohia 84 ITR 273 (SC). As to the argument of revenue that the amounts in question have not been assessed as income of the assessee in any assessment order, it is settled position that any business loss of revenue in nature incurred by the assessee on account of non recovery of debts has to be allowed as deduction if not as bad debt Under Section 36(i)(vii) then as business loss Under Section 28 of the Act.
As to the argument that write off on the part of the assessee is premature, the same is not at all justified. To argue that loss arises only when the debtor company is completely liquidated and last penny available is distributed is very unfair and unrealistic. It is well settled that in income tax matters, the assessments are to be made taking into view such commercial expediency that a prudent man engaged in trade would understand. For all practical purpose, once M/s. Dhanraj Mills was notified by Special Court and income tax department staked its claim to the tune of Rs. 183 crores the assessee could take into consideration that a business loss had arisen. Taking into consideration these aspects, we direct that the assessee be allowed deduction of the sum of Rs. 24,90,085 as claimed, as business loss having arisen to the assessee on account of debt owed by M/s. Dhanraj Mills having become bad and irrecoverable. We direct accordingly.
12. Ground of appeal No. 2 is directed against the ld. CIT(A) rejecting the claim of the assessee that profit of Rs. 13,70,000/- received by the assessee on sale of shares of Bangalore stock exchange constituted long term Capital gain. Facts of the case leading to this ground of appeal as recorded by authorities below are that with a view to expand the existing brokerage business the assessee acquired business of one Shri. M.L. Gopal Shetty on 15.3.1990 for Rs. 3,30,000/-. The main purpose of purchasing that business was membership share that Shri.
Gopal Shetty held in Bangalore Stock Exchange. However, on account of the assessees not getting SEBI permission that business was sold by the assessee on 18.12.91 to one Shri. R.M. Venkatachalan for Rs. 17 lakhs.
The assessee argued that it had acquired share in Bangalore Stock Exchange as there was no asset worth the name acquired from Gopal Shetty apart from the aforesaid share. The share carried the membership right in Stock Exchange of Bangalore and permitted the holder to trade there but the fact remained that what was acquired by the assessee was a share certificate of Bangalore Stock exchange. As the share certificate was sold after a gap of more than one year, the assessee claimed that profit arising on sale of share was a long term capital gain within the meaning of Section 2(29B) read with 2(29A) and 2(42A).
The ld. AO found that the assessee was having 2 ledger accounts in its books of accounts for purchase and sale of shares. First account comprised of transactions carried on behalf of clients while the second account comprised of transactions carried out on own account. The transaction of purchase and sale of shares of Bangalore Stock Exchange did not figure in any of those two accounts. The assessee explained that Mr. M.L. Gopal Shetty was having a running account with the assessee and the sum of Rs. 3,30,000 paid to him for purchase of one share of Bangalore Stock Exchange was credited to his account. As on 31.3.1990 there was a debit balance of Rs. 10,01,288 in that account that included the aforesaid sum of Rs. 3,30,000 also. The ld. AO held that all sundry debtors shown in the books of account of the assessee represented business assets and not capital assets. Therefore profit arising on sale of such business asset should be taxed under the head "Profits and gains of business or profession." If the assessee wanted to show the purchase of shares of Bangalore Stock Exchange as investment in a capital asset, he should have then shown the purchase under the head investments in his books of account. Such investments should have been offered for wealth tax purpose for A.Y. 91-92, but that was not done. Thus the fact of the matter was that the assessee had not given to one share of Bangalore Stock Exchange, the same treatment as he had given for the shares acquired by him in open market. For that reason it did not matter that the share was sold after 12 months. In the case of the assessee, where large number of shares were purchased, the treatment given in the accounts could alone show whether the shares were held as capital asset or they were held as stock in trade. The ld. AO alleged that in order to avail of the benefit of long term capital gain, the assessee had passed journal entries as on 31.3.92. Merely by passing journal entries, stock in trade could not be converted into capital asset. Even if the journal entries were relied upon the effect was that there was purchase on 31.3.92 and sale on same date. On such reasoning, the ld. AO assessed the profit of Rs. 13,70,000 as business income of the assessee.
13. During the course of hearing before the ld. CIT(A) the assessee stated that share in stock exchange was a capital asset and the same was held by the assessee for more than 12months. There was therefore transfer of long term capital asset within the meaning of Proviso to Section 2(42A). The treatment given in the books of account of the assessee was not material. The assessee argued that the share in Bangalore Stock Exchange offered membership rights to the holder which became a source of income to the holder of the share. Such share could not become stock in trade. The ld. CIT(A) held that what was material was the true nature and quality of the receipt, as held in the judgement in the case of Chowringhee Sales Bureau Pvt. Ltd. 87 ITR 540(SC. The share in Bangalore Stock Exchange entitled the holder to carry on brokerage business, such shares were neither quoted in the stock exchange nor traded like other shares. Such shares fell in a distinct category unlike other equity shares. Those shares were neither purchased nor sold like other shares and the same were acquired with the intention to carry on the business of share broker. Therefore the shares were not purchased as an investment. What the assessee purchased was a right to do business. On sale of such rights the profits were chargeable to tax as business income and not capital gains at all.
Further more, even if, presuming though not admitting the share in question represented a capital asset Proviso to Section 42(A) was not attracted. The share was having unique features that distinguished it from what was ordinarily understood as a share. Such share, if sold before 36months of acquisition represented sale of a short term capital asset resulting into short term capital gains. Based on such reasoning the ld. CIT(A) rejected the assessee's ground of appeal.
14. During the course of hearing before us on 29-08-2006 the ld.Counsel for the assessee argued that by no means the share could be treated as stock in trade as held by the ld. AO. The share was essential to entitle the holder to carry on business of broker in Bangalore stock exchange. The share was therefore a capital asset and not stock in trade. The assessee was certainly not in the business of buying and selling stock exchange memberships. At the time of acquisition, the assessee's intention was to expand its share broker business. As that intention could not materialize the share was sold.Thus what the assessee purchased and sold was a capital asset. The ld.AO was not justified in deciding this issue on the basis of his interpretation of the entries made in the books of accounts of the assesee. Even if the ld. AO correctly read the entries in the books of accounts, the liability of the assessee to pay tax was not depending upon the entries made in the books of account. There was no justification for the assumption of CIT(A) that if a right to do business was sold, the resultant gain also had to be business income only. The right to do business was always in capital field and therefore had to be considered as capital asset. As to the second argument of the CIT(A) that the shares in stock exchange were not shares in the ordinary sense, the ld. Counsel argued that the fact of the matter was that the nomenclature given by Bangalore stock exchange was "Share". Bangalore stock exchange was floated as a limited companyand in that sense shares of Bangalore Stock Exchange were not different from other shares. That it entitled right to do business was an additional benefit but what the assessee held was a share in Bangalore stock exchange that was a company. The ld. counsel thus argued that Proviso to Section 2(42A) squarely applied.
15. The ld. DR relied upon the judgement of Hon'ble Gujarat High Court reported in 262 ITR 657 (Guj.). The ld. departments representative strongly relied upon the reasoning of the ld. CIT(A). He argued that what was being called as stock exchange card in Bombay Stock Exchange was called share in Bangalore Stock Exchange. Therefore share in Bangalore stock exchange was not like an equity share. It was a different specie and therefore it fell outside the ambit of Proviso to the Section 2(42A).
16. After hearing of the case on 29-08-2006, we felt that the facts of the case were required to be brought on record with more clarity. There was certain amount of confusion as to what exactly the assessee sold on 18-12-1991 to Shri RM Venkatachalam for Rs. 17 lakhs. The confusion arose because we found at certain points in the orders of the authorities below as well as submissions of the learned counsel of the assessee during the course of hearing by us there was mention of Stock Exchange Membership Card. The question arose as to whether the assessee sold only a share of Bangalore Stock Exchange or he sold it along with some Membership Card of entitlement to carry on stock broking business.
Secondly the assessee's agreement of purchase with Mr. M.L. Gopal Shetty dated 15-03-1990 stated that the assessee would be put as the vendor's nominee in possession of the vendor's share broking business and that the vendor would assign that business including the tenancy of the office, furniture, telephone to the assessee. We therefore fixed the case for further hearing and the same was heard on 15-12-2006 and 21-12-2006. During the course of further hearing of this appeal the learned counsel for the assessee explained that there was no such thing as Membership Card as far as Bangalore Stock Exchange at the material time was concerned. Bangalore Stock Exchange had been incorporated and was a company while Bombay Stock Exchange and Ahmedabad Stock Exchange were Association of Members. Bangalore Stock Exchange comprised of share holders while Bombay Stock Exchange and Ahmedabad Stock Exchange comprised of its members. The learned counsel extensively referred to Memorandum of Association and Articles of Association of Bangalore Stock Exchange and pointed out that only a share holder of Bangalore Stock Exchange could carry on share broking business in Bangalore Stock Exchange. A share in Bangalore Stock Exchange did not ipso facto entitle the share holder to share broking activities in Bangalore Stock Exchange. At the same time holding of a share in the Stock Exchange was an essential qualification. With a view to expand the existing business the assessee purchased a share in Bangalore Stock Exchange. However, he could not be elected for carrying on share broking activity in the Exchange and therefore the share purchased by him was rendered to be not of much use and accordingly sold. The learned counsel further explained that any person, who wished to carry on share broking activity in Bangalore Stock Exchange was required to acquire a share of Bangalore Stock Exchange and that could be acquired only from an existing share holder. For that reason the shares of Bangalore Stock Exchange carried considerable price. As to our query whether along with the share the assessee also sold any tenancy rights, office furniture, etc. the learned counsel for the assessee stated that his instructions were that all that the assessee sold was one share in Bangalore Stock Exchange and nothing else. To put the matter beyond doubt we directed the assessee to file an affidavit and that was done on 21-12-2006. In his affidavit the assessee has categorically stated, "I say that, the same Eq. share of Bangalore Stock Exchange Ltd. was sold by me to one Mr. R.M. Venkatachalam on 14.12.1991 at a net consideration of Rs. 17,00,000/-. I say that only One Eq. share of M/s. Bangalore Stock Exchange Ltd. was Sold to Mr. R.M. Venkatachalam and no other assets were Sold and transferred to him." 17. The learned departmental representative argued that the clarification given by the assessee did not alter the legal position.
The fact of the matter was that what the assessee purchased and sold was not an ordinary share of an Indian company. The share was pre-requisite to carry on share broking business and therefore it constituted a business asset that yielded business income. As the same was sold before expiry of 36 months, the assessee could under no circumstances claim to have received long term capital gains.
18. We have carefully considered the rival submissions. In our view the ld. AO entirely erred in insisting upon the share as a stock in trade of the assessee for the simple reason that the amount had been shown in the balance sheet of the assessee under the head sundry debtors. The assessee neither included it in stock in trade nor in investments as far as the books of account are concerned. Thus entries in the books of account did not support the case of revenue either. Moreover entries made by the assessee in the books of account do not determine the chargeability of tax that is fixed by law and not by the accountant of the assessee. It is the correct nature of the transaction that is required to be seen. Reference in this respect is invited to Hon'ble Supreme Court judgements reported in 82 ITR 363 (SC) and 116 ITR-1 (SC). We also see no logic in the inference drawn by the ld. CIT(A) that right to do business was on a par with the trading assets of the assessee. In law a profit making apparatus is always treated as a capital asset. It is not the case of the revenue that the assessee was engaged in the business of trading in stock exchange memberships. It can not therefore be denied that the assessee acquired a capital asset and as the same was sold by the assessee, there is transfer of a capital asset chargeable to tax under the head "Capital gains". The point at issue, therefore is whether or not Proviso to Section 2(42-A) applies. If the assessee's case is covered by the Proviso, the gains are chargeable to tax as long term capital gain. If the proviso does not apply, the gains are to be charged to tax as short term capital gain on account of having been sold before expiry of 36 months from the date of acquisition. We find that Proviso is attracted if the asset sold is "a share held in a company". Prima-facie it can not be denied that the assessee held a share in Bangalore Stock Exchange Limited that was a company and that share was sold by the assessee. The ld. CIT(A) has sought to distinguish the case of the assessee on the ground that by way of its intrinsic nature the share held by the assessee was different from the shares that are commonly bought, held and sold. The ld. CIT(A) has thus sought to give a purposive interpretation to Proviso to Section 2(42A). Settled legal position is that where the language of a statute is clear and unambiguous, more so of a taxation statute, there is no room for any interpretation or intendment.
References, in this respect may be made to the judgement of the Hon'ble Supreme Court in the case of CIT v. T.V. Sundaram Iyengar & Sons Pvt.
Ltd. 101 ITR 764 (SC). It cannot by any means be held that what the assessee sold was not "a share held in a company". Once that is so the requirements of the Proviso to Section 2(42A) are fully met. We therefore hold that the assessee has rightly claimed the sum of Rs. 13,70,000 is chargeable to tax as long term capital gain. This view is supported by ITAT Chennai Special Bench order dt. 14th September 2006 in the case of Shri R.M. Valliappan. We direct the assessing officer to compute the assessee's tax liability accordingly.
19. Ground of appeal No. 3 is directed against disallowance of assessee's claim of loss amounting to Rs. 1,53,500/-. Similarly, ground of appeal No. 4 is directed against disallowance of the assessee's claim of loss amounting to Rs. 900710/-. Facts of the case leading to these grounds of appeal briefly are that the assessee purchased and sold certain shares for M/s. Lupin Laboratories Ltd. The ld. AO found that those transactions were carried out without taking actual delivery of shares by the client. According to the ld. AO, the assessee paid difference of sale and purchase amounts to M/s. Lupin Laboratories several months before the actual transaction and that showed that only paper entries had been created. The ld. AO recorded the statement of Shri. S.S. Kulkarni, Sr. Finance Manager of the client. Admittedly that statement was recorded by the AO prior to having the knowledge of assessee's transaction with Lupin Laboratories. In that statement Shri.
Kulkarni stated that in all its share transactions that company had earned profit and no loss and that nature of the transactions was speculation transaction. The ld. AO found that profit of Rs. 44,20,875/- was given to Lupin Lab by way of paper transactions.
Corresponding loss was incurred by the following parties.
20. The ld. AO accepted that the losses were incurred by Rajkumar Bothra and K. Motiram Vakil as those parties had furnished confirmations. As to the loss incurred by the assessee, the ld. AO held that as those were paper transactions only and not genuine transactions, the assessee's loss was to be disallowed entirely. Even if, the transactions were treated genuine transactions still, the loss claimed by the assessee was not allowable as being a speculative loss.
21. Similarly, the ld. AO found that the assessee had entered into certain transactions of various companies as referred to in para 11 of the assessment order. The ld. AO held that the assessee had not followed any consistent method to work out profit and loss on its share trading. Those transactions had been made without taking actual delivery. The transactions had been incurred through a broker viz. K.Motiram Vakil. It appeared to the ld. AO that the assessee had used K.Motiram Vakil for mere paper transactions. Therefore, genuineness of the transaction was doubtful. The ld. AO therefore held that the loss was disallowable either not based on any genuine transactions or in any case on account of being speculation loss. On assessee's appeal the ld.CIT(A) held that the genuineness of the transaction was doubted as the same were recorded in the books of account of the assessee after the date of transactions. Even otherwise there was no evidence of actual delivery. The ld. CIT(A) doubted as to how transactions in group 'B' shares could be made without actual delivery. That could happen only if transactions were jobbing transactions for which no evidence had been led. As to the loss of Rs. 9,00,710/- claimed by the assessee, the ld.CIT(A) held that all those transactions were through Shri. K. Motiram Vakil only and except ACC shares all other shares belonged to group B shares where actual delivery of shares was necessary unless the transaction of purchase and sales were squared up in the same settlement. The ld. CIT(A) also alleged that the assessee had not followed any consistent method of accounting. He, therefore confirmed the disallowance as made by the assessing officer.
22. During the course of hearing before us, the ld. counsel for the assessee argued that at worst the ld. AO could have treated the loss incurred by the assessee as speculation loss. In that event, he should have allowed the assessee benefit of carry forward of loss as a speculation loss. He argued that the finding of the departmental authorities that there was no genuine transaction was based entirely on suspicion, surmises and conjectures. The assessee had duly recorded the transactions and the same had been confirmed by the parties concerned.
23. On consideration of the matter, we find that the ld. AO has not been able to establish that Shri. K. Motiram Vakil was merely a name lender and the transactions in question did not take place. The ld.CIT(A) has expressed doubt because some of the shares belonging to 'B' category though he admits that the transactions could be squared up if purchase and sale was made within the same settlement period. On consideration of the matter, we are of the view that the alternate claim of the assessee that the losses be allowed as speculative transactions has been kept aside without adequate material. It is true that these transactions were incurred without actual delivery but from that the assessing officer could not draw inference that the transactions were not genuine. We therefore see considerable force in the contention of the assessee that the loss claimed should be treated as speculative loss. We therefore restore the issues relating to the assessee's claim of loss of Rs. 1,53,500/- and Rs. 9,00,710 to the file of the ld. AO for decision afresh. He should examine whether apart from non delivery of scripts is there any material to hold that the transactions are not genuine. If the only objection is that the party has not taken actual delivery of the shares, the loss has to be allowed at least as speculative loss to be adjusted against future speculative profit. The ld. AO is directed to decide these issues afresh after allowing the assessee reasonable opportunity being heard din the matter.
24. Ground of appeal No. 5 is directed against disallowance of the sum of Rs. 2,00,000/- paid as special brokerage to Shri J.P. Merchant and M/s J.R. Motishaw. During the course of hearing before us, it was argued that this issue is covered in favour of the assessee by the order of ITAT Mumbai 'D' Bench dated 31.7.2001 in the case of the assessee in ITA No. 6517/Mum/96 for assessment year 91-92. Following the same we direct the ld. AO to allow the assessee's claim of deduction.
1. I have carefully gone through the orders proposed by my learned brother in this appeal and had also discussed with him the issue involved in ground No.2. However, since I am unable to persuade him to subscribe to the view proposed by my learned brother in respect of Ground No2, I hereby pass a separate dissenting order.
2. The facts of the case are stated by my learned brother in para 12 of the proposed order. The submissions made by the ld. Counsel for the assessee before the ld. CIT(A) are also briefly stated by my learned brother in para 13 of the impugned order. The ld. CIT(A) rejected the same as per detailed reasoning given on pages 9 to 13A in the impugned order, which are reproduced hereunder: The second ground of appeal is against the assessment of profit on sale of Bangalore Stock Exchange Card as business as against the appellant's claim of such profit as long term capital gain. The appellant had shown long term capital gain of Rs. 13,70,000 on sale of Bangalore Stock Exchange card purchased by the appellant from one Mr. M.L. Gopala Shetty as per agreement dated 25.3.1990 for Rs. 3,30,000 and had sold the same to Mr. R.M. Venkatachalam on 18.12.91, for Rs. 17,00,000 as mentioned by the AO in the assessment order. Mr. Shetty was to assign the business including the tenancy of the office, furniture, telephone to the appellant or his nominee by agreeing to execute a power of attorney in favour of his nominee for conducting the business. In view of the above, the AO was of the opinion that the appellant had taken over the business of Mr. Shetty for Rs. 3,30,000.
It was argued by the appellant that the Bangalore Stock Exchange was a limited company and to become a member of the Stock Exchange, a share of the said exchange had to be bought which was bought for Rs. 3,30,000 on 15.3.90. However on account of restriction of dual membership (the appellant was already a member of BSE), the appellant could not become a member of Bangalore Stock Exchange and therefore he sold the said shares for Rs. 17,00,000 on 18.12.1991 resulting in long term capital gain on sale of said share. (Period of holding being more than 12 months).
The AO looked into the treatment given by the appellant, in his books of account, as far as purchase and sale of said share of Bangalore Stock Exchange was concerned. He found that the appellant had shown the purchase of Bangalore Stock Exchange card under the head 'sundry debtors' in the books of Shri Mahesh J. Patel (wherein purchase and sale of shares held in stock in trade were recorded), right from the date of purchase till the date of sale. It has also been observed by the AO that the appellant had passed journal entries on 31.3.1992 by transferring the entries regarding purchase and sale of Bangalore Stock Exchange Card from the books of M/s.
Mahesh J. Patel to the personal books of Shri Mahesh J. Patel (wherein all the investments are shown) to convert stock-in-trade into capital asset and that these journal entries show that the Bombay Stock Exchange Card was purchased and sold on the same day and resultant transaction would result in short term capital gain.
In view of the above facts the AO assessed profit of Rs. 13,70,000 as business income rejecting the claim of the appellant that it was a long term capital gain earned by transfer of Bangalore Stock Exchange Card against which the appellant has come in appeal.
It was pleaded in appeal proceedings that the share in Stock Exchange was a "capital asset" as per provision of Section 2(14) of the IT act and since the appellant held the same for more than 12 months before its transfer Proviso to Section 2(42A) was attracted and the share could not be treated as "short term capital asset". It was immaterial whether the purchase of the said share is shown in the account of M/s. Mahesh J. Patel under the head sundry creditors or in the account of M/s. Mahesh J. Patel as an investment. It was pleaded that separate accounts cannot ipso facto convert short term capital gain into long term capital gains. Reliance was placed on the decision of the Hon'ble Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd v. CIT 87 ITR 542 wherein it was held that the true nature in the quality of the receipt and not the head under which it is entered in the account books is the decisive factor. It was stated that the AO had himself treated the Stock Exchange Card as an asset Under Section 2(e) of the WT act, in the WT assessment of the appellant for A.Y 92-93.
It was further stated that the shares in Bangalore Stock Exchange Ltd. represent right of a holder to be a member and the ownership of the share entitles its holder to have a source of income. The shares ipso facto are not dealt with as a stock-in-trade. Such shares are sui-generis. They are not quoted in the Stock Exchange and there is no free purchase and sale. The very fact that the assessee could not become a member of Bangalore Stock Exchange because of the restriction of multiple membership places such a share in a distinct category not akin with those of the shares treated in the Stock Exchange. The share in Bangalore Stock Exchange was an asset from the exploitation of which the assessee was deriving income and was not stock in trade. Thus, it was submitted that the share having been purchased prior to 31.3.90 and sold after 31.3.91 was a long term capital asset and the gain arising therefrom was a long term capital gain and that it was neither a business profit nor a short-term capital gain.
I have carefully considered the submissions of the learned representative, I agree with the authorized representatives that the holding of a share in the Bangalore Stock Exchange gives the holder the right ti act a s a share broker in the stock exchange and to have a source of income. I also agree with the appellant that the nature of entries made by the appellant in the books of accounts maintained by it is not relevant to determine the character of a particular receipt. What is relevant is the true nature and quality of the receipt as held by the Hon'ble Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. v. CIT 87 ITR 542. One has to be a holder of share in Bangalore Stock Exchange to act as a share broker. Such shares are neither quoted in the Stock exchange nor are treated like other shares. Such shares fall in a distinct category not akin to other shares transferred like other shares. Therefore when one acquires a share of a stock exchange the intention can be other intention. One does not acquire a share of a stock exchange with a view to hold it as an investment. Hence the intention behind the acquisition of the share was in actual fact to take over the business of share-broking from M/s. Gopal Shetty. This intention is not denied by the appellant, for he admits that he bought the share when he thought that dual membership of various stock exchange in the country would be allowed. So what he sought to buy was the 'right to do business' and what he ultimately transferred was the right to carry on the stock broking business.
Thus in actual fact the profits there from are assessable under the head business and not under the head capital gains at all. The transaction is in my view a venture in the nature of trade. The fact that the AO has assessed it as an asset under the WT act is not really contradictory, for business can be done only when the necessary tool/apparatus giving a right to do business is acquired.
The stock exchange share is necessary to run share-broking business and without it, it would not be possible to run the said business.
Even, presuming though not admitting that it is an asset to which capital gains tax is attracted, in my view the proviso to Section 2(42A) would not be attracted. For determining the period of holding, the share in the Stock exchange company would fall in the category of assets other than 'shares', because of its 'distinct character from what is ordinarily understood as a share'. The transfer of the said share involved the transfer of the concomitant right to do share-broking business. Hence since the period of holding of that right is less than 36 months, it will have to be treated as a short term capital asset, and profits therefrom would be assessable under the head "short term capital profits".
3. Aggrieved by the aforesaid order of the ld. CIT(A) the assessee is in appeal before the Tribunal vide concise Ground No.2 (letter dt.6.10.2004) which reads as under: The ld. CIT(A) has erred in law and in facts in rejecting the claim of the appellant that the gains of Rs. 13,70,000/-out of sale of shares of Bangalore Stock Exchange constituted long term capital gain on sale of shares.
4. At the time of hearing before us, on behalf of the assessee, Shri Vijay Mehta appeared and reiterated the submissions made before the ld.CIT(A), which are contained in para 13 of the proposed order of my learned brother. The ld. Counsel for the assessee also pointed out that the predominant objective of the agreement executed on 15.3.1990 with Shri M.L. Gopala Setty was to acquire the share of Bangalore Stock Exchange Ltd., and rights of trading attached to it. He submitted that even though the business rights are attached with the share, what have been acquired is share. If the legislature wanted to treat such assets differently, they would have provided so as it has been done vide Section 27(iii) of I.T. Act and Section 4(7) of Wealth Tax Act. In support of this, he strongly relied on the decision of the Hon'ble Gujarat High Court in the case of CIT v. Anilaben Upendra Shah 262 ITR 657 (Guj). The Counsel further submitted that as the period of holding is more than one year, it is long term capital gain.
5. On the other hand, the ld. D.R. contended that as per agreement executed on 15th day March, 1990 between M.J. Gopal Shetty and the assessee, Shri M.J. Patel, Mr. Gopal Shetty was to assign the business of share broking under the name and style of M.L. Gopala Setty including the tenancy of the office, furniture, telephone to the assessee at any time and in any manner that the assessee may wish. The ld. D.R. accordingly submitted that consideration of Rs. 3,30,000/- paid by the assessee for Membership Card of Bangalore Stock Exchange and price for tenancy of the office, furniture and telephone etc. He further submitted that as per Article Association of the Bangalore Stock Exchange Ltd., the Membership Card of Bangalore Stock Exchange is not transferable; it could be sold on with the approval of the Stock Exchange and can even be the subject matter of auction, where there is any default by the member. In view of the right to nominate a successor, such right is saleable in certain circumstances.
6. The ld. D.R. drew our attention to para 9 of the assessment order, wherein, the AO stated as under: The assessee has shown long term capital gain of Rs. 13,70,000/- on the sale of the Bangalore Stock Exchange Card. The card was shown as purchased from M.L. Goptal Shetty on 15.3.1990 for Rs. 3,30,000.00 and sold to R.M. Venkatchalan on 18.12.1991 for Rs. 17,00,000/-. The capital gain on this is shown under the head of long term capital gains. It was stataed that the card was sold for Rs. 18,00,000/-, but the assessee was liable to pay Rs. 1,00,000/- as admission fees to the buyer and therefore, the net sale proceeds of the card were Rs. 17,00,000/-.
7. Relying on the above, he pointed out that the assessee has not sold the share of Stock Exchange but Membership of Stock Exchange alongwith tenancy right of the office, furniture, telephone, etc. For computing the capital gain, the assessee has deducted the entire cost which include the cost of tenancy right of the office, furniture, telephone, etc and also paid Rs. 1 lakhs as admission fee which the liability of the buyer. Thus, the assessee purchased membership of the Bangalore Stock Exchange alongwith the tenancy right of the office, furniture, telephone, etc., and sold the same. He further submitted that the decision of the Hon'ble Gujarat High Court in the case of Anilaben Upendra Shah (supra) relied by the ld. Counsel for the assessee supports the view of the revenue that Stock Exchange Card is not share but right to carry on the business in the Stock Exchange. The assessee has purchased the right to carry on share broking business alongwith the tenancy of the office, furniture, telephone, etc, therefore, period of holding the surplus as "Long term capital gain" required as per Section 2(42A) of the I.T. Act is 36 months and not 12 months as claimed by the assessee. The ld. D.R. contended that the aim and object of buying the running business of Shri M.L. Gopala Setty was different than acquiring a share, therefore, the order of the ld. CIT(A) on this issue be upheld.8. After considering the aforesaid submissions, I found considerable force in the submissions made by the ld. D.R. First of all I may point out that the ground raised by the assessee is mis-conceived because the gain of Rs. 13,70,000/- arose from sale of business of share broking alongwith tenancy right, furniture and telephone, etc and not shares of Bangalore Stock Exchange Ltd., as stated in the concise grounds of appeal submitted vide letter dated 6.10.2004. The agreement executed on 15^th day of March, 1990 through which the assessee acquired the right to carry on the business of share broking by himself or his nominee is filed by the assessee before us which is reproduced hereunder in its entirety.
1. M.L. Gopala Setty, son of Mysore Lachia Setty, aged about 79 years, residing at No. 125/A, First Block, Jayanagar, Bangalore-560 001 (hereinafter called the PARTY OF THE FIRST PART, which expression shall mean and include his heirs, legal representatives, administrators, executors and assigns.
2. MAHESH JAYANTLLAL PATAEL, aged about 46 years, son of Jayantilal Pate/, Bombay residing at No. 403 (Flat No.) 4^th floor, 6-A, Worli Sea Face, Worli, Bombay 400 025 (hereinafter called the PARTY OF THE SECOND PART, which expression shall mean and include his heirs, legal representatives, administrators, executors and assigns) WHEREAS the Party of the First Part has been carrying on share broking business under the name and style of M.L. Gopal Setty in premises taken on lease from Bank of India, K.G. Road, II floor, Bangalore-560 009.
WHEREAS the Party of the Second Part desirous to ultimately acquire the aforesaid business by himself or his nominee which the party of the First Part has been carrying on from 1.4.1990 onwards.
WHEREAS the parties have agreed upon the terms and conditions in this regard and desire to reduce to writing the agreement.
1. The party of the First Part shall put the party of the Second party or his nominee as his nominee In possession of the said business and is willing to execute a power of Attorney in favour of the party of the Second Part or his nominee.
2. The party of the First Part agree to assign the business including the tenancy of the office, furniture, telephone to the party of the Second Par at any time and in any manner that party of the Second Party may wish.
3. The Party of the First Part shall receive a consideration of Rs. 3,30,000/- which sum excluded Rs. 50,000/- in lieu of about Rs. 60,000/- (Rupees sixty thousand only) deposit which the party of the First Part has made with Bangalore Stock Exchange in cash and shares of different companies.
4. The Party of the Second Part has agreed to deposit Rs. 50,000/- (Rupees fifty thousand only) after 1.4.90 in Bangalore Stock Exchange through the First party when the First Party can withdraw his deposit of cash and shares.
5. The Party of the First Part shall, on the request of Mr. M.J. Patel or his nominee make an application to Bangalore Stock Exchange to have his membership transferred to the Party of the Second Part or his nominee.
6. If, in the unlikely event of the transfer not being acceptable to Bangalore Stock Exchange, the party of the First Part shall enter into any arrangement for the effective 'transfer' of the membership by such modus operandi as may be specified by the Party of Second Part.
7. In the event, the agreement cannot be put into effect, the parties hereto shall as far as possible be restored to status quo ante.
IN WITNESS WHEREOF the parties hereto have set their hands to his agreement on the day , month and year first above mentioned.
9. From the perusal of clause-2 of the aforesaid agreement, it is clear that the First Party namely Mr M.L. Gopal Setty agreed to assign the business of share broking under the name and style of M.L. Gopal Setty carried on in the premises taken on lease from Bank of India, K.G.Road, II Floor, Bangalore-560 009. The consideration of Rs. 3,30,000/- also includes the tenancy of the office, furniture, telephone, which will be assigned in favour of the assessee at any time and in any manner that the assessee may wish. The assessee has sold the entire business which he had purchased from M.L. Gopal Setty to Shri R.M.Venkatchalan on 18.12.1991 for a consideration of Rs. 18 lakhs (including Rs. 1 lakh as admission fee paid on behalf of the buyer) and shown profit of Rs. 13,70,000/- under the head "long term capital gains". The sale consideration received by the assessee of Rs. 18 lakhs includes liability to pay admission fees of Rs. 1 lakh which clearly indicate that the assessee has sold Membership of Bangalore Stock Exchange alongwith other assets, otherwise, there was no necessity to include Rs. 1 lakh in sales consideration. The affidavit filed by the assessee in this regard on 21.12.2006 i.e. the date fixed for clarification is nothing but self serving document.
10. To a query from the bench that what agreement the assessee executed when he sold the Membership Card of Bangalore Stock Exchange, which was purchased from Mr. M.L. Gopal Setty vide agreement dated 15.3.1990, the Counsel replied that he has no documents in this regard except the affidavit of the assessee. It is pertinent to note that the intention behind entering into the agreement dt. 15.3.1990 with Mr. Gopal Setty was to take over the business of share broking. As a matter of fact, this intention was not denied by the assessee before the ld. CIT(A).
The ld. CIT(A) in the impugned order, clearly stated that the assessee admitted that he entered into agreement with Mr. Gopal Setty, when he though dual Membership of various Stock Exchange would be allowed. So what the assessee sought to buy was to 'right to do business' and what he ultimately transferred 'right to carry on stock broking business'.
The assessee has not filed either before us or before any of the authorities below the agreement if any executed by him with the buyer namely, Shri R.M. Venkatchalan to whom, he sold the Bangalore Stock Exchange card on 15.3.1990. Prima facie, it appears that he merely nominated Mr. Venkatchalan and ultimately relevant documents were signed in favour of Venkatchalan by Mr. Gopal Setty.
11. The price paid by the assessee includes tenancy right which is a capital asset. The 'transfer' of tenancy right is a capital asset within the meaning of Section 45 of the I.T. Act as held by the Hon'ble Supreme Court in the case of A. Gasper v. CIT 199 ITR 382 (SC).
Therefore, any gain arising on transfer of tenancy right is subject to capital gain under Section 45 of the I.T. Act, 1961.
12. Apart from the above, from the perusal of agreement, it is clear that the assessee has acquired the right to carry on the business as a stock broker and not share in a joint stock company. Under the I.T.Act, various sections such as Section 2(42A) Explanation 2, Section 55(2)(aa), Section 112(1) Explanation all adopt the definition of 'security' under Securities Contracts (Regulation) Act, 1956 ( herein called 'SCRA')and therefore, this definition has significance even under the I.T. Act. Similarly, Section 2(45AA) of the Companies Act also adopts the same definition of "securities". The definition of "security" is contained in Section 2(h) of Securities Contracts (Regulation) Act, which include: (i) shares, scrip, stocks, bond, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate.
It is pertinent to note that 'share' is not defined separately under Securities Contracts (Regulation) Act. Section 2(46) of the Companies Act 1956 defines a 'share' to mean 'share in the share capital of a company, and includes stock except where a distinction between stock and shares is expressed or implied'. Thus, the term 'share' would include both equity shares as well as preference shares as defined in Section 85(1) and 85(2) of the Companies Act 1956. Under the I.T. Act, as per explanation to clause (xi) of Section 47 of the I.T. Act, 1961, 'membership of a recognized stock exchange' means membership of Stock Exchange in India which is recognized under the provisions of the Securities Contracts (Regulation) Act, 1956. The right to carry on share broking business in the Bangalore Stock Exchange Ltd., alongwith tenancy right, furniture and telephone, etc, is a capital asset and not share of the Indian Company per see as defined under the Companies Act or Securities Contracts (Regulation) Act 1956.
13. Recently, the Special Bench of ITAT Chennai in the case of Shri R.M. Valliappan v. ACIT 103 ITD 63 (Chen)(SB) held that membership card of a Stock Exchange is a capital asset within the meaning of Section 2(14) of the I.T. Act, 1961; inconsequent, consideration of the alleged transfer of membership card is exigible to capital gains tax.
Generally, Stock Exchange Card is not transferable, it could be so done with the approval of the stock exchange and can even be the subject matter of auction, where there is any default by the member. In view of the right to nominate a successor, such right is saleable in certain circumstances. It was found to be capable of attachment and sale as property by the Hon'ble Gujarat High Court but this was reversed by the Hon'ble Supreme Court in the case of Stock Exchange, Ahmedabad v. ACAIT (2001) 248 ITR 209 (SC) pointing out that the right of nomination is not automatic and that even in the case of succession, such a right is subject to conditions. It is a right recognized for personal participation on personal terms under the Securities Contract (Regulation) Act, 1956. It was in this context, that the attachment for income tax recovery was found to be invalid. In coming to the conclusion, the Hon'ble Supreme Court followed the decision in Vinay Bubna v. Stock Exchange (1999) 97 Comp Cas 874, where it was held to be not an asset of the member and that exercise of any power under the same actually vested in the Stock Exchange.
14. The ITAT Mumbai 'D' Bench vide order dt.4.1.2006 in the case of Techno Shares & Stocks Ltd v. ITO (2006) 101 TTJ (Mumbai) 349 took the view that Stock Exchange Card is an intangible asset within the definition of Section 32 of the I.T. Act and the assessee is entitled for depreciation on stock exchange card. A person can hold the shares either as stock-in-trade or as an investment. There is no provision to allow depreciation on shares of Joint Stock Company, whereas on Stock Exchange Card, depreciation has been allowed by the Coordinate Bench of the Tribunal in the case of Techno Shares & Stock Ltd (supra) The ITAT Ahmedabad Bench 'A' in the case of V.G. Fajjar v. DCIT (2005) 93 ITD 624 (Ahd) has held that Membership card of Stock Exchange is an asset within the meaning of Section 2(e) of Wealth Tax Act. In this decision, the Co-ordinate Bench observed that stock exchange card is a property and it can be sold/transferred by nomination by the card holder with.
the permission of the Stock Exchange and on being declared as defaulter by the Stock Exchange or his legal heir a right to be substituted on repayment of dues of cardholders.
15. Sub-section (42A) of Section 2 of the I.T. Act provides that capital asset can be divided into two types i.e. short term and long term. This division is on the basis of period of holding of the asset by the assessee. It is pertinent to note that the legislature is fully aware of distinction between share and Membership of a recognized Stock Exchange. This is event from the provisions contained in clause (xi) of Section 47 of the I.T. Act, 1961, wherein, any transfer made on or before 31st December, 1998 of a person (not being a company) of capital asset being Membership of a recognized Stock Exchange for share of a company, any exchange shares allotted by the company to the transferor is not regarded as transfer within the meaning of Section 45 of the I.T. Act, 1961. Further Sub-section (2) of Section 47 of the Act provides that in case share received on transfer of membership of a recognized Stock Exchange are sold before the expiry of period of three years from the date of transfer, in that event, exemption granted under Sub-section (11) of Section 47 of the I.T. Act may be withdrawn. From this, intention of the legislature is clear that shares are different other than membership of a recognized stock exchange. As a matter of fact, the membership of a recognized stock exchange is a licence to carry on the business and not shares as argued by the ld. Counsel for the assessee before us and before authorities below.
16. There is no dispute that period of holding required for share is 12 months or more whereas in case of other than share i.e. for 'right to do business' alongwith tenancy right, furniture and telephones, the period of holding required is 36 months or more. In this case, the holding period of the assessee is less than 36 months. Hence, it was rightly treated by the CIT(A) in the impugned order as a short term capita! asset, and profits therefrom would be assessable under the head "short term capital profits" 17. In view of the foregoing, I am of the view that the view taken by the ld. CIT(A) is legally and factually correct, hence, I decline to interfere. This ground of appeal is accordingly rejected.
18. In respect of other grounds, I fully agree with the proposed order of my learned brother.