DCIT, Kanpur v. M/s. Mani Stock Brokers Ltd., Kanpur

ITA 579/LKW/2010 | 2007-2008
Pronouncement Date: 30-12-2010 | Result: Dismissed

Appeal Details

RSA Number 57923714 RSA 2010
Assessee PAN AAACD4968M
Bench Lucknow
Appeal Number ITA 579/LKW/2010
Duration Of Justice 3 month(s) 20 day(s)
Appellant DCIT, Kanpur
Respondent M/s. Mani Stock Brokers Ltd., Kanpur
Appeal Type Income Tax Appeal
Pronouncement Date 30-12-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted A
Tribunal Order Date 30-12-2010
Date Of Final Hearing 25-11-2010
Next Hearing Date 25-11-2010
Assessment Year 2007-2008
Appeal Filed On 09-09-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL A - BENCH LUCKNOW. BEFORE SHRI H.L.KARWA HON'BLE VICE PRESIDENT AND SHRI N.K.SAINI ACCOUNTANT MEMBER I.T.A.NO.579(LKW.)/2010 A.Y. : 2007-08 THE DY.CIT RANGE-4 VS. M/S. MANI STOCK BROKERS L TD. KANPUR. 14 RATAN MAHAL 15/197 CIVIL LINES KANPUR. PAN AAACD 4968M (APPELLANT) (RESPONDENT) C.O.NO.48(LKW.)/2010) ( IN I.T.A.NO.579(LUC.)/2010) A.Y. : 2007-08 MANI STOCK BROKERS LTD. VS. THE DY.C.I.T.-4 KANPUR. KANPUR. (CROSS OBJECTOR) (RESPONDENT) DEPARTMENT BY : SHRI PRAVEEN KUMAR SR.D.R. ASSESSEE BY: SHRI AKSHAY GUPTA C.A. O R D E R PER N.K.SAINI ACCOUNTANT MEMBER THE APPEAL BY THE DEPARTMENT AND THE CROSS OBJECTI ON BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 23.6. 2010 OF THE LD.CIT(A) KANPUR. FIRST WE WILL DEAL WITH THE CROSS OBJECTIO N FILED BY THE ASSESSEE. C.O.NO.48(LKW.)/2010 2. THE ONLY EFFECTIVE GROUND RAISED IN THIS CROSS O BJECTION READS AS 2 UNDER : 1. BECAUSE THE LEARNED COMMISSIONER OF INCOME-TA X (APPEALS) II KANPUR HAS ERRED ON FACTS AND IN LAW IN MAKING THE DISALLOWANCE OF RS.4 02 716 BY APPLYING THE PROVISIONS OF RULE 8D O F THE INCOME-TAX RULES 1962 RETROSPECTIVELY TO THE YEAR UNDER APPEAL WHEREAS THE SAME RULE WAS EFFECTIVE FROM ASSESSMENT YEAR 2008-09. 3. THE FACTS OF THE CASE IN BRIEF ARE THAT THE AS SESSEE IS A MEMBER OF NATIONAL STOCK EXCHANGE AND ALSO ACTS AS SUB-BROKER OF THE BOMBAY STOCK EXCHANGE. THE ASSESSEE FILED THE RETURN OF INCOME O N 29.10.2007 DECLARING TOTAL INCOME AT NIL. THE SAID RETURN WAS PROCESSED UNDER SECTION 143(1) OF THE INCOME-TAX ACT 1961. SUBSEQUENTLY THE CASE WA S SELECTED FOR SCRUTINY. THE AO DID NOT MAKE ANY DISALLOWANCE ON ACCOUNT OF INTEREST. HOWEVER CERTAIN OTHER DISALLOWANCES WERE MADE. WHEN THE ASS ESSEE PREFERRED APPEAL TO THE LD.CIT(A) HE NOTICED THAT THE ASSESSEE HAD CONSIDERABLE INVESTMENT IN SHARES INCOME FROM WHICH WAS NOT LIABLE TO INCOME- TAX. HE ALSO NOTICED THAT THE ASSESSEE HAD INCURRED SUBSTANTIAL EXPENSES ON ACCOUNT OF INTEREST PAYMENT AND ALSO OTHER OFFICE/ADMINISTRATIVE EXPENS ES AND THAT THE AMOUNTS WERE ALL INTER-MINGLED MEANING THEREBY THAT THERE WAS NO CLEAR DEMARCATION OF FUNDS USED FOR VARIOUS ACTIVITIES. HE THEREFORE WAS OF THE VIEW THAT THESE EXPENSES NAMELY INTEREST AND OTHER OFFICE/ADMINIS TRATIVE EXPENSES WERE PARTLY DISALLOWABLE UNDER SECTION 14A OF THE INCOME -TAX ACT 1961 READ WITH RULE 8D OF THE INCOME-TAX RULES AND SINCE THE AO HAD NOT DISALLOWED THE SAME THE LD.CIT(A)ISSUED ENHANCEMENT NOTICE TO THE ASSESSEE. THE ASSESSEE FURNISHED WRITTEN SUBMISSIONS TO THE LD.CI T(A) WHICH READ AS UNDER (VERBATUM): 3 7. DISALLOWANCE UNDER SEC-14A READ WITH RULE-6D : DURING THE COURSE OF HEARING IT WAS NOTICED THAT TH E ASSESSEE HAD CONSIDERABLE INVESTMENTS IN SHARES THE INCOME FROM WHICH IS NOT LIABLE TO INCOME TAX. FURTHER IT WAS ALSO SEEN TH AT THE ASSESSEE HAD INCURRED SUBSTANTIAL EXPENSES ON ACCOUNT OF IN TEREST PAYMENTS AND ALSO OTHER OFFICE/ ADMINISTRATIVE EXPENSES. TH E ACCOUNTS ARE ALL INTERMINGLED MEANING THEREBY THAT THERE IS NO CLEAR DEMARCATION OF FUNDS USED FOR VARIOUS ACTIVITIES ITS ALL DONE FROM THE SAME POOL. THUS THESE EXPENSES NAMELY-INTEREST AND OTHER OFF ICE/ ADMINISTRATIVE EXPENSES ARE PARTLY DISALLOWANCE U/S-14A OF THE INC OME TAX ACT 1961 READ WITH RULE-8D. SINCE THE AO HAD NOT DISALL OWED THE SAME A SHOW CAUSE NOTICE (READ ENHANCEMENT NOTICE) WAS SER VED TO THE ASSESSEE IN THIS RESPECT. IN REPLY TO THIS NOTICE THE ASSESSEE FURNISHED ITS ARGUMENTS WHICH ARE REPRODUCED AS UNDER :- WE RESPECTFULLY SUBMIT THAT THERE IS NO DISALLOWA BLE EXPENDITURE U/S 14A READ WITH RULE 8D. THE NET INTEREST PAID IS RS . 387590/- ONLY. THE SAME IS PAID TO CLIENTS ON THEIR MARGIN AND OT HER DEPOSIT. THUS THE ENTIRE INTEREST IS PAID FOR THE BROKING BUSINE SS. SIMILARLY IT MAY BE OBSERVED FROM THE HEAD OF EXPENSES ACCOUNT THAT AL L THE EXPENSES ARE INCURRED EXCLUSIVELY FOR BROKING BUSINESS. THUS T HERE IS NO EXPENSE WITH RESPECT TO INVESTMENTS HELD BY THE COMPANY. I T IS ALSO RELEVANT THAT THE COMPANY HAS OWN FUNDS OF RS. 6.48 CRORES WHICH IS FAR IN EXCESS OF THE INVESTMENTS OF RS. 2.72 CRORES. IN ANY CASE THERE IS NO INTEREST OR EXPENSE WHICH HAS BEEN INCURRED WITH R ESPECT TO EARNING OF DIVIDENDS WHICH ARE EXEMPT FROM TAX. B. RULE 8D (2) PRESCRIBE FOR DISALLOWANCE OF THE AGGREGATE OF THE AMOUNTS IN PARA (I) (II) AND (III) OF THE SAID RU LE. (I) THERE IS NO EXPENDITURE WHICH IS DIRECTLY RELATING TO INCOME W HICH DO NOT FORM PART OF TOTAL INCOME; (II) IT APPLIES TO INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. SINCE THE ENTIRE INTEREST IS DIRECTLY ATTRIBUTABLE TO BROKERAGE BUS INESS THIS SUB CLAUSE DO NOT APPLY; (III) THE EXPENDITURE SHOULD HAVE RE LATION TO INCOME WHICH DO NOT FORM PART OF INCOME AS MENTIONED IN T HE OPENING LINES OF PARA 8D(2). THERE IS NO RELATION OF ANY EXPENSE TO THE EXEMPT INCOME. C. IN CIT VS. HERO CYCLES (PUNJAB & HARIYANA HIG H COURT) LATEST UNREPORTED JUDGMENT SOURCE ITATONLINE. ORG. - IT HAS 4 BEEN HELD THAT EVEN UNDER RULE 8D OF SEC. 14A DIS ALLOWANCE CAN BE MADE ONLY IF THERE IS ACTUAL NEXUS BETWEEN TAX FRE E INCOME & EXPENDITURE. THE ASSESSEE EARNED DIVIDEND INCOME ON SHARES WHI CH WAS EXEMPT FROM TAX. THE AO TOOK THE VIEW THAT THE INV ESTMENT IN SHARES WAS MADE OUT OF BORROWED FUNDS ON WHICH INTEREST E XPENDITURE WAS INCURRED AND CONSEQUENTLY MADE A DISALLOWANCE U/S 14A. THIS WAS PARTLY UPHELD BY THE CIT (A). ON FURTHER APPEAL BY THE ASSESSEE THE TRIBUNAL DELETED THE DISALLOWANCE BY NOTING THAT T HE ASSESSEE HAD PROVED THAT THE INVESTMENT IN SHARES WAS MADE OUT OF NON-INTEREST BEARING FUNDS. IT HELD THAT UNLESS THERE WAS EVIDE NCE TO SHOW THAT THE INTEREST BEARING FUNDS HAD BEEN INVESTED IN THE TAX FREE INVESTMENTS AND THE NEXUS WAS ESTABLISHED BY THE R EVENUE S. 14A COULD NOT BE APPLIED ON MERE PRESUMPTION. THE REVE NUE APPEALED TO THE HIGH COURT AND CLAIMED THAT IN VIEW OF S. 14A (2) AND RULE 8D (1) (B) A DISALLOWANCE COULD BE MADE EVEN IF THE ASSE SSEE CLAIMED THAT NO EXPENDITURE HAD BEEN INCURRED IN RESPECT OF THE TA X FREE INCOME. HELD DISMISSING THE APPEAL: (I) IF THE INVESTMENT IN THE SHARES IS OUT OF THE NON-INTEREST BEARING FUNDS DISALLOWANCE U/S 14A IS NOT SUST AINABLE; (II) THE CONTENTION OF THE REVENUE THAT DIRECTLY OR INDIRECTLY SOME EXPENDITURE IS ALWAYS INCURRED WHICH MUST BE DISAL LOWED U/S 14A CANNOT BE ACCEPTED; (III) DISALLOWANCE U/S 14A REQUIRES A FINDING OF INCURRING OF EXPENDITURE. IF IT IS FOUND THAT FOR EARNING EXEMP TED INCOME NO EXPENDITURE HAS BEEN INCURRED DISALLOWANCE U/S 14 A CANNOT STAND; (IV) THE CONTENTION OF THE REVENUE EVEN IF THE AS SESSEE HAS MADE INVESTMENTS IN SHARES OUT OF ITS OWN FUNDS THE SA ID OWN FUNDS ARE MERGED WITH THE BORROWED FUNDS IN A COMMON KITTY A ND THEREFORE DISALLOWANCE U/S 14A CAN BE MADE IS ALSO NOT JUSTI FIED. IN CIT VS. RELIANCE UTILITIES (BOMBAY HIGH COURT SOURCE ITATONLINE.ORG. 5 ADVANCES TO SISTER CONCERNS MUST BE PRESUMED TO HAV E COME OUT OF OWN FUNDS AND NOT BORROWED FUNDS. WHERE THE ASSESSEE HAD ITS OWN FUNDS AS WELL AS BOR ROWED FUNDS AND IT ADVANCED FUNDS TO ITS SISTER CONCERNS FOR ALLEGE DLY NON-BUSINESS PURPOSES AND THE QUESTION AROSE WHETHER THE AO WAS JUSTIFIED IN DISALLOWING THE INTEREST ON THE BORROWED FUNDS ON T HE GROUND THAT THEY HAD BEEN USED FOR NON-BUSINESS PURPOSES HELD: WHERE AN ASSESSEE HAS HIS OWN FUNDS AS WELL AS BOR ROWED FUNDS A PRESUMPTION CAN BE MADE THAT THE ADVANCES FOR NON-B USINESS PURPOSES HAVE BEEN MADE OUT OF THE OWN FUNDS AND TH AT THE BORROWED FUNDS HAVE NOT BEEN USED FOR THIS PURPOSE. ACCORDIN GLY THE DISALLOWANCE OF THE INTEREST ON THE BORROWED FUNDS IS NOT JUSTIFIED. IN OUR CASE THE OWN FUNDS ARE MUCH MORE THAN THE IN VESTMENTS HELD. IN THE CASE OF CIT VS. WINCOME TEXTILE INDUSTRIES L IMITED (2009) 319 ITR 204 (PUNJAB & HARYANA) IN THIS JUDGMENT ALSO DISALLOWANCE OF INTEREST U/S 14A WAS DELETED. THE HONBLE PRESIDENT OF THE ITAT HAS VIDE HIS ORDE R DATED 24.08.2009 BLOCKED THE JUDGMENT IN CASE OF DAGA CA PITAL MANAGEMENT (P) LTD. (ITA NO. 8057/M/03 DATED 20.10. 2008) TILL JANUARY 2010 OR TILL THE DISPOSAL OF THE MATTER BY THE BOMBAY OR ANY OTHER HIGH COURT WHICHEVER IS EARLIER. 4. THE LD.CIT(A) DISALLOWED A SUM OF RS.4 02 71 6 BY OBSERVING AS UNDER : 8. DECISION : I HAVE CONSIDERED THE REPLY OF THE ASSESSEE. IN THE CASE OF HERO CYCLES LTD. (SUPRA) IT WAS FOUND ON FACT THAT ASS ESSEE HAD MADE THE INVESTMENTS FROM AN ALTOGETHER SEPARATE ACCOUNT WHI CH SOLELY CONSISTED OF ITS OWN FUNDS; THERE WAS NO INTERMINGL ING OF BORROWED AND OWN FUNDS. IT WAS UNDER THOSE CIRCUMSTANCES THA T THE DECISION WAS RENDERED. HOWEVER IN THE INSTANT CASE IT IS A N ADMITTED POSITION THAT THE FUNDS I.E. BORROWED AND OWN FUNDS ARE ALL ARE INTERMINGLED. THUS THE EXPENDITURE INCURRED BY THE APPELLANT ON INTEREST OTHER 6 EXPENSES CANNOT BE ATTRIBUTED TO ANY SPECIFIC ACTIV ITY OR INCOME OF THE COMPANY. IN SUCH SITUATION THE PROVISIONS OF SEC-1 4A READ WITH RULE- 8D OF INCOME TAX RULES ARE CLEARLY APPLICABLE. IN T HIS REGARD I AM FULLY SUPPORTED BY THE DECISION OF THE HONBLE ITA T IN THE CASE OF DAGA CAPITAL MANAGEMENT LIMITED (SUPRA). THE DISALL OWANCE IS COMPUTED AS UNDER :- A) GROSS INTEREST 11 52 488 B). INVESTMENT ON 01.04.2006 3 15 82 585 31.03.2007 2 72 18 884 B) AVERAGE INVESTMENT = 2 94 00 734 C) TOTAL ASSETS 01.04.2006 12 65 25 668 31 03.2007 13 84 91 642 C) AVERAGE ASSETS 13 25 08 655 INTEREST = A X B / C = 2 55 71 2 EXPENSES = 0.5% OF B = 1 47 0 04 4 02 716 8.1 THE TOTAL DISALLOWANCE UNDER SEC.14A COMES TO R S.4 02 716. THE AO IS DIRECTED TO VERIFY THE AFORESAID CALCULAT ION AND MAKE SUITABLE DISALLOWANCE.. NOW THE ASSESSEE HAS FILED THE CROSS OBJECTION. 5. DURING THE COURSE OF HEARING BOTH THE PARTIES A GREED THAT THE ISSUE IS SQUARELY COVERED BY THE EARLIER DECISION OF THIS BE NCH OF THE TRIBUNAL ON A SIMILAR ISSUE IN THE CASE OF M/S. GOEL INVESTMENTS LTD. BAREILLY VS. ADDL.CIT RANGE-I BAREILLY IN ITA NO.238 (LUC.)/20 10 ORDER DATED 15.9.2010. 7 6. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE P ARTIES IT IS NOTICED THAT A SIMILAR ISSUE HAS BEEN ADJUDICATED BY THIS B ENCH OF THE TRIBUNAL IN I.T.A.NO.238(LUC.)/2010 IN THE CASE OF M/S. GOEL IN VESTMENTS LTD. VS. THE ADDL.CIT RANGE I BAREILLY VIDE ORDER DATED 15.9.2 010 AND THE RELEVANT FINDINGS HAVE BEEN GIVEN IN PARAS 8 8.1 AND 8.2 OF THE ORDER WHICH READ AS UNDER : 8. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON T HE RECORD. IN THE PRESENT CASE THE AO INVOKED THE PROVISIONS OF SEC TION 14A OF THE INCOME-TAX ACT 1961. THE SAID PROVISION READS AS U NDER : 14A. (1) FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDER THIS CHAPTER NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (2) THE ASSESSING OFFICER SHALL DETERMINE THE AMOU NT OF EXPENDITURE INCURRED IN RELATION TO SUCH INCOME WHI CH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT IN ACC ORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED IF THE ASSESSING OFFICER HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE IS N OT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE I N RESPECT OF SUCH EXPENDITURE IN RELATION TO INCOME WHICH DOES N OT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. (3) THE PROVISIONS OF SUB-SECTION (2) SHALL ALSO AP PLY IN RELATION TO A CASE WHERE AN ASSESSEE CLAIMS THAT NO EXPENDIT URE HAS BEEN INCURRED BY HIM IN RELATION TO INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT : PROVIDED THAT NOTHING CONTAINED IN THIS SECTION SHALL EMPOWE R THE ASSESSING OFFICER EITHER TO REASSESS UNDER SECTION 147 OR PASS AN ORDER ENHANCING THE ASSESSMENT OR REDUCING A REFUND ALREADY MADE OR OTHERWISE INCREASING THE LIABILITY OF THE 8 ASSESSEE UNDER SECTION 154 FOR ANY ASSESSMENT YEAR BEGINNING ON OR BEFORE THE 1ST DAY OF APRIL 2001. 8.1 FROM THE ABOVE PROVISIONS IT WOULD BE CLEAR THA T THE MANDATE OF SECTION 14A IS TO PREVENT CLAIMS FOR DEDUCTION O F EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME OF THE ASSESSEE. THIS SECTION IS ENACTED TO ENSURE THAT O NLY EXPENSES INCURRED IN RESPECT OF EARNING TAXABLE INCOME ARE A LLOWED. ALL EXPENDITURE INCURRED IN RELATION TO INCOME WHICH D OES NOT FORM PART OF THE TOTAL INCOME UNDER THE PROVISIONS OF THE I.T .ACT HAS TO BE DISALLOWED UNDER SECTION 14A. UNDER SUB-SECTION (2 ) OF SECTION 14 THE AO IS REQUIRED TO DETERMINE THE AMOUNT OF EX PENDITURE INCURRED BY AN ASSESSEE IN RELATION TO SUCH INCOME WHICH DO ES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT IN ACCORDANCE WITH SUCH METHOD AS MAY BE PRESCRIBED. IN THE PRESENT CASE ALTHOUGH T HE AO HAS NOT ESTABLISHED THE NEXUS BETWEEN THE EXPENDITURE AND THE EXEMPTED INCOME (DIVIDEND) TO WORK OUT THE EXPENDITURE BUT FOR MAKING DISALLOWANCE INVOKED THE PROVISIONS OF RULE 8D OF T HE INCOME-TAX RULES 1962 WHICH ARE INSERTED BY THE INCOME-TAX ( FIFTH AMENDMENT) RULES 2008 W.E.F. 24.3.2008. HOWEVER AS PER THE R ATIO LAID DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) THE PROVISIONS OF RULE 8D ARE APP LICABLE PROSPECTIVELY AND NOT RETROSPECTIVELY. IN THE SAID CASE THEIR LORDSHIPS OF THE HON'BLE BOMBAY HIGH COURT WHILE INTERPRETI NG THE PROVISIONS OF SECTION 14A OF THE ACT AND RULE 8D OF THE INCOM E-TAX RULES 1962 OBSERVED AT PARAS 66 & 67 OF THE AFORESAID REFERRE D TO ORDER (HEAD NOTE) AS UNDER : THE FIRST POINT TO BE NOTED ABOUT THE PROVISIONS O F S. 14A AND R. 8D IS THAT DIFFERENT DATES HAVE BEEN PROVIDED IN THESE PROVISIONS FOR THEIR ENFORCEMENT: (I) SUB-SEC. (1) OF S. 14A WAS INSERTED BY THE FINANCE ACT OF 2001 WITH RETROSPECT IVE EFFECT FROM 1ST APRIL 1962; (II) SUB-SS. (2) AND (3) WERE INSERTED IN S. 14A BY THE FINANCE ACT OF 2006 W.E.F. 1ST APRIL 20 07; (III) THE PROVISO WAS INSERTED BY THE FINANCE ACT OF 2002 WIT H RETROSPECTIVE EFFECT FROM 11TH MAY 2001; (IV) RULE 8D WAS INSERTED BY THE IT (FIFTH AMENDMENT) RULES 2008 BY PUBLICATION IN THE GAZETTE DT. 24TH MARCH 2008. SU B-R. (2) OF R.1 STIPULATES THAT THE RULES SHALL COME INTO FORCE FROM THE DATE 9 OF THEIR PUBLICATION IN THE OFFICIAL GAZETTE. THIS BY ITSELF IS NOT CONCLUSIVE. SECONDLY PRIOR TO THE INSERTION OF S. 14A BY THE FINANCE ACT OF 2001 THE SUPREME COURT HAD HELD IN I TS DECISIONS IN CIT VS. INDIAN BANK LTD. AIR 1965 SC 1 473 CIT VS. MAHARASHTRA SUGAR MILLS LTD. 1973 CTR (SC) 489: (1971) 82 ITR 452 (SC):(1971) 3 SCC 543 AND RAJASTHAN STAT E WAREHOUSING CORPORATION VS. CIT (2000) 159 CTR (SC) 132 : (2000) 242 ITR 450 (SC) THAT IN THE CASE OF A COMPO SITE AND INDIVISIBLE BUSINESS WHICH RESULTED IN TAXABLE AND NON-TAXABLE INCOME IT WAS IMPERMISSIBLE FOR THE AO TO APPORTIO N THE EXPENDITURE INCURRED IN RELATION TO SUCH BUSINESS A S BETWEEN THE EARNING OF TAXABLE AND NON-TAXABLE INCOME. SUB- SEC. (1) OF S. 14A WAS INSERTED WITH RETROSPECTIVE EFFECT FROM 1ST APRIL 1962 TO OVERCOME THE DECISIONS OF THE SUPREME COURT . AT THE SAME TIME AS HAS BEEN NOTICED BY THE SUPREME COURT IN ITS DECISION IN CIT VS. WALFORT SHARE & STOCK BROKERS ( P) LTD. (2010) 233 CTR (SC) 42 : (2010) 41 DTR (SC) 233 TH E THEORY OF APPORTIONMENT OF EXPENDITURE BETWEEN TAXABLE AND NON- TAXABLE INCOME HAS IN PRINCIPLE BEEN NOW WIDENED UNDER S. 14A. READING S. 14 IN JUXTAPOSITION WITH SS. 15 TO 59 IT HAS BEEN OBSERVED THAT THE WORDS 'EXPENDITURE INCURRED' IN S . 14A REFER TO EXPENDITURE ON RENT TAX SALARY INTEREST ETC. IN RESPECT OF WHICH ALLOWANCES ARE PROVIDED FOR. THIRDLY SUB-SS. (2) AND (3) WERE INTRODUCED BY A LEGISLATIVE AMENDMENT BROUGHT ABOUT BY THE FINANCE ACT OF 2006. THE MEMORANDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL OF 2006 RECOGNIZES T HAT THE EXISTING PROVISIONS OF S. 14A DID NOT PROVIDE A MET HOD OF COMPUTING THE EXPENDITURE INCURRED IN RELATION TO I NCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. CONSEQUENTL Y THERE WAS A CONSIDERABLE AMOUNT OF DISPUTE BETWEEN THE TAXPAY ERS AND THE DEPARTMENT ON THE METHOD OF DETERMINING SUCH EXPEND ITURE. IT WAS IN VIEW OF THESE DISPUTES THAT PARLIAMENT INSER TED A NEW SUB-SEC. (2) TO PERMIT THE FRAMING OF SUBORDINATE L EGISLATION TO PROVIDE A MANDATORY METHOD FOR THE AO TO FOLLOW IN DETERMINING THE EXPENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IF TH E AO WAS NOT SATISFIED WITH THE CORRECTNESS OF THE CLAIM OF THE ASSESSEE. THE MEMORANDUM PROVIDED THAT 'THIS AMENDMENT WILL TAKE EFFECT FROM 1ST APRIL 2007 AND WILL ACCORDINGLY APPLY IN RELATION TO THE ASST. YR. 2007-08 AND SUBSEQUENT YEARS'. A CIRC ULAR WAS 10 ISSUED BY THE CBDT ON 28TH DEC. 2006 ONCE AGAIN CL ARIFYING THE POSITION THAT THE AMENDMENT WOULD BE APPLICABLE 'FROM THE ASST. YR. 2007-08 ONWARDS'. AT ANY RATE THIS CONSTR UCTION WHICH HAS BEEN PLACED ON THE AMENDMENT BOTH IN THE MEMORA NDUM EXPLAINING THE PROVISIONS OF THE FINANCE BILL OF 20 06 AND IN THE CIRCULAR OF THE CBDT DT. 28TH DEC. 2006 CAN BE REG ARDED AS A REASONABLE INTERPRETATION OF THE PROVISION. THE FOU RTH ASPECT OF THE MATTER WHICH WOULD MERIT EMPHASIS IS THE PRINC IPLE OF LAW THAT IN DETERMINING AS TO WHETHER A RULE IN A PIECE OF SUBORDINATE LEGISLATION IS TO BE REGARDED AS PROSPE CTIVE OR RETROSPECTIVE AN IMPORTANT ASPECT IS AS TO WHETHER THE RULE EMBODIES WHAT IS ESSENTIALLY A WELL KNOWN A WELL S ETTLED OR WELL ACCEPTED METHOD. AS A MATTER OF FACT IN THE PR ESENT CASE THERE CAN BE NO DOUBT ABOUT THE POSITION THAT R. 8D HAS ESSENTIALLY PUT INTO PLACE AN ARTIFICIAL METHOD OF ESTIMATING THE EXPENDITURE THAT CAN BE REGARDED AS BEING RELATABLE TO INCOME THAT DOES NOT FORM PART OF THE TOTAL INCOME UNDER T HE ACT. BEFORE THE INSERTION OF S. 14A THERE WAS NO SPECIF IC METHOD OF DETERMINING THE EXPENDITURE INCURRED IN RELATION TO NONTAXABLE INCOME. LOOKING AT THE TOTALITY OF THE CIRCUMSTANCE S THE MEASURE OF 0.5 PER CENT PROVIDED IN R. 8D(2)(III) I S REASONABLE. HENCE WHILE THE METHOD OF COMPUTATION PROVIDED IN R. 8D IS FAIR AND REASONABLE TO PASS MUSTER UNDER ART. 14 THE METHOD MUST TAKE EFFECT PROSPECTIVELY. FINALLY SUB-SEC. ( 4) OF S. 295 EMPOWERS THE RULE-MAKING AUTHORITY TO GIVE RETROSPE CTIVE EFFECT TO SUBORDINATE LEGISLATION. HOWEVER UNLESS EXPRESS LY OR BY NECESSARY IMPLICATION A CONTRARY PROVISION IS MADE NO RETROSPECTIVE EFFECT IS TO BE GIVEN TO ANY RULE SO AS TO PREJUDICIALLY AFFECT THE INTERESTS OF THE ASSESSEE. EVEN IN THE ABSENCE OF SUB-SS. (2) AND (3) OF S. 14A AND OF R. 8D THE AO WAS NOT PRECLUDED FROM MAKING APPORTIONMENT. SUCH A N APPORTIONMENT WOULD HAVE TO BE MADE IN ORDER TO GIV E EFFECT TO THE SUBSTANTIVE PROVISIONS OF SUB-S. (1) OF S. 14A WHICH PROVIDE THAT NO DEDUCTION WOULD BE ALLOWED IN RESPECT OF EX PENDITURE INCURRED IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE CHANGE WHICH IS BRO UGHT ABOUT BY THE INSERTION OF SUB-SS (2) AND (3) INTO S. 14A BY THE FINANCE ACT OF 2006 W.E.F. 1ST APRIL 2007 IS THAT IN A SIT UATION WHERE THE AO IS NOT SATISFIED WITH THE CORRECTNESS OF THE CLA IM OF THE ASSESSEE IN REGARD TO THE EXPENDITURE INCURRED BY I T IN RELATION 11 TO THE NON-TAXABLE INCOME THE AO WOULD HAVE TO FOL LOW THE METHOD WHICH IS PRESCRIBED BY THE RULES. THE AMENDM ENT RULES WERE NOTIFIED TO COME INTO FORCE ON 24TH MARCH 200 8. IT IS A TRITE PRINCIPLE OF LAW THAT THE LAW WHICH WOULD APP LY TO AN ASSESSMENT YEAR IS THE LAW PREVAILING ON THE FIRST DAY OF APRIL. CONSEQUENTLY R. 8D WHICH HAS BEEN NOTIFIED ON 24TH MARCH 2008 WOULD APPLY WITH EFFECT FROM ASST. YR. 2008-09 . THE RULE CONSEQUENTLY CANNOT HAVE APPLICATION IN RESPECT OF ASST. YR. 2002-03 WHICH IS THE YEAR UNDER CONSIDERATION IN TH IS CASE. 8.2 IN THE PRESENT CASE SINCE THE AO APPLIED THE P ROVISIONS CONTAINED IN RULE 8D WHICH ARE APPLICABLE WITH EFFE CT FROM A.Y. 2008- 09 WHILE THE ASSESSMENT YEAR INVOLVED IN THIS CASE IS 2006- 07 THEREFORE WE ARE OF THE VIEW THAT THE LD.CIT(A) WAS NOT JUSTIFIED IN CONFIRMING THE ACTION OF THE AO BY CONSIDERING THE RATIO LAID DOWN BY THE I.T.A.T. SPECIAL BENCH IN THE CASE OF M/S. DAGA CAPITAL MANAGEMENT PRIVATE LTD. 312 ITR 1 (S.B.) MUMBAI W HICH IS NOT A GOOD LAW IN VIEW OF THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN THE AFORESAID REFERRED TO CASE OF GODREJ & BOYCE MFG. CO. LTD. (SUPRA) WE THEREFORE SET ASIDE THE ORDER OF THE LD.CIT(A) AND REMAND THE ISSUE BACK TO THE FILE OF THE AO FOR FRE SH ADJUDICATION BY KEEPING IN VIEW THE GUIDELINES LAID DOWN BY THE HO N'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. L TD. (SUPRA) AND DIRECT THE AO TO COMPUTE THE DISALLOWANCE IF ANY BY APPLYING A REASONABLE METHOD HAVING REGARD TO THE FACTS AND CI RCUMSTANCES OF THE CASE. 7. SO RESPECTFULLY FOLLOWING THE AFORESAID ORDER DA TED 15.9.2010 OF THIS BENCH OF THE TRIBUNAL THIS ISSUE IS SENT BACK TO T HE AO TO BE ADJUDICATED AS DIRECTED; IN THE AFORESAID REFERRED TO ORDER OF THE TRIBUNAL DATED 15.9.2010 IN THE CASE OF M/S. GOEL INVESTMENTS LTD. BAREILLY ( SUPRA). 8 NOW WE WILL DEAL WITH THE REVENUES APPEAL IN IT A NO.579(LKW)/2010. 12 9. GROUNDS NO.1 AND 2 OF THIS APPEAL READ AS UN DER : 1. THE COMMISSIONER OF INCOME TAX (APPEALS)-II KA NPUR HAS ERRED IN LAW AND ON FACTS IN DIRECTING THE ASSESSIN G OFFICER TO TREAT THE PROFIT ON SALE OF SHARES AS CAPITAL GAIN INSTEAD OF INCOME FROM BUSINESS HOLDING THAT THE ASSESSEE HAD DEMONSTRATED THAT THE SHARES IN QUESTION WERE ACTUA LLY HELD AS INVESTMENT IGNORING THE FINDINGS OF THE HON'BLE SUP REME COURT IN THE CASE OF G. VANKASTESH WAMY NAIDIU & CO. VS. CIT-35 ITR-594(S.C.) AND ALSO EXPRESS NEW PAPER LTD. VS. CIT 53 ITR-250 (S. C). 2. THE COMMISSIONER OF INCOME TAX (APPEALS)-II KAN PUR HAS ERRED IN LAW AND ON FACTS IN DIRECTING THE ASSESSIN G OFFICER TO TREAT THE PROFIT ON SALE OF SHARES AS CAPITAL GAIN INSTEAD OF INCOME FROM BUSINESS AS ASSESSED BY THE ASSESSING O FFICER IGNORING THE FACT THAT THE ASSESSEE WAS SHARE BROKE R AND THE MAIN BUSINESS OF THE ASSESSEE WAS PURCHASE AND SALE S OF SHARES AND AS PER JUDICIAL PRONOUNCEMENT CONTAINED IN 35 I TR 594 (SUPREME COURT) AND 53 ITR- 250 (S. C) INCOME DERIV ED BY THE ASSESSEE FROM PURCHASE AND SALES OF SHARES IN CLASS IFIED UNDER BUSINESS INCOME AND NOT AS CAPITAL GAINS. 10. FROM THE ABOVE GROUNDS IT WOULD BE CLEAR THAT THE GRIEVANCE OF THE DEPARTMENT RELATES TO THE TREATMENT OF PROFIT ON SA LE OF SHARES HELD AS INVESTMENTS IN THE BOOKS OF ACCOUNT OF THE ASSESSEE . THE ASSESSEE HAD OFFERED SUCH GAINS UNDER THE HEAD CAPITAL GAINS AS LONG TERM AND SHORT TERM DEPENDING UPON THE PERIOD OF HOLDING. HOWEVER THE AO ASSESSED SUCH GAINS AS INCOME FROM BUSINESS BY FOLLOWING HIS ORDER FOR THE ASSESSMENT YEAR 2006-07 IN THE CASE OF THE ASSESSEE. THE ASSE SSEE CARRIED THE MATTER TO THE LD.CIT(A) AND SUBMITTED AS UNDER : 1. THE APPELLANT COMPANY HAS HELD AND MAINTAINED I TS INVESTMENT 13 PORTFOLIO IN EQUITY SHARES DEBENTURES AND UNITS ET C. FOR ALMOST TEN YEARS. THE PORTFOLIO OF INVESTMENTS IS ALWAYS A CCOUNTED AND REFLECTED AS INVESTMENT IN ACCOUNTS AND BALANCE SH EET. THE SHARES IN WHICH TRADING IS DONE IS ACCOUNTED AS ST OCK IN TRADE. A COPY OF BALANCE SHEET IS ATTACHED. 2. THE PROFIT ON SALE OF INVESTMENTS IS TREATED AS CAPITAL GAIN. THE LEARNED ACIT HAS HOWEVER ASSESSED THE SAME AS BUSIN ESS PROFITS BY MECHANICALLY FOLLOWING THE ASSESSMENT OR DER OF EARLIER YEAR I.E.2006-07. COPY OF THE EARLIER ORDE R IS ENCLOSED. 3. THE LEARNED ACIT HAS IGNORED THE FACT THAT THE L EARNED CIT(A) HAS ALLOWED THE APPEAL OF THE ASSESSEE AND HAS TRE ATED THE SIMILAR INCOME IN A.Y. 2003-04 AND 2005-06 AS INCOM E FROM CAPITAL GAINS. FOR A.Y.2003-04 THE DEPARTMENT DID NOT PREFER SECOND APPEAL AND THE ORDER IN RESPECT OF THE APPE AL FOR A.Y. 2005-06 ARE AWAITED FROM THE HON'BLE TRIBUNAL WHICH WAS HEARD ON 16.2.2009. COPIES OF CIT(A)ORDERS ARE ATTA CHED. (LATER THE AR SUBMITTED THE ORDER OF HON'BLE TRIBUN AL FOR A.Y.2005-06 WHICH HAS ACCEPTED THE CLAIM OF THE AS SESSEE TO TREAT THE GAINS ON SALE OF INVESTMENTS AS CAPITAL GAINS.) 4. IN A.Y. 1999-2000 THE INCOME FROM SALE OF INVEST MENTS WAS TAXED AND ASSESSED AS CAPITAL GAIN. ORDER ATTACHED. 5. A COPY OF THE SCHEDULE OF INVESTMENTS AND DETAIL S OF SALE MADE DURING THE YEAR IS ATTACHED. IT MAY BE OBSERVED TH AT OUT OF 45 SCRIPTS HELD ONLY 10 SCRITPS HAVE BEEN SOLD WHICH W ERE HELD FOR REASONABLY LONG PERIOD. THERE IS NO TRANSACTION IN MOST OF THE SCRIPTS WHICH ARE HELD AS LONG TERM. THE RATIO OF S ALE TO HOLDING AND PURCHASES IS QUITE LOW. 6. THE INVESTMENT PORTFOLIO INCLUDES UNQUOTED SHARE S OF RS.84 38 LACS AND UNITS OF 121.02 LACS OUT OF TOTAL INVESTME NTS OF RS.281.05 LACS WHICH IS APPROX. 73%. THUS EVEN THE NATURE OF HOLDING IS NOT AKIN TO TRADING. 14 7. THE INVESTMENTS HAVE BEEN ACCOUNTED AS SUCH SINC E INCEPTION AND THUS THE INTENTION TO HOLD THEM AS INVESTMENT I S CLEAR AND UNAMBIGUOUS. 8. THE INVESTMENTS ARE OUT OF OWN FUNDS AND THERE ARE NO BORROWING FOR THE PURCHASE OF INVESTMENTS. 9. THE LEARNED ACIT HAS RELIED ON THE CASE OF M/S. ATUL KANODIA (PLEASE REFER ASSESSMENT ORDER FOR 2006-07 SUPRA). THE SAID CASE IS DECIDED IN FAVOUR OF THE ASSESSEE BY HON'BL E ITAT. 11. THE LD.CIT(A) HELD THAT THE CAPITAL GAIN OF RS .1 067 63 929 ON SALE OF INVESTMENT WAS LIABLE TO BE TAXED AS CAPITAL GAINS AND NOT BUSINESS PROFIT BY OBSERVING AS UNDER : 3.1 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORD ER SUBMISSIONS OF THE AR AND THE DOCUMENTS ON RECORD. THE SUBJECT MATTER IS COVERED BY THE ORDER OF HON'BLE ITAT VIDE ITA NO.486/LUC./0 9 FOR A.Y.2005- 06 AND FOR AY 2003-04 BY MY PREDECESSOR AND THE SA ME WAS NOT APPEALED BY THE DEPARTMENT. THE AO HAS NOT BROUGHT ANY NEW MATERIAL ON RECORD AND HAS SIMPLY FOLLOWED THE ORD ER FOR EARLIER YEAR. MOREOVER THE NATURE OF HOLDING PERIOD OF HOLDING METHOD OF ACCOUNTING RATIO OF SALES TO HOLDING AND SOURCE OF INVESTMENTS INDICATE THAT THE DOMINANT INTENTION OF THE ASSESSE E IS TO HOLD THE INVESTMENTS TO EARN DIVIDEND AND CAPITAL APPRECIATI ON. IN SUCH CONDITIONS THE GAIN REALIZED IS LIABLE TO TAX AS CA PITAL GAIN. I THEREFORE HOLD THAT THE GAIN OF RS.1 07 63 929 ON SALE OF INV ESTMENTS IS LIABLE TO BE TAXED AS CAPITAL GAINS AND NOT BUSINESS PROFITS . THIS GROUND OF APPEAL IS ALLOWED. 12. DURING THE COURSE OF HEARING THE LD. COUNSEL F OR THE ASSESSEE AT THE VERY OUTSET STATED THAT THIS ISSUE HAS ALREADY BE EN ADJUDICATED BY THIS BENCH OF THE TRIBUNAL IN ITA NO.608 TO 610(LKW)/2010 FOR THE ASSESSMENT YEARS 15 2001-02 2004-05 AND 2006-07 RESPECTIVELY VIDE ORDE R DATED 9 TH NOVEMBER 2010 WHEREIN EARLIER ORDER DATED 16.2.2010 PASSED IN ASSESSEES CASE IN I.T.A.NO.509(LUC.)/2009 RELATING TO THE AS SESSMENT YEAR 2005-06 HAS BEEN FOLLOWED. 13. IN HIS RIVAL SUBMISSIONS THE LD.D.R ALTHOUGH SUPPORTED THE ORDER OF THE LD.CIT(A) BUT COULD NOT CONTROVERT THE AFORESAI D CONTENTIONS OF THE LD. COUNSEL FOR THE ASSESSEE. 14. AFTER CONSIDERING THE SUBMISSIONS OF BOTH THE P ARTIES AND THE MATERIAL ON RECORD IT IS NOTICED THAT A SIMILAR ISSUE HAVIN G IDENTICAL FACTS HAS ALREADY BEEN ADJUDICATED BY THIS BENCH OF THE TRIBUNAL IN I .T.A.NOS.608 TO 610(LKW.)/2010 FOR THE ASSESSMENT YEARS 2001-02 200 4-05 AND 2006-07 RESPECTIVELY WHEREIN THE EARLIER ORDER DATED 16.2.2 010 PASSED IN I.T.A.NO.509(LUC.)/2009 FOR THE ASSESSMENT YEAR 200 5-06 HAS BEEN FOLLOWED AND THE RELEVANT FINDINGS HAVE BEEN GIVEN IN PARAS 6 7 AND 8 OF THE SAID ORDER WHICH READ AS UNDER : 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE AL SO PERUSED THE MATERIALS AVAILABLE ON RECORD. AT THE VERY OUTSET SHRI AKSHYA GUPTA C.A. LD. COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THIS BENCH OF THE TRIBUNAL DATED 16.2. 2010 PASSED IN ASSESSEES CASE IN I.T.A.NO.509(LUC.)/2009 RELATING TO THE ASSESSMENT YEAR 2005-06. WHILE DECIDING A SIMILAR ISSUE THE T RIBUNAL VIDE PARA 11 OF THE ORDER HELD AS UNDER: 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND CA REFULLY GONE THROUGH THE MATERIALS AVAILABLE ON THE RECORD . IN THE INSTANT CASE IT IS NOTICED THAT THE ASSESSEE ALTHO UGH WAS DEALING IN THE SHARES STOCKS AND UNITS BUT AT THE SAME TIM E MAINTAINED SEPARATE INVESTMENT PORTFOLIO. THE INCOME EARNED O N THE INVESTMENT CANNOT BE CONSIDERED AS TRADING INCOME 16 PARTICULARLY WHEN THE SHARES/STOCKS HAS BEEN HELD F OR A PERIOD LASTING MORE THAN FOUR YEARS. THE ASSESSEE HAD SHO WN THE INVESTMENT SEPARATELY IN THE BALANCE SHEET. THE SA ID BALANCE SHEET HAD BEEN ACCEPTED AS TRUE BECAUSE IT IS NOT T HE CASE OF THE ASSESSING OFFICER THAT THE PARTICULARS MENTIONED IN THE BALANCE SHEET WERE WRONG. MOREOVER THE ASSESSING OFFICER HIMSELF ADMITTED THAT THE LEARNED CIT(A) AS WELL AS THE IT AT HAD DELETED THE ADDITION IN SIMILAR FACTS AND CIRCUMSTA NCES IN THE CASE OF SHRI ATUL KANODIA. HOWEVER HE DID NOT ACC EPT THE VIEW TAKEN BY THE LEARNED CIT(A) AND THE ITAT IN THE CAS E OF SHRI ATUL KANODIA FOR THE REASON THAT AN APPEAL HAD BEE N FILED U/S 260A IN THE CASE OF SHRI ATUL KANODIA BEFORE THE HO N'BLE HIGH COURT. HOWEVER NOTHING WAS BROUGHT ON RECORD TO SUBSTANTIATE THAT THE ORDER PASSED BY THE ITAT HAD BEEN REVERSED OR SET ASIDE BY THE HON'BLE HIGH COURT. IT IS ALSO NOTICED THAT THE LEARNED CIT(A) WHILE ADJUDICATING THE APPEAL OF THE ASSESSEE FOR THE ASSESSMENT YEAR 2003-2004 H AS DIRECTED THE ASSESSING OFFICER TO TREAT THE LOSS CLAIMED BY THE ASSESSEE ON THE SHARES / UNITS WHICH WERE HELD AS INVESTMENT AND CONTINUED TO BE MAINTAINED LIKE THAT AS LONG TERM CAPITAL LOSS. THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSES SEE THAT AGAINST THE SAID ORDER DATED 06/01/2009 FOR THE ASS ESSMENT YEAR 2003-2004 THE DEPARTMENT HAD NOT MOVED ANY APPEAL WAS NOT CONTROVERTED (COPY OF THE SAID ORDER IS PLACED AT P AGE NO. 79 TO 92 OF THE ASSESSEES COMPILATION). THEREFORE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION THE VIEW TAKEN BY THE LEARNED CIT(A) IS IN CONSONANCE WITH THE VIEW TAKEN FOR THE ASSESSMENT YEAR 2003-2004 IN ASSESSEES OWN CASE AN D THE DEPARTMENT HAD NOT PREFERRED ANY APPEAL FOR THE SAI D ASSESSMENT YEAR 2003-2004 MOREOVER THE VIEW TAKEN BY THE LEARNED CIT(A) IS ALSO IN ACCORDANCE WITH THE DECIS ION OF THE ITAT IN THE CASE OF SHRI ATUL KANODIA (SUPRA). WE THEREFORE DO NOT SEE ANY MERIT IN THIS APPEAL OF THE DEPARTME NT. 7. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBU NAL PASSED IN ASSESSEES CASE FOR ASSESSMENT YEAR 2005-06 WE DO NOT SEE ANY MERIT IN THIS APPEAL OF THE DEPARTMENT. ACCORDINGLY I.T.A.NO.608(LKW)/2010 IS DISMISSED. 17 8. THE ABOVE FINDINGS WILL APPLY WITH EQUAL FORCE T O THE COMMON GROUNDS RAISED IN I.T.A.NOS.609 AND 610(LKW)/2010 S INCE THE FACTS ARE SIMILAR EXCEPT THE AMOUNT OF ADDITION. 15. SINCE THE FACTS FOR THE YEAR UNDER CONSIDERATIO N ARE SIMILAR TO THE FACTS INVOLVED IN THE EARLIER YEARS SO RESPECTFULLY FO LLOWING THE AFORESAID EARLIER ORDERS OF THE TRIBUNAL WE DO NOT SEE ANY MERIT IN THE APPEAL OF THE DEPARTMENT ON THIS ISSUE 16. GROUNDS NOS.3 AND 4 RAISED BY THE DEPARTMENT READ AS UNDER : 3. THE COMMISSIONER OF INCOME TAX (APPEALS)-II KANPUR HAS ERRED IN LAW AND ON FACTS IN DIRECTING THE ASSESSIN G OFFICER TO TREAT THE SUM OF RS.1 04 70 000/- IS A CAPITAL RECEIPT NOT LIABLE TO TAX HOLDING THAT THE ASSESSEE HAS FURNISHED THE LIST OF CUSTOMERS TRANSFERRED AND THE EVIDENCES FOR ACTUAL TRANSFER OF CUSTOMERS BY THEIR REGISTRATION WITH MOTILAL OSWAL SECURITIES LTD. (MOSL) MUMBAI AND THE ASSESSEE COMPANY HAS NO CONTROL OVER SUCH CUSTOMERS ESPECIALLY WHEN THE AS SESSEE HAS SURRENDERED ITS NSE MEMBERSHIP TO CLOSE THE BUSINE SS. 4. THAT THE ORDER OF COMMISSIONER OF INCOME-TAX (A PPEALS)-II KANPUR BEING ERRONEOUS IN LAW AND ON FACTS DESERVE TO BE VACATED AND THAT THE ORDER OF THE AO BE RESTORED. 17. THE FACTS RELATING TO THE ISSUE INVOLVED IN THE ABOVE GROUNDS IN BRIEF ARE THAT DURING THE YEAR UNDER CONSIDERATION THE AS SESSEE DECIDED TO CLOSE ITS BUSINESS OF SHARE BROKING AND DEPOSITORY PARTICIPAN T. THE ASSESSEE ENTERED INTO AN AGREEMENT WITH M/.S MOTI LAL OSWAL SECURITI ES ( IN SHORT MOSL) TO TRANSFER ALL ITS CUSTOMERS AND THEIR DATA TO MO SL NOT TO COMPETE WITH 18 MOSL AND TO NOMINATE A COMPANY TO BE A SUB BROKER O F MOSL FOR TRANSACTION OF CUSTOMERS. BESIDES NON-COMPETITION F EE TO THE ASSESSEE AND THE PROMOTERS OF THE ASSESSEE-COMPANY MOSL PAID A SUM OF RS.1 04 07 000 TO THE ASSESSEE FOR TRANSFER OF ITS CUSTOMERS AND RELATED DATA TO THEM. WHILE NON-COMPETITION FEE HAS BEEN OFFERE D TO TAX AS BUSINESS RECEIPTS UNDER SECTION 28 OF THE I.T.ACT THE AMOUN T FOR TRANSFER OF CUSTOMERS RIGHTS ETC. HAD BEEN ACCOUNTED AS CAPITA L RECEIPT NOT LIABLE TO TAX. THE CONTENTION OF THE ASSESSEE BEFORE THE AO WAS AS UNDER : .. THE CONCLUSION THAT MSB WILL RETAIN CONTROL O VER BUSINESS OF THE CLIENTS TRANSFERRED TO MOSL THROUGH MSB BROKER AND THAT THERE IS NO ACTUAL TRANSFER OF CUSTOMERS RIGHTS AND THAT IT IS ONLY FOR INCOME TAX PURPOSES THAT THIS ARRANGEMENT HAS BEEN SOUGHT TO AVOID TAX PAYMENT IS NOT CORRECT. AS PER AGREEMENT NO.1 CLAUSE NO.2 THE MOSL HAS AGREED TO ACQUIRE MSBS CUSTOMER RIGHTS WHICH ME ANS ALL THE RIGHTS INCLUDING DATABASE RIGHT TO ACCESS THE CUSTOMERS AND CUSTOMER- RELATED-INFORMATION OF MSB INCLUDING THE CUSTOMER S OF ITS SUB- BROKERS CUSTOMER-RELATED-INFORMATION WHICH INTER ALIA INCLUDES THE DATA DOCUMENTS FILES RECORDS NOTE-BOOKS STATIS TICS RESEARCH BLUE- PRINTS TOOLS PROCEDURES CODES AND OTHER INFORMAT ION RELATING TO THE CUSTOMERS AND CUSTOMER CONTRACTS INCLUDING ANY SUCH INFORMATION RECORDED OR STORED IN WRITING OR UPON MAGNETIC TAP E OR DISC OR OTHERWISE RECORDED OR STORED FOR REPRODUCTION WHET HER BY MECHANICAL OR ELECTRONIC MEANS AND ALL OTHER DATA WHICH WOULD BE RELEVANT TO ENSURE CONTINUITY IN PROVISION OF SERVICE TO THE CU STOMER. YOUR KIND ATTENTION IS INVITED TO PREAMBLE OF AGRE EMENT NO.1 WHERE THE PURPOSE OF AGREEMENT IS EXPLAINED VERY CL EARLY:- AS PER PREAMBLE IT IS MENTIONED:- WHEREAS MOSL WITH A VIEW TO GROW FASTER IN THE RETA IL DISTRIBUTION AND AS A GROWTH STRATEGY FOR GROWING A CROSS THE 19 COUNTRY IS KEEN TO ACQUIRE CLIENTELE OF OTHER BROK ERS SUB- BROKERS WITH OR WITHOUT INFRASTRUCTURE THAT IS REQU IRED FOR TRADING (THE TRADING SYSTEM VSAT IDU/S ETC.); WHEREAS MSB IS ALSO IN THE BUSINESS OF STOCK BROKI NG AND IS A MEMBER OF NSE & SUB-BROKER OF BSE ENJOYING LARGE CLIENTELE AND SUB-BROKER NETWORK MSB HAS ENTERED I NTO NECESSARY AGREEMENT(S) WITH AL ITS CLIENTS AND THE CLIENTS OF ITS SUB-BROKER AS PER THE REGULATORY REQUIREMENTS OF SE BI AND THE STOCK EXCHANGES; WHERE MOSL IS DESIROUS OF ACQUIRING THE CUSTOMER RIGHTS FROM MSB WHICH MEANS ALL THE RIGHTS INCLUDING THE DATABASE RIGHTS TO ACCESS THE CUSTOMERS AND CUSTOMER-RELATED INFORMATION OF MSB ALOGNWITH THE CUSTOMERS OF ITS SUB-BROKER; WHEREAS BASED ON MUTUAL DISCUSSIONS AND UNDERSTAN DING REACHED BETWEEN THE PARTIES MSB AND ITS MANAGEMEN T ARE SUBJECT TO SUCH TERMS AND CONDITIONS AS ARE SPECIF IED HEREINAFTER IN THIS AGREEMENT AGREEABLE TO TAKE FUL L EFFORTS TO TRANSFER ITS ENTIRE CLIENTELE OF BROKERING PORT-F OLIO MANAGEMENT AND DEPOSITORY BUSINESS AND ALL ITS RIGH TS THEREIN TO MOSL AND GET SUCH TRANSFER EXECUTED. MSB WILL INITIATE THE PROCESS OF TRANSFER OF CLIENTS ESPECIALLY THAT RE LATED TO EXECUTION OF ACCOUNT OPENING FORMS AND CLIENTS RE GISTRATION FORMS WITH IMMEDIATE EFFECT; WHEREAS IT HAS BEEN AGREED BETWEEN THE PARTIES H ERETO THAT FOR THE PURPOSE OF MANAGING AND SERVICING THE BUSI NESS RELATED TO THE CLIENTS TRANSFERRED TO MOSL MOSL SHALL APP OINT A COMPANY NOMINATED BY MSB AS ITS SUB-BROKER (HEREIN AFTER REFERRED TO AS MSB SUB-BROKER). MOSL SHALL ENTER I NTO AGREEMENTS WITH MSB SUB-BROKER AS REQUIRED BY SEB I EXCHANGES AND OTHER AUTHORITIES AS MAY BE APPLICAB LE. IT IS ONLY BECAUSE MOSL WANTS TO EXPAND IN RETAIL D ISTRIBUTION 20 AND FOR GROWING ACROSS THE COUNTRY HAS AGREED TO AC QUIRE THE LARGE CUSTOMER RIGHTS AND DATABASE ALONGWITH THE BR OKING PORT-FOLIO MANAGEMENTS AND DEPOSITORY BUSINESS OF M SB. AS MOSL IS NOT OPERATING IN THE GEOGRAPHICAL AREAS OF MSB AND MSB HAD DEVELOPED THE CLIENTS THE BUSINESS IN ITS AREA AND THUS WELL VERSED WITH THE CLIENTS AND BUS INESS IN THIS GEOGRAPHICAL AREA. BECAUSE OF THIS EXPERIENCE MOSL AGREED THAT A PARTY NOMINATED BY MSB SHALL BE MSB SUB BROK ER FOR THIS GEOGRAPHICAL AREA. THE CONTROL OVER THE CLIENTS AND EVEN ON MSB BROKER SHALL BE ABSOLUTE IN THE HANDS OF MOSL AND IT IS NOT TO AVOI D THE TAX PAYMENT. THE PARTIES ARE NOT RELATED TO EACH OTHER AND THEY HAVE ACTED ON THE PRINCIPLE OF ARMS LENGTH DISTANCE AND ARMS LENGTH PRICE. HAD THE CONTROL STILL BEEN WITH MSB WHY THE MOSL WOULD HAVE PAID SUCH A SUBSTANTIAL AMOUNT TO A N UNRELATED PARTY? AS PER CLAUSE-5 OF THE AGREEMENT IT HAS BEEN AGREED THAT MSB SUB-BROKERS SHALL NOT FUNCTION AS SUB-BROKER OF ANY OTHER STOCK BROKER ANY TIME IN FUTURE. MSB SUB-BROKER SHALL NOT SOLICIT OR ENTICE AWAY OR ATTEMPT TO SOLICIT OR ENTICE AWAY D IRECTLY OR INDIRECTLY ANY CUSTOMERS OF STOCK BRAKING PORT-FO LIO MANAGEMENT AND DEPOSITORY BUSINESS OF MOSL TO ANY O THER PERSON OR STOCK BROKER IN ANY MANNER AT ANY TIME IN FUTURE. AS PER CLAUSE-6 OF THE AGREEMENT IT IS AGREED THAT MSB SHALL TRANSFER ITS ASSETS AND EMPLOYEES TO MSB SUB-BROKER FOR THE PURPOSE OF CARRYING ON OF THE BUSINESS AS SUB-BROKE R OF MOSL. THIS HAS BEEN DONE TO FACILITATE SMOOTH TRANSITION OF BUSINESS FROM MSB TO MOSL (OPERATED THROUGH MSB BROKERS). AS PER CLAUSE-7 OF THE AGREEMENT MSB ALSO AGREES TO TRANSFER ITS CLIENTS HOLDING DEMAT ACCOUNTS IN MSBS CAPACITY AS DEPOSITORY PARTICIPANT (DP) OF CENTRAL DEPOSITORY S ERVICES LIMITED (CDSL) TO MOSL. THESE ALL ABOVE COVENANTS CLEARLY ESTABLISH THAT IT IS REAL AND FACTUAL THAT MSB HAS ACTUALLY TRANSFERRED ITS CUSTO MER RIGHTS 21 AND CUSTOMER RELATED INFORMATION AT A PRICE TO MOSL AND ULTIMATELY HAS LOST ALL CONTROL OVER THESE RIGHTS A ND EVENTUALLY OVER THE SOURCE OF INCOME .... THE ABOVE CLAUSE OF SHARING REVENUE BETWEEN MOSL & MSB SUB-BROKER EQUALLY IN RESPECT OF CLIENTS TRANSFERRE D BY MSB TO MOSL AND FUTURE CLIENTS OF MSB ALSO CLEARLY ESTABLI SH THAT MSB IS NOT IN PICTURE AND IT IS SHARING OF REVENUE BETWEEN MOS AND MSB SUB-BROKER. MSB AND MSB SUB-BROKER BOTH ARE CORPORATE ENTITIES AND THUS ARE INDEPENDENT JURISD ICTIONAL AND LEGAL PERSON. MSB DOES NOT HAVE ANY INTEREST IN MSB SUB- BROKER. BOTH ARE INDEPENDENT. AS MOSL WILL BE EARNI NG ITS REVENUE THROUGH ITS CLIENTS AND OPERATION PART SHAL L BE MANAGED BY MSB SUB-BROKER AND BECAUSE OF THIS THERE IS SHARING OF REVENUE. MSB WILL HAVE NO INTEREST OR SH ARE IN ABOVE PROFIT. IT HAS TRANSFERRED ITS DATABASE AND CUSTOME RS RIGHT WHICH IT BUILT OVER YEARS AND AFTER SUCH TRANSFER I T HAS LOST ITS THIS SOURCE OF INCOME ALSO. YOUR CONTENTION THAT TRANSFER OF CUSTOMER RIGHTS IS ACTUALLY PART AND PARCEL OF GOODWILL IS NOT CORRECT. YOU HAVE ALS O MENTIONED THAT CUSTOMERS HAVE AGREED TO COME WITH MOSL BECAUSE OF THE GOODWILL. WHICH MSB ENJOYS WITH ITS CLIENTS AND CLIENTS ARE ASSURED THAT THERE BUSINESS WILL BE DEA LT WITH BY MSB BROKER NOMINATED BY MSB. IN THIS REGARD IT I S SUBMITTED THAT GOODWILL IS AN ACCOUNTING TERM USED TO REFLECT THE PORTION OF TILE BOOK VALUE OF A BUSINES S ENTITY NOT DIRECTLY ATTRIBUTABLE TO ITS ASSETS AND LIABILI TIES. IT REFLECTS THE ABILITY OF THE ENTITY TO MAKE A HIGHER PROFIT THAN WOULD BE DERIVED FROM SELLING THE TANGIBLE ASS ETS. GOODWILL IS CONSIDERED AN INTANGIBLE ASSET. THUS FROM THE CONCEPT OF GOODWILL IT IS CLEAR THAT IT REFLECTS THE PORTION OF THE BOOKS VALUE OF A BUSINE SS ENTITY NOT DIRECTLY ATTRIBUTABLE TO ITS ASSETS AND LIABILI TIES AND IT REFLECTS THE ABILITY OF ENTITY TO MAKE A HIGHER PRO FIT THAN WOULD BE DERIVED FROM SELLING THE TANGIBLE ASSETS. IN OUR CASE ON CONTRARY WE HAVE SOLD/TRANSFERRED THE COMPLETE DATABASE AND CUSTOMER RIGHTS AND ENSURED T HAT 22 CLIENTS ARE TRANSFERRED TO MOSL. THE CUSTOMERS HAVE AGREED TO BECOME CLIENTS OF MOSL BECAUSE OF GREAT RESEARCH BASED FACILITIES ADVICES TIPS FLASHES A ND BECAUSE OF CREDIT/GOODWILL AND NET WORTH OF MOSL AN D NOT BECAUSE THAT THEIR BUSINESS WILL BE DEALT WITH BY MSB BROKER. FURTHER FROM THE CONCEPT OF GOODWILL AS MENTIONED ABOVE IT REFLECT ABILITY TO MAKE A HIGHER PROFIT. AGAIN IN OUR CASE IT IS NOT TRUE AS CLIENTS WILL GE NERATE THE SAME PROFIT FOR MOSL AS WAS DERIVED FOR MSB. IT IS JUST BECAUSE THAT MOSL WANTED TO EXPAND ITS REACH ACROSS THE COUNTRY IT PAID RS.L.04 CRORES FOR ACQUIRING T HE CUSTOMER RIGHTS AND CLIENT INFORMATION AND NOT BECA USE OF ANY GOODWILL INVOLVED IN IT. A SEPARATE NOTE 017 CAPITAL RECEIPT ON TRANSFER OF CUSTOMER RIGHTS IS E NCLOSED FOR YOUR KIND PERUSAL. 18. THE AO DID NOT ACCEPT THE CONTENTION OF THE AS SESSEE AND MADE THE ADDITION OF RS.1 04 70 000 BY OBSERVING A S UNDER : 14. THE CONTENTION OF THE ASSESSEE THAT MSB HAS A CTUALLY TRANSFERRED ITS CUSTOMER RIGHTS AND CUSTOMER RELATE D INFORMATION AT A PRICE TO MOSL AND ULTIMATELY HAS L OST ALL CONTROL OVER THESE RIGHTS AND EVENTUALLY OVER THE S OURCE OF INCOME IS NOT ACCEPTABLE BECAUSE OF THE FACT THAT T HE BUSINESS RELATED TO THE C1IENTS TRANSFERRED TO MOSL BY MSB W ILL BE MANAGED AND SERVICED BY A COMPANY NOMINATED BY MSB AS ITS SUB- BROKER. IT IS A KNOWN FACT THAT 'THE POWER OF NOMINATION' P ROVIDES GREAT POWER TO MSB TO RETAIN CONTROL OVER THE CLIEN TS TRANSFERRED TO MOSL SINCE MSB WILL ALWAYS TRY TO N OMINATE SUCH COMPANY AS MSB SUB-BROKER WHICH WILL TEND TO F ULFILL THE DIRECTIONS GIVEN BY MSB SINCE ITS SURVIVAL AND STA TUS AS MSB SUB-BROKER WILL DEPEND UPON THE WHIMS AND FANCIES O F MSB. THUS MSB WILL ALWAYS BE ABLE TO RETAIN CONTROL OVE R THE BUSINESS OF THE CLIENTS TRANSFERRED TO MOSL THROUGH MSB SUB- BROKER. THUS IT IS CLEAR THAT THERE IS NO ACTUAL TRANSFER OF CUSTOMER 23 RIGHTS AND THE AMOUNT OF RS.L 04 70 000/- WHICH THE ASSESSEE IS CLAIMING THAT IT HAS RECEIVED IT AS CAPITAL RECEIPT FOR TRANSFER OF CUSTOMER RIGHTS IS ACTUALLY A PART AND PARCEL OF GO ODWILL. SINCE THE CUSTOMERS HAVE AGREED TO COME ON THE ROLLS OF M OSL BECAUSE OF THE GOODWILL WHICH MSB ENJOYS WITH ITS C LIENTS AND THE CLIENTS ARE ASSURED THAT THEIR BUSINESS WILL BE DEALT WITH BY MSB BROKER NOMINATED BY MSB. SO RS.1 04 70 000/- IS A PART AND PARCEL OF GOODWIL L AND TREATED AS TAXABLE CAPITAL RECEIPT AND CHARGED TO T AX ACCORDINGLY. 19. THE ASSESSEE CARRIED THE MATTER TO THE LD.CIT(A ) AND THE SUBMISSIONS MADE BEFORE HIM ARE REPRODUCED VERBATUM AS UNDER : 1. THE APPELLANT WAS CARRYING ON THE BUSINESS OF S TOCK BROKERS AS A MEMBER OF NATIONAL STOCK EXCHANGE LTD AND AS SUB BROKER OF A BSE MEMBER. IT WAS ALSO ACTING AS DEPOSITORY PARTICIPAN T OF CDSL FOR A COUPLE OF YEAR. 2. DURING THE COURSE OF BUSINESS IN ALMOST TEN YEAR S THE APPELLANT EXPANDED ITS BUSINESS BY REGISTERING LARGE NUMBER O F CUSTOMERS EITHER DIRECTLY OR THROUGH SUB BROKERS. 3. HOWEVER DUE TO EMERGING BUSINESS TRENDS LIKE INT ERNET BROKING AND EMERGENT OF LARGE PLAYERS IN BROKING BUSINESS E.G. SHARE KHAN RELIANCE MOTILAL OSWAL ETC. IT WAS THE NEED OF T HE HOUR EITHER TO UPDATE OUR INFRASTRUCTURE AND BUSINESS SET UP TO CO PE UP WITH THE BUSINESS TRENDS AND COMPETITION OR TO COME OUT OF T HE BUSINESS. AS WE WERE NOT EQUIPPED WITH THE LARGE INFRASTRUCTURE REQ UIRED AND THE RESEARCH AND MARKETING NETWORK TO COMPETE WITH SUCH LARGE PLAYERS WE DECIDED TO CLOSE AND REALISE OUR ASSETS IN THE B EST MANNER POSSIBLE. 4. IN THE PROCESS MOTILAL OSWAL SECURITIES LTD (MOS L) WITH A VIEW TO GROW FASTER IN THE RETAIL DISTRIBUTION AND AS A GROWTH STRATEGY ACROSS THE COUNTRY AGREED TO ACQUIRE THE ENTIRE CL IENTELE/ CUSTOMERS RIGHTS OF THE APPELLANT FOR A CONSIDERATION. COPIES OF THE AGREEMENTS DATED 29 TH DAY OF JULY 2006 ARE ATTACHED AT PAGE 85 TO 99 OF THE PAPER BOOK. THE SALIENT FEATURES OF THE DEAL AND THE AGRE EMENTS ARE AS UNDER: 24 A. MOSL SHALL ACQUIRE ENTIRE CUSTOMER RIGHTS OF THE APPELLANT WHICH MEANS ALL THE RIGHTS INCLUDING THE DATA BASE RIGHTS TO ACCESS THE CUSTOMERS CUSTOMERS INFORMATION CUSTOMERS REG ISTRATIONS CODES AND ALL RECORDS RELATED TO CUSTOMERS; B. MOSL SHALL CARRY ON THE BUSINESS OF STOCK BROKER S BY APPOINTING A SUB BROKER OF MOSL DULY REGISTERED WIT H SEBI AND ENTIRE REVENUE SHALL BE SHARED BY MOSL AND ITS SUB BROKER ONLY; C. FOR THE PURPOSE OF SMOOTH TRANSITION OF CUSTOMER S TO MOSL AND ITS SUB BROKER THE APPELLANT SHALL NOMINATE A COMPANY AND SHALL ARRANGE FOR THE ACTUAL TRANSFER AND REGISTRAT ION OF THE CUSTOMERS AS THAT OF MOSL WITH NSE AND BSE; D. THE APPELLANT AND ITS PROMOTERS SHALL NOT CARRY ON THE BUSINESS OF STOCK BROKERS DEPOSITORY PARTICIPANTS ETC EXCE PT IN ASSISTING MOSL IN COMPLYING WITH THE TERMS OF THE AGREEMENT F OR TRANSFER OF CUSTOMERS AND RUNNING OF BUSINESS BY MOSL THROUGH I TS SUB BROKER. E. THE APPELLANT COMPANY SHALL TRANSFER THE EMPLOYE ES TO THE SUB BROKER COMPANY. F. THE APPELLANT COMPANY SHALL TRANSFER ITS CLIENTS HOLDING DEMAT ACCOUNTS IN ITS CAPACITY AS DEPOSITORY PARTICIPANT (DP) OF CDSL TO MOSL. G. THE FOLLOWING CONSIDERATION WAS AGREED TO BE PAID B Y MOSL: I. FOR TRANSFER OF CUSTOMERS AND CUSTOMER RIGHTS TO TH E APPELLANTRS. 35 LAKHS PLUS 0.55 TIMES OF THE TOTAL REVENUE (GROSS BROKERAGE NET OF ALL LEVIES) EARNED BY APPELLANT FOR THE PERIOD 1.4.2006 TO 30.09.2006. TH IS AMOUNTED TO RS. 1 04 70 000/-; II. RS. 10 00 000/- TO APPELLANT FOR GOODWILL; III. RS. 15 00 000/- TO APPELLANT FOR NOT CARRYING ON TH E BUSINESS OF STOCK BROKER ETC. I.E. NON COMPETITION ; IV. RS.35 00 000/- TO PROMOTERS OF THE APPELLANT COMPA NY FOR NOT CARRYING OF THE BUSINESS OF STOCK BROKER ET C. I.E. NON COMPETITION. 25 5. IN ACCORDANCE WITH THE AFORESAID AGREEMENTS A NE W COMPANY WAS FORMED WHICH ITSELF ENTERED INTO STOCK BROKER A ND SUB BROKER AGREEMENT WITH MOSL AND WERE REGISTERED AS SUCH WIT H THE NSE AND BSE. 6. ALL THE CUSTOMERS AND CUSTOMERS RIGHTS WERE TRA NSFERRED TO MOSL AND ITS SUB BROKER. THE CUSTOMERS ENTERED IN T O CLIENT AGREEMENT WITH MOSL. 7. THE APPELLANT HAVING LOST ITS BASIC SOURCE OF IN COME APPLIED TO NSE FOR SURRENDER OF MEMBERSHIP WHICH WAS SUBSEQUEN TLY ACCEPTED BY THE EXCHANGE AFTER DUE PROCESS. 8. THE AMOUNT RECEIVED ON ACCOUNT OF GOODWILL NON- COMPETE FEE AND SALE OF CUSTOMERS RIGHTS WAS ACCOUNTED AS CAPI TAL RESERVE UNDER THE HEAD RESERVES AND SURPLUS AND THE FACT WA S DULY DISCLOSED IN THE NOTES TO ACCOUNTS. 9. THE AMOUNT OF THE NON- COMPETE FEE WAS OFFERED F OR TAX AS BUSINESS INCOME U/S 28 OF THE INCOME TAX ACT AND TH E GOODWILL OF RS. 10 LAKH UNDER THE HEAD CAPITAL GAIN. 10. THE AMOUNT RECEIVED ON TRANSFER OF CUSTOMERS A ND CUSTOMERS RIGHTS WAS TREATED AS CAPITAL RECEIPT NO T LIABLE TO TAX SINCE THE APPELLANT IMPAIRED AND LOST ITS VERY SOUR CE OF EARNING INCOME BY SUCH TRANSFER. THIS IS IN ACCORDANCE WITH VARIOUS JUDICIAL PRONOUNCEMENTS. ALTERNATIVELY ALSO IF THE CUSTOMERS RIGHT IS TREATED AS A CAPITAL ASSET (ALTHOUGH IT IS NOT A DMITTED) THE SAME CAN NOT BE TAXED AS CAPITAL GAIN IN ABSENCE OF ANY COST OF ACQUISITION IN VIEW OF DECISION OF HONBLE SUPREME COURT IN CIT VS. B SRINIVAS SETTY 128 ITR 294. THE LEARNED ACIT HAS HOWEVER ASSESSED THE RECEIPT OF RS. 1 04 70 000/- AS PART OF GOODWILL AND TREATED THE SAME AS CAPITAL RECEIPT CHARGEABLE TO T AX UNDER THE HEAD CAPITAL GAIN. THE FINDINGS OF THE LEARNED ACIT ARE IN PARA 14 OF THE ASSESSMENT ORDER AND ARE REPRODUCED: THE CONTENTION OF THE ASSESSEE THAT MSB HAS ACTUAL LY TRANSFERRED ITS CUSTOMER RIGHTS AND CUSTOMER RELATED INFORMATIO N AT A PRICE TO MOSL AND ULTIMATELY HAS LOST ALL CONTROL OVER THESE RIGHTS AND 26 EVENTUALLY OVER THE SOURCE OF INCOME IS NOT ACCEPTA BLE BECAUSE OF THE FACT THAT THE BUSINESS RELATED TO THE CLIENTS T RANSFERRED TO MOSL BY MSB WILL BE MANAGED AND SERVICED BY A COMPANY NO MINATED BY MSB AS ITS SUB-BROKER. IT IS A KNOWN FACT THAT THE POWER OF NOMINATION PROVIDES GREAT POWER TO MSB TO RETAIN CONTROL OVER THE CLIEN TS TRANSFERRED TO MOSL SINCE MSB WILL ALWAYS TRY TO NOMINATE SUCH COMPANY AS MSB SUB-BROKER WHICH WILL TEND TO FULFIL THE DIRECT IONS GIVEN BY MSB SINCE ITS SURVIVAL AND STATUS AS MSB SUB-BROKE R WILL DEPEND UPON THE WHIMS AND FANCIES OF MSB. THUS MSB WILL A LWAYS BE ABLE TO RETAIN CONTROL OVER THE BUSINESS OF THE CLI ENTS TRANSFERRED TO MOSL THROUGH MSB SUB-BROKER. THUS IT IS CLEAR THAT THERE IS NO ACTUAL TRANSFER OF CUSTOMER RIGHTS AND THE AMOUNT OF RS.1 04 70 000/- WHICH THE ASSESSEE IS CLAIMING THAT IT HAS RECEIVED IT AS CAPITAL RECEIPT FOR TRANSFER OF CUSTOMER RIGHTS IS ACTUALLY A PART AND PARCEL OF GO ODWILL. SINCE THE CUSTOMERS HAVE AGREED TO COME ON THE ROLLS OF MOSL BECAUSE OF THE GOODWILL WHICH MSB ENJOYS WITH ITS CLIENTS AND THE CLIENTS ARE ASSURED THAT THEIR BUSINESS WILL BE DEALT WITH BY M SB BROKER NOMINATED BY MSB. SO RS.1 04 70 000/- IS A PART AND PARCEL OF GOODWIL L AND TREATED AS TAXABLE CAPITAL RECEIPT AND CHARGED TO T AX ACCORDINGLY. 11. WE SUBMIT FOR YOUR CONSIDERATION: A. THE LEARNED ACIT COULD NOT APPRECIATE THE REAL N ATURE AND TERMS OF THE TRANSACTIONS. THE SUB BROKER COMPA NY HAS ACTUALLY BEEN APPOINTED BY MOSL AND THE ENTIRE REVE NUE OF THEIR BUSINESS BELONGS TO THEM AND THE APPELLANT CO MPANY HAS NO AUTHORITY OR RESPONSIBILITY IN THE CONDUCT OF TH EIR BUSINESS. THERE IS NO AGREEMENT OR UNDERSTANDING THAT THE CUS TOMERS OR ANY OF CUSTOMER RELATED INFORMATION OR DATA SHALL R EVERT BACK OR BE CONTROLLED BY THE APPELLANT COMPANY. B. IT WAS AN OBLIGATION OF THE APPELLANT COMPANY TO TRANSFER THE CUSTOMERS AND THEIR DATA AND OTHER INFORMATION TO SUB BROKER OF MOSL AS CUSTOMERS OF MOSL. IT IS ONLY TO FACILITATE SUCH TRANSFER IN REAL MANNER THE APPELLANT WAS ASK ED TO 27 NOMINATE A COMPANY OF CHOICE. OTHER REASON FOR SUCH NOMINATION IS THAT MOSL HAS NO INFRASTRUCTURE OR FA CILITY IN THIS PART OF THE COUNTRY TO FORM A NEW COMPANY AND COMPLETE ALL THE FORMALITIES. THE NOMINATION DOES NOT EMPOWE R THE APPELLANT COMPANY WITH ANY AUTHORITY OR CONTROL OVE R THE SUB BROKING COMPANY OR ANY OF THE CUSTOMERS OF MOSL. RA THER THE NOMINATION BY THE APPELLANT IS AN OBLIGATION IN TER MS OF THE AGREEMENT. C. THE SUB BROKER COMPANY OF MOSL HAS TO OPERATE AN D FUNCTION IN ACCORDANCE WITH THE AGREEMENT AND INTER SE RELATIONSHIP BETWEEN THEM. THE AGREEMENT OR THE NOM INATION DO NOT AUTHORISE THE APPELLANT IN ANY CASE TO EXERCISE OR GIVE DIRECTIONS TO THE SUB BROKER COMPANY. IT IS A MERE FIGMENT OF IMAGINATION OF THE LEARNED ACIT THAT THE SUB BROKER COMPANY WILL TEND TO FULFIL THE DIRECTIONS GIVEN BY THE APP ELLANT COMPANY. D. THE LEARNED ACIT HAS ACTED ARBITRARILY AND ON CONJECTURE AND SURMISES THAT THERE IS NO ACTUAL TRA NSFER OF CUSTOMER RIGHTS. IN FACT THE ENTIRE CLIENTELE OF TH E APPELLANT HAS BEEN TRANSFERRED AND REGISTERED AS CLIENTS OF MOSL AND THE APPELLANT COMPANY HAS NO BUSINESS OR OTHER RELATION S WITH ANY OF SUCH CLIENT. FURTHER THE APPELLANT COMPANY HAS C LOSED ITS BUSINESS OF STOCK BROKING IN DUE COURSE AFTER COMPL ETING THE NECESSARY PROCESS AND FORMALITIES. E. THE CONTENTION OF THE LEARNED ACIT THAT THE CUST OMERS AGREED FOR THE TRANSFER BECAUSE OF THE GOODWILL OF THE APPELLANT COMPANY AND SERVICES BY THE SUB BROKER NOMINATED BY THE APPELLANT IS AGAIN A FIGMENT OF IMAGINATION AND WIT HOUT APPRECIATING THE ENTIRE OBJECTIVE AND PURPOSE OF TH E TRANSACTION. IN FACT IF THE APPELLANT HAS NOT TRANS FERRED THE CUSTOMERS TO A COMPANY LIKE MOSL THEY WOULD HAVE L EFT THE APPELLANT COMPANY IN DUE COURSE DUE TO LACK OF INFR ASTRUCTURE RESEARCH BASE AND COMPETITIVE RATES IN MARKET. IT I S THE GOODWILL AND REPUTATION OF MOSL WHICH ATTRACTED THE M TO SWITCH TO MOSL. THE NOMINATION OF MSB SUB BROKER IS JUST TO FACILITATE SUCH TRANSFER IN THE BEST INTEREST OF MO SL AND THE CUSTOMERS. 28 F. FURTHER THE APPOINTMENT OF A SUB BROKER IS NORMA L WAY OF EXPANDING THE BUSINESS OF STOCK BROKING AND IT WAS MOST NATURAL AND CONVENIENT FOR MOSL TO APPOINT A SUB BR OKER NOMINATED BY THE APPELLANT COMPANY WHICH COULD ENS URE SMOOTH AND ASSURED TRANSITION OF CUSTOMERS AND ALSO THE RUNNING OF BUSINESS FOR THEIR BENEFIT. G. GOODWILL AND CUSTOMERS RIGHTS AND THEIR DATA BAS E ETC ARE TWO DIFFERENT COMPONENTS OF COMMERCE AND BUSINE SS. IN THE PRESENT CASE MOSL HAS ALREADY GOODWILL AND CREDIBIL ITY IN MARKET. WHAT IT REQUIRED TO EXPAND ITS BUSINESS IN THIS PART OF COUNTRY WAS A LARGE ESTABLISHED CUSTOMER BASE TO ES TABLISH ITS BUSINESS. IN CASE ONLY GOODWILL WOULD HAVE BEEN SOL D TO THEM THEY COULD NOT HAVE ANY RIGHT ON THE EXISTING CUSTO MERS OF THE APPELLANT AND HAD TO CONDUCT EXTENSIVE MARKETING AN D BUSINESS ACTIVITIES TO GET SUCH CUSTOMER RIGHTS AND BASE. TH E CONTENTION OF THE LEARNED ACIT THAT THE CUSTOMERS RIGHT SOLD I S PART OF GOODWILL HAS NO LEGS AND CONTRARY TO THE FACTS OF T HE PRESENT CASE AND NORMAL BUSINESS PARLANCE. H. IT IS CLEAR AND OBVIOUS THAT BY TRANSFERRING THE ENTIRE CUSTOMERS RIGHTS AND CUSTOMER RELATED INFORMATION A ND DATA BASE THE APPELLANT HAS LOST ITS VERY SOURCE OF EARN ING INCOME. THE TENOR AND PURPOSE OF THE ENTIRE TRANSACTION CLE ARLY SUGGEST THAT THE APPELLANT HAS DECIDED TO CLOSE ITS BUSINES S AND IN FACT THE SAME WAS CLOSED BY SURRENDERING THE MEMBERSHIP OF NSE. I. THE TRANSACTING PARTY ARE NOT RELATED TO EACH OT HER AND HAVE ACTED ON ARMS LENGTH DISTANCE AND ARMS LENGTH PRICE. THERE WAS NO REASON FOR MOSL TO PAY SUCH SUBSTANTIA L AMOUNT IN CASE THE CONTROL ON CUSTOMERS REMAINS WITH THE A PPELLANT COMPANY. J. ADMITTEDLY THE LEARNED ACIT HAS HELD THE RECEIPT OF RS. 1 04 70 000/- AS CAPITAL RECEIPT. AS EXPLAINED AB OVE THE SAME IS NOT PART OF GOODWILL AND THUS DO NOT FORM INCOME LIABLE TO TAX. K. IT HAS BEEN HELD BY VARIOUS COURTS THAT A RECEIP T IN RESPECT OF A TRANSACTION RESULTING IN THE LOSS OF V ERY SOURCE OF 29 INCOME IS A CAPITAL RECEIPT NOT LIABLE TO TAX. THE FOLLOWING JUDICIAL PRONOUNCEMENTS ARE RELEVANT: I. CIT VS. AMBADI ENTERPRISES LTD 267 ITR 702 (MAD) -- -- HELD THAT THE ENTIRE TRAINED MANPOWER AND CUSTOMER NETWORK WERE HANDED OVER TO THE OTHER PARTY TO THE AGREEMENT. IN SUCH A SITUATION THE PAYMENT RECEIVE D BY THE ASSESSEE HAD THE IMPRINT OF A CAPITAL RECEIPT. THE ASSESSEE HAD A WELL DEVELOPED LARGE SCALE ORGANISAT ION AND MARKETING NETWORK AND HAD GIVEN UP THE ENJOYMEN T OF GOOD PROFITS THAT IT HAD IN ALL THESE YEARS TILL THE DATE OF TERMINATION OF THE AGREEMENT. THE ASSESSEE HAD ALSO ENTERED INTO A RESTRICTIVE COVENANT. ALL THESE FACT S WOULD INDICATE THAT THE TERMINATION OF THE AGREEMENT HAD MATERIALLY CRIPPLED THE STRUCTURE OF THE ASSESSEES PROFIT MAKING APPARATUS AND WHAT WAS RECEIVED WAS A CAPITA L RECEIPT. II. CIT VS. T.I. & M. SALES LTD. 259 ITR 116------ HELD THAT THE AMOUNT PAID TO THE ASSESSEE WAS COMPENSATION FO R IMPAIRMENT OF THE PROFIT MAKING APPARATUS OF THE ASSESSEE AND FOR THE STERILISATION OF THE VERY SOUR CE OF ITS INCOME; THAT MERELY BECAUSE THE COMPENSATION HAD BE EN QUANTIFIED ON THREE COUNTS VIZ. COST OF TRAINED M AN POWER COMPENSATION FOR COST OF DEALERS AND COMPENSATION FOR LOSS OF PROFITS IT COULD NOT BE S AID THAT THE ASSESSEE HAS RECOUPED OR BEEN REIMBURSED THE EXPENSES IN THE PAST OR THAT IT HAD BEEN REIMBURSED THE PROFIT THAT WAS NOT AVAILABLE AS A RESULT OF THE TERMINATION OF THE DISTRIBUTION AGREEMENT; THEREFO RE THE TRIBUNAL WAS RIGHT IN TREATING THE AMOUNT RECEIVED BY THE ASSESSEE AS A CAPITAL RECEIPT. III. OBEROI HOTEL PVT LTD VS. CIT 236 ITR 903 (SC) ---- HELD LOSS OF SOURCE OF THE ASSESSEES INCOME. THE RECEIP T IN HANDS OF THE ASSESSEE IS A CAPITAL RECEIPT. 53 ITR 261 (SC) APPLIED. 30 L. THE FACTS OF THE PRESENT CASE ARE SIMILAR TO THE CASE MENTIONED IN (I) ABOVE AND THE PRINCIPLES LAID DOWN IN OTHER CASES MENTIONED ARE APPLICABLE. BY TRANSFERRING THE CUSTO MERS AND ENTIRE RIGHTS OVER THE CUSTOMERS IN THE ENTIRETY O F THE FACTS AND CIRCUMSTANCES OF THE CASE THE APPELLANT HAS LOST I TS VERY SOURCE OF INCOME AND HAS MATERIALLY CRIPPLED THE STRUCTURE OF THE ASSESSEES PROFIT MAKING APPARATUS. THE RECEIPT OF RS. 1 04 70 000/- IS THUS A CAPITAL RECEIPT NOT CHARGEA BLE TO TAX. M. EXTRACTS OF OUR SUBMISSIONS BEFORE THE LEARNED A CIT MENTIONED ON PAGE 9 TO 11 OF THE ASSESSMENT ORDER MAY ALSO BE CONSIDERED. 20. THE LD.CIT(A) ASKED THE ASSESSEE TO FURNISH CER TAIN DETAILS WITH RESPECT TO CUSTOMERS AND THEIR DATA BEING TRANSFER RED TO THE PURCHASER NAMELY MOSL. IN RESPONSE THE ASSESSEE FURNISHED T HE FOLLOWING DOCUMENTS: 1. A LIST OF CUSTOMERS TRANSFERRED TO MOSL WITH T HEIR RESPECTIVE CLIENTS CODE; 2. COPIES OF FEW ACCOUNT OPENING FORMS OF THE CUSTO MERS WITH MOSL IN RESPECT OF CUSTOMERS TRANSFERRED TO THEM; 3. COPY OF APPLICATION TO NSE FOR SURRENDER OF MEMB ERSHIP; 4. COPY OF THE APPROVAL LETTER FOR SURRENDER OF MEMBERSHIP WITH NSE. 20.1 ON THE BASIS OF ABOVE DOCUMENTS THE ASSESSEE SUBMITTED TO THE LD.CIT(A) THAT THE CUSTOMERS HAD ACTUALLY BEEN TRA NSFERRED TO MOSL AS AGREED AND THE BUSINESS WAS CLOSED BY SURRENDERING THE MEMBERSHIP WITH THE NATIONAL STOCK EXCHANGE. IT WAS ALSO STATED THAT TH E ASSESSEE WAS NOT ENTITLED FOR ANY REVENUE FROM MOSL OR ITS SUB-BROKE RS IN RESPECT OF THEIR BUSINESS WITH ANY OF THE CUSTOMERS. 31 20.2 THE LD.CIT(A) AFTER CONSIDERING THE SUBMISSIO NS OF THE ASSESSEE OBSERVED THAT THE AO ON THE BASIS OF CLAUSE IN THE AGREMENT THAT THE ASSESSEE SHALL NOMINATE SUB-BROKER COMPANY OF MOSL HAS HELD THAT THE ASSESSEE KEPT EFFECTIVE CONTROL ON THE CUSTOMERS WHO WERE TRANSF ERRED TO MOSL AND THE CAPITAL RECEIPT WAS THUS FOR TRANSFER OF GOODWILL . ACCORDING TO THE LD.CIT(A) THE OBSERVATION OF THE AO WAS WITHOUT AP PRECIATING THE REAL NATURE OF THE TRANSACTION AND TERMS OF THE AGREEMEN T. HE POINTED OUT THAT AS PER THE AGREEMENT THE ASSESSEE WAS OBLIGED TO TRAN SFER ITS CUSTOMERS AND RELATED DATA ETC. TO MOSL AND THE NOMINATION OF SU B-BROKER COMPANY BY THE ASSESSEE WAS TO SECURE AND FACILITATE THE TRAN SFER OF CUSTOMERS. HE ALSO POINTED OUT THAT THE LIST OF CUSTOMERS TRANSFERRED AND THE EVIDENCES FOR ACTUAL TRANSFER OF CUSTOMERS BY THEIR REGISTRATION WITH M OSL REVEALED THAT THE ASSESSEE HAD NO CONTROL OVER SUCH CUSTOMERS ESPEC IALLY WHEN THE MEMBERSHIP OF NSE HAD BEEN SURRENDERED BY THE ASSES SEE TO CLOSE THE BUSINESS. THE LD.CIT(A) ALSO POINTED OUT THAT THE A GREEMENT PRESCRIBED THAT THE CONSIDERATION WAS FOR TRANSFER OF CUSTOMERS RIGHTS AND THERE WAS NO MATERIAL ON RECORD TO SHOW THAT THE ASSESSEE HAD KE PT ITS CONTROL OVER THE CUSTOMERS. THEREFORE IN ABSENCE OF ANYTHING CONTRA RY BROUGHT ON RECORD THE AGREEMENT HAS TO BE READ AS IT IS. THE LD.CIT (A) OPINED THAT THE CONSIDERATION OF RS.1 04 70 000 WAS FOR TRANSFER OF CUSTOMERS AND RELATED DATA AS PRESCRIBED IN THE AGREEMENT. ACCORDING TO HIM CUSTOMERS RIGHTS AND DATA LIKE TRADE MARK OR BRAND NAME WAS A SEPAR ATE AND DISTINCT COMMERCIAL ASSET WHICH COULD BE EXPLOITED BY THE BU SINESS AND WHEN AN ENTERPRISES USES THE SAME FOR THE PURPOSE OF ITS OW N BUSINESS THE INCOME GENERATED THEREFROM WOULD CONSTITUTE BUSINESS INCO ME WHEREAS IF AN ENTERPRISE TRANSFERS ITS ASSET FOR GOOD WHILE CLOSI NG DOWN THE BUSINESS IT WOULD CONSTITUTE SALE OF A CAPITAL ASSET AND THE R ECEIPTS THEREOF WOULD 32 CONSTITUTE CAPITAL RECEIPTS. THE LD.CIT(A) WAS OF T HE VIEW THAT THE CONSIDERATION WAS ON ACCOUNT OF TRANSFER OF A CAPIT AL ASSET NAMELY CUSTOMERS RIGHTS AND DATA AND SO IT WAS A CAPITAL RECEIPT. THE LD.CIT(A) POINTED OUT THAT THE CUSTOMERS RIGHTS AND DATA THE REOF GOT COLLECTED OVER A PERIOD OF TIME WHILE CARRYING ON OF THE BUSINESS AND APPARENTLY NO COST OF ACQUISITION COULD BE ATTRIBUTED TO THIS ASSET PER S E. RELIANCE WAS PLACED ON THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CA SE OF CIT VS. SRINIVAS SHETTY 128 ITR 294(S.C.) WHEREIN IT HAS BEEN HELD THAT IN CASE OF A CAPITAL ASSET WHOSE COST OF ACQUISITION WAS UNASCERTAINABLE ON TRANSFER OF SUCH ASSETS NO CAPITAL GAINS COULD BE COMPUTED UNDER SE CTION 45 OF THE I.T. ACT. ACCORDING TO THE LD.CIT(A) NEWLY INTRODUCED SECTI ON 55(2) OF THE I.T.ACT MENTIONS A LIST OF ASSETS WHOSE COST OF ACQUISITION FOR THE PURPOSES OF COMPUTING CAPITAL GAINS UNDER SECTION 45 OF THE I. T.ACT WILL BE DEEMED TO BE NIL. THE LD.CIT(A) CATEGORICALLY STATED THAT TH E ASSETS MENTIONED IN THE LIST WERE SPECIFIC AND THE ASSETS LIKE CUSTOMERS RIGHTS AND DATA HAD NOT BEEN INCLUDED IN THE LIST OF ASSETS. HE ACCORDINGLY HELD THAT SINCE NO COST OF ACQUISITION OF THE IMPUGNED ASSETS COULD BE ASCERTA INED IN THE PRESENT CASE THEREFORE NO CAPITAL GAINS COULD BE COMPUTED IN TERMS OF THE PROVISIONS OF SECTION 45 OF THE I.T.ACT. HE THEREFORE HELD TH AT A SUM OF RS.1 04 70 000 WAS A CAPITAL RECEIPT NOT LIABLE TO TAX. 21. NOW THE DEPARTMENT IS IN APPEAL. 22. THE LD.D.R. STRONGLY SUPPORTED THE ORDER OF THE AO AND FURTHER SUBMITTED THAT THE TRANSACTION ENTERED INTO BY THE ASSESSEE WITH MOSL WAS A BUSINESS ACTIVITY. THEREFORE THE AMOUNT RECEIVED WAS ON ACCOUNT OF GOODWILL WHICH THE ASSESSEE GENERATED IN PASSAGE OF TIME AND SINCE THE 33 ASSESSEE WAS HAVING RIGHT TO APPOINT THE SUB-BROKER OF MOSL THEREFORE THE EFFECTIVE CONTROL WAS IN THE HANDS OF THE ASSESSEE . SO THE AMOUNT RECEIVED BY THE ASSESSEE BEING A PART AND PARCEL OF GOODWILL SHOULD HAVE BEEN TREATED AS TAXABLE RECEIPT. 23. IN HIS RIVAL SUBMISSIONS THE LD. COUNSEL FOR T HE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND S TRONGLY SUPPORTED THE IMPUGNED ORDER PASSED BY THE LD. CIT(A). HE FURTHER SUBMITTED THAT THE CUSTOMERSRIGHTS AND DATA WAS WELL NARRATED IN PAR A 2 OF THE AGREEMENT DATED 29.7.2006 WHICH THE ASSESSEE ENTERED INTO WIT H MOSL. A REFERENCE WAS MADE TO PAGE 34 OF THE ASSESSEES PAPER BOOK. H E ALSO DREW OUR ATTENTION TO PAGES 46 TO 71 OF THE ASSESSEES PAPE R BOOK WHICH IS A LIST OF CUSTOMERS TRANSFERRED TO MOSL AND POINTED OUT THAT CLIENT REGISTRATION CODE ALLOTTED BY THE ASSESSEE AND ON TRANSFER BY THE M OSL WERE DIFFERENT WHICH HAS BEEN REFLECTED IN THE SAID LIST. HE FURTHER SUB MITTED THAT STOCK-BROKING BUSINESS WAS PRIMARILY CLIENT BASE WHICH GOT CREATE D OVER A PERIOD OF TIME AND BEFORE TAKING ANY ONE AS A CLIENT A DUE DILIG ENCE IS DONE AS REGARDS ITS IDENTITY CREDITWORTHINESS COMPLIANCE WITH REQUIRE MENTS OF REGULATORY AUTHORITIES AND STOCK EXCHANGES DEPOSITORIES. HE F URTHER SUBMITTED THAT A LARGE NUMBER OF INFORMATION AND DATA OF THE CUSTOME RS WERE MAINTAINED E.G. A. INTRODUCTION OF THE CLIENT B. APPLICATION FOR REGISTRATION OF CLIENT. C. PARTICULARS OF THE CLIENTS I.E. NAME ADDRESS FATHERS NAME ETC. D. KNOW YOUR CLIENT (KYC) DOCUMENTATION I.E. PROOF OF IDENTITY AND PROOF OF ADDRESS. E. PHYSICAL VERIFICATION OF CLIENTS ADDRESS. F. DETAILS OF BANK ACCOUNT. 34 G. DETAILS OF PAN NO. H. DETAILS OF DEMAT ACCOUNT. I. ACCOUNT OF FINANCIAL TRANSACTIONS. J. DETAILS OF CLIENTS HOLDINGS IN DEMAT AND PHYSIC AL FORMS. K. ASSESSMENT OF CLIENTS CREDITWORTHINESS AND HIS LIMIT TO TRADE/TRANSACT. L. SECURITIES AND MARGINS. M. CLIENTS TRACK RECORD OF DETAILS AND COMPLIANCES IN MAKING PAYMENTS AND DELIVERIES. N. CLIENTS SOURCES OF INCOME AND HIS FAMILY ACCOUNTS. O. COPIES OF CONTRACT NOTES AND BILLS ETC. FOR SEVERAL YEARS. IT WAS FURTHER SUBMITTED THAT APART FROM THE AFOR ESAID OTHER DATA WERE ALSO MAINTAINED TO ASSESS THE PATTERNS OF CLIENTS TRADI NG IN THE MARKET AND THE PATTERN OF HOLDING FOR PROMOTION OF BUSINESS AND PR OVIDE SERVICES TO THE CLIENTS. HE THEREFORE SUBMITTED THAT THE ASSESSEE S CASE WAS NOT OF TRANSFER OF GOODWILL RATHER THE CASE OF TRANSFER OF CUSTOMER S RIGHTS AND CUSTOMERS RELATED INFORMATION AT A PRICE AND THE ASSESSEE ULT IMATELY LOST ALL CONTROL OVER THOSE RIGHTS AND OVER THE SOURCE OF INCOME SO THE AMOUNT OF RS.1 04 07 000 RECEIVED BY THE ASSESSEE WAS A CAPITAL RECEIPT NOT LIABLE TO TAX. 24. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON THE RECORD. IN TH E PRESENT CASE IT APPEARS THAT THE ASSESSEE WHO WAS A MEMBER OF NATIONAL ST OCK EXCHANGE AND ALSO ACTED AS SUB-BROKER OF BOMBAY STOCK EXCHANGE CLOSE D ITS BUSINESS BY ENTERING INTO AN AGREEMENT WITH MOSL. THE ASSESSEE RECEIVED A SUM OF 35 RS.1 04 70 000 ON ACCOUNT OF TRANSFER OF CUSTOMERS RIGHTS AND DATA INFORMATION TO MOSL. A COPY OF AGREEMENT DATED 29.7 .2006 IS PLACED AT PAGES 31 TO 45 OF THE ASSESSEES COMPILATION. CLAUS E 2 OF THE SAID AGREEMENT READS AS UNDER : 2. SUBJECT TO THE TERMS AND CONDITIONS CONTAINED I N THESE PRESENTS MOSL HEREBY AGREES TO ACQUIRE MSB'S 'CUSTOM ER RIGHTS' WHICH MEANS ALL THE RIGHTS INCLUDING DATABA SE RIGHTS TO ACCESS THE CUSTOMERS AND' CUSTOMER-RELATED INFORM ATION OF MSB INCLUDING THE CUSTOMERS OF ITS SUB-BROKERS. 'CUS TOMER RELATED INFORMATION' WHICH INTER ALIA INCLUDES THE DATA DOCUMENTS FILES RECORDS NOTEBOOKS STATISTICS R ESEARCH BLUE PRINTS TOOLS PROCEDURES CODES AND OTHER INF ORMATION RELATING TO THE CUSTOMERS AND CUSTOMER CONTRACTS I NCLUDING ANY SUCH INFORMATION RECORDED OR STORED IN WRITING OR UPON MAGNETIC TAPE OR DISC OR OTHERWISE RECORDED OR STOR ED FOR REPRODUCTION WHETHER BY MECHANICAL OR ELECTRONIC M EANS AND ALL OTHER DATA WHICH WOULD BE RELEVANT TO ENSUR E CONTINUITY IN PROVISION OF SERVICE TO THE CUSTOMER. 25. FROM THE ABOVE CLAUSE IT IS CRYSTAL CLEAR THAT MOSL I.E. THE PURCHASER AGREED TO ACQUIRE ASSESSEES CUSTOMERS R IGHTS I.E. ALL THE RIGHTS INCLUDING DATABASE RIGHTS TO ACCESS THE CUSTOMERS AND CUSTOMER RELATED INFORMATION. THE CUSTOMER RELATED INFORMATION IN CLUDED THE DATA DOCUMENTS FILES RECORDS NOTE BOOKS STATISTICS R ESEARCH BLUE PRINTS TOOLS PROCEDURES CODES AND OTHER INFORMATION RELA TING TO THE CUSTOMERS AND CUSTOMER CONTRACTS ANY SUCH INFORMATION RECORD ED OR STORED IN WRITING OR UPON MAGNETIC TAPE OR DISC OR OTHERWISE RECORDED OR RESTORED FOR REPRODUCTION WHETHER BY MECHANICAL OR ELECTRON IC MEANS. FOR THE ABOVE TRANSACTION I.E. TRANSFER OF CUSTOMER RIGHTS THE MOSL PAID A SUM OF RS.1 04 70 000. THE ASSESSEE SEPARATELY RECEIVED A SUM OF RS.10 LACS TOWARDS GOODWILL AS MENTIONED IN CLAUSE 3 OF THE AG REEMENT DATED 36 29.7.2006. SINCE THE ASSESSEE RECEIVED SEPARATE AMO UNT FOR THE GOODWILL THE AO WAS NOT JUSTIFIED IN CONSIDERING THE AMOUNT IN QUESTION AS A RECEIPT ON ACCOUNT OF GOODWILL. IN THE INSTANT CAS E THE ASSESSEE AFTER TRANSFERRING THE CUSTOMER RIGHTS TO MOSL SURRENDERE D ITS MEMBERSHIP WITH NATIONAL STOCK EXCHANGE AND THUS WAS DEBARRE D FROM DOING THE BUSINESS IN WHICH IT WAS EARLIER ENGAGED. FURTHERMO RE THE PURCHASER I.E. MOSL ALLOTTED SEPARATE REGISTRATION CODES TO THE CU STOMERS WHEN THOSE WERE TRANSFERRED BY THE ASSESSEE THEREFORE THE C ONTROL ON THE CUSTOMERS WAS OF MOSL AND THE ASSESSEE HAD NO CONTROL OVER S UCH CUSTOMERS PARTICULARLY WHEN THE MEMBERSHIP OF NATIONAL STOCK EXCHANGE WAS SURRENDERED TO CLOSE THE BUSINESS. SINCE THE AMOUNT WAS RECEIVED BY THE ASSESSEE WHILE CLOSING DOWN ITS BUSINESS AND ALSO E NTERED INTO A RESTRICTIVE COVENANT THE AMOUNT RECEIVED FOR SUCH TRANSACTION WOULD CONSTITUTE SALE OF A CAPITAL ASSET AND THE RECEIPTS THEREOF WOULD CONSTITUTE CAPITAL RECEIPT. THE HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. AMBADI ENTERPRISES LTD.(2004) 267 ITR 702(MAD.) HEL D AS UNDER : THAT THE ENTIRE TRAINED MAN POWER AND CUSTOMER NETW ORK WERE HANDED OVER TO THE OTHER PARTY TO THE AGREEMENT. IN SUCH A SITUATION THE PAYMENT RECEIVED BY THE ASSESSEE HAD THE IMPRIN T OF A CAPITAL RECEIPT. THE ASSESSEE HAD A WELL DEVELOPED LARGE SC ALE ORGANISATION AND MARKETING NETWORK AND HAD GIVEN UP THE ENJOYMEN T OF GOOD PROFITS THAT IT HAD IN ALL THESE YEARS TILL THE DAT E OF TERMINATION OF THE AGREEMENT. THE ASSESSEE HAD ALSO ENTERED INTO A RES TRICTIVE COVENANT. ALL THESE FACTS WOULD INDICATE THAT THE TERMINATION OF THE AGREEMENT HAD MATERIALLY CRIPPLED THE STRUCTURE OF THE ASSESS EES PROFIT MAKING APPARATUS AND WHAT WAS RECEIVED WAS A CAPITAL RECEI PT. IN THE PRESENT CASE ALSO THE ASSESSEE ENTERED INT O AN AGREEMENT WITH MOSL AND TRANSFER ITS CUSTOMERS RIGHTS AND SURRENDE RED ITS MEMBERSHIP 37 WITH NATIONAL STOCK EXCHANGE. THEREFORE THE AGREEM ENT HAD MATERIALLY CRIPPLED THE STRUCTURE OF THE ASSESSEES PROFIT MA KING APPARATUS AND AS SUCH THE AMOUNT RECEIVED WAS A CAPITAL RECEIPT. 25.1 SIMILARLY THE HON'BLE APEX COURT IN THE CASE OF OBEROI HOTEL PVT. LTD. VS. CIT (1999) 236 ITR 903 (S.C.) HAS HELD AS UNDER : REVERSING THE DECISION OF THE HIGH COURT THAT THE AMOUNT RECEIVED BY THE ASSESSEE WAS THE CONSIDERATION FOR GIVING UP IT S RIGHT TO PURCHASE AND/ OR TO OPERATE THE PROPERTY OR FOR GETTING IT O N LEASE BEFORE IT WAS TRANSFERRED OR LET OUT TO OTHER PERSONS. IT WAS NOT FOR SETTLEMENT OF RIGHTS UNDER A TRADING CONTRACT BUT THE INJURY WAS INFLICTED ON THE CAPITAL ASSET OF THE ASSESSEE AND GIVING UP THE CON TRACTUAL RIGHT ON THE BASIS OF THE PRINCIPAL AGREEMENT HAD RESULTED IN LO SS OF SOURCE OF THE ASSESSEES INCOME. THE RECEIPT IN THE HANDS OF THE ASSESSEE WAS A CAPITAL RECEIPT. 26. AS WE HAVE ALREADY POINTED OUT IN THE PRESENT CASE THE AMOUNT RECEIVED BY THE ASSESSEE WAS TO COMPENSATE FOR ITS TRANSFER OF THE CUSTOMER RIGHTS AND DATA INFORMATION WHICH WERE IT S SOURCE OF INCOME AND THE ASSESSEE SURRENDERED ITS MEMBERSHIP WITH TH E NATIONAL STOCK EXCHANGE SO IT WAS NOT ENTITLED TO ACT IN THE ST OCK BROKERSHIP WHICH RESULTED IN THE LOSS OF PROFIT MAKING APPARATUS. THEREFORE THE AMOUNT RECEIVED BY THE ASSESSEE WAS CAPITAL RECEIPT. 27. IN VIEW OF THE AFORESAID DISCUSSION WE ARE OF THE OPINION THAT THE LD.CIT(A) WAS JUSTIFIED IN HOLDING THAT A SUM OF RS .1 04 70 000 RECEIVED BY THE ASSESSEE WAS A CAPITAL RECEIPT NOT LIABLE TO TAX. 28. IN THE RESULT THE APPEAL OF THE DEPARTMENT IS DISMISSED AND THE 38 CROSS OBJECTION OF THE ASSESSEE IS ALLOWED FOR STAT ISTICAL PURPOSES. THE ORDER PRONOUNCED IN THE OPEN COURT ON 30.12.10 . SD. SD. (H.L.KARWA) (N.K.SAINI) VICE PRESIDENT ACCOUNTANT MEMBER DECEMBER 30TH 2010. COPY TO THE : 1. APPELLANT 2. RESPONDENT 3. CIT(A) (4) CIT 5.DR. A.R. ITAT LUCKNOW. SRIVASTAVA.