DCIT LTU-1 , CHENNAI vs. MAHINDRA HOLIDAYS & RESORTS (P) LTD., CHENNAI

िनधा�रती िनधा�रती क� िनधा�रती िनधा�रती क� क� ओर क� ओर ओर सेसेसेसे /Assessee by ओर : Mr. R.Vijayaraghavan, Advocate राज�व क� राज�व क� ओर ओर सेसेसेसे /Revenue by राज�व राज�व क� क� ओर ओर : Mr. S. Senthil Kumaran, CIT-DR सुनवाई क� तारीख / Date of Hearing : 15/03/2023 घोषणा क� तारीख/Date of Pronouncement : 10/05/2023 आदेश आदेश / O R D E R आदेश आदेश Per Arun Khodpia, AM :

These are the appeals filed by the assessee and revenue against the separate orders dated 27.01.2017, 17.01.2018 & 30.01.2019, passed by the ld. CIT(A)-5, Chennai for the assessment years 2009-2010 to 2015-2016. are belonged to the same assessee, having common and identical issues except difference in quantum, therefore the same, for the sake of convenience and brevity, are being disposed off by this common order.

1. The order of The Commissioner of Income tax (Appeals) is contrary to law, facts and circumstances of the case.

2. The Commissioner of Income tax (Appeals) erred in confirming the reopening of the assessment u/s 147. 2.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the appellant has furnished all the materials and particulars fully and truly. The assessment u/s 143(3) was completed on 28.12.2011 and issue of notice u/s 148 on 28.03.2014 has arisen only due to change of opinion and not on account of concealment of any particulars by the Appellant; hence the order is to be quashed as being without jurisdiction. 2.2 Appellant relies on the decision of the Supreme Court in the case of CIT V. Kelvinator India Limited, reported in 320 ITR 561 (SC). 3. The Commissioner of the Income tax (Appeals) erred in confirming the restriction of depreciation claimed on electrical installations to 10% as against 15% claimed by the appellant. 3.1 The Commissioner of the Income tax (Appeals) ought to have appreciated that the electrical installations installed are primarily Air Conditioners, Refrigerators, Generators, etc. and have classified under plant and machinery. Other items such as Bulbs, Holders, Adaptors and small wiring works have been classified as electrical fittings and are included under Furniture and Fittings eligible for depreciation @ 10%.

3 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 3.2 The Commissioner of the Income tax (Appeals) ought to have appreciated that the above electrical installations are to be reckoned as plant and machinery and not in the nature of electrical fittings to be capitalized under furniture and fittings. Hence the claim of the appellant that the depreciation @ 15% should be allowed.

4. The Commissioner of the Income tax (Appeals) erred in confirming the disallowance of depreciation on non-compete fee @ 25% amounting to Rs.50,00,000/-. 4.1 The Commissioner of the Income tax (Appeals) ought to have appreciated that the appellant has paid non-compete fees to AGS Hotels & Resorts Private Limited by executing non- compete agreement dated 22.08.2008 for a consideration of Rs.2,00,00,000/-. This agreement was entered pursuant to the purchase of the hotel business of AGS Hotels by the appellant. 4.2 The Commissioner of the Income tax (Appeals) ought to have appreciated that non-compete fee is an intangible asset eligible for depreciation u/s 32(1 (ii). Appellant relies on the decision of the supreme court in the case of Techno shares and stocks Ltd Vs. CIT, reported in 327 ITR 323(SC). And Madras High Court Decision in the case of Pentasoft Technologies Ltd Vs. DCIT, reported in 264 CTR 197(Mad). 5 Without prejudice to the above, Non-compete fee paid to ward off competition and protect the business of the appellant should be allowed as revenue deduction. 6 The Appellant craves leave to file additional grounds at the time of hearing.

Subsequently, the assessment was reopened u/s 147 of the Act. Reasons assessee vide an office letter dated 27.08.2014. Two reasons for reopening were (1) Excess claim of depreciation for 15% on Electrical Fitting Capitalized, instead of 10%, (2) Treating of non-compete fee as an intangible asset and claimed depreciation @25%. In response to the notice and letter with reasons for reopening, the assessee objected on the reopening itself, by stating that the company has submitted all the details / information called for by the AO during the scrutiny assessment proceedings including financial statements, tax audit report, computation of total income and other supporting documents. According to assessee, the order passed by AO u/s 143(3) was after examining the records of the assessee and have accepted the claim of depreciation on electrical fitting at 15% and on noncompete fee @25%, thus in absence of any fresh material reopening of assessment was not justified and the reponing was only on the basis of change of opinion. Objections of the assessee were considered by the AO but have not accepted, finally the proposed disallowances were confirmed for Rs. 23,88,822/- and Rs. 50,00,000/- towards Excess claim of depreciation on Electrical Fitting by 5% and Depreciation @25% on non-compete fee, respectively. Aggrieved by the order of AO u/s 143(3) r.w.s. 147 of the Act, assessee preferred an appeal before the Ld CIT(A), but no success.

5. Now, the assessee being aggrieved with the order of Ld CIT(A), is in appeal before us. parties, perused the orders of the lower authorities, the material available on record and have considered the judicial pronouncements that have been relied upon by the assessee as well as department in order to substantiate their respective contentions.

8. Ground no 2, 2.1 & 2.2 regarding the objection of the assessee that the reopening of assessment u/s 147 of the Act was bad in law, assessee placed its reliance on decision of Hon’ble Supreme Court in the case of Kelvinator India limited, reported in 320 ITR 561(SC). wherein, it has been held as under:

'The concept of "change of opinion" on the part of the Assessing Officer to reopen an assessment does not stand obliterated after the substitution of section 147 of the Income Tax Act, 1961, by the Direct Tax Laws (Amendment) Acts, 1987 and 1989. After the amendment, the Assessing Officer has to have reason to believe that income has escaped assessment, but this does not imply that the Assessing Officer can reopen an assessment on mere change of opinion. The concept of "change of opinion" must be treated as an in- built test to check the abuse of power. Hence, after April 1, 1989, the Assessing Officer has power to reopen an assessment, provided there is "tangible material" to come to the conclusion that there was escapement of income from assessment. Reason must have a link with the formation of the belief. Decisions of the Delhi High Court in CIT v. Kelvinator of India Ltd. (2002) 256 ITR 1 (FB) and CIT v. Eicher Ltd. (2007) 294 ITR 310 affirmed.' judgment by Hon’ble Jurisdiction High Court of Madras in the case of Mobis India Ltd. Vs. DCIT, reported in (2015) 61 Taxmann.com 442 (Madras), wherein it has been held that, “Where Assessing Officer initiated reassessment proceedings on ground that assessee's claim for depreciation on vendor and dealer network was not allowable, assessee having participated in reassessment proceedings in pursuance to notice issued under section 143(2), impugned order passed under section 143(3) read with section 147, rejecting assessee's claim was to be upheld.”

10. Respectfully following the decision in the case of Mobis India Ltd. (supra), Ld CIT(A) had upheld the reopening of assessment on the basis, that the assessee had participated in the reassessment proceedings by furnishing written submission before the AO, was upheld.

11. On perusal of the judgment in the case of Mobis India Ltd.(supra), it is transpired that in the said case, the assessee company did not file any objections to the reasons for the reopening of the above assessments, participated in the reassessment proceedings and obtained an adverse order, the writ of the petitioner assessee was failed with the observations that:

“The Act provides complete machinery for the assessment/reassessment of tax, imposition of penalty and for obtaining relief in respect of any improper orders passed by the Revenue Authorities, and the assessee could not be permitted to 7 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 abandon that machinery and to invoke the jurisdiction of the High Court under Article 226 of the Constitution when he had adequate remedy open to him by an appeal to the Commissioner of Income Tax (Appeals).” “The Writ Court ought not to have entertained the Writ Petition filed by the assessee, wherein he has only questioned the correctness or otherwise of the notices issued under Section 148 of the Act, the re-assessment orders passed and the consequential demand notices issued thereon."

12. Finally, Hon’ble Madras High Court in the Mobis India Ltd. (supra), has held that: It is not in dispute that as against the impugned proceedings, the assessee is having efficacious remedy of appeal under section 246A before the Commissioner (Appeals) and without exhausting the same, the assessee has approached the Court and hence, the instant writ petition is not maintainable.

14. On the issue of reopening Ld AR drew our attention to the objections filed by the assessee against the reopening of assessment, at page 16 and 17 of the paper book (dated 13 March 2022) of the assessee. According to objections raised by the appellant the issue relating to excess depreciation on electrical fittings was already in dispute and was pending for adjudication by way of rectification under the has examined the issues raised for reopening during the course of assessment proceedings u/s 143(3). Assessee company had submitted all the details sought by the Ld AO while completing the assessment, the said details, includes statement of total income, depreciation statement along with working of claim of depreciation @15% on electrical fittings, tax audit report, financial statement consisting of P&L Account, Balance Sheet along with schedules. Thus, having all the material information in hand, Ld AO had applied his mind and completed the assessment proceedings, therefore having no new material to arrive at a conclusion that any income has escaped assessment. No basis to invoke the provisions of section 147 of the Act.

“5. We have considered the rival submissions. It is noticed that the issue of re-opening has been decided by the learned CIT(A) by following the decision of the Hon'ble Full Bench of the Delhi High Court in the case of Kelvinator of India Ltd. reported in 256 ITR 1 which has been approved by the Hon'ble Supreme Court in 320 ITR 561. It is also noticed that the learned CIT(A) following the decision of the Hon'ble Supreme Court in the case of GKN Driveshafts, reported in 259 ITR 19 (S.C) has held that as the Assessing Officer has not passed a speaking order in regard to the objections raised by the assessee, the assessment is quashed. This finding of the learned CIT(A) is not acceptable insofar as per the decision of the Hon'ble Supreme Court in the case of GKN Driveshafts, the Assessing Officer is duty bound to give reasons recorded for the purpose of re-opening to the assessee as also pass a speaking order dealing with the assessee's objections, if any. Just because the Assessing Officer has not passed a speaking order in regard to the objections raised by the assessee, it would not mean that the re-opening would be invalid. However, in the present case as the facts are clearly available and as it is noticed that all the facts necessary for adjudicating the issue were available before the Assessing Officer when the original

10 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 assessment order itself was passed u/s 143(3) on 17-03-2005, in view of the decision of the Hon'ble Supreme Court in the case of Kelvinator of India Ltd., referred to supra, the re-opening is liable to be held to be invalid as the same is beyond the period of 4 years and the re-opening is only on the basis of change of opinion. In the circumstances, the re-opening of the assessment stands quashed by following the principles laid down by the Hon'ble Supreme Court in the case of Kelvinator of India Ltd., referred to supra. In the circumstances, the appeal of the Revenue is dismissed.”

11 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 pragmatically, so as to ensure that if the Assessing Officer has reason to believe, which is not change of opinion, then he must be allowed to complete the reassessment proceedings as contemplated under the provisions of the Act.

57. As elaborately discussed in the aforementioned paragraphs, disposal of objections submitted by the petitioner on the reasons furnished is to be done based on objective satisfaction and not on subjective satisfaction. An elaborate adjudication is required and such adjudications are to be done during the course of reopening proceedings and certainly not at the stage of disposal of objections filed by the Assessee on the reasons furnished. Once the Assessing Officer prima facie arrived a conclusion that he has reason to believe and reasons are furnished, objections received and disposed of by the authority, the said procedure as directed by the Hon'ble Supreme Court of India in GKN Driveshafts case (cited supra), is to be construed as completion of compliance of the principles of natural justice.

Accordingly, the reopening in the present case is validly upheld by the Ld CIT(A) and deserves to be sustained.

B.1 Claim of depreciation @ 15% on ‘electrical fittings’: B.1.1 We wish to submit that electrical installations installed at our resorts are primarily Air Conditioners. Refrigerators, Generators, etc. and have been classifièd~Tm3er” Plant Machinery. Items such as Bulbs, Folders, Adaptors and small wiring works have been classified as electrical fittings and are included under Furniture's Fittings Eligible for depreciation @10%. B.1.2 We submit that the above electrical installations are to be reckoned as Plant & Machinery for the purpose of our

14 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 business and are not in the nature of electrical fittings to be capitalized under Furniture & Fittings. We also wish to submit that, being in the business of providing holiday packages, owning and maintaining resorts form an integral part of our business. These resorts are an apparatus or adjunct for running the business and hence electrical installations are rightly to be capitalized only under Plant & Machinery. Hence, electrical installations in such resorts are to be treated as falling under Plant & Machinery block of assets.

B.1.3 We also submit that such electrical installations are required by the nature of our business and did not merely form part of the setting in which our business was being carried on. Hence they are rightly capitalized under Plant & Machinery block of assets.

B.1.4 We wish to draw inference from the decision of the Madras High Court in the case of Geetha Hotels (P) Ltd. vs. CLT [254 ITR 649] where it has been held that electrical installations and sanitary fittings in a hotel building is to be treated as being “Plant” and cannot be treated as building for the purpose of depreciation. The relevant extract of the decision of the High Court is as under –

"The apex Court in the case of CIT vs. Anand Theatres (2000) 160 CTR (SC) 492: (2000) 244 ITR 192 (SC), approved the manner in which this Court had construed the judgment of the apex Court in the case of Taj Mahal Hotel (supra). The sanitary fittings and the electrical installations, therefore, are clearly "plant". Once they are regarded as plant the fad that they are used in a hotel building and fixed to the building does not render these fittings depreciable in the same manner as the building itself when the provisions dealing with depreciation in the Act make a clear distinction among building, machinery and plant. ” (Emphasis supplied)

“Electrical installations” such as lighting and small power installations, installation and testing of lighting fixtures, telephone systems, panes, distribution boards, cabling, earthing, internal/external water supply and drainage systems, sanitary fittings and fixtures, landscaping, etc. have also been included under Plant & Machinery.

Therefore, we submit that these electrical installations are to be considered as part of plant & machinery eligible for depreciation @ 15%. pointed out that the requisite details pertaining to the electrical installations were not provided by the assessee to the AO as well as to Ld CIT(A) and therefore in absence of such details it is impossible to decide the nature and utility of the assets which are the key factors for deciding the rate of depreciation. Ld DR drew our attention to Para 8.2 of the order of Ld CIT(A), wherein it was observed that the details regarding the electrical fittings were not produced by the AR of the assessee before the AO during the assessment proceedings, further, Ld CIT(A) has observed that the breakup of the additions made to electrical equipment contains addition on account of ceiling fans, exhaust fans and pedestal fans on which a higher depreciation of 15% was claimed. Ld CIT(A) finds that the addition made by the Ld AO is sustainable and thus upheld the same. It was therefore submitted by the LD CITDR to affirm the decision of Ld CIT(A) on this ground.

“5. The apex Court in the case of CIT vs. Anand Theatres (2000) 160 CTR (SC) 492 : (2000) 244 ITR 192 (SC), approved the manner in which this Court had construed the judgment of the apex Court in the case of Taj Mahal Hotel (supra). The sanitary fittings and the electrical installations, therefore, are clearly “plant”. Once they are regarded as plant the fact that they are used in a hotel building and fixed to the building does not render these fittings depreciable in the same manner as the building itself, when the provisions dealing with depreciation in the Act make a clear distinction among building, machinery and plant. When a thing by itself is to be classified under one head as “plant” or “building”, it should not, normally, when used along with an item falling under another head be treated as also falling under the other head by a process of osmosis as it were. The electrical installations and sanitary fittings which by themselves are “plant” for the purpose of depreciation in the scheme of s. 32, cannot be regarded as “building” when such fittings are fitted to the building. Those fittings do not become brick or mortar which are essential for the construction of the buildings. They remain electrical and sanitary fittings which are meant to be used for a purpose other than giving shelter. These installations are installations which are capable of being used in a wide variety of circumstances to make a variety of goods. Their use is not confined to hotel building. Such installations, therefore, remain “plant” only even when they are installed in a building used as a hotel. The Tribunal was right in the view that it took that such fittings are not eligible for initial depreciation as they cannot be regarded as falling within the scope of the term “building” used in s. 32 of the Act.”

The above question was decided against the assessee but at the same time it was also held that “The sanitary fittings and the electrical installations, therefore, are clearly “plant”. Respectfully following the observations of the Hon’ble Madras High Court in the case of Geetha Hotels (P) Ltd. (supra), which was relied upon by the assessee in its objections on reasons for reopening but the same was not contravened or distinguished by the Ld AO while disposing the objections of the assessee in present case vide letter dated 23.10.2014 neither any observation have been offered by the Ld CIT(A) on the same. We therefore are of the considered opinion that assessee’s contention that the electrical installation should be considered as Plant is fortified by the judgment of Hon’ble Jurisdictional High Court in the case of Geetha hotel Pvt Ltd (supra) and consequently ground no 3, 3.1 and 3.2 of ITA 936/CHNY/2018 are decided in favour of the assessee in terms of our observation herein above.

B.2 Claim of deprecation on non-compete fees under ‘intangible assets’ @ 25%.

B.2.1 With regard to claim of depreciation on non-compete fee, we submit that it is an intangible asset eligible for depreciation under Section 32(1)(ii) of the Act.

B.2.2 The Company has paid non-compete fees to AGS Hotels & Resorts Private Limited by executing a non-compete agreement dated 22.08.2008 for a consideration of Rs.2,00,00,000 (Rupees Iwo Crores Only). This non- compete agreement is entered pursuant to the purchase of the hotel business of AGS Hotels by the assessee.

B.2.3 In this regard, we rely on the decision of the jurisdictional Madras High Court in the case of Pentasoft Technologies Ltd. vs DC'IT[(2014) 264 CTR 197] wherein it has been held that -.on-compete fee is an intangible asset eligible for depreciation under Section 32(1 )(ii) of the Act. Your goodself s observation that the facts arc different in the said case is not acceptable for the following reasons:

• In Pentasoft Technologies Ltd. vs DCIT (supra), the assessee had entered into a similar agreement for purchase of software development, hardware sales and educational training business from another company. For this purpose, the assessee had entered into an composite agreement for hive off and transfer of the said business. As the business acquired was one of software development, the assessee had paid a consideration for acquisition of intellectual property rights as well as non- compete fees. • The Madras High Court observed as follows –

“We are unable to agree with the stand taken by the Revenue for the simple reason that the agreement between the parties is a composite agreement. Under the agreement, the transferor had transferred all its rights, copy rights, trade marks in respect of the word 'pentasoft' as well as the training and development division exclusively to be exploited by the assessee.

In order to strengthen those rights transfer under the said composite agreement, there was a non-compete clause by virtue of which, the transferor was restrained from using the same trade mark, copyrights etc., in favour of the assessee.

Therefore, the non-compete clause under the agreement should be read as a supporting clause to the transferor of the copy rights and patents rather to strengthen the commercial right, which was transferred in favour of the assessee. ” (Emphasis supplied)

• The High Court also observed that – “... non-compete, at best could be a commercial right because that right is relatable to the transfer of trade mark, copy rights and patents Therefore, the view taken by the Commissioner of Income Tax (Appeals) in this regard is acceptable. " (Emphasis supplied)

• We submit that your goodselfs contention that there is no transfer of IPR's to the assessee under the non-compete agreement is not valid. Your goodself will appreciate that the Madras High Court has also rejected the revenue's contention that it is only a negative right and has categorically noted that non-compete fee could be treated as a commercial right. (Para 20)

• We are not in agreement with your goodselfs contention that the right obtained through a non-compete agreement is purely personal. Such rights obtained, can in no case, be a ‘right in-personam' as payment of non-compete fees confers an exclusive right to carry on the primary business activity to the transferee of the right and is therefore a ‘right in-rem'.

• Therefore, a non-compete right obtained through a non- compete agreement is an intangible asset eligible for depreciation under Section 32(l)(ii) of the Act. In light of the foregoing submissions and judicial pronouncements, we submit that reopening of assessment under Section 147 of the Act cannot be made on the basis of the aforesaid reasons.

Prayer: Under these circumstances, we request your goodself to kindly consider our above submissions and drop the proceedings initiated under Section 148 of the Act under intimation to us.

We further request you to provide an opportunity of being heard before deciding on the issue. contentions: -

(i) PCIT Vs Piramal Glass Limited – 105 CCH 34 (Mum) (ii) Pentasoft Technologies Ltd. Vs. DCIT, 2645 CTR 187 (Mad) (iii) Technoshares & Stocks Ltd. & Ors Vs. CIT, 327n ITR 323 (SC)

28. With an alternate argument Ld AR of the assessee argued that, if the expenditure incurred by the assessee is not regarded as a capital expenditure, since it has been incurred for the business of the assessee, which has not been disputed by the revenue, the same should be treated as a revenue expenditure and entire expenditure shall be allowed in the year in which the payment was made. Reliance was placed on judgment in the case of Carborandum Universal Ltd – 26 Taxmann.com 268 (Madras), wherein it has been held that, “where assessee made payment as non-compete fee for the purpose of business of assessee, expenditure was on revenue count”. Another case place before us was, in the case of Asianet Communications Vs CIT – 96 Taxman.com 399 (Mad), held that, “where non-compete fee paid by the assessee was for the purpose of its business and did not entail any enduring benefit to assessee in its business, payment of such fee was to be allowed as revenue expenditure.

Based on findings in the case of Carborandum and Asianet (supra), It was submitted by the Ld AR that, if the expenditure is treated as not for enduring benefit or not in capital nature but as revenue expenditure than the income offered for tax in ITR will come down below the returned income, thereby the present case shall fall under the realm of provisions assessee will be assessed at a sum lower than the assessed income as was assessed in the original assessment and therefor the assessee is entitled to claim that the proceedings under section 147 of the Act shall be dropped, thus the Ld AR prayed to set aside the assessment reopened U/s 147 of the Act.

31. Respectfully following the judicial precedence laid down by the Hon’ble jurisdictional High Court of Madras, which is a binding law to be followed by us, we are of the considered opinion that the depreciation on ld. CIT(A) was an erroneous application of law and bad finding, therefore the same deserves to be reversed and we do so. Thus, the ground Nos.

4, 4.1 & 4.2 in in the appeal of the assessee is allowed.

1. The order of The Commissioner of Income tax (Appeals) is contrary to law, facts and circumstances of the case.

2.2 The Commissioner of Income Tax (Appeals) ought to have appreciated that the decision of the Hon’ble Madras High court in the case of CIT vs Ooty Dasaprakash - 237 ITR 902 (Mad) has held that construction of building on lease hold land is admissible as revenue expenditure.

2.3 The commissioner of Income Tax (Appeals) ought to have considered the ITAT order in the assesse’s own case for previous assessment years, where the matter was remanded to the Assessing officer to allow all expenses of revenue nature instead of disallowing the entire expenditure as capital expenditure.

3. The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs.1,52,41,240/- u/s 40(a)(i) the payments made to nonresidents towards rooms facilities and amenities for non-deduction of TDS.

3.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that the payments made to Heritage Bird and Hutchinson & Co, who are tax residents in Malaysia and Thailand respectively have provided time share membership. The payment made is towards the Annual management/subscription fees which is part of the membership agreement towards use of the Resorts in their respective countries outside India and hence not taxable in India

3.2 The Commissioner of Income tax (Appeals) erred in not appreciating the fact that these payments constitute BUSINESS PROFITS of the non-residents and therefore, liability of tax in India does not arise in the assessee’s case.

3.3 The commissioner of Income tax (Appeals) erred in not appreciating that these are payments towards use of properties located outside India and hence are not subject to TDS provisions.

3.4 Without prejudice to the above, the CIT(A) has erred in not appreciating the fact that the payments, even if construed as FTS, were made in respect of services utilized in a business outside India and for purpose of making or earning income from any source outside India and therefore is not taxable under section 9(1 )(vii)(b) of the Act.

3.5 The Commissioner of Income tax(Appeals) ought to have appreciated that the question of deduction of tax arises only when the payments are chargeable to tax in India and not otherwise as laid down by the Supreme Court in GE India P Ltd. vs. CIT (327 456 SC)

4. Disallowance of Professional charges u/s 40(a)(i) of Rs.48,77,501/-

4.1 The Commissioner of Income tax(Appeals) erred in confirming the disallowance of the payments made by the assessee to non-residents namely Margus Hugelshofer, Switzerland (Rs.14,92,691 ) towards professional services, Northcourse Ltd., UAE (Rs.23,80,800) towards advisory services and Grapevine International Services Ltd.,UK (Rs. 10,04,010) towards consultancy charges for Non-Deduction of Tax at Source.

4.2 The Commissioner of Income tax (Appeals) has erred in not appreciating the fact that none the non-residents to whom payments were made have any Permanent Establishment (PE) in India and also that services were provided by the non- residents outside India, hence the payments are not liable to tax under the Indian Income Tax Act.

4.3 The CIT(A) ought to have appreciated that payments made by the assessee were BUSINES PROFITS of the non- residents not taxable in India under Article 7 of the DTAA or Section 9(1 )(i) of the Act.

4.4 Without prejudice to the above, with respect to payments made to non residents, the ACIT has failed to note that no technical knowledge, skill, knowhow etc. was “made available” to the assessee as mandated by the Royalties/FTS Article of the relevant DTAA for the payments to be construed as FTS. Hence the payments were BUSINESS PROFITS under Article 7 taxable only in the foreign country and not in India 5. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of Rs.1,60,37,640/- the payments made towards Marketing Expenses at UK u/s 40(a)(i) of the Act.

5.1 The Commissioner of Income tax Appeals) has erred in not appreciating the fact that non-resident does not have any Permanent Establishment (PE) in India and also that entire services were provided by the non-residents outside India and hence is not taxable under Act.

5.2 The Commissioner of Income tax(Appeals) ought to have appreciated that payments made by the assessee were BUSINESS PROFITS of the non-resident marketing company which is not taxable under the Indian Income Tax Act.

5.3 Without prejudice to the above, the CIT(A) has failed to note no technical knowledge, know-how, skill etc were “made

27 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 available” to the assessee as mandated by Article 13(4)(c) of the India-UK DTAA for the payments to be construed as FTS. Hence the payments were only BUSINESS PROFITS under Article? taxable in UK and not India

6. The Commissioner of Income tax(Appeals) erred in confirming the disallowance of the expenses of Rs.77,20,903/- relatable to earning the dividend income u/s 14A by applying Rule 8D.

6.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that assessee earned dividend income only from investments in mutual funds made out of surplus funds available with it.

6.2 The Commissioner of Income tax (Appeals)ought to have appreciated that u/s.14A only the actual expenditure incurred for the purpose of earning exempt income should be disallowed. All the investments have been made by assesee’s own fund and the appellant has not incurred any expenditure for earning the dividend income.

6.3 The Commissioner of Income Tax (Appeals)ought to have appreciated that loans were borrowed specifically for working capital purpose which cannot be utilized for making any investments.

6.4 The Commissioner of Income Tax (Appeals) ought to have appreciated that investments made into subsidiaries are strategic investments made for acquiring control in the subsidiary and no dividend income earned from the subsidiaries. 6.5 The Commissioner of Income Tax (Appeals) ought to have appreciated that the method prescribed under Rule 8D, can be invoked only where the assessing officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of expenditure made by the assessee or claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act.

6.6 The Commissioner of Income Tax (Appeals) ought to have appreciated that in the present case the accounts of the assessee clearly evidence the fact that no expenditure was incurred by the assessee for earning the income by way of dividend, which does not form part of the total income.

6.7 The Commissioner of Income tax (Appeals) ought to have appreciated that the Hon’ble Punjab & Haryana High Court in the case of CIT Vs M/s. Hero Cycles Limited - reported in 323 ITR 518 has held that “Disallowance u/s.14A requires finding 28 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance u/s.14A cannot stand.” 6.8 It is submitted that the Delhi Tribunal in the case of ACIT Vs Sun Investments reported in 8 ITR (Tri) 33 have held that unless the assessing officer established that specific expenditure has been incurred by the assessee for earning exempt income there can be no disallowance under Section 14A.

7. The Commissioner of Income tax (Appeals) erred in restricting the claim of appellant on depreciation on electrical equipment’s to 10% against the claim of the appellant as 15%. 7.1 The Commissioner of the Income tax (Appeals) ought to have appreciated that the above electrical installations are to be reckoned as plant and machinery and not in the nature of electrical fittings to be capitalized under furniture and fittings. Hence the claim of the appellant that the depreciation @ 15% should be allowed.

8. The Appellant craves leave to add to, alter, amend or delete the above grounds of appeal

36. Ground No.1 & 8 are general in nature, which require no adjudication.

37. Ground Nos.2, 2.1, 2.2 & 2.3 are regarding treating the expenditure incurred towards interior decoration, extension and renovation of buildings as capital expenditure.

38. At the outset, ld. AR of the assessee submitted that similar issue in assessee’s own case was decided by the coordinate bench of the Tribunal in &1227/Mds/2013, wherein it was held that, “the CIT(A) confirmed the expenditure on civil, electrical, carpentry and plumbing work done in a leasehold building as capital expenditure. In in directing the AO to allow the expenditure which was in revenue field and disallow the claim of the expenditure which was in capital field. Since the issue was decided by restoring the same for readjudication to the file of the AO by the ITAT in assessee’s own case, it was requested to restore the same to the file of AO for the year under consideration also.

39. Ld. CIT-DR vehemently supported the order of the ld. CIT(A).

40. We have considered the rival contentions and perused the material available on record. Since the issue in assessee’s own case was already decided in & 1227/Mds/2013 by the coordinate bench of the Tribunal vide order date 26.09.2013 and the matter was restored back to the file of AO with a direction to disallow the claim of the expenditure which was in the capital field and allow the expenditure which was in the revenue field. Therefore, respectfully following the same, ground Nos.2, 2.1, 2.2 & 2.3 on this issue are restored to the file of AO to adjudicate the same as directed hereinabove, consequently, these grounds are partly allowed for statistical purposes.

41. Next grounds i.e. ground Nos.3 to 3.5, 4 to 4.4 and 5 to 5.3 are regarding disallowance u/s.40(a)(i) of the Act on account of payments made to nonresidents without deduction of tax under the provisions of Act.

42. Ld. AR before us submitted that this disallowance was made by the AO pertaining to payment towards maintenance charges of resort. It was to Heritage Bird and Hutchinson & Co, who are tax residents in Malaysia and Thailand respectively have provided time share membership. The payment made is towards the Annual management/subscription fees which is part of the membership agreement towards use of the Resorts in their respective countries outside India and hence not taxable in India.

The ld. AO was wrong in not appreciating the fact that these payments constitute BUSINESS PROFITS of the non-residents and therefore, liability of tax in India does not arise in the assessee’s case. It was also the contention of the ld. AR that the ld. AO was also wrong in not appreciating the fact that the payments, even if construed as FTS, were made in respect of services utilized in a business outside India and for purpose of making or earning income from any source outside India and therefore is not taxable under section 9(1)(vii)(b) of the Act. Ld AR also relied on the article 6,7,8 of the DTAA between India and Malaysia.

Reliance was placed on the decision of Hon’ble Supreme Court in the case of GE India Technology Centre (P) Ltd., reported in (2010) 327 ITR 456 (SC), wherein the Hon’ble Apex Court has held as under :-

Section 195 of the Income-tax Act, 1961 - Deduction of tax at source - Payment to non-resident - Whether the moment a remittance is made to a non-resident, obligation to deduct tax at source does not arise; it arises only when such remittance is a sum chargeable under Act, i.e., chargeable under sections 4, 5 and 9 - Held, yes - Whether section 195(2) is not a mere provision to provide information to ITO(TDS) so that department can keep track of remittances being made to non-residents outside India; rather it gets attracted to cases where payment made is a composite payment in which certain proportion of payment has an element of 'income' chargeable to tax in India and payer seeks a

3. Disallowance of Maintenance charges for Resorts u/s.40(a)(i) of Rs.1,52,41,240/-: The above charges were paid towards maintenance of resorts located in Malaysia and Thailand. The services were rendered outside and the income does not deemed to accrue or arise in India under sec. 9(1). The payments represent the business profits of the non-residents and are not taxable in India. Hence, no tax is deductible u/s.195 of the Act. Even assuming it is FTS, then as per sec.9(1)(vii)(b) the resort maintenance fees are payable in respect of services utilized in a business carried on by assessee outside India hence the income shall not be deemed to accrue or arise in India.

4. Disallowance of Professional charges u/s.40(a)(i) of Rs.48,77,501/-. Assessee has made the following payments towards professional services; i) Payment to Markus Hugelshofer towards advisory services of Rs.14,92,691/-; ii) Payment to Northcourse Ltd towards advisory charges of Rs.23,80,800/-; iii) Payment to Grapevine International Services Ltd. towards consultancy charges of Rs.10,04,010/-. It is submitted that entire services were rendered outside India. 5. Disallowance of Payments made towards marketing expenses at UK u/s.40(a)(i) of Rs.1,60,37,640/-. The payment was made for marketing the assessee’s business outside India. Entire marketing service was rendered outside India. It represents the business profit of the non-resident and it did not make available any knowledge, experience, skill to assessee.

Even assuming for a moment that the marketing services rendered by the Non-resident were in the nature of technical services as per section 9(1)(vii), the same would not become FTS as per the DTAA because of the language of Article 13(4)(c) which mandates that such services must be made available to the payer of the consideration. As the Non-residents in the instant case has not made available any technical knowledge, experience, skill etc. to the assessee company the same cannot be subjected to tax by considering the provisions of section 9(1)(vii) on stand alone basis.

8. Disallowance u/s 40(a)(i) of IT Act 8.1 On perusal of the notes of the accounts for the year ended on 31.03.2011 it was observed that the assessee made payments in foreign currency for various expenditures. Hence, the assessee was asked to furnish the details of the above payments and the corresponding TDS details as per the provisions of section 195 of the Income tax act & also asked to show cause if there is any default in TDS compliance, why the above amount should not be disallowed as per the provisions of Section 40(a)(i) of the Income- tax Act. 8.2 The assessee company vide letter dated 14.03.2014 submitted the details. The submissions made by the assessee are as follows: • Payments made to Heritage Bird (M) sdn, Bhd towards management fees for resort maintenance in Malaysia of Rs. 97,56,621/- (Rs.23,79,817, Rs. 24,06,808, Rs. 49,69,996.) • Payments made to Hutchinson & co. service Ltd towards management fees paid for resort maintainance in Thailand of Rs. 54,84,619. In support of non deduction of TDS the assessee stated that, “Property located outside India. Management fees paid for resort maintenance (in Malaysia & Thailand)" The assessee's contention cannot be accepted for the following reasons:- 8.3 As per the provisions of Section 9(1)(vii) of the IT Act, any payment made for the purpose of rendering management services outside India shall be considered only as the payment made for fees for technical services. For better clarity the corresponding explanation of the said provision is being reproduced as under “Explanation 2 .-For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or 34 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".”

8.4 It is clear that the intention of the legislature to include the management services under the head “Fees for the technical services” as per the provisions of section 9(1 )(vii) of the IT Act is mainly due to the reason that any payments made by the resident of India to the Non-resident, other than transactions exempted as per the provisions of section 9(1) (i) of the Income tax Act shall be taxable only in India. In other words, any payments made by the resident for the purpose of receipt of services under the ambit of managerial, technical & consultancy shall be taxable only in India. Accordingly, the concept of PE shall be applicable only to the income related to the head “business income” (purchase & sale of goods) falls within the provisions of section 9(1) (i) of the Income tax Act.

8.5 The explanation to section 9(1)(vii) of the IT Act, which has been introduced by Finance Act, 2010 with retrospective effect from 01.06.1976, clearly states that the above payments for the purpose of Royalty or Fees for technical services, shall be taxable only in India irrespective of the PE of the non resident and irrespective of the place in which the service was rendered. The relevant explanation to section 9(1)(vii) of the IT Act is reproduced below:

'‘[Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not.—

(i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.]”

8.6 Hence, as per the above facts and legal positions explained, the above foreign remittances which are effected without making TDS are being disallowed and added to the total income of the current year by invoking the provisions of section 40(a)(i) of the Income-tax Act.

Disallowance : Rs. 1,52,41,240 (9756621 + 5484619)

8.7 It is further observed that the assessee made the following payments towards professional services.

35 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 • Payments made to Marqus Huqelshofer towards Professional services : Rs. 14,92,691 • Payments made to Northcourse Ltd towards advisory services : Rs. 23,80,800 • Payments made to Grapevine International Services Ltd towards Consultancy charges : Rs.10,04,010.

In support of non deduction of TDS the assessee stated that, “ Entire service rendered outside India" cannot be accepted for the following reason.

Apparently, all the above payments were made by the assessee as fees for professional / consultancy/ advisory services, which clearly falls within the definition, 'fees for technical services’, i.e., covered U/s 9(1)(vii) of the Act. The explanation to section 9(1)(vii) of the IT Act, which has been introduced by Finance Act 2010 with retrospective effect from 01.06.1976, clearly states that the above payments for the purpose of technical services, shall be taxable only in India irrespective of the PE of the non resident and irrespective of the place in which the service was rendered. The relevant explanation to section 9(1 )(vii) of the IT Act is reproduced below:

"-[Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (I) and shall be included in the total income of the nonresident, whether or not— (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.]”

8.9 Accordingly, the aforesaid fees for technical services of Rs.48,77,501 (1492691 + 2380800 + 1004010) paid without deduction of tax at source, is being disallowed u/s.40(a)(i) r.w.s 195 of the Income-Tax Act and the same is added to the total income of the current year. Disallowance : Rs.48,77,501

8.10 Payment made toward marketing expenses at UK.

During the course of assessment proceedings it was observed that assessee made payments for marketing expenses outside India. On this issue the assessee was asked to substantiate the compliance of TDS on these payments. On verification of the details submitted by the assessee on 14.03.2014 in connection with payments made in foreign currency, it is noted that payment towards marketing expenses were made to some entities in UK, to the tune of Rs. 1,64,16,578. It was further observed that out of this, TDS was deducted on an expense of Rs.3,78,938. For the remaining amount of Rs. 1,60,37,640, the assessee stated in the 36 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 note that “Marketing expenses shown above where no tax has been deducted are not taxable as entire marketing service is rendered outside India".

8.11 The assessee's submissions are general in nature and do not provide the true nature of services rendered by each party and also not substantiated with relevant evidences. This office vide notice U/s. 142(1) of the Act dated 8.1.2014, the assessee company was specifically asked to furnish party wise breakup of foreign currency payments and to give reasons for each case where tax not deducted. The relevant portion of notice u/s 142(1) of the Act dated 8.1.2014 is reproduced below:

“c. In respect of foreign remittances made by the company, please furnish complete breakup details, viz., name & address of the recipient, nature and mode of payment and details of TDS. If tax not deducted, please give the reasons thereof. "

8.12 However, the assessee has not given the nature of marketing services rendered by the foreign entities. As per the provisions of Section 9(1 )(vii) of the Act, any payment made for the purpose of rendering consultancy services outside India shall be considered only as the payment made for fees for technical services. For better clarity the corresponding explanation of the said provision is being reproduced as under:

“Explanation 2 .-For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of .technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries".".

8.13 The fact that the assessee had deducted tax on some on the expenses towards marketing expenses shows that the payments were indeed in the nature of consultancy charges or fees for technical services. From the details filed by the assessee in respect of marketing expenses at U.K, it is seen that the assessee had deducted tax at source on the payments made to Travel Counsellors Ltd in the month of November & December 2010 but no tax deducted in respect of payment of Rs.5,78,824 made to the same entity in March 2011. The assessee has not furnished any details to show that tax not deductible in respect of this payment made in March 2011. Similarly, the assessee has not furnished any details or clarified as to how the marketing services rendered by other entities, for which payments of Rs. 1.6 crores were made, cannot be treated as fees for consultancy charges. When the Department has made a specific query, the onus lies on the assessee to furnish all relevant details and conclusively prove that 37 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 tax not deductible in respect of the said payments towards marketing expenses. 8.14 The assessee also states that the marketing services were rendered outside India and hence, not taxable in India. This contention is no more applicable as per the explanation to section 9(1)(vii) of the IT Act, which has been introduced by Finance Act 2010 with retrospective effect from 01.06.1976. The explanation clarifies that the above payments for the purpose of Royalty or Fees for technical services, shall be taxable only in India irrespective of the PE of the non resident and irrespective of the place in which the service was rendered. The relevant explanation to section 9(1)(vii) of the IT Act is reproduced below: “[Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not,— (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.]” 8.15 Hence, as per the above facts and legal positions explained, the above foreign remittance towards marketing expenses made without TDS, is being disallowed and added to the total income of the current year as per the provisions of section 40(a)(i) r.w.s. 195 of the Income-tax Act. Disallowance : Rs.1,60,37,640

8.2 Explanation 2 to Section 9( 1 )(vii) reads as under: "Explanation 2. -For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head "Salaries"." 8.3 Explanation to Section 9(2) reads as under: "[Explanation. —For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be 38 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 deemed to accrue or arise in India under clause (v) or clause (w) or clause (vii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not,— (i) the non-resident has a residence or place of business or business connection in India; or (ii) the non-resident has rendered services in India.]" 8.4 There is no dispute that this amount was paid towards management fees paid for Resort maintenance. Hence in the light of the above stated two explanations, the same is taxable in India. Hence the disallowance u/s 40(a)(i) for not deducting TDS is upheld

9.1 In the grounds of appeal the appellant contested as under:

"5.1 The Assistant commissioner of Income tax, LTU erred in disallowing the payments made by the assessee to non- residents namely Margus Hugetshofer, Switzerland (Rs. 14,92,691) towards professional services, North course Ltd., UAE (Rs.23,80,800) towards advisory services and Grapevine International Services Ltd., UK (Rs.10,04,010) towards consultancy charges for Non-Deduction of Tax at Source.

5.2 The Assistant commissioner of Income tax, LTU has erred in not appreciating the fact that none of the non- residents to whom payments were made have any Permanent Establishment (PE) in India and also that services were provided by the non-residents outside India, hence the payments are not liable to tax under the Indian Income Tax Act.

5.3 The ACIT ought to have appreciated that payments made by the assessee were BUSINES PROFITS of the non- residents not taxable in India under Article 7 of the DTAA or Section 9(1 )(i) of the Act.

5.4 Without prejudice to the above, with respect to payments made to non-residents, the ACIT has failed to note that no technical knowledge, skill, knowhow etc. was "made available" to the assessee as mandated by the Royalties/FTS Article of the relevant DTAA for the payments to be construed as FTS. Hence the payments were BUSINESS PROFITS under Article 7 taxable only in the foreign country and not in India."

9.2 There is no dispute that these payments were made towards Professional services, Advisory services and Consultancy services. The Assessing Officer concluded that these services come under "Fee for technical services"

9.3 The appellant contested that these payments were Business Profits of the non-residents not taxable in India

However, the assessee did not furnish the party wise breakup of foreign currency payments and evidence in support of the nature of services rendered for which the payments were made.

In the absence of evidence in support of the ground of appeal, the disallowance u/s 40(a)(i) is upheld.

10 Disallowance of Payments made towards marketing expenses at UK u/s.40(a)(i) Of Rs.1,60,37,640/-:

10.1 In the grounds of appeal the appellant contested as under:

"6.1 The Assistant commissioner of Income tax, LTD erred in disallowing Rs. 1,60,37,640/- the payments made towards Marketing Expenses at UK u/s 40(a)(i) of the Act.

6.2 The Assistant Commissioner of Income tax has erred in not appreciating the fact that non-resident does not have any Permanent Establishment (PE) in India and also that entire services were provided by the non-residents outside India and hence is not taxable under Act.

6.3 The Assistant commissioner of Income tax, LTU ought to have appreciated that payments made by the assessee were BUSINESS PROFITS of the non-resident marketing company which is not taxable under the Indian Income Tax Act.

6.4 Without prejudice to the above, the ACIT has failed to note no technical knowledge, know-how, skill etc were "made available" to the assessee as mandated by Article 13(4)(c) of the India-UK DTAA for the payments to be construed as FTS. Hence the payments were only BUSINESS PROFITS under Article? taxable in UK and not India."

10.2 Out of the total payment of Rs. 1,64,16,578/- made towards Marketing Expenses at UK the assessee deducted TDS on payment of Rs. 3,78,938 and did not deduct TDS on the remaining amount of Rs.1,60,37,640/-

The Assessing officer asked the assessee to furnish party wise breakup of foreign currency payments and to give reasons for each case where tax was not deducted.

However, the assessee did not furnish the nature of marketing services rendered by the foreign entities.

40 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 10.3 Before the CIT(A) also the assessee did not furnish the party wise breakup of foreign currency payments and the nature of services rendered for which the payments were made. The disallowance u/s 40(a)(i) made by the Assessing Officer is further strengthened by the fact that the assessee had deducted TDS on some portion of the payment made towards Marketing Expenses at UK. Hence the disallowance u/s 40(a)(i) is upheld.

Apparently, as per the observations of the ld. AO and ld. CIT(A) and also on perusal of the paper book of the assessee which is not making any statement nor are certified that whether all such information are furnished before the revenue authorities to adjudicate the issue lawfully. Since the ld. AR has discussed that the relaxation in DTAA are available to the assessee on the services rendered by the foreign entities to it which was opposed by or challenged by the ld. CIT-DR with drawing attention to other clauses of the same DTAA or contented that the averment of the that the payments made falls under different article than what the assessee is claiming. The assessee’s contention that the income derived by the foreign authorities were in the nature of income from immovable property or are in the nature of business profits, therefore, no TDS has to be made. However after deliberations, during the course of hearing, learned counsel of both the sides have fairly admitted that certain details which were necessary to adjudicate this issue were neither called for by the department nor the assessee has furnished the same. We, therefore, are of the considered view that all these issues raised by the assessee regarding disallowance u/s.40(a)(ia) of the Act, in the interest of justice, needs to be restored back to the files of AO for thorough examination of facts, analysis of the same and to reajudicate the applicability of section 40(a)(i) in accordance with the provisions of Income Tax Act r.w. DTAA between India and respective countries and the foreign entities. In view of these observations, the ground Nos.3 to 5.3 are restored back to the file of AO for fresh readjudication. The assessee is also directed to furnish all the necessary details and evidences before the Ld AO to examine the issues appropriately. Thus, these grounds are allowed for statistical purposes.

“Section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not included in total income (Computation of) - Assessment year 2008-09 - While determining disallowance under section 14A and adding same to assessee's income, Assessing Officer instead of adopting average value of tax exempt investment, had chosen to factor in total investment itself - Commissioner (Appeals) recorded value of investment attributable to dividend and found same to be constituting less than 1 per cent of total scheduled fund - Whether such value of investment was required to be adopted and thereafter exact disallowance was to be arrived at 0.5 per cent of same - Held, yes [Para 8] [In favour of assessee/Matter remanded]”

(SB), wherein the Special Bench of the Delhi Tribunal has held as under :-

II. Section 14A of the Income-tax Act, 1961 read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to exempt income not includible in total income - Assessment year 2008-09 - Whether only those investments are to be considered for computing average value of investment which yielded exempt income during year - Held, yes [Para 11.16][Matter remanded]

11.2 The assessee claimed that the surplus and own funds were invested to earn exempt income. Hon'ble High Court of Bombay in the case of Godrej & Boyce Mfg. Co. Ltd., while upholding the constitutional validity of Sec.l4A(2) & (3), accepted the contention of revenue that Rule 8D(2)(ii) has been inserted since it would have been difficult to allocate the actual quantum of borrowed funds that have been used for making tax free investments and that Rule 8D(2)(iii) has been inserted to attribute part of administrative and management expenditure to tax-exempt income. It even distinguished the case of Reliance Utilities & Power Ltd. noting that in the judgement of Reliance Utilities & Power Ltd., it was shown that there were interest free own funds available but not merely reserves. It even noted that the fact that the assessee has utilized its own funds in making the investments would not be dispositive of the question as to whether the assessee had incurred expenditure in relation to the earning of such income. A view can be taken after analyzing the above that if the assessee can prove by way of presumption or by way of direct nexus that interest free funds have been utilized in making the investments, then Rule 8D(2)(ii) would not be applicable. However, Rule 8D(2)(iii) continues to be applicable in such a case unless proven otherwise by the assessee by way of suo moto apportioned disallowance of expenditure in relation to exempt income since inevitably some part of administrative/managerial expenditure is bound to be incurred which may have a proximate cause with the exempt income. A contention was made by the revenue in the case of Godrej & Boyce Mfg. Co. Ltd. that a presumption cannot be drawn merely on the basis of reserves since the reserves on the liabilities side of the balance sheet are represented by a variety of assets on the asset side. The assets could be fixed or non-liquid assets and thus not investible. Even in the case of Reliance Utilities & Power Ltd., the revenue made a contention that the shareholders funds were utilized in acquisition of fixed assets. A way to ascertain whether any presumption can be made that the investments are not made from borrowings is to prepare fund flow statements at short time intervals.

46 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 Fund flow statements essentially show the movements of funds from sources to their application between two dates. Thus, one could ascertain whether any funds have been applied to fixed assets/investments/repayments of debt etc. The assessee did not furnish any such fund flow statement in support of the claim that the surplus and own funds were invested to earn exempt income. 11.3 The assessee further claimed that appellant did not incur any expenditure for earning the dividend income. However, in [2017] 82 taxmann.com 276 (Chennai - Trib.) M.A. Alagappan vs Assistant Commissioner of Income-tax, Corporate Circle 3(1), Chennai, the hon'ble ITAT Chennai bench ’D’ held - Even when no expenditure is incurred in earning exempt income, statute has provided for presumptive expenditure and, thus, assessing authority has to apply rule 8D. 11.4 The assessee further claimed that the investments made into subsidiaries are strategic investments made for acquiring control in the subsidiary. However, in [2016] 72 taxmann.com 102 (Karnataka) United Breweries Ltd vs Deputy Commissioner of Income-tax, Central Circle- 2(3), Bangalore, the hon'ble High Court of Karnataka held - Section 14A is applicable even where motive in acquiring shares is to obtain controlling interest in companies. 11.5 For the reasons stated above all the grounds of appeal with respect to the disallowance u/s 14A are dismissed and the disallowance u/s 14A is upheld.

53. We have considered the rival submissions, perused the material available on record and the judicial pronouncements submitted for our perusal. The contention of the ld. AR of the assessee before us is that no expenditure has been incurred in relation to income which does not form part of total income or relatable to earning the dividend income for which no disallowance u/s.14A r.w.sr.8D can be made. It was also the contention of the assessee that investments were made out of own funds of the assessee, no borrowed funds were utilized for the purpose of contention and the reason behind the disallowance was the claim of the assessee cannot be considered or allowed as the assessee did not furnish any details or fund flow in support of the claim that surplus and own funds were invested to earn the exempt income. Since this issue is covered on the decision of the Hon’ble Delhi High Court, as relied on by the ld. AR, in the case of ACB India Ltd. (supra), wherein it has been categorically held that for the purpose of Section14A instead of taking into account the total investment, the investment attributable to dividend was required to be adopted and thereafter di9sallowance was to be arrived at.

A similar finding was given by the ITAT Delhi Bench of the Tribunal in the case of Vireet Investment (P) Ltd. (supra), wherein it has been held that only those investments are to be considered for computing average value of investment which yielded exempt income during the year. In order to arrive at the quantum of disallowance or non-disallowance, it is required to examine the status of investment during the relevant financial year by the assessee also the utilization of the investment which has yielded exempted income during the year. It was the observation of the ld. CIT(A) that necessary financial information like fund flow statements were not produced by the assessee before the AO as well as before the ld. CIT(A).

Therefore, the disallowance made by the ld. AO was upheld by the ld. CIT(A). Looking to such factual matrix of the case, we are of the considered view that all the information required to arrive at the figure of disallowance u/s.14A or to examine the applicability of provisions of conclusion that if the financial information of the assessee are suggesting any disallowance in terms of provisions of Section 14A or not. We, therefore, restore this matter back to the file of AO to readjudicate the issue afresh. The assessee is directed to submit all the necessary information required for readjudication. The AO is also directed to consider the judicial principles laid down by the Hon’ble courts referred to hereinabove. Thus, ground Nos. 6 to 6.8 are partly allowed for statistical purposes.

56. In this appeal, the assessee has raised the following grounds :-

1. The order of The Commissioner of Income tax (Appeals) is contrary to law, facts and circumstances of the case.

2. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of Long Term Capital Loss amounting to Rs.1,08,38,402/-. 2.1 The Commissioner of Income tax (Appeals) erred in holding the lease premium was amortized over the period of lease but was not shown as an asset in the income tax depreciation schedule and therefore the long term capital loss has escaped assessment. 2.2 The Commissioner of Income tax (Appeals) ought to have appreciated that depreciation/amortization is not applicable for land under the income tax Act, the same was not shown in the income tax depreciation schedule and no depreciation/amortization was claimed during any of the relevant assessment years during which the lease was in existence. 2.3 The Commissioner of Income tax (Appeals) erred in holding that there is no transfer of a capital asset resulting in a loss. 2.4 The Commissioner of Income tax (Appeals) erred in holding that document executed by way of surrender of leasehold lands and getting back the least premium would not tantamount to transfer but only reversal of a transaction of lease. 2.5 The Commissioner of Income tax (Appeals) ought to have appreciated that the lease was cancelled and the lease hold rights were surrendered on 14.02.2011 and the lease consideration was refunded by lessor. Upon surrender of lease consideration amortiozed from the date of lease till the date of cancellation of lease was accounted for and the loss on sale accounted in the books should be allowed to be carried forward. 3. Appellant craves leave to adduce additional grounds at the time of hearing.

".......i) We would like to bring to your kind notice, that the premium amount was not shown in the income tax depreciation schedule as depreciation/amortization was not claimed on the same. ii) We have clarified the same along with copies of the relevant pages of the Form 3GI) in the earlier paragraph. iii) There is no provision for depreciation on land and hence was not shown in the Form 3CD. This is in itself is a proof that we have not taken amortization on the asset during the period of lease and hence there is not disallowance qualified. ivj Further we would like to state that, even if there is a disallowance it cannot be the asset Value as the same is not an expense by a capital spend. It was capitalized in the books of accounts as confirmed by your good self in the show cause notice. Hence there was no claim as expense from the income to qualify for disallowance. If at all disallowance can be to the extent of amortization; if claimed in the income tax return. y) We had clarified with relevant copies of the return that no amortizaition was clamed and that we ad reversed the amortization value as per books of accounts while computing tax liability for the relevant year …..

58. However, the contention of the assessee was disowned by the AO observing as under :-

51 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 9. The assessee company's claim of long term capital loss of Rs. 1,08,38,4027- has been considered in the light of the computation presented as part of the Memo of Income, The claim that there has been a 'transfer' of a capital asset which results in the loss has to be examined in the light of the attendant facts and circumstances.

(a) assessee had change in its business plans; (b) Therefore, it did not require the leasehold lands anymore for the project purposes.

(c) Assessee has not done any activity in the leased plot till date;

52 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 accepted in the original assessment is ignored and there is no claim of carry forward of such loss. Hence the claim of capital loss to the tune of Rs.l,08,38,402/- is not allowed to carry forward to the subsequent assessment years.

59. The assessee challenged before the ld. CIT(A) wherein without success disallowance made by the AO was sustained by the ld. CIT(A) with the following observations :-

7.2 The assessee had taken lease of the property from M/s. Mahindra World City Developers on 28,03.2007 for Rs.2.55 crores for a period of 99 years- On 14.02,2011, the said lease right was cancelled and received back the; amount paid to M/s. Mahindra World City Developers, The Deed of Surrender did not contain any consideration for the transfer but only mentioned that the lessor has already refunded the lease premium Rs.2,55,00,000/- paid. Assessee has not done any activity in the leased plot from the date of taking it on lease to date of surrendering the same. The Assessing Officer further observed that the document was prepared as ‘Deed of Cancellation’ only and thereafter, the word 'cancellation' was struck off arid the word ‘surrender' Was substituted by hand. Hence the Assessing Officer concluded that the document executed by way of surrender of leasehold lands and getting back the lease premium of Rs.2.55 crores would not tantamount to transfer but only reversal of a transaction of lease. 7.3 The A.R of the assessee did not dispute these facts. Moreover the A.R did not bring any material on record to establish that the assessee was having rights in the said property. From the above facts, It can be concluded that effectively, this is a cancellation of existing arrangement of lease and cannot partake the character of transfer of leasehold rights by the assessee for consideration giving rise to capital gain or loss, Hence the disallowance of claim of capital loss of Rs.1,08,38,402/- is upheld,

60. At the outset, ld. AR of the assessee submitted that the property taken on lease of 99 years from Mahindra World City Developers on surrender. However, the ld. AO and ld. CIT(A) has not appreciated the fact in right perspective and have considered that the document executed by way of surrender of leasehold and getting back lease premium would not be tantamount to transfer but only reversal of transaction of lease.

Therefore, it is hereby requested to consider the same as transfer and claim of capital loss under the provisions of Income Tax by allowing indexation may be permitted. Ld. AR relied on the order in the case of CIT Vs. Hitashi Estates Ltd., reported in 313 ITR 393 (Delhi), wherein the Hon’ble High Court has held as under :-

Section 28(i) of the Income-tax Act, 1961 - Business loss - Allowable as - Assessment year 2002-03 - Assessee-company took a property on rent - Subsequently, it made improvements in said rented premises and retained same for more than five years - Assessee had shown said property as stock-in-trade in its balance- sheet - However, in relevant year in which assessee surrendered tenancy right of said property to owner for certain consideration, it showed property-in-question as capital asset - Thus, assessee claimed loss incurred on surrender of tenancy right as capital loss - Assessing Officer as well as Commissioner (Appeals) held that loss-in-question was business loss - On further appeal, Tribunal noticed that assessee was engaged in business of purchase and sale of property on ownership basis; and that there was no transaction involving purchase or sale of tenancy rights, except one in question - Tribunal further observed that treatment given by assessee in its books of account for earlier years was patently wrong and, thus, such wrong treatment could not be held against assessee when it was apparent that tenancy right was a capital asset in assessee's hand - Accordingly, Tribunal allowed assessee's claim - Whether transaction in dispute, i.e., acquisition/surrender of a tenancy right, could not, in law, acquire a different character because of wrong treatment accorded to it in books of account of assessee - Held, yes - Whether, therefore, impugned order of Tribunal did not require any interference - Held, yes

54 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 61. Ld.AR also relied on the CBDT Circular F.No.275/29/2015-IT(B) dated 13th October, 2016, wherein in para 4 it is mentioned that the Hon’ble Chennai High Court in the case of Foxconn India Developer Limited (Tax Case Appeal No.801/2013) has held that the one-time non- refundable upfront charges paid by the assessee for the acquisition of leasehold rights over an immovable property for 99 years could not be taken to constitute rental income in the hands of the lessor, obliging the lessee to deduct tax at source u/s.194-I of the Act and that in such a situation the lease assumes the character of “deemed sale”. The content of the Circular is as under :-

Subsequently on 14.02.2011, the assessee company vide Deed of Surrender, dropped the plan to set up a Hotel Infrastructure in the leased land and surrendered the leasehold rights. outlines the terms under which one party agrees to rent property from another party. A lease deed for 99 years is a long-term lease that controls the transfer of land and its uses. A surrender deed is a legal document that transfers ownership of property from one party to another. It is used when the lessee ceases to have an interest in the property and comes into a mutual agreement with the lessor. The surrender deed can be used to reverse the lease deed for 99 years by transferring ownership back to the lessor. When a lease deed is surrendered before the end of its term, it is considered as a transfer of capital asset and is subject to capital gains tax. The capital gains tax is to be calculated as prescribed under the provisions of Income Tax Act 1961, as the difference between the sale price and the cost of acquisition. The cost of acquisition is the price at which the property was acquired by the lessee. In present case the sale price is the price at which the property was surrendered by the lessee.

1. The order of The Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case.

2. The Commissioner of Income Tax (Appeals) erred in holding that the expenditure incurred towards interior decoration, extension and renovation of buildings is capital expenditure. 2.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that the expenditure incurred on lease hold land is not capital expenditure and is allowable as revenue expenditure. 2.2 The Commissioner of Income Tax (Appeals) ought to have appreciated that the decision of the Hon’ble Madras High court in the case of CIT vs Ooty Dasaprakash - 237 ITR 902 (Mad) has held that construction of building on lease hold land is admissible as revenue expenditure. 2.3 The commissioner of Income Tax (Appeals) ought to have considered the ITAT order in the assesse’s own case for previous assessment years, where the matter was remanded to the Assessing officer to allow all expenses of revenue nature instead of disallowing the entire expenditure as capital expenditure. 3. The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs.1,82,27,324 u/s 40(a)(i) the payments made to non-residents towards rooms facilities and amenities for non-deduction of TDS. 3.1 The Commissioner of Income Tax (Appeals)ought to have appreciated that the payments made to Heritage Bird and Hutchinson & Co, who are tax residents in Malaysia and Thailand respectively have provided time share membership. The payment made is towards the Annual management/ subscription fees which is part of the membership agreement

3.2 The Commissioner of Income tax (Appeals) erred in not appreciating the fact that these payments constitute BUSINESS PROFITS of the non-residents and therefore, liability of tax in India does not arise in the assessee’s case

3.3 The commissioner of Income tax (Appeals) erred in not appreciating that these are payments towards use of properties located outside India and hence are not subject to TDS provisions.

3.4 Without prejudice to the above, the CIT(A) has erred in not appreciating the fact that the payments, even if construed as FTS, were made in respect of services utilized in a business outside India and for purpose of making or earning income from any source outside India and therefore is not taxable under section 9(1 )(vii)(b) of the Act.

3.5 The Commissioner of Income tax (Appeals) ought to have appreciated that the question of deduction of tax arises only when the payments are chargeable to tax in India and not otherwise as laid down by the Supreme Court in GE India P Ltd. vs. CIT (327 456 SC)

4 The Commissioner of Income tax (Appeals) erred in confirming the disallowance of Rs. 1,28,59,659/- the payments made towards Marketing Expenses at UK u/s 40(a)(i) of the Act.

4.1 The Commissioner of Income tax (Appeals) has erred in not appreciating the fact that non-resident does not have any Permanent Establishment (PE) in India and also that entire services were provided by the non-residents outside India and hence is not taxable under Act.

4.2 The Commissioner of Income tax (Appeals) ought to have appreciated that payments made by the assessee were BUSINESS PROFITS of the non-resident marketing company which is not taxable under the Indian Income Tax Act.

4.3 Without prejudice to the above, the CIT(A) has failed to note no technical knowledge, know-how, skill etc were “made available” to the assessee as -"dated by Article 13(4)(c) of the India-UK DTAA for the payments to be construed as FTS. Hence the payments were only BUSINESS PROFITS under Article? taxable in UK and not India

61 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 5. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of the expenses of Rs.77,54,324/- relatable to earning the dividend income u/s 14A by applying Rule 8D.

5.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that assessee earned dividend income only from investments in mutual funds made out of surplus funds available with it.

5.2 The Commissioner of Income tax (Appeals) ought to have appreciated that u/s.14A only the actual expenditure incurred for the purpose of earning exempt income should be disallowed. All the investments have been made by assesee’s own fund and the appellant has not incurred any expenditure for earning the dividend income.

5.3 The Commissioner of Income Tax (Appeals) ought to have appreciated that loans were borrowed specifically for working capital purpose which cannot be utilized for making any investments.

5.4 The Commissioner of Income Tax (Appeals) ought to have appreciated that investments made into subsidiaries are strategic investments made for acquiring control in the subsidiary and no dividend income earned from the subsidiaries.

5.5 The Commissioner of Income tax (Appeals) ought to have appreciated that the method prescribed under Rule 8D, can be invoked only where the assessing officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of expenditure made by the assessee or claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act.

5.6 The Commissioner of Income Tax (Appeals) ought to have appreciated -that in the present case the accounts of the assessee clearly evidence the fact that no expenditure was incurred by the assessee for earning the income by way of dividend, which does not form part of the total income.

5.7 The Commissioner of Income tax (Appeals) ought to have appreciated that the Hon’ble Punjab & Haryana High Court in the case of CIT Vs M/s. Hero Cycles Limited - reported in 323 ITR 518 has held that “Disallowance u/s.14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance u/s.14A cannot stand.”

62 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 5.8 It is submitted that the Delhi Tribunal in the case of ACIT Vs Sun Investments reported in 8 ITR (Tri) 33 have held that unless the assessing officer established that specific expenditure has been incurred by the assessee for earning exempt income there can be no disallowance under Section 14A.

6. The Commissioner of Income tax (Appeals) erred in restricting the claim of appellant on depreciation on electrical equipment’s to 10% against the claim of the appellant as 15%.

6.1 The Commissioner of the Income tax (Appeals) ought to have appreciated that the above electrical installations are to be reckoned as plant and machinery and not in the nature of electrical fittings to be capitalized under furniture and fittings. Hence the claim of the appellant that the depreciation @ 15% should be allowed.

7. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of the depreciation on Non- compete Fee Amounting to Rs.21,09,375/-

7.1 The Commissioner of Income tax(Appeals) ought to have appreciated that appellant has paid non-compete fees to AGS Hotels & Resorts Private for a consideration of Rs.2,00,00,000/-. This agreement was entered pursuant to the purchase of the hotel business of AGS Hotels by the appellant.

7.2 The Commissioner of the Income tax (Appeals) ought to have appreciated that non-compete fee is an intangible asset eligible for depreciation u/s 32(1 )(ii). The Appellant relies on the decision of the Supreme Court in the case of Techno Shares and Stocks Ltd Vs. CIT, reported in 327 ITR 323 (SC) and the Madras High Court Decision in the case of Pentasoft Technologies Ltd Vs. DCIT, reported in 264 CTR (Mad) 187.

7.3 The commissioner of Income tax (Appeals) ought to have appreciated that AGS Hotels & Resorts P Limited, the recipient of the non compete fees had declared this amount as revenue and remitted tax on the same.

7.4 Without prejudice to the above, non-compete fee paid to ward off competition and protect the business of the appellant should be allowed as revenue deduction.

8. The Appellant craves leave to add to, alter, amend or delete the above grounds of appeal

70. Ground Nos.2 to 2.3 regarding the expenditure claimed by the assessee is allowable as revenue expenditure has already been decided by us in ground No.2 to 2.3 in the appeal of the assessee for A.Y.2011- 2012 in wherein we have restored the issue to the file of AO for readjudication in view of our observations made therein.

Therefore, following the reasoning given in the appeal of assessee for A.Y.2011-2012, we also restore this issue to the file of AO with a direction to disallow the claim of the expenditure which was in the capital field and allow the expenditure which was in the revenue field. These grounds are partly allowed for statistical purposes.

This ground is similar to the ground No.4 of appeal of the assessee for A.Y.2009-2010 in wherein we have allowed this ground of assessee following the judicial precedence laid down by the Hon’ble jurisdictional High Court of Madras and we have held that the depreciation on non-compete fee which was disallowed by the ld. AO and upheld by the ld. CIT(A) was an erroneous finding and the same deserves to be reversed and we do so. In view of our observations made in the appeal of the assessee for A.Y.2009-2010, these ground in the appeal of the assessee are allowed. (Assessee’s appeal for A.Y.2013-2014)

1. The order of The Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case.

2. The Commissioner of Income Tax (Appeals) erred in holding that the expenditure incurred towards interior decoration, extension and renovation of buildings is capital expenditure. 2.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that the expenditure incurred on lease hold land is not capital expenditure and is allowable as revenue expenditure. 2.2 The Commissioner of Income Tax (Appeals) ought to have appreciated that the decision of the Hon’ble Madras High court in the case of CIT vs Ooty Dasaprakash - 237 ITR 902 (Mad) has held that construction of building on lease hold land is admissible as revenue expenditure. 2.3 The commissioner of Income Tax (Appeals) ought to have considered the ITAT order in the assesse’s own case for previous assessment years, where the matter was remanded to the Assessing officer to allow all expenses of revenue nature instead of disallowing the entire expenditure as capital expenditure. 3. The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs. 1,22,00,878/- u/s 40(a)(i) the payments made to nonresidents towards rooms facilities and amenities for non-deduction of TDS. 3.1 The Commissioner of Income Tax (Appeals)ought to have appreciated that the payments made to Heritage Bird and Hutchinson Er Co, who are tax residents in Malaysia and Thailand respectively have provided time share membership. The payment made is towards the Annual management/ subscription fees which is part of the membership agreement towards use of the Resorts in their respective countries outside India and hence not taxable in India 3.2 The Commissioner of Income tax (Appeals) erred in not appreciating the fact that these payments constitute

3.3 The commissioner of Income tax (Appeals) erred in not appreciating that these are payments towards use of properties located outside India and hence are not subject to TDS provisions.

3.4 Without prejudice to the above, the CIT(A) has erred in not appreciating the fact that the payments, even if construed as FTS, were made in respect of services utilized in a business outside India and for purpose of making or earning income from any source outside India and therefore is not taxable under section 9(1 )(vii)(b) of the Act.

3.5 The Commissioner of Income tax (Appeals) ought to have appreciated that the question of deduction of tax arises only when the payments are chargeable to tax in India and not otherwise as laid down by the Supreme Court in GE India P Ltd. vs. CIT (327 ITR 456 SC)

4. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of the expenses of Rs.76,08,876/- relatable to earning the dividend income u/s 14A by applying Rule 8D(iii).

4.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that assessee earned dividend income only from investments in mutual funds made out of surplus funds available with it.

4.2 The Commissioner of Income tax (Appeals) ought to have appreciated that u/s.14A only the actual expenditure incurred for the purpose of earning exempt income should be disallowed. All the investments have been made by assesee’s own fund and the appellant has not incurred any expenditure for earning the dividend income.

4.3 The Commissioner of Income Tax (Appeals) ought to have appreciated that investments made into subsidiaries are strategic investments made for acquiring control in the subsidiary and no dividend income earned from the subsidiaries.

4.4 The Commissioner of Income tax (Appeals) ought to have appreciated that the method prescribed under Rule 8D, can be invoked only where the assessing officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of expenditure made by the assessee or claim made by the assessee that no expenditure has been incurred

4.5 It is submitted that the Delhi Tribunal in the case of ACIT Vs Sun Investments reported in 8 ITR (Tri) 33 have held that unless the assessing officer established that specific expenditure has been incurred by the assesse for earning exempt income there can be no disallowance under Section 14A.

5. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of the depreciation on Non- compete Fee Amounting to Rs.40,00,000/- The Deputy commissioner of Income tax has disallowed an amount of Rs. 40,00,000/- as depreciation on Non-compete fee. This is the depreciation as per Financial accounts of the company. The actual depreciation claimed for Income tax as per IT returns is Rs. 15,32,081/-.

5.1 The Commissioner of Income tax(Appeals) ought to have appreciated that the appellant has paid non-compete fees to AGS Hotels & Resorts Private Limited for a consideration of Rs.2,00,00,000/-. This agreement was entered pursuant to the purchase of the hotel business of AGS Hotels by the appellant. 5.2 The Commissioner of the Income tax (Appeals) ought to have appreciated that non-compete fee is an intangible asset eligible for depreciation u/s 32(1 )(ii). The Appellant relies on the decision of the Supreme Court in the case of Techno Shares and Stocks Ltd Vs. CIT, reported in 327 ITR 323 (SC) and the Madras High Court Decision in the case of Pentasoft Technologies Ltd Vs. DCIT, reported in 264 CTR (Mad) 187.

5.3 The commissioner of Income tax (Appeals) ought to have appreciated that AGS Hotels & Resorts P Limited, the recipient of the non compete fees had declared this amount as revenue and remitted tax on the same.

5.4 Without prejudice to the above, non-compete fee paid to ward off competition and protect the business of the appellant should be allowed as revenue deduction.

6.1 The Commissioner of Income tax(Appeals) ought to have appreciated that the UPS attached to computer form an intrinsic part of computer system and helps to preserve the data in case of power failure. Hence they are entitled to depreciation as applicable to computers at 60%.

6.2 The proposition that all peripherals that function along with computer are classifiable as computer for the purpose of depreciation is supported by the following judicial precedents: Nestle India Ltd Vs DCIT - 111 TTJ 498 (Del) ITO vs. Samiran Majumdar (2006) 98 ITD 119 (Koi) Bisquare Technologies (P) Ltd Vs ITO - 21 SOT 503 (Del) CIT Vs Orient Ceramics & Industries Ltd - 3 ITR (Trib) 246 (Del) Expediators International (India) P td Vs Addi.CIT - 118 TTJ 652 (Del) 6.3 Without prejudice, if the UPS are held as not forming part of the computer system they were entitled to depreciation @ 80% as energy saving devices 7. The Appellant craves leave to add to, alter, amend or delete the above grounds of appeal

76. Ground Nos. 1 & 7 are general in nature.

77. Ground Nos.2 to 2.3 regarding the expenditure claimed by the assessee is allowable as revenue expenditure has already been decided by us in ground No.2 to 2.3 in the appeal of the assessee for A.Y.2011- 2012 in wherein we have restored the issue to the file of AO for readjudication in view of our observations made therein.

Therefore, following the reasoning given in the appeal of assessee for A.Y.2011-2012, we also restore this issue to the file of AO with a direction to disallow the claim of the expenditure which was in the capital field and allow the expenditure which was in the revenue field. These grounds are partly allowed for statistical purposes.

1. The order of The Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case.

2. The Commissioner of Income Tax (Appeals) erred in holding that the expenditure incurred towards interior decoration, extension and renovation of buildings is capital expenditure. 2.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that the expenditure incurred on lease hold land is not capital expenditure and is allowable as revenue expenditure. 2.2 The commissioner of Income Tax (Appeals) ought to have considered the ITAT order in the assesse's own case for 71 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 previous assessment years, where the matter was remanded to the Assessing officer to allow all expenses of revenue nature instead of disallowing the entire expenditure as capital expenditure.

2.3 The Commissioner of Income Tax (Appeals) ought to have appreciated that the decision of the Hon'ble Madras High court in the case of CIT vs Ooty Dasaprakash - 237 ITR 902 (Mad) has held that construction of building on lease hold land is admissible as revenue expenditure.

3. The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs.1,59,33,4097- u/s 40(a)(i) the payments made towards room facilities and amenities to non-residents towards the Maintenance of Resort for non- deduction of TDS.

3.1 The Commissioner of Income Tax (Appeals)ought to have appreciated that the payments made to Heritage Bird and Hutchinson & Co, who are tax residents in Malaysia and Thailand respectively have provided time share membership. The payment made is towards the Annual management/ subscription fees which is part of the membership agreement towards use of the Resorts in their respective countries outside India and hence not taxable in India

3.2 The Commissioner of Income tax (Appeals) erred in not appreciating the fact that these payments constitute BUSINESS PROFITS of the non-residents and therefore, liability of tax in India does not arise in the assessee's case

3.3 The commissioner of Income tax (Appeals) erred in not appreciating that these are payments towards use of properties located outside India and hence are not subject to TDS provisions.

3.4 Without prejudice to the above, the C1T(A) has erred in not appreciating the fact that the payments, even if construed as FTS, were made in respect of services utilized in a business outside India and for purpose of making or earning income from any source outside India and therefore is not taxable under section 9(1)(vii)(b)of the Act.

3.5 The Commissioner of Income tax (Appeals) ought to have appreciated that the question of deduction of tax arises only when the payments are chargeable to tax in India and not otherwise as laid down by the Supreme Court in GE India P Ltd. vs. CIT (327 ITR 456 SC)

4. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of the expenses of Rs.69,68,703/-

4.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that assessee earned dividend income only from investments in mutual funds made out of surplus funds available with it.

4.2 The Commissioner of Income tax (Appeals) ought to have appreciated that U/S.14A only the actual expenditure incurred for the purpose of earning exempt income should be disallowed. All the investments have been made by assesee's own fund and the appellant has not incurred any expenditure for earning the dividend income.

4.3 The Commissioner of Income Tax (Appeals) ought to have appreciated that investments made into subsidiaries are strategic investments made for acquiring control in the subsidiary and no dividend income earned from the subsidiaries.

4.4 The Commissioner of Income tax (Appeals) ought to have appreciated that the method prescribed under Rule 8D, can be invoked only where the assessing officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of expenditure made by the assessee or claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the Act.

4.5 It is submitted that the Delhi Tribunal in the case of ACiT Vs Sun Investments reported in 8 ITR (Tri) 33 have held that unless the assessing officer established that specific expenditure has been incurred by the assesse for earning exempt income there can be no disallowance under Section 14A.

5. The Commissioner of income tax (Appeals) erred in confirming the disallowance of the depreciation on Non-compete Fee Amounting to Rs.15,67,1237-

5.1 The Commissioner of Income tax(Appeals) ought to have appreciated that the appellant has paid non-compete fees to ACS Hotels & Resorts Private Limited for a consideration of Rs.2,00,00,000/-. This agreement was entered pursuant to the purchase of the hotel business of ACS Hotels by the appellant.

5.2 The Deputy commissioner of Income tax has disallowed an amount of Rs. 15,67,1237- as depreciation on Non-compete fee. The actual depreciation claimed for Income tax as per IT returns is Rs. 11,86,5237-.

5.3 The Commissioner of the Income tax (Appeals) ought to have appreciated that non-compete fee is an intangible asset eligible for depreciation u7s 32(1 )(ii). The Appellant relies on the decision of the Supreme Court in the case of Techno Shares and Stocks Ltd Vs. CIT, reported in 327 ITR 323 (SC) and the Madras High Court Decision in the case of Pentasoft Technologies Ldt Vs. DCIT reported in 264 CTR (Mad) 187. 5.4 Without prejudice to the above, non-compete fee paid to ward off competition and protect the business of the appellant should be allowed as revenue deduction.

6. The Appellant craves leave to add to, alter, amend or delete the above grounds of appeal

84. Ground Nos. 1 & 6 are general in nature.

85. Ground Nos.2 to 2.3 relates to the expenditure claimed by the assessee is allowable as revenue expenditure has already been decided by us in ground No.2 to 2.3 in the appeal of the assessee for A.Y.2011- 2012 in wherein we have restored the issue to the file of AO for readjudication in view of our observations made therein.

Therefore, following the reasoning given in the appeal of assessee for A.Y.2011-2012, we also restore this issue to the file of AO with a direction to disallow the claim of the expenditure which was in the capital field and allow the expenditure which was in the revenue field. These grounds are partly allowed for statistical purposes.

1. The order of The Commissioner of Income Tax (Appeals) is contrary to law, facts and circumstances of the case.

2. The Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs.2,56,62,661/- u/s 40(a)(i) the payments made towards room facilities and amenities to non-residents towards the Maintenance of Resort for non- deduction of TDS, 2.1 The Commissioner of Income Tax (Appeals)ought to have appreciated that the payments made to Heritage Bird who is tax residents of Malaysia is engaged in the business of providing services for the maintenance of Resorts in their respective countries outside India and hence not taxable in India 2.2 The Commissioner of Income tax (Appeals) erred in not appreciating the fact that these payments constitute BUSINESS PROFITS of the non-residents and therefore, liability of tax in India does not arise in the assessee's case 2.3 Without prejudice to the above, the CIT(A) has erred in not appreciating the fact that the payments, even if construed as FTS, were made in respect of services utilized in a business outside India and for purpose of making or earning income from any source outside India and therefore is not taxable under section 9(1)(vii)(b)of theAct. 2.4 The Commissioner of Income tax (Appeals) ought to have appreciated that the question of deduction of tax arises only when the payments are chargeable to tax in India and not otherwise as laid down by the Supreme Court in GE India P Ltd. vs. CIT (327 ITR 456 SC) 3. The Commissioner of Income Tax (Appeals) erred in holding that the expenditure of Rs.6,40,06,635/- incurred during construction pending allocation as incurred towards repairs / renovation.

76 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 3.1 The Commissioner of Income Tax (Appeals) ought to have appreciated that the expenditure relates to expansion of the same business and not starting a separate line of business and hence an allowable expenditure. 3.2 The Commissioner of Income Tax (Appeals) ought to have appreciated that similar claim was allowed by the Hon'ble Income Tax Appellate Tribunal in ITA No 1761 /Mds/2011 for AY 2005-06.

4. The Appellant craves leave to add to, alter, amend or delete the above grounds of appeal

91. Ground Nos. 1 & 4 are general in nature.

92. Ground Nos.2 to 2.4 are relating to disallowance made u/s.40(a)(ia) of the Act. This issue has already been decided by us in ground Nos.3 to 3.5, 4 to 4.4 and 5 to 5.3 of the appeal of the assessee for A.Y.2011-2012 in wherein we have restored the issue to the file of AO for readjudication in accordance with the provisions of Income Tax Act r.w. DTAA between India and respective countries and the foreign entities. In view of our reasoning given in the appeal of assessee for A.Y.2011-2012, these grounds are also allowed for statistical purposes.

93. Ground Nos.3 to 3.2 are relating to the expenditure claimed by the assessee is allowable as revenue expenditure has already been decided by us in ground No.2 to 2.3 in the appeal of the assessee for A.Y.2011- 2012 in wherein we have restored the issue to the file of AO for readjudication in view of our observations made therein.

Therefore, following the reasoning given in the appeal of assessee for A.Y.2011-2012, we also restore this issue to the file of AO with a direction allow the expenditure which was in the revenue field. These grounds are partly allowed for statistical purposes.

2. The CIT(A) has erred in deleting the addition on deferred income of advance received from members of Rs.185,14,41,408/-. 3. The CIT(A) has failed to appreciate the fact that the department has not accepted the relied upon order of ITAT in the assessee's own case in to 2416/Mds/2005 dated 26.05.2010. 4. The CIT(A) has erred in allowing the depreciation @ 60% on UPS holding it as part of computer as against 15% allowed by the Assessing Officer holding it as part of electrical appliance. 5. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld. CIT(A) may be set aside and that of the Assessing Officer restored.

Secondly, by saying that no service is left to be rendered, what the assessee means to say is that there is no taxable event under the Service Tax laws once a person becomes member. Therefore, the reliance of the department on the affidavit has no substance at all.

29.We again revert to the aspect of liability. In this connection, the judgment of the Supreme Court in the case of Rotork Controls India (P.) Ltd. (supra) is quite useful. Of course, we are conscious of the fact that that case pertained to provision for warranties, nonetheless, certain principles enunciated therein are quite apt for the case on hand as well. In the said case, the assessee had made provision for warranties. The Madras High Court in their judgment in CIT v. Rotork Controls India Ltd. [2007] 293 ITR 311 denied deduction of the provision for warranties on the ground that the liability was not certain. In fact at page 315 the High Court expressed this view by stating that considering the nature of the liability, which is yet to crystallise but loaded ,with uncertainty of the event, to cause a liability, there is no justification to accept the plea of the assessee. On the other hand, the Supreme Court observed that liability is defined as a present obligation arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits. It was further observed that a past event that leads to a present obligation is called as an obligating event. The obligating event is an event that creates an obligation which results in an outflow of resources. It also observed that for a liability to qualify for recognition there must be not only present obligation but also the probability of an outflow of resources to settle that obligation (underline by us). If we consider the facts in the present case, the past event is admitting a person as a member with a promise to fulfil the obligation of providing him accommodation for one week

80 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 every year for the next 33/25 years. It is not an ordinary obligation. In fact, in our view, the obligation is heavier than that in the case of sale of goods. In the .case of sale of goods, the goods are already in possession of the buyer and are being used by the buyer. On the other hand, the sale of timeshare unit: is not as tangible as sale of goods but becomes tangible when the assessee fulfils its promise. Let us consider certain factors which may prevent the assessee from keeping its promise. Most of the members would opt for a holiday during the peak season, i.e. during vacation in schools and this can put a lot of pressure on the assessee to satisfy each and every member. It will have to disappoint certain members for non- availability of accommodation and this may invite outflow of resources. There may be a demand for a particular resort but the assessee may not be able to provide it if the same is under some major repairs or renovation. These types of contingencies will always entail outflow of resources for the assessee in future. Therefore, we are of the view that there is every possibility of an obligating event arising which will result in an outflow of resources.

30. A question may be raised that if the obligating event is sure to arise, the assessee could have made reasonable provision every year which would meet the matching concept also. Let us see how it is not possible. In the case of Rotork Controls (supra), the Supreme Court has observed that a provision is recognised when: (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision can be recognised. In the present case, we have already observed in the preceding paragraphs that the assessee has a present obligation as a result of a past event. Thus, the first condition is satisfied. We have also observed that outflow of resources is probable to settle the obligation. The second condition is also satisfied. However, considering the nature of activity, it is the third condition which is difficult to satisfy. The demand for accommodation by the members is essentially tourism oriented. Tourism, in turn, depends on several factors. They may be social, political, climatic and so on. If wedding season is in full swing, tourism can get affected. If there is some commotion around a particular resort or if the law and order situation is not conducive, tourism can be affected. Sudden change in weather can also affect tourism. Further, availability of rail or air reservation can also affect tourism. The possibility of leave travel concession (LTC) getting lapsed can see sudden spurt in tourism. These are only a few illustrations which can affect the demand for accommodation either way. There may be many possibilities which may not come to mind but may put the assessee into tremendous pressure. All these factors are such which are twined with the normal human life and, hence, are not only certain to occur but also makes it difficult to reasonably estimate the probable outflow of resources. Moreover, as mentioned earlier, most of the grievances are settled by 81 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 Consumer Forum and it can be anybody’s guess as to what damages the Forum will award. Some orders of the Consumer Forum awarding damages to the complainants have been placed on record. Considering the difficulty in estimating reasonably the obligation in monetary terms, no provision can be made.

32. Accordingly, to answer the question posed to the Special Bench, the entire amount of timeshare membership fee receivable

82 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 by the assessee up front at the time of enrolment of a member is not the income chargeable to tax in the initial year on account of contractual obligation that is fastened to the receipt to provide services in future over the term of contract.

, assessment order, written submission and material available on record. My observations in respect of the grounds raised by the appellant are as follows:

6. Addition of Advance received from members Rs.185,14,41,408/-: 6.1 In the grounds of appeal the appellant contested as under: "2.1 The Assistant Commissioner of Income tax, LTU erred in treating a sum of Rs.185,14,41,408 received during the year from the customers/New members, being a part of the membership fees relatable to the-"" contracted membership periods as income of the year under appeal. 5.1 . The Assistant Commissioner of income tax, LTU ought to have appreciated that the assessee has been consistently following an accepted method of accounting in respect of such fees by offering 60% of the fees received from the members as income in the year of which the member is admitted and the balance 40% is equally spread over the balance membership period, which consistently reflects the correct income of the Appellant which at the highest, could be brought to tax in the year under appeal. 5.2 The appellant has to provide stay at holiday resorts of assessee for agreed period every year to the members, over the period of their membership. Further as and when the member resigns from membership, pro rate fee is refunded. Hence, the entire fee paid by the member cannot be assessed as income of the assessee in the year of joining of the member.

84 ITA No.1089/CHNY/18 & ITA No.1012/CHNY/19 5.3 The Assistant Commissioner of Income tax, LTU erred in not following the Order of the Hon'ble ITAT Special Bench, Chennai in the assessee's own case for the assessment years 1998-99 to 2003-04 in ITA Nos.2412 to 2416/Md5/2005 dated-26.05-2010 wherein the claim of the assessee has been allowed. Subsequently in Consistent with the ruling of Special bench, the ITAT, Chennai in ITA nos. 1614, 1615, 1616 and 1764/Mds/2011 has accepted the appellant's stand that deferred income of 40% be charged to tax in year subsequent to receipt of the payment for AY 2006-07, 2007-08 & 2008-09. Without prejudice, if the entire income is assessed in the year of joining estimated expenditure to be incurred throughout the period of membership should also be estimated and allowed as a deduction." 6.2 This issue was decided by the hon'ble ITAT 'B' Bench Chennai in assessee's own case for the A.Y 2009-10 in ITA No. 1339 & 1227/Mds/2013 at Para No. 38 to 39 in Page No. 18 to 20 as under: "Revenue is aggrieved that CIT(Appeals) deleted an addition made towards advance membership fees. We find that on the issue of advance membership fee Id. ClT(Appeals) had followed the decision of Special Bench of this Tribunal in assessee's own case for assessment years 1998-99 to 2003-04 in ACIT v. Mahindra Holidays & Resorts (India) Ltd (2010) 131 TTJ 1. Ld CIT(Appeals) having followed the Special Bench order in assessee's own case which was in turn relied on by this Tribunal on Revenue's appeal for assessment year 2006-07 and 2007-08, we do not find any reason to interfere." 6.3 The Assessing Officer is directed to follow the Order of the Hon'ble ITAT Special Bench, Chennai in the assessee's own case for the assessment years 1998-99 to 2003-04 in ITA Nos.2412 to 2416/Mds/2005 dated-26.05-2010.

Order pronounced in pursuance to the Rule 34(4) of ITAT Rules,1963 on 10/05/2023.

Sd/- Sd/- (MAHAVIR SINGH) (ARUN KHODPIA) उपा�� / VICE PRESIDENT लेखा लेखा लेखा सद�य लेखा सद�य सद�य / ACCOUNTANT MEMBER सद�य चे�ई/Raipur; �दनांक Dated 10/05/2023 Prakash Kumar Mishra, Sr.P.S आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : अ�ेिषत अपीलाथ� / The Appellant- 1. ��यथ� / The Respondent- 2. आयकर आयु!(अपील) / The CIT(A), 3. 4. आयकर आयु� / CIT िवभागीय $ितिनिध, आयकर अपीलीय अिधकरण, रायपुर/ DR, ITAT, 5. Raipur गाड� फाईल / Guard file. 6. आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार आदेशानुसार स�यािपत �ित //True Copy//