INGERSOLL-RAND (INDIA) LIMITED vs. THE COMMISSIONER OF INCOME TAX 1

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ITA/7/2011HC KarnatakaKAHC01009233201111 March 2020Bench: ALOK ARADHE,M.NAGAPRASANNA17 pages
AI SummaryAllowed

What did the High Court hold?

The High Court held that the Tribunal erred in treating club membership fee as capital expenditure. It noted that the CIT(A) had allowed it in previous years, the revenue had not appealed those decisions, and a division bench of the High Court had upheld a similar view in CIT vs. Infosys Technologies Ltd., which was binding on the Tribunal. Therefore, the first substantial question of law was answered in favour of the assessee. Regarding expenditure for exempt income, the Court held that prior to Finance Act, 2006, there was no mechanism to compute disallowance for earning exempt income, and ad-hoc allowances could not be made without material. The Supreme Court's decision in CIT vs. Essar Tele Holdings Ltd. was cited, stating sub-sections (2) and (3) of Section 14A are prospective. Thus, the second substantial question of law was answered in favour of the assessee. For ad-hoc disallowances on entertainment and business expenses, the Court found no satisfaction recorded by authorities that the expenditure was not wholly and exclusively for business, and cited Walchand supra, answering the third question in favour of the assessee. On Section 80HHC, the Court held that service charges could not be deducted as profits of business for this purpose, referring to the decision in CIT vs. Pfizer Ltd. and K. Ravindranath Nair, stating the Tribunal's finding was factually incorrect. The fourth and fifth questions were answered in favour of the assessee. The ITAT's order and the CIT(A)'s order rejecting the assessee's claims were quashed.

What were the facts?

The assessee, Ingersoll-Rand (India) Limited, is appealing against orders for assessment years 2000-01, 2001-02, and 2002-03. For AY 2000-01, the Assessing Officer (AO) disallowed club membership fees (Rs. 11,29,520) as capital expenditure, disallowed Rs. 23,490 as expenditure for earning exempt income, disallowed EDP expenses (Rs. 60,79,380) as capital expenditure, and made an ad-hoc disallowance of Rs. 10 Lakhs from entertainment and business expenses. The AO also reduced 90% of service income (Rs. 3,05,11,720) and sundry income (Rs. 21,77,493) from business profits for Section 80HHC computation. The Commissioner of Income Tax (Appeals) partly allowed the appeal, deleting the disallowances for club membership fees, exempt income expenditure, and ad-hoc entertainment expenses, but upheld the EDP disallowance and the Section 80HHC adjustments. The Income Tax Appellate Tribunal (ITAT) then set aside the CIT(A)'s order and allowed the revenue's appeal.

What were the issues?

The Tribunal had to decide the following substantial questions of law: 1. Whether club membership fee of Rs. 11,29,520 paid by the appellant was in the nature of capital expenditure and therefore not deductible as revenue expenditure, as held by the Tribunal. 2. Whether the Tribunal was justified in setting aside the Commissioner's order deleting the disallowance of Rs. 23,490 as expenditure incurred for earning exempt income. 3. Whether the Tribunal erred in setting aside the Commissioner's order deleting the ad-hoc disallowance of Rs. 10 Lakhs out of entertainment, business, meals, gifts, and association fees, disallowing Rs. 5,00,000 on an estimation basis without evidence of non-business expenditure. 4. Whether the Tribunal erred in confirming the orders of the appellate authority and AO in reducing 90% of income from services rendered (Rs. 3,05,11,720) and sundry income (Rs. 21,77,493) from profits of business while computing deduction under Section 80HHC. 5. Whether the Tribunal erred in not considering the alternate ground that 90% of service income and sundry income should be reduced from net expenditure incurred for earning such income for Section 80HHC purposes. Assessee's contentions: The assessee argued that club membership fees were revenue expenditure, that ad-hoc disallowances were made without evidence, and that the ITAT erred in its Section 80HHC computation. They relied on previous years' treatment by the CIT(A) and the High Court's decision in CIT vs. Infosys Technologies Ltd. The revenue contended that the Tribunal's order was just and legal, that estimation of expenses was a finding of fact, and that the decision in Walchand supra supported their case.

Which sections of the Income-tax Act were involved?

Section 260A,Section 143(2),Section 142(1),Section 143(3),Section 80HHC,Section 80HHE,Section 80I,Section 80IA,Section 10(33),Section 37(1),Section 14-A,Section 28

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 11TH DAY OF MARCH 2020

PRESENT

THE HON’BLE MR. JUSTICE ALOK ARADHE

AND

THE HON’BLE MR. JUSTICE M. NAGAPRASANNA

I.T.A. NO.6/2011 C/W I.T.A. NO.7/2011 & I.T.A. NO.8/2011

I.T.A. NO.6/2011

BETWEEN:

INGERSOLL-RAND (INDIA) LIMITED PLOT NO.35, KIADB INDUSTRIAL AREA BIDADI, BANGALORE-562109 (REP. BY ITS COMPANY SECRETARY MR. P.R. SHUBHAKAR)

PREVIOUSLY AT SOLITAIRE CORPORATE PARK IV UNIT NOS.411 & 412 I FLOOR, ANDHERI-KURLA ROAD ANDHERI (E), MUMBAI. ... APPELLANT (By Sri. T. SURYANARAYANA, ADV., FOR M/S. KING & PARTRIDGE, ADVS.,)

AND:

1.

THE COMMISSIONER OF INCOME-TAX-I

C.R. BUILDINGS, QUEEN’S ROAD

BANGALORE.

2.

THE DEPUTY COMMISSIONER OF INCOME-TAX

CIRCLE-6(3), MUMBAI. ... RESPONDENTS (By Sri. K.V. ARAVIND, ADV.) - - -

THIS ITA IS FILED UNDER SECTION 260A OF I.T. ACT 1961 ARISING OUT OF ORDER DATED 30/8/2010 PASSED IN ITA NO.7254/MUM/2003, FOR THE ASSESSMENT YEAR 2000-01, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT IN ITA NO.7254/MUM/2003 DATED 30/8/2010 AND CROSS OBJECTIONS NO.495/MUM/2004 TO THE EXTENT QUESTIONED THEREIN, IN THE INTEREST OF JUSTICE AND EQUITY.

I.T.A. NO.7/2011 BETWEEN:

INGERSOLL-RAND (INDIA) LIMITED PLOT NO.35, KIADB INDUSTRIAL AREA BIDADI, BANGALORE-562109 (REP. BY ITS COMPANY SECRETARY MR. P.R. SHUBHAKAR)

PREVIOUSLY AT SOLITAIRE CORPORATE PARK IV UNIT NOS.411 & 412 I FLOOR, ANDHERI-KURLA ROAD ANDHERI (E), MUMBAI. ... APPELLANT (By Sri. T. SURYANARAYANA, ADV., FOR M/S. KING & PARTRIDGE, ADVS.,)

AND:

1.

THE COMMISSIONER OF INCOME-TAX-I

C.R. BUILDINGS, QUEEN’S ROAD

BANGALORE.

2.

THE ADDITIONAL COMMISSIONER OF INCOME-TAX

RANGE-6(1), MUMBAI. ... RESPONDENTS

(By Sri. K.V. ARAVIND, ADV.) - - -

THIS ITA IS FILED UNDER SECTION 260A OF I.T. ACT 1961 ARISING OUT OF ORDER DATED 30/8/2010 PASSED IN PREVIOUS YEAR NO.3952/MUM/2005, FOR THE ASSESSMENT YEAR 2001-02, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT IN ITA NO.3952/MUM/2005 DATED 30/8/2010 TO THE EXTENT QUESTIONED THEREIN, IN THE INTEREST OF JUSTICE AND EQUITY.

I.T.A. NO.8/2011 BETWEEN:

INGERSOLL-RAND (INDIA) LIMITED PLOT NO.35, KIADB INDUSTRIAL AREA BIDADI, BANGALORE-562109 (REP. BY ITS COMPANY SECRETARY MR. P.R. SHUBHAKAR)

PREVIOUSLY AT SOLITAIRE CORPORATE PARK IV UNIT NOS.411 & 412 I FLOOR, ANDHERI-KURLA ROAD ANDHERI (E), MUMBAI. ... APPELLANT (By Sri. T. SURYANARAYANA, ADV., FOR M/S. KING & PARTRIDGE, ADVS.,)

AND:

1.

THE COMMISSIONER OF INCOME-TAX-I

C.R. BUILDINGS, QUEEN’S ROAD

BANGALORE.

2.

THE ASSISTANT COMMISSIONER OF INCOME-TAX

CIRCLE-6(1), MUMBAI. ... RESPONDENTS - - -

THIS ITA IS FILED UNDER SECTION 260A OF I.T. ACT 1961 ARISING OUT OF ORDER DATED 30/8/2010 PASSED IN ITA

NO.7158/MUM/2005, FOR THE ASSESSMENT YEAR 2002-03, PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED THEREIN. ALLOW THE APPEAL AND SET ASIDE THE ORDER PASSED BY THE ITAT IN ITA NO.7158/MUM/2005 DATED 30/8/2010 TO THE EXTENT QUESTIONED THEREIN, IN THE INTEREST OF JUSTICE AND EQUITY.

THESE ITAs COMING ON FOR HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING:

COMMON JUDGMENT

These appeals under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act' for short) are preferred by the assessee. I.T.A.No.6/2011 was admitted by a bench of this Court by an order dated 09.02.2011 on the following substantial question of law:

1.

Whether in the facts and circumstances of the case and the grounds urged, the Tribunal was right or justified in holding that club membership fee of Rs.11,29,520/- paid by appellant was in the nature of capital expenditure and therefore not deductable as revenue expenditure?

2.

Whether in the facts and circumstances of the case and the grounds urged, the Tribunal was right or justified in setting aside the Commissioner’s order deleting

the disallowance of Rs.23,490/- as expenditure incurred for earning exempt income?

3.

Whether Income Tax Appellate Tribunal erred in law in setting aside the order of the Commissioner in deleting the adhoc disallowance of Rs.10 Lakhs out of expenditure incurred for entertainment, business, meals, gifts fees for association etc. and disallowing Rs.5,00,000/- on a estimation basis without any evidence of the fact that such expenses were in the nature of non-business expenditure?

4.

Whether the Income Tax Appellate Tribunal erred in confirming the orders of the appellate authority as well as the assessing officer in reducing 90% of Rs.3,05,11,720/- being income from services rendered and Rs.21,77,493/- being sundry income from profits of the business while computing deduction under Section 80HHC?

5.

Whether the Tribunal committed an error in law in not considering the alternate ground raised by the appellant that 90%

of the service income and sundry income was required to be reduced from “profits of business” for the purposes of Section 80HHC, the same should be net expenditure incurred for earning such income?

2.

In I.T.A.No.7/2011 & I.T.A.No.8/2011, since the same questions of law viz., question of law Nos.4 and 5 only arise for consideration, and as all the appeals pertains to the same assessee for different assessment years, they were heard together and are being decided by this common judgment.

3.

I.T.A.No.6/2011 pertains to assessment year 2000-01, whereas I.T.A.No.7/2011 pertains to assessment year 2001-02 and I.T.A.No.8/2011 pertains to the assessment year 2002-03. For the facility of reference, facts from I.T.A.No.6/2011 are being referred to.

4.

Appellant is a company engaged in the business of manufacture and sale of air and gas compressors, rock and water well drilling equipment, pit pressures etc. The

appellant filed its return of income for assessment year 2000-01 on 30.11.2000 declaring total income of Rs.58,06,47,260/-. The return was initially processed under Section 143(2) and 142(1) by the Deputy Commissioner of Income Tax but thereafter, the notices were issued under Section 143(2) and 142(1) of the Act. On receipt of the aforesaid notice, the appellant filed a response by way of written submissions and sought personal hearing. The assessing officer passed an order on 19.03.2003 under Section 143(3) of the Act re-determining the total income by resorting to certain adjustments and re-computing the deductions under Section 80HHC, 80HHE, 80I and 80IA of the Act.

5.

The Assessing Officer disallowed the deduction claimed by the appellant in respect of club membership of Rs.11,29,520/- on the ground that the aforesaid expenditure was not incurred for business purposes. While considering the claim for exemption in respect of dividend income under Section 10(33) of the Act, assessing officer assumed an estimated expenditure of Rs.23,490/- at 5% of the dividend

income of Rs.4,69,800/- and disallowed the sum of Rs.23,490/-. The Assessing officer also disallowed EDP expenses to the tune of Rs.60,79,380/- by treating the same as capital expenditure. The Assessing Officer also disallowed a sum of Rs.10 Lakhs out of the expenditure incurred for entertainment, business, meals, gifts fees for association etc. on an adhoc basis by considering the same as non business expenditure. The Assessing Officer reduced 90% of Rs.3,05,11,720/- being income from services rendered and Rs.21,77,493/- being sundry income from “profits of business” for the purposes of computation of deduction under Section 80HHC.

6.

Being aggrieved by the aforesaid order, the assessee filed an appeal before Commissioner of Income Tax (Appeals). The appellate authority by an order dated 29.08.2003 allowed the appeal partly insofar as it pertains to club membership fee, expenses allegedly incurred to earn exempt income and adhoc disallowance of Rs.10 Lakhs relatable to expenditure for entertainment, business, meals, gifts fees for association etc. However, the Commissioner

rejected the appeal to the extent of disallowance of EDP expenses and reduction of 90% of the income rendered and sundry income from profits of business for the purpose of computation of deduction under Section 80HHC. Accordingly, the appeal was partly allowed. Being aggrieved, the revenue filed an appeal before the Income Tax Appellate Tribunal. The Tribunal by an order dated 30.08.2010; set aside the order passed by the appellate authority and allowed the appeal preferred by the revenue. In the aforesaid factual background, this appeal has been filed.

7.

Learned counsel for the appellant submitted that the Tribunal grossly erred in treating the club membership fee of Rs.11,29,520/- in the nature of capital expenditure. It is further submitted that the Tribunal ought to have appreciated that the order passed by the Tribunal dated 21.10.2011 in ‘CIT & ANOTHER VS. INFOSYS TECHNOLOGIES LTD., was upheld by division bench of this court vide order dated 21.10.2011 in ITA No.2975, 2976 and 2011/2005 and therefore, the same ought not to have been treated as capital expenditure. It is also submitted that in

earlier years and in subsequent years, the Commissioner of Income Tax (Appeals) had allowed the claim of the appellant in this regard which was not challenged by the revenue. It is further submitted that in the absence of any mechanism to compute the disallowance, the Tribunal grossly erred in deleting disallowance of Rs.23,490/- as expenditure incurred for earning exempt income. It is further submitted that sub- Section (2) and (3) of Section 14-A of the Act, which were inserted in the year 2008, have been held to be prospective in nature by the Supreme Court in ‘CIT VS. ESSAR TELE HOLDINGS LTD.,’, (2018) 90 TAXMANN.COM 2 (SC) to be prospective in nature and in the absence of any mechanism, adhoc assessment with regard to deletion of disallowance for earning exempt income could not have been made.

8.

It is further submitted that deletion of adhoc disallowance of Rs.10 Lakhs and disallowance of Rs.5 Lakhs on estimate basis is not based on any evidence. It is further submitted that such disallowance cannot be made on adhoc basis. In support of aforesaid submission, reliance has been

placed on decision of Supreme Court in ‘CIT VS. WALCHAND & CO. (P) LTD.,’ (1967) 65 ITR 381 (SC). Lastly, it is urged that sub-Section (3) of Section 80HHC provides the manner, in which deduction has to be computed. Learned counsel for the appellant has also invited our attention to explanation contained to Section 80HHC (4C) and has submitted that profit of business means the profit of business as computed under the head “profits of business” or “profession” as reduced by 90% of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. It is also submitted that the Tribunal grossly erred in holding that the decision rendered in ‘CIT VS. BANGALORE CLOTHING COMPANY’, (2003) 127 TAXMANN 637 has been over ruled in ‘CIT VS. K.RAVINDRANATH NAIR’, (2007) 165 TAXMANN 282 (SC), which is factually incorrect. It is further submitted that the decision in K.RAVINDRANATH NAIR supra does not deal with the issue of business profits. It is further submitted that the Tribunal ought to have appreciated that in earlier

years as well as subsequent years, the appellate authority had held in favour of the assessee and the revenue had not preferred any appeal.

9.

On the other hand, learned counsel for the revenue submitted that the order passed by the Tribunal is just and legal and does not call for any interference. It is further submitted that issue of estimation of expenses is a finding of fact and since, the appellant had not followed the criteria under Section 37(1) of the Act, therefore, the Tribunal had quantified the amount. It is further submitted that the decision rendered in the case of WALCHAND supra supports the case of the revenue and the assessee had not produced any material to show that business income has a direct nexus with the exports.

10.

We have considered the submissions made on both the sides and have perused the record. The Assessing Officer disallowed club membership expenditure on the ground that it is a capital expenditure. However, the Commissioner of Income Tax (Appeals) by an order held that in earlier years, it has been held by the Commissioner of

Income Tax (Appeals) that club membership are to be allowed in deduction and accordingly, the aforesaid deduction was permitted. However, the Tribunal followed the decision in case of ‘FRAMATONE CONNECTOR OEN LTD. VS. DCIT’, (2007) 294 ITR 599 and held the same to be a capital expenditure. However, the Tribunal failed to take into account the fact that its order passed in CIT AND ANOTHER VS. INFOSYS TECHNOLOGIES LTD., by which it had held that the club membership expenditure was in the nature of revenue expenditure was upheld by division bench of this court vide dated 21.10.2011, which was binding on the Tribunal. The Tribunal also failed to appreciate that the order of the Commissioner of Income Tax (Appeals), by which it has held the expenditure to be revenue expenditure in previous years was not challenged by the revenue. Therefore, the first substantial question of law is held in the negative and in favour of the Revenue.

11.

It is pertinent to mention here that Sub-Section

(2) and (3) to Section 14-A were incorporated by Finance Act, 2006 with effect from 01.04.2007 and prior to it, there

was no mechanism to compute the disallowance on the expenditure for earning exempt income. In the absence of any mechanism, adhoc allowance could not have been made in the absence of any material with regard to actual expenditure. It is pertinent to mention here that in ‘CIT VS. ESSAR TELE HOLDINGS LTD.,’, (2018) 90 TAXMANN.COM 2(SC) the Supreme Court has held that sub-Section (2) and (3) are prospective nature and have to be utilized for computing expenditure for the assessment year 2007-08 and onwards. In the absence of any mechanism to compute the disallowance as expenditure incurred for earning exempt income, the Tribunal grossly erred in setting aside the order of the Commissioner of Income Tax (Appeals). Therefore, the second substantial question of law is answered in the negative and in favour of the assessee. It is pertinent to mention here that the Commissioner of Income Tax (Appeals) without any evidence on record, treated the adhoc disallowance of Rs.10,000/- out of the expenditure incurred for entertainment, business, meals, gifts fees for association etc. and in disallowing Rs.5,000/- on estimation basis. The Supreme Court in the

case of WALCHAND supra has held that the Tribunal has to record the satisfaction that the expenditure was laid out or expendid wholly and exclusively for the purpose of business of the assessee and there is no reason why the full amount should not have been allowed. In the instant case, no such satisfaction has been recorded by the authorities. Therefore, the third substantial question of law is also answered in favour of the assessee.

12.

The Commissioner of Income Tax (Appeals) as well as the Tribunal have reduced 90% of Rs.3,05,11,720/- being income from services rendered and Rs.21,77,493/- being sundry income from profits of business while computing deduction under Section 80HHC. It is pertinent to note that the service charges could not be deducted as profits of business means profits of business reduced by 90% of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. In ‘COMMISSIONER OF INCOME TAX VS. PFIZER LTD.’, it has been held that

Explanation (baa) in terms does not refer to export turnover. Therefore, before a receipt is liable to be excluded to the extent of 90% it must be a receipt of a nature similar to brokerage, commission, interest, rent or charges. It is also pertinent to note that decision of the Supreme Court in K.RAVINDRANATH NAIR does not deal with the issue of business profits and has not over ruled the decision in BANGALORE CLOTHING CO. supra. The finding in this regard recorded by the Tribunal is factually incorrect. Therefore, the service charges are liable to be excluded from profits of business for the purposes of computing deduction under Section 80HHC. Accordingly, the fourth and fifth substantial questions of law is also answered in favor of the assessee and against the revenue.

13.

The substantial question of law framed in ITA No.7 & 8/2011 are also answered in favour of the assessee and against the revenue. In view of the preceding analysis, the order passed by the Income Tax Appellate Tribunal as well as the order passed by the Commissioner of Income Tax (Appeals) insofar as it pertains to rejection of the claim of the

appellant are hereby quashed. In the result, the appeals are allowed.

Sd/- JUDGE

Sd/- JUDGE

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