ACIT, NEW DELHI vs. M/S NIIT TECHNOLOGIES LTD.,, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: ‘E’, NEW DELHI

BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI O.P. KANT, ACCOUNTANT MEMBER

ITA Nos. 5491 & 5492/Del/2013 Assessment Year: 2007-08 & 2008-09

ACIT, Vs. M/s. NIIT Technologies Ltd., Circle-13(1), 8, Balaji Estate, 1st Floor, New Delhi Guru Ravi Das Marg, Kalkaji, New Delhi PAN :AAACN0332P (Appellant) (Respondent)

And ITA No.5524 & 5525/Del/2013 Assessment Year: 2007-08 & 2008-09

M/s. NIIT Technologies Ltd., Vs. ACIT, 8, Balaji Estate, 1st Floor, Circle-13(1), Guru Ravi Das Marg, Kalkaji, New Delhi New Delhi PAN :AAACN0332P (Appellant) (Respondent)

Department by Ms. Pramita M. Biswas, CIT(DR) Assessee by Mr. Rohit Jain, Adv. Mr. Tejasvi Jain, CA Ms. Somya Jain, CA

Date of hearing 06.11.2019 Date of pronouncement 28.01.2020

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ORDER PER O.P. KANT, AM:

The appeals having ITA No.5524/Del/2013 and ITA No. 5491/Del/2013 filed by the assessee and the Revenue respectively are directed against order dated 30/7/2013 passed by the Learned Commissioner of Income-tax (Appeals)-XVI, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2007-08. Similarly, the appeals having ITA No. 5525/Del/2013 and ITA No. 5492/Del/2013 filed by the assessee and Revenue respectively are directed against order dated 13/07/2013 passed by the Learned CIT(Appeals) for assessment year 2008-09. Identical issues permeating from same set of facts and circumstances are involved in these appeals, thus, same were heard together and disposed off by way of this consolidated order for convenience. 2. First, we take up the appeals for assessment year 2007-08. The grounds raised by the assessee and the Revenue in ITA No. 5524/Del/2013 and ITA No. 5491/Del/2013 for assessment year 2007-08 are reproduced as under:

Grounds of appeal of the assessee: 1. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in upholding disallowance of Rs. 44,00,739/-, claimed under section 35DD of the Income Tax Act, 1961 (“the Act”) in respect of 1/5* of demerger expenses incurred by the appellant. 1. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in holding that in terms of section 35DD of the Act, demerger expenses are allowable only in the hands of the demerged company and not in the hands of the resultant company. 1.2 That the Commissioner of Income-Tax (Appeals) failed to appreciate that the claim of appellant was sustainable in law

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inasmuch as the appellant had fulfilled all the conditions for claiming deduction under section 35DD of the Act. 2. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in sustaining disallowance to the extent of Rs. 82,05,031/- under section 14A of the Act, comprising of Rs.37,33,490/- towards indirect interest expenditure incurred in relation to interest income and Rs. 44,71,541/- towards administrative expenses allegedly incurred in relation to exempt income. 2.1 That the Commissioner of Income-Tax (Appeals) erred on facts and in law in disallowing indirect interest expenditure to the tune of Rs. 37,33,490/- without appreciating that investment in mutual funds were made out of interest free/surplus funds available with the appellant. 2.2 That the Commissioner of Income-Tax (Appeals) erred in holding that shares in NUT GIS Ltd. and NIIT Smartserve Ltd. were acquired out of funds received by the Appellant on the issue of non-convertible debentures, without appreciating that the said shares alongwith the debentures were acquired by the appellant as part of the demerged Global Software Business Undertaking that vested in the appellant w.e.f 01.04.2003.

2.3 That the Commissioner of Income-Tax (Appeals) erred on facts and in law in disallowing, on an ad-hoc basis, administrative expenses to the tune of Rs.44,71,541/, without appreciating that the expenditure offered for disallowance was reasonable.

2.4 That the Commissioner of Income-Tax (Appeals) erred on facts and in law in observing that the appellant failed to discharge its onus in substantiating that no expenditure in addition to expenditure suo motu offered by disallowance was incurred in relation to earning to exempt income.

3.1 That the Commissioner of Income-Tax (Appeals) erred on facts and in law in disallowing the claim of the appellant on the ground that the appellant had not been able to demonstrate that the bad debts written off during the captioned year formed part of the sundry debtors offered to tax in the preceding years.

3.2 Without prejudice, the CIT(A) failed to appreciate that deduction of amounts written off during the relevant previous year was alternatively allowable as trading loss under sections 28/37(1) of the Act.

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Grounds of appeal of the Revenue: 1. On the facts & in the circumstances of the case and in law, the Ld. CIT (A) has erred in allowing the deduction claimed by the assessee u/s 10B of the Act by not appreciating the fact that all the different units of the assessee company are not operating in isolation as alleged by the assessee, but as different branches of the same tree. 1.1 On the facts & in the circumstances of the case and in law, the Id.CIT(A) has erred in not appreciating the fact that the assessee is maintaining single books of accounts for all units i.e. those which are covered for deduction, as well as those which are not covered for deduction. It is only for the purpose of computing deduction u/s 10B that the assessee has tried to allocate the expenses between these units and compute their profits. 1.2 On the facts & in the circumstances of the case and in law, the Id.CIT(A) has erred by holding that independent books of accounts are not required to be maintained under the provisions of section 10B of the I T Act, since the language of form 56G starts with " I/we have examined the accounts and records " which makes it clear that the assessee has to maintain separate books of accounts. The annexure "A" of Form 56G also requires the details of total profit of the business etc. & keeping in view of the aforesaid facts, it is clear that the assessee was required to maintain separate books of accounts. 1.3 On the facts & in the circumstances of the case and in law, the Id.CIT(A) has erred in not appreciating the fact that annexure “A" of Form 56G also requires the details of total profit of the business etc. which makes it clear that the assessee was required to maintain separate books of accounts. 1.4 On the facts & in the circumstances of the case and in law, the Id. CIT(A) has erred in not considering the whole provisions laid down by the Board in Para 2(v) of the circular 1/2013 dated 17.01.2013, where in it is specifically mentioned that the AO, if requires can call for the separate books of accounts of all the units for which deduction u/s 10B is claimed. 1.5 On the facts & in the circumstances of the case and in law, the Id.CIT(A) has erred by ignoring the fact that under the amended provisions effective from 01.04.2001, the claim u/s 10B has been declared as deduction and not exemption, therefore, one cannot exclude depreciation allowance while computing profits derived from a newly established undertaking. 2. On the facts & in the circumstances of the case and in law, the Id. CIT(A) has erred in not appreciating the fact that the claim of the assessee which is contrary to section 32 has virtually taken exemption from payment of tax even for other business as well as non business incomes, which should not be allowed.

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ITA No.5524/Del/2013 (Assessee’s Appeal) 4. The ground Nos. 1 to 1.2 of the appeal of the assessee relate to disallowance of ₹44,00,739/-, which was claimed by the assessee as deduction under section 35DD of the Act.

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4.1 The facts qua the issue in dispute are that the M/s. NIIT Ltd. was demerged pursuant to a scheme of demerger approved by the Hon’ble High Court of Delhi with effect from 01/04/2003. As a result of that demerger, the units of ‘NIIT Ltd.’ not eligible for deduction under section 10B of the Act were vested with the assessee. It was claimed that the assessee had incurred expenditure aggregating to ₹ 2,20,03,694/- on legal and professional expense in assessment year 2004-05 for pursuing the aforesaid scheme of demerger of ‘NIIT Ltd.’ and claimed deduction of 1/5th of the aforesaid expenditure, amounting to ₹ 44,00,739/- for first-time in assessment year 2004-05 and subsequently 1/5th each in assessment years 2005-06; 2006-07; 2007-08 and 2008-09. According to the Assessing Officer, in view of the provisions of section 35DD of Act, the deduction of Rs.44,00,739/- for demerger expenses is to be allowed in the hands of the original company and not in the company resulted out of demerger. Accordingly, he disallowed the claim of assesse of deduction of Rs.44,00,739/- under section 35DD of the Act. The Ld. CIT(A) also sustained the disallowance. According to the Ld. CIT(A), the language of the provisions of section 35DD are clear that demerger expenses are allowable only in the hands of the parent company ‘NIIT Ltd.’ The Ld. CIT(A) relied on the decision of Hon’ble Supreme Court in the case of Orissa State Warehousing Corporation Vs CIT (SC) 237 ITR 589 and decision of the Hon’ble Gujarat High Court in the case of CIT Vs Gautam Sarabhai Trust (Guj.) 173 ITR 216 to support that the words of a statute are first understood in their natural, ordinary or popular sense and phrases and sentences construed according to their

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grammatical meaning unless that leads to some absurdity. He held that in view of the clear provisions of section 35DD of the Act, the expenses claimed by the assessee are not allowable as the undertaking are not demerged from the assessee company but only vested with it. 4.2 Before us, the learned counsel of the assessee filed a paper book in two Volumes, containing pages 854 and submitted that the lower authorities have not appreciated facts and law properly. The learned counsel referred to the scheme of demerger approved by the Hon’ble Delhi High Court available on pages 14 to 16 of the paper-book and submitted that section 35DD of the Act provides for allowability of the expenditure incurred in relation to demerger. According to him, there is nothing in the law which debars the resultant company from claiming such expenditure. The learned counsel referred to the decision of the Hon’ble Supreme Court in the case of CIT vs Bombay Dyeing and Manufacturing Company Ltd., reported in 219 ITR 521, which was rendered prior to the insertion of section 35DD of the Act. The Ld. Counsel also submitted that the CBDT Circular No. 779 dated 14/09/1999 has explained the scope and legislative intent behind insertion of the aforesaid provision. According to him, in the said circular also nowhere the resultant company has been debarred from claiming such expenditure under section 35DD of the Act. The learned counsel submitted that the Assessing Officer/CIT(A) has failed to appreciate that the word “assessee” refers to either or both the companies i.e. the demerged company/resultant company, being Indian companies who incur any expenditure in relation to such merger/demerger. According

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to him, the expression “assessees” has not been used by the legislature due to the fact that in the event of the merger, the amalgamating company gets automatically dissolved and loses its independent identity and both the amalgamated and, amalgamating companies never exist together post the merger, so as to claim 1/5th of the deduction of the demerger/merger expenses. The uses of the word “assesseees” would have resulted in ambiguity in law and therefore to avoid such confusion, the expression “ assessee” has been used in the said section. 4.3 The learned counsel further submitted that the deduction should have also been allowed in the year following the rule of consistency because the department has allowed the deduction since assessment year 2004-05 onwards and in the year under consideration, for the first time, the deduction has been disallowed by the Assessing Officer/CIT(A). The learned counsel referred to pages 2, 7 and 11 of the paper-book to substantiate that said deduction under section 35DD of the Act was allowed to the assessee in assessment at 2004-05; 2005-06 and 2006-07. To support the rule of consistency, the learned counsel relied on the decision of the Hon’ble Delhi High Court in the case of CIT Vs Rajasthan Bereweries Ltd. (ITA 889/2009) . 4.4 The learned Department Representative, relied on the finding of the lower authorities and submitted that in view of the express provision of the Act, only the demerged/parent entity was entitled for the deduction and not the resultant company. 4.5 We have heard the rival submission of the parties and perused the relevant material on record. As a result of demerger of units of parent company M/s NIIT Ltd , few units were merged

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with the assessee company. It is the claim of the assessee that legal and professional expenses towards the demerger of the units of parent company M/s NIIT Ltd has been incurred by the assessee in assessment year 2004-05 and 1/5th of said expenses has been claimed deduction under section 35DD of the Act since assessment year 2004-05 for consecutive five assessment years. According to the Revenue, the said deduction under section 35DD of the Act is allowable only to the parent demerged company and not to the resultant company i.e. the assessee company. For ready reference, the said provisions of section 35DD of the Act are reproduced as under:

“Amortisation of expenditure in case of amalgamation or demerger. 35DD. (1) Where an assessee, being an Indian company, incurs any expenditure, on or after the 1st day of April, 1999, wholly and exclusively for the purposes of amalgamation or demerger of an undertaking, the assessee shall be allowed a deduction of an amount equal to one-fifth of such expenditure for each of the five successive previous years beginning with the previous year in which the amalgamation or demerger takes place. (2) No deduction shall be allowed in respect of the expenditure mentioned in sub-section (1) under any other provision of this Act.”

4.6 In the above section the deduction has been allowed to the “assessee” for expenditure incurred wholly and exclusively for demerger of an undertaking. Since demerger of the undertaking(s) in the instant case has taken place from the parent company M/s NIIT Ltd, the word “assessee” here refers to M/s NIIT Ltd. and not the target company M/s NIIT Technologies Ltd. i.e. the Assessee, with whom the undertakings of M/s NIIT Ltd. got merged. In our opinion the language of the section is clear and there is no

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ambiguity, as who is entitled to claim the said deduction. In case of demerger, where the undertaking(s) which get demerged, may result in new entity and in said circumstances, the resultant company cannot incur expenditure before its birth. It is the parent entity, who initiates demerger of the undertaking(s) and incur expenditure for legal and professional expenses in relation to such demerger. The resultant company, come into existence as a result of demerger only, the word “assessee” in section 35DD of the Act cannot mean to include the resultant company. The decision relied upon by the assessee in the case of CIT Vs Bombay dyeing and manufacturing company limited (supra) relates to period prior to insertion of section 35DD of the Act, wherein the expenses related to amalgamation were allowed to the assessee as incurred wholly and exclusively for the purpose of the business of the assessee.. In the said case the issue was of whether the legal and professional expenses incurred in relation to the amalgamation were revenue or capital in nature. The ratio of the said decision cannot be applicable over the facts of the instant case in view of the specific provision of section 35DD of the Act introduced. 4.7 As far plea of rule of consistency is concerned, we may like to refer to the decision of the Hon’ble Supreme Court in the case of Distributors (Baroda) P. Ltd. Vs. Union Of India & Ors. reported in 155 ITR 120, where it is observed if any wrong has been committed, same should not be perpetuated. The relevant observations of the Hon’ble Supreme Court are reproduced as under:

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“28. But, even if, in our view, the decision in Cloth Traders' case (supra) is erroneous, the question still remains whether we should overturn it. Ordinarily, we would be reluctant to overturn a decision given by a Bench of this Court, because it is essential that there should be continuity and consistency in judicial decisions and law should be certain and definite. It is almost as important that the law should be settled permanently as that it should be settled correctly. But there may be circumstances where public interest demands that the previous decision be reviewed and reconsidered. The doctrine of stare decisis should not deter the Court from overruling an earlier decision, if it is satisfied that such decision is manifestly wrong or proceeds upon a mistaken assumption in regard to the existence or continuance of a statutory provision or is contrary to another decision of the Court. It was Jackson, J., who said in his dissenting opinion in Massachusetts vs. United States (333 US 611) : "I see no reason why I should be consciously wrong today because I was unconsciously wrong yesterday". Lord Denning also said to the same effect when he observed in Ostime vs. Australian Mutual Provident Society (1960) AC 459, 480 :

"The doctrine of precedent does not compel your Lordships to follow the wrong path until you fall over the edge of the cliff." Here we find that there are overriding considerations which compel us to reconsider and review the decision in Cloth Traders' case (supra). In the first place, the decision in Cloth Traders' case (supra) was rendered by this Court on 4th May, 1979, and immediately thereafter, within a few months, Parliament introduced s. 80AA with retrospective effect from 1st April, 1968, with a view to overriding the interpretation placed on s. 80M in Cloth Traders' case (supra). The decision in Cloth Traders' case (supra) did not, therefore, hold the field for a period of more than a few months and it could not be said that any assessee was misled into acting to its detriment on the basis of that decision. There was no decision of this Court in regard to the interpretation of sub- s. (1) of s. 80M prior to the decision in Cloth Traders' case (supra) and there was therefore no authoritative pronouncement of this Court on this question of interpretation on which an assessee could claim to rely for making its fiscal arrangements. The only decision in regard to the interpretation of sub-s. (1) of s. 80M given by any High Court prior to the decision in Cloth Traders' case (supra), was that of the Gujarat High Court in Addl. CIT vs. Cloth Traders P. Ltd. (supra) and that decision took precisely the same view which we are inclined to accept in the present case. It is, therefore, difficult to see how any assessee can legitimately complain that any hardship or inconvenience would be caused to it if the decision in Cloth Traders' case was overturned by us. If despite the decision of the Gujarat High Court in Addl. CIT vs. Cloth Traders P. Ltd. (supra), the assessee proceeded on the assumption, now found to be erroneous, that the Gujarat High Court

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decision was wrong and the deduction permissible under sub- s. (1) of s. 80M was liable to be calculated with reference to the full amount of dividend received by the assessee, the assessee can have only itself to blame. Knowing fully well that the Gujarat High Court had decided the question of interpretation of sub-s. (1) of s. 80M in favour of the Revenue and there was no decision of this Court taking a different view, no prudent assessee could have proceeded to make its financial arrangements on the basis that the decision of the Gujarat High Court was erroneous. Moreover, we find, for reasons we have already discussed, that the decision in Cloth Traders' case is manifestly wrong because it has failed to take into account a very vital factor, namely, that the deduction required to be made under sub-s. (1) of s. 80M is not from the gross total income but

from "such income by way of dividends". There is also another circumstance which makes it necessary for us to reconsider and review the decision in Cloth Traders' case and that is the decision in Cambay Electric Supply Co.'s case (supra). The decision in Cloth Traders' case is inconsistent with that in Cambay Electric Supply Co.'s case. Both cannot stand together. If one is correct, the other must logically be wrong and vice versa. It is, therefore, necessary to resolve the conflict between these two decisions and harmonise the law and that necessitates an inquiry into the correctness of the decision in Cloth Traders' case. It is for this reason that we have reconsidered and reviewed the decision in Cloth Traders' case and on such reconsideration and review, we have come to the conclusion that the decision in Cloth Traders' case is erroneous must be overturned.”

4.8 In view of the above decision of the Hon’ble Supreme Court, we reject the contention of the learned Counsel of the assessee to allow the deduction under section 35DD of the Act, following rule of the consistency. 4.9 In view of the above discussion, we uphold the finding of the Ld. CIT(A) on the issue in dispute. Accordingly, the grounds No. 1 to 1.2 of the appeal of the assessee are dismissed. 5. The ground Nos. 2 to 2.4 of the assessee relates to disallowance of Rs. 82,05,031/- under section 14A of the Act, which include disallowance of Rs.37,33,490/- towards indirect

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interest expenditure and ₹ 44,71,541/- towards administrative expenses. 5.1 The facts qua the issue in dispute that during the year under consideration, the assessee shown investment in mutual funds at ₹ 144,42,73,807/- and received dividend income amounting to ₹1,66,74,318/- in respect of the units held in various mutual funds, which was claimed as exempt under section 10(33)/10(34) of the Act. In the return of income filed, the assessee did not make suo motu disallowance under section 14A of Act for expenses incurred towards earning exempt income. The Assessing Officer was not satisfied with the claim of the assessee that no expenses were incurred for earning exempt income. According to him, income whether exempt or not cannot be earned without making some expenditure and often such expenditure for earning exempted income are not segregated in the accounts of the assessee and remain clubbed with administrative/financial and other expenses of the business as a whole, and thus it becomes duty of the Assessing Officer to reasonably allocate expenses relatable to such income and disallow the same. The Assessing Officer placed reliance on the decision of the special bench of the Tribunal in the case of ITO vs Daga Capital Management Private Limited, reproved in (2009) 117 ITD 169 and computed the disallowance aggregating to ₹ 1,79,17,211/-under section 14A of the Act as per method prescribed under rule 8D of Income Tax Rules, 1962 (in short ‘the Rules’) in following manner:

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Sl. No. Particulars Amount (in Rs.) A Direct expenditure in relation to Nil exempt incoke [(refer Rule 8D(2)(ii)] B Interest expenditure not directly 1,02,88,677 attributable to any particular income [(refer Rule 8D(2)(ii)] C ½% of average investments [(refer 76,28,534 Rule 8D(2)(iii)] Total 1,79,17,211

5.2 On further appeal, the Ld. CIT(A) observed that in view of the decision of the Hon’ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited Vs. DCIT, 234 CTR 1 and decision of the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. Vs. CIT 15 Taxman.com 390 , the rule 8D was not operating retrospectively but it is applicable prospectively with effect from 24/03/2008. Before the Ld. CIT(A), the assessee filed letter dated 25/11/2010 that disallowance under section 14A of the Act should not exceed ₹ 5,62,842/-being 20% proportionate cost of running the treasury operations of the assessee, which was arrived at on the proportionate basis of salaries and common expenses allocated towards the staff involved in the Treasury division. The Ld. CIT(A) found that working provided by the assessee in the said letter was adhoc without any basis for adopting 20% of the expenses for disallowance and accordingly, he rejected the working provided by the assessee. The Ld. CIT(A) also rejected the computation of the Assessing Officer on the ground that the Assessing Officer considered the average of the entire investment including the

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investment made in foreign subsidiary companies. The ld. CIT(A) computed the disallowance related to interest expenditure at Rs.37,33,490/- after excluding the interest incurred on vehicle loans etc. observing as under:

“8.6.5 The exempt dividend income are earned from mutual fund investments which had gone up from Rs. 20.30 crores to Rs. 83.59 crores during the year. The secured loans are for vehicle loan and non-convertible debentures only. Unsecured loans borrowed were repaid during the year. The interest expenditures are incurred on vehicle loan (interest Rs. 13,05,415/-), borrowing repaid during the year (interest Rs. 6,82,740/-) and non-convertible debentures (interest Rs. 1,77,19,178/-). Vehicle loan being for specific purpose for vehicles, therefore, its interest is not attributable to the investments from which the exempt dividend income is earned. As such, the AO is not justified in considering the entire interest expenditure which includes the vehicle loan interest also for the purpose of disallowance u/s 14A.

8.6.6 The non-convertible debentures of Rs. 50 crores were issued in the AY 2004-05, the year in which the shares in NIIT GIS ltd. (Rs. 89 lakh), NIIT Smartserve Ltd. (Rs. 9.99 crores) and mutual funds (Rs. 9.60 crores) (total Rs. 20.87 crores) were also acquired. Therefore, it is clear that debentures have contributed to the common pool of fund which were utilized to acquire the shares in NIIT G1S ltd., NUT Smartserve ltd. & the mutual funds. The debentures are also not directly attributable to any particular income or receipt. As such interest expenditure incurred during the previous year on account of debentures are indirectly attributable to the investment from which tax free income is earned or will be earned in future. Further, in the absence of any separate accounts, the submission of the appellant that borrowed funds were not utilized for investment in mutual funds and shares, is without any merit. Since the investments in AY 2004- 05 was Rs. 20.87 crores, therefore, interest on debentures upto Rs. 20.87 crores needs to be considered for disallowance as indirect interest expenditure incurred during the relevant previous year in relation to the exempt income. The average value of debentures remaining in AY 2007- OS i.e. average of opening balance and closing balance (40 crores + 25 crores)/2 is Rs. 32.5 crores and the interest paid on debentures during the AY 2007-08 is Rs. 1.77 crores. Therefore, in the absence of any separate account of interest expenditure and considering the original investment of Rs. 20.87 crores of AY 2004-05 in which the debentures were also

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issued, 65% interest expenditure of Rs. 1.77 crores (65% of 1.77 crores = 1,15,17,465/-) incurred on debenture during the AY 2007- 08 needs to be considered for disallowance, as original investment is 65% of the debentures remaining.

8.6.7 Unsecured loan borrowings repaid during the year have contributed to the common mixed pool of fund which were utilized for investment during the year in NUT Smartserve ltd. (Rs. 25 crores) and mutual funds (Rs. 63.25 crores). Therefore, the interest expenditures (Rs. 6.82 lakhs) on such borrowing needs to be considered for disallowance as indirect interest expenditure incurred during the relevant previous year in relation to the exempt income. Keeping in view of the above, indirect interest expenditure on account of debenture incurred during the previous year in relation to the exempt income is worked out on proportionate and reasonable basis as under:

A: Proportionate interest expenditure on account of debenture (65% of Rs. 1 77 crores) + 6,82,740/- = Rs. 1,15,17,465/- + 6,82,740/- = 122,00,205/-

B: Average value of investment (excluding investment foreign companies) income from which doe‘s not or shall not form part of the total income = (133,55,97,392 +

C: Average total assets = Rs. 292,23,98,024/- Therefore, the indirect interest expenditure incurred during the previous year in relation to income which does not or shall not form part of the total income is = A x B/C = 122,00,205 x 89,43,08,292 / 292,23,98,024 - Rs. 37,33,490/-“

5.3 With regards to administrative expenses and management expenses, the learned CIT(A) sustained the disallowance of ₹44,71,541 at the rate of 0.5% of the average value of the investment excluding investment in foreign subsidiary companies observing as under:

“8.6.8 With regard to administrative and management expenses during the relevant previous year mutual funds investments have increased from Rs. 20.30 crores as on 31/03/2006 to Rs. 83.54 crores as on 31/03/2007 Investment in fully paid equity shares in NUT Smartserve ltd. have increased from Rs. 25 crores to Rs. 50 crores from which tax free dividend income will arise. Therefore, it is

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clear that there was substantial investment activity during the year. It cannot be investments decisions whether to buy, sale or retain the investments, involving multi- crore investments and dividend income, are made by staff members without any vetting by the Board and without any involvement of the top level management. Considering the investment in mutual funds and fully paid equity shares of N1IT GIS ltd, NI1T Smartserve ltd, and other companies it is evident that top level management and the Board is involved in these important merger and acquisition decisions. It is evident that top level management and the Board are involved in the administration and management of these equity holding in NIIT GIS ltd., NIIT Smart Serve ltd. and new companies from which tax free dividend income has arisen and will also arise in future. As such it is also evident that official machinery is utilized by the top level management and Board. There cannot be any dispute that dividends will arise in future out of investments in equity shares in NIIT GIS ltd, NIIT Smartserve ltd. and other companies. Therefore, administration and management expenses on account of use of official machinery calls for disallowance u/s 14A.

8.6.9 Hon’ble Special Bench of ITAT in Cheminvest Ltd. v. ITO [2009] 121 ITD 318 (DELHI)(SB) held that where any expenditure has been incurred by an assessee in relation to an income, that does not form part of total income disallowance u/s 14A could be made even if no income has resulted or made or earned by the assessee in the year under consideration.

8.6.10 The correctness of the claim of expenditure made by the appellant by without any detail, is found to be not satisfactory. In view of the above, even though Rule 8D is not applicable in respect of AY 2007-08, however for the purpose of disallowance of administration and management expenses u/s 14A, 0.5% of average value of investments, income from which does not or shall not form part of the total income as provided in Rule 8D appears to be a very reasonable basis. In view of the above 0.5% of Rs. 89.43,08,292/- [133,55,97,392 + 45,30,19,192/2 excluding the investments in foreign subsidiary companies] = 44,71,541/-, calls for disallowance u/s 14A on account of administrative and management expenses. Therefore, the total disallowance u/s 14A on account of financial, administrative and management expenses works out to Rs. 82,05,031/- (44,71,541 + 37,33,490). Considering the above the disallowance made by the AO u/s 14A is reduced from Rs. 1,79,17,211 /- to Rs. 82,05,031/-.”

5.4 Before us, the Counsel of the assessee referred to various decision of the Hon’ble courts and submitted that for making

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disallowance under section 14A of the Act till assessment year 2007-08, the Assessing Officer must satisfy following: (a) there must be some actual expenditure incurred (b) such expenditure must be incurred in relation to earning exempt income, which means that there must be some nexus between the actual expenditure and actual exempt income and (c) the Assessing Officer must on the facts, record satisfaction that having regard to the accounts of the assessee sumo disallowance if any under section 14A of the Act is not correct.

5.5 The learned Counsel submitted that no disallowance under section 14A is warranted in the present case as the Assessing Officer has not recorded proper satisfaction as mandated under section 14A of the Act. 5.6 Regarding the disallowance out of interest expenditure, the learned Counsel submitted that no portion of the borrowed funds was utilized in making investment in shares/mutual funds that resulted in the earning of exempt dividend income and investments had been made out of own funds. The Ld. Counsel referred to the pages of the balance sheet as on 31/03/2006 and 31/03/2007 to demonstrate that investment was made out of own funds. The Ld. Counsel relied on the decision of the Hon’ble Bombay High Court in the case of CIT Vs Reliance Utilities and Power Ltd. 313 ITR 340 (Bom) and decision of Hon’ble Gujarat High Court in the case of CIT Vs UTI Bank Ltd reported in 32 taxmann.com 370 to support the contention that where the

19 ITA No. 5491 & 5491/Del/2013 & ITA Nos. 5524 & 5525/Del/2013

appellant had sufficient funds/deposits for advancing interest free loans or making investment in shares etc. and there is nothing on record to show that borrowed funds have been directly utilized for such purposes, a presumption in favour of the assessee can be drawn with respect to utilization of the interest free funds towards investment in shares and no disallowance can be made under section 14A of the Act. 5.7 The learned Counsel further without prejudice to the arguments above submitted that if disallowance for interest is made, first the interest expenditure should be netted against the interest income and any net expenditure should only be considered for disallowance under section 14A of the Act. 5.8 Regarding disallowance out of administrative expenses, the learned Counsel provided detail of the expenses claimed in the profit and loss account and claimed that no expenses have been incurred toward earning of the exempt income. The submission of the assessee in this regard is reproduced as under: “(b) Disallowance out of Administrative expenditure Kind attention is invited to the audited profit and loss account for the year ended 31st March, 2007. On perusal of the same, it will be kindly noticed that the appellant had, during the year under consideration, claimed the following expenditure (refer page no. 592 of PB Vol-2):

Particulars Amount (Rs.) Personnel 116.83 crores Development and Bought out 10.34 crores Administration, Finance and 44.19 crores Others Marketing 3.06 crores Depreciation and Amortization 21.78 crores

20 ITA No. 5491 & 5491/Del/2013 & ITA Nos. 5524 & 5525/Del/2013

Re (a): Personnel Expenses

With regard to personnel expenses, it is respectfully submitted that no separate manpower has been employed/ engaged to look after the investment in shares of domestic subsidiaries/ mutual funds, income wherefrom is received directly in the banks. Further, the assessing officer has not been, it is submitted, able to point out any specific expenditure incurred in relation to exempt income.

Re (b): Development and bought expenses

As regards development and bought out expenses, kind attention is invited to Note- 15 of the audited annual accounts for the relevant assessment year 2007-08(refer page no. 600 of PB Vol-II). On the perusal of the same, it may kindly be appreciated that these expenses includes bought out items, professionals charges, equipment hiring, consumables and others, which has no relation to the earning of exempt income and are purely in the nature of day to day expenses.

Re (c): Administration and Other expenses

As regards other expenses, viz., administrative and operating expenses, kind attention is invited to Note-16 of the audited annual accounts for the relevant assessment year (refer page 601 of the PB - Vol-II). On perusal of the same, may kindly be appreciated that all expenses are in the nature of day-to-day expenses and the same cannot be held to be relatable, directly or indirectly, to the exempt income earned by the appellant. Such expenses have to be incurred, whether or not, there is any exempt income and hence such income is not related to the earning of exempt income.

Kind attention, in this regard, is invited to the decision of the Delhi Bench of the Tribunal in the case of SIL Investment Ltd. v. ACIT: 148 TTJ 213 (Del.), wherein the Tribunal has held that no disallowance could be made under section 14A of the Act out of audit fees, normal travelling expenses, etc. The pertinent observations of the Tribunal are reproduced as under:

“33 There is absolutely nothing on record to show that any part of the expenditure was incurred to earn the exempt income. And not only this, as rightly canvassed, this expenditure of Rs. 16,54,531/- even included expenditure towards remuneration to Director and Audit Fees. Now this kind of expenditure, irrespective of the fact whether or not intome not forming part of the total income is earned, has to be incurred. Therefore also, these expenses cannot, in any manner, be said to be

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relatable to earning of exempt income by the assessee company ” (emphasis supplied)

Reference in this regard is made to the decision of Amritsar bench of the Tribunal in the case of DCIT v. Jammu and Kashmir Bank Ltd: 152 TTJ 522 wherein it was held as under:

“16. The arguments made by the learned counsel for the assessee and submissions made before the authorities below by him are convincing to the Bench that administrative and other expenses are fixed irrespective of the fact whether or not tax-free income is earned and therefore, these expenses cannot be said to be relatable to exempt income. Every year is an independent year and in the present case, as held by us there is nothing on record brought out by the AO that the assessee has actually incurred any cost or expenditure in relation to the exempt income, therefore, no disallowance on account of interest, management or administrative cost can be made by the AO. Therefore, the learned CIT(A) has rightly allowed the appeal of the assessee in relation to deleting the addition of Rs. 7.05 crores being the proportionate disallowance on account of interest expenses. Therefore, the learned CIT(A) is not justified in retaining disallowance even of Rs.8.10 lacs out of Rs.2.26 crores disallowed by the AO. The AO is directed to allow the claim of the assessee accordingly. Thus, all the grounds of the Revenue are dismissed and solitary ground of the assessee in cross- objection is allowed”

Re (d): Marketing

With regard to marketing expenses, it is respectfully submitted that no advertising and publicity expenses were incurred in relation to exempt income earned from investment as the business of the appellant is to provide software services and solutions & systems integration and such amount had been incurred as the normal day to day business operations. The same, therefore, cannot be held to be relatable, directly or indirectly, to the exempt income earned by the appellant.

Re (e): Depreciation and Amortization Expenses

Insofar as depreciation/amortization is concerned, it is respectfully submitted that the same is non-cash expenditure and is basically in the nature of charge on the fixed assets utilized for business purposes, which cannot be subject matter of disallowance under section 14A of the Act.

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Reference in this regard may be made to the decision of the Special Bench of the Tribunal in the case of Vishnu Anant Mahajan vs ACIT: 137 ITD 189 held that depreciation cannot be disallowed under section 14A of the Act. The pertinent observations of the Tribunal read as under: “8. Coming to the question regarding depreciation being an expenditure or not, it has been held in the case of Hoshane D. Nanavati (supra) that section 14A deals only with the expenditure and not any statutory allowance admissible to the assessee. The decision has been arrived at after considering the decision in the case of Nectar Bebverages Pvt. Ltd. vs. DCIT (2009) 314 ITR 314. The Id. CIT (DR) has not been able to displace the ratio of these cases. Thus, on consideration, we find that section 14A uses the words "expenditure incurred by the assessee in relation to income A statutory allowance under section 32 is not an expenditure. Therefore, we are in aereement with the decision of the Division Bench in the case of Hoshane D. Nanavati. ” (emphasis supplied) In view of the aforesaid, it is respectfully submitted that depreciation/amortization could not be disallowed under section 14A of the Act.”

5.9 The learned Counsel also submitted that for computation of disallowance under Rule 8D(2)(iii) investment which has yielded exempt income should only be considered for the purpose of disallowance. In support of the claim the learned Counsel relied on the decision of the Jurisdictional Delhi High Court in the case of ACB India Ltd Vs ACIT 374 ITR 108 and special bench Tribunal decision in the case of ACIT Vs Vireet Investments P ltd 165 ITD 27. 5.10 The Ld. Counsel submitted that in view of the arguments above, the disallowance under section 14A of the Act might be deleted. 5.11 On the other hand, the Department Representative (DR) relied on the order of the Ld. CIT(A) and submitted at Ld. CIT(A)

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has not strictly followed the Rule 8D of the Rules and he has sustained the disallowance for the interest and administrative expenses for exempt income following a reasonable method. Further, the Ld DR submitted that the Assessing Officer was not satisfied with the claim of assessee of no expenses incurred and accordingly not being satisfied, he computed the disallowance under section 14A of the Act and thus the contention of the learned Counsel of the assessee of no dissatisfaction of claim of assessee was recorded, was not correct. The ld DR supported computation of disallowance of interest expenditure and administrative expenses made by the Ld. CIT(A). 5.12 We have heard the rival submission of the parties and perused the relevant material on record. In the instant case, the Assessing Officer has expressed dissatisfaction on the claim of the assessee that no expenses were incurred for earning the exempt income, which is evident from following paragraph of the assessment order:

“5.2. No income, whether exempt or not, can be earned without making some expenditure. Often times such expenditure are not segregated in the accounts of the assessee and remain clubbed with overall administrative/financial and other expenses for the business as a whole. It thus becomes the duty of the AO to reasonably allocate expenses relatable to such income and disallow the same. Section 14A of the Act (inserted by the Finance Act. 2001 with retrospective effect from 1.4 1962) specifically addresses this issue by providing that 'no deduction shall be allowed in respect of expenditure incurred in relation to such income which does not form part of total income’ under the Act. Further, sub-section (2) of Section 14A empowers the AO to determine the amount of expenditure incurred in relation to exempt income in accordance with the method as may be prescribed. The method has since been prescribed by insertion of Rule 8 D of the I T Rules. 1962 w.e.f. 24.3.2008. Sub section (3) of Section 14A mandates that the above provisions of sub- section (2) shall also apply to a case where an assessee claims that

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no expenditure has been incurred by him in relation to exempt income.”

5.13 The Hon’ble Delhi High Court in the case of Indiabulls Financial Services Ltd Vs DCIT 395 ITR 292 (Delhi) that even an implied dissatisfaction on the claim of the disallowance under section 14A by the assessee is sufficient to meet the requirement of section 14A(2) of the Act. The relevant finding of the Hon’ble Delhi High Court is reproduced as under:

“ 7. Undoubtedly, the language of Section 14A presupposes that the AO has to adduce some reasons if he is not satisfied with the amount offered by way of disallowance by the assessee. At the same time Section 14A (2) as indeed Rule 8D(i) leave the AO equally with no choice in the matter inasmuch as the statute in both these provisions mandates that the particular methodology enacted should be followed. In other words, the AO is under a mandate to apply the formulae as it were under Rule 8D because of Section 14A(2). If in a given case, therefore, the AO is confronted with a figure which, prima facie, is not in accord with what should approximately be the figure on a fair working out of the provisions, he is but bound to reject it. In such circumstances the AO ordinarily would express his opinion by rejecting the disallowance offered and then proceed to work out the methodology enacted. 8. In this instance the elaborate analysis carried out by the AO – as indeed the three important steps indicated by him in the order, shows that all these elements were present in his mind, that he did not expressly record his dissatisfaction in these circumstances, would not per se justify this Court in concluding that he was not satisfied or did not record cogent reasons for his dissatisfaction to reject the AO’s conclusion. To insist that the AO should pay such lip service regardless of the substantial compliance with the provisions would, in fact, destroy the mandate of Section 14A.”

5.14 In view of above decision of the Hon’ble Delhi High Court, in case of Indiabull Financial Services Ltd. (supra), we reject the contention of the assessee that no dissatisfaction was recorded by

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the Assessing Officer while invoking section 14A of the Act for computing disallowance towards earning the exempt income. 5.15 The second contention of the assessee is that no disallowance should be made for interest expenditure in view of sufficient own funds available with the assessee. The details of position of the funds of the assessee as on 31/03/2006 and 31/03/2007 filed by the assessee in paper-book is reproduced as under:

Particulars 2007 2006 Rs. In million Rs. In million Liabilities

Share Capital 395 400 Reserves 2,575 1,770 Loan 267 438 Current and Other Liabilties 748 569 Total 3,985 3,177 Assets Rs. In million Rs. In million

Fixed Assets 602 591 Investments in Subs 1,132 881 Investment in Mutual funds 835 203

5.16 In the case of the assessee share capital and reserve funds available are in far access to investment made by the assessee in mutual funds i.e. investment in assets yielding exempt income. The Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities and Power Ltd. in (2009) 313 ITR 340 has held as under :

“10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme

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Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber’s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal”

5.17 When we apply the ratio of the decision of the Hon’ble Bombay High Court in the case of Relance utilities and power ltd (supra) over the facts of the instant case, we find that the instant case also there are sufficient interest-free funds in the form of share capital and reserves available to explain the investment in mutual funds. In view of no interest expenditure relatable to investment in assets yielding exempt income, the disallowance of ₹ 37,33,490/- sustained by the Ld. CIT(A) is deleted. 6. Regarding the administrative expenses for earning the exempt income is concerned, we find that Hon’ble Delhi in the case of ACB India Ltd. (supra) and the Special Bench in the case of ACIT Vs Vireet Investment Private Limited (supra) has held it

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for considering disallowance towards administrative expenses, the investment which has yielded exempt income during the year under consideration should only be considered. 6.1 The assessee before the Ld. CIT(A) has accepted 20% of the certain expenses towards salary etc. of employees engaged in investment activity. Thus, the contention of the assessee that no expenses have been incurred for earning the exempt income is not acceptable and some expenses on salary, rent and other office expenses definitely goes toward earning of the exempt income. In absence of any bifurcations of the expenses, a reasonable estimate has to be made for such disallowance. Respectfully, following the decision of the Hon’ble Delhi High Court in the case of ACB India Ltd (supra) and special bench Tribunal in the case of Vireet Private Limited (supra), we direct the Assessing Officer to restrict the disallowance at 0.5 % of the value of assets which has yielded exempt income during the year under consideration. The ground of the appeal of the assessee is accordingly partly allowed. 6.2 The Ground Nos. 3 to 3.2 the appeal of the assessee relate to bed debt claim of ₹ 3,59,27,941/- in respect of the amount due from Government Agencies and other parties. 6.3 The facts qua the issue in dispute are that the Assessing Officer observed claim of bed debt in respect of amount due from Government Agencies and other parties. A list of such parties with amount written off is available on page 532 of the paper- book Volume II, which is reproduced as under:

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6.4 The Assessing Officer rejected the claim on two counts. Firstly, that the assessee did not provide details whether the debt

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was taken into consideration as income in the earlier or in the current year. Secondly, the assessee did not establish that the debt become bad. In view of no evidence produced, the Assessing Officer disallowed the entire claim of bad debt of Rs. 3,59,27,971/-. 6.4 The Ld. CIT(A) in view of the decision of the Hon’ble Supreme Court in the case of TRF Ltd Vs CIT 323 ITR 397 and decision of the Hon’ble Delhi High Court in the case of CIT Vs Autometers Ltd 292 ITR 345 (Delhi) held that once the debt has been written off in the books of accounts of the assessee as irrecoverable, the claim of bad debt is allowable and it is not necessary for the assessee to establish that the debt, in fact has become irrecoverable. However, the Ld. CIT(A) asked the assessee to establish that the debt under dispute was appearing in the balance Sheet as on 31/03/2006. In absence of any documentary evidence filed by the assessee, the Ld. CIT(A) confirmed the disallowance observing as under: “8.7.4 From the above it is clear that while it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable and the bed debt claimed by the assessee would be allowable in the year in which the debt was written off as irrecoverable in the books of accounts, however, the bad debts must be shown as good debts in the books during the previous year. The appellant in the course of appellate proceedings placed on record the year-wise details as to when the bad debts claimed were offered to tax. However, the appellant failed to furnish the particulars to substantiate that sundry debtors shown in the balance sheet as on 31/03/2006 also includes the amounts shown as bad debts written off in the relevant AY 2007-08. In other words, it cannot be ascertained that the bad debts written off in AY 2007-08 as irrecoverable were shown as good debts as on 31/03/2006. In view of the above the claim of bad debts are not allowable. The alternative submission of the appellant is that the bad debts written off should have been allowed as trading loss. The above submission is also not sustainable because no such claim for deduction as trading loss was made in the profit &

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loss account. The claim made in the P&L account was as bad debts which is not sustainable because as stated earlier, the appellant failed to furnish the particulars to substantiate that bad debts were shown as good debts as on 31/03/2006. In view of the above, the disallowance of bad debts of Rs. 3.59 crores made by the AO is justified and as such confirmed. The appeal fails in this ground.”

6.5 Before us the learned Counsel of the assessee submitted that if opportunity is provided to the assessee, all the details as required by the Ld. CIT(A) shall be provided and issue may be decided afresh. 6.6 The Learned DR relied on the order of the Ld. CIT(A) and submitted that in absence of the information whether the debt in respect of the parties was in existence as on 31/03/2006, the Ld. CIT(A) was justified in sustaining the disallowance. 6.7 We have heard the rival submission and perused the relevant material on record. The finding of the Assessing Officer of requirement of establishing whether the debt become bad has already been rejected by the Ld. CIT(A) and Revenue is not an appeal on that issue. The Ld. CIT(A) has sustained the disallowance in absence of the information provided by the assessee regarding existence of the debt in respect of the parties as on 31/03/2006. Now, the assessee has given undertaking to provide all the details in respect of the existence of the debt as on 31/03/2006. In the interest of justice, we feel it appropriate to restore this issue to the file of the Ld. CIT(A) for deciding a fresh with the direction to the assessee to provide all required details in respect of the debts. Both the parties i.e the assessee and the Assessing Officer shall be afforded adequate opportunity of being

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heard. The Ground Nos. 3 to 3.2 of the appeal of the assessee are accordingly allowed for statistical purposes.

ITA No. 5491/Del/2013 (Revenue’s Appeal) 7. Now we take up the appeal of the Revenue having ITA No. 5491/Del/2013. The Ground Nos. 1 to 1.5 and 2 of the appeal of the Revenue relate to disallowance of deduction under 10B of the Act by the Assessing Officer, which has been deleted by the Ld. CIT(A). 7.1 The facts qua the issue in dispute are that the assessee claimed deduction under section 10B of the Act in respect of profit derived from its 100% export-oriented undertaking/units, namely, NTL Salt Lake, Kolkata (Unit-II), (Rs. 8,16,72,880/-); NTL Banerghatta Road, Bangalore (Rs.5,23,90,061/-) and NTL Athena, New Delhi (Rs.93,03,25,683/-), totaling to Rs.106,43,88,624/-. In respect of these units, deduction under section 10B of the Act was claimed in assessment year 2006-07 also which was disallowed by the Assessing Officer, however same was allowed by the Ld. CIT(A). The Assessing Officer observed that the different units of the assessee company are not operating in isolation but they are operating as different branch of the same tree. The Assessing Officer observed that the assessee was maintaining single books of accounts for all its units, including the units covered by the deduction under section 10B of Act and the assessee has allocated the expenses between the different units for computing deduction under section 10B of Act. According to the Assessing Officer, the basis of appropriation was not explained by the assessee. In absence of any specific method, the

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only lawful basis of allocating the expenses towards different unit has to be on the basis of the revenue generated by the said units. The Learned Assessing Officer mentioned that as per subsection (4) of section 10B of the Act, first the profit of the business has to be computed under the head ‘profit and gains of the business or profession’ and in then profit is to be apportioned between the export turnover and the local turnover. Accordingly, the Assessing Officer computed the deduction under section 10B of the Act allowable to the assessee at ₹89,68,09,126/- as follows: Total profit of the business X Export Turnover/Total Turnover =113,86,62,502/- X 234,04,66,797 297,16,48,815 =Rs.89,68,09,126/-

7.2 The Ld. CIT(A) followed the finding of his predecessor in assessment year 2006-07 and allowed the deduction under section 10B of the Act claimed by the assessee with following observations: “8.1.3 The AO allowed the deduction u/s 10B with reference to the global profits of the assessee as a whole and not with reference to the profits of the eligible undertaking. The above view of the AO is erroneous because the issue whether deduction under section 10A/10B of the Act has to be allowed qua profits of the eligible undertaking(s) or the global profits of the assessee as a whole, is no longer res integra. Hon’ble apex Court in the case of CIT vs. Canara Workshops (P) Ltd.: 161 ITR 320 held that deduction under section 80E of the Act was to be allowed with reference to profits of the eligible undertakings. Hon’ble Delhi High Court in CIT vs. Dewan Kraft System (P) Ltd, : 297 iTR 305 (Delhi) have taken the view that deduction under section 801/801A has to be computed with reference to profits of the eligible business / undertaking, unaffected by the profits / losses suffered in other eligible/ ineligible business owned by the assessee. Hon’ble Karnataka High Court in the CIT v. Yokogawa India Ltd. 314 ITR 385/ 246 CTR 226 while dealing with the issue of deduction u/s 10A of the Act, observed that the relief under this section is with reference to the STP undertakings and not

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to the assessee. It was held that the phrase “total income” used in sec 10A(1) is to be understood as the total income of the STP unit. Special Bench of the Tribunal in the case of Scientific Atlanta India Technology Pvt. Ltd. 38 SOT 252 observed that assessee may have more than one undertaking and in such a case, one has to consider the profits and gains of that "particular undertaking" which qualify for deduction under s. 10A. It was held that in computing deduction under s. 10A, we have to ascertain the total income as per the provisions of the Act in respect of "that undertaking" and the amount so determined is to be reduced from the total income. Therefore, it is a settled issue that the deduction u/s 10A/10B of the Act has to allowed with reference to the profits of the eligible undertaking and not with reference to the appellant’s business as a whole.

8.1.4 The AO did not allow the deduction with reference to the profits of the eligible undertaking because he observed that appellant was maintaining consolidated books of accounts. However in view of the decisions in the case of DCIT v. Arabian Exports Ltd. : 109 TTJ 440 (Mum), CIT v. Fusion Software Engg. Pvt. Ltd. : 1TA No. 952 and 953 of 2006 (Kar HC) & JOT v. Gebbs Infotech Ltd. : ITA No. 3370/Mum/2007 (Mum) and in view of CBDT Circular No. 1/201.3 dt. 17.01.2013 it is a settled issue that it is not mandatory for an eligible undertaking to maintain separate books of accounts and the claim for deduction u/s I0A/10B cannot be denied to any assessee on this ground.

8.1.5 Even in the instant AY 2007-08 the three units in respect of which deduction u/s I0B have been claimed viz NTL-Salt Lake - Kolkata, NTL-Bannerghatta Road, Bangalore & NTL- Athena, New Delhi are the same units which were also claiming the deduction u/s 10B in AY 2006-07. Each of the units have got separate approvals from the STP1 Authority for claiming exemption u/s 10B of the Act and they have also been issued separate licenses for custom bonded warehouse under 100% LOU STP scheme by the Customs authorities. These units have separate locations in far-flung areas such as Kolkata, Bangalore & New Delhi as is indicated from their respective addresses. Therefore, there cannot be any dispute that these are independent & separate units and as such each of the units have to be treated as the eligible undertakings for the purposes of deduction u/s 10B of the Act.

8.1.6 The appellant has explained that in the ERP Software accounting system implemented by them, each and every transaction of each unit is separately coded and, therefore, all the transactions are identifiable as in the case of separate books. The appellant also explained that in the ERP based accounting software system all the expenses are captured into 3 categories: i) Direct Expenses which are chargeable to individual Business Group/ Unit,

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ii) Service Group (Corp) Expenses such as Financial Service Organization (FSO)/ Commercial Service Organization (CSO)/ Communicating and Markeing Organization (CMO) expenses allocated based on the respective revenue of the EOU’s and Non- EOU’s and iii) Expenses like rent, electricity, water, repairs and maintenance, etc., that are building related and common in nature are allocated to the respective Business Groups/ Service Groups/ EOU’s based on the area occupied. The annual report of the company also specifies the ERP system of accounts maintained by the company. The deduction has been claimed by the appellant in respect of each of the three EOUs on the basis of the prescribed Audit Report in Form No. 56G. The facts and circumstances are identical in AY 2007-08 as in AY 2006-07, and AO had also recomputed the deduction u/s 10B on the basis of recomputation of deduction adopted in AY 2006-07. Therefore, in view of the above factual and legal position, and following the decision of Id. CIT(A)-32 of AY 2006-07 it is held that profits arising from each of the eligible undertaking have be to allowed as deduction under section 10B of the Act separately as certified by the Audit Report in Form 56G. Accordingly, the issue is decided in favour of the assessee.”

7.3 On the issue of adjustment of brought forward loses unabsorbed depreciation of earlier years also, the Ld. CIT(A), following the finding of his predecessor in assessment year 2006- 07, decided the issue in favour of the assessee. 7.4 Before us, learned DR relied on the Assessing Officer and submitted that in absence of separate books of accounts maintained for eligible unit, the Assessing Officer is justified in computing the profit derived from the export undertaking as profit of the business of the assessee in proportion to export turnover to the total turnover. She also supported the action of the Assessing Officer in not allowing the unobserved losses and depreciation. 7.5 We have heard the rival submissions and perused the relevant material on record. It is undisputed that both the Assessing Officer and the Ld. CIT(A) has followed respective

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finding of their predecessors in assessment year 2006-07. We find that the Tribunal in assessment year 2006-07 in ITA no. 3076/Del/2012 has dismissed the grounds of the appeal of the revenue against the deduction under section 10B allowed by the Ld. CIT(A). The finding of the Tribunal is reproduced as under: “5. We have heard both the sides and perused the entire materials on record and we find that the ld. CIT(A) has dealt with the issue in the impugned order in right perspective and we do not find any justification to discard the findings reached by him. For ready reference, the findings of the ld. CIT(A) are reproduced hereunder :

2.4 I have carefully considered the facts of the case, the arguments of the appellant, the observations made by the AO in his remand report and the rejoinder of the appellant. First of all, I would like to decide the issue of the admission of the additional evidence as sought to be adduced by the appellant. In their application for admission of additional evidence, the appellant have taken the following grounds: (i) That the aforesaid additional evidence only seek to further corroborate/substantiate the contention of the appellant that all the eligible EOU's are separate and independent units, which is also supported by the documents already on record. (ii) That the appellant was prevented by a sufficient cause from producing evidence before the A.O. as the appellant was never issued any notice or afforded any opportunity to demonstrate that the various units operating during the year under consideration have independent and separate existence and could not be treated as one common business. (iii) That the assessment was completed in haste without raising specific query based on which final order has been passed thereby denying sufficient and adequate opportunity to the appellant to adduce the entire evidences. (iv) That the evidence being- produced are critical and material for adjudication of the grounds raised in appeal. 2.4.1 The AO, on the other hand, has vehemently opposed admission of the additional evidence on the ground that the appellant was given due opportunities during the assessment proceedings. However, no specific observations giving dates and details of such opportunities has been made by the AO in his remand report. Further, the AO has not controverted the appellant's contention that no specific show cause notice was issued to the appellant to demonstrate as to how the various export oriented units operating during the year were having

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independent and separate existence and why they should not be treated as a single business unit. Therefore, I am of the view that specific opportunity was not granted to the appellant for clarifying the issue as to why all the units of the appellant company may not be considered as one unit for the purpose of deduction u/s 108 of the Act. The documents that the appellant seeks to admit at this level are mainly documents relating to Customs Licenses issued to each of the eligible units and the registers maintained by those units under the Customs rules, details of fixed assets purchased at the time of formation of the EOUs and separate monthly performance reports of the EOUs. The Assessing officer has raised the issue of some of these documents bearing the name of "M/s NIIT Ltd." instead of "M/s NIIT Technologies Ltd.", which has been explained by the appellant stating that all the eligible units were initially part of NIIT Ltd and were demerged into the appellant company through the court approved scheme of demerger, approved by the Hon'ble High Court of Delhi with effect from 1.04.2003. That is why the documents relating to the demerged eligible units, executed prior to the effective date, i.e., 4.06.2004, are in the name of the demerged company, i.e., NIIT Ltd. To my mind, these documents are material to decide the question as to whether the EOUs are to be treated as separate undertakings or they are in fact expansion of the business of the appellant company as held by the Assessing Officer. The Hon. Jurisdictional High Court in the case CIT vs. Text Hundred India Pvt. Ltd.: 239- CTR 263, held that Rule 29 enables the Tribunal to admit any additional evidence which would be necessary to do substantial justice in the matter. Their Lordships further observed that the various procedures, including that relating to filing of additional evidence, is handmade for justice and justice should not be allowed to be choked only because of some inadvertent error or omission on the part of one of the parties to lead evidence. In the case of CIT v. Virgin Securities & Credits (P) Ltd.: 332 ITR 396 (Del), the Hon. jurisdictional High Court held that the CIT(A) may admit additional evidence, after obtaining a remand report from the assessing officer, if the evidence sought to be adduced by the applicant is crucial to the disposal of the appeal. Hon'ble ITAT Delhi have also held in the case of Electra (Jaipur) (P) Ltd. vs. lAC (26 ITO 236) that if the evidence is genuine, reliable, proves the assessee's case, then the assessee should not be denied the opportunity. Similarly it was held in Dwarka Prasad VIs ITO 63 ITD 1 (TM) that additional evidence if in the interest of justice, and renders assistance to the authority in passing order, may be admitted. Other similar rulings are 68 TTJ 722, 231 ITR 1, 21 SOT

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218,293 ITR 53, 941TD 79 etc. In view of the guidance available in the afore-cited judicial pronouncements, 1 hold that the additional evidence as mentioned in para 2.3 above are admissible u/r 46A and are taken on record. 2.4.2 Having decided the question of admission of additional evidence, now the substantive issues are to be decided. The same are discussed in the following paragraphs. 2.4.3 The first substantive issue is whether the appellant was correct in claiming deduction under section 108 of the Act with reference to separate and independent profits of each of the eligible units as against the action of the assessing officer in computing such deduction with reference to business profits of the appellant company as a whole. The AO had observed that all the units were in fact expansion of the same business as they were engaged in, the same line of business as the company and no separate books of accounts have been maintained for these units. He had also raised doubts about the allocation of expenses to these units to 'arrive at the conclusion that deduction could not be calculated in respect of the units separately and therefore he calculated the deduction u/s 108 by aggregating all the profits of eligible and non eligible units and applying the-formula as given in section 108(4) to the. entire profits of the business of the appellant company thereby reducing the deduction substantially. The appellant has made detailed submissions on this ground as summarised/extracted hereinabove. Various evidences to establish separate "identity and independent existence of the eligible EOUs have been furnished from which it appears that these units are independent of each other as well as of the non-eligible units in respect of their licences, location and resources etc. They have got separate approvals from the- STPI Authority for claiming exemption ills 108 of the Act as newly set up 100% EOU and they have also been issued separate export licences by the Customs authorities. These units have separate locations as is indicated from their respective addresses. The appellant has also produced evidences to establish that they have separate fixed assets, plants & machinery and furniture and fixtures etc. Each of the EOUs have independent, separate and distinct operations as indicated in the evidences produced in the form of copies of softex forms, copies of the invoices, copies of foreign inward remittance certificates, copies of custom bonded register maintained by each unit and copies of Monthly performance reports on sample basis. Though separate books of accounts in respect of units have not been maintained in the traditional sense, the appellant has explained that in the ERP Software accounting system implemented by them each and every transaction of each unit is separately coded and therefore all

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the transactions are identifiable as in the case of separate books. Moreover, the deduction has been claimed' in respect of the EOUs on the basis of the prescribed Audit Report in Form No.56G which also requires the certifying Chartered Accountant to certify the amount claimed as deduction u/s 10B on the basis of examination of the accounts and records of the assessee relating to the business of the eligible undertaking. This report also does not refer to any separate books to be maintained or required to be maintained by the eligible EOU. This issue is also directly covered in the case of DCIT V. Arabian Exports Limited: 109 TTJ 440 (Mum.) as cited by the appellant hereinabove, wherein the Tribunal, upheld the following decision of the CIT(A) :

"2.4 In view 'of the above provisions of s10B, any profits and gains which are derived by an assessee from a 100 per cent export-oriented undertaking shall not be included in the total income of the assessee, if the conditions in sub-s.· (2) of this section are fulfilled. Looking to these conditions as mentioned in sub-s.(2) of this section, it is not seen that separate books of accounts are the requirement of claiming deduction from the total income of any assessee relating to the profits and gains derived by that assessee from a 100 per cent export-oriented undertaking ................ ... This Koregaon unit is fulfilling all the conditions as per sub-s. (2) of s..10B of the Act and therefore, it. is entitled for that exemption .. This ground 'Of appeals is allowed. " Reference, in this regard has also been made to the following decisions of the Court / Tribunal where it has been held that there is no requirement to maintain separate books of accounts as a necessary precondition for claiming the benefit of relief under sections 1OA/10B of the Act:- • CIT V. Fusion Software Engg. (P.) Ltd.: ITA No. 952 and 953 of 2006 (Kar HC) • JCIT v Gebbs Infotech Ltd.: ITA No. 3370/Mum/2007 (Mum.) 2.4.4 In view of the evidence placed and the explanations furnished, it is held that the eligible units of the appellant company identified as the following:

NTL-Salt Lake - Kolkata EM4/1, 2nd Floor, North Wing Sector-V, Salt Lake Electronics Complex, Kolkata NTL-Safed Pool, Mumbai Aditya Textile Compound, Carouroy Building Safed Pool, Andheri Kurla Road,

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Andheri (E), Mumbai NTL-Pretoria Street, Kolkata 6B, Pretoria Street, Kolkata NTL-Bannerghatta Road, No.39/2,Bannerghatta Road, Bangalore Bangalore 560029 NTL-Athena, New Delhi A-44, Mohan Co-operative Industrial Estate, Mathura Road, New Delhi.

are-separate 100% EOUs of the appellant company for the purposes of claiming deduction u/s 10 B of the Act and they cannot be treated as one with the appellant company just because they carry out the same nature of business. As has been held in the cases of CIT v Mahan Foods Ltd. 216 CTR 148 and CIT v Gedore Tools (India) P.Ltd. 126 ITR 613 by the Hon. Jurisdictional High Court, just because the new undertaking carries en the same nature of business as the old unit, it cannot be treated as one with the old unit unless it has been formed by splitting up or reconstruction of the old unit. It is not the case of the AO that in the instant case, the eligible units have been formed by splitting up or reconstructing the old .or non-eligible units. Since there is enough evidence in the appellant's case that the Expert Oriented Units were formed independently of the existing units for the purpose of export of software and they were approved as such by the relevant authorities, and that they have functioned independently of each other for the purposes of the business of expert of software, these units have to be treated as the eligible undertakings for the purposes of deduction u/s 10B of the Act and profits arising therefrom have to be allowed as deduction under that section separately as certified by the Audit Report in Form 56G, The first substantive issue is therefore decided in favour of the appellant and the AO is directed to re-compute the deduction u/s 10B accordingly. 2.4.5 The second substantive issue in this appeal is as to the stage of allowance of deduction under section 10B of the Act. The Assessing Officer has taken the view that the deduction u/s 10B was allowable after deducting unabsorbed brought forward depreciation from the profits of business of the appellant company. He has placed reliance mainly on the judgment of the Hon. Karnataka High Court in the case of CIT vs. Himmatsingike Seide Ltd. 286 ITR 255 for the above proposition. The case of the appellant is that deduction is allowable from profits of the eligible business as computed under the head "business income". As a necessary corollary, such profits are the individual profits of the eligible units computed before setting off of brought forward unabsorbed losses depreciation, if any, of non-eligible undertakings,

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required to be set off, subsequently at the stage of computing gross total income, under Chapter VI of the Act. According to the appellant, on one hand, the facts of the case of CIT vs. Himmatsingike Seide Ltd. 286 ITR 255 are clearly distinguishable from the facts of the instant case and on the other, the. aforesaid issue is squarely covered by the decision of the-Special Bench of the' Tribunal in the case of Scientific Atlanta India (P) limited: 38 SOT 252/129 TTJ 273 wherein the Tribunal has held that deduction under section 10A of the Act has to be independently computed in relation to the profits of the eligible unit without adjusting the same against- unabsorbed depreciation relating to the non-eligible unit(s). Reliance has also been placed by the appellant on the decision of Bangalore Bench of Tribunal in the case of ACIT v. Yokogawa India Ltd. 111 TTJ 548, wherein it was held that deduction under section 10A shall be allowed from the profits of eligible undertaking without setting off the losses /carried forward losses of other non-eligible divisions. Other cases relied upon by the appellant are as under: • Changepond Technologies (P.) Ltd. V. ACIT: 119 TTJ 18 (Chenn.) • KPIT Cummins Infosystems (Bangalore) (P) Ltd. V. ACIT: (2008) 26 SOT 529 (Bang,) • Reliq Software (P) Limited V. ITO: 125 ITO 101 (Bang.) Besides the above decisions cited in their written submissions, the appellant's AR also brought to my attention the judgement of Hon. Karnataka High Court in the case of Yokogawa India Ltd. : 246 CTR 226 (Kar), wherein this issue has been examined by the Hon. High Court and decided in the favour of the assessee. The AR has argued since the provisions of section 10A are analogous to the provisions of section 10B the ratio laid down by the above said judicial pronouncements are applicable to the appellant's case also. 2.4.5.1 I have perused the judicial pronouncements as relied upon by the Assessing Officer and the appellant. In the case of CIT vs. Himmatsingike Seide Ltd. 286 ITR 255, the assessee had 100% Export Oriented Undertaking eligible for deduction under section 10B of the Act. The undertaking was set up in the assessment year 1988-89. The assessee, however, claimed deduction for five consecutive years from assessment year 1992-93. The year under consideration before the Hon Court was assessment year 1994-95. The assessee had unabsorbed depreciation relating, to the 100% Export Oriented Undertaking carried forward from assessment year 1988-89 to the year under consideration. The said unabsorbed_ depreciation was adjusted by the assessee against certain income from "other sources" and not against the eligible profits of the 100% Export Oriented Undertaking

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and the entire profits from the Export Oriented Undertaking was claimed as exempt from tax. The assessee, by doing so was able to set off the unabsorbed depreciation of the Export Oriented Undertaking against the taxable profits from "other sources", which had the effect of reducing the taxable income to nil. The Hon High Court, after analyzing the entire scheme held that the unabsorbed depreciation of the Export Oriented Undertaking had to be adjusted against the eligible profits before allowing exemption/deduction under section 108 of the Act. The Hon. Court observed that by claiming set off of unabsorbed depreciation of the eligible undertaking against "income from other sources", the assessee had virtually taken exemption from payment of tax even in respect of other business income, which was clearly not permissible. Applied to the present case, it is immediately discernible that the facts of the present case are totally opposite of the facts of the cited case. There is no brought forward unabsorbed depreciation in respect of the 100% EOUs in the present case. In the present case, it is noticed that the question of set off of unabsorbed deprecation brought forward from earlier year(s) prior to claiming deduction under section 108 of the Act would not arise since the unabsorbed depreciation of Rs.13,90,60,056 carried forward from assessment year 2005-06 related to undertakings not eligible for deduction under section 10B of the Act during the year under consideration. This fact clearly establish that unabsorbed depreciation brought forward actually pertained to the non-eligible unit and not to the eligible unit(s) and therefore, the question of set off of such unabsorbed depreciation prior to claiming deduction under section 10B of the Act in my view does not arise at all. I agree with the contention of the appellant that facts of the instant case are distinguishable from the facts of the cited case and hold that the decision of Hon. Karnataka High Court in the case of Himmatsingkie Siede Ud.(supra) is not applicable in the present case and that the reliance placed by the Assessing Officer on that case is somewhat misplaced. 2.4.5.2 In the case of Scientific Atlanta India Technology (P) Limited: 38 SOT 252 I 129 TTJ 273 as relied upon by the appellant, it has been held by the Special Bench of the Tribunal as under: “Under the scheme of the Act the profits of the unit eligible for deduction under section 10A of the Act," would form part of the income computed under the head "Profits and gains of business and profession". However, in order the same will not suffer tax deduction will have to be made -in respect of such profits while computing the income under the head "Profits and gains of business and profession". In other words, a deduction in respect of profits eligible under section 10A is

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required to be made at the stage of computing the income under the head' "Profits and gains of business or profession". Thus, we find that what is contemplated by the Legislature is that profits and gains of the undertakings from the export of articles or things or computer software are to. be deducted computing the profits and gains of business or profession (at hundred per cent upto assessment year 2002-03 and ninety per cent thereafter). Even though it is a deduction to be Given, it is to be deducted while arriving at the profits of business and profession and not from the gross total income as envisaged under Chapter VI-A. Thus,-we hold that deduction under section 10A under Chapter III of the IT. Act is to be granted while computing the profits and Gains of business and profession itself and not from the gross total income………………… . 25. Having held that the claim under section 10A is only deduction and the same is not subjected to section 80AB of Chapter VI-A, now, let us consider whether the deduction so to be given under section 10A is undertaking specific or otherwise. 26. It can be noticed from the language of section 10A(1) that a deduction of such profits and gains that as are derived by "an" undertaking 'qualifies under section 10A is to be given from the total income. Interestingly, the Legislature has mentioned the profits and gains as are derived by an undertaking. It means that. the assessee may have more than one undertaking and in such a case, one has to consider the profits and gains of that "particular undertaking" which qualifies for deduction under section 10A. According to section 10A(4), the deduction is to be computed in the same proportion which bears to the profits of the undertaking, the same proportion as the export turnover bears to the total turnover. It may be noticed that again the words used are "Profits and gains of business of the undertaking". In any case, this is not the total profits of the business of the assessee. Thus in computing deduction under section 10A we have to ascertain the total income as per the provisions of the Act in respect of "that undertaking" and the amount so determined is to be reduced from the total income . 27. Having held that the deduction under section -10A is not an exemption but only a deduction under Cbepter III of the Income-tax Act and the provisions of section 8OAB of Chapter VIA would not be applicable to such deduction under section 10A, and also that the deduction under section 10A is undertaking specific, we have to answer the question posed before us by holding that the business losses are non-eligible unit, whose income is not eligible for deduction under section 10A of the Act, cannot be set off against the profits of the

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undertaking eligi61e for deduction under section 10A for the purpose of determining the allowable deduction under section 10A of the Act. Of course, if there are more than one undertaking which is eligible for deduction under section 10A and if some of the units have profit and other units have loss, it would be an entirely different case which is before us. Hence, the decision rendered in this appeal would not-be applicable to such cases where there are more than one eligible undertaking claiming deduction under section 1OA. In this case, there is only one eligible unit claiming deduction under section 10A and hence, the loss from non-eligible unit cannot be set off against the profits of the eligible unit while determining deduction under section 1OA.II (emphasis supplied) 2.4.5.3 In the case of ACIT v. Yokogawa India Ltd.: 111 TTJ 548 the Bangalore Bench of Tribunal held that deduction under section 10A shall be allowed from the profits of eligible undertaking without setting off the losses or carry forward losses of other non-eligible divisions. This decision was subjected to appeal u/s 260A by the Revenue and the Hon. High Court of Karnataka has given its verdict in ITA No. 78/2011 dated 9th August 2011, reported in 246 CTR 226(Kar) in a combined order in respect several other cases, a copy of which has been furnished by the AR of the appellant. From a perusal of this judgement, it is seen that the Hon. High Court has answered the question as to whether the profit of eligible undertaking for the purpose of allowing deduction u/s 10A of the Act (which is analogous to section 108) at the source itself or after deduction of unabsorbed brought forward depreciation, in favour of the assessee. The Hon. Court while upholding the contention of the assessee that deduction u/s 1OAwas to be allowed at the source itself observed as under:

"12. A literal reading of the above provision requires deduction from the total income. There can be deduction in computing the 'tote! income. However, there cannot be deduction from the total income which is the final result of the computation process. The language adopted in section 1O-A is different from the one adopted in section 80 -A. Section 10 -A provides for deduction from the total income. In the scheme of the Act, while- various deductions are allowed –in computing the total income once the total income is computed, no further adjustments to the total income is envisaged. The scheme of the Act provides for deductions in computing the total income but no mechanism for any deduction from the total income already computed is provided under the Act. Once the total income is computed, the next step is determination of the tax by applying applicable rates on the total income ........ . .

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total income, it could have placed the same in Chapter- Vl(A) which houses the section like 80-HHC 80-IA.etc. The Parliament was aware of the various restriction and limiting provisions like section 8OA and section 80AB which Was in Chapter VI-A which do not appear in Chapter-III. The fact that even after its recast the relief has be-en retained in Chapter 11/ indicates that the intention of Parliament is to regard it as an exemption and not a deduction. The Act of the Parliament in consciously retaining the section in Chapter 11/ indicates its intention that the nature of relief continues to be an exemption. The Parliament despite being conversant with the implications of this Chapter has consciously chosen to retain section 10A in Chapter III. 17. If section 10A is to be given effect to as a deduction from the total income as defined in section 2(45), it would mean that section 10A is to be considered after Chapter VI-A deductions have been exhausted. The deductions under Chapter VI-A are to be given from out of the gross total income. The term "gross total income" is defined in section 80B(5) to mean the total income computed in accordance with the provisions of the Act, before making any deduction under this Chapter. As per the definition the gross total income, the other provisions of the Act will have to be first given effect to. There is no reason why reference to the provisions of the Act should not include section IDA. In other words, the gross total income would be arrived at after considering section 10A deduction also. Therefore, it would be inappropriate to conclude that section 10A deduction is to be given effect to after Chapter VIA deductions are exhausted. 18. It is after the deduction under Chapter VI-A that the total income of an assessee as arrived at. Chapter VI-A deductions are the last stage of giving effect to all types of deductions permissible under the Act. At the end of this exercise, the total income is arrived at. Total income is thus, a figure arrived at, after giving effect to all deductions under the Act. There cannot be any further deductions from the total income as the total income is itself arrived at after all deductions. 19. From the aforesaid discussion, it is clear that the income of 10A unit has to be excluded before arriving at the gross total income of the assessee. The income of 10A unit has to be deducted at source itself and not after computing the gross total income. The total income, used in"'the provisions of section IDA in this context means the global income off the assessee and not the total income as defined in section 2(45). …………………………………. 27. Form No.1 read with Rule 12 of the Income Tax Rules, 1962 provides for return of income and return of fringe benefits.

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deduction u/s 10B accordingly. This disposes off Ground Nos. 1, 2 & 3. (Allowed)

8.5 We find that following grounds were raised in assessment at 2006-07: “1. Whether on the facts and circumstances of the case, the Ld. CIT(A) has erred in not appreciating the fact that all the different units of the assessee company are not operating in isolation as alleged by the assessee, but as difference branches of the same tree.

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8.6 In view of the identical grounds raised in the year under consideration and identical facts and circumstances, we allow the claim of the deduction of the assessee under section 10B of the Act and dismiss the ground No. 1 to 1.5 and 2 of the appeal of the Revenue. 9. The Ground Nos. 3 and 4 of the appeal of the Revenue relate to one-time lease rental charges paid by the assessee to Greater Noida Industrial Development Authorities (GNIDA) for taking plot of land on lease for development of IT Park for a period of 90 years. 9.1 The facts qua the issue in dispute that the assessee had taken on lease plot No. 2A at sector Techzone (IT Park) situated in GNIDA, Gautam Buddhnagar (UP). The deed of lease was executed on 12/01/2007 for the purpose of construction of the project with integrated, ready to use office space and land and social infrastructure so as to develop IT industries and IT enabled services (i.e. SEZ) in Greater Noida. The assessee was obliged under the lease deed to complete the construction of the whole project and facilities within seven years from the date of the execution of the lease deed according to the layout in the building plan to be approved by the GNIDA. The lease term is of 90 years commencing from 12/01/2007 with the right of the GNIDA

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reserved. In accordance with the terms of lease agreement dated 12/01/2007 entered into between the assessee and the GNIDA , the assessee had option to either pay (a) the advanced annual rent on yearly basis or (b) commuted one time lease for the period of the lease, and no lease rent would be payable by the assessee during the lease period as chargeable from the date of executation of the lease deed. The assessee opted second option and paid commuted one time lease rent of ₹ 77,98,042/- and claimed the same as revenue expenditure. 9.2 According to the Assessing Officer, the said lease rental charges being of enduring nature, are capital expenditure not allowable under section 37(1) of the Act. 9.3 On further appeal, the Ld. CIT(A) held that the expenditure incurred is not in the capital field, therefore following the judicial precedent on the issue , allowed the claim of the assessee 9.4 The learned Departmental Representative relied on the order of the Assessing Officer and submitted that lease rentals has been paid for the periods of 90 years, and this expenditure being of enduring nature, the Assessing Officer was justified in treating the expenditure as capital expenditure. 9.5 The learned counsel of the assessee, on the other hand, relied on the order of the Ld. CIT(A) and the judicial precedents relied upon by him. The Ld. Counsel also relied on the decision of the Hon’ble, Karnataka High Court in the case of CIT Vs HMT, 203 ITR 820 where the premium of ₹ 12,09,200/- paid by the assessee to acquire land on lease for 95 years was held as revenue expenses because the annual rent was only one rupee and the premium paid was nothing but “advance rent”. The

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landed Counsel of the assessee also relied on the decision of the Hon’ble madras High Court in the case of CIT Vs Gemini Arts (P) Ltd 254 ITR 201 . 9.6 We have heard the rival submission and perused the relevant material on record. The assessee has filed a copy of the lease deed under reference. In terms of the lease deed, the assessee has made following payments to GNIDA: one-time lease premium of ₹ 2,83,56,515/- (a) commuted one time lease rent of ₹ 77,98,042/- (b)

9.7 As far as payment of one-time lease premium is concerned, the assessee has capitalized the said amount in its books of accounts. The Ground No. 4 of the appeal of the Revenue is factually incorrect because the premium has already been capitalized by the assessee and the issue in dispute is only in respect of the commuted one timely lease rent. 9.8 The Ld. CIT(A) after considering the decisions on the issue of when a particular expenditure has to be considered as capital expenditure, in the case of Empire Jute Co. Vs CIT 124 ITR 1 (SC); Lakshmiji Sugar Mills Co P Ltd Vs CIT 82 ITR 376 (SC) and Madras Auto Services (P) Ltd 233 ITR 468 (SC) allowed the claim of the assessee observing as under: “8.5.2 The appellant submitted that it had claimed deduction of Rs.77,98,042 on account of payment of commuted lease rentals to Greater Noida Authority for Plot No. 2A taken on lease situated in Greater Noida Industrial Development Area District, Gautam Budh Nagar. The appellant had the option to either pay (a) the advance annual rent on yearly basis ; or (b) commuted one time lease rent for the period of lease and no lease rent would be payable by the appellant during the lease period. The appellant opted for option (b). The deed of lease was executed on 12th January, 2007. The lease term is of 90 years commencing from 12th January, 2007, with the right of the Greater Noida Industrial Development Authority

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reserved. It is submitted that the appellant under the lease deed with the Greater Noida Industrial Development Authority has agreed to develop SEZ in Greater Noida by constructing the project with integrated, ready to use office space and land and social infrastructure, etc. The appellant is obligated under the lease deed to complete the construction of the whole project and facilities within 7 years. It is submitted that the object and purpose of such lease deed, is only to facilitate IT Industries and IT enabled services and expansion of the business of the appellant. That apart from the aforesaid benefit, which is in the revenue field, there is no advantage in the capital field as there is no acquisition of any capital asset inasmuch the plot of land is not under the ownership of the appellant and remains the property of Greater Noida Industrial Development Authority. It is submitted that payment of commuted lease rentals did not result in creation of a capital asset having enduring benefit in the capital field. The amount in question was essentially revenue expenditure allowable deduction.

8.5.3 Hon’ble Supreme Court in the case of Empire Jute Co. v CIT: 124 ITR 1, held that the test of enduring benefit is not certain or conclusive test in determining whether the expenditure is capital or revenue in nature and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. The Supreme Court further laid down that what is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future.

8.5.4 In the case of Lakshmiji Sugar Mills Co. P. Ltd. v. CIT : 82 ITR 376, Hon’ble Supreme Court held that the contribution made by the assessee under a statutory obligation for the development of roads which were originally the property of the Government and remained so even after the improvement had been done, being expenditure incurred for running of the business efficiently and conveniently and not for acquiring a capital asset was of revenue nature and not of a capital nature.

8.5.5 In the case of Madras Auto Service (P) I imited (233 ITR 468) the assessee tenant had spent the amounts in question in order to construct a new building after demolishing the oid building. The new building, however, from inception was to belong to the lessor and not to the assessee. The assessee, however, had the benefit of the

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existing lease in respect of the new building at the agreed rent for a period of 39 years The assessee claimed deduction for the entire amount spent on construction of the building as revenue expenditure. Hon’ble Supreme Court in the said case observed:

“In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view. What advantage did the assessee get by constructing a building which belonged to somebody else and spending money for such construction? The assessee got a long lease of a newly constructed building suitable to its own business at a very concessional rent. The expenditure, therefore, was made in order to secure a long lease of new and more suitable business premises at a lower rent. In other words, the assessee made substantial savings in monthly rent for a period of 39 years by expending these amounts. The saving in expenditure was a saving in revenue expenditure in the form of rent. Whatever substitutes for revenue expenditure should normally be considered as revenue expenditure. Moreover, the assessee in the present case did not get any capital asset by spending the said amounts The assessee, therefore, could not have claimed any depreciation. Looking to the nature of the advantage which the assessee obtained in a commercial sense, the expenditure appears to be revenue expenditure.”

8.5.6 The above decisions of Apex Court are squarely applicable in the case of the appellant. In the case of the appellant, also it did not acquire title / ownership of any capital asset. The plot of land on which construction would be carried on by the appellant under the lease deed of 99 years, would remain the property of Greater Noida Industrial Development Authority at all times. In lieu of incurring the expenditure, the appellant would be entitled to enjoy the property as a tenant under long term lease. Such an advantage even though, enduring in nature, could not be regarded as in the capital field as the expenditure only facilitates the carrying out of business more efficiently and profitably by making available suitable premises for the business of the appellant. The expenditure on account of commuted lease rentals paid by the appellant company has been incurred in respect of premises used wholly and exclusively for the purposes of the business of the company; and the same represents commuted payment in lieu of regular lease rental and hence is in the nature of revenue expenditure. In view of the above, the AO has erred in making the disallowance of the commuted lease rentals. The appeal is allowed in this ground no. 7 of appeal. Since appeal is allowed in ground no. 7 of appeal, therefore, the plea of the

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appellant in ground no. 8 of appeal is infructuous and not necessary to be adjudicated.”

9.9 We find that the Ld. CIT(A) has distinguished the expenditure in the capital field and expenditure incurred only to facilitate the carrying of the business more efficiently and profitably, which is revenue in nature. The one-time premium paid by the assessee has already been considered by the assessee as capital expenditure. The assessee had the option to pay the lease rental on year-to-year basis or as a one-time expenditure. The assessee has substituted the revenue expenditure which was to be paid on year-to-year basis and the nature of the expenditure remained same though it has been paid as a composite payment. Thus, it is clear that the expenditure incurred by the assessee is not capital expenditure. The expenditure was to be incurred on year to year basis for the period of lease of 90 years. The lesser gave the assessee two option. The first option was to pay on year to year basis and claim the same as revenue expenditure. The second option was provided by the lessor was to pay a composite amount for the period of lease as onetime payment. The lessor provided some benefit for making onetime payment. The assessee has chosen the second option and paid the entire lease rent of 90 years as composite onetime payment. Thus, in our opinion, the liability of 90 years has been paid in one year only. In such circumstances, the liability of lease rent relatable to year under consideration would be 1/90th of the amount paid and balance amount would be pre-paid advance rent only. The assessee is entitled to claim 1/90th of the amount every year till the period of lease of 90 years as revenue expenditure. Even according to the

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matching principles of income and expenditure the entire expenditure is not justified for allowance in one year (i.e. the year under consideration) when the income corresponding to expenditure of subsequent years will be reflected in relevant year only. The expenditure not being relatable to the year under consideration cannot be allowed as revenue expenditure in the instant year. For the year under consideration, only 1/90th of the amount of Rs.77,98,042/- has been incurred wholly and exclusively for the purposes of the business for the year under consideration. Accordingly, we allow 1/90th of Rs.77,98,042/- as revenue expenditure in the year and balance be characterized as advance rent in the financial statement as on 31.03.2007. Accordingly, the Ground Nos. 3 & 4 of the appeal of the Revenue are partly allowed. 10. Now, we take up the appeal of the assessee and Revenue for assessment year 2008-09 bearing ITA No. 5525/Del/2013 & 5492/Del/2013 respectively. 11. The grounds raised by the assesssee and the Revenue in their respective appeals are reproduced as under: Grounds of appeal of the assessee: 1. That the Commissioner of Income-Tax (Appeals) erred on facts and in law in upholding disallowance of Rs. 44,00,739/-, claimed under section 35DD of the Income Tax Act, 1961 (“the Act”) in respect of 1/5th of demerger expense incurred by the appellant. 1.1 That the Commissioner of Income-Tax (Appeals) erred on facts and in law in holding that in terms of Section 35DD of the Act, demerger expenses are allowable only in the hands of the demerged company and not in the hands of the resultant company. 1.2 That the Commissioner of Income-Tax (Appeals) failed to appreciate that the claim of appellant was sustainable in law inasmuch as the Appellant had fulfilled all the conditions for claiming deduction under section 35DD of the Act.

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Grounds of appeal of the Revenue: 1. On the facts & in the circumstances of the case and in law, the Ld. CIT (A) has erred in allowing the deduction claimed by the assessee u/s 10B of the Act by not appreciating the fact that all the different units of the assessee company are not operating in isolation as alleged by the assessee, but as different branches of the same tree.

1.1 On the facts & in the circumstances of the case and in law, the Id.CIT(A) has erred in not appreciating the fact that the assessee is maintaining single books of accounts for all units i.e. those which are covered for deduction, as well as those which are not covered for deduction. It is only for the purpose of computing deduction u/s 10B that the assessee has tried to allocate the expenses between these units and compute their profits.

1.2 On the facts & in the circumstances of the case and in law, the Id.CIT(A) has erred by holding that independent books of accounts are not required to be maintained under the provisions of section

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10B of the I T Act, since the language of form 56G starts with "I/we have examined the accounts and records " which makes it clear that the assessee has to maintain separate books of accounts. The annexure "A" of Form 56G also requires the details of total profit of the business etc. & keeping in view of the aforesaid facts, it is clear that the assessee was required to maintain separate books of accounts. 1.3 On the facts & in the circumstances of the case and in law, the Id. CIT(A) has erred in not considering the whole provisions laid down by the Board in Para 2(v) of the circular 1/2013 dated 17.01.2013, where in it is specifically mentioned that the AO, if requires can call for the separate books of accounts of all the units for which deduction u/s 10B is claimed.

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is partly allowed but the appeal of Revenue for assessment year 2008-09 is dismissed. Order is pronounced in the open court on 28th January, 2020.

Sd/- Sd/- (BHAVNESH SAINI) (O.P. KANT) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: 28th January, 2020. RK/-(D.T.D.) Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR

Asst. Registrar, ITAT, New Delhi