ACIT, NEW DELHI vs. M/S. PEPSICO INDIA HOLDINGS PVT. LTD., GURGAON

Brief facts of the case are that assessee is in the business of manufacturing and trading of snacks, aerated and non-aerated beverage products and export and trading of such products. For the assessment year 2008-09 it had filed its return of income on 30/9/2008 showing the total income as nil after setting off brought forward depreciation/loss of Rs. 1,01,40,76,789/-under the normal provisions of the Income Tax Act, 1961 (for short “the Act”) and Rs. Nil under section 115 JB of the Act after setting off lower of the brought forward depreciation/business loss, profits. Assessee revised the return on 1/9/2009 declaring a total income of nil after setting off brought forward depreciation/loss of Rs.104,75,87,646/-and also nil under section 115JB of the Act. Assessment was complete by order dated 30/12/2011 under section 143(3) of the Act after making several additions which includes, for the purpose of these appeals, Rs. 4,67,23,766/-under section 14A of the Act read with Rule 8D of the Income Tax Rules1962 (“the Rules”), disallowance on account of provision for leave encashment and provision for gratuity while computing the book profits u/s. 115JB of the Act, disallowance on account of furnishing expenses of Tropicana beverage merger, disallowance of excess depreciation on computer peripherals, disallowance of depreciation on non-compete fees under normal computation and the disallowance of depreciation on account of merger with the Tropicana beverage company under normal computation.

Aggrieved by such additions assessee preferred appeal before the Ld. CIT(A). Ld. CIT(A) by way of impugned order gave partial relief to the assessee while sustaining certain additions. Hence, both the assessee and the Revenue are in these appeals before us.

Though the assessee preferred several grounds, at the time of arguments submitted that grounds No. 7 and 8 are not pressed. Grounds No. 1, 2, 4, 5 and 6 related to the disallowance under section 14A of the Act read with Rule 8D of the Rules under normal provisions of the Act; whereas ground No. 3 is the challenge to such a disallowance under section 14A of the Act read with Rule 8D of the Rules under section 115JB of the Act.

Insofar as the addition under section 14A of the Act read with Rule 8D of the Rules under normal provisions of the Act is concerned, the submission on behalf of the assessee is that the assessee had not incurred any expenditure in relation to dividend income, but sue moto the assessee had disallowed a sum of Rs. 1,01,36,427/-under rule 8D(2)(iii) of the Rules, whereas the learned Assessing Officer made an addition under rule 8D(2)(ii) of the Rules also to the tune of Rs.4,49,72,528/-and under rule 8D(2)(iii) of the Rules to the tune of Rs.1,18,87,665/-which came to Rs. 5,68,60,193/-. By reducing such an amount by the sue moto disallowance of the assessee, learned Assessing Officer assessed the total disallowance to the tune of Rs. 4,67,23,766/-. It is further submitted that the Ld. CIT(A) in the impugned order deleted the disallowance under rule 8D(2)(ii) of the Rules but sustained the disallowance under rule 8D(2)(iii) of the Rules.

Ld. AR further submitted that during the year the total exempt income earned by the assessee was only Rs.37,13,348/-. According to the Ld. AR the disallowance cannot exceed the exempt income. For this proposition Ld. AR placed reliance on the decision of the Hon’ble jurisdictional High Court in the case of Joint Investments Private Limited vs. CIT (2015) 59 taxmann.com 295 (Delhi) and also the Tribunal’s decision in assessee’s own case for the assessment year 2006-07 in by order dated 02/06/2016.

There is no dispute as to the quantum of the dividend earned during the year and it is Rs.37,13,348/-. In Joint Investments Private Limited (supra), Hon’ble jurisdictional High Court held that where the assessee declared tax-exempt income and voluntarily disallowed a certain expenditure under section 14A, in the absence of any reason why the assessee’s claim for disallowance under section 14A had to be rejected, learned Assessing Officer was not justified in computing the disallowance. It is further held that by no stretch of imagination can section 14A of the Act read with Rule 8D of the Rules be interpreted so as to mean that the entire tax exempt income is to be disallowed, the window for disallowance is indicated in section 14A and is only to the extent of disallowing expenditure “incurred by the assessee in relation to the tax exempt income”, and this proportion are portion of the tax exempt income surely cannot swallow the entire amount.

Further in assessee’s own case, a coordinate Bench of this Tribunal held that the disallowance in any case cannot exceed the exempt income. Ld. DR does not dispute this proportion of law as laid down by the Hon’ble High Court and in a number of decisions by the coordinate benches of this Tribunal. We, therefore, while respectfully following the same answer the issue in favour of the assessee and allow ground No. 1, 2 and 4 to 6.

By way of ground No. 3, assessee challenged the disallowance under section 14A of the Act read with Rule 8D of the Rules. While computing the profits under section 115JB of the Act and while placing reliance on the decision of the special Bench of this Tribunal in the case of ACIT vs. Vireet Investment (P) Ltd reported in (2017) 82 taxmann.com 415 (Delhi-Trib.) (SB) it is submitted by the Ld. AR that the disallowance under section 14A of the Act read with Rule 8D of the Rules cannot be added while computing profit as per section 115JB as Explanation 2to that section does not specifically mentions section 14A of the Act, and therefore, no disallowance can be made under section 14A of the Act while computing book profits under MAT provisions.

InVireet Investment (P) Ltd (supra), the Special Bench dealt with this aspect at length and held that the computation under clause (f) of explanation 1 to section 115 JB (2) is to be made without resorting to the computation as contemplated under section 14A of the Act read with Rule 8D of the Rules. There is no dispute on this proposition. We therefore, while respectfully following the said decision answer the issue in favour of the assessee.

In Revenue’s appeal, grounds No. 1 and 8 are general in nature. Ground No. 2 relates to the deletion of the disallowance on account of provision for leave encashment and provision for gratuity while computing the profits under section 115 JB of the Act.

It could be seen from the assessment order that during the year under consideration the assessee created provision for gratuity to the tune of Rs. 11,30,68,439/-and for leave encashment to the tune of Rs.64,21,504/-and submitted that the provision for gratuity and leave encashment was created scientifically on the basis of actuarial valuation and were, therefore, in the nature of ascertained liability and placed reliance on the decision of the Hon’ble Apex Court in the case of Bharat Earth movers vs. CIT 245 ITR 428 (SC) and a Metal Box Company of India Ltd vs. Their Workmen (1969) 73 ITR 53 (SC).

Learned Assessing Officer however was of the opinion that the assessee had equated an unascertained liability with contingent liability and actuarial valuation relied upon by the assessee to calculate the liability on account of gratuity is subject to a number of conditions and is largely based on estimates and presumed figures, the basis of calculation might be scientific but this does not make it an actual/ascertained liability. According to the learned Assessing Officer even if an amount is at all required to be set-aside for meeting liabilities in future, the same can be done by creating a reserve rather than creating a provision which is directly charged to the taxable profit. Learned Assessing Officer, therefore, brought these amounts to tax.

At the outset, Ld. AR submitted that the Assessing Officer had accepted that the basis of calculation was scientific, but it was still held that the same is not an actual/ascertained liability. He submitted that a similar issue had arisen in assessee’s own case for the assessment year 2002-03 in and 2003-04 in ITA No. 936 /Del/ 2012; that the matter was restored back to the learned Assessing Officer to verify actuarial valuation, and the learned Assessing Officer after verifying the actuarial valuation report allowed the claim of the assessee. He further submitted that similar was the case in respect of the assessment year 2005-06 in ITA No. 822/del/2004 when the coordinate Bench of this Tribunal remanded the issue to the file of the learned Assessing Officer.

This fact is not controverted. We have gone through the orders are cited by the Ld. AR. In assessee’s own case for the assessment year 2005- 06 in also the Tribunal dealt with this issue in the light of the view taken for the earlier years to remand issue to the file of the learned Assessing Officer for verification of the actuarial valuation. Relevant observations of the Tribunal read thus,-

Ground 3 of Revenue’s appeal is covered by our discussion on grounds No. 1, 2 and 4 to 6 of assessee’s appeal and in view of the same we dismiss the Revenue’s ground.

Ground No. 4 of Revenue’s appeal related to the disallowance on account of unfurnished expenses of Tropicana Beverage Manager. It could be seen from the impugned assessment order that during the year M/s Tropicana Beverages Company (TBC) has merged with/amalgamated with the assessee company w.e.f. 1/4/2007 and while filing the original return of income a sum of Rs.15,37,72,000/-was claimed towards expenses relating to TBC and added back, whereas in the revised income the same was not so added back. Assessing officer was of the opinion that such an expenditure pertains to/incurred for the purpose of amalgamation/merger of the two entities, and therefore, the same has to be capitalised and only 1/5 thereof has to be allowed as per the provisions of section 35DD of the Act. On this premise learned Assessing Officer added back the 4/5ths of Rs.15,37,72,000/-which comes to Rs.12,30,17,600/-to the income of the assessee.

According to the assessee these expenses related to the operation of M/s Tropicana Beverages Company and after the merger, the assessee claimed the same as a deduction under section 37 of the Act. Assessee submits that this expenditure was not, as held by the learned Assessing Officer, incurred for the purpose of amalgamation. The counsel argued that pursuant to the merger, profits made by the Tropicana beverages were included in the profits of the assessee and true disclosure thereof was made in scheduled 16 of the financials. He further submitted that the expense disallowed by the Assessing Officer represent the expense incurred by the assessee on behalf of Tropicana Beverages and was so disclosed in the P&L Account, but the learned Assessing Officer wrongly concluded that these expenses are in the nature of amalgamation expenses.

On this aspect, Ld. CIT(A) while dealing section 35DD of the Act gave a finding that unless and until the expenditure was incurred wholly and exclusively for the purpose of amalgamation, such a section has no application. He further recorded that without giving any finding as to the nature of expenditure to say that it was pertaining to the amalgamation/merger and was not a regular business expenditure, invocation of the provisions of section 35DD of the Act is bad.

Before usalso, the assessee argued that the expenditure was for day-to-day business activities as could be seen from the financials of the assessee. Our attention is drawn to schedule 16: notes to the accounts at page No. 57 of the paper book where it is stated that the transactions including income and expenses for the year ended 31st of March 2008, when the transferor company was being run and managed in trust by the transferee company has also been incorporated in these accounts. The details of such income and expenditure are shown. On a perusal of the details we are of the considered opinion that the sum of Rs.12,30,17,600/-does not relate to the amalgamation expenses and on the other hand they represent the expenses incurred by the assessee on behalf of Tropicana Beverages and were disclosed in the profit and loss account. We, therefore, do not find any perversity in the findings of the Ld. CIT(A) and, accordingly, decline to interfere with the same on this aspect. Ground No. 4 of Revenue is accordingly dismissed.

Ground number 5 of Revenue’s appeal involves the disallowance of excess depreciation on computer peripherals. During the assessment proceedings learned Assessing Officer noticed that a number of items like project, Cabinet, battery, RSA token EPBAX, air conditioner, photocopier, switch, UPS, storage, printer etc were added to the block of assets and the depreciation was claimed it 60% though they form part of their office equipment/furniture and fittings. Learned Assessing Officer therefore disallowed the claim of depreciation to the tune of Rs. 42,24,297/-in respect of such items the value of which was 93, 87, 327/-.

While inviting our attention to page No. 71 of the paperbook, it is submitted by the Ld. AR that the assessee originally claimed the depreciation in respect of UPS, printer, project, Cabinet and air conditioner to the tune of Rs. 48,71,847/-but the Assessing Officer considered the UPS, printer, projector and the Cabinet worth Rs. 35,61,885/- as office equipment whereas the assessee sue moto admitted Cabinet and air conditioner to be the part of office equipment and its value is Rs. 1,05,870/-in respect of which a disallowance of Rs. 47,642/-alone could be made.

On a perusal of the details furnished as to the additions made in the block of computers and computer peripherals, we find that such addition was in respect of UPS, printer, projector, Cabinet and air conditioner, out of which the assessee sue moto admits that Cabinet and air conditioner do not form part of the computer peripherals whereas other items, namely, UPS, printer and projector are certainly computer peripherals and admissible for 60% depreciation in view of the decisions of the Hon’ble Apex Court in the case of CIT vs. M/s Birlasoft Ltd in appeal No. 2645/2012 and the decision of the Hon’ble jurisdictional High Court in the case of CIT vs. BSES Rajdhani powers Ltd (Delhi High Court) in ITA No. 266/2010.

In the circumstances we uphold the contention of the assessee that UPS, printer and projector form part of the computer peripherals and direct the Assessing Officer to recomputed the depreciation in respect of these 3 items at 60%. Ground number 5 is answered accordingly.

We have gone through the details of the noncompete fees incorporated at page No. 70 of the paper book which clearly reveals that for the earlier years, namely, 2005-06 to 2007-08 the Revenue accepted the depreciation claimed at Rs. 63,54,176/-, Rs. 47,65,632/-, and Rs.35,74,224/-, but in respect of the assessment year 2008-09 the depreciation on the capitalised noncompete fee claimed that Rs.26,80,668/-was disallowed. Reasoning given by the Assessing Officer to disallow this claim is that the issue hinges around the interpretation of the phrase “business or commercial rights of similar nature” used in clause (ii) of section 32, and a careful reference to the language of the provisions in section 32 makes it clear that all the specific awards that a preceding general words “business or commercial rights of similar nature” are related to a class of rights which are intellectual property rights whereas the alleged payment is for noncompete fee. Further, according to the learned Assessing Officer the right to noncompete acquired by the assessee is only a right in personam and therefore the assessee is not entitled to claim depreciation on the noncompete fee. Learned Assessing Officer does not refer to any change of circumstances from the earlier years so as to deviate from the view that was taken for earlier years. We therefore do not find anything illegality or irregularity in the Ld. CIT(A) following the view taken for the earlier years under identical circumstances. Ground No. 6 is accordingly devoid of merits and is dismissed.

Ground No. 7 relates to the disallowance of depreciation on account of merger with the Tropicana Beverages Company under normal computation. On this aspect, Ld. AR submitted before the Ld. CIT(A) that this is an inadvertent mistake crept into record because instead of considering the amount of depreciation appearing in the revised tax audit report learned Assessing Officer relied on the original tax audit report for computing the depreciation amount under the provisions of the Act. Ld. CIT(A) considering the revised tax audit report, directed the Assessing Officer to verify the record and allow depreciation as per the tax audit report filed pursuant to merger of Tropicana Beverages Company with the assessee.

From the impugned assessment order, we find that on noticing the chart of depreciation as per income Tax Act, 1961 duly certified by the auditor which shows the amount of depreciation at Rs. 1 22, 63, 09, 689/- as against the amount of depreciation of Rs. 1 22, 82, 86, 789/-directed in the revised computation of income, learned Assessing Officer brought the difference of depreciation to tax. Ld. CIT(A) considered the original tax audit report and the revised tax audit report and directed the Assessing Officer to verify from the records and allow depreciation as per the tax audit report that was filed pursuant to the merger of Tropicana Beverages Company with the assessee. We do not find any reason for grievance of the Revenue on this aspect, because the Ld. CIT(A) did not delete addition and on the other hand she rectified the apparent mistake committed by the learned Assessing Officer. We therefore decline to interfere with the findings of the Ld. CIT(A) and dismiss ground No. 7.

In the result, appeal of the assessee in is allowed and appeal of the Revenue in is allowed in part for statistical purpose.