M/S. NEW CITY OF BOMBAY MFG. MILLS LTD.,MUMBAI vs. ACIT, NEW DELHI

Date of hearing 28.03.2019 Date of pronouncement 04.04.2019 ORDER PER O.P. KANT, A.M.: This appeal by the assessee is directed against order dated 29/08/2014 passed by the Ld. Commissioner of Income-tax (Appeals)-XVI, New Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2011-12, raising following grounds:

1. That the Ld. AO has erred in making the addition of Rs. 5,64,407/- u/s 14A of the Income Tax Act, 1962 without appreciation the explanation made by the assessee and facts of the case and the Ld. CIT(A) has also erred in confirming the same. Thus, the disallowance of expenses of Rs.5,64.407/- may please be deleted.

2. That the Ld. AO has erred in disallowing the lease deed registration charges of Rs. 12,08,891/- claimed by the assessee company during the relevant assessment year without appreciating the facts of the case & explanation made by the assessee and the Ld. CIT(A) has also erred in confirming the same. Thus, the disallowance of Rs. 12,08,861/- may please be deleted.

3. The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal.

2. Briefly stated facts of the case are that the assessee is a joint-venture company having 51% shareholding of National Textile Corporation (NTC) i.e. the government of India undertaking under the Ministry of Textile and 49% shareholding of M/s Alok Industries Limited. The assessee was engaged in the business of trading and manufacturing of garment and designing activity. The ‘NTC’ provided its land and existing structure thereon in Mumbai to the assessee at annual lease premium of Rs.100/p.m. for a period of 33 years and according to the terms of the lease agreement, all the stamp duty and registration charges were to be borne by the assessee. Further, a share subscription and shareholder agreement was entered into among 1. NTC, 2. Alok Industries Limited (strategic partner), and 3. New City Bombay Manufacturing Mills Ltd. (i.e. the assessee). According to clause 4.6(ii) of this Tripartite Agreement, the strategic partner was required to subscribe share at premium of Rs.112.40 per share aggregating to Rs. 55 crore and also lease deed charges were to be borne by the strategic partner and for that the strategic partner was to bring in additional amount in to the company for making such payments which would be considered a share premium for subscribing the shares by the strategic partner.

3. For the year under consideration, the assessee filed return of income on 28/09/2011 declaring total income of Rs.7,38,71,310/-. The case was selected for scrutiny and notice under section 143(2) of the Income-tax Act, 1961 (in short ‘the Act’) was issued and complied with. In the assessment completed, the Assessing Officer made disallowance of expenses under section 14A of the Act, amounting to Rs.5,64,407/- and disallowance of lease deed and registration charges of Rs.12,08,861/-. Aggrieved the assessee filed appeal before the Ld. CIT(A), however, could not succeed and, thus, it is before the Tribunal by way of raising grounds as reproduced above.

4. In gound No.1, the assessee is agitated with the diallowance of Rs.5,64,407/-made by the Assessing Officer under section 14A of the Act. 4.1 Before us, the Ld. counsel of the assessee submitted that the assessee has sold entire investment in mutual funds, shares etc and there was no closing balance. According to the Ld. counsel, in absence of any closing stock of investment, the lower authorities were not justified in invoking Rule 8D(2)(iii) of Income- tax Rules, 1962 (in short ‘the Rules’). 4.2 On the contrary, the Ld. DR relied on the order of the lower authorities and also cited the decision of Hon’ble Supreme Court in the case of Maxopp Investment Limited Vs CIT (2018) 91 taxman.com 154 (SC). 4.3 We have heard the rival submission and perused the relevant material on record. The assessee earned dividend income of Rs.39,86,457/-during the year under consideration. At the beginning of the year i.e. 31/03/2010, the assessee was having investment in shares and mutual fund of Rs.22,57,62,768/-. This entire investment in shares and mutual fund was sold during the year under consideration. In the return of income filed, the assessee did not make any suo-motu disallowance in respect of expenditure incurred in relation to exempt income under section 14A of the Act. According to the Assessing Officer, considering the investment in shares and mutual fund and sale of the same during the year under consideration, some managerial and administrative expenses could not be ruled out. The Ld. CIT(A) has observed that it is inevitable that official machinery was used by the assessee while making above investment and overhead expenses such as Establishment and administrative expenses, expenses incurred in using the official machinery, salaries to the top management that takes investment decision, expenditure on board level meeting related to investment decision etc were also attributable to the tax-exempt income as a whole. The Ld. CIT(A) observed that such expenditure are not segregated in the accounts of the assessee and they are being incurred to earn both tax-free and tax-exempt income. In view of the above, he upheld the action of the Assessing Officer of disallowing amount of Rs.5,64,407/-under rule 8D(2)(iii) of the Rules. In our opinion, the Assessing Officer has duly recorded dissatisfaction as to the accounts of the assessee of claim of no expenditure incurred in relation to exempt income. Further the contention of the Ld. counsel that in absence of any closing stock, no disallowance could be made under rule 8D(2)(iii) of the Rules is without any basis and same cannot be accepted. The Ld. Assessing Officer has computed the disallowance according to the formula provided under Rule 8D(2)(iii) of the Rules and wherein if the closing stock is nil, then 50% of the opening stock, becomes the average investment. The Assessing Officer has computed the disallowance in accordance with law. In view of the aforesaid discussion, we do not find any error in the order of the Ld. CIT(A) on the issue in dispute and accordingly we uphold the same. The ground No. 1 of the appeal of the assessee is accordingly dismissed.

5. In ground No. 2, relates to the disallowance of lease deed and registration charges of Rs.12,08,891/-. 5.1 Before us, the Ld. counsel of the assessee filed a paper book containing pages 1 to 104 and submitted that the lease deed registration charges though have been paid to the assessee by the strategic partner, it was responsibility of the assessee as per the agreement between the assessee and M/s NTC. The Ld. counsel referred to relevant paragraph of the lease deed agreement, to emphasize that stamp duty and lease deed registration charges were to be borne by the lessee i.e. the assessee. According to Ld. counsel, it was a revenue expenditure to be allowed in the hands of the assessee. He further submitted that the strategic partner has contributed the said charges by way of additional amount in the form of share premium. According to the Ld. Counsel, the strategic partner has merely reimbursed the cost of expenses to the assessee but incurring expenses was the responsibility of the assessee and thus, it was incurred wholly and exclusively for the purpose of the business and allowable in the hands of the assessee. 5.2 Ld. DR, on the other hand, relied on the order of the lower authorities. 5.3 We have heard the rival submission and perused the relevant material on record. The facts in brief in relation to issue in dispute have already been mentioned in earlier paragraphs.

The learned Assessing Officer has observed that the assessee amortized total stamp duty and lease registration charges of Rs.3,62,65,825/- over the lease period of 33 years and claimed corresponding expenses of Rs.12,08,861 during the year under consideration. According to the Assessing Officer this amount was in the nature of capital expenditure, whereas according to the assessee, the building premise and land was owned by NTC, and not by the assessee therefore, the stamp duty expenses incurred by the assessee are in the nature of revenue expenditure. We find that the Ld. CIT(A) sustained the disallowance observing as under:

“4.2.1 Ground no. 3 of appeal is directed against disallowing the I.ease deed registration charges of Rs. 12,08.861 /'-. The assessee company had booked expenses on account of lease deed registration charges amounting to Rs. 12,08,861/- in the P&L account. AO observed from Schedule 21 of the ‘Notes on Accounts’ that statutory dues of Rs. 3 ,62,65,825/- as per schedule 9 (current liabilities) includes the amount of stamp duty payable of Rs. 3,62,65,825/- which is recoverable from the strategic partner M/s Alok Industries Ltd. as per share subscription and shareholders agreement and the same is to be shown as capital reserve. Therefore, AO held that the same cannot be claimed as revenue expenditure. The above amount was stamp duty' raised by Collector ol Stamps, Mumbai which was amortized by appellant company in 30 years of the lease period and expenditure amounting to Rs. 12,08,861/'- was claimed on this account during the year under consideration. Therefore, the same is disallowed and added back by the AO to the income of the assessee company. 4.2.2 Schedule 21 of the ‘Notes on Accounts’ forming part of the balance sheet in Auditor’s Report says following about Contingent Liability at si. 8 & 9 of the ‘Notes on accounts’:- “8. Contingent Liability Current year Nil Previous year (The company contingent liability on 31.03.2010 is Rs. 3,62,57,800/- towards payment of stamp duty payable on the registration of the lease deed pertains to land and structure there on taken on lease subscription and shareholders NTC Ltd. and Alok Industries Ltd. the amount of the stamp duty will bring in by the strategic partner as additional share premium).

From the above article in the agreement it is ciear that all government and / or statutory duties, stamp duties, cess, liability payable by the appellant company in regard to the completion of transaction and lease deed shall be solely borne by the strategic partner M/s Alok Industry Ltd. which, shall be considered as share premium for subscribing to strategic partner shares. In view of the above it is clear that the liability of stamp duties shall not accrue in the hands of the appellant company but the same shall accrue m the lands of the strategic partner M/s Alok Industry Ltd. Because the tarns of agreement clearly says that all such Government and statutory duties payable by the appellant Company shall be solely borne by the strategic partner. Therefore, no liability arises in the hands of the appellant company on account of the stamp duty paid/payable. In view of the above, the amortised amount of Rs. 12,08,861/- debited in the P&L account of the assessee, is not allowable as revenue expenditure in the hands of the assessee. As such, the disallowance made by the AO is sustained. The appeal fails in this ground.”

5.4 The Ld. CIT(A) has referred to the clause 4.6(ii) of the shares subscription and shareholder agreement entered among, M/s NTC, M/s Alok industries limited (strategic partner) and the assessee company. This agreement has clearly specified that expenses on stamp duty and other charges were to be borne by the strategic partner and said additional amount was to be brought into the assessee company by way of share premium. The assessee also credited the said amount into the reserves of the company. In our opinion, the strategic partner itself has brought the said amount as part of capital contribution and not as reimbursement of revenue expenditure. The expenditure incurred on stamp duty and lease registration charges are evidently are of enduring nature in instant transaction that too are borne by the strategic partner and thus the assessee is not entitled for claiming the same as revenue expenditure. The order of the Ld. CIT(A) on the issue in dispute is well reasoned and we do not find any error in the same, accordingly, we uphold the same. The ground No. 2 of the appeal of the assessee is accordingly dismissed.