DCIT 10(1), MUMBAI vs. INFRASTRUCTURE LEASING & FINANCIAL SERVICES LTD, MUMBAI

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “C”, MUMBAI BEFORE SHRI C.N. PRASAD, HON'BLE JUDICIAL MEMBER AND SHRI G. MANJUNATHA, HON'BLE ACCOUNTANT MEMBER ITA.NOs. 3785 & 3786/MUM/2013 (A.Ys: 2008-09 & 2009-10) M/s. Infrastructure Leasing & v. Addl. Commissioner of Income Tax Range – 10(1) Financial Services Ltd., Room No. 455, 4th Floor The IL & FS Financial Centre Aayakar Bhavan Plot No. C-22, G Block M.K. Road, Mumbai – 400 020 Bandra Kurla Complex Bandra (E), Mumbai – 400 051 PAN: AAACI0989F (Appellant) (Respondent) ITA.NOs. 3699 & 3700/MUM/2013 (A.Ys: 2009-10 & 2008-09) Dy. Commissioner of Income Tax v. M/s. Infrastructure Leasing & Range – 10(1) Financial Services Ltd., Room No. 455, 4th Floor The IL & FS Financial Centre Aayakar Bhavan Plot No. C-22, G Block M.K. Road, Mumbai – 400 020 Bandra Kurla Complex Bandra (E), Mumbai – 400 051 PAN: AAACI0989F (Appellant) (Respondent) Assessee by : Shri Sandeep Bhalla & Shri Prashant Bhojwani Department by : Shri Awangshi Gimson

Date of Hearing : 19.11.2019 Date of Pronouncement : 28.11.2019

2 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., O R D E R PER C.N. PRASAD (JM)

3 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 5. On the facts and circumstances of the case the Learned Commr. of Income Tax (Appeals) has erred in confirming the disallowance of depreciation on the Toll Road amounting to Rs.3,16,705/-. 6. On the facts and circumstances of the case the appellant submits that they have not received any income in respect of the Toll Road and the matter is in dispute. The Learned Commr. of Income Tax (Appeals) has erred in directing the Learned Assessing Officer to estimate the interest income due from MPSIDC. The appellant prays that they are not entitled to and have not received any interest income from MPSIDC and hence the direction of the Learned Commr. of Income Tax (A) to tax the estimated interest income may be set aside. 7. On the facts & circumstances of the case the Learned Commr. of Income Tax (A) has erred in confirming the disallowance of Rs.25.02 crores being the expenditure relating to exempt income while computing book profit u/s. 115JB. On the facts and circumstances of the case the appellant submits that the disallowance of Rs.25.02 crores is not justified and be deleted. 8. The Learned Commr. Of Income Tax (Appeals) has erred in confirming the levy of interest u/s 234B. On the facts & circumstances of the case the appellant denies the liability for payment of interest u/s 234B. The appellant prays that they are not liable to pay any interest u/s 234B and the levy of interest u/s 234B may be deleted. 9. The Learned Commr. Of Income-tax (Appeals) has erred in confirming the levy of penalty u/s. 234D. On the facts & circumstances of the case the appellant denies the liability for payment of interest u/s. 234D. The appellant prays that they are not liable to pay any interest u/s. 234D and the levy of interest u/s. 234B may be deleted.”

4 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 5. On the other hand, Ld. DR strongly supported the orders of the authorities below.

“9. We have heard both the parties, perused materials available on record and gone through the orders of authorities below. We find that the Co-ordinate Bench of ITAT, ‘I’ Bench in assessee’s own case for AY 2004-05 had considered an identical issue and after considering the relevant facts, held that with introduction of concept of block of assets, an individual assets losses its identity, therefore, no segregation thereof could be done notwithstanding the fact that the income from certain property was offered under the head ‘income

5 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., from house property’. However, when the Bench has posed specific question to the Ld. AR for the assessee to the effect that whether the assessee has claimed standard deduction as provided u/s 24(a) of the Act or not in respect of ‘income from house property’ in addition to depreciation and other maintenance expenses claimed, the Ld. AR for the assessee, fairly accepted that this aspect has not been examined by the authorities below and also there is no finding from the Tribunal in the earlier years. Therefore, the issue may be set- aside to the file of the AO for verification of facts with regard to standard deduction claimed u/s 24(a) of the Act and further if at all the assessee has claimed deduction u/s 24(a) of the Act, it amounts to double deduction and the same may be directed to be disallowed. Therefore, consistent with view taken by the Co-ordinate Bench for earlier years, we direct the AO to allow depreciation as claimed by the assessee on residential premises, but verify the fact with regard to deduction claimed u/s 24(a) in the light of our discussions given hereinabove. In case, the assessee claimed deduction u/s.24(a), then the same needs to be disallowed.”

6 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., “4.6. The Ld. AR contended that the same was revenue in nature and no TDS was deducted there-from since the land was acquired long ago when there was no requirement to deduct the TDS against the said payment. However, we find that the issue before us is regarding the nature of the impugned expenditure and since we have already noted that the said expenditure was capital in nature, the same was not allowable to the assessee. Therefore, after considering the factual position and various judicial pronouncements, we are of the considered opinion that the amortization of lease premium over the lease period was capital in nature and hence, not allowable to the assessee. The ground of assessee's appeal stands dismissed.”

7 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., “6.2. We have heard the rival contentions. We find it is fairly settled legal position that strategic investments not capable of yielding exempt incomes and investments held as stock in trade are not to be considered for computation of Section 14A disallowance. Further, if the net-worth of the assessee is quite sufficient so as to cover the investments held by the assessee, a presumption has to be drawn that investments are out of own funds unless the nexus of borrowed funds with investments is established by the revenue. A perusal of Balance Sheet, at a glance, reveals that the assessee' Share Capital and Reserves & surplus stood at Rs.725.23 crores as against investment of Rs. 1394.44 crores, which prima-facie weakens the argument advanced by Ld. AR. However, the Ld. AR has contended that investment includes strategic investments, investment not capable of earning exempt incomes and investment held as stock in trade, which are not includible in the value of investments for the purpose of Section 14A disallowance. The Ld. AR has provided before us detailed working of adjusted investments in the light of his contentions. Also, we note that in the preceding paragraph, we have already restored the matter back to the file of AO to find out the closing stock valuation of the securities held as stock in trade and the income of which has been offered under the head business income. Therefore, in the light of these facts / observations, we remit the matter back to the file of AO to re-compute the said disallowance qua interest and administrative expenses after properly appreciating the capital structure of the assessee. The assessee is also directed to substantiate its claim forthwith in the light of our observations before the lower authorities, falling which the authorities shall be at liberty to decide the same on the basis of available material on record. The assessee’s grounds of appeals stand allowed for statistical purposes.”

8 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., issue of disallowance of expenses incurred in relation to exempt income including interest in light of arguments of the assessees that strategic investments made in group/associate concerns for the purpose of holding controlling interest cannot be considered for determination of average value of investments and held that even though investment are made in group/associate concerns for the purpose of holding strategic investment disallowances contemplated u/s 14A of the Act triggers the moment the assessee earned exempt income. However, the Hon’ble Court has not touched the concept of commercial expediency and consideration of disallowance on actual dividend yielding investment. Further, various Hon’ble Court including the High Court of Bombay in number of cases had held that only investment which yield exempt income needs to be included in average value of investment for the purpose of determination of interest expenditure and other expenditure. Therefore, we are of the considered view that the issue needs to be go back to the file of the AO for the purpose of determination of average value of investment and also quantum of disallowance of interest expenditure and other expenditure keeping in view that of the decision of the Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs CIT (supra), hence, we set-aside the issue to the file of the AO and direct him to reconsider the issue in light of our discussion hereinabove.”

9 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., submitted that the Hon'ble Bombay High Court in I.T. Appeal No. 411 of 2014 dated 14.02.2019 has dismissed the revenue’s appeal for the A.Y.1994-95 to A.Y.1998-99.

10 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., reduced to naught, as the credits and debits in the Profit and Loss Account would square off with each other. 7.3. Further a perusal of earlier orders of Tribunal, we find that while prima facie allowing the claim of lease equalization charges, it has been held that deprecation which is to be taken for this purpose should be the depreciation allowable as per the Income Tax Act only and not the book deprecation. Therefore, in the light of these observations and following the judicial precedence, the matter is restore back to the file of AO with the direction to decide the issue afresh after giving adequate opportunity to the assessee to substantiate his claim in this regard. It is clarified that to maintain consistency, the depreciation which is to be considered for the purpose of calculating lease equalization charges would be the Income Tax Depreciation and not the book depreciation as held by the Tribunal in earlier years. The grounds stands allowed for statistical purpose.”

11 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., offered for tax, which is determined by applying the IRR to the net investment made in the asset. The lease equalization charge is the result of the adjustment, which the assessee has to make whenever the amount put aside towards capital recovery is not equivalent to the depreciation claimed by the assessee. Lease equalization charges is a method of recalibrating the depreciation claimed by the assessee in a given accounting period. If the depreciation claimed is less than the capital recovery, the difference is debited in the profit & loss account in the form of lease equalization charge and similarly if, for any reason the depreciation claimed is more than the capital recovery, then the difference is credited, once again, in the form of lease equalization charge to the Profit & Loss Account. Therefore, the assessee in effect debits are credits its profit & loss account with a lease equalization charge depending on whether or not the depreciation claimed is less or more than the capital recovery. The method employed by the assessee, therefore, over the full term of the lease period would result in the lease equalization amount being reduced to naught, as the credits and debits in the profit & loss account would square off with each other. 7.3 Further a perusal of earlier orders of Tribunal, we find that while prima facie allowing the claim of lease equalization charges, it has been held that deprecation which is to be taken for this purpose should be the depreciation allowable as per the Income Tax Act only and not the book deprecation. Therefore, in the light of these observations and following the judicial precedence, the matter is restore back to the file of AO with the direction to decide the issue afresh after giving adequate opportunity to the assessee to substantiate his claim in this regard. It is clarified that to maintain consistency, the depreciation which is to be considered for the purpose of calculating lease equalization charges would be the Income Tax Depreciation and not the book depreciation as held by the Tribunal in earlier years. The grounds stands allowed for statistical purposes.” 25. We further noted that the Hon’ble Supreme Court has considered an identical issue in light of accounting standard prescribed by ICAI and held that lease equalisation reserve computed as per accounting standards prescribed by ICAI is an allowable deduction because there is no express bar in the IT Act, 1961 regarding application of such accounting standards. The Hon’ble Court further held that only real income i.e. finance income should be taxed for the purpose of Income Tax which can be arrive

12 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., only after applying such method which is prescribed in the guidance note. Therefore, we are of the considered view that prima-facie, the issue is settled by the decision of the Hon’ble Supreme Court, however, consistent with view taken by the Co-ordinate Bench for earlier years, we restore this issue to the file of the AO and direct him to decide computation of lease equalisation reserve in accordance with the direction of Hon’ble Supreme Court in the case of Virtual Soft Systems Ltd. (supra).”

13 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 14/02/2017]. Respectfully following the cited decision, we direct so. The Ld. AO is directed to re-compute the same and grant depreciation thereupon as intangible assets. The assessee is also directed to substantiate his claim in this regard. The grounds of assessee's appeal stands allowed for statistical purposes.”

14 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 11.11 Therefore, on the facts and circumstances, we restore the matter back to the file of Ld. AO with a direction to estimate the income on the basis of latest decision of the Appellate Tribunal or any higher authority, as the case may be. The assessee is directed to substantiate his claim in this regard forthwith failing which the Ld. AO shall be at liberty to decide the same on the basis of material available on record. 11.12 Since, we have already directed the Ld. AO to tax the estimated income from the toll road, as a logical consequence, the assessee becomes entitled to claim the depreciation on the toll road. After considering the cited decisions relied upon by respective representative, we find that since the assessee is not the owner of the toll road, depreciation thereupon could not be allowed to him in terms of decision of Hon’ble Bombay High Court in North Karnataka Expressway Ltd. Vs. CIT [supra]. However, depreciation on the same as intangible assets being ‘any other business or commercial rights of similar nature’ as per Section 32 would be available to the assessee in terms of decision of Special Bench of the Tribunal, Hyderabad rendered in Progressive Constructions Ltd. Vs. ACIT [ITA No. 1845/Hyd/2014 order dated 14/02/2017]. Respectfully following the cited decision, we direct so. The Ld. AO is directed to re-compute the same and grant depreciation thereupon as intangible assets. The assessee is also directed to substantiate his claim in this regard. The grounds of assessee’s appeal stands allowed for statistical purposes.” 32. In this view of the matter and consistent with view taken by the Co-ordinate Bench of the Tribunal in assessee’s own case for earlier period, we restore this issue to the file of the AO and direct him to decide in accordance with direction given by the Tribunal for AY 2004-05.

15 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 24. Ground No.6 of grounds of appeal of the assessee is relating to the addition made towards notional interest in respect of toll road from Madhya Pradesh State Industrial Development Corporation.

16 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., of the Act towards expenditure incurred in relation to exempt income. Further, a similar adjustment has been made towards amount disallowed u/s 14A of the Act, while computing book profit u/s115JB of the Act. 48. The Ld. AR for the assessee, submitted that this issue is covered in favour of the assessee by the decision of ITAT, Delhi, Special Bench in the case of ACIT vs Vireet Investment Pvt Ltd. (2017) 82 taxmann.com 415 (Del. ITAT), wherein, the Tribunal held that disallowance contemplated u/s 14A shall not be added back while computing book profit u/s 115JB of the Act. 49. We have heard both the parties, perused materials available on record. We find that both issue is covered in favour of the assessee by the decision of ITAT Delhi Special Bench in the case of ACIT vs Vireet Investment Pvt Ltd.(supra). But, fact remains that the issue of disallowance contemplated u/s 14A of the Ac read with Rule-8D has already been discussed by us in preceding paras in ground no. 4, 5, 7 and 10 of assessee’s appeal, where the matter has been restored back to the file of the AO to recompute disallowance of expenditure by excluding investment which do not yield exempt income. The issue of computation of book profit with reference to 14A disallowance is bearing on the outcome of computation of disallowance u/s 14A of the Act in light of our discussions given in the grounds of appeal taken for the assessee’s in its appeal. Therefore, we restore this issue back to the file of the AO and direct him to first re-compute disallowance contemplated u/s 14A and then decide this issue in accordance with findings of the Special Bench of ITAT, Delhi in the case of ACIT vs Vireet Infest Pvt. Ltd. (supra) and also the Hon’ble Bombay High Court in the case of CIT vs Ms/ Bengal Finance Investment Pvt. Ltd. in Income Tax Appeal No.337 of 2013.”

17 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., thus, we restore these grounds to the file of the Assessing Officer to decide in accordance with law.

18 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 6. On the facts and circumstances of the case the appellant submits that they have not received any income in respect of the Toll Road and the matter is in dispute. The Learned Commr. of Income Tax (Appeals) has erred in directing the Learned Assessing Officer to estimate the interest income due from MPSIDC. The appellant prays that they are not entitled to and have not received any interest income from MPSIDC and hence the direction of the Learned Commr. of Income Tax (A) to tax the estimated interest income may be set aside. 7. On the facts & circumstances of the case the Learned Commr. of Income Tax (A) has erred in confirming the additions of Rs.2,41,00,000/- based on the information of AIR transactions The appellant states that they have not entered into transactions for Rs 2,41,00,000/- as recorded in the AIR Information. The appellant prays that the addition confirmed by the CIT (Appeals) may be deleted. 9. On the facts & circumstances of the case the Learned Commr. of Income Tax (A) has erred in confirming the disallowance of Rs.85,81,73,026/- being the expenditure relating to exempt income while computing book profit u/s. 115JB. On the facts and circumstances of the case the appellant submits that the disallowance of Rs.85,81,73,0267- is not justified and be deleted.

19 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 34. Ground Nos. 3 & 4 of Grounds of appeal for the A.Y. 2009-10 is relating to disallowance interest u/s. 14A of the Act. This ground which is similar to Ground No.3 in the appeal for the A.Y. 2008-09 has been decided while disposing off the appeal and the decision taken therein shall apply mutatis mutandis for this year also i.e. A.Y. 2009-10. We order accordingly.

20 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 39. Ld. DR submitted that the matter may be restored to the file of the Assessing Officer for verification.

21 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., the correct method of calculation is applied the proportionate interest works out to only ₹.11 Crores and not ₹.30.01 Crores and requested the Ld. CIT(A) that if entire addition is not deleted Assessing Officer may be directed to rectify and compute the disallowance at ₹.11 Crores as calculated by the assessee.

22 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 46. It is the finding of the Ld. CIT(A) that the assessee has not proved that the loan is given for the purpose of business of the assessee. Even before us the assessee could not substantiate that the loan has been given for the purpose of business of the assessee. In the circumstances, we are not inclined the disturb the finding of the Ld. CIT(A) hence, the action of the Ld.CIT(A) is sustained. Ground raised by the assessee is rejected.

23 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., assessee has not substantiated if it earned the exempt income only out of its reserve fund. l(iii). restricting the Other Expenses attributable to the earning of exempt income to Rs. 0.66 crs as against the disallowance of Rs. 0.92 crs computed by the AO U/S.14A of the Act. 2. holding that expenditure of Rs.6,01,694/- was incurred by the assessee towards the license fee paid for acquiring right to use software and the said expenditure incurred on accounting software was allowable as revenue expenditure. 3. ought to have upheld the action of the AO in estimating the income from the toll road at Rs. 1,50,00,000 as the assessee has the right to receive such income from the Madhya Pradesh Govt. 4. in deleting the disallowance of payment made to clubs amounting to Rs. 21,05,325/-. 5. deleting the disallowance of Rs.1,33,690/- made by AO on account of sec.40(a)(ia) of the Income Tax Act. Ignoring the fact that assessee company had failed to deduct the TDS as required at the prescribed rate during the year out of the payments made u/s. 194-1 & 194-J and thereby allowing the assessee to deduct TDS at a shorter rate than what is prescribed as per the Act. 6(i). allowing the claim of deduction of Rs.6,30,00,000/- u/s.36(l)(viii) of the Income Tax Act which otherwise the assessee was not eligible for. 6(ii). allowing the claim of deduction of Rs.6,30,00,000/- u/s.36(l)(viii) of the Income Tax Act ignoring the fact that there was a major business re-organization w.e.f. 1.4.2007 through which the assessee company had transferred its (i) financial services business to M/s.lLFS Ltd, (ii) depository back office and capital market related services to M/s.ILFS Securities Services Ltd, (iii) portfolio management and related services to M/s.ILFS Portfolio Managers Sendees Ltd. 6(iii). ignoring the stipulated condition laid down in sec.36(l)(viii) wherefrom it is noted by AO that the assesses business was not eligible business for the deduction. 6(iv). ignoring further that, after re-orgnization of business w.e.f. 1.4.2007, the assessee company is only engaged in managing its investments within group entities. 7. deleting the adjustment of Rs. 28,48,716/- made by the AO on account of Lease Equalisation Reserve while ... ailing the Book Profit u/s.115JB(2) of the Act.

24 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 8. restricting the amount of disallowance U/S.14A to Rs.25.03 crs as against Rs.47.47 crs made by AO towards adjustment of expenses attributable to exempted income while compiling the Book Profit u/s.115JB(2) of the Act.”

25 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., “60. We have heard both the parties and perused the material available on record. The Tribunal has considered an identical issue for AY 2004-05 where it was held that Software Development Expenses is debited under the head miscellaneous expenses are in the nature of AMC Charges, internet access charges, lease line expenses, anti-virus expenses and other software expenses for accounting package, therefore, being revenue in nature and allowable as deduction. The relevant findings of the Tribunal are as under:- “20. Facts qua Ground No. 1 are that the assessee claimed certain software development expenses of Rs.1.16 crores, the details of which were not filed before the AO which led the AO to believe that the same expenditure, being capital in nature, was not allowable to the Assessee. The assessee provided the details thereof before Ld. CIT(A) who noted that the impugned expenses were in the nature of AMC Charges, internet access charges, lease line expenses, anti-virus expenses, charges for link facility, software charges for accounting package and therefore, being revenue in nature and hence allowable to the assessee. 20.1 The Ld. DR has contended that no details were filed by the assessee before Ld. AO and therefore, the assessee has rightly been saddled with impugned additions and Ld. CIT(A) erred in providing relief to the assessee. The Ld. AR placed reliance on the findings of Ld. CIT(A) and drew our attention to details of expenses as placed in Page No. 543 of the paper- book to support the contention that impugned expense, being revenue in nature, were allowable to the assessee and the Ld. CIT(A) provided relief to the assessee after due appreciation of the material facts. 20.2 We have considered the rival contentions and inclined to agree with the findings of Ld. CIT(A) who after appreciating the relevant material came to the right conclusion that the impugned expenditure being revenue in nature, were allowable to the assessee. A bare perusal of the said expenses reveals that the said expenditure are primarily revenue in nature and the Ld. AO disallowed the same on mere presumption. However, Ld. CIT(A) examined the same and provided relief to the assessee after appreciating the material and therefore, we find no reason to interfere with the same. The revenue’s ground of appeal stands dismissed.” 61. In view of the matter and consistent with view taken by the Co- ordinate Bench, we do not find any infirmity in the findings of the Ld. CIT(A) and hence, we are inclined to upheld the findings of the ld. CIT(A) and reject the ground taken by the Revenue.’

26 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 54. No distinguishable facts have been brought to our notice. Thus respectfully following the said decision, we uphold the order of the Ld. CIT(A) and reject the ground raised by the revenue.

27 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., issue is covered in favour of the assessee by the decision of Hon’ble Bombay High Court in asessee’s own case for AY 1997-98 in Income Tax Appeal No.2402 of 2013 where under identical set of facts, the Hon’ble High Court by following its earlier decision in the case of Otis Elevator Co. (India) Ltd. vs CIT (1992) 195 ITR 682 (Bom.) held that Club membership fee paid to the club is in the nature of revenue expenditure, which is allowable as deduction. 70. Having heard both sides and considered the material available on record, we find that Hon’ble Bombay High Court has considered an identical question of law in assessee’s own case for AY 1997-98 and by following its earlier order in case of of Otis Elevator Co. (India) Ltd. vs CIT (1992) 195 ITR 682 (Bom.) held that expenditure incurred on club facilities is revenue in nature, which is allowable deduction. Therefore, respectfully following the decision of the Hon’ble Bombay High Court in assesseee’s own case, we direct the AO to delete the additions made towards disallowance of payments to Clubs.”

28 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., [46 taxmann.com 444] submitted that there shall not be any disallowance when there is a short deduction of tax.

29 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., wherein it is held that there is no dispute with reference to the deduction of tax u/s 192 of the Act with the fact that the alleged consultants, in their individual assessments declared these payments as salary payments and accepted by revenue as it is. Further, it is held that the assessee had deducted tax u/s. 192 of the Act as against the allegation of revenue that the provisions of section 194J of the Act would be attracted as these consultants are in the capacity of professionals. The Bench held that the provisions of section 40(a)(ia) of the Act will not apply as the said provision can be invoked only in the event of non-deduction of tax but not for lesser deduction of tax. In that case the assessee has deducted tax u/s. 192 of the Act as against section 194J of the Act as against the claim of revenue. 6. In the present case before us the assessee has deducted tax u/s. 194C(2) of the Act being payments made to sub-contractors and it is not a case of non-deduction of tax or no deduction of tax as is the import of section 40a(ia) of the Act. But the revenue’s contention is that the payments are in the nature of machinery hire charges falling under the head ‘rent’ and the previous provisions of section 194I of the Act are applicable. According to revenue, the assessee has deducted tax @ 1% u/s. 194C(2) of the Act as against the actual deduction to be made at 10% u/s. 194I of the Act, thereby lesser deduction of tax. The revenue has made out a case of lesser deduction of tax and that also under different head and accordingly disallowed the payments proportionately by invoking the provisions of section 40(a)(ia) of the Act. The Ld. CIT, DR also argued that there is no word like failure used in section 40(a)(ia) of the Act and it referred to only non-deduction of tax and disallowance of such payments. According to him, it does not refer to genuineness of the payment or otherwise but addition u/s. 40(a)(ia) can be made even though payments are genuine but tax is not deducted as required u/s. 40(a)(ia) of the Act. We are of the view that the conditions laid down u/s. 40(a)(ia) of the Act for making addition is that tax is deductible at source and such tax has not been deducted. If both the conditions are satisfied then such payment can be disallowed u/s. 40(a)(ia) of the Act but where tax is deducted by the assessee, even under bonafide wrong impression, under wrong provisions of TDS, the provisions of section 40(a)(ia) of the Act cannot be invoked. Here in the present case before us, the assessee has deducted tax u/s. 194C(2) of the Act and not u/s. 194I of the Act and there is no allegation that this TDS is not deposited with the Government account. We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs, one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required

30 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., by or under the Act, but the facts is that this expression, ‘on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139’. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act.”

31 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., provisions of section 40(a)(ia) of the Act cannot be invoked. Here in the present case before us, the assessee has deducted tax u/s. 194C(2) of the Act and not u/s. 194I of the Act and there is no allegation that this TDS is not deposited with the Government account. We are of the view that the provisions of section 40(a)(ia) of the Act has two limbs, one is where, inter alia, assessee has to deduct tax and the second where after deducting tax, inter alia, the assessee has to pay into Government Account. There is nothing in the said section to treat, inter alia, the assessee as defaulter where there is a shortfall in deduction. With regard to the shortfall, it cannot be assumed that there is a default as the deduction is not as required by or under the Act, but the facts is that this expression, ‘on which tax is deductible at source under Chapter XVII-B and such tax has not been deducted or, after deduction has not been paid on or before the due date specified in sub-section (1) of section 139’. This section 40(a)(ia) of the Act refers only to the duty to deduct tax and pay to government account. If there is any shortfall due to any difference of opinion as to the taxability of any item or the nature of payments falling under various TDS provisions, the assessee can be declared to be an assessee in default u/s. 201 of the Act and no disallowance can be made by invoking the provisions of section 40(a)(ia) of the Act. Accordingly, we confirm the order of CIT (A) allowing the claim of assessee and this issue of revenue’s appeal is dismissed.”

32 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., “17.1 During the assessment proceedings, it was noticed that me assessing was claiming deduction u/s.36(1)(viii) of the Act of Rs.63000000/-. It was further noticed from the annual report, that there was the major reorganization of the business w.e.f. 01.04.2007 in which the assessee has transferred i) its financial services business to M/s. ILFS Ltd., ii) depository back office and capital market related services to M/s. ILFS Securities Services Ltd. and iii) portfolio management and related services to M/s. ILFS Portfolio Managers Services Ltd. The assessee company, after this became a non-banking, non-financial company that primarily manages its investments in group entities and effects loans and advances to its subsidiaries and affiliate. It also owns and manages reality assets. As per sec.36(l)(viii) of the Act, the deduction is available only on the profits derived from eligible business and eligible business is defined as a business of providing long term finance for industrial or agricultural development or development of infrastructural facility in India or construction or purchase of houses in India for residential purposes. 17.2 After the reorganization of the business the assessee is only engaged in managing its investments in group entities. Assessee company became a non-financial and non-banking company, and thus is nowhere engaged in directly providing long term finance as specified for the- eligible business in section 36(l)(viii). Therefore, the deduction claimed by the assessee of Rs.63000000/- is disallowed and added to the income of the assessee. Penalty proceedings initiated separately for furnishing inaccurate particulars of income / concealment of income. (Addition: Rs.63000000/-)”

33 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 71. We have heard the rival submissions and perused the orders of the authorities below. We observe from the order of the Ld.CIT(A) that considering the submission and evidences produced by the assessee the Ld.CIT(A) held that the assessee is entitled for deduction U/s.36(1)(vii) of the Act observing as under: - “13.1. The facts of the case were that the A.O. has disallowed the claim of the appellant u/s.36(l)(viii) for Rs.6,30,00,000/- as the appellant is not advancing any loans for long term finance and appellant is not only managing its investment in group companies. As appellant is not providing long term finance for infrastructure projects, the A.O. had disallowed the claim of the appellant.

13.2. During appellate proceedings, the appellant submitted as under: "Ground No. 6 deals with the rejection of the claim of the appellant of deduction u/s.36(l)(viii) (amounting to Rs.6,30,00,000/-) on the inference that "the company after the reorganization has become a non-banking non-finance company and after the reorganization, the assessee is only engaged in managing its investments in group entities''. It is submitted that the inference of the Hon'ble AO is erroneous. Even after the reorganization, the company is engaged in the business of granting of loans to all its infrastructure and other group companies and it continues to be a Finance Company as stipulated by the RBI and continues to be under the direct supervision of the RBI even after the reorganization. The company has earned an interest income of Rs. 128.74 crores in FY 2008, breakup of which is as follows: Interest income on loans Rs. 110.02 crores Interest income on securities Rs.18.72 crores The copy of the audited "Notes to Accounts" evidencing the same has already been enclosed. Further, as of March, 2008 the company has granted loans amounting to Rs.1401.24 crores to its various group companies towards infrastructure projects. The company has claimed deduction u/s.36(l)(viii) on only those net interest income which has been earned on long term financing. As such the income from the long term loans given to the group companies are eligible for deduction u/s.36(l)(viii). It is

34 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., submitted that the disallowance ofRs.6.3 crores made by the A.O. may be deleted." ……. (A) Industrial or agricultural development; (c) ''banking company" means a company to which the Banking Regulation Act, 1949 applies and includes any bank or banking institution referred to in section 51 of that Act; (h) "long term finance" means any loan or advance where the terms under which moneys are loaned or advanced provide for re-payment alongwith interest thereof during a period of not less than five years." As per sec.36(l)(viii) the appellant is eligible if it fulfills two conditions i.e. one is appellant should be specified entity and 2nd condition is extend loans for infrastructural facilities for a long term basis i.e. above 5 years. I had examined appellant's detailed submissions produced before me alongwith the loans extended by the appellant. The appellant had advanced loans for infrastructural facilities to group entities which are developing the infrastructural facilities in separate company. This separate company formed as group entity develops infrastructural facility and income from this accrues to this group entities. The appellant's extended loan for development of infrastructural facilities on long term basis which is the 2nd condition which appellant has to fulfill to claim sec.36(l)(viii). As appellant is fulfilling the condition of specified entity and extending the loan for infrastructural facilities though they are group companies which are themselves developing infrastructural facilities, the appellant is eligible for deduction u/s.36(l)(viii). Hence this ground of appeal is allowed.”

35 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 74. It is submitted that the Tribunal in assessee’s own case for the A.Y.2004-05 restored this matter to the file of the Assessing Officer with a direction to recompute the book profits after consideration of the decision of the Hon'ble Supreme Court in the case of Virtual Soft Systems Ltd.,

36 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 78. Ground No. 8 of Grounds of appeal of the revenue is relating to disallowance u/s. 14A while computing book profits u/s. 115JB(2) of the Act. This ground which is similar to Ground No. 7 in the appeal of the assessee for the A.Y. 2008-09 has been decided while disposing off the appeal and the decision taken therein shall apply mutatis mutandis for this appeal also. Since we have decided this issue by restoring the ground to the file of the Assessing Officer this ground is also restored to the file of the Assessing Officer. We order accordingly.

37 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., 4. in deleting the disallowance of payment made to clubs amounting to Rs.18,59,191/-. 5(i). allowing the claim of deduction of Rs.6,20,00,000/- u/s.36(l)(viii) of the Income Tax Act which otherwise the assessee was not eligible for. 5(ii). allowing the claim of deduction of Rs.6,20,00,000/- u/s.36(l)(viii) of the Income Tax Act ignoring the fact that there was a major business re-organization w.e.f. 1.4.2007 through which the assessee company had transferred its (i) financial services business to M/s.ILFS Ltd, (ii) depository back office and capital market related services to M/s.ILFS Securities Services Ltd, (iii) portfolio management and related services to M/s.ILFS Portfolio Managers Services Ltd. 5(iii) ignoring the stipulated condition laid down in sec.36(l)(viii) wherefrom it is noted by AO that the assessees business was not eligible business for the deduction. 5(iv). ignoring further that, after re-orgnization of business w.e.f. 1.4.2007, the / assessee company is only engaged in managing its investments within group / entities. 6. restricting the disallowance of the interest to the extent of Rs. 11,00,00,000/- as against the disallowance of Rs.30,01,92,990/- computed by the AO in respect of the interest-free loans given to IL&FS Employees Welfare Trust.”

38 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., the appeal. The decision taken therein shall apply mutatis mutandis for this year also. We order accordingly.

39 ITA.NOs. 3699, 3700, 3785 & 3786/MUM/2013 M/s. Infrastructure Leasing & Financial Services Ltd., in the appeal of the assessee for the A.Y. 2009-10 and it has been decided while disposing off the appeal. The decision taken therein shall apply mutatis mutandis for this appeal also. We order accordingly.

Order pronounced in the open court on the 28th November, 2019

Sd/- Sd/- (G. MANJUNATHA) (C.N. PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai / Dated 28/11/2019 Giridhar, Sr.PS

Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file.

//True Copy// BY ORDER

(Asstt. Registrar) ITAT, Mum