S.NIHAR & CO.,MUMBAI vs. ADDITIONAL CIT-12(2), MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

1. Ground 1: The Hon’ CIT (A)-28, Mumbai has erred in confirming addition of Rs.32,982/- made by the Ld. AO (Addl CIT-12(2)) u/s 14A of the Income Tax Act 1961 r.w.r. 8D of the Income Tax Rules,1962. The Appellant firm humbly submits that: A.Y.2011-12 I. The Entire Income on Mutual Funds of Rs.4,I7,000/- is a dividend declared and re-invested by the respective mutual funds for which no separate additional expenses were incurred by the appellant firm.

2. The Ld. AO could not establish nexus between the expenses incurred and exempt income.

3. The Ld. AO did not record objective satisfaction before dismissing the appellant firm's claim that no expenses were incurred to earn exempt income. Relief Claimed: Addition u/s 14A of Rs.32,982/- is unjustified and incorrect and may please be deleted. Ground 2: The Hon' CIT(A) has erred in confirming the disallowance of Depreciation on Motor Car of Rs.4,78,354/- by restricting the Depreciation at 15% instead of Depreciation allowable on New Commercial Vehicle at 50% as per CBDT Circular No.10/2009 dated 19- 01-2009. The Appellant Firm humbly submits that: I. The Motor Car purchased in March 2009 is covered by the entry (via) to New Appendix-I Part A of Tangible Asset and Note 6 to the New Appendix-I prescribing the rate of Depreciation to New Commercial Vehicle at 50% Relief Claimed: The appellant firm requests your to allow the depreciation on motor car at the rate of 50% and delete the depreciation disallowed of Rs.4,78,354/- Ground 3: The Appellant firm prays for your leave to add, alter & amend the above ground of appeals if necessary.”

3. The brief facts of the case are that the assessee filed the revised return of income for the A.Y. 2011-12 on 02.09.2011 declaring total income to the tune of Rs.9,48,39,690/-. The return was processed u/s 143(1) of the I.T. Act. The case was selected for scrutiny. Notices u/s 143(2) & 2 A.Y.2011-12 142(1) of the Act were issued and served upon the assessee. The assessee was engaged in the business of commission and indenting agents and during the year under consideration, there is no change in the nature of business of the assessee. During the period under consideration, the proprietary business has been converted into partnership firm. The assessee was following the cash system of accounting. From the perusal of the return of income, it was found that the assessee has made the investment amounting to Rs.1,31,92,927/- in mutual funds and claimed exempt income of Rs.4,17,927/-. The AO applied the provisions u/s 14A r.w. Rule 8D of the Act and assessed the expenditure incurred to earn the exempt income to the tune of Rs.32,982/- and was added to the income of the assessee. The assessee claimed the depreciation @ 50% on his BMW car of Rs.6,83,362/- which was restricted to the extent of 15% and the income of the assessee was assessed to the tune of Rs.9,57,12,870/-. Feeling aggrieved, the assessee filed an appeal before the CIT(A) who confirmed the addition, therefore, the assessee has filed the present appeal before us.

ISSUE No. 1 4. Under this issue the assessee has challenged the confirmation of the disallowance of Rs.32,982/- raised by the AO in view of the provisions u/s 14A r.w. Rule 8D of the Act. At the very outset, the Ld. Representative of the assessee has argued that the assessee earned the dividend income of Rs.4,17,927/- from LIC saving plus scheme of LIC mutual fund which was not received by the assessee being the same was reinvested in the units of mutual fund but the CIT(A) has taken into consideration of the whole investment in sum of Rs.65,96,464/-for assessing the expenditure to earn the exempt income which is not justifiable because those investment which earned dividend income is required to be considered for computing the 3 A.Y.2011-12 expenditure to earn the exempt income in view of the provisions u/s 14A r.w. Rule 8D (2)(iii) of the Income Tax Rule, 1962 and in this regard the Ld. Representative of the assessee has also relied upon the decision of the CIT Vs. Vireet Investment (P.) Ltd. [2017] 165 ITD 27/82 taxmann.com 415. However, on the other hand, the Ld. Representative of the department has refuted the said contention. As per the record, the assessee has earned the dividend income of Rs.4,17,927/- on investment of Rs.31,92,927/- in LIC mutual fund. The CIT(A) has taken into consideration the whole investment in sum of Rs.65,96,464/- for the purpose of disallowance u/s 14A r.w. Rule 8D(2)(iii) of the Act. According, to the decision in the case of CIT Vs. Vireet Investment (P.) Ltd. [2017] 165 ITD 27/82 taxmann.com 415 Delhi Special Bench only those investments is liable to be considered which yielded exempt income during the year. Accordingly, the finding of the CIT(A) is not justifiable, hence, is hereby order to be set aside and we hold that the investment in sum of Rs.31,92,927/- is liable to be taken into consideration for computing the expenditure to earn the exempt income in view of the provisions u/s 14A of the Act r. w. Rule 8D(2)(iii) of the Rules. We restored this issue to the file of the AO for computing disallowance u/s 14A of the Act r.w. Rule 8D of the Rules by taking into consideration of the investment in the LIC mutual fund in sum of Rs.31,92,927/- which yielded dividend income in the year. Accordingly, this issue is decided in favour of the assessee against the revenue in the manner as indicated above. We order accordingly. ISSUE NO. 2 4 A.Y.2011-12 5. Issue no. 2 is in connection with the restriction of the depreciation @ 15% of the motor-car which has been claimed by assessee @ 50%. The Ld. Representative of the assessee has argued that the assessee owned the commercial vehicle in the relevant assessment year, therefore, the assessee is entitled to the depreciation @ 50% as per the CBDT Circular No.10/2009 dated 19.01.2009, hence, the finding of the CIT(A) is not justifiable, hence, is liable to be set aside. However, on the other hand, the Ld. Representative of the Department has refuted the said contention. Before going further we deem it necessary to advert the finding of the CIT(A) on record.:-

“5.2 Before me, submissions identical to what was pleaded before A.O. were given. The key point in notification is a "new commercial vehicle" "acquired between 01.01.2009 and 31.03.2009" AND 'PUT TO USE' prior to 01.04.2009 for business of profession shall qualify for accelerated depreciation of 50%. How vehicle (a BMW car) is commercial vehicle is not demonstrated. What 'purpose' of business was served too is not proved. A.R. has not submitted the date on which vehicle was put to use. In absence of all these facts, it is difficult to give relief to appellant. The disallowance is confirmed, however A.O. shall check for any statistical/computational errors while giving effect to this order and suitably modify the effect if error is apparent.”

6. We have considered rival contentions and perused the material on record. We have observed that the assessee is an individual and has a proprietary concern namely Omprakash & Co. The assessee is engaged in the business of real estate 5 A.Y.2011-12 development and construction. The assessee purchased BMW car wherein it is claimed to have been used for the purposes of her business of real estate and construction. The assessee had claimed depreciation @ 50% on BMW car claiming the said BMW car to be „Commercial Vehicle‟ which was purchased during the specified period. It is claimed by the assessee that the user of BMW car by proprietor or by other employees of the assessee concern for its business of real estate and construction per-se would make the said BMW car as „Commercial Vehicle‟ entitled for higher depreciation. The assessee has relied upon the CBDT Notification No. 10/2009/F.No.142/01/09-TPL dated 19.01.2009 , vide S.O. 197(E), which amended Income-tax Rules,1962 vide Income- tax (Third Amendment) Rules, 2009 which came into force with effect from 1st day of April 2009 , which stipulates as under: “INCOME-TAX (THIRD AMENDMENT) RULES, 2009 - AMENDMENT IN NEW APPENDIX 1 NOTIFICATION NO. 10/2009, DATED 19-1-2009 In exercise of the powers conferred by section 295 of the Income-tax Act, 1961 (43 of 1961), the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:— (1) These rules may be called the Income-tax (Third Amendment) Rules, 2009 (2) They shall come into force on the 1st day of April, 2009. In the Income-tax Rules, 1962, in the Table to New Appendix 1, in Part-A relating to TANGIBLE ASSETS, under the heading III. MACHINERY AND PLANT, in item (3), after sub-item (vi) and entries relating thereto, the following shall be inserted, namely:— 6 A.Y.2011-12 (via) New commercial vehicle which is acquired on or after the 1st day of January, 2009 but before the 1st day of April, 2009 and is put to use before the 1st day of April, 2009 for the purposes of business or profession [See paragraph 6 of the Notes below this Table] 50".

[F. No. 142/01/09-TPL]”

The sun-set date as aforesaid was further extended by CBDT to a date for commercial vehicles purchased prior to 1st October 2009 and put to use prior to 1st October 2009, and the entry now reads in Appendix I (effective from assessment year 2006-07 onwards) Part A , entry III , sub- entry 3(via) as under:

[(via) “New commercial vehicle which is acquired on or [40] after the 1st day of January, 2009 but before the 1st day of [October], 2009 and is put to use before the 1st day of [October], 2009 for the purposes of business or profession [See paragraph 6 of the Notes below this Table] “ Th The definition of commercial vehicle as is specified at Note 6 below the table in Appendix I to Income-tax Rules, 1962, reads as under: “6. "Commercial vehicle" means "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle" and "medium passenger motor vehicle" but does not include "maxi-cab", "motor-cab", "tractor" and "road-roller". The expressions "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle", "medium passenger motor vehicle", "maxi-cab", "motor-cab", "tractor" and "road-roller" shall have the meanings respectively assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988).” The entry prior to this entry in Appendix I (effective from assessment year 2006-07 onwards) Part A , entry III , sub- 7 A.Y.2011-12 entry 3(via) to 1962 Rules relating to higher depreciation for Commercial Vehicles purchased during specified period, is an entry at relates to depreciation on Motor buses , motor lorries and motor taxies used in the business of running them on hire which also provide for higher depreciation @40%. Still above these two entries , there is an entry in Appendix I (effective from assessment year 2006-07 onwards) Part A , entry III , sub- entry 3(ii) to 1962 Rules for providing depreciation on Motor cars, other than those used in a business of running them on hire, acquired or put on or after the 1st day of April 1990 which provided for depreciation @15%. These entries in Appendix 1 to the 1962 Rules are under the head Machinery and Plant (III) with sub-entry (2), (3)(ii) and 3(via). The general rate of depreciation on Machinery and Plant other than those covered by sub-entry (2),(3) and (8) below provide for depreciation @15% in the same Appendix I to 1962 Rules . This Appendix refers to Rule 5 of the 1962 Rules , which Rule deals with depreciation having chapter heading „Determination of Income‟ under Part-II with sub-heading at „C-Profit and Gains of business of Profession‟ of the 1962 Rules. Thus, Rule 5 of the 1962 Rules concerns itself with manner of providing depreciation while computing income under the head „Profits and Gains of Business or Profession‟ which refers and relates to Section 32 of the 1961 Act. Depreciation as is provided u/s 32 of the 1961 Act falls under sub-chapter heading „Profits and Gains of Business or Profession‟ under sub-chapter D of the main chapter IV to the 1961 Act which deals with „Heads of income‟ and „Computation of Income‟. This Section 32 of the 1961 Act refers to depreciation to be provided on the Block of 8 A.Y.2011-12 Assets , such percentage on the written down value thereof as may be prescribed and also concerns itself with providing depreciation while computing income under the head „Profit and Gains of Business or Profession‟. Thus, it is clear that all the entries pertaining to vehicles as discussed above as are placed in Appendix I which pertains to the vehicles which are used for the purposes of business or profession on which depreciation is to be allowed as provided under the 1961 Act read with 1962 Rules and concerns itself for providing depreciation while computing income under the head „Profits and Gains of Business or Profession‟. Thus, all these three entries concerns itself with vehicles used for business purposes. We have to harmoniously interpret these three entries which are appearing successively under the Appendix-I to 1962 Rules. The first entry in Appendix I under item III concerning Machinery and Plant under sub-item (1) of item III of Part A deals with Machinery and Plant other than those covered by entries (2),(3) and (8) below which is a general entry with which we are not presently concerned. While interpreting the provisions, the cardinal rule is that law makers inserted a provision in the statute knowingly with complete knowledge and understanding of the matter and none of the words used are surplusage .Thus, all the entries are to be harmoniously read so that none of the words used become surplus or otiose , unless there are strong and compelling reasons for taking contrary view and only in that situation conclusions are reached by Judicial Bodies that these words cannot be harmoniously read and reconciled, the said words shall be then read down or be taken as if they 9 A.Y.2011-12 never existed in the statute by Judicial bodies while interpreting the provisions in the statute. Coming back, the second entry concerns itself with Motor Cars , other than used in a business of running them on hire which in-fact is a case before us as we will see later and it provides for depreciation @15%. The next entry concerns itself with Motor Buses, Motor lorries and motor taxis used in a business of running them on hire , which again is not the case before us as this BMW car was admittedly never been given on hire by the assessee and/or was never used as motor taxi. The next entry in Appendix I to the 1962 Rules concerns itself with „Commercial Vehicle‟ and higher depreciation is provided for the vehicles which falls under this category of „Commercial Vehicle‟. This word „Commercial‟ which precede the word „Vehicle‟ is not used in any other entry in Appendix I except in Part A , entry III , sub-entry 3(iii) to (via) which relates to same class. This word „Commercial‟ is also not defined per-se in the 1961 Act and the only definition is under the table to Appendix I to the 1962 Rules in clause 6 . The said definition in clause 6 to table in Appendix A only defines that „Commercial Vehicles‟ means as under : “6. "Commercial vehicle" means "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle" and "medium passenger motor vehicle" but does not include "maxi-cab", "motor-cab", "tractor" and "road-roller". The expressions "heavy goods vehicle", "heavy passenger motor vehicle", "light motor vehicle", "medium goods vehicle", "medium passenger motor vehicle", "maxi-cab", "motor-cab", "tractor" and "road-roller" shall have the meanings respectively assigned to them in section 2 of the Motor Vehicles Act, 1988 (59 of 1988).”

10 A.Y.2011-12 In the 1961 Act and also in Motor Vehicle Act,1988 , the said word „Commercial Vehicle‟ is not defined except as stated above in Appendix I to the 1962 Rules. The above definition in Appendix I to the 1962 Rules only indicates that some category of vehicle as enumerated in clause 6 shall be classified as Commercial Vehicle. No other definition of „Commercial Vehicle‟ as stipulated in any other statute in India is brought to our notice by authorities below in their orders or by the learned counsels for the rival parties. Under these circumstances, we have to refer to the meaning of Commercial Vehicle as is used in common parlance by business community. The said word „Commercial Vehicle‟ is also used by Insurance Industry while granting insurance cover /policy in favour of the vehicle. In Wikipedia, A Commercial Vehicle is any type of motor vehicle used for transporting goods or paying passengers. The European Union defines a "commercial motor vehicle" as any motorized road vehicle, that by its type of construction and equipment is designed for, and capable of transporting, whether for payment or not: (1) more than nine persons, including the driver; (2) goods and "standard fuel tanks". These entries as they found mentioned in Appendix I to the 1962 Rules and provision of depreciation u/s 32 of the 1961 Act , all concerns itself with computation of income under the head „Profits and Gains of Business or Profession‟. Thus, it is a precondition that the said „Commercial Vehicle‟ is to be put to use for business or profession of the assessee . This particular entry also say that the commercial vehicle is to be put to use for the business or profession of the assessee prior to 01st October 2009. This 11 A.Y.2011-12 clearly reveals that now we have to interpret the word „Commercial‟ in juxtaposition with the word „Vehicle‟ and none of the words can be taken to be surplus as used by lawmakers as presumption is that law makers have knowingly used these words with complete understanding of the matter. On careful perusal of this entry, it also reveals that there is no requirement that this commercial vehicle is to be let on hire. As we have seen above in Wikipedia, A commercial vehicle is any type of motor vehicle used for transporting goods or paying passengers. The European Union defines a "commercial motor vehicle" as any motorized road vehicle, that by its type of construction and equipment is designed for, and capable of transporting, whether for payment or not: (1) more than nine persons, including the driver; (2) goods and "standard fuel tanks". In our considered view based on our aforesaid discussions, the said vehicle has to be an commercial vehicle which albeit may not be given on hire by the tax-payer but can be used in the business or profession of the tax-payer itself and merely because any car or other vehicle is used for transporting a particular employee/ director of the tax-payer from his home to office and back or for other official purposes shall not make the vehicle a Commercial Vehicle and shall remain to be a private vehicle . Say for example, the ambulance owned by tax-payer hospital for transporting its patients will fall under the category of commercial vehicle. Similarly passenger bus or even SUV‟s owned by the taxpayer which are used for commuting its pool of employees from home to work and back will fall under the category of Commercial Vehicle. Similarly, certain vehicles