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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: Shri Shamim Yahya & Shri Amarjit Singhand
आदेश / O R D E R Per Shamim Yahya (Accountant Member) This appeal by Revenue is directed against order of the Ld. CIT(A)-1, Mumbai, dated 20/11/2017 and pertains to Assessment Year 2014-15. The ground of appeal raised by the Revenue is as under:-
2. The grounds of appeal read as under:-
1. "On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in deleting disallowance u/s 14A of the Act without appreciating the fact that as per CBDT Circular No.5 of 2014,it was directed that disallowance u/s.14A should be made even if the assessee did not earn any exempt income during the previous year."
2. On the facts and in the circumstances of the case and in law the Ld.CIT(A) has erred in deleting disallowance u/s.14A of the Act without appreciating the fact that the assessee itself disallowed expense u/s.14A in its return but did not compute the disallowance as per Rule 8D. 3.On the facts and in the circumstances of the case in law the Ld.CIT(A) has erred in deleting disallowance on purchase of tenancy right without appreciating the fact that the assessee acquired enduring right for using the property and hence the transaction should be treated as capital in nature.
3. The brief, facts of the case are that the AO noted that the assessee is having investments of Rs. 1,066.91 crore in funds from which income would be exempt and the actual amount disallowed by the assessee is of Rs. 51,15,960/- and further that the correctness of the claim of the expenses made by the assessee as per the rule 8D r.w. section 14A is being rejected for being without any substantiation.
Accordingly the AO worked out disallowance under clause (ii) and (iii) of the Rule 8D(2) totalling to Rs.22,88,52,118/-.
4. Upon assessee’s appeal, Ld. CIT(A) granted relief to the assessee. He held that since assessee has not earned any exempt income, no disallowance u/s 14A is permissible. The Ld. CIT(A) granted relief accordingly except for the disallowance made by the assessee itself.
5. Against this order, Revenue is in appeal before us.
6. Apropos ground number one that no disallowance is to be done under 14A if no exempt income is earned. At the outset, ld. Counsel of the assessee submitted that this issue is covered in favour of the assessee by the following case laws:-
i. Chem Invest Ltd. vs CIT (ITA No.749 of 2014)(Delhi High Court) ii. ACIT vs Ballarpur Industries Ltd. (ITA No.51 of 2016) (Bombay High Court) He submitted that following the above case laws, ITAT in assessee’s own case for Assessment Year 2012-13 & 2013-14, has decided this issue in assessee’s favour.
Upon careful consideration, we note that the issue above stands covered in favour of the assessee by the decisions as above. Hence ground no.1 stands dismissed.
Apropos ground no.2. On this issue, we find that the ground is misplaced it is as much as learned CIT(A) has granted the relief to the assessee excluding the amount offered by the assessee itself.
Apropos ground no.3. Brief, facts on this issue are as under:-
During the year the assessee has paid premium of Rs. 2,50,00,000/-on lease rent. Out of which assessee claimed Rs. 50 lakhs to Brandon & Company Pvt. Ltd. (BCPL) as premium on leave and license, represent amortized amount paid to the previous tenant. The said consideration was paid to BCPL as compensation for procuring the surrender of tenancy rights for assessee to take possession of the premises for its commercial use. The assessee was asked by the AO to justify the claim. In response, the assessee furnished its reply. The submission made by the assessee was considered but not found to be acceptable by the AO due to the following reason:- “1. The tenancy right is a capital asset as per Income Tax Act.
2. The assessee has not produced any registered document/supporting evidences as per Maharashtra Rent control Act, 1991 which can substantiate claim of purchase of tenancy right.
Assessee's submission is that it has entered into leave and license agreement and on which lease rent is being paid. If the submission is accepted for while, then also assessee cannot claim amortization of lease premium paid as it is again capital in nature. • 4. The tenancy right is not a business asset failing under section 32 of I.T. Act, 1961.
5. The assessee has acquired tenancy right which is perpetual in nature and assessee has enduring benefit from it.
6. Notwithstanding above, the assessee has not deducted TDS on above payment as per provisions of section 40(a)(ia) r.w.s. 194IA of the I.T. Act, 1961. Hence, provisions of disallowance u/s 40(a)(ia) is also applicable.” The assessee was asked to show cause by the AO and after considering the reply of the assessee, the AO disallowed payment for Tenancy right amounting to Rs. 50,00,000/-.
10. Upon assessee’s appeal, Ld. CIT(A) noted that assessee submissions as under:-
“1. As submitted vide submission chart filed with your Honour on 12 Oct 2017, the Appellant had paid compensation amounting to INR 25,000,000 to Brandon & Company Private Limited (Brandon') for vacating the premises occupied by them and availing the said premises on leave and license basis for a period of 60 months on the same terms at which the said premises was given by Ewart Investments Ltd ('Ewart) to Brandon, which is beneficial to the Appellant. The Appellant claimed one fifth of the said amount as revenue expenditure during the captioned assessment year, which the learned AO disallowed treating it as capital expenditure.
In last hearing, your Honour had enquired about the tax treatment of such compensation given by Brandon in its return of income filed. We have been informed by Brandon that they have offered the said compensation of INR 25,000,000 as income under the head 'Capital Gains' and have paid long term capital gains tax on the same in the assessment year 2012-13.
3. As submitted during the last hearing and in the submission chart that the captioned payment is a revenue expenditure as the Appellant has neither acquired any capital asset nor acquired any enduring right/ benefit.
Further, as submitted during the last hearing, whether the payment is a capital expenditure or revenue expenditure, is to be examined from the payer's perspective and based on the factors related to the transaction. The tax treatment in the hands of the recipient cannot be a determinative factor for evaluating deductibility of such payment in the hands of the payer.
It is a settled law that the tax treatment provided for a particular item in the hands of one party to the transaction cannot be considered as a conclusive factor to determine taxability/ deductibility in the hands ,of the other party to the transaction. In this regard, the Appellant places strong reliance on the decision of Honourable Supreme Court in case of Empire Jute Co. Ltd. v/s. C/T [(1980) 124 ITR 1] wherein the Honourable Supreme Court has held as under (relevant extract reproduced):
"In the first place, it/s not a universally true proposition that what may be a capital receipt in the hands of the payee must necessarily he capital expenditure in relation to the payer. The fact that a certain payment constitutes income or capital receipt in the hands of the recipient is not material in determining whether the payment is revenue or capital disbursement qua the payer..........Whether it is capital expenditure or revenue expenditure would have to he determined having regard to the nature of the transaction and other relevant factors.
In light of the above, the Appellant submits before your Honour that the treatment given by Brandon in its income-tax return is not a relevant factor to determine the capital or revenue nature of expenditure in the hands of the Appellant. In absence of bringing into existence any capital asset in the hands of the Appellant, the compensation paid out of business exigency, which has not resulted into advantage of enduring nature, should be allowed as a revenue expenditure. In this regard reliance is placed on the decisions of the Honourable Supreme Court in case of and Empire Jute Co (supra) and CIT v/s. Madras Auto Service (P.) Ltd. [(1998) 99 Taxman 575]. The relevant extract of the decision of Honourable Supreme Court in case of Madras Auto Service (Supra) is as under: In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view.......since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus, saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure. "
7. In view of the aforesaid facts and submissions, the Appellant prays before your Honour that the compensation paid and claimed by the Appellant should be allowed as a revenue deduction and the disallowance of INR 5,000,000 made by the learned A 0 should be deleted. Without prejudice to above and in the alternative, the Appellant submits that in case the payment is characterized as capital one, then the depreciation should be allowed to the Appellant under section 32 of the Act.
Thereafter, the Ld. CIT(A) concluded as under:-
“9.3 I have carefully considered the facts of the case, discussion of the AO in the assessment order, oral contentions and written submission of the assessee and material available on record. It is the submission of the appellant that it had paid compensation amounting to INR 25,000,000 to Brandon & Company Private Limited
('Brandon') for vacating the premises occupied by them and availing the said premises on leave and license basis for a period of 60 months on the same terms at which the said premises was given by Ewart Investments Ltd ('Ewart) to Brandon. The Appellant claimed one fifth of the said amount as revenue expenditure during the captioned assessment year, which the AO disallowed treating it as capital expenditure. Though the Brandon has offered the said compensation of INR 25,000,000 as income under the head 'Capital Gains' and have paid long term capital gains tax on the same in the assessment year 2012-13, but it is the contention of the Appellant that it has neither acquired any capital asset nor acquired any enduring right! benefit. In absence of bringing into existence any capital asset in the hands of the Appellant, the compensation paid out of business exigency, Which has not resulted into advantage of enduring nature, would allowable as a revenue expenditure . In this regard the reliance placed on the decisions of the Honourable 'Supreme Court in case of Empire Jute Co (supra) and CIT v/s. Madras Auto Service (P.) Ltd. [(1998) 99 Taxman 575] is found to be applicable. The relevant extract of the decision of Honourable Supreme Court in case of Madras Auto Service (Supra) is as under:
"...In order to decide whether this expenditure is revenue expenditure or capital expenditure, one has to look at the expenditure from a commercial point of view .since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus, saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure.
In view of the aforesaid facts and discussion the observations and conclusion of the AO is not found to be justifiable and accordingly the ground raised is allowed.”
Against above order, Revenue is in appeal before us.
We have heard both the counsel and perused the records. The ld. Counsel of the assessee reiterated the submission made before the Ld. CIT(A). He submitted that assessee has paid the compensation to obtain the premises on lease for a period of five years. He submitted that assessee has not purchased any capital asset. Hence, he submitted that the entire amount paid was itself allowable as revenue expenditure. He submitted that however the assessee has been claiming proportionately over the period of five years of lease. He submitted that the amount was paid in Assessment Year 2011-12. He submitted that the expense was allowed in the earlier year and for the first time in this year the assessing officer has made the disallowance. The Ld. Counsel submitted that the Ld. CIT(A) has passed a reasonable order which doesn’t need any interference.
Per Contra, Ld. Departmental Representative relied upon the order’s of the Assessing Officer.
Upon careful consideration, we find that assessee has paid the aforesaid sum as compensation for obtaining the premises on lease for a period of five years. Assessee had paid the sum in Assessment Year 2011-12. Assessee has amortized the aforesaid sum at the rate of 20% for the period of five years of the lease. The Revenue allowed the aforesaid amortisation in the earlier two years. The Assessing Officer has disallowed the expenses for the current year. On the facts and circumstances, it is clear that assessee has not spent the amount for purchase of any capital asset. On the touchstone of decision from the Hon’ble Apex Court issue in the case of Madras Auto Service (supra), the entire amount was allowable as revenue expenditure. However, the assessee has been claiming the sum proportionately over the period of lease.
This has been allowed in earlier two years. In absence of any change in facts and circumstances in our considered opinion there was no reason for the AO to take a different stand.
Accordingly, in the background of aforesaid discussion and precedent, we do not find any infirmity in the order of the Ld. CIT(A), accordingly be of formed the same.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the Open Court on 09/05/2019