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Income Tax Appellate Tribunal, DELHI BENCH “G” NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI PRASHANT MAHARISHI
The aforesaid appeals have been filed by the Revenue against the common order dated 05.11.2015, passed by ld. CIT (Appeals)-XV, Delhi for the Assessment Years 2008-09 & 2009-10. Since issues involved in both the appeals are common, arising out of identical set of facts, therefore, same were heard together and are being disposed of by way of this consolidated order. We will first take up the appeal for the Assessment Year 2008-09 wherein the Revenue has raised the following grounds:- 1. “Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) erred in deleting the disallowance of Rs.
2 I.T.As. No.761 & 762/Del/2016 13,02,49,286/- incurred by the assessee for purchase of application software holding it as revenue in nature disregarding the fact that it is providing enduring benefits and should have been capitalized.
2. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) erred in deleting the addition of Rs.91558225/- made by AO u/s 14A without appreciating the facts that the assessee had failed to establish that the borrowed funds were exclusively used for business purposes.
3. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) erred in deleting the income of Rs. 660185/- being made by AO on account of reversal of income as per RBI guide lines.”
The brief facts are that the assessee is a non banking financial company engaged in the business of leasing, hire purchase and finance. The Assessing Officer during the course of the assessment proceedings noted that assessee company had incurred total expenditure of Rs. 34,30,05,872/- in respect of issue of debentures and discount of commercial paper. In the books of account, the assessee had debited a sum of Rs.21,27,56,382/- and in the P&L account and remaining amount of Rs.13,02,49,490/- was treated as deferred revenue expenditure. The bifurcation of the figures was as under:-
Details Debenture issue Discount on Total expenses commercial papers Amount Rs.9,01,59,872/- Rs.25,27,89,300/- Rs.34,29,49,172 incurred in A.Y. 2008-09
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Amount Rs.3,05,66,332/- Rs.18,21,33,554/- Rs.21,26,99,886/- debited to P& L account Amount Rs.5,95,93,540/- Rs.7,06,55,746/- Rs.13,02,49,286/- deferred
In the revised computation, assessee made a claim whereby it was contended that the debentures issue expenses and discount on commercial paper should be allowed in full in the year in which they are incurred. However, the learned Assessing Officer, relying upon the judgment of Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation vs. CIT, reported in 225 ITR 802 (SC) held that the concept of deferred revenue expenditure has been given a legal sanctity. Thus, following the judgment of Hon'ble Supreme Court, he disallowed the claim of entire expenditure made in this year.
4. Before the ld. CIT (A), the assessee submitted that the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation (supra) was distinguishable on facts and in fact the assessee’s case is squarely covered by the judgment of Hon'ble Jurisdictional High Court in the case of CIT vs. Panacea Biotech Ltd. [ITAs No.22 & 24/2002 (Del.)] which was identical on facts. It was submitted that though under the Companies Act in the books of account the debenture issue expenses and discount on commercial paper were treated as deferred revenue expenditure. However for income tax purpose, entire amount has been treated as revenue expenditure. It was also clarified
4 I.T.As. No.761 & 762/Del/2016 that the debenture issue expenses did not include deferred interest payable on interest but where onetime expense incurred at the time of raising the loan fund and they are not accounted to the tenure of debentures. Similarly, on account of discount and commercial papers, the same was incurred in the normal course of business. It was further explained that there is no concept of deferred expenditure in the Income Tax Act and since they are purely revenue expenditure, the same has to be allowed in the year in which it has been incurred. Ld. CIT(A) held that in the case of Madras Industrial Investment Corporation Ltd. (supra), the assessee itself had claimed only part of expenses against taxable income and when the expenses itself has been claimed on proportionate basis, the Hon'ble Apex Court held that assessee was committed to do so, whereas in the present case the assessee has not avail such option and has claimed the deduction for the full amount and same should be allowed in the year of the payment and should not be deferred over the period of time. The Hon'ble Jurisdictional High Court in the case of CIT vs. Panacea Biotech Ltd. (supra), has distinguished the judgment of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. (supra). He further observed that issue under consideration is also squarely covered by the Jurisdictional Tribunal in the case of the assessee itself for the Assessment Year 2000-01. Accordingly, he allowed the claim u/s.37 during the year itself.
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Before us the ld. counsel for the assessee, at the outset submitted that this issue stands covered by the decision of the Tribunal in assessee’s own case for the Assessment Year 2000-01 and 2001-02. On the other hand, learned DR strongly relied upon the order of the Assessing Officer.
After considering the relevant finding given in the impugned orders as well as the order of the Tribunal in assessee’s own case for the earlier years, we find that the amounts in respect of debenture issue expenses and discount on commercial paper are revenue expenditure per se. However, the Assessing Officer has disallowed it on the ground that in the books of account the assessee has treated part of the expenditure as deferred revenue expenditure, and therefore, in view of the decision of Hon'ble Apex Court in the case of Madras Industrial Corporation (supra), the expenditure so deferred proportionately for various years cannot be claimed in this year. We find that this precise issue has come up for consideration before the Tribunal in Assessment Year 2000-01, ITAs No.2897 & 2807/Del/2007 and Assessment Year 2001-02, ITAs No.2808 and 2898/Del/2007), the Tribunal after referring to various decision including that of Hon'ble Jurisdictional High Court in the case of CIT vs. Panacea Biotech Ltd. (supra) and catena of other decisions had allowed the said claim u/s.37 in the year in which such expenditure has incurred. Apart from that, we find that the Hon'ble Apex Court in the subsequent judgment in the case of Taparia Tools Ltd. vs. JCIT,
6 I.T.As. No.761 & 762/Del/2016 reported in (2015) 372 ITR 605, held that the assessee is entitled to claim the entire expenditure in the year in which it has been incurred. The Hon'ble Apex Court had also explained the judgment in the case of Madras Industrial Investment Corporation (supra) by observing and holding as under: “16) Judgment in Madras Industrial Investment Corporation Limited v. Commissioner of Income Tax, (1997) 4 SCC 666 was cited by the learned counsel for the Revenue to justify the decision taken by the courts below. We find that the Court categorically held even in that case that the general principle is that ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business is to be allowed in the year in which it is incurred. However, some exceptional cases can justify spreading the expenditure and claiming it over a period of ensuing years. It is important to note that in that judgment, it was the assessee who wanted spreading the expenditure over a period of time and had justified the same. It was a case of issuing debentures at discount; whereas the assessee had actually incurred the liability to pay the discount in the year of issue of debentures itself. The Court found that the assessee could still be allowed to spread the said expenditure over the entire period of five years, at the end of which the debentures were to be redeemed. By raising the money collected under the said debentures, the assessee could utilise the said amount and secure the benefit over number of years. This is discernible from the following passage in that judgment on which reliance was placed by the learned counsel for the Revenue herself: "15.. The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs.3,00,000 in that accounting year. This conclusion does not appear to be justified
7 I.T.As. No.761 & 762/Del/2016 looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corporation Ltd. vs. CIT, (1982) 30 CTR (Cal) 363: (1983) 144 ITR 474 (Cal) the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question.
Issuing debentures at a discount is another such instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures." 17) Thus, the first thing which is to be noticed is that though the entire expenditure was incurred in that year, it was the assessee who wanted the spread over. The Court was conscious of the principle that normally revenue expenditure is to be allowed in the same year in which it is incurred, but at the instance of the assessee, who wanted spreading over, the Court agreed to allow the assessee that benefit when it was found that there was a continuing benefit to the business of the company over the entire period.
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18) What follows from the above is that normally the ordinary rule is to be applied, namely, revenue expenditure incurred in a particular year is to be allowed in that year. Thus, if the assessee claims that expenditure in that year, the IT Department cannot deny the same. However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of 'Matching Concept' is satisfied, which up to now has been restricted to the cases of debentures. 19) In the instant case, as noticed above, the assessee did not want spread over of this expenditure over a period of five years as in the return filed by it, it had claimed the entire interest paid upfront as deductible expenditure in the same year. In such a situation, when this course of action was permissible in law to the assessee as it was in consonance with the provisions of the Act which permit the assessee to claim the expenditure in the year in which it was incurred, merely because a different treatment was given in the books of accounts cannot be a factor which would deprive the assessee from claiming the entire expenditure as a deduction. It has been held repeatedly by this Court that entries in the books of accounts are not determinative or conclusive and the matter is to be examined on the touchstone of provisions contained in the Act [See - Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income Tax (Central), Calcutta, (1972) 3 SCC 252; Tuticorin Alkali Chemicals & Fertilizers Ltd., Madras v. Commissioner of Income Tax, Madras, (1997) 6 SCC 117 ; Sutlej Cotton Mills Ltd. v. Commissioner of Income Tax, Calcutta, (1978) 4 SCC 358; and United Commercial Bank, Calcutta v. Commissioner of Income Tax, WB-III, Calcutta, (1999) 8 SCC 338]. 20) At the most, an inference can be drawn that by showing this expenditure in a spread over manner in the books of accounts, the 9 I.T.As. No.761 & 762/Del/2016 assessee had initially intended to make such an option. However, it abandoned the same before reaching the crucial stage, inasmuch as, in the income tax return filed by the assessee, it chose to claim the entire expenditure in the year in which it was spent/paid by invoking the provisions of Section 36(1)(iii) of the Act. Once a return in that manner was filed, the AO was bound to carry out the assessment by applying the provisions of that Act and not to go beyond the said return. There is no estoppel against the Statute and the Act enables and entitles the assessee to claim the entire expenditure in the manner it is claimed.”
The aforesaid judgment clearly clinches the issue wherein it has been held that if the revenue expenditure has been incurred in a particular year then same has to be allowed in that year itself, if the assessee has claimed the expenditure in that year and Revenue cannot deny the same. Thus, in view of earlier year precedence in assessee’s own case by the Tribunal and also respectfully following the ratio laid down by the Hon'ble Apex Court in the case of Taparia Tools Ltd. (supra), we decide this issue in favour of the assessee and accordingly ground no.1 is treated as dismissed.
Now coming to the issue of disallowance u/s.14A, the facts in brief are that the assessee has earned dividend income of Rs.72,61,069/- which was claimed as exempt and not chargeable to tax. In response to the show cause notice as to why expenditure in relation to earning of exempt income be not disallowed u/s.14A r.w. Rule 8D, the assessee submitted that, firstly, there is no direct nexus between the interest
10 I.T.As. No.761 & 762/Del/2016 bearing funds and the investment made since the entire investments have been made out of internal accruals and no borrowed funds have been used. Hence, no interest can be attributed to the income earned from investments; and secondly, in so far as administrative cost, the assessee cited following reasons:- “c. No administrative costs have been incurred to monitor the investments due to the following reasons: i. The assessee does not have a large portfolio of shares and as such does not require efforts on monitoring and management of shares. ii. Moreover in the present day scenario, an entity does not need to spend any significant amount on the maintenance of securities. We would like to draw your honour's attention to the Depositories Act, 1996, which came into force on September 20, 1995 under which the securities are no longer required to be maintained physically. As a result, the expenditure (management and/or administrative) required to be incurred on the securities, if at all, has become inconsequential.”
However, the learned Assessing Officer rejected the assessee’s contention on the ground that, firstly, there is an inbuilt cost even in so called passive activity of investment and there is incidental expenditure of collection, telephone, etc.; secondly, there is a deployment of funds and therefore, composite fund having cost, needs to be spread so as to apportion appropriate cost of funds invested in the activity lending to carrying of exempt income; lastly, Rule 8D is procedural and therefore, it has to be applied. After relying
11 I.T.As. No.761 & 762/Del/2016 upon the ITAT Special Bench decision in the case of ITO, Mumbai vs. M/s. Daga Capital Management Pvt. Ltd, he proceeded to work out the disallowance by applying Rule 8D and thereby made Rs.9,15,58,225/- which consisted of interest disallowance of Rs.8,52,13,518/- and indirect expenditure of Rs.63,44,707/-.
Before the ld. CIT(A), it was submitted that the investment have been made by the assessee’s own fund and not from the borrowed capital and there were huge reserves and surplus which aggregated to Rs.482.2 crore, whereas the investment stood at Rs.166.2 crore. It was further submitted that in the earlier years also disallowance on account of interest expenditure has been deleted. Ld. CIT (A) after detailed discussion noted that the investment in the units of mutual fund was made on the last date of the financial year and no dividend income has been earned and therefore, there is no question of incurring any expenditure. Apart from that assessee had sufficient interest free fund available for making investment in shares and mutual fund for earning the dividend income. The Assessing Officer has not recorded the ‘satisfaction’ with sufficient cause/reason by rejecting the claim of the assessee before making the disallowance u/s.14A and he has made only general observation about the applicability by provision of Section 14A. Again following the earlier year order of the Tribunal in the Assessment Year 2000-01, wherein it was held that dividend received from the group companies where the investment was made as strategic
12 I.T.As. No.761 & 762/Del/2016 investment and not for the purpose of earning dividend, therefore, no expenditure should be attributed. Following the same, he reiterated disallowance made by the Assessing Officer.
Before us, the ld. CIT-DR submitted that now in view of the latest decision of Hon'ble Supreme Court in the case of M/s. Max Opp. Investment Ltd. vs. ACIT, [2018] 91 taxmann.com 154 (SC), even if the investments are strategic investment then also disallowance u/s.14A is to be treated. Apart from that he submitted that assessee before us has not offered any suo motu disallowance, and therefore, there was no question of Assessing Officer to record any satisfaction and he has to resort to disallowance u/s.14A by applying Rule 8D. On the issue of disallowance of interest expenditure, he relied upon the order of the Assessing Officer.
On the other hand, learned counsel for the assessee submitted that before the Assessing Officer the assessee has given a very detailed explanation as to why interest expenditure and administrative cost could not have been apportioned for the purpose of disallowance u/s.14A. Apart from that, he submitted that the Assessing Officer as held by the ld. CIT(A) has not recorded his ‘satisfaction’ before invoking Rule 8D which is the mandatory requirement u/s.14A(2) and (3). In absence of such recording of satisfaction, Assessing Officer cannot proceed to make any disallowance. On the issue of interest expenditure, he
13 I.T.As. No.761 & 762/Del/2016 submitted that now it is a well settled proposition that if assessee has own surplus funds which are interest free far exceeding the investment made, then no interest component should be disallowed. Alternatively on the issue of administrative cost, he submitted that those investments which has not yielded dividend income, then same should be excluded from the computation of disallowance under Rule 8D (2)(iii). In respect of his contentions, especially on the issue of recording of satisfaction, he relied upon the decision of Hon'ble Delhi High Court in the case of HT Media Ltd. vs. Pr.CIT, reported in (2017) 399 ITR 576 (Del.) and Hon'ble Apex Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. Dy.CIT & Anr., reported in (2017) 394 ITR 449 (SC).
We have heard the rival submissions and also perused the relevant finding given in the impugned orders. First of all, we find that before the Assessing Officer in response to the show cause notice as to why disallowance u/s.14A r.w. Rule 8D should not be made, assessee has given a very detailed reason as to why interest expenditure or administrative cost cannot be said to be attributable for the purpose of earning of dividend income. The Assessing Officer without going into the merit of such a claim as was required by him in terms of sub- section (2) and sub-section (3) of Section 14A, that is, the Assessing Officer has to first examine the accounts of the assessee and if he is not satisfied with firstly, the correctness of assessee’s claim of expenditure; or secondly, the claim
14 I.T.As. No.761 & 762/Del/2016 made by the assessee that no expenditure has been incurred. Similar stipulation has been laid down under Rule 8D (1) also and once these mandatory conditions are satisfied then only he can proceed to apply formula Rule 8D. If he does not complies with such mandatory requirement, then he cannot proceed to make disallowance. Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Ltd. (supra) has upheld the said proposition in the following manner:- “Sub-sections (2) and (3) of section 14A of the Act read with rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of section 14A(2) and (3) read with rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.”
Similarly, the Hon'ble Jurisdictional High Court in the case of HT Media Ltd. (supra) had also reiterated the same principle in the following manner:- Rule 8D(1) states more or less what section 14A(2) of the Act states. It requires the Assessing Officer to first examine the accounts of the assessee and then record that he is not satisfied
15 I.T.As. No.761 & 762/Del/2016 with (a) the correctness of the assessee's claim of expenditure or (b) the claim made by the assessee that no expenditure has been incurred. Unless this stage is crossed, i.e., the stage of the Assessing Officer recording that he is not satisfied with the claim of the assessee in the manner indicated, i.e., after examining the assessee's accounts, the question of applying the formula under rule 8D(2) does not arise. That this is a mandatory pre-requisite for applying rule 8D(2) is fairly well-settled.”
Thus in absence of any kind of satisfaction by the Assessing Officer after examining the nature of expenditure debited and examining the accounts of the assessee, he cannot proceed to apply Rule 8D. Here in this case, it is more so, because assessee has given a very categorical explanation as to why disallowance u/s.14A should not be made, because entire investments have been made out of internal accruals and own interest free funds; and secondly, has given reasons as to why administrative expenditure cannot be held to be attributable at all for the purpose of disallowance. The Assessing Officer should have first examined such a claim with regard to the accounts of the assessee and the nature of expenditure debited so as to prima-facie come to a satisfaction whether any expense can be attributed for the purpose of earning the exempt income. It is only when he finds certain discrepancies in assessee’s claim, then only he can proceed with making of the disallowance. Here in this case, as discussed above, no such satisfaction has been recorded, and therefore, we hold that no disallowance
16 I.T.As. No.761 & 762/Del/2016 u/s.14A should be made. The other plea taken by the parties before us, are not discussed, because at the threshold we have held that no disallowance should be made.
Lastly, with regard to the issue of deletion of addition of Rs.6,60,185/- on account of reversal of income as per RBI guidelines, the Assessing Officer held that the reversal of income made by the assessee is against the principle of mercantile system of accounting and held that ITAT Special Bench in the case of New India Industries Ltd. vs. ACIT wherein it was held that RBI Guidelines cannot overruled statutory provision of law, added the same to the income of the assessee.
16. Before the ld. CIT(A), it was submitted that this issue has been discussed by the Tribunal in assessee’s own case for the Assessment Year 1999-00 in the case of its sister concern which has been confirmed by the Hon'ble Delhi High Court also. The ld. CIT (A) has held that since the issue is now settled by the Hon'ble Jurisdictional High Court in the case of the assessee and on the similar facts, he deleted the addition.
Both the parties before us agreed that this issue stands covered in favour of the assessee, therefore, the finding and observation given by the ld. CIT (A) is upheld.
In the result, the appeal of the Revenue is dismissed.
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In the Assessment Year 2009-10, the Revenue has raised following grounds:-
1. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) erred in deleting the disallowance of Rs. 30272952/- incurred by the assessee on issuance of debenture as revenue in nature disregarding the fact that it is providing enduring benefits and should have been capitalized.
2. Whether on the facts and circumstances of the case & in law, the Ld. CIT (A) erred in deleting the addition of Rs.90652715/- made by AO u/s 14A without appreciating the facts that the assessee had failed to establish that the borrowed funds were exclusively used for business purposes.”
20. Since, the issues involved are exactly similar to the issues raised in the Assessment Year 2008-09 and the ld. CIT (A) too has given a consolidated finding for both the years, therefore, our finding given above will apply mutatis mutandis for this year also. Consequently, ground no.1 is dismissed as the same is squarely covered by the decision of the Tribunal for the earlier years and also by the Hon'ble Apex Court in the case of Taparai Tools Ltd. (supra) as held by us in the aforesaid appeal. The disallowance u/s.14A is also not sustainable as similar facts are permeating in this year also as Assessing Officer has not recorded his satisfaction on the claim made by the assessee. Hence, the appeal of the Revenue is dismissed.
To sum up, both the appeals of the Revenue are dismissed.
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