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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
In these three appeals, two appeals by the assessee and one by the Revenue, are arising out of the orders of Commissioner of Income Tax-21, Mumbai [in short CIT(A)], in appeals Nos. CIT(A)-21/IT/203 /2010- 11 & CIT(A)-21/IT/428/2011-12, orders dated 09.09.2011 & 01.04.2013. The Assessments were framed by the Asst. Commissioner of Income Tax, Circle-10(1), Mumbai (in short ‘ACIT/ AO’) for the A.Ys. 2008-09 & 2009- 10 vide order dated nil, 06.12.2011 under section 143(3) of the Income Tax Act, 1961 (hereinafter ‘the Act’).
2. The first common issue in ITAs no. 5395/Mum/2013 & 8547/Mum/2011 for AY 2008-09 is as regards to the disallowance of expenses relatable to exempt income by the AO and confirmed by CIT(A) by invoking the provisions of section 14A of the Act read with Rule 8D of the IT Rules of 1962. For this assessee has raised the identically worded grounds and the facts and circumstances are also exactly identical in both the years. The ground as raised in AY 2009-10 reads as under: - “1. On the facts and circumstances of the case and in law, the CIT(A) erred in confirming the action of the Assistant Commissioner of Income Tax 10(1). Mumbai ("the AO") in disallowing a sum of Rs. 19,74,351/- u/s. 14A of the Act being the disallowance u/s 14A of the Act r.w.r SD of the Rules.
We further erred in applying rule SI) of the Rules automatically without considering the facts of the Appellant and without recording his dissatisfaction on the amount computed and offered for disallowance by the Appellant.
3. The Appellant prays that the disallowance u/s 14A of Rs. 19,74,351/- be deleted.
4. Without prejudice. the Appellant prays that the disallowance be restricted to Rs. 3,98,152/-."
3. Brief facts are relating to this issue are that the assessee has earned dividend income of ₹ 8,14,31,884/- and claimed the same as exempt under section 10(34) of the Act. The assessee vide letter dated 25.08.2011 suo moto disallowed expenses relatable to this exempt income at ₹ 3,98,152/-. The AO invoked the Rule 8D(2)(iii) and disallowed administrative expenses at ₹ 23,72,503/- by observing as under: - “iii. Disallowance of other expenses 0.5% of average amount of investments o.5% of ₹ 474500548 ₹ 23,72,503 total disallowance under section 14A 23,72,503/-."
Aggrieved, assessee preferred the appeal before CIT(A), who also confirmed the action of the Assessing Officer. Aggrieved, now assessee is in second appeal before Tribunal.
We have heard rival contentions and gone through the facts and circumstances of the case. Before us, the learned Counsel for the assessee filed detailed scientific disallowance made by assessee and the relevant is enclosed in assessee’s paper book at page 68. This information was filed by assessee before Assessing Officer. The relevant details of expenses are as under: - Type of expenses Nature Yearly No. of No. For 1 % to Total amount empls of employee be amount at empl. taken lower parel Staff salary CTC Direct 667,853 40% 267,141 Authorised signatory 1% of 5,601,354 1% 56,014 CTC 0.1% of ₹ 5173997 (CEO’s 6,522,000 0.10% 6,522 Deputation Expenses) Office Boy salary 1% of CTC 111,192 1% 1,112 Rent Indirect 21,170,758 159 1 133,149 40% 53,260 Security Charges Indirect 426,062 159 1 2,680 40% 1072 House Keeping Indirect 409,482 159 1 2575 40% 1030 Canteen Exps Indirect 491752 159 1 3093 40% 1237 Electricity Charges Indirect 3375902 159 1 21232 40% 8493 Telephone Exps Indirect 902867 159 1 5678 40% 2271 398152
We have gone through the assessment order and noticed that the assessing officer have nowhere pointed out any defect in the suo moto disallowance computed by the assessee in regard to expenses relatable to exempt income. Simply the AO has applied Rule 8D(2)(iii) and by applying the said formula he has computed the disallowance. According to us, this issue is squarely covered by the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC), held as under: - ““41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/ making the investment in shares is to be examined by the AO.”
We are of the view that satisfaction is mandatory in view of the above decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd and in the present case, there is no whisper about rejection of assessee’s contention of expenses disallowed suo moto in relation to earning of exempt income. Hence, according to us there is no satisfaction recorded by the AO for rejection of the assessee’s disallowance and accordingly, we delete the disallowance.
Similar are the facts in AY 2008-09 and hence, taking a consistent view, we delete the disallowance in AY 2008-09 in also.
Another issue in for AY 2008-09 is as regards to the order of CIT(A) confirming the disallowance of expenses relatable to exempt income under section 14A while computing the book profit under section 115JB of the Act. For this assessee has raised the following ground No. II: -
1. On the facts and circumstances of the case and in law, the Id. CIT(A) erred in confirming the addition made by the AO of a sum of Rs. 15.24.386/-to the computation of the Appellant u/s 115JB of the Act u/s. 14A read with rule 8D of Income Tax Rules, 1962.
2. The Appellant prays that as no disallowance is warranted u/s 14A of the Act, the aforesaid addition of Rs. 15,24,386/- be deleted.
Without prejudice. the Appellant prays that the addition be restricted to Rs. 3,15,255/."
At the outset, it is noticed that this issue is squarely covered in favour of assessee and against Revenue by the decision of Special Bench of this Tribunal in the case of Vireet Investments (P.) Ltd. [2017] 58 ITR (AT) 313 (Delhi - Trib.) (SB) wherein the Tribunal has clearly held that no disallowance under section 14A of the Act r.w.r 8D of the Rules can be made while computing book profit under section 115JB of the Act. The learned Sr. DR could not controvert the above proposition. Accordingly, we are of the view that this issue is covered by the special bench decision of this Tribunal in the case of Vireet Investments (P.) Ltd. (supra). Respectfully following the same, we delete the disallowance and allow this issue of assessee’s appeal.
The first issue in Revenue’s appeal in for AY 2008-09 is against the order of CIT(A) allowing depreciation on computer accessories and printers at 60%. For this assessee has raised the following ground No. 1: -
1. On the facts and circumstances of the case and in law, the learned CIT(A) erred in allowing depreciation @ 60% on computer accessories & printers."
Brief facts are that during the year under consideration, the assessee purchase scanner machine, printers and claimed depreciation on printers and scanners at the rate of 60%. According to AO, depreciation on printers and scanners was allowable at the rate of 15% as against 60% claimed by assessee. But CIT(A) allowed the claim of depreciation at the rate of 60% by observing as under: - “Since in various decisions it had been held that the computer accessories and other items are integral part of computer system and hence allowable depreciation is @ 60%. Following the above decisions, the AO is directed to allow depreciation @ 60% on printers."
Aggrieved, Revenue is in appeal before Tribunal.
13. At the outset, the learned Counsel for the assessee filed copies of Tribunals order in assessee’s own case in for AY 2007-08, wherein Tribunal vide order dated 22.07.2015 has allowed the claim of the assessee by observing in Para 5 as under: - “5. Before us, the Ld. Departmental Representative had not raised any cogent reasoning to negate the finding of CIT(A) that the items picked up by the Assessing Officer were part and parcel of the entire computer system and that the same could be operate on a standalone basis. In this view of the matter, we therefore, find no reason to interfere with the ultimate conclusion of the CIT(A) to allow depreciation at the rate of 60% on the cost of Switches, Routers, Ports, Server Racks, Data patch cords, Networking accessories etc., comprised in the computer block. Moreover, the Ld. Representative had referred to the judgement of Hon’ble Delhi High court in the case of CIT vs. BSES Yamuna Powers Ltd. (2013) 40 taxmann.com 108 (Delhi, Wherein, it has been held that the computer accessories and peripherals being an integral part of the computer system are eligible for depreciation at the rate of 60%. Therefore, in the aforesaid background, we uphold the decision of the CIT(A) that the impugned items constitute an integral part of the computer and, therefore, the cost of such items is also entitled for depreciation at the rate of 60% which is the rate prescribed for “Computers” in Appendix 1 to Rule 5 of the Income Tax rules, 1962. Thus, insofar as, Ground of appeal No. 1 is concerned Revenue fails."
14. Respectfully following the Tribunals order in assessee’s own case, we confirm the order of CIT(A) and dismiss this issue of Revenue’s appeal.
15. The second issue in this appeal of Revenue in for AY 2008-09, is against the order of CIT(A) directing the AO to assess interest income under the head business income. For this Revenue has raised the following ground No. 2: -
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the AO to assess interest income under the head “business income."
We have heard rival contentions and gone through the facts and circumstances of the case. We find that the CIT(A) has followed earlier years order of assessee’s own case for AY 2007-08 and held that the interest receipt are business income because the assessee, for a very short period investing in FD’s and Mutual Funds and earned interest income which is incidental. For this CIT(A) observed in para 8.1 as under: - “8.1 I have considered the facts of the case. This issue was also there in appellant’s case in AY 2007/08 wherein it was held that such interest income was assessable under the head business income. The facts of the year under consideration are identical to that of AY 2007-08. During the course of business, the business receipts of the appellant were available for short period of time for deposing the same in fixed deposits and mutual funds. Thus the interest income has been earned on deployment of business receipts. The Hon’ble Bombay High Court in the case of CIT vs. Lok Holdings 308 ITR 356 held that where business receipts are used for earning interest income, the interest income was assessable under the head business income. In the case under considerations the business receipts were not surplus funds but were not immediately required for the purpose of business activities. Thus these business receipts were available to the appellant for a very short period during the year which were invested in FDs and mutual funds. Following the Bombay High Court decision in the case of Lok Holding and appeal order of AY 2007-08, the AO is directed to assess the interest income under the head profits and gains of business or profession. This ground of appeal is therefore, allowed."
We find that the Tribunal in for AY 2007- 08 vide order dated 22.07.2015 considered this issue and treated this as business income by observing in para 10 to 13 as under: - “10. On account of the aforesaid business cycle, money collected by assessee on behalf of its client's is retained by it till it is paid-off to the client's. In such interregnum period, assessee enjoys control over the entire amount of receivables from the settlement date to status date and for the net amount (i.e. amount of receivables less the amount of failures) for one day (i.e. from the status date to the following day, when the payment has to be made to clients). The above funds and surplus generated through internal accruals are invested for short periods of time in fixed deposits and mutual fund units, which yield incomes to the assessee. The amount of interest income in question is stated to have been earned on FDRs kept out of such float of funds. The aforesaid factual matrix has not been assailed by the Revenue before us and, therefore, it would be appropriate to infer that the impugned interest income on FDRs has arisen by deployment of funds generated in the course of business activity. Notably, there is a close and intrinsic connection between the income earned by deployment of short term funds and assessee's ECS transaction processing activity of business.
11. In the context of the aforesaid factual matrix, the CIT(A) found that the Judgment of Hon'ble Bombay High Court in the case of CIT Vs. Lok Holdings 308 ITR 356 (Born.), covers the controversy in favour of the assessee. In the case of Lok Holdings (supra), assessee was engaged in construction business and received monies from the purchasers of flats which it deposited with the bank before using it for its activity of construction. The income earned on money deposited with banks was held to be assessable as business income on the ground that the interest income sprang from the business activity of the assessee and not out of any independent activity. In our considered opinion, the ratio of the Judgment of Hon’ble Bombay High Court in the case of Lok Holdings (Supra) is clearly attracted in the instant case also. In the case before us, the assessee is in the business of ECS transaction processing activity in the course of which, it gains control over funds for a short period of time, which it deploys with the bank and earns interest. The business mechanics brought out by the assessee clearly establish that the interest income arises from the business activity of the assessee and not out of any independent activity and thus, the same is assessable as business income.
12. Apart therefrom, the judgment of Hon'ble Madras High Court in the case of CIT Vs. Tamil Nadu Dairy Development Corporation Ltd. 216 ITR 535 (Madras), relied upon by the assessee before us also supports the conclusion drawn by the CIT(A). As per the Hon'ble Madras High Court interest income earned oil term deposits of business funds available with the assessee before the same were utilized for actual business operations was to be treated as an activity incidental to the business income. In the case before us also, factually assessee is earning interest out of an activity incidental to its business operations and, therefore, the impugned interest income has been correctly held to be assessable as business income by the CIT(A). The judgement of Hon’ble Kolkata High Court in the caseo f CIT vs. East India Hotels 207 ITR 881 (Kolkata) (HC) and the judgement of Hon’ble Karnataka High Court in the case of CIT vs. Production (P) Ltd (2007) 290 ITR 598 (Kar) also supports the aforesaid proposition.
In view of the aforesaid discussion an having regard to the material on record, we hereby affirm the action of the CIT(A) in accepting the interest income of ₹ 68,26,326/- as business income. Thus, this aspect also, Revenue fails."
Respectfully, following the Tribunal order in assessee’s own case, we dismiss this issue of Revenue’s appeal.
In the result, the appeals of assessee in & 5395/Mum/2013 for AY 2008-09 & 2009-10 respectively, are allowed. The appeal of Revenue in ITA No. 8576/Mum/2011 is dismissed. Order pronounced in the open court on 12-10-2018.