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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI G. MANJUNATHA
Date of Hearing – 17.01.2018 Date of Order – 24.01.2018
2 M/s. Tata Motors Ltd. O R D E R PER SAKTIJIT DEY, J.M.
Aforesaid cross appeals arise out of order dated 20th February 2006, passed by the learned Commissioner (Appeals)–X, Mumbai, for the assessment year 1999–2000.
In ground no.1, assessee has challenged disallowance of depreciation amounting to ` 55,02,27,227, on leased assets.
Brief facts are, the assessee earlier known as Tata Finance Limited was engaged in financing and related activity. For the assessment year under dispute, the assessee filed its return of income on 30th December 1999, declaring loss of ` 1,14,86,748 under normal provisions and book profit of ` 13,18,79,252, on which assessee paid taxes. In course of the assessment proceedings, the Assessing Officer noticed that the assessee has claimed depreciation of ` 55,02,27,226, on assets leased by it which includes depreciation @ 50% amounting to ` 16,04,71,679, on leased assets depreciation on which was disallowed in assessment year 1998–99. The Assessing Officer being of the view that allowability of depreciation is based on fulfillment of twin condition of ownership of assets by the claiment and its user for the purpose of business, called upon the assessee justify its claim. Though, the assessee made elaborate submissions justifying its claim
3 M/s. Tata Motors Ltd. of depreciation, however, the Assessing Officer did not find merit in the submissions of the assessee. The Assessing Officer referring to the sale and lease back transactions entered with different companies held that they are simply in the nature of finance / loan transaction, therefore, the assessee is neither the owner of the assets nor such assets were used for the purpose of its business. Accordingly, he disallowed assessee’s claim of depreciation on leased assets.
Though, the assessee challenged the disallowance of depreciation before the first appellate authority, however, he also sustained the disallowance.
The learned Sr. Counsel, Shri Dinesh Vyas, appearing for the assessee submitted that in the preceding assessment years in assessee’s own case, the Tribunal has decided the issue in favour of the assessee by applying the ratio laid down by the Hon'ble Supreme Court in case of ICDS Ltd. v/s CIT, 350 ITR 527 (SC). In this context, he referred to the decision of the Tribunal for assessment years 1994– 95 to 1998–99. He submitted, there being no difference in facts on the basis of which the Tribunal had decided the issue in assessee’s own case earlier, the decisions have to be followed in the impugned assessment year as well. Further, he also relied upon the decision of the Hon'ble Jurisdictional High Court in CIT v/s Apollo Finvest (I) Ltd., of 2013.
4 M/s. Tata Motors Ltd.
6. The learned Departmental Representative Shri Manjunatha Swamy, relied upon the observations of the Departmental Authorities.
We have considered rival submisions and perused material on record. We have also applied our mind to the decisions relied upon. Undisputedly, the issue relating to assessee’s claim of depreciation on leased assets is a recurring dispute between the parties from the preceding assessment years. The Departmental Authorities treating the lease transaction as finance transaction continued to disallow assessee’s claim of depreciation. However, the Tribunal while deciding the issue in assessee’s own case for assessment year 1997–98 and 1998–99 in ITA no.6214/Mum./ 2003 and others, dated 6th January 2017, followed the decision of the Hon'ble Supreme Court in ICDS Ltd. (supra) and allowed assessee’s claim of depreciation. Following the aforesaid decision, the Tribunal again while deciding assessee’s appeal for assessment years 1994–95 to 1997–98 in 1487/Mum./2012, dated 12th June 2017, allowed assessee’s claim with the following observations:–
“5. We have considered the rival submission of the parties and perused the material available on record carefully. Besides the year under consideration, the ld. CIT(A) sustained the similar disallowance of depreciation of leased asset for AYs 1995–96, 1996–97,1997–98 and 1998–99. The assessee has filed appeal before the ITAT vide for AY 1997–98 and ITA No. 7148/Mum/2004 for AY 1998–99 and the Tribunal passed the following order:
5 M/s. Tata Motors Ltd.
“18.15. We have heard the rival submissions and perused the material before us. We find that impugned assets underlying lease agreements were very much in existence, that purchase consideration of assets was discharged by the assessee through banking channels, that copies of the cheques were also produced, that the lease transactions were completed as per all legally prescribed procedures, that it was a rightful owner of leased assets that the leassees had confirmed the ownership of assets, that lease rentals earned by the assessee was offered to tax and same was assets by the AO.s in the year under consideration as well as in the subsequent AY.s. Here, we would like to discuss the matter of I.C.D.S. Ltd.(supra).In that case the Hon’ble Apex Court has held as under:– “The provision on depreciation in the Income–tax Act, 1961, reads that the asset must be “owned, wholly or partly, by the assessee and used for the purpose of the business”. Therefore, it imposes a twin requirement of “ownership” and “usage for business” for a successful claim under section 32 of the Act. The section requires that the assessee must use the asset for the “purposes of business”. It does not mandate usage of the asset by the assessee itself. As long as the asset is utilized for the purpose of business of the assessee, the requirement of section 32 will stand satisfied, notwithstanding non– usage of the asset itself by the assessee. The definitions of “ownership” essentially make ownership a function of legal right or title against the rest of the world. However, it is “nomen generalis– simum”, and its meaning is to be gathered from the connection in which it is used, and from the subject– matter to which it is applied. As long as the assessee has a right to retain the legal title against the rest of the world, it would be the owner of the asset in the eyes of law.” As the assessee was the owner of the assets leased out to different parties, so, it was entitled to claim depreciation. The FAA had gone through the lease agreements, confirmation letters and other relevant material. As the existence of assets and their use is in 6 M/s. Tata Motors Ltd. doubt, so, the AO, in our opinion was not justified in denying the claim of depreciation made by assessee. We also find that FAA had allowed depreciation @500%, as the assets were used for less then 180 days during the year under consideration. It is also a fact that two of the lessees are state electricity boards i.e. APSEB and RSEB. Both of them have confirmed the lease transaction and installation of machinery/ assets. The FAA had observed that it could not be alleged that govt. undertakings had colluded with the assessee to mislead and defraud the govt. of its revenue by giving wrong confirmations. So, we do not see any infirmity in the order of the FAA. Confirming his order, we decide the Ground No. 11 against the AO.”
Thus, considering the decision of Tribunal in assessee’s own case on identical ground of appeal, which was decided on the identical fact, we find that this ground of appeal is covered in favour of assessee and against the revenue. The coordinate bench decided the identical ground of appeal on the basis of decision of Apex Court in case of ICDS Ltd (supra). Thus, respectfully following the decision of Tribunal the ground No.1 of appeal raised by assessee is allowed.”
8. There being no difference in facts nor any contrary decision brought to our notice by the learned Departmental Representative, respectfully following the decisions of the Co–ordinate Bench in assessee’s own case, as referred to above, wherein, the principle laid down by the Hon'ble Supreme Court in ICDS Ltd. (supra), were applied we allow depreciation claimed by the assessee. This ground is allowed.
9. In ground no.2, assessee has challenged the disallowance of an amount of ` 89,10,830, being expenses incurred for increase in authorised share capital.
7 M/s. Tata Motors Ltd. 10. Brief facts are, the Assessing Officer while examining the nature of the expenditure claimed found that it was related to increase of authorised share capital of the company. Therefore, treating the expenditure incurred as capital nature, he disallowed the claim.
The learned Commissioner (Appeals) also sustained the disallowance for the very same reason.
We have considered rival contentions and perused the material on record. Learned Sr. Counsel for the assessee fairly conceded that in view of the decision of the Hon'ble Supreme Court in Punjab State Industrial Development Corporation v/s CIT, 225 ITR 792 and Brooke Bond India Ltd v/s CIT, 225 ITR 798, the expenditure incurred by the assessee has to be treated as capital in nature. In view of the aforesaid, we uphold the decision of the first appellate authority on this issue. Ground no.2 is dismissed.
In ground no.3, the assessee has challenged the disallowance of prior period expenses amounting to ` 9,87,760=54.
Brief facts are, during the assessment proceedings the Assessing Officer noticing that the assessee has debited an amount of ` 9,87,760=54 towards expenses relating to prior period called upon the assessee to justify its claim. Though, the assessee vide letter dated 27th February 2002, submitted that the expenditure was claimed
8 M/s. Tata Motors Ltd. because it crystallized in the impugned assessment year, however, the Assessing Officer rejecting the explanation of the assessee disallowed the expenditure claimed.
The first appellate authority also confirmed the disallowance.
Learned Sr. Counsel drawing our attention to the audit report in form no.3CD filed before the Assessing Officer submitted that in the relevant assessment year while the assessee offered prior period income of ` 76,06,741=23 it claimed prior period expenditure of ` 9,87,760=54. He submitted, though, the income and expenditure related to the prior period, however, since they crystilazed in the impugned assessment year, the assessee offered the income to tax and claimed the expenditure relating to prior period. He submitted, when the Department is accepting the prior period income, there is no reason why it should disallow the prior period expenditure. Further, the learned Sr. Counsel submitted, the prior period expenses if netted off against prior period income, no disallowance could be made. Further, he submitted, the year of allowance of expenditure becomes immaterial when it is revenue neutral due to same tax rate. In support of such contention, the learned Sr. Counsel relied upon the following decisions:– i) CIT v/s Excel Industries Ltd., 358 ITR 295 (SC); ii) CIT v/s Nagri Mills Co. Ltd., 33 ITR 681 (Bom.);
9 M/s. Tata Motors Ltd. iii) CIT v/s ExxonMobil Lubricants Pvt. Ltd., 328 ITR 17 (Del.); iv) CIT v/s Mahanagar Gas Ltd., 221 Taxman 80 (Bom.); and v) CIT v/s Jagatjit Industries Ltd., 339 ITR 382 (Del.).
Finally, learned Sr. Counsel submitted, though, the assessee is following similar method of accounting with regard to prior period income and expenditure, no such disallowance has been made either in the preceding or succeeding assessment years. Therefore, applying the rule of consistency also, the expenditure has to be allowed.
The learned Departmental Representative relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals).
We have considered rival contentions and perused material on record. We have also applied our mind to the decisions relied upon. In so far as the factual aspect of the issue is concerned, there is no dispute that in the relevant previous year the assessee has offered prior period income of ` 76,06,741=23 and claimed prior period expenditure of ` 9,87,760=54. Before the Assessing Officer, the assessee also justified its claim by stating that such expenditure did crystallize in the impugned assessment year. The Assessing Officer has not rebutted the aforesaid claim of the assessee with any cogent reasoning. Moreover, when the Assessing Officer has no objection in accepting the prior period income, applying the same principle he
10 M/s. Tata Motors Ltd. should not have objected to the claim of prior period expenditure when such expenditure claimed by the assessee is far less than the prior period income. Even the expenditure could have been netted off against the income relating to prior period. Therefore, keeping in view the ratio laid down by the learned Sr. Counsel, we allow assessee’s claim and delete the addition made on account of disallowance of prior period expenditure. This ground is allowed.
In ground no.4 of the assessee’s appeal corresponding to the only effective ground by the Revenue in its appeal, the issue of disallowance under section 14A of the Act has been raised.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that in the relevant previous year, the assessee has earned exempt income by way of dividend amounting to ` 9,96,85,247, whereas it has not disallowed any expenses attributable to such income earned as per section 14A of the Act, called upon the assessee to explain why disallowance under the said provision should not be made. In response, it was submitted by the assessee that investment in exempt income yielding assets were made out of own funds, therefore, no disallowance of interest expenditure can be made. Further, it was submitted, no expenditure having specifically been incurred only and exclusively for the investment activity, disallowance under section 14A cannot be made. In support of his contention, the 11 M/s. Tata Motors Ltd. assessee relied upon a number of case laws. The Assessing Officer, however, was not convinced with the explanation of the assessee. He observed, in every year, there is certain increase in capital, interest bearing borrowings and profits of that year. However, it is improbable to co–relate that only capital of profits of the year was invested in earning the exempt income. He observed, due to blending of funds, logically it has to be held that interest bearing funds were also used in investment activities. Therefore, disallowance of interest expenditure on proportionate basis has to be made. Accordingly, he disallowed interest expenditure to the tune of ` 34.96 crore. Further, the Assessing Officer held that the assessee must have incurred other expenses like salary, travelling, conveyance, telephone, office maintenance, general expenditure for earning dividend income which cannot be quantified on exact basis. Therefore, he disallowed 10% of the dividend income towards expenditure incurred for earning such income. Against the disallowance made under section 14A of the Act, the assessee preferred appeal before the first appellate authority.
The learned Commissioner (Appeals) after considering the submissions of the assessee upheld disallowance of interest expenditure, however, insofar as ad–hoc disallowance of 10% out of other expenditure is concerned, the first appellate authority deleted the disallowance on the reasoning that there is nothing on record to 12 M/s. Tata Motors Ltd. suggest that the assessee has incurred any other expenditure for earning the dividend income. While the assessee is challenging disallowance of interest expenditure, the Department is aggrieved with the decision of the learned Commissioner (Appeals) in deleting disallowance of other expenditure.
The learned Sr. Counsel for the assessee reiterating the stand taken before the Departmental Authorities submitted that own surplus interest free fund available with the assessee during the relevant previous year far exceeds the investments made in shares, therefore, no disallowance of interest expenditure can be made. He submitted, considering the aforesaid factor, the Tribunal in assessee’s own case for assessment year 1999–2000 to 2002–03, has deleted the disallowance of interest expenditure. Further, in support of his contention, the learned Sr. Counsel for the assessee relied upon the following decisions:–
i) HDFC Bank Ltd. v/s CIT, 383 ITR 529 (Bom.); ii) CIT v/s HDFC Bank Ltd., 366 ITR 505 (Bom.); and iii) CIT v/s Reliance Utilities & Power Ltd., 313 ITR 340 (Bom.).
The learned Departmental Representative, though, supported the decision of the first appellate authority in respect of disallowance of interest expenditure, however, so far as disallowance of other expenditure is concerned, he submitted, the first appellate authority
13 M/s. Tata Motors Ltd. was not justified in deleting the disallowance of other expenditures made by the Assessing Officer.
In the rejoinder, the learned Sr. Counsel submitted, though, disallowance of other expenditure is not called for, however, one percent out of the dividend income can be disallowed in view of the decision of the Tribunal in assessee’s own case for assessment year 1999–2000 to 2002–03.
We have considered rival contentions and perused material on record. We have also examined the decisions relied upon. Insofar as disallowance of interest expenditure is concerned, notably, the financial statement of the assessee clearly demonstrate that the assessee was having own interest free fund available which far exceeds the investments made. In fact, the Assessing Officer at Page– 40 of the assessment order has himself reproduced the details of fund available with the assessee and investment made. A perusal of the said figure would reveal that while the assessee has own interest free funds available with it amounting to ` 411.76 crore, the investments made were to the tune of ` 249.82 crore. Thus, the assessee having sufficient interest free funds available with it to take care of it investments, no disallowance out of interest expenditure can be made under section 14A of the Act in view of the decisions of the Hon'ble Jurisdictional High Court (supra) relied upon by the learned Sr.
14 M/s. Tata Motors Ltd. Counsel for the assessee. In fact, in assessee’s own case for assessment year 1999–2000 to 2002–03, the Co–ordinate Bench while deciding the appeal in ITA no. 3329/Mum./2011 and others dated 31st August 2017, deleted the disallowance of interest expenditure applying the ratio laid down by the Hon'ble Jurisdictional High Court referred to above. In view of the aforesaid, we delete the disallowance of interest expenditure made by the Assessing Officer and sustained by the learned Commissioner (Appeals).
Insofar as disallowance of other expenditure under section 14A is concerned, notably, the Tribunal while deciding assessee’s appeals for 1999–2000 to 2002–03 in the order referred to above, sustained such disallowance to be made under section 14A at one percent of the exempt income. Following the aforesaid decision of the Co–ordinate Bench, we direct the Assessing Officer to disallow one percent of the dividend income earned during the year. Ground raised by the assessee is allowed and ground raised by the Revenue is partly allowed.
In the result, both the appeals are partly allowed. Order pronounced in the open Court on 24.01.2018