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Income Tax Appellate Tribunal, DELHI BENCH ‘C’ NEW DELHI
Before: SHRI H.S. SIDHU & SHRI L.P. SAHU
Per L.P. Sahu, Accountant Member:
This is an appeal by the Revenue against the order dated 31.10.2013 of ld. CIT(A)-XV, New Delhi for the assessment year 2010-11 on the following grounds :
“1. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of Rs.56,44,511/- made by the AO u/s. 14A r.w.r. 8D?
2. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of Rs.56,86,641/- made by the AO on account of disallowance of depreciation of fixed assets despite the fact that the assessee company has closed its business activities during
the concerned year in which those fixed assets were in use and therefore those assets cannot be said to put to use during the concerned year as per the decision of the Hon’ble Bombay High Court decided in the favour of the Revenue in the case of Dineshkumar Gulabchand Agarwal vs.CIT & Anr. (Bom.) 267 ITR 768.
3. Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of Rs.13,99,056/- made by AO on account of disallowance on account of advance & securities written off?”
It transpires from the above grounds of appeal, that the Revenue has assailed the impugned order of ld. CIT(A) on deletion of following three disallowances made by the Assessing Officer :
(i). Disallowance u/s. 14A Rs.56,44,511/- (ii). Disallowance out of depreciation claimed Rs.56,86,641/- (ii). Disallowance of advance & Securities written off Rs.13,99,056/-
The factual matrix leading the first issue is that during the course of assessment proceedings, the AO noticed that the assessee company earned dividend income on shares at Rs.5,14,95,795/- and on mutual funds at Rs.62,55,905/- totaling to Rs.5,77,51,700/- which was claimed as exempt income. However, as per AO since no expenses were claimed to have been incurred for earning this exempt income, the assessee was required to explain as to why the disallowance u/s. 14A of the Act be not determined as per Rule 8D of the IT Rules. In response, the assessee explained that out of the aggregate expenses of Rs.5.57 crores claimed in the profit and loss account, expenses aggregating to Rs.4.96 crores were already disallowed and added back in the computation of income and therefore, no further disallowance out of balance expenses of Rs.60,77,000/- claimed against the business income, is warranted u/s. 14A of the Act. The AO was not convinced with the explanation of the assessee and observed that bulk of investment of assessee was in shares and mutual funds only amounting to Rs.2,90,96,41,000/-. He, therefore, relying on the decision of Special Bench of ITAT, New Delhi in the case of Cheminvest Ltd. v. ITO, 317 ITR 86 and another order of ITAT in Daga Capital Pvt. Ltd. in invoked the provisions of Rule 8D and worked out the disallowance thereunder of an amount of Rs.1,38,31,112/-.
However, noticing that the assessee had claimed expenses only to the tune of Rs.60,77,000/-, the AO disallowed such expenses in proportion of total exempt income to the total taxable income and accordingly made disallowance of Rs.56,44,511/- u/s. 14A of the IT Act r.w.r. 8D of the IT Rules.
The assessee carried the matter in appeal before the first appellate authority, who after considering the elaborate submissions of the assessee, deleted the addition observing as under :
“Regarding the Ground No.1 of the appeal relating to disallowance under Section 14A, I find that the Ld. AO was not satisfied with the claim of the appellant and invoked the Rule 8D. However, the total disallowance as per Rule 8D worked out at Rs. 1,38,31,112/-. Therefore, he disregarded the computation under Rule 8D and applied a thumb rule, whereby he took into account total expense claimed by the appellant amounting to Rs.60.77 lakhs, and disallowed the above expenses in the ratio of total exempt income to total income of the appellant of an amount of Rs.56,44,511/-.
6.3.2 The purpose of section 14A, when inserted by the Finance Act, 2001, was to ensure that no expenses that are actually incurred for earning tax exempt income are claimed against the taxable income. In order to avoid subjectivity in such determination and to avoid resulting litigation objective procedure was prescribed in the form of Rule 8D, w.e.f. 24.3.2008. However, this procedure is to be applied only, where the AO, having regard to the accounts of the taxpayer, is satisfied that the claim of appellant is not correct. Other than this procedure, no other method is legally permissible to compute the disallowance.
6.3.3 I find that the Ld. AO has actually not applied the prescribed method under Rule 8D but has used a thumb rule of his choice. Further, while rejecting the claim of the appellant, the Ld AO failed to appreciate that the appellant had suo moto disallowed an amount of Rs 4.96 crores out of the total expenses of Rs 5.57 crores, i.e., almost 89% of total expenses, by attributing the same not for earning taxable business income. No cogent findings were given by the Ld AO as to how this claim of the appellant with regard the balance amount of Rs 60.77 lakhs was incorrect, having regard to the accounts of the appellant. The Ld. AO did not examine the claim of the appellant that the total personnel and administrative expense of Rs.10,70,000/- were in respect of a thin strength of employees, who were working for providing IT enabled BPO services and were not involved in the activity of making investment in shares/mutual funds. I also find that while making the disallowance u/s 14A in respect of such balance expenses, the Ld. AO disregarded the fact that he had also disallowed individual expenses embedded in the claim of Rs 60.77 lakhs separately, as under:
Particulars (in Rs.) Amount 1. Disallowance out of Depreciation allowance 56,86,641 2. Disallowance of rental expenses 8,23,166 3. Disallowance of bad debts 2,66,243 4. Disallowance of advances and security deposits 13,99,056 written of 6.3.4 On careful consideration, I hold that the action of the Ld. AO in attributing balance expenses over and above the 89% of the expenses already added back by the appellant, towards the activity of the earning dividend income from investment made in shares/mutual funds was without any cogent ground. Moreover, for the assessment year 2008-09 onwards disallowance u/s 14A could be made only by invoking the prescribed method of Rule 8D only. No other subjective thumb Rule and estimation is possible where the Ld. AO is not satisfied with the claim of the appellant. In the case of the appellant, it is evident that the appellant had already disallowed 89% of its total expense debited in P&L account and added back to the same to the total income. Regarding the balance expense, the Ld. AO has not specifically identified any expense that could have been attributable to the earning of the dividend income. Under the circumstances, keeping in view the decision of Hon'ble Delhi High Court in the case of Maxopp Investments Limited Vs. CIT (Supra), provisions of Rule 8D could not have been invoked in the case of the appellant. In view of the same, the action of the Ld. AO of making disallowance of balance expense of Rs.60.77 lakhs u/s 14A was not justified in view of the applicable law in the matter. In view of the same, the addition on this ground is deleted. Accordingly, this ground of appeal is allowed in favour of the appellant.
During the course of hearing, the ld. DR relying upon the assessment order, submitted that the ld. CIT(A) was not justified in deleting the addition made by the AO u/s. 14A of the Act read with Rule 8D of the Income-tax Rules after relying upon the decision of Special Bench of Tribunal. It was submitted that the ld. CIT(A) has not given any good reasons to discard the findings reached by the Assessing Officer for making the disallowance. He accordingly, urged for allowance of the appeal.
In his rival submissions, the ld. AR of the assessee placed before us a written synopsis, stating on this issue as follows:
“It is a matter of fact and record that the assessee vide its computation of income (page 7 PB) has already suo moto offered to tax around 89% of total expenses as debited in the profit & loss account. Out of the total expenses of Rs. 55,687,000 as debited in profit & loss account the assessee has already offered to tax expenses of Rs. 49,611,000 as per the said computation. Only the bare minimum remaining expenses of 11% amounting to Rs. 6,077,000 which are in any case required to be incurred for running the corporate identity of the company have been claimed. This fact has been undisputed by the AO.
In response to a query raised by the AO on disallowance of further expenses u/s 14A it was submitted vide submission dated 29/10/12 before the AO (reproduced at internal page 2 of AO order) that out of the total expenses incurred the assessee has already suo moto offered to tax a huge amount comprising of 89% of total expenses debited as per the profit & loss account & therefore any further disallowance of expenses u/s 14A would be highly unwarranted on the facts and circumstances of the case.
1.2 AO’s decision: In spite of the above position the AO proceeded to disallow the remaining expenses of 11% amounting to Rs. 6,077,000 u/s 14A on a presumptive basis i.e. in proportion of exempt income to total income resulting in a further disallowance of Rs. 5,644,511 out of the total remaining expenses claimed of Rs. 6,077,000. As a result of this action on part of AO almost all expenses debited as per the profit and loss account stood disallowed after considering the suo moto disallowance by the assessee, supra.
The AO in making disallowance u/s 14A in the aforesaid manner just failed to record the mandatory satisfaction as provided u/s 14A(2) of the Act requiring the AO to record his satisfaction on the correctness of claim made by the assessee having regard to the accounts of assessee. The AO just failed to objectively record any satisfaction in its order as to how the voluntary disallowance of expenses by the assessee (to the magnitude of 89% on the facts of present case) will not be sufficient for the purpose of section 14A. Further the AO also failed to record a satisfaction / give any finding as to how much of the remaining small expenses of 11% claimed (Rs. 6,077,000) have been actually incurred for the purpose of earning exempt income and only on a presumptive / estimate basis he disallowed a substantial part out of the remaining 11% expenses.
1.3 Decision of CIT(A):
The CIT (A) rendered a clear finding on the issue after considering the entire facts and circumstances and the legal position.
The CIT(A) at the outset vide para 6.3.2 of its order records that the aggregate of various disallowances made by the AO has resulted in a disallowance of Rs. 1,38,17,613 which is much higher than the actual expenses of Rs. 6,077,000 only as claimed by the assessee resulting in a serious anomaly in the approach of the AO.
The CIT(A) thereafter records that as per the mandatory requirement of law i.e. section 14A(2) the AO can proceed to make a disallowance u/s 14A only where the AO having regard to the accounts of the assessee is satisfied that the claim of the assessee is not correct.
Importantly the CIT(A) vide para 6.3.3 of its order records that the AO while rejecting the claim of the assessee failed to appreciate that the assessee had suo moto disallowed almost 89% of total expenses. The CIT(A) records that no cogent findings have been given by the AO as to how the claim of the assessee with regard the balance amount of expenses of Rs. 60.77 lacs is incorrect having regard to the accounts of the appellant. Importantly the CIT(A) also records that the AO did not examine the claim of appellant that the total personnel and administrative expenses of Rs. 1,070,000 were in respect of a thin strength of employees who were working for the IT enabled BOP services and were not involved in the activity of making investment in shares / mutual funds. The CIT(A) also notes that vide para 6.3.3 of its order that the AO has already disallowed the individual expenses embedded in claim of Rs. 60.77 lacs resulting a double addition in the hands of assessee.
The CIT(A) thereafter concludes while observing, interalia, at para 6.3.4 of its order that the AO had made a disallowance u/s 14A without giving any cogent reasons and without considering the fact that the assessee had already offered to tax 89% of expenses on a suo moto basis & without specifically identifying any expenses out of the remaining 11% expenses which could be identified towards earning of dividend income. The CIT(A) relies upon the mandate of Jurisdictional High Court in the case of Maxopp Investment Ltd. Vs CIT 347 ITR 272 (Del.) requiring the AO to record appropriate satisfaction having regard to the accounts of the assessee before proceeding to make any disallowance u/s 14A.
Assessee’s submissions:
It is respectfully submitted that there is a serious fallacy in the decision & approach of the AO in proceeding to make a further disallowance of Rs. 5,644,511 u/s 14A over and above the suo moto addition by the asssessee of 89% of its expenses debited to profit & loss account. The anomaly which is resulting from this is that almost the entire expenses debited to profit and loss account have been disallowed. In fact it is also pertinent to submit that the CIT(A) precisely records vide para 6.3.2 of its order that the aggregate of various disallowances made by the AO has resulted in a disallowance of Rs. 1,38,17,613 which is much higher than the actual expenses of Rs. 6,077,000 only as claimed by the assessee resulting in a serious anomaly in the approach of the AO.
It would be important to quote here the specific provisions of sub section (2) of section 14A as under:
“2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act”.
Thus, the necessary condition prescribed for the AO to make an addition u/s 14A is to firstly record a satisfaction as to how the voluntary disallowance made by the assessee (to the magnitude of 89% on the facts of present case) will not be sufficient for the purpose of section 14A. Further on the facts of present case the AO also failed to record a satisfaction / give any finding as to how much of the remaining small expenses of 11% claimed (Rs. 6,077,000) have been actually incurred for the purpose of earning exempt income and only on a presumptive / estimate basis he disallowed a substantial part out of the remaining 11% expenses. The cumulative effect of this is that the entire expenses as per profit & loss account have been disallowed in fact the disallowance has been much more than the actual expenses of Rs. 60.77 lacs claimed by assessee as pointed by CIT(A) vide para 6.2 of its order. Such an approach of the AO is highly unjustified on the facts and circumstances of the case and in the law & also highly illogical.
A direct reliance is placed in this regard on the following decisions from the Jurisdictional High Court, copies submitted: i. Decision of Delhi High Court in the case of CIT Vs Taikisha Engineering India Ltd. (2015) 370 ITR 338 (Del.): Held after extensively considering the earlier decision in case of Maxopp Investment Ltd. Vs CIT 347 ITR 272 (Del.) that the AO cannot proceed to make any disallowance u/s 14A without elucidating and explaining why the voluntary disallowance made by the assessee was unreasonable and unsatisfactory. It would be pertinent to note the following observations of the High Court vide para 20:
“20. However, in the present case, we need not refer to sub-rule (2) of rule 8D of the Rules as conditions mentioned in sub-section (2) of section 14A of the Act read with sub-rule (1) of rule 8D of the Rules were not satisfied and the Assessing Officer erred in invoking sub-rule (2), without elucidating and explaining why the voluntary disallowance made by the assessee was unreasonable and unsatisfactory. We do not find any such satisfaction recorded in the present case by the Assessing Officer, before he invoked sub-rule (2) of rule 8D of the Rules and made the re- computation. Therefore, the respondent-assessee would succeed and the appeals should be dismissed.” ii. Decision of Delhi High Court in the case of CIT Vs I.P. Support Services India (P) Ltd. (2015) 378 ITR 240 (Del.): Similarly held that the approach of the AO in invoking section 14A without recording his satisfaction as to why the voluntary disallowance by the assessee was unreasonable and unsatisfactory is not sustainable under law. iii. Decision of Delhi High Court in the case of CIT Vs Zuari Investment in dated 27/05/16: Held that the approach of the AO in invoking section 14A without recording his satisfaction as to why the voluntary disallowance by the assessee was unreasonable and unsatisfactory is not sustainable under law.
Further the decision of Special Bench of ITAT in case of Cheminvest Ltd. Vs ITO as relied upon by the AO has been reversed by the Jurisdictional High Court in its decision in the case of Cheminvest Ltd. Vs CIT 378 ITR 33 (Del), copy submitted. The Jurisdictional High Court reversing the decision of ITAT Special Bench has held that section 14A will have no application in the absence of exempt income.
A reliance is also placed on the following High Court decisions, copies submitted, wherein it has been held that administrative expenses cannot be disallowed u/s 14A in the absence of any finding by the AO as to how much administrative expenses have been incurred to earn the exempt income; such expenses cannot be disallowed on the basis of presumption: i) Decision of Gujarat High Court in the case of CIT Vs UTI Bank Ltd. dated 22/03/13; ii) Decision of Gujarat High Court in the case of CIT Vs Torrent Power Ltd. dated 04/02/14.
Conclusion: Thus, in view of the foregoing facts and submissions and the legal position it is submitted that the AO had grossly erred in making an additional disallowance of Rs. 56,44,511 u/s 14A of the Act. The same is highly unwarranted on the facts and circumstances of the case and particularly in view of the fact that the assessee had already suo moto offered to tax 89% of expenses as debited in profit & loss account. The approach followed by AO has resulted in a disallowance of expenses more than actually claimed by assessee as precisely identified by the CIT(A) vide para 6.3.2 of its order being a highly unwarranted situation. It is respectfully submitted that the Ld. CIT(A) has given a well reasoned order on the issue and the same does not requires any interference.”
We have considered the rival submissions and have perused the entire material available on record. Before we deal with the issue, it is felt necessary to reproduce the relevant provisions of section 14A of the Act, which read as under :
14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed19, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.
8. A plain reading of the provisions of section 14A(2)/ (3)suggests that the disallowance under this section can be made only if the Assessing Officer is satisfied that the amount claimed by the assessee to have been incurred for earning exempt income is not correct. Furthermore, such satisfaction is to be arrived at with reference to the account books of the assessee. In the instant case, it is an undisputed fact that out of the total expenses of Rs. 5,56,87,000/- as debited in profit & loss account the assessee has already offered substantial expenses of Rs. 4,96,11,000/- (representing to 89% of the total expenditure) to tax in the computation of income filed in relation to earning of exempt income. A perusal of the assessment order nowhere reveals that the Assessing Officer has returned any finding that he is not satisfied with the correctness of the expenditure claimed and offered for taxation in relation to exempt income.
We further observe that the AO did not at all consider the assessee’s submissions and straightway proceeded to work out the disallowance as per Rule 8D. There is complete lack of finding by the AO that he is not satisfied with the expenditure suo moto offered by assessee in the computation of income for disallowance u/s. 14A. For this proposition, we stand fortified by the decision of jurisdictional High Court in the case of Maxopp Investment Ltd., 347 ITR 272 (Del) wherein the Hon’ble Court has laid down the following principle of law :
“The requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure.”
9. Similar view has been taken by the coordinate bench of Delhi Tribunal in the case of Crown Corporation Pvt. Ltd. vs. ACIT vide order dated 27.06.2016, whereby the similar issue has been decided in favour of the assessee after following the decision of Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. (supra). Therefore, for want of statutory satisfaction recorded by the AO, the AO was not justified in resorting to the provisions of section 14A or Rule 8D of the Act. This view also gets support from the following decisions relied on by the assessee :
(i). CIT vs. Taikisha Engineering India Ltd., 370 ITR 338 (Del.) (ii). CIT vs. I.P. Support Services India (P) Ltd., 378 ITR 240 (Del.) (iii). CIT vs. Zuari Investment in dated 27.05.16 (copy placed on record).
The Assessing Officer has relied on the decision of Special Bench of ITAT in Chemnivest Ltd. vs. ITO (supra) which stands reversed by Hon’ble jurisdictional High Court in the said case as reported in 378 ITR 33 (Del.)
We further find considerable force in the contention of Sh. Piyush Kaushik, the ld. Counsel for assessee that once the assessee had offered 89% of the total expenditure for disallowance in the computation of income, it was imperative on the Assessing Officer first to show as to how the suo motu disallowance offered by the assessee in the computation of income is incorrect and to record the satisfaction as regards the incorrectness of the assessee’s claim. If the same is not done, the AO cannot resort to the re-computation of disallowance as per section 14A read with Rule 8D.
On examination of record, we also find no material on record to discard the finding of the ld. CIT(A) that the AO has failed to find out as to how the balance expenditure of Rs.60.77 lacs claimed by assessee was incorrect or had any nexus with earning of exempt income. The AO also did not examine the stand of the assessee that administrative expenses of Rs.10,70,000/- were in respect of a thin strength of employees who were working for providing IT enabled BPO Services and were not involved in the activity of making investment in shares or mutual funds. We also find substance in the observation of the ld. CIT(A) that the AO has disregarded the fact that he had also disallowed individual expenses embedded in the claim of Rs.60.77 lakhs separately, such as disallowance of depreciation of Rs.56,86,641/-, disallowance of rental expenses Rs.8,23,166, disallowance of bad debts Rs.2,66,243 and disallowance of advances and security deposits written off Rs.13,99,056/-. In view of what has been discussed above, we do not find any justification to interfere with the order of ld. CIT(A) on this count.
Accordingly, ground No. 1 of the Revenue is liable to be dismissed.
Adverting to the next issue of disallowance of depreciation, we find that the AO disallowed the depreciation of Rs.56,86,641/- on the furniture & fixtures, office equipments and computer items. As per AO, all the above fixed assets were used by the assessee for the business of Data Processing and Export thereof, which as per assessee stood already ceased to exist in July, 2008. He accordingly observed that the business of Data processing and export was stopped in F.Y. 2008-09 and the above fixed assets on which depreciation was claimed by assessee were not used for the purpose of business during the year under consideration. He therefore, concluded that the assessee had claimed depreciation on the assets which were not used for the purpose of business to minimize the taxable income from house property.
He accordingly disallowed depreciation of Rs.56,86,641/- out of total claim of depreciation of Rs.58,08,280/-. The assessee carried the matter to the ld. CIT(A), who after relying on the decision of Hon’ble Delhi High Court in the case of CIT vs. Yamaha Motor India Pvt. Ltd. 328 ITR 297, deleted the disallowance.
The ld. DR relied on the order of the AO whereas the ld. AR of the assessee supported the order of ld. CIT(A) stating that the issue is covered by the decision of jurisdictional High Court in the case of CIT vs. Yamaha Motor India Pvt. Ltd. (supra) wherein the decision of Bombay High Court relied on by the Revenue in the grounds of appeal stands considered and dissented and the decision of jurisdictional High Court shall prevail over the decision of other High Courts. It was also submitted by the ld. AR that once an asset becomes a part of a block of asset then it loses its individual identity and the tax depreciation continues to be claimed unless the entire block ceases to exist or the sale value exceeds the tax WDV of the respective block. Further the AO also failed to appreciate that in view of the mandate from Jurisdictional High Court the expression ‘used for the purpose of business’ in context with claim of depreciation u/s 32 would also include a passive user i.e. kept ready for use though not actually used and with respect to discarded items it would mean that user in business is not relevant in the current financial year but in the earlier financial year. Reliance is further placed on the following decisions :
(i). Stitchwell Qualitex (RF) vs. ITO 2015-TOIL-2184-HC-Del. (ii). National Thermal Power Corpn. Ltd. vs. CIT dt. 15.10.12(copy placed) (iii). Capital Bus Service P. Ltd. vs. CIT, 123 ITR 404 (iv). CIT vs. Refrigeration and Allied Ind. Ltd., 247 ITR 12.
Having considered the submissions of both the parties, we find no substance in this ground of appeal. It is a fact that the assessee had computed the depreciation on the reduced WDV only after reducing the assets sold.
There is no material on record to assail the finding of the ld. CIT(A) that once an asset becomes a part of a block of assets, it loses its individual identity.
However, the depreciation on that block of asset is continued and claimed until the entire block ceases to exist. The finding of the ld. CIT(A) is also found supported by the decision of Hon’ble jurisdictional High Court in the case of CIT vs. Yamaha Motor India Pvt. Ltd. (supra), wherein the Hon’ble Court held as under :
“7. On the aspect of passive user, there are two decisions of two Division Benches of this court in the cases reported as CIT v. Refrigeration and Allied Industries Ltd. [2001] 247 ITR 12 (Delhi) and Capital Bus Services P. Ltd. v. CIT [1980] 123 ITR 404 (Delhi). In this view of the matter, we need not refer to the judgments of any other court as we are bound by the earlier judgments of this court. In fact, we also agree with the ratio of both the decisions which hold that as long as the machinery is available for use, though not actually used, it falls within the expression " used for the purposes of the business" and the assessee can claim the benefit of depreciation.
Looking at the facts from this point of view, an actual user is not required as has been contended by the Revenue.
The matter can be looked at from another angle also. No doubt, the expression used in section 32 is " used for the purposes of the business" . However, this expression has to be read harmoniously with the expression " discarded" as found in sub-clause (iii) of sub-section (1). Obviously, when a thing is discarded it is not used. Thus " use" and " discarding" are not in the same field and cannot stand together. However, if we adopt a harmonious reading of the expressions " used for the purposes of the business" and " discarded" then it would show that " used for the purposes of the business" only means that the assessee has used the machinery for the purposes of the business in earlier years. It is not disputed in the facts of the present case, and as discussed above, that the machinery in question was in fact used in the previous year and depreciation was allowed on the block of assets in the previous years. Taking therefore a realistic approach and adopting a harmonious construction, we feel that the expression " used for the purpose of the business" as found in section 32 when used with respect to discarded machinery would mean that the user in the business is not in the relevant financial year/previous year but in the earlier financial years. Any other interpretation would lead to an incongruous situation because on the one hand the depreciation is allowed on discarded machinery after allowing, inter alia, an adjustment for scrap value, yet, on the other hand user would be required of the discarded machinery which use is not possible because of various reasons, viz., the age of the machinery, or that it has become obsolete as new technology has come in and so on. We thus hold that the discarded machinery may not be actually used in the relevant previous year as long as it is used for the purposes of business in the earlier years”.
In view of the above legal position, it is clear that the expression “used for the purpose of business” would mean & imply that the use of asset would be relevant in previous financial years with respect to the discarded assets forming part of the block. Furthermore, the nature of assets in the present case comprises of general items such as furniture & fixtures & office equipments which were “ready for use”. Such passive user is also entitled for depreciation in view of various decisions of jurisdictional High Court relied by the ld. AR, noted supra. Following the above decisions, and having found no contrary material, we do not find any justification to interfere with the conclusion reached by the ld. CIT(A) on this issue. Accordingly, ground No. 2 of the Revenue is also dismissed.
The facts relating to third and last issue are that the Assessing Officer disallowed advances and security deposits written off by assessee amounting to Rs.3,80,700/- and Rs.10,18,356/- respectively. These expenditures were also considered by the AO while computing the proportionate disallowance u/s. 14A, which according to the ld. CIT(A) amounted to double disallowance.
The contention of the assessee had been that a sum of Rs.3,80,700/- was given to M/s. Reliance Infocom for VPN connections five years back as advance and since such connections were not sanctioned nor the above amount was returned to the assessee, the appellant decided to write off the same.
Similarly, a sum of Rs.10,18,356/- was given to various authorities/parties for taking utility connections such as telephone, internet etc. and since the assessee closed its business of Data Processing and Export and the above amount was not recoverable or its recovery was fetching substantial time and inordinate cost, hence, the assessee had written of the same in its books of accounts. The AO disallowed the claim of assessee on the ground that no evidence was laid on record to substantiate any effort of recovery. The ld. CIT(A) deleted the addition observing that in view of the nature of business of assessee i.e., IT enabled services, such advances were given in the course of ordinary course of business and hence, the claim of written off amounts was allowable u/s. 28 of the Act.
The ld. DR relied on the order of Assessing Officer whereas the ld. Counsel for the assessee reiterated the submissions made before the ld. CIT(A) as also enumerated in its written synopsis placed before us. It was also submitted that the ld. AO has tried to step into the shoes of businessman and impose a condition that the assessee should have made rigorous follow up before writing off the advances/security paid, which is not legally required at all once the assessee had written off the same in its books of account.
Having considered the rival submissions, we find that it is not in dispute that substantial material was placed before the AO that the said advances/securities were outstanding for last 5-10 years. The nature of these payments, i.e., towards advances and securities for getting VPN and utility connections, as noted above, is also not doubted by the Assessing Officer. In such state of affairs, if the assessee decided to write off the said advances/securities given in ordinary course of business, in its books of accounts, the claim of assessee cannot be discarded simply because substantial evidences were not placed to prove its efforts of their recovery or that the said debts became irrecoverable, by way of stepping into the shoes of business. This view of ours is fortified by the following decisions relied by the ld. Counsel for the assessee :
(i). TRF Ltd. vs. CIT, 323 ITR 397 (SC) (ii). Minda HUF Ltd. vs. JCIT 285 ITR(AT) 88 (Del. Tri.) (iii). CIT vs. Modi Telecommunication Ltd. 325 ITR 291 (Del.) (iv). Madhav Marbles and Granites vs. ITAT, 362 ITR 647 (Raj.)
In view of these decisions, and in the totality of facts and circumstances, we do not find any justification to interfere with the order of ld.CIT(A) on this count. Accordingly, this ground of appeal also deserves to fail.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 22.09.2016.