DCIT, CHENNAI vs. M/S. TURBO ENERGEY LIMITED, CHENNAI

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

These are the cross appeals filed by the Revenue as well as the

assessee against the orders of the CIT(A) for the A.Y 2006-07, 2007-08,

2008-09 and 2009-10. Since the common issues are involved, all the

appeals are clubbed, heard together and disposed off in common order for

the sake of the convenience as under:

2.0 ITA No.203/2014 AY 2006-07:

All the grounds of appeal for the AY 2006-07 are related to the set

off of unabsorbed business losses pertaining to the eligible unit of 10B

against the profits of non eligible undertaking of 10B units. The appeal

was filed by the Revenue. During the assessment proceedings, the AO

found that the assessee has incurred a loss of Rs.2,33,61,500/- from

100% Export Oriented Units (EOU) Astra Tel, which was set off against the

income of non-10B Units( i.e. from normal taxable income of other units).

The AO was of the view that the unit eligible for deduction u/s 10B is a

separate entity for the purpose of Income Tax and to be assessed as an

independent unit as if it is only the source of income. The unabsorbed

losses of eligible units of 10B undertaking should be carried forwarded

separately and allowed to be set off against the future incomes of 10B

units alone. Further, the AO opined that in case, the assessee wishes to

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avail the normal provisions of the Income Tax Act, it should opt out from

claiming the deduction u/s 10B and submit a declaration as per

Sec.10B(8) of IT Act before the due date of filing the return of income

treating the eligible unit as a non-eligible unit u/s.10B of IT Act. In the

instant case the assesse has not furnished any such undertaking hence

the AO was of the view that the provisions of Sec.80IA and 10B are

parimeteria and accordingly, disallowed the set off of losses relating to

10B unit against the profits of non-eligible units and computed the total

income at Rs.85,25,27,170/- against the returned income of

Rs.82,91,65,600/-.

2.1 Aggrieved by the order of the AO, the assessee went on appeal

before the Ld.CIT(A) the Ld.CIT(A) allowed the assesses’s appeal, placing

reliance on the decision of the Co-ordinate Bench of ITAT Chennai in the

case of Brakes India Ltd (ITA No.266/Mds/2012 dated 22.03.2013 for the

AY 2007-08). The relevant part of the Ld.CIT(A) order is extracted as

under:

5.0 Second ground pertains to disallowance of set off of loss from 10B unit against the profit of non-10B units. With regard to this issue the Hon’ble ITAT Chennai in the case of Brakes India Ltd (ITA 266/Mds/2012 dated 22.03.2013 for A.Y. 2007-08) held as under: “34. Vide its ground No.6, Revenue is aggrieved that the CIT(Appeals) allowed setting off of loss in 10B units against profits of non-10B units. 35. ………… 36. ……….. 37. ………… 38. ……….. 39. ….. Here it is a claim for set off of loss of a unit on which claim under Section 10B could be preferred with the profits of a unit on which deduction under Section 10B was not available. This issue, in our opinion, has already been resolved in favour of assessee by Hon’ble Bombay High Court in the case of Hindustan Unilever Ltd (supra). In the said case, assessee had four units which were eligible for

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deduction under Section 10B, of which, three units had returned profits, whereas, the fourth unit returned a loss. Deduction was independently claimed for the profits of the 10B units. Loss of the fourth unit was allowed to be set off against profits of the units on which there was no deduction available under Section 10B. Later the assessment was sought to be reopened. Their Lordship held the reopening done for disallowing set-off of the loss of the fourth unit to be invalid. Their Lordship observed that assessee was entitled to claim deduction in respect of the profits of three eligible units, and also entitled to claim set-off of loss arising in the fourth unit against other business income. We are of the opinion that this decision clearly goes in favour of assessee. Ld. CIT(Appeals) was justified in directing the Assessing officer to allow set off of loss in the 10B units with profits in other non-10B units. 40. Ground No.6 of the Revenue stands dismissed.”

Respectfully following the above decision, it is held that the AO has wrongly concluded that it was incorrect to set off loss of Rs.2,33,61,500/- incurred by 100% EOU against the income of the non-10B units in A.Y.2006-07. Therefore, the AO is directed to allow set off of loss of 10B unit from the profits of non-10B units for A.Y. 2006-07. Accordingly, the ground is allowed.

2.2 Aggrieved by the order of the Ld.CIT(A), the Department is on

appeal before us. Appearing for the Revenue, the Ld.DR argued that the

assessee is eligible for deduction u/s 10B for ten consecutive assessment

years which is recognized as tax holiday period and during the tax holiday

period units eligible to claim exemption u/s.10B are being treated as

separate and independent unit as if it is only the source of income. The

profits and gains of the eligible unit has to be computed separately and

the deduction has to be allowed to the extent of profits and in case of loss

incurred during the tax holiday period the same should be considered

separately and to be carried forwarded to the next year and set off against

the income of the eligible unit in the subsequent year. In case ,the

assessee wants to opt out from 10B for the relevant previous year, the

assessee is free to opt out from the tax holiday period for any previous

year, by furnishing a declaration as required u/s.10B(8) of IT Act to

include the profits of eligible units in normal provisions of IT Act. In the

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assessee’s case, the assessee has not furnished any such declaration.

Therefore, the losses of the assessee derived from the eligible undertaking

cannot be allowed to be set of against the taxable income of the other

non-eligible units. The assessee’s losses have to be computed separately

during the tax holiday period and should be set of against the incomes of

the eligible units. By setting up of the losses of eligible units from the

taxable income the assessee is reducing the taxable income which is not

permissible. The Ld.DR relied on the following decisions vehemently

opposing the orders of the Ld.CIT(A):

2.3 On the other hand, the Ld.AR argued that the benefit of tax holiday

was originally introduced as an absolute exemption under Chapter-III of

IT Act, 1961 and remained as exempt for more than two decades. The

Finance Act which came into effect from April 1, 2010 allowed special

provisions in respect of newly established 100% orient EOUs w.e.f. April,

2001 and the profits and gains of the undertaking are allowed as a

deduction but not as exemption as envisaged originally. However, the

Sec.10A & 10B remained in Chapter-III meant for the incomes which do

not form part of total income. Therefore, the Ld.AR contended that the

income of 10B undertaking should be allowed as a deduction from the

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source itself but not from the gross total income. The very purpose of

placing Sec.10A & Sec.10B being remained in Chapter-III under the head

incomes which do not form part of total income is to allow the deduction

from the source itself. Accordingly, the losses of the 10B units required to

be allowed set off against the profits and gains of the business before

arriving at the gross total income. The Ld.AR argued that the profits and

gains of the business required to be computed as per provisions of Sec.28

to 43 inclusive of 10B units and allow the deduction u/s.10B from the

business income itself. There is no provision in the IT Act not to allow the

set off of losses of 10B eligible units from the total income of the assessee

and carry forward it separately. The Ld.AR further argued that the

provisions of Sec.80IA cannot be equated with that of the provisions of

Sec.10B. As per Sub Sec.5 of 80IA, the profits and losses of eligible units

required to be computed separately as a separate unit for the purpose of

carry forward and set off of losses and computation of income during the

tax holiday period. Such provisions are not placed in Sec.10B. Therefore,

the Ld.AR contended that the losses of 10B units need not separately be

carry forward and the assessee is eligible for set off of loss of 10B units

from the normal taxable units. The Ld.AR also relied on the following

decisions:

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2.4 We heard the rival submissions and perused the material placed on

record.

The issue is squarely covered by the Hon’ble Supreme Court

judgment in the case of CIT & Anr. v. Yokogawa India Ltd. [2017] 77

taxmann.com 41 (SC) in favour of assessee. The questions raised before the

Hon’ble Apex Court are under:

The broad question indicated above may be conveniently dissected into the following specific questions arising in the cases under consideration.

(i) Whether Section 10A of the Act is beyond the purview of the computation mechanism of total income as defined under the Act. Consequently, is the income of a Section 10A unit required to be excluded before arriving at the gross total income of the assessee? (ii) Whether the phrase "total income" in Section 10A of the Act is akin and pari materia with the said expression as appearing in Section 2(45) of the Act? (iii) Whether even after the amendment made with effect from 1.04.2001, Section 10A of the Act continues to remain an exemption section and not a deduction section? (iv) Whether losses of other 10A Units or non 10A Units can be set off against the profits of 10A Units before deductions under Section 10A are effected? (v) Whether brought forward business losses and unabsorbed depreciation of 10A Units or non 10A Units can be set off against the profits of another 10A Units of the assessee.

The Hon’ble Apex Court answered the above questions in Para

No.18 as under:

The Hon’ble Apex Court has held that as per the amended provision

for deduction, the stage of deduction would be while computing the gross

total income of the eligible undertaking under Chapter-IV of IT Act and not

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at the stage of total income under Chapter-VI. Therefore, the loss of the

eligible unit would be allowed as a deduction at source before computing

the total income under Chapter-VI. Therefore, we do not find any

infirmity in the order the Ld.CIT(A) and the same is upheld. The

revenue’s appeal is dismissed.

AYs 2007-08, 2008-09 and 2009-10:

3.0 During the Assessment Year 2007-08, the eligible unit derived

profit of Rs.3,15,19,439/- and claimed the entire income as deduction

u/s.10B of IT Act. In the course of assessment proceedings, for the A.Y

2006-07 the assessee had incurred a loss of Rs.2,33,61,500/- relating 10B

unit which was claimed set off against the income of non-eligible units.

The AO in the assessment proceedings u/s 143(3) for the A.Y.2006-07

disallowed the loss of eligible unit claimed from the taxable income and

re-computed the total income of the assessee. During the AY under

consideration, the AO has set off the brought forward unabsorbed loss of

Rs.2,33,61,500/- relating to AY 2006-07 of the eligible unit from the profit

of 10B units Rs.3,15,19,439/- and re-computed the deduction u/s.10B at

Rs.18,49,480/- which was allowed as deduction from the total income.

3.1 Aggrieved by the order of the AO, the assessee went on appeal

before the Ld.CIT(A) and the Ld.CIT(A) allowed the assesse‘s appeal

holding that the deduction u/s.10B is allowable before setting off of

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brought forward unabsorbed business losses and the depreciation relating

to the earlier AYs. For ready reference, we extract the relevant paragraph

No.4.3 from Ld.CIT(A)’s Order as under:

4.3 I have carefully considered the facts of the case and the submissions made by the AR. I have also gone through the decisions relied upon by the AO and AR. I find that on the question of filing of declaration, the filing of declaration enables the appellant to opt out of the provisions of section 10B. Further the filing of declaration u/s.10B(8) is only directory and not mandatory as held in a number of judicial decisions. Hence the appellant can at any time during the assessment file the above declaration before the AO. In case no declaration is filed at all, the provisions of section 10B will be made applicable to the appellant. I find that the contention of the AO is that the appellant had not filed the declaration in the preceding year and therefore the. provisions of section 10B was made applicable and loss of 10B unit (which was already set off against the income of non-10B unit in the preceding year) was notionally brought forward in the current year and set off against profits of the 105 unit in the current year. The appellant submits that the declaration was filed at the time of hearing before AO in the proceedings u/s.147. However, I find, that in various judicial decisions it has been held that the loss arising from a 10B unit can be set off against the income from non 10B unit. Therefore, in my considered opinion, the filing or delayed filing of the declaration does not adversely affect the claim of the appellant of setting off of the loss of 10B unit against the income of non 10B unit in the same year. In view of the above, I am of the considered opinion, that non filing of declaration u/s.10B (8) would not empower the AO to notionally reject the set off of loss of 10B unit against the profits of non 10B unit done in the earlier year and carry forward the said losses and set it off against the income of the current assessment year. This is because the loss which has been already set off against the non 10B unit in the previous year cannot be notionally carried forward in the current year and set off against the profits of the 105 unit. The decision of the Hon’ble Jurisdictional High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd V ACIT (340 ITR 477) supports this view Further, I find that as submitted by AR, the Hon’ble Jurisdictional ITAT Chennai in the case of ACIT V Charon Tec P. Ltd (supra) had held that the exemption u/s. 10B was to be allowed without setting off brought forward unabsorbed loss and depreciation from the earlier assessment year. Respectfully following the above decisions, I hold that the deduction u/s. 10B has to be allowed before set off of the brought forward losses.

3.2 We heard both the parties and perused the material placed on

record. The assessee’s appeal for the AY 2006-07 is allowed by us in this

appeal in earlier paragraphs holding that the loss of 10B unit is allowed to

set off at the source point under Chapter-IV of the IT Act before

computing the gross total income. Therefore, there was no unabsorbed

loss remained relating to the eligible unit u/s.10B for the AY 2006-07 to

adjust against the profits of the eligible units in the year under

consideration. The issue regarding the stage of deduction u/s.10B was

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decided by the Hon’ble Supreme Court in the case of CIT & Anr. v.

Yokogawa India Ltd. 45 DTR 000 1. The Hon’ble Apex Court held that the

deduction u/s.10B would be allowed while computing the total income of

the eligible undertaking at the stage of Chapter-IV of the Act and not at

the stage of computation of income under Chapter-VI. Accordingly, the

appeal of the assessee for the AY 2006-07 was allowed by this Tribunal

in favour of the assessee and there was no unabsorbed business losses of

10B units which required to be set off against the profits of the eligible

units. Therefore, we do not find any error in the order of Ld.CIT(A) and

the same is upheld and the Revenue’s appeal on the issue of set off of

unabsorbed loss of 10B unit for the AY 2007-08 is dismissed.

4.0 The next issue for the A.Y 2007-08 is the exclusion of freight from

the export turn over for the purpose of computation of deduction u/s.10B.

The AO noticed that the assessee has incurred expenditure of

Rs.68,33,274/- towards freight charges outside India. While computing

the deduction u/s.10B, the assessee has excluded the expenses incurred

outside India for the purpose of deduction u/s.10B. The AO viewed that

the amount of freight should be excluded from the export turnover but not

from the total turnover as per Explanation-2 (iv) of Sec.10B of IT Act and

accordingly, excluded the freight charges for the deliver the goods outside

India to the tune of Rs.68,33,274/- from the export turnover and re-

worked the deduction u/s.10B.

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4.1 Aggrieved by the order of the AO, the assessee went on appeal

before the Ld.CIT(A) and the Ld.CIT(A) allowed the assesse’s appeal in

Para No.4.5 of CIT Order as under:

4.5 I have carefully considered the facts of the case and the submissions of the AR. I have also gone through the decision relied upon by the AR. The Hon’ble jurisdictional ITAT in the case of SRA Systems Ltd, (supra) had held that the expenditure incurred in foreign currency has to be reduced both from export turnover and total turnover as a matter of consistency in applying the provisions of the Act. This has also been followed in the case of Charon Tech P. Ltd (supra). Respectfully, following the above said decisions the AO is directed to exclude the freight expenses both from total turnover and export turnover. This ground is allowed.

Against the Order of the Ld.CIT(A), Revenue is in appeal before us.

4.2 We heard the rival submissions and perused the material placed on

record.

The issue is squarely covered in favour of the assessee in the

following cases relied upon by the assessee:

As per the judicial precedents the expenditure of freight incurred in

foreign currency outside India for delivery of goods has to be reduced both

from the export turnover as well as the total turnover i.e. numerator and

denominator. The Ld.CIT(A) followed the same principle decided by the

Hon’ble special Bench ,Chennai in the case of Sak Soft Ltd., and allowed

the assesse’s appeal. Therefore, we do not find any reason to interfere

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with the order of the Ld.CIT(A) and this ground of appeal of the Revenue

is dismissed.

5.0 The next issue for the A.Y 2007-08 is the apportionment of R&D

expenditure to 10B units. The assessing officer found that the assessee

claimed weighted deduction in respect of capital expenditure incurred

towards in-house R&D facility as per Sec.35(2AB) of Income Tax Act. The

expenditure incurred was Rs.4,95,26,696/- and the weighted deduction

claimed was Rs.6,72,67,539/-. No expenditure was allocated towards the

eligible units. The AO examined the details and observed that the

assessee is doing in-house research of the business activities carried on by

the assessee and further observed from Form-3CM (order of approval of

in-house R&D facility the Ministry of Science and Technology) that the

objective of the scientific research to be conducted by the in-house R&D

facility was mentioned as ‘design & development of turbo charges for

various engines manufactured in India ultimate objective of manufacturing

the turbo charges totally and indigenously’. The same object has been

reflected in Form-3CM submitted by the prescribed authority. The AO

distinguished the case law relied upon by the assessee in the case of

M/s.Brakes India Ltd., for the AY 1986-87 and 1989-90 vide ITA Nos.3190

& 3191/Mds/92 dated 06.02.2003 and held that the expenditure incurred

for the purpose of R&D is relatable to both 10B & non-10B units and

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accordingly, apportioned a sum of Rs.62,37,997/- for the eligible unit and

re-computed the deduction u/s.10B.

5.1 The Ld.CIT(A) allowed the assesse’s appeal in paragraph No.5.1

which is extracted as under:

5.1 I have carefully considered the facts of the case and the submissions of the AR. I have also gone through the decisions relied on by the AR. As submitted by the AR the scope of adjustments that can be made in computing the profits of 10B unit are narrow since the section exempts the “profits derived” from the export oriented units. From the evidences filed in the nature of various products arising out of the 10B undertaking viz., turbocharger parts, the appellant has confirmed that the R & D facility is related to development of new turbo charger assembly, whereas the exports related to turbo charger parts where the designing is done by the foreign buyer. The expenditure relating to R & D for a full assembly cannot be allocated to the unit which are manufacturing and exporting only components. The appellant also submits that R&D facility is an independent unit, distinct from 10B unit. The Hon’ble jurisdictional High Court in the case of Brakes India Ltd, supra, had under similar circumstances in the context of deduction u/s.80IB has held that no such apportionment is warranted. Accordingly, this ground of appeal is allowed.

5.2 We heard the rival submissions and perused the material placed on

record.

The Ld.CIT(A) deleted the addition and allowed the assesse’s appeal

stating that the R&D activity is not related to the 10B unit and the 10B

unit is a separate and distinct unit. The Ld.CIT(A) given a finding that the

expenditure related to R&D is for a full assembly unit which cannot be

allocated to the units which are manufacturing and exporting only

components. The Ld.CIT(A) also stated that the assessee’s case is

squarely covered by the decision of jurisdictional High Court in the case of

Brakes India Ltd., in Tax Appeal Nos.737 to 739 of 2005 dated 17.10.2012

and also Punjab Con Cast Steel Vs. CIT & ors. 49 ITD 430 Chandigarh.

During the appeal, the Ld.DR vehemently argued stating that non-

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allocation of expenditure to 10B Units was only a device to reduce the

taxable income but no evidence has been brought on record to controvert

the submissions of the assessee or to establish that the in-house R&D

facility belong to the eligible 10B units also. Therefore, we do not find any

infirmity in the order of the Ld.CIT(A) and the order of the Ld.CIT(A) is

confirmed. The appeal of the Revenue is dismissed.

6.0 Ground No.5 in Revenue’s appeal for the AY 2007-08 is addition of

Rs.77.99 lakhs relating to loss on forward contracts. This issue is involved

for the A.Y.2007-08 in appeal No.629/2013 and for the A.Y 2008-09 in

ITA No.204/2014.

6.1 During the assessment proceedings, the AO found that the assessee

had incurred a loss of Rs.77.99 lakhs in AY2007-08 and Rs.3,99,47,000/-

for the AY 2008-09 on account of restatement of foreign exchange

contracts. The assessee argued before the AO that the forward contract

was the hedging activity of the assessee on the underlying transaction of

export receivables and import payables which does not fall under the

purview of speculative transaction. The AO held that the exchange loss on

account of derivative transactions for restatement of forward contracts

cannot be allowed as a deduction as per CBDT instruction No.03/2010

dated 23.03.2010. Accordingly, the AO disallowed the foreign exchange

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loss amounting to Rs.77.99 lakhs in A.Y 2007-08 and Rs.3,99,47,000/-

for the A.Y. 2008-09 and added back to the total income.

6.2 Aggrieved by the order of the AO, the assessee went on appeal

before the Ld.CIT(A) and the Ld.CIT(A) allowed the assessee’s appeal

following the Apex Court’s decision in CIT v. Woodward Governer of India

P. Ltd.(312 ITR 254) Relevant Paragraph No.6.1 at Page No.7 of the

Ld.CIT(A)’s Order extracted as under:

6.1 I have carefully considered the facts of the case and the various submissions of the AR. I have also gone through the decisions relied on by the AR. It is not disputed that the appellant had substantial transactions in foreign exchange and therefore it is natural that it had to take hedge against potential due to exchange fluctuations. Though the term used was “derivative” the transactions are basically taking foreign exchange contract hedge against fluctuations. With regard to the loss in respect of Mark to Market losses of derivative contracts, as explained by the AR, these were entered into for the purpose of hedging the current assets and current liabilities which form part of the circulating/ working capital of the appellant. It was held by the Supreme Court in the case of CIT Vs Canara Bank (63 ITR 328) that the loss on account of fluctuation of exchange which arise in the course of business operations and which is incidental to trading operations is allowable as deduction. In the instant case the loss has arisen in the course of appellants trading operation only. This view is also supported by the decision of Bombay High Court in the case of CIT Vs Bank of India (218 ITR 371). Further the decision of Apex Court in CIT v Woodward Governor India P. Limited (312 ITR 254) also fortifies the case of the appellant. The Honorable Court in that case had observed as under: “Loss1’ suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the Balance sheet date is an item of expenditure under section 37(1) of the Income tax Act, 1961”. As clearly laid down by the Supreme Court, the loss incurred by the appellant on account of exchange fluctuations has to be allowed as deduction. Respectfully following the decision of the Supreme Court, the claim of the appellant is allowed.

Against the Orders of the Ld.CIT(A), the Revenue has filed appeal

before us.

6.3 We heard the rival submissions and perused the material placed on

record.

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The Ld.DR argued that the forward contracts loss is a notional loss

which is contingent in nature and not allowable to be set off against

taxable income. The loss was only due to restatement of foreign

exchange which should be allowed only on actual happening of the event.

Further, Ld.DR stated that the loss was booked without actual delivery of

the commodity and hence the loss should be treated as speculative

transaction as per Sec.43(5) of Income Tax Act. On the other hand, the

Ld.AR argued that the loss is business loss and squarely covered by the

following decisions

and also relied on the decision of CIT v. Woodword Governor of India Ltd.

312 ITR 254.

6.4 We heard both the parties and perused the material placed before

us.

The assesse has entered into forward contract for hedging purposes

against the underlying receivables (exports) and payables (imports)

transactions in foreign currencies. As rightly explained by the assessee

derivative products are intangible and are not capable of delivery or

transfer. It was also explained that forex derivatives are not traded on

security markets and therefore has no application of Sec.43(5) of IT Act.

The assesse has entered into forward contracts for the purpose of its

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business and there was no dispute on this issue. As on the closing date,

the foreign exchange was restated which resulted into loss and the

assessee relied on the Hon’ble Apex Court judgment cited supra wherein it

was held that the loss incurred on account of restatement of foreign

exchange as on the Balance sheet date is a business loss. For ready

reference, we reproduce the catch note of the cited judgment as under:

I. Section 37(1), read with section 145, of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1998-99 - Whether expression ‘expenditure’ as used in section 37 may, in circumstances of a particular case, cover an amount which is really a ‘loss’, even though said amount has not gone out from pocket of assessee - Held, yes - Whether loss suffered by assessee on account of foreign exchange difference as on date of balance sheet is an item of expenditure under section 37(1) - Held, yes - Whether accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till Assessing Officer comes to conclusion for reasons to be given that said system does not reflect true and correct profits - Held, yes - Whether an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period - Held, yes.

The Ld.CIT(A) allowed the assessee’s appeal following the decision

of the Hon’ble Apex Court cited supra. Therefore, we do not find any error

in the order of the Ld.CIT(A) and the same is upheld. The Revenue’s

appeals on this issue for the A.Y.2007-08 and for the A.Y 2008-09 are

dismissed.

7.0 Ground No.6 of Revenue for the AY 2007-08 is the disallowance

u/s.40(a)(i) in respect of payment made to non-resident Export agent

M/s.Biggleswade Ltd., Hongkong without deduction of tax at source. This

isuue is involved for the A.Y 2007-08, 2008-09 and A.Y 2009-10.

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7.1 The AO found that the assessee has paid a commission of

Rs.2,21,80,564/- to M/s.Biggleswade Ltd., Hongkong for the services

rendered by the foreign agent to the assessee as per the details given

below:

A.Y 2007-08 Rs.2,21,80,564/- A.Y 2008-09 Rs.2,30,44,518/- A.Y 2009-10 Rs.2,00,00,000/-

7.2 The AO considered the payment made to the foreign agent was in

the nature of Managerial services as per Explanation-2 of Sec.9(1)(vii) of

IT Act and held the payment as fee for technical services which attracts

the TDS provisions of Sec.195 of IT Act and the assessee required to

deduct the tax at source. Since the assessee failed to deduct the tax at

source, the AO has brought the payments made to the non-resident agent

to tax u/s.40(a)(i) of IT Act.

7.3 The Ld.CIT(A) allowed the assessee’s appeal with an observation

that the scope of the work undertaken by the non-resident agent is to

canvass the exports of the assessee outside India, and not in the nature of

Managerial services to apply the provisions of Sec.9(1)(vii) of IT Act. The

Ld.CIT(A) relied on the decision of the Hon’ble Supreme Court in the case

of GE Technological Centre Pvt. Ltd. v. CIT 327 ITR 456.

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7.4 Aggrieved by the order of the Ld.CIT(A), the Department is on

appeal before us.

7.5 We heard both the parties and perused the material placed on

record.

The Ld.AR argued that the services rendered by the foreign agent

was to canvass the assessee’s products outside India and no managerial

and consultancy services were rendered by the foreign agents. The entire

services were rendered outside India and the party does not have any

permanent establishment or business connection in India. The nature of

services rendered was examined by the Ld.CIT(A) and given a finding that

the services do not fall under the category of managerial services to be

taxed u/s 9(1)(vii) of IT act as FTS. On similar facts in the case of

M/s.Brakes India Ltd., in ITA No.266/2012 dated 22.03.2013, the ITAT,

Chennai has decided the issue in favour of the assessee. The assessee

has relied on the following decisions also:

• CIT v. Faizan Shoes (TCA No.789 of 2013) (Mad HC) • ACIT v. Farida (ITA No.359/Mds/2013) • Delta Shoes Pvt. Ltd. (ITA No.909/Mds.2013)

The Entire services were rendered outside India and the party does

not have any establishment or business connection in India. The Ld.CIT(A)

has allowed the assessee’s appeal following the decision of the Hon’ble

Supreme Court and the jurisdictional High Court in the case of Faizan

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shoes which supports the assessee’s case. Therefore, we do not find any

reason to interfere with the order of the Ld.CIT(A) and the same is upheld.

7.6 Even otherwise, Explanation to Sec.9(2) of IT Act is amended by

Finance Act, 2010 w.e.f. 01.04.1976. The assessment year involved is

2007-08 to 2009-10 and there is no provision to tax the payments

made to the services rendered outside India to the foreign agents in the

Income Tax u/s.9(1)(vii) prior to the amendment. This view is upheld by

the decision of the Hon’ble Supreme Court relied upon by the Ld.AR in the

case of Ishikawajima-Harima Heavy Industries Ltd vs. DIT (2007) (288

ITR 408) which clarified that despite the deeming fiction in section 9, for

any such income to be taxable in India, there must be sufficient territorial

nexus between such income and the territory of India. It further held that

for establishing such territorial nexus, the services have to be rendered in

India as well as utilized in India. The explanation to section 9(2) was

introduced by Finance Act 2010 w.e.f.1976 and as on the date of

assessment there was no such provision to tax the FTS rendered outside

India and hence we agree with the Ld.A.R that no tax is deductible u/s

195 and consequent disallowance is not called for.

7.7 Therefore, we hold that the payment made by the assessee for the

services rendered outside India are not taxable under section 9(1)(vii) of

I.T. Act in the assessment years under consideration and the disallowance

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is not called for. We uphold the order of the Ld.CIT(A) and the Revenue

appeals on this issue for the AYs 2007-08, 2008-09 and AY 2009-10

are dismissed.

8.0 Ground No.7 of the AY 2007-08 is the disallowance u/s.40(a)(i) in

respect of payment made to Sonima Logistics, Germany without deduction

of tax at source. This issue is involved for the A.Ys 2007-08, 2008-09

and A.Y 2009-10. The AO found that the assessee has paid commission

for the AYs 2007-08 to 2009-10 as under:

• AY 2007-08 - Rs.5,19,93,634/-

• AY 2008-09 - Rs.6,75,34,886/-

• AY 2009-10 - Rs.5,32,06,430/-

The payment was made to Sonima Logistics, Germany for rendering

the following services outside India.

a) Import customs clearance including liaison with appropriate agencies b) Transporting the custom cleared containers to warehouse and unloading containers. c) Unpacking cases/cartons and transferring contents to pallets. d) Delivering components to supplier as per schedule. e) After delivery acknowledgements from supplier to be forwarded to Turbo Energy Ltd f) To maintain running account of pallets received from supplier and delivered back to them and reconcile these figures on monthly basis. g) To provided in all pallets delivered to supplier, details of part number, quantity and the related master consignment reference h) To send stock status report to Turbo Energy Limited on weekly basis.”

8.1 The AO held that the payments were made for managerial services

and taxable u/s.9(1)(vii) of IT Act. Since the assessee failed to deduct the

tax at source u/s.195 of the IT Act, disallowed the payments u/s.40(a)(i)

of IT Act. The Ld.CIT(A) deleted the addition finding that the services

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rendered by non-resident do not fall under managerial or technical

services within the meaning of IT Act and the services are rendered

outside India and non-resident party has no permanent establishment or

business connection in India. Accordingly, relying on the decision of the

Hon’ble Apex Court in G.E. Technological Centre Pvt. Ltd., the Ld.CIT(A)

allowed the appeal of the assessee. During the appeal, the Ld.AR argued

that the services were rendered by the non-resident are liasoning services

but not the managerial and technical services. Further, argued that even

if the services rendered outside India are to be taxable, it is taxable as

business profits in which case, only the profits required to be brought to

tax if there is a permanent establishment or business connection in India.

Since the assessee has no permanent establishment, the application of

Sec.9(1)(vii) and Sec.195 has no application. The assessee also relied on

the following decisions:

• Brakes India Ltd. V. DCIT (LTU) (266/Mds/2012) (Chennai) • Sun Micro Systems India (P) Ltd (125 ITD 196) (Bang) • G.E. Technology Centre Pvt. Ltd., Vs. CIT (327 ITR 456)

8.2 We heard the rival submissions and perused the material placed on

record.

The assessee has produced the copy of the agreement before the

Ld.CIT(A). The Ld.CIT(A) examined the Explanation of the assessee and

the document placed before the CIT and concluded that the services

rendered by the non-resident do not fall under the category of technical or

managerial services. Ld.CIT(A) further stated that the services are

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rendered outside India and there is no permanent establishment or

business connection to the non-resident in India. This fact has not been

disputed by the Revenue. The profits of the services rendered outside

India cannot be taxed in India unless the non-resident has permanent

establishment/or business connection in India as envisaged in Sec.9(1) of

IT Act. The Ld.CIT(A) deleted the addition relying on the decision of the

Hon’ble Apex Court in the case of GE Technological Centre Pvt. Ltd. v. CIT

327 ITR 456. The findings and conclusions arrived in earlier ground in

respect of payment made to M/s.Biggleswade Ltd., are squarely applicable

to this ground also. Therefore, we do not find any infirmity in the order of

the Ld.CIT(A) and the same is upheld. The Revenue’s appeal on this issue

for the A.Ys 2007-08, 2008-09 and A.Y 2009-10 are dismissed.

9.0 Ground No.8 for the A.Y 2007-08 is related to the disallowance of

expenditure as per Sec.14A r.w.r.8D of IT Act. The AO disallowed a sum of

Rs.4,85,292/- applying the provisions of Rule 8D of IT Act. The Ld.CIT(A)

held that the Rule 8D is not applicable for AY 2007-08 and confirmed the

disallowance to the extent of 2% of dividend income placing reliance on

Godrej & Boyce 328 ITR 81.

9.1 We heard the rival submissions and perused the material placed on

record.

ITA No.351/Mds/2013 & ITA Nos.316 & 317/Mds/2014 ITA No.629/Mds/2013 ITA Nos.203, 204 & 205/Mds/2014 :- 24 -: The Rule 8D is introduced on 24.03.2008 and applicable w.e.f.

24.03.2008. This Tribunal has consistently followed that Rule 8D is

applicable from 24.03.2008 but not to the earlier period. Therefore, we

are of the considered opinion that the Ld.CIT(A) has correctly applied the

provisions of Rule 8D and held that Rule 8D is not applicable for the AY

under consideration. Prior to the introduction of Rule 8D this Tribunal has

consistently upheld the disallowance of expenditure related to the exempt

income @ 2% of exempt income. The Ld.CIT(A) also restricted the

disallowance to the extent of 2%. Therefore, we do not find any reason to

interfere with the order of the Ld.CIT(A) and the same is upheld. The

appeal of the Revenue on this issue is dismissed.

10.0 The next issue is additional depreciation on which the assessee has

filed the appeal. The AO disallowed the additional depreciation claimed by

the assessee u/s.32(1)(iia) for the AYs 2007-08, 2008-09 & 2009-10.

The AO disallowed the additional depreciation claimed by the assessee

amounting to for the AYs 2007-08 to 2009-10 as under:

• AY 2007-08 - Rs.55,04,308/- • AY 2008-09 - Rs.43,47,901/- • AY 2009-10 - Rs.1,60,96,965/-

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The AO made the disallowance stating that the additional

depreciation is allowed only for purchase of new plant and machinery

added during the year. The AO further held that consequent upon

inclusion of the asset in the block of assets the residual unavailed

additional depreciation cannot be allowed to be carried forward to the

subsequent assessment year and accordingly disallowed the same. The

contention of the AO is (i) The plant and machinery having purchased in

the previous Financial year cannot be held as new plant and machinery in

the subsequent Financial year and not eligible for additional Depreciation.

(ii) Depreciation is allowed on the Plant and machinery and included in the

block of assets. There is no provision in the block of assets to carry

forward and allow the residual additional Depreciation.

10.1 The Ld.CIT(A) confirmed the addition made by the AO holding that

additional Depreciation is only one time measure in the year of purchase

and it is not possible to carry forward the unavailed/unabsorbed additional

depreciation to the subsequent assessment year. For ready reference we

extract the relevant part of the Ld.CIT(A) order in Para No.10 as under:

As per the provisions of section 32(1 )(iia), the additional depreciation shall be available only for the new assets added during the year. For better clearance, the relevant provisions of section 32(1)(iia) is reproduced as under: “32(1 )(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31St day of March, 2002, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to fifteen per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii):”

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Based on the above legal position, it is clear that,, the additionai depreciation shall be provided only for the new Plant & machineries added during the current year. Hence, the submission of the assessee cannot be accepted and the claim of additional depreciation related to the assets added during the assessment year 2006-07 amounting to Rs.64,75,668/- is not allowable as deduction for the current year. II. Notwithstanding to the above facts, the assessee also not eligible for the residual additional depreciation claim based on the following reasons: The residual additional depreciation cannot carried forwarded to the next assessment year: a. In the case of provisions related to normal depreciation, the cost of such assets are included in the block of assets and therefore, even if depreciation is allowed at the rate of 50% due to the fact additions were made in the second half of the year, depreciation is allowed on the residual value in the subsequent year since such value will form part of the opening WDV in the subsequent year. Therefore, such provisions are completely different from the provisions of section 32(1)(iia) which allows additional depreciation as a onetime measure only in the year.

10.2 We heard the rival submissions and perused the material placed on

record.

10.3 The issue is squarely covered in favour of the assesse by the

following judicial pronouncements:

• Devi Polymers (ITA No.165/Mds/2014) (Chennai) • SIL Investments (26 Taxmann.com 78) (Del) • MITC Rolling (ITA No.2789/Mum/2012) • DCIT v. Cosmo Films (2012) 139 ITD 628 (Delhi) (Trib.)

The Hon’ble jurisdictional High Court in TCA No.551/2013 in the

case of M/s.Brakes India Ltd., held that the balance additional

depreciation which was not allowed in the year in which it was put to use,

should be allowed in the subsequent year.

10.4 Respectfully following the decision of the Hon’ble jurisdictional High

Court we set aside the orders of the lower authorities and direct the AO to

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allow the additional depreciation. Accordingly, the assessee’s appeal on

this ground for the AYs 2007-08, 2008-09 & 2009-10 are allowed.

11.0 The next issue in Ground No.2 is disallowance of depreciation on

UPS. Both the assessee and Revenue have filed appeal on this issue. The

assessee filed appeal for the AY 2007-08 and the Revenue has filed appeal

for the AY 2008-09 and 2009-10. This issue is involved for the AYs2007-

08, 2008-09 & 2009-10. The AO disallowed a sum of Rs.1,26,086/- for the

A.Y 2007-08, Rs.3,75,082/- for the AY 2008-09 and Rs.6,29,235/- for the

A.Y 2009-10.The assessee claimed the depreciation @80% on UPs stating

the UPS being an automatic voltage controller as well as power saving

equipment is a energy saving device and claimed the depreciation @80%

in accordance with Appendix-I to Income-Tax Rules. Reliance is also

placed on the decision of 1TAT’s Order in DCIT v Surface Finishing

Equipment (2003) 81 TTJ 448. The AO examined the explanation of the

assessee and held that the UPS is neither a part of the computer nor a

energy saving device but it is only as an uninterrupted power supply

equipment for all the electrical appliances. The AO relied on the decision of

Hon’ble ITAT Delhi in the case of Nestle India Limited Vs. DCIT [111 TTJ

498], wherein it was held that UPS is not an integral part of computer and

allowed depreciation as a part of general plant and machinery.

Accordingly, the excess depreciation claimed by the assessee is

disallowed and added to the total income.

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11.1 During the appeal hearing the Ld.AR of the assessee argued that

energy saving devices being automatic voltage controllers are the

equipment eligible for claiming depreciation @80%. It was the contention

of the Ld.AR that the UPS has inbuilt automatic voltage regulator which is

capable of regulating the incoming voltage to feed stabilizer output

voltage to the connected instrument in addition to the uninterrupted

power supply during the power failure with the help of batteries. The

Ld.AR also relied on the following decisions:

• Sundaram Asset Management (2013) 145 ITD 17 (Chennai) • Godrey Phillips India Ltd. • DCIT vs. Surface Finishing Equipment

11.2 Though there are decisions in favour of assessee the claim of the

assessee that the UPS as an energy saving device is not acceptable. It is

only an equipment for uninterrupted power supply to all the electrical

appliances as held by the Ld.AO. However ITAT’C’ Bench, Chennai in ITA

No1774/Mds/2012 in the case of Sundaram Asset Management Co.Ltd vs

DCIT held that UPS is an part integral of computer and eligible for

Depreciation @60%. Therefore, we are unable to accept the contention of

the Ld.AR that UPS is eligible for 80% depreciation. Following the decision

of this tribunal in the case cited (Supra) we uphold the order of the

Ld.CIT(A) and direct the AO to allow the depreciation @60%. In the

result, the assessee’s appeals as well as Revenue’s appeals are dismissed.

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12.0 Next issue for the A.Y.2008-09 is addition u/s.40(a)(i) for

Software purchase for non-deduction of tax at source. The Assessing

officer disallowed a sum of Rs.17,72,916/- for non deduction of tax at

source u/s 194J of Income Tax Act. The Revenue has filed appeal on this

issue. The AO relied on the decisions of the Hon’ble Delhi ITAT in the case

of Microsoft Corporation v. ADIT & Gracemac Corporation v. ADIT in lTA

Nos. 1331 to 1336 (Del) of 2008 for AYs 99-2000 to 2004-05 dated

26.10.2010 wherein it was held that the income from supply of ‘shrink-

wrapped’ software is assessable as ‘Royalty’. The Ld.CIT(A) allowed the

assessee’s appeal following it’s own order for the earlier year. The Ld.A.R

submitted that software purchases were shelf software which were merely

copy of the copy right and not copy right as such. The assessee also

placed reliance on M/s.Samsung Electronics Ltd v. ITO (TDS)-1 (94 ITD 91

and Hon’ble Special Bench, ITAT in the case of Motorolo Inx. vs. DCIT

reported in 95 ITD 269.

12.1 We heard the rival parties and perused the material placed before

us. There is no dispute in fact that the assessee has purchased the

software and the assessing officer has admitted this fact in the

assessment order. The payment made towards the purchase of software

is squarely covered by the decision of the Hon’ble jurisdictional High court

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in CIT Vs M/s.Vinzas Solutions India Pvt. Ltd. in ITA No.861/2016 dated

04.01.2017 wherein their lordships held as under:

“The word ‘royalty’ means a share of the product or profit reserved by the owner for permitting another to use the property, the share of the production or profit paid the owner; a share of the product or proceeds therefrom reserved to the owner for permitting the another to use the property; the share of the produce reserved to the owner for permitting another to exploit and use the property; a share of the profit, reserved by the owner for permitting another to use the property; the amount reserved or the rental to be paid the original owner of the whole estate.”

“The term “royalty’ normally connotes the payment made by a person who has exclusive right over a thing for allowing another to make use of that thing which may be either physical or intellectual property or thing. The exclusivity of the right in relation to the thing for which royalty is paid should be with the grantor of that right. Mere passing of information concerning the design of a machine which is a tailor-made to meet the requirement of a buryer does not by itself amount to transfer of any right of exclusive user so as to render the payment made there for being regarded as ‘royalty’.

12.2 Respectfully following the decision of Hon’ble jurisdictional High court

we hold that the payment towards software purchase is not royalty within

the meaning of non-taxable u/s.9(1)(vi) of Income Tax Act and not liable

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Ld.CIT(A)dismiss the revenue’s appeal on this issue.

13.1 The Next issue for the A.Y.2008-09 and 2009-10 in assessee’s

appeal is the disallowance u/s.14A r.w.Rule 8D of Income Tax Rules. The

AO disallowed the expenditure relating to the dividend income for the AYs

2008-09 and 2009-10 as under:

• AY 2008-09 – Rs.5,42,601/- • AY 2009-10 – Rs.10,13,125/-

The AO noticed from the P&L Account that the assessee has shown

income by way of dividend from the mutual fund and domestic companies

for the AYs 2008-09 & 2009-10, but the assessee has not disallowed

any expenditure in the P&L account for earning the dividend income. The

AO asked the assessee to explain why the expenditure for earning of the

dividend income should not be disallowed by applying Rule 8D w.r.t.

Section 14A of the Income-Tax Act and the assessee’s submitted it’s reply

stating that the Company has no borrowed funds and hence there is no

question of interest payments and consequently no interest is disallowable

as envisaged in rule 8D. Further if at all any expenditure that can be

related to income exempt from tax viz., dividend income, then the same

would only be the expenditure by way of salary paid to the staff whose

routine included handling investment portfolio and the annual salary cost

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to the accompany amounted to Rs.2,29,436/-. According to the assessee,

other than this item of expenditure, no amount is disallowable under rule

8D of the Income-Tax Rules, considering the fact that no expenditure was

incurred in collecting this dividend. Not being impressed by the reply of

the assessee the AO disallowed a sum of Rs.542601/- for the A.Y 2008-

09 and Rs.10,13,125/- for the A.Y 2009-10 applying the Rule 8D of

Income Tax Rules. The AO relied on CBDT Instruction

(F.No.173/172/2008-ITA-l dated 4.2.2009, Honorable ITAT, New Delhi

decision in the case of M/s.Chemivest Ltd vs. ITO reported in 121 lTD 318,

124 TTJ 577) and the Hon’ble ITAT Special Bench, Mumbal in the case of

M/s.Daga Capital Management Private Limited for the A.Y. 2001-02 vide

ITA No.8057/Mumbai/03 dated 20.10.2008.

13.2 The assessee went on appeal before the CIT(A) and the Ld.CIT(A)

confirmed the order of the AO. The Ld.CIT(A) discussed the issue at length

in his order For ready reference and for the sake of clarity we extract

relevant paragraph No.10.2 to 10.2.3 as under:

10.2 I have carefully considered the facts of the case and the submissions made by the Ld.AR. I have also gone through the decisions relied on by the AO and AR. I am not in agreement with the contentions of the Ld.AR that no expenditure was incurred to earn tax- free income. In the instant case, the appellant has offered a ‘zero amount of deduction. Not only that the AO has given his satisfaction for invoking the provisions as seen from the assessment order wherein an explanation was also called for from the appellant. The appellant has debited certain expenditure towards establishment and administration and a portion of which can be attributed towards the activity of earning dividend income. The assessee also incurred managerial remuneration. The managerial staff and the Directors are involved in making decisions on investments. Such being the case, a portion of this managerial remuneration and Directors remuneration should also be attributed towards the dividend earned by the assessee, the A.O reasons. The argument of the appellant that administrative expenses were incurred only for manufacturing activity but not for earning

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exempt income was also rejected by the AO since no bifurcation of such expenses were forthcoming from the accounts. Therefore, the contention of the appellant that no expenditure was incurred for earning exempt income is not acceptable. Further, the section 14A(3) itself states that the provisions of sub-sec (2) of 14A 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. In the case of Godrej & Boyce Mfg. & Co. v. DCIT, 328 ITR 81, the Bombay High Court has held that the Rule 8D is applicable from A.Y. 2008-09 onwards and disallowance under Rule 8D r.w.s. 14A(2) is “fair and reasonable”. The very act of the AO in invoking the provisions show that the AO is not satisfied with the working of the appellant with regard to expenditure relatable to exempt income and taxable income. The reason why he was not satisfied is proved by the fact that the details relatable to taxable income and exempt income and the investment relatable to earning of dividend income and other investments was not separated by the appellant in its accounts. Therefore, in the case of the appellant invoking of provisions u/s 14A r.w. Rule 8D are not out of context.

10.2.1 With regard to the argument that the appellant had huge interest free funds and no borrowed funds were used for investing in tax free investments also the A.O has given his reasoning. Even though the assessee has claimed that borrowed funds were not utilized for making investments, it could not clearly establish the same. Funds for a company come in a common kitty. They comprise of borrowed funds, share capital, and retained earnings (Reserves and Surpluses). Therefore, to argue that no portion of the interest paid relates to investment which earned dividend income is not proper. To tide over this difficulty, the provisions of s.14A and Rule 8D were introduced which are applicable from the AY 2008-09. Thus the AR’s argument that they have their own interest free funds and no borrowed funds were used for earning exempt income is too defensive. Having sufficient interest free funds will not automatically prove substantively that the same amount has gone to invest in dividend earning investments but not the other investments like fixed assets, current assets etc. The onus is on the appellant to strive a little hard to separate such amounts. In the event of not providing such accounts by the appellant, the AO has no other alternative but to work out the ratios on the basis of the formula laid down under Rule 8D. In fact the decisions in the cases of CIT v Reliance Utilities and Power Ltd and Hero Cycles Ltd are not applicable in the instant case. The Courts have never laid down any formula or rule. They simply said that it can be “presumed” that the ‘investments were made from interest free funds’. As laid down the accounts should be clear not only with regard to expenditure relatable to exempt income and taxable income but also with regard to investments which have gone into earning dividend income and those which have gone to other investments since the s.14A emphasizes on the words “with due regard to the accounts”. Since the actual amount of expenditure incurred relatable to exempt income could not be quantified by the appellant on its own, the AO has rightly invoked the provisions of rule 8D. The Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd (supra) has also held that the provisions of rule 8D are “fair and reasonable” and are applicable from A.Y.2008-09 onwards. Therefore, Rule 8D is exigible in the appellant’s case and the AO has invoked the provisions correctly. It is to be noted here that “presumptions” have no role to play in claiming any exemptions.

10.2.2 With regard to the argument that while taking averages of investment, the entire investments as per balance-sheet were taken instead of only the investment on which tax- free income was earned, I cannot find fault with the AO. When it is the duty of the appellant to furnish the details of the investment relatable to earning of dividend income and investment relatable to others, and when such details were not forthcoming from the records or accounts of the appellant, AO was left with no alternative but to invoke the laid down provisions of sec 14A r.w. Rule 8D. Further, when a laid down principle in the form of Rule 8D is prescribed, the appellant’s argument that at best only the salary paid to one officer alone should be taken for disallowance has no meaning.

10.2.3 The appellant’s another argument that only 2% of tax-free income can be attributed to earning tax-free income also lacks merit, especially in the light of the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. & Co. V. DCIT (supra) wherein it was held that Rule 8D is applicable from A.Y. 2008-09. When clear-cut formula is available to the AO estimating the disallowance is not required.

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Against the order of the Ld.CIT(A), the assessee is in appeal before

us.

13.3 We heard both the parties and perused the material placed on

record. The assessee has earned the dividend income and the AO has

given a finding that the Profit & Loss A/c does not show any disallowance

of expenditure relating to the dividend income. The AO disallowed the

expenditure by applying Rule 8D of IT Act. Though the assessee claimed

that some amount of salary was incurred it was not supported by

complete information and the documentation. As per the P&L account no

expenditure was debited by the assessee and no disallowance was made

by the assessee. Therefore, the AO made the disallowance placing

reliance on CBDT Instruction (F.No.173/172/2008-ITA-l dated 4.2.2009,

Honorable ITAT, New Delhi decision in the case of M/s.Chemivest Ltd vs.

ITO reported in 121 lTD 318, 124 TTJ 577) and the Hon’ble ITAT Special

Bench, Mumbai in the case of M/s.Daga Capital Management Private

Limited for the A.Y. 2001-02 vide ITA No.8057/Mumbai/03 dated

20.10.2008.. The assessee relied on the decision of ITAT, Chennai in ITA

No.1609/Mds/2012 wherein ITAT has restricted the disallowance to the

extent of 2%. Rule 8D was introduced w.e.f. 24.03.2008 and hence the

ad hoc estimation of disallowance is not applicable for the AY 2008-09

onwards. Therefore, Rule 8Dhas mandatory application. The assessee

ITA No.351/Mds/2013 & ITA Nos.316 & 317/Mds/2014 ITA No.629/Mds/2013 ITA Nos.203, 204 & 205/Mds/2014 :- 35 -:

also submitted that the loans for specific business purposes cannot be

included u/s.14A. No such details were furnished by the assessee. What

were the loan availed for specific purposes and whether the financial

institutions have directly paid to the supplier or accounted through

common account, etc., were not furnished by the assessee. Therefore,

the reliance placed by the assessee in ITA No.1331/Kolkata/2011 is not

applicable in this case. The assessee also argued that investment which

yielded exempt income alone should be considered. This argument of the

assessee also is not acceptable since the assessee has borrowed funds

and invested on shares and the shares earned the income which is

exempt. No details regarding shares which earned dividend income was

placed by the Ld.AR. This Tribunal has consistently followed that

investments made from the common account attracts the disallowance

u/s.14A. Once, the assessee earns the dividend income, the application of

Sec.14A is attracted and consequently the disallowance has to be made

applying the Rule 8D. Therefore, we do not find any infirmity in the

Orders of the lower authorities and the same is upheld. The appeal of the

assessee on this ground is dismissed.

14.0 Ground No.3 in assessee’s appeal for the A.Y 2009-10 is

disallowance of weighted deduction for scientific Research u/s.35(2AB) of

IT Act. The AO disallowed a sum of Rs.1,13,05,335/- over and above the

expenditure prescribed by the authority while issuing the approval for the

ITA No.351/Mds/2013 & ITA Nos.316 & 317/Mds/2014 ITA No.629/Mds/2013 ITA Nos.203, 204 & 205/Mds/2014 :- 36 -:

scientific research. The Ld.CIT(A) confirmed the order of the AO. The

assessee argued that the claim which is otherwise allowable cannot be

restricted, merely because the amount is not originally included in the

Annual Report. The due process of approval by DSIR require the

reconciliation of amount of claim as certified by auditor and the amount

disclosed in the annual report. The restriction by DSIR overlooking the

reconciliation is unjust and hence the claim as made by the appellant

should have been allowed. The Ld.A.R relied on the following decisions:

i. CIT vs Claris Life Sciences Ltd. 326 ITR 251(Guj) ii. CIT vs.Wheels India Ltd 336 ITR 513 (Mad) iii. Electronics Corporation of India Ltd.vs ACIT(ITA No.1106/Hyd/2011

14.1 We have heard both the parties and perused the materials placed

on record. The act does not place any restrictions to incur the

expenditure. The expenditure incurred for the purpose of scientific

research required to be allowed as deduction u/s.35(AB) subject to

complying the conditions laid down in Rule 6. The expenditure was

incurred by the assessee which is certified by the tax audit report. There

is no dispute regarding the actual amount incurred by the assessee.

The assessee relied on the jurisdictional High Court decision supra.

The decisions relied upon by the Ld.AR are not directly related to the

issue of R&D expenditure incurred over and above the specified limit of

ITA No.351/Mds/2013 & ITA Nos.316 & 317/Mds/2014 ITA No.629/Mds/2013 ITA Nos.203, 204 & 205/Mds/2014 :- 37 -: DSIR. However, the essence of the judgments relied upon by the Ld.AR

suggests to allow the actual expenditure. There is no dispute regarding

the genuineness of expenditure. Therefore, we hold that the assessee is

entitled for the weighted average deduction on the amount actually spent.

Accordingly, the appeal of the assessee is allowed.

15.0 In the result, the appeals of the assessee are partly allowed and the

appeals of the Department are dismissed.

Order pronounced in the Open Court on 3rd May, 2017, at Chennai.

Sd/- Sd/- (एन.आर.एस. गणेशन) (!ड.एस. सु�दर $संह) (N.R.S. GANESAN) (D.S.SUNDER SINGH) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER

चे�नई/Chennai, 5दनांक/Dated: 3rd May, 2017. TLN

आदेश क0 ,�त$ल6प अ7े6षत/Copy to: 1. अपीलाथ+/Appellant 4. आयकर आयु8त/CIT 5. 6वभागीय ,�त�न�ध/DR 2. ,-यथ+/Respondent 3. आयकर आयु8त (अपील)/CIT(A) 6. गाड. फाईल/GF