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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
O R D E R Per Saktijit Dey, Judicial Member:
The aforesaid cross-appeals by the assessee and the department are against the common order dated 17.04.2015, of the learned CIT(A)-22, Mumbai for the A.Y. 2011-12.
Ground Nos. 1 to 3 pertain to disallowance of assessee’s claim on depreciation on assets acquired on demerger.
Briefly, the facts are, the assessee, a company is engaged in the business of manufacturing and marketing of steel furniture, security equipments, typewriters, electronic equipments, machine tools, fork lift trucks, locks, press tools etc. In the course of assessment proceedings, the AO noticed that the assessee has claimed depreciation of Rs.82,16,84,008/- and in the tax audit report it was stated by the assessee that such depreciation is claimed on the WDV of assets transferred from Godrej Appliances Ltd., pursuant to demerger of the said company. The AO called upon the assessee to explain why the claim of depreciation should not be disallowed. Though, the assessee justified its claim through an elaborate submission made before the AO, however, the AO taking note of the amendment made to Explanation 2B to section 43(6) of the Act from A Y 2004-05 disallowed assessee’s claim of depreciation on assets acquired on demerger and, accordingly, reduced the claim of depreciation by an amount of Rs.3,09,61,631/- thereby allowing depreciation of Rs.79,07,22,377/-.
Though, the assessee challenged the part disallowance of depreciation before the first appellate authority, he also confirmed the disallowance taking note of the fact that in assessee’s own case ITAT has decided the issue against the assessee.
The learned AR fairly submitted that the issue has been decided against the assessee by the ITAT while deciding assessee’s appeals for A.Ys.
2003-04 to 2010-11 in three separate orders. The learned DR agreed with the aforesaid submissions of the assessee.
We have considered the submissions of the parties and perused the material on record. As could be seen, the issue relating to disallowance of assesee’s claim of depreciation on assets acquired on demerger of Godrej Appliance Ltd. is arising from A.Ys. 2003-04 onwards and the matter has travelled upto ITAT. In three separate orders i.e. & Ors dated 31.12.2014 (for A Y 2003-04); ITA 4540/Mum/2011 & Ors for AY 2005-06 dated 13.04.2016 and ITA 8488/Mum/2011 (for AY 2008-09) dated 23.08.2016, the Tribunal has upheld the order of the departmental authorities in disallowing assessee’s claim of depreciation on assets acquired on demerger. Respectfully, following the consistent view of the Tribunal in assesse’s own case for the preceding assessment years, we uphold the decision of the CIT(A) on this issue and dismiss the ground raised by the assessee.
In ground nos. 4 to 6, the assessee has challenged disallowance of claim of expenditure on brand improvement. Briefly, the facts are during the assessment proceedings, the AO noticing that payment of professional fees of Rs.88,93,432/- to Interbrand UK for development of brand, has been claimed as revenue expenditure, called upon the assessee to explain why the expenditure should not be disallowed as it is in the nature of capital expenditure. In reply, it was explained by the assessee that the expenditure incurred is not for development of the brand as it is in existence for more than 100 years. It was submitted, the expenditure was incurred for maintaining the existing brand name of the company. It was submitted, to maintain goodwill and brand awareness attached to the Godrej brand, assessee had appointed Interbrand to provide professional customized brand assessment services, to study the value of the “Godrej” brand and to provide services to maintain and enhance the existing brand. Therefore, it was claimed, the expenditure incurred being for the purpose of maintaining brand to promote their business and sales, it is allowable as business expenditure.
The AO, however, was not convinced with the explanation of the assessee.
Ultimately, he held that the expenditure being in the nature of capital expenditure is not allowable and allowed depreciation @25% on the expenditure claimed. The learned CIT(A) also upheld the decision of the AO while deciding assessee’s appeal.
The learned AR submitted, issue stands decided in favour of the assessee by the decision of the Tribunal in its own case for A.Ys. 2008-09, 2009-10 and 2010-11. The learned DR has not controverted the aforesaid submission of the assessee.
We have heard the parties and perused the material on record. As could be seen, the assessee has claimed similar expenditure in A.Ys. 2008-09, 2009-10 and 2010-11 as well. In fact, the payments in those assessment years were also made to the same party. However, while deciding assessee’s appeals, the Tribunal has allowed assessee’s claim of expenditure by holding that expenditure incurred on brand building is revenue in nature.
Respectfully following the aforesaid decision of the Tribunal in assessee’s own case in & Ors dated 23.08.2016, we delete the addition made by the AO while allowing assessee’s claim.
At this stage, it is relevant to observe that apart from the ground raised in the memorandum of appeal, the assessee vide letter dated 22.03.2017 has sought to raise issues relating to disallowance made u/s. 14A read with Rule 8D by way of additional grounds which are as under:
“1.0. Both the lower authorities erred in applying the provisions of Section 14A to shares held by the Appellant. Since the dividend from shares/units of mutual funds is subjected to dividend distribution tax, the appellant submits that relevant income is not tax free and, consequently, the provisions of Section 14A are not attracted. 2.0 The Assessing Officer erred in applying Rule 8D, without recording his satisfaction. 3.0 Without prejudice, and in any event, the Appellant submits that the investments made in shares of its subsidiary/group companies, are strategic investments and the same should not be considered for computing the average value of investments for the purpose of Rule 8D. 4.0 Both the lower authorities erred in holding that disallowance made u/s. 14A of the Act under normal computation of income was also required to be added back for computing book profits u/s. 115JB of the Act. 5.0 Without prejudice, and in any event, the disallowance made u/s. 14A in the computation of book profits requires to be reduced substantially.” Since the additional grounds raised by the assessee can be decided on the basis of facts available on record and do not require investigation into fresh facts, we are inclined to admit the additional grounds raised by the assessee for adjudication.
Briefly, facts are, during the course of assessment proceedings, the AO noticing that that assessee had earned exempt income of Rs.84,30,37,423/- from shares and mutual funds but did not disallow any expenditure attributable to earning of exempt income, called upon the assessee to explain why expenditure relatable to earning of exempt income should not be disallowed. In response, the assessee submitted a detailed reply objecting to the disallowance proposed by the AO. The AO however, rejecting the claim of the assessee proceeded to compute the disallowance u/s. 14A as per the method prescribed in Rule 8D and accordingly, quantified the disallowance at Rs.5,11,85,000/- comprising of interest expenditure of Rs.3,98,61,000/- and administrative expenditure of Rs.1,13,24,000/- Assessee challenged the disallowance before the CIT(A). The CIT(A) after considering the submissions of the assessee found that the issue of disallowance u/s. 14A read with Rule 8D in assessee’s own case was considered in AY 2010-11 by the CIT(A) and the CIT(A) had held that after introduction of Rule 8D disallowance u/s. 14A has to be made in terms of the method prescribed under the said Rule. He further observed that in AY 2010-11, the CIT(A) while sustaining the disallowance of administrative expenditure made under Rule 8D(2)(iii) has deleted the disallowance of interest expenditure made under Rule 8D(2)(ii)
Being aggrieved of the aforesaid decision of the CIT(A), both the assessee and the department are in appeal before us. While the assessee is challenging the part disallowance sustained by the CIT(A), the department has challenged relief granted by the CIT(A) to the assessee.
The learned AR challenging the disallowance of expenditure u/s.14A read with Rule 8D has advanced the following propositions:
i) Without recording satisfaction with regard to the correctness of assessee’s claim of expenditure with reference to the books of account of the assessee, the AO canot make disallowance u/s. 14A read with Rule 8D. In support of the aforesaid contentions, the learned AR has relied on the decision of Hon’ble Bombay Higg Court in its own case i.e.
Godrej & Boyce Manfucturing Co. Ltd. v. DCIT (2010) 328 ITR 81. ii) Provisions of section 14A is not attracted on dividend from shares/units of mutual funds. iii) Strategic investments made by the assessee for business purpose are to be excluded for computing average investment under Rule
8D(2)(iii). iv) Disallowance made u/s. 14A not to be considered for computation of book profit u/s. 115JB of the Act.
The learned DR, on the other hand, relying upon the observations of the AO submitted that the disallowance made by the AO should be restored in its entirety.
We have considered the submissions of the parties and perused the material on record in the light of the decisions relied upon. At the outset, we will deal with the first proposition advanced by the learned AR viz. without recording satisfaction with regard to the correctness of asessee’s claim in relation to expenditure attributable to earning of exempt income; no disallowance u/s. 14A can be made. It needs to be observed, as per section 14A(1) any expenditure incurred by the assessee for earning income which does not form part of the total income shall not be allowed as deduction.
However, as per sub section (2) of section 14A which was introduced in the statute book by Finance Act, 2006 w.e.f. 1.4.2007, before computing the expenditure attributable to earning of exempt income, the AO having regard to the books of account of the assessee must record a satisfaction that assessee’s claim with regard to the expenditure incurred for earning exempt income is not correct. In fact, Rule 8D which was introduced to the statute w.e.f. 24.03.2008 and which lays down the method for computing expenditure incurred in relation to exempt income is also similarly worded as section 14A(2). Thus, from a conjoint reading of section 14A(2) with Rule 8D(1), it becomes clear that before proceeding to disallow the expenditure incurred in relation to exempt income earned by the assessee, the AO must record a satisfaction that assessee’s claim in relation to the expenditure incurred for earning exempt income is not correct. Keeping in view the aforesaid legal principle, we have to examine the facts of the present case.
As could be seen from the material on record, along with the return of income assessee has submitted a computation of inadmissible expenditure u/s. 14A amounting to Rs.13,66,635/-. It is the claim of the assessee that the disallowance made by it u/s. 14A is as per the books of account and clearly attributable to earning of exempt income. On a perusal of the assessment order, we have not found any discussion by the AO with regard to the computation of inadmissible expenditure made by the assessee forming part of the return of income. The AO has not recorded any satisfaction that the working of inadmissible expenditure u/s. 14A is incorrect having regard to the books of account of the assessee. The Hon’ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. v. DCIT (supra), while examining the importance of recording of satisfaction by the AO in terms of section 14A(2) has held as under:
Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of expression “prescribed” in section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence sub-section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the Legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law.
A careful reading of the aforesaid extracted portion of the judgment of Hon’ble Jurisdictional High Court would make it clear, regard being had to subsection (2) of section 14A, the provision does not empower the AO to apply Rule 8D straightaway without considering the correctness of assessee’s claim in respect of expenditure incurred in relation to exempt income. If one applies the aforesaid legal principle to the facts of the present case, it emerges that though the assessee along with return of income has furnished a computation of inadmissible expenditure u/s. 14A, the AO has neither examined such claim of the assessee nor has recorded any satisfaction with regard to the correctness or otherwise of assessee’s claim with reference to the books of account. That being the case, the disallowance made by applying Rule 8D is not only against the statutory mandate but contrary to legal principles laid down in the judicial precedents referred to above. In the aforesaid view of the matter, the disallowance made by the AO and partly sustained by the CIT(A) would have no leg to stand. Accordingly, the addition made deserves to be deleted. However, the disallowance made u/s. 14A by the assessee itself is also required to be disallowed while computing the book profit u/s. 115JB in view of the decision of the Tribunal in assessee’s own case for A.Ys. 2005-06 to 2010-11 as referred to above.
In view of our aforesaid decision, the other propositions raised by the assessee challenging the disallowance u/s. 14A are not required to be gone into. The grounds raised are partly allowed.
ITA 4321/Mum/2015
The only issue raised by the department is in relation to the deletion of addition made on account of interest expenditure u/s. 14A read with Rule 8D(2)(ii). As discussed earlier, the AO while completing the assessment had computed disallowance u/s. 14A read with Rule 8D for a total amount of Rs.5,11,85,000/- which included disallowance of interest expenditure under Rule 8D(2)(ii) of the Act. However, the learned CIT(A) deleted the disallowance of interest expenditure on the ground that the assessee had surplus interest free fund available with it to make the investment in exempt income earning asset.
We have heard the parties and perused the material on record. While deciding the additional ground raised by the assessee in the earlier part of the order, we have deleted the disallowance made by the AO u/s. 14A read with Rule 8D for the reasons discussed therein. That being the case, the issue raised by the department in the present appeal would no more survive.
Suffice to say the CIT(A) has deleted the addition made on account of interest expenditure for the reason that the assessee had sufficient interest free surplus fund to make the investment. In fact, the AO himself in assessment order has stated that the assessee had substantial surplus fund available with it. That being the case, the interest expenditure under no circumstances can be disallowed u/s. 14A read with Rule 8D(2)(ii). The ground raised by the department is therefore dismissed.
In the result, assessee’s appeal is partly allowed and the department’s appeal is dismissed.
Order pronounced in the open court on this 5th day of April 2017