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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S. SUNDER SINGH
PER N.R.S. GANESAN, JUDICIAL MEMBER: Both the appeals of the Revenue are directed against the respective orders of the Commissioner of Income Tax (Appeals)
and relates to two independent assessees. We heard both the appeals together and disposing of the same by this common order.
There was a delay of 35 days in filing this appeal by the Revenue. The Revenue has filed a petition for condonation of delay. We have heard Ld. D.R. We find that there was sufficient cause for not filing the appeal before the stipulated time. Therefore, we condone the delay and admit the appeal.
Let us first take for consideration: The only issue arises for consideration is depreciation on pre- qualification rights and technical know-how.
No-one appeared for the assessee inspite of service of notice through the Assessing Officer. The Ld. Departmental Representative has placed on record the copy of the acknowledgement as proof of service of notice on the assessee.
Therefore, we heard the Ld. D.R., and proceeded to dispose the appeal on merit.
Shri Shiva Srinivas, the Ld. D.R., submitted that the assessee received ‘technical proprietary information’ and ‘prequalification rights’ on transfer from its wholly owned subsidiary company. The assessee claimed depreciation on the technical proprietary information and prequalification rights under Section 32(1)(ii) of the Income Tax Act, 1961 (in short ‘the Act’). The Assessing Officer disallowed the claim of the assessee on the ground that the assets transferred are not acquired by the parent company and it was self-generated intangible asset. Referring to the order of this Tribunal in the assessee’s own case for the assessment year 2002-03 to 2005-06, the Assessing Officer found that the department has already filed an appeal before the High Court under Section 260A of the Act. Therefore, in order to keep the matter alive, the Revenue has filed the appeal before this Tribunal.
We have considered the submissions of the Ld. D.R., and perused the material available on record. The assessee claimed depreciation on the technical proprietary information and prequalification rights which was said to be transferred by the parent company. This issue was examined by the Tribunal in the assessee’s own case for the assessment years 2002-03 to 2005-06 in to 1678/Mds/2008 dated 20.04.2011. This Tribunal apparently placed its reliance on the judgment of the Supreme Court in Techno Stocks and Shares v CIT 327 ITR 323 and found that the assessee is eligible for depreciation. The CIT (Appeals) by placing reliance on the order of this Tribunal allowed the claim of the assessee. Now, the Revenue claims that an appeal was already filed before the high Court against the order of this Tribunal and it is pending. This Tribunal is of the considered opinion mere pendency of an appeal before the high court cannot be a reason for taking a different view. It is not the case of the Revenue that the order of this Tribunal was stayed by the High Court. In those circumstances, this Tribunal is of the considered opinion the CIT (Appeals) has rightly placed his reliance on the order of this Tribunal and allowed the claim of depreciation.
Accordingly, this Tribunal do not find any reason to interfere with the order of the lower authority and the same is confirmed.
In the result the appeal of the Revenue stands dismissed.
Now coming to the first ground of appeal is disallowance of employees contribution.
9. Shri Shiva Srinivas, the Ld. D.R., submitted that the assessee paid the employees’ contribution to Provident Fund before the due date for filing the return of income under Section 139(1) of the Act, however the payment was beyond the due date prescribed by the PF Act. Therefore, the Assessing Officer disallowed the claim of the assessee. The CIT (Appeals) by placing his reliance on the judgment of Madras High Court in CIT v Nexus Computer (P)
Ltd (2009) 313 ITR 144 (Mad) found that the PF contribution of the employees was paid before the due date for filing the return of income under Section 139 (1) of the Act. Therefore, he allowed the claim of the assessee. In fact, The CIT (Appeals) directed the Assessing Officer to verify the exact date of payment of employees’ contribution and if it is paid before the due date for filing the return of income, he directed the Assessing Officer to allow the same.
We have considered the submissions of the Ld. D.R., and perused the material available on record. Both the employees’ and employer contribution has to be allowed on payment before the due date for filing the return of income in view of Section 43B of the Act.
In this case, the assessee claims that the employees’ contribution was paid to the account of the Government before the due date for filing the return of income under Section 139(1) of the Act.
However, the Assessing Officer has no occasion to exempt the actual payment said to be made by the assessee. Therefore, the CIT (Appeals) has directed the Assessing Officer to verify the exact date of payment and allow the claim of the assessee provided the same was paid within the due date provided under Section 139(1) of the Act. This Tribunal is of the considered opinion, in view of the judgment of Madras High Court in Nexus Computer (P) Ltd supra, the payment made before the due date of filing of return of income under Section 139(1) of the Act has to be allowed. Accordingly the Assessing Officer needs to verify the exact date of payment of employees’ contribution to the PF account and if it is paid before the due date for filing of return of income, the same has to be allowed as found by the CIT(Appeals). Therefore this Tribunal do not find any reason to interfere with the order of the lower authority.
Accordingly the same is confirmed.
The next ground of appeal is with regard to disallowance made by the Assessing Officer under Section 14A read with Rule 8D of the Act.
The Ld. D.R., submitted that the Assessing Officer disallowed ₹1,03,44,540/- under Section 14A read with Rule 8D of the Act. The Ld. D.R. further submitted that the assessee borrowed funds for the business and also made investment to the extent of 7 & I.T.A. No.647/Mds/2016 ₹119,38,10,000/- during the year under consideration. The income from the above investment to the extent ₹18,19,381/- is exempted from taxation. Therefore, the Assessing Officer by placing reliance on the provisions of Rule 8D of the Income Tax Rules, computed the disallowance. However, the CIT (Appeals) allowed the claim of the assessee on the ground that no exempt income was received during the relevant assessment year.
We have considered the submissions of the Ld. D.R., and perused the material available on record. The Parliament in their wisdom thought it fit to disallow the expenditure relating to income which is otherwise not taxable under the Income Tax Act. Before introduction of Rule 8D and 14A of the Act, the Apex court found that when there was a composite business an agricultural activity, even though part of the expenditure was relatable to earning of income which is not taxable under the provisions of Income Tax Act, the entire expenditure has to be allowed as deduction. To overcome this judgment of the Apex Court probably the Parliament thought it fit to introduce the provisions of Section 14A of the Act. Section 14A of the Act, provides for disallowance of expenditure relatable to earning of exempted income. Rule 8D (2) of the Act, provides for methodology for computation of disallowance for earning the exempted income. In fact, the constitutional validity of Rule 8D and Section 14A of the Act was challenged before the Delhi High Court and the Delhi High Court uphold the constitutional validity of Rule 8D and Section 14A of the Act. Therefore, it is mandatory for the Assessing Officer to compute the disallowance as per the method prescribed under Rule 8D of the Income Tax Rules.
Let us now examine Rule 8D (2) of the Act. Rule 8D (2) (i) of the Act provides for disallowance of direct expenditure relating to income which does not form part of the total income. Admittedly, the assessee did not incur any direct expenditure. Therefore, the Assessing Officer has not taken any amount for disallowance under Rule 8D(2)(i) of the Act.
Now coming to Rule 8D(2)(ii) of the Act, the assessee admittedly borrowed loan and paid interest. The payment of interest does not directly attributable to any income or receipt. In such a situation Rule 8D(2)(ii) of the Act provides for a computation of disallowance. The Assessing Officer computed the expenditure under Rule 8D(2)(ii) of the Act at ₹81,55,000/-.
Now, coming to Rule 8D(2)(iii) of the Act, the Assessing Officer has taken an amount equal to 0.5% of the average value of the investment, income from which does not and shall not form part of the total income as appearing in the balance sheet of the assessee at ₹66,80,022/-. Aggregate of all the three limb of Rule 8D(2) was computed at ₹1,03,44,540/-. From a bare reading of Rule 8D (2) of the Rules, it is obvious that generation of income is an essential requirement under 8D(2)(iii) of the Rules, even though under other two limbs namely 8D(2)(i) and 8D(2)(ii) of the Act generation of income is irrelevant. What is to be taken in to consideration is the expenditure directly incurred by the assessee and also the expenditure by way of interest which does not directly attributable to any particular income or receipt.
In view of the above, the CIT (Appeals) is not justified in deleting the addition made by the Assessing Officer, merely on the ground that there was no exempt income. Accordingly, the order of the CIT (Appeals) is set aside and that of the Assessing Officer is restored.
With the above observation, the appeal of the Revenue is partly allowed.
To sum-up, of the Revenue is dismissed, however ITA No.647/Mds/2016 is partly allowed.
Order pronounced on 28th February, 2017 at Chennai.