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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)
2 I.T.A. No.646/Mds/2016 & I.T.A. No.647/Mds/2016
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 ITA No.646/Mds/2016 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
3 I.T.A. No.646/Mds/2016 & I.T.A. No.647/Mds/2016
‘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 ITA Nos. 1675 to 1678/Mds/2008 dated 20.04.2011. This
Tribunal apparently placed its reliance on the judgment of the
4 I.T.A. No.646/Mds/2016 & I.T.A. No.647/Mds/2016
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 ITA No.647/Mds/2017, the first ground of
appeal is disallowance of employees contribution.
Shri Shiva Srinivas, the Ld. D.R., submitted that the
assessee paid the employees’ contribution to Provident Fund before
5 I.T.A. No.646/Mds/2016 & I.T.A. No.647/Mds/2016
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
6 I.T.A. No.646/Mds/2016 & I.T.A. No.647/Mds/2016
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.646/Mds/2016 & 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
8 I.T.A. No.646/Mds/2016 & I.T.A. No.647/Mds/2016
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/-.
9 I.T.A. No.646/Mds/2016 & I.T.A. No.647/Mds/2016
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.
10 I.T.A. No.646/Mds/2016 & I.T.A. No.647/Mds/2016
With the above observation, the appeal of the Revenue is partly allowed.
To sum-up, ITA No.646/Mds/2016 of the Revenue is dismissed, however ITA No.647/Mds/2016 is partly allowed.
Order pronounced on 28th February, 2017 at Chennai.
Sd/- Sd/- (िड.एस. सु�दर �सह) (एन.आर.एस. गणेशन) (D.S. Sunder Singh) (N.R.S. Ganesan) लेखा सद�य/Accountant Member �याियक सद�य/Judicial Member चे�ई/Chennai, �दनांक/Dated, the 28th February, 2017.
JR. आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु� (अपील)/CIT(A)-1, Chennai 4. आयकर आयु�/CIT 5. िवभागीय �ितिनिध/DR 6. गाड� फाईल/GF.