TATA CONDULTING ENGINEERS LTD,MUMBAI vs. ADDL CIT 7(3), MUMBAI

O R D E R

PER AMARJIT SINGH, JM:

1. The ld. Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the action of the Assessing Officer (AO) in disallowing expenditure of Rs.1,185,545 under Section 14A of the Act. Without prejudice to above, the ld. CIT(A) has also erred in confirming the computation made by the AO, by including investments, the income from which does not or shall not form part of the total income, in the average value of investments under Rule 8D(2)(iii).

2. The ld. CIT(A) erred in confirming the action of the AO in holding that the expenditure incurred on leasehold improvement is capital expenditure. The ld. CIT(A) erred in ignoring the submissions and documents filed by the appellant in support of its claim that expenditure incurred on leasehold improvements is revenue expenditure and in dismissing the ground of appeal by following the appellate order for A.Y.2009-10.

3. The ld. CIT(A) erred in confirming the action of the AO in not allowing the claim for depreciation on software for earlier years amounting to Rs.1,43,45,844/- claimed in the Revised Return of Income on the ground that the same pertains to earlier years and is not allowable during the current year. Your appellant submits that the AO be directed to allow the additional depreciation in the relevant assessment year. & 6786/Mum/2012 A.Y. 2008-09 & 2009-10

3. The brief facts of the case are that the assessee filed e-return of income on 30.09.2008 declaring total income to the tune of Rs.44,65,03,503/- and subsequently filed revised e-return of income on 25.03.2010 declaring total income to the tune of Rs.39,37,12,267/-. The return was processed u/s.143(1) of the Income Tax Act, 1961 ( in short “the Act”)on 08.02.2010. The case was selected for scrutiny, therefore, the notice u/s.143(2) of the Act was issued and served upon the assessee. Thereafter, the case was assigned to the present Assessing Officer by Addl.CIT Range 7(3), Mumbai vide order No. CIT-7/Assign./u/s.120(4)(b)/10-11 dated 13.07.2010. Thereafter notice u/s.142(1) of the Act along with questionnaire dated 30.09.2010 was issued and served upon the assessee. The assessee is in the business of providing Engineering Consultancy service. During the year, income from services has been shown to the tune of Rs.192.99 crores. The major expenditure was on account of employees which amount to Rs.89.70 crores. In the Profit & Loss A/c. the profit before tax has been shown at Rs.45.17 crores. During the relevant assessment year the assessee earned the dividend/exempt income to the tune of Rs.50,000 and Rs.1,11,23,750/- on account of Long Term Capital Gain on Mutual Fund and Rs.31,55,355/- on account of other income from mutual funds. The assessee did not disallow any expenditure relating to these exempt income, therefore, the Assessing Officer applied the provision u/s.14A sub clause (iii) of rule 8D of the Act and the expenditure was 3 & 6786/Mum/2012 A.Y. 2008-09 & 2009-10 assessed to the tune of Rs.48,90,200/-. The assessee also claimed the expenditure on account of lease hold improvements to the tune of Rs.85,64,892/- but the same was disallowed by treating the same as capital in nature. The assessee also claimed the depreciation on the software for the earlier years amounting to Rs.1,43,45,844/- but the same was also disallowed on the basis of this fact that the said depreciation was belonging to earlier years. Feeling aggrieved, the assessee filed the appeal before the CIT(A) who confirmed the order, therefore, the assessee has filed the present appeal before us. ISSUE NO.1:-

4. Under this issue the assessee has challenged the disallowance u/s.14A of the Act to the tune of Rs.11,85,545/-. The Assessing Officer assessed the expenditure incurred to earn the exempt income to the tune of Rs.48,90,200/-. However, in appeal before the CIT(A), the CIT(A) confined the expenditure to the extent of administrative expenses by applying the provision of sub-clause (iii) of Rule 8D(2) of the Act and upheld the disallowance to the tune of Rs.11,85,545/-. The learned representative of the assessee has argued that the assessee has earned the dividend income from the mutual fund of Rs.50,000/-, and long term capital gains on mutual funds of Rs.1,11,23,750/- and other income from mutual funds of Rs.31,55,355/-, therefore in the said circumstances the assessee did not incur any expenses to earn the income from mutual fund which is long term capital gain, therefore, 4 & 6786/Mum/2012 A.Y. 2008-09 & 2009-10 the income from mutual fund is not liable to be considered for the purpose of section 14 read with Rule 8D of the Act specifically in view of the decision of Karnataka High Court in the case of Canara Bank Vs. ACIT (265 CTR 385). On the other hand the learned representative of the department has strongly relied upon the order passed by the CIT(A) in question. It is not in dispute that the assessee earned the Long Term Capital Gain on mutual fund of Rs.1,11,23,750 and other income from mutual funds of Rs.31,55,355/-. It is long term investment and the income was directly credited to the assessee’s account by way of bank transfer. Nothing was seen to be incurred to earn the said income from mutual funds. In view of the above mentioned law i.e. Canara Bank Vs. ACIT (265 CTR 385), the said income is not liable to be considered for the purpose to assess the expenditure incurred to earn the exempt income. Accordingly, we set aside the order of CIT(A) in question and direct the Assessing Officer to re-assess the expenditure incurred to earn the exempt income in view of the above mentioned law by giving an opportunity of being heard to the assessee. Accordingly, this issue is decided in favour of the assessee against the revenue for the statistical purpose. ISSUE NO.2:-

5. Issue no.2 is in connection with the confirmation of the expenditure incurred upon lease hold improvements. The assessee took some premises for the purpose of his business. The premises 5 & 6786/Mum/2012 A.Y. 2008-09 & 2009-10 were taken for the lease period of three years. The assessee did some improvement such as cabling work for computers / LAN, tiles, flooring, partition, fixing floor mats and other interior work etc., electrical fixtures and other electrical works, switches and distribution boards. The Assessing Officer was of the view that the same was of the capital in nature, therefore, the same is not liable to be allowed and the same view of Assessing Officer was confirmed by the CIT(A) by virtue of order in question. The learned representative of the assessee has argued that the expenditure on lease hold is revenue in nature and also relied upon the law settled in CIT Vs. Talathi & Panthaki Associates (P.) Ltd. (343 ITR 309) (Bom.) and CIT Vs. HEDE Consultancy (P.) Ltd. (258 ITR 380) (Bom.) and CIT Vs. Hi Line Pens (P.) Ltd. (175 Taxman 132) (Delhi) and Urban Infrastructure Venture Capital Ltd. Vs. DCIT (48 taxmann.com 156) (ITAT Mumbai) and Peri India (P.) Ltd. Vs. JCIT (71 taxmann.com 79)(ITAT Mumbai). On the other hand Ld representative of the department has placed reliance upon the order passed by the CIT(A) in question.

6. Keeping in view of the arguments advanced by the learned representative of the parties and perusing the concerned record it came into the notice that the assessee took some premises on lease for the period of three years. The assessee makes improvement such as cabling work for computers / LAN, tiles, flooring, partition, fixing ITA No.3595/M/2013 & 6786/Mum/2012 A.Y. 2008-09 & 2009-10 floor mats and other interior work etc., electrical fixtures and other electrical works, switches and distribution boards. The provision of explanation 1 of the section 32 does not disallow the leasehold improvement expenditure if it is revenue in nature. Moreover, this controversy has also been decided in the above mentioned law i.e. CIT Vs. Talathi & Panthaki Associates (P.) Ltd. (343 ITR 309) (Bom.) and CIT Vs. HEDE Consultancy (P.) Ltd. (258 ITR 380) (Bom.) and CIT Vs. Hi Line Pens (P.) Ltd. (175 Taxman 132) (Delhi) and Urban Infrastructure Venture Capital Ltd. Vs. DCIT (48 taxmann.com 156) (ITAT Mumbai) and Peri India (P.) Ltd. Vs. JCIT (71 taxmann.com 79)(ITAT Mumbai). In view of the above said law it is quite clear that the expenditure incurred on lease hold premises has been treated by the above said authorities as revenue expenditure, therefore, in view of the said circumstances we are of the view that the finding of the CIT(A) on this issue is wrong against law and facts, therefore is not liable to be sustainable in the eyes of law hence we set aside the finding of the CIT(A) on this issue and direct the Assessing Officer to consider the expenditure as revenue in nature. Accordingly, this issue is decided in favour of the assessee against the revenue. ISSUE NO.3:- 7. Issue no.3 is in connection with the disallowance of claim for depreciation of Rs.1,43,45,844/- in respect of earlier years. At the 7 & 6786/Mum/2012 A.Y. 2008-09 & 2009-10 very outset the learned representative of the assessee has argued that this issue has been covered by the order passed by the Tribunal in the assessee’s own case for the A.Y.2007-08. The order of the Tribunal has been perused which is reproduced as under for ready reference:- “12. Third ground of appeal pertains to claim for depreciation of Rs.1.42 Crores. During the assessment proceedings, the assessee made a claim of further additional depreciation amounting to Rs.1,25,87,517/- due to difference in depreciation rate from 25% to 60% for the A.Y.2004-05 and 2005-06. It was contended that assessee had claimed depreciation, @ 25% instead of 60%. The FAA rejected the claim made by the assessee and held that it was not allowable during the year under consideration as it pertained to A.Y.2004-05 and 2005- 06. 12.1 Before us, AR stated that letter dated 02.12.2009 was submitted before the AO, that the AO did not rejected the claim of the assessee on merits, that he had rejected the claim only on the ground that the assessee did not make the claim in its return of income or revised return of income, that the FAA had not examined the facts of the case and had summarily dismissed the ground that claim can made before the AO otherwise then by filing revised 8 ITA No.3595/M/2013 & 6786/Mum/2012 A.Y. 2008-09 & 2009-10 return. In his support he referred cases of Balmukund Acharya (310 ITR 310), Ramco International (332 ITR 306), Chicago Pnematic India Ltd. (15 SOT 252), Hero Honda Finlease Ltd. (115 TTJ 752) and Raj Rani Gulati (345 ITR 350). DR supported the order of the FAA. 12.2 We have heard the rival submissions and perused the material before us. We find that the FAA has rejected the claim made by the assessee as he was of the opinion that the assessee should have filed a revised return of income. We find that the Hon’ble jurisdictional High Court in the case of Brokers & Shareholders (349 ITR 336) has held that appellate authorities can admit new claim made by the assessee during appeal proceedings. Considering the ration of above judgment we are remitting the issue to the file of the FAA to decide the claim made by the assessee after considering the above judgment and after giving a reasonable opportunity of hearing to the assessee. Ground no.3 is decided in favour of the assessee, in part.”

1. The ld. Commissioner of Income Tax (Appeals) [CIT(A)] erred in confirming the action of the Assistant Commissioner of Income Tax Range OSD-7 (‘the ACIT’) in holding that the expenditure incurred on leasehold improvements is capital expenditure. The ld. CIT(A) erred in ignoring the submissions made by the appellant in support of its claim that expenditure incurred on leasehold improvements is revenue expenditure and dismissed the ground of appeal only on the basis of the findings by the A.O. Your appellant submits that on the facts and circumstances of the case, the ACIT be directed to allow Rs.3,85,63,944/- in respect of leasehold improvement expenditure as revenue expenditure as claimed in the return of income.

2. The ld. CIT(A) erred in confirming the action of the AO that the provisions of Section 14A under the Income Tax Act, 1961 (‘the Act’) are attracted in the case of the appellant. The CIT(A) ought to have held that the provisions of Section 14A of the Act are not applicable, as your appellant has not incurred any expenditure in relation to the earning of tax free income. Your appellant submits that the ACIT be directed to delete the disallowance of Rs.90,764/-.”