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Before: SHRI G. D. AGRAWAL & SMT SUCHITRA KAMBLE
ORDER PER SUCHITRA KAMBLE, JM
These appeals are filed by the Revenue against the order dated 22/02/2011 & 7/12/2011 respectively, passed by the CIT(A)-V, New Delhi.
2. The grounds of appeal are as under:
“1. The Ld.CIT(A) has erred on facts and in law in deleting addition of Rs.53,12,500/- made on account of call option fee by holding the expenses as revenue in nature, as: a). Ld.CIT(A) erred in law by admitting the additional evidences regarding call option fees because this case is not covered under Rule 46A of the I.T. Rules 1962. b) The cases relied on by Ld.CIT(A) are not squarely applicable in this case. c) All the expenditure is integral part of profit earning process and cannot be held as revenue expenditure because only necessity of expenditure or expenditure incurred for protecting the interest of investors is not the test of revenue or capital expenditure. d) Expenditure for purchase of shares or any right to purchase of shares can be held as revenue expenditure in the case of share dealer/trader only and assesse does not deals in shares.
2. The Ld.CIT(A) has erred on facts and in law in restricting the disallowance u/s 14A read with Rule 8D to Rs.1,06,563/- as against disallowance of Rs.2,13,126/-. Ld.CIT(A) has failed to take cognizance of sub-section (3) of Section 14A which specifies that even if the assessee makes a claim that no expenditure has been incurred in earning the exempted income, sub-section (2) of section 14A shall apply, meaning thereby, disallowance u/s 14(A) is called for.” (ITA No. 1456/Del/2011)
“Whether, on the facts and in the circumstances of the case, the Ld. CIT(A) was right in law in deleting the addition of Rs.28,515/- made by the Assessing Officer on account of excess depreciation claimed on ‘UPS’. The definition of computer has not been given in the Income Tax Act and as such its meaning is to be derived from the allied Acts. As per the Information Technologies Act, UPS is not covered in the definition of ‘Computer’ or ‘Computer System’. Hence, it can only fall under the head of ‘Plant and Machinery’?”
“Whether, on the facts and in the circumstances of the case, the Ld.
CIT(A) was right in law in deleting the addition of Rs.1,21,75,000/- made by the Assessing Officer treating the call option fees as capital expenditure. The ‘call option fees’ is a fee paid by the assessee company to the promoters of the investee companies for securing an option to purchase the share capital in case of certain default events which may or may not occur. Thus, the same is related to investments which are clearly an expenditure of capital nature?” 3. “Whether on the facts and in the circumstances of the case, the case laws relied upon by the Ld. CIT(A) are squarely applicable in this case in view of the fact that all the expenditure is integral part of profit earning process and cannot be held as revenue expenditure on the basis of necessity of expenditure. The expenditure incurred for protecting the interest of investors is not the test of revenue or capital expenditure?” 4. “Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was right in law in admitting the additional evidence regarding call option fees?”
Instant two appeals have been filed by the revenue, which pertain to the assessment years 2007-2008 and 2008-2009. One of the common ground involved in both these appeals pertain to the deletion of a disallowance of an expenditure incurred by the assessee debited under the head ‘call option fee’. The call option fee was the nomenclature used for which sum had been incurred to secure and thereby to induce investors of the risks undertaken by them on making investment on advice of the assessee and annualled expenditure to earn the origination fee, the source of its income and thus the expenditure incurred had direct nexus with the incurring of expenditure. Another common ground involved in both these appeals pertain to the Revenue’s grievance of the admission made of additional evidence,
submitted by the assessee before the CIT(A), who accepted the application made under Rule 46A of the Income tax Rules, 1962. The other ground for the AY 2007-2008, raised by the Revenue is with regard to, restricting of the disallowance made under section 14A of the Act read with Rule 8D of the I.T. Rules, 1962. In so far as the Assessment Year 2008-09, there is one more ground other than the common ground which pertains to the deletion of the disallowances of claim of depreciation.
FACTUAL BACKGROUND OF THE CASE:
The assessee is a private limited company and was incorporated on 17/5/2006 under the Companies Act, 1956. The assessee is engaged in the business of providing investment advisory & derives income by way of origination fee (which assists developers in real estate in arranging financial assistance for their real estate projects) and, also provides advisory services relating to investment opportunities in the Indian real estate sector to its overseas associated enterprises/funds.
Disallowance of expenditure of ‘call option fee’:-
For the assessment year 2007-08, the assessee company filed a return of income on 30.10.2007 declaring a total income of Rs. 98,52,467/- and for the AY 2008-2009 the assessee filed its return of total income on 30.09.2008 at a loss of Rs. 1,11,41,459/-. These returns of income were duly accompanied by the audited financial statements and, tax audit report u/s 44AB of the Act. A copy of the audited financial statements and, other enclosures filed along with return of income is placed at pages 3-48 of the PB for the AY 2007-2008 and at 3-50 of the PB for the AY 2008-2009.
5.1. However, the Assessing Officer in orders u/s 143(3) of the Act dated 19.11.2009 and 29.10.2010 computed the income of the assessee company for the AY 2007-2008 at an income of Rs. 1,65,71,920/- and for AY 2008-2009 at an income of Rs. 13,52,750/-, respectively.
5.2. The assessee company being aggrieved against the aforesaid orders of the assessments, preferred appeals before the CIT(A) and filed its written submissions (see page 81-110 of the PB for the AY 2007-2008 and (page 105-135 of the PB for the AY 2008- 2009). During the appellate proceedings, the assessee made an application dt. 17.12.2010 (pages 111-115) under Rule 46A of the Income Tax Rules, 1962 seeking a permission to furnish additional evidences, since in the course of the assessment proceeding the assessee had not been granted a valid and adequate opportunity of being heard and further before drawing an adverse inference, when he disallowed the claim of expenditure the AO never gave any specific notice of treating the expenditure as disallowable, but was of the opinion that it represents capital expenditure though claimed as revenue expenditure. The evidence placed by the assessee as an additional evidence though were adverted by the assessee before the AO however since the AO did not dispute the contents of such documentary evidence, such evidences were not physically placed on record and it is thus submitted otherwise too in law the evidence were to referred as additional evidence could not be regarded, technically as an additional evidence. The additional evidence submitted by the assessee for AY 2007-08 was as under: Mandate Letter dated December 18, 2006 executed 1 between Beekman Helix India Consulting Pvt. Ltd. and the investor Ritesh Spinning Mills Limited (Pages 116- 122 of the paper book for AY 2007-2008) Term sheet dated January 10, 2007 executed between 2 Beekman Helix India Consulting Pvt. Ltd. and Ritesh Spinning Mills Ltd. (Pages 123- 131 of the paper book for AY 2007-2008) All the call option agreements executed by Beekman 3 Helix India Consulting Pvt. Ltd. with the promoters of the investee companies (Sample copy of a call option agreement is enclosed at pages 132-146 of the paper book for AY 2007-2008)
5.3. The aforesaid additional evidences along with the written submission of the assessee were sent to the AO for his comments. The CIT (A) after perusing the assessment record & after being satisfied with the submission of the assessee made in its application dt. 17.12.2010 found them to be factually correct and was borne out from record and thus directed the AO to re- examine the claim of the expenditure in the light of facts of the case and in the light of evidence produced before him with course of assessment proceeding with reference to the said evidence which the applicants had sought to physically place on record. In compliance thereto the AO furnished his remand report for both the assessment years (placed at page 147-149 of the PB for AY 2007-2008 and at page 102-104 of the PB for AY 2008-2009). The AO in his remand report reiterated that the expenditure incurred on account of call option fees paid is for purchasing share capital of certain companies in certain circumstances and thus the same is related to investments, which is clearly an expenditure of capital nature. The CIT(A) observed that the A.O being fully aware of the proceedings which had taken before him did not seriously object to the assessee’s prayer that such documents be allowed to be taken physically on record and were duly adverted before him. In fact on the perusal of the comments of AO in his remand report, he mainly objected to the admission of the additional evidence with reference to clause (a) and Clause (b) of Sub Rule (1) of Rule 46A of the I.T. Rules and did not at all object to the submission of the assessee that such an evidence as was being physically produced before the CIT (A) were also referred before the AO. In other word, he did not make any comment on the assessee’s submission in respect of clause (c) & (d) of sub- Rule (l) of Rule 46A of the I.T Rules, 1962. In response to the remand report, assessee also furnished its rejoinder (page 150- 153 of the PB for the AY 2007-2008 and pages 136-140 of the PB for the AY 2008-2009).
5.4. The CIT(A) after considering the remand report and submissions of the assessee admitted the additional evidence (para 4.3 and para 6.3 of the order of the CIT(A) for the AY 2007- 2008 and 2008-2009, respectively) and deleted the allowances made by the AO by holding that the expenditure incurred by way of call option fee is revenue expenditure and had direct nexus with the earning of income and cannot be regarded as capital in nature.
5.5. Instant appeals have been preferred by the revenue, wherein one of the issue involved is with regard to the deletion of the disallowance of the expenditure incurred representing “call option fee paid by the assessee company” which expenditure has been disallowed by the AO by holding the same to be capital expenditure.
5.6. The Ld. DR relied upon the order of the Assessing Officer. The Ld. DR further submitted that the AO rightly computed the income of the assessee company for the AY 2007-2008 at an income of Rs. 1,65,71,920/- and for AY 2008-2009 at an income of Rs. 13,52,750/-, respectively.
5.7 The Ld. AR submitted that to attract the investor to invest in the companies to whom lessee has given investment advisory and to secure the investment of the investor, the assessee company also incurs expenditure denominated as “call option fee” so that investors are secured of their risk they undertake on making investments on advice of the assessee company. The said expenditure is incurred under an agreement titled as ‘call option agreements’ entered by the assessee company with the promoters of the investee companies, which enables the assessee company to purchase shares of group concerns of promoters provided they fail to honour their obligations towards the investors. The details of the origination fee received and call option fee paid for Assessment Year 2007-08 are as under:-
S. Name of the Party Investment Origination fee Call option fee No. 1 D. D. Housing Ltd. Rs.112.50 Rs. 28,12,500/- Crore 2 Supreme Build Cap Rs. 75 Rs. 18,75,000/- Crore 3 Ritesh Spinning Rs. 25 Rs. 6,25,000/- Mills Crores. Total Rs. 4,42,71,818/- Rs.53,12,500/-
The details of the origination fee received and call option fee paid for AY 2008-09 are as under:
S. Name of the Investment (Rs. Origination Call option fee No. party In corres) fee (in Prs.) (in Rs.) 1 Pacific 32.00 48,00,000/- 8,00,000/-
Infrastructure Private Limited (IT Park Project) 2 Pacific 75.00 1,12,50,000/- 18,75,000/- Infrastructure Private Limited (Residential Project) 3 Parkwood 25.00 50,00,000/- 6,25,000/- Developers Private Limited (Group Housing Project at MOhali) 4 Global Hiritage 100.00 2,00,00,000/- 25,00,000/- Venture Limited (Hotel Project at Gurgaon) 5 Netzone 255.00 4,46,25,000/- 63,75,000/- Developers Private Limited (Commercial Project Mumbai) Total 487.00 8,56,75,000/- 1,21,75,000/-
The Ld. AR further submitted that the assessee has incurred the expenditure of call option fee, which expenditure was incurred for the purpose of earning the origination fee. It is submitted that for the purpose of earning the origination fee, assessee had paid an amount to the promoters of the investee companies to acquire the total shares of the promoters of the investee companies on the happening of the certain events (which events are mainly in the nature of protecting the interest of investor companies), and by incurring this call option fee, assessee respondent has ensured that the investee companies don’t make any default in any respect.
5.8. The Ld. AR submitted that incurring of the expenditure of ‘call option fee’ and earning of the origination fee has complete nexus, as but for the call option fee, assessee would not have been able to persuade the investors to invest in the investee companies from whom the assessee has earned the ‘origination fee’. It is submitted that the nature of the business carried on by the assessee makes it prudent for it to enter into such arrangement, so as to attract the investors to invest in the companies at the advise of the assessee. It is further submitted that had such an arrangement was not entered by the assessee with the investor companies, it would not have been possible for the assessee to get the investment for their clients and therefore it would not have been able to earn the ‘origination fee’. The Ld. AR submitted that since, the assessee company is in the business of arranging funds and providing research services, any failure of the project recommended by it would have negative impact on the prospective customers, and as such, to insure the regular flow of the business such as expenditure has been incurred. The Ld. AR submitted that without such an arrangement, assessee would not have arranged any investment for any of its clients. Entering into the ‘call option agreement’ was mutually agreed by the assessee and the investee company, as can be seen from the ‘Mandate Letter’ (page 116-122 of the PB for the AY 2007-2008) and only then the assessee provide the investment advisory services. The Ld. AR submitted that as per the understanding i.e. ‘Mandate Letter’, the nature of the services to be provided by the assessee are as under: Appraisal of SPV and the projects to be undertaken by such i. SPV. ii. Identifying potential investors. Arranging for investor due diligence. iii. Structuring the transaction. iv. Preparing presentation material for approval by the investors. v.
5.9 The Ld. AR placed on record a mandate letter dated 18.12.2006 issued by M/s Ritesh Spinning Mills Ltd. (promoter), a copy of which was placed at pages 116 to 122 of PB for the AY 2007-08. A perusal thereof would show that, assessee company was given the mandate to identify potential investors in lieu of origination fee being 2.5% of the investments made by investor. However, to earn the said income, the assessee agreed to incur expenditure of 0.25% of the investments made as call option fee.
We have heard both the parties and perused relevant documents. The expenditure incurred as Call Option Fee paid by assessee company was part and parcel of the business of the assessee company. The same was for the investors to secure their risk they have undertaken on making investments on advise of the assessee company. The said expenditure is incurred under an agreement titled as ‘call option agreements’ entered by the assessee company with the promoters of the investee companies, which enables the assessee company to purchase shares of group concerns of promoters provided they fail to honour their obligations towards the investors. This expenditure was incurred for the purpose of earning Origination fee. Thus CIT(A) has rightly allowed the claim of the assessee. There is no requirement of interfering the findings of the CIT(A). This ground is dismissed.
Disallowance under section 14A of the Act: In the assessment year 2007-08, the assessee company has received dividend income from mutual funds amounting to Rs. 26,30,028 which has been claimed as exempt under section 10 (35) of I.T. Act, 1961. During the assessment proceedings the A.O. held that no expenditure directly or indirectly was incurred for earning the exempt income and computed the expenses under Rule 8D of the Income Tax Rules, 1962 at 0.5 % of the closing value of investment and disallowed the same as expenses incurred in relation to exempt income.
7.1. The assessee company being aggrieved preferred an appeal before the CIT (A) and contended that section 14A of the Act would trigger only when expenditure has been incurred in order to earn the income that, is otherwise exempt. Without prejudice to the above contentions, the assessee company also submitted before the CIT(A) that the disallowance has been wrongly been computed at 0.5% on the closing balance of the investments of Rs. 4,26,25,260/-, rather than the average value of investments, as prescribed under Rule 8D of the Rules. Since, the opening value of investment is Nil, the average value of the investment should be computed at Rs.2,13,12,630/-. Accordingly, the correct amount of disallowance would be Rs.1,06,563/-. After considering the assessee company’s contentions, the CIT(A) held that the AO has correctly disallowed 0.5% of the value of investment, however the calculation of 0.5% should be made on average value of investment, as contended by the assessee company. Hence, the CIT(A) limited the addition to Rs.1,06,563/-.
7.2. In the instant appeal filed by the revenue, revenue has challenged the deletion of the addition by the CIT(A) on the ground that sub-section (3) of section 14A of the Act which specifies that even if the assessee makes a claim that no expenditure has been incurred in earning the exempted income, sub-section (2) of section 14A of the Act shall apply, meaning thereby, disallowance u/s 14A(1) of the Act is called for. The Ld. DR submitted that the Assessing Officer has rightly held that no expenditure directly or indirectly was incurred for earning the exempt income and computed the expenses under Rule 8D of the Income Tax Rules, 1962 at 0.5 % of the closing value of investment and disallowed the same as expenses incurred in relation to exempt income.
7.3. In light of the aforesaid background, the Ld. AR submitted that CIT(A) has merely rectified the computation of the disallowance made by the AO under section 14A of the Act read with Rule 8D of the Rules. The Ld. AR submitted that for making the disallowance, AO has invoked Rule 8D(2)(iii) of the Income Tax Rules which provides that the expenditure in relation to income which does not form part of the total income shall be an amount equal to one- half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. Here, average value of the investment means the average of the opening value of the investment at the beginning of the assessment year and closing value of the investment at the end of the assessment year. The Ld. AR submitted that AO while computing the disallowance has erroneously taken the value of the investment i.e. the value of the investment at the close of the year, not the average value of the investment as per the aforesaid rule.
7.4. The Ld. AR submitted that the CIT(A) has only corrected the computation of disallowance in accordance with the provisions of Rule 8D of the I. T. Rules to 0.5% the average value of investments. Since, the opening value of investment is Nil, the average value of the investment should be computed at Rs.2,13,12,630/- [(0+4,26,25,260)/2]. Accordingly, the correct amount of disallowance is Rs. 1,06,563/- [0.5% x 2,13,12,630]. The contention of the Ld. DR that the CIT(A) has erred in restricting the disallowance under section 14A of the Act read with Rule 8D of the Rules to Rs. 1,06,563/- as against the disallowance of Rs.2,13,126/-, does not have any support.
We have heard both the parties and perused relevant documents. The AO while computing the disallowance has erroneously taken the value of the investment i.e. the value of the investment at the close of the year, not the average value of the investment as per the aforesaid rule. The CIT(A) has only corrected the computation of disallowance in accordance with the provisions of Rule 8D of the I. T. Rules to 0.5% the average value of investments. Since, the opening value of investment is Nil, the average value of the investment should be computed at Rs.2,13,12,630/- [(0+4,26,25,260)/2]. Accordingly, the correct amount of disallowance is Rs. 1,06,563/- [0.5% x 2,13,12,630]. Thus, no interference is required in the order of the CIT(A). This ground is dismissed.
Deletion of disallowance of depreciation on UPS:
During the assessment year 2008-09, the assessee company has purchased UPS equipment amounting to Rs. 1,26,734 that has been included in the block of ‘Machinery and Plant’ under the head ‘Computer including computer software’, in accordance with the provisions of section 32 of the Act read with Rule 5 of the Rules. Accordingly, the assessee has claimed depreciation @ 60% on the UPS.
9.1. However, the AO held that UPS is separate equipment which can work in conjunction with a computer but can also work independently with other electrical/ electronic equipments. The AO held that the UPS is not part of computer system eligible for depreciation @ 60%, rather is a part of ‘Machinery and Plant’ which is eligible for depreciation @ 15% and accordingly disallowed Rs. 28,515/- as excess depreciation claimed on UPS.
9.2. The CIT(A) allowed this ground in favour of the assessee.
9.3 The Ld. DR relied upon the order of the Assessing Officer and submitted that the disallowance is rightly made by the AO.
9.4 The Ld. AR submitted that the term ‘computer’ has not been specifically defined for the purpose computing depreciation under the provisions of the Act. Therefore, reliance may be placed on judicial precedents in order to understand the term ‘computer’. In this regard, the Ld. AR placed reliance on the case of CIT vs BSES Yamuna Powers Limited (ITA No 1267/2010), wherein the Hon’ble High Court of Delhi has held as under:
“We are in agreement with the view of the Tribunal that Computer accessories and peripherals such as, printers, scanners and server etc. form an integral part of the computer system. In fact, the computer accessories and peripherals cannot be used without the computer. Consequently, as they are the part of the computer system, they are entitled to depreciation at the higher rate of 60% “. 9.5. Furthermore, in the case of CIT vs Orient Ceramics & Industries Ltd (56 DTR 397), the Hon’ble High Court of Delhi, relying on its own judgment in the case of CIT vs BSES Yamuna Powers Limited (supra), has held as under:
“The assessee company had claimed depreciation on UPS @ 60 per cent whereas the AO had allowed it @ 25 percent and on this basis, disallowance of Rs. 1,4 70 was made. The issue now stands covered by the judgment of this Court in the case of CIT vs. BSES Yamuna Powers Ltd. (in IT Appeal No. 1267 decided on 31st Aug.,2010) wherein it was held that the depreciation @ 60 per cent on such items shall be allowed. ” The Ld. AR placed reliance on the following judicial precedents, in support of its contentions:
CIT vs Citicorp Maruti Finance Limited (1TA No. 1712/2010 and ITA No. i. 1714/2010) (Del HC) ii. DCIT vs Datacraft India Ltd. (133 TTJ 377) (Special Bench of the Mumbai Tribunal) iii. ITO vs Omni Globeinformation Technologies India (P) Ltd (ITA No 3465/Del/2009) iv. ACIT vs Fidelity Information Systems Co. India (P) Ltd (ITA No 2951 of 2009)(Delhi Tribunal) v. Expeditors International India Private Limited Vs. Addl. CIT [2008] 118 TTJ 652 (Delhi Tribunal) vi. ITO vs. Samiran Mjumdar (98 ITD 119) (Kolkata Tribunal)
In light of the above, the Ld. AR submitted that the UPS purchased by the Assessee company form an integral part of the Computer block and are eligible for depreciation @60%. Accordingly, the depreciation claimed on UPS at the rate of 60% is in accordance with the law and the same should be sustained.
We have heard both the parties and perused all the materials available on record. It is pertinent to note that the CIT(A) has given an extensive finding on the issue mentioned hereinabove. The UPS purchased by the Assessee company form an integral part of the Computer block and are eligible for depreciation @60%. Accordingly, the depreciation claimed on UPS at the rate of 60% is in accordance with the law and the same should be sustained. Thus the order of the CIT(A) is just and proper.
In the result, both the appeals of the Revenue are dismissed.