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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SHAILENDRA KUMAR YADAV, JM & SHRI RAJESH KUMAR, AM
सुनवाई की तारीख / Date of Hearing : 23.6.2016 घोषणा की तारीख /Date of Pronouncement:30.06.2016 आदेश / O R D E R PER RAJESH KUMAR, A. M: There are three appeals under consideration, out of which one appeal by the revenue for assessment year 2008-09 is directed against the order dated 20.12.2013 of ld.CIT(A) and remaining two appeals are the cross-appeals directed against order of ld.CIT(A) dated 11.7.2014 for the assessment year 2010-11. Since, the appeals before us relate to the groups of companies, therefore, for the sake of convenience, they are clubbed together, heard together and disposed of in this consolidated order. Appeal wise adjudication is given in the succeeding paragraphs.
First we will take up the appeal bearing No. by the revenue
Only issue raised in this appeal is whether the first appellate authority (FAA) was justified in deleting the addition made by the AO on account of claiming of interest expense u/s 57(iii) without appreciating the fact that the was no direct nexus between the loan borrowed by the assessee and the interest bearing loan advanced by the assessee.
Brief facts of the case are that the assessee filed its return of income for the assessment year 2010-11 on 4.10.2010 declaring total loss of 3 1165/Mum/2014 and others two appeals Rs.2,51,33,965/-. The return was processed under section 143(1) of the Income tax Act, 1961. Thereafter the case of the assessee was selected for scrutiny and the statutory notices u/s 143(2) and 142(1) were issued and served upon the assessee. The assessment was framed by the AO after considering the submissions of the assessee as made from time to time during the assessment proceedings vide order dated 20.2.2013 passed under section 143(3) of the Act by assessing loss of Rs.1,60,13,040/- by making two disallowances namely u/s 14A amounting to Rs.21,19,699/- and interest income treated as income from other sources as amounting to Rs.51,89,984/- without allowing deduction as claimed u/s 57(iii). The subject matter of the present appeal by the revenue is deletion of disallowance u/s 57(iii) of the Act against the interest income. Aggrieved by the order of the AO, the assessee has preferred an appeal before the ld. CIT(A), who allowed the appeal of the assessee by observing and holding as under (para 5.3.10): “5.3.10 Having regard to facts and circumstances of the case and in view of the above, the A.O. is directed to verify the linkage between the loans borrowed by the appellant and the interest bearing loans advanced by the appellant and if the linkage is established, as has been claimed by the appellant before the A.O. and during the appellate proceedings, then the deduction of Rs. 51,89,984/-- claimed by the appellant u/s 57 of the Act in respect of expenditure incurred for earning the equal interest income of Rs.51,89,984/- offered and taxed as Income from other Sources u/s. 56 of the Act, is allowable u/s. 57 of the Act. Therefore ground of appeal no. 2 is allowed subject to verification of facts from the original assessment records.”
4 1165/Mum/2014 and others two appeals 5. The ld. DR submitted before us that the assessee has not disclosed the interest income of Rs.51,89,984/- by claiming deduction u/s 57(iii) of the Act. The ld. DR further argued that the assessee was engaged in the business of development, sale and purchase of infrastructure and real estate projects. The assessee had borrowed money for these projects purposes and capitalised the interest incurred on the said loans as per the accounting guidelines as the gestation period of such real estate projects was long. The assessee chose not to keep the unutilised funds idle and gave the same as loan to other companies till the time the funds were needed for the projects. During the year, the assessee earned income amounting to Rs.51.90 lakhs on such development and reduced the projects cost by the same amount for accounting purposes. The ld. DR further pointed out that the borrowed funds were clearly meant for projects of the assessee and therefore the plea of the AR that the interest on borrowed funds from the banks was out of the interest receipt from lending from other companies was totally wrong and against the provisions of Act. Finally, the ld. DR submitted that the order of ld. CIT(A) was wrong and therefore deserved to be quashed by restoring the order of the AO.
On the contrary, the ld. Counsel brought to our notice that there was direct nexus between the interest bearing borrowed funds and earning of interest income by advancing loans to other companies and 5 1165/Mum/2014 and others two appeals the AO had completely ignored this fact while making the disallowance as claimed u/s 57(iii) of the Act. The ld. AR further submitted that the AO disallowed the deduction claimed u/s 57 on the ground that the purpose of taking loan from bank was not connected with the loan advanced, whereas the provisions of section 57 (iii) of the Act provided for the deduction where the expenditure was incurred wholly and exclusively for the purpose of making or earning such income and thus, existence of nexus between the activity producing the income and the expenditure incurred is the sole criteria for claiming deduction u/s 57(iii) of the Act. The ld. AR strongly supported the order of ld. CIT(A) who has rightly appreciated the facts that there was a nexus between the earning of income and incurring the expenditure for earning such income and therefore prayed that the order of ld. CIT(A) be upheld by dismissing the appeal of the revenue.
We have considered the rival contentions and perused the material on record including the orders of authorities below. From the arguments of both the sides and on perusal of the records, we find that the assessee has raised some interest bearing funds from the banks for the purpose of projects. As the gestation period of projects is long and therefore the fund lying idle with the assessee were lent to the other companies and thus, the assessee received income from such lending.
6 1165/Mum/2014 and others two appeals 8. Now, the issue before us is whether the interest paid to the bank on the borrowed funds is admissible under section 57(iii) of the Act or not as being wholly and exclusively expended for the purposes of earning such interest income. We find that the assessee has advanced money out of the funds borrowed from the bank and therefore there is direct nexus between money raised and money lent. We are in agreement with findings of the ld.CIT(A) that the interest to bank is admissible deduction against the interest earned by the assessee from lending such money. The fact has been admitted by the AO while recording the finding of facts that those interests have been earned on the money borrowed from the banks but the same was not allowed as deduction as the purpose of borrowing was different. Since there is direct nexus between the lending out of borrowed funds and thus the interest paid on borrowings from banks is allowable deduction u/s 57(iii) of the Act against the interest income liable to be assessed u/s 56 of the Act. In our opinion the CIT(A) has passed a very reasoned order which requires no interference on our part. Accordingly the same is upheld.
Appeal of the revenue stands dismissed.
Now, we will deal with the appeal bearing ITA No.1165/M/2014
Grounds of appeal No.1 and 2 relate to deletion of addition of Rs.2,34,98,339/- by ld. CIT(A) comprising Rs.1,50,37,135/- on brand building, marketing expenses, Rs.19,28,589/- on marketing research
7 1165/Mum/2014 and others two appeals expenses and Rs.65,32,615/- on visual display and signage expenses by holding the same as revenue expenditure as against the addition made by the AO by treating the same as capital expenditure.
The issue raised in the grounds of appeal No.3 and 4 is against the deletion of software expenses Rs.4,91,14,857/- by ld.CIT(A) by holding the same as revenue in nature as against the capital expenditure treated by AO.
Brief facts of the case are that the assessee filed its return of income for the assessment year 2008-09 on 27.9.2008 declaring total loss of Rs.110,90,93,410/-. The return was processed under section 143(1) of the Income tax Act, 1961. Thereafter the case of the assessee was selected for scrutiny and the statutory notices u/s 143(2) and 142(1) were issued and served upon the assessee. The assessment was framed by the AO, after considering the submissions of the assessee as made from time to time during the assessment proceedings vide order 29.12.2010 passed under section 143(3) of the Act by assessing the loss at Rs.1,04,48,39,034/- by making various disallowances as detailed in para 6 of the assessment order.
Regarding the issue raised in grounds No.1 and 2 the facts are that the AO during the course of assessment proceedings found that the assessee has debited the following expenses under the head Advertising, marketing and sales promotion expenses :
8 1165/Mum/2014 and others two appeals
1.Brand building marketing expenses Rs.1,50,37,135/- 2.Market research expenses Rs.19,28,589/- Visual display and signage expenses Rs.65,32,615/- total Rs.2,34,98,339/- The AO came to the conclusion that the above said expenditures were of capital in nature and were wrongly claimed by the assessee and hence issued show cause notice to the assessee to show cause as to why these expenses should not be disallowed and added to the total income of the assessee. The AO after considering the reply of the assessee dated 19.11.2010 treated the same as capital expenditure by rejecting the submissions of the assessee by holding that the said expenses has resulted in enduring benefit to the assessee for years together specifically when the brand is also defined as a capital asset u/s 55(2)(a) of the Act. The ld. CIT(A) allowed the appeal of the assessee after considering the submissions and argument during the course of appellate proceedings by observing and holding as under (para 3.2): “3.2 I have considered the facts and submissions. As the AO has stated that these expenses are giving long-lasting benefit to the business of the assessee, the appellant was asked to furnish the bills pertaining to such expenses. Same were produced. I have looked into the same and noted that under the head advertisement, the expenses were incurred for making payment towards advertisement published in newspapers, through hoardings, by printing logo on various items of day to day use like mugs, T-shirts ,saris and others and the bills are raised by the parties who did the job for the appellant. It is also noted that bills in a few cases are on monthly basis and are in accordance with contract entered for the same. In view of this the observation that these expenses are having
9 1165/Mum/2014 and others two appeals enduring benefits and hence are capital expenses in nature is found to be not factually supported. It is also supported by the decisions relied upon and quoted by the appellant in their submission. I find that there are direct decisions on the issue that such expenses incurred for day-to-day promotion and giving impetus to the existing business for generating more and more revenue are revenue expenses, as the decision given in the case of Monte ,Motors Ltd. ,in and again in case of CIT V/s Orient Ceramics and Industries Ltd (ITA No.65 and 66 of 2011) by Hon’ble High Court Delhi. In view of this the place taken by the appellant that expenses incurred under the head marketing research, brand building, advertisement and sales promotion are revenue expenses as supported by cited decisions on the issue, are allowed. Accordingly the addition made of Rs.2,34,98,339/-while treating the same as capital expenditure being not sustainable is deleted herewith. The ground number 1 taken by the appellant is allowed.”
The ld. DR submitted before us that the order of ld.CIT(A) was bad in law as the ld. CIT(A) has failed to appreciate the fact that the expenses as claimed by the assessee were of capital nature. The ld. DR heavily relied on the order of AO by submitting that the AO has rightly disallowed the expenditure being capital in nature as the assessee purposively suppressed the income by charging off the capital expenditure as revenue. The ld. DR prayed that the order of the ld. CIT(A) be set aside and that of AO be restored.
On the other hand, the ld.AR while strongly objecting the arguments of the ld. DR submitted that these are routing revenue expenses incurred on brand building marketing expenses (Rs.1,50,37,135/-), Market research expenses (Rs.19,28,589/-) and Visual display and signage expenses (Rs.65,32,615/-). The ld. AR submitted that the assessee retail business
10 1165/Mum/2014 and others two appeals was to sell designer or branded readymade garments for every section of society in addition to the other personal wears like watches, foot wears, cosmetics, sunglasses. Jewellery etc. garments for men and kids were from the recognised brands like allen solly, van huesein, Louis Philips, arrow, pepe, levis, spykar Raymond’s and so on. But for women category, the assessee had very few branded materials. They needed newly designed, fashion oriented dress materials, sari, and many other format with latest trends. In order to meet the demands, the assessee had set up its own designing team to get these dress made from various manufacturers. These dress materials had its own name as brand and the assessee had spent lot of money to sell these products by offering more and more benefits upon buying these branded goods rather than other goods. Such expenses, related to selling the brands, were debited to brand building marketing expenses. These are normal and regular sales promotions expenses and they are not capital expenses as women dress and designs do not stand or line even for a year. Each year we need to change new brands and new designs. Similarly, market research expenses are incurred to understand the current trends and moods of the people around our stores at very frequent intervals. Due to stiff competition in the retail market, the update and new technology, new fashion, new foods habit, new entertainments were to be followed well in advance. This was being carried out by the recognised research surveyors in the field and constituted day to day expenses keeping in view, the display of products
11 1165/Mum/2014 and others two appeals at windows, stores inside and outside will make lots of difference to make the sale. Lots of efforts are being made to make the right kind of product display for every brand, every season, every category, every design. The latest design with latest models pictures were very very important for the sale of dresses and other personal wears. The expenses for photos, design drawing, painting, board making, hanging them, light arrangements, colour back ground, position at store, location creations, some banners, posters etc were the real expenses incurred under this head and they were of the nature of sales and marketing expenses for every year and, therefore, they were revenue in nature. The ld. AR finally relied on the order of ld.CIT(A) who after considering the submissions of the assessee has rightly deleted the addition and hence observations and findings of the ld.CIT(A) be upheld by dismissing the appeal of the revenue.
After going through the contentions of both sides and on perusal of the records including the orders of authorities below, we find that the expenses incurred by the assessee under various heads as has been mentioned herein above are more of revenue in nature than the capital ones. The AO without going into the real nature of the expenses, described the same as capital in nature whereas as a matter of fact, the ld. CIT(A) has gone into the nature of expenses purpose of expenses and business expediency and accordingly treated the same as revenue
12 1165/Mum/2014 and others two appeals expenditure. We, therefore finding no fault with the findings of ld.CIT(A) on this issue, dismiss the ground No.1 and 2 taken by the revenue by upholding the order of CIT(A) on this issue and direct the AO accordingly.
Facts relating to next issue raised in the grounds no.3 and 4 are that the AO during the course of assessment proceedings found that the assessee has debited a sum of Rs.4,91,14,857/- under the head repairs and maintenance of plant and machinery for purchase of software as per details mentioned at pages 3 and 4 of the assessment order which are as under : 1 R&M-IT software-used Prod.Tool Rs.12,59,345 2 R&M-IT software-business appl. Rs.1,68,358 3 R&M-IT software-communication Rs.1,20,52,611 4 R&M-IT software-used Prod.Tool. Rs.24,61,362 5 R&M-IT software-business appl. Rs.55,69,724 6 R&M-IT software-communication Rs.68,17,718 7 R&M-IT software-outsourcing Rs.2,07,85,739 Total Rs.4,91,14,857 The AO, after taking into consideration the reply of the assessee dated 19.11.2010, filed in response to the notice issued by the AO, came to the conclusion that the above expenses were capital in nature and accordingly treated the same as capital in nature and allowed depreciation at the rate of 25% on Rs.4,91,14,857 thereby adding remaining amount of Rs.3,68,36,143/- to the total income of the assessee. The assessee preferred an appeal before the ld. CIT(A) challenging the action of the AO. Before the first appellate authority, the assessee submitted that the assessee had incurred expenses on purchase of various computer 13 1165/Mum/2014 and others two appeals softwares installed in various locations for the purpose of day to day running of its business. The ld.CIT(A) deleted the addition made by the AO by observing and holding as under : 4.2 As the appellant has cited various case laws, I have gone through the same. It is noted that for purchase of SAP/ERP which is a comprehensive software/program, Hon’ble ITAT, Mumbai decided in case of M/s Glenmark Pharmaceutical Ltd, that even though the benefit is enduring, payment for application software for running the business efficiently will still be revenue in nature. Same is the decision in case of Brics Securities Ltd in ITA No.4514/Mum/2008 by Hon’ble ITAT, Mumbai again. In view of this the amount spent on these software for running the business efficiently by the appellant have to be allowed. Accordingly the addition made of Rs.3,68,36,143 (total purchase amount of Rs.4,91,14,857/- less depreciation of Rs.1,22,78,714) being not sustainable is deleted herewith. The ground No.2 is allowed”. Aggrieved by the order of ld.CIT(A), the revenue is in appeal before the Tribunal.
Before us the ld. DR submitted that the expenditure incurred by the assessee on the purchase of various computers software are capital in nature and the assessee derived the benefit of enduring nature which extended for more than a year and even longer and therefore the same could not be allowed as revenue expenditure. The ld. DR heavily relied on the order of AO and prayed for upholding of the order of AO.
Per contra, the ld. AR submitted before us that the expenditure incurred by the assessee for purchase of computer software were of revenue nature. The ld.AR submitted that the purchase of software were required in order to run and operate the business of the assessee at 14 1165/Mum/2014 and others two appeals various locations and these were routing expense. In defence of his arguments the ld.AR relied in the number of decisions viz. M/s Glenmark Pharmaceutical Ltd, in and Brics Securities Ltd in ITA No.4514/Mum/2008 and finally prayed that the order of ld.CIT(A) being reasoned and deserved to be upheld in view of the ratio laid down in the above decisions.
We have considered the rival submissions of the parties, perused the material placed before us including the orders of authorities below and decisions relied upon by the parties. We find that the assessee incurred expenses for the purchase of computer softwares to the tune of Rs.4,91,14,857/- and claimed the same as revenue expenditure under the head repairs and maintenance of plant and machinery. These expenses were required to be incurred in order to maintain the various outlets of the assessee company and smooth working of the organisation. Besides, the case of the assessee is squarely covered by the decision of the Mumbai Tribunal in the case of M/s Glenmark Pharmaceutical Ltd, wherein it has been held as under :
“15. We have heard the learned representatives of the parties, records perused and gone through the decisions cited. The assessee purchases the software called as SAP. The assessee claimed the expenditure incurred on the said software as revenue expenditure, but the same disallowed by the revenue, treating it as capital expenditure. The question to be examined in this ground of appeal is whether the expenditure incurred on SAP/ERP/software by the assessee is a revenue expenditure or capital expenditure. There is 15 1165/Mum/2014 and others two appeals no embracing formula, which can provide a ready solution to the problem; no touchstone has been devised. Every case has to be decided on its own facts, keeping in mind the broad picture of the whole operation in respect of which the expenditure incurred. To know the nature of activities for which expenditures incurred we would like to refer written submissions of the assessee filed before CIT (A) of which copy placed in paper book at page numbers 80 to 117. The relevant part of Para 42 of the said letter reproduce as under:- "It is relevant to note the concept of ERP in brief in order to understand the correct nature of said expenditure. There are number of different systems in a large company's "back office," including, planning, manufacturing, distribution, shipping, and accounting, Enterprise resource planning (ERP) is a system that integrates all of these functions into a single system, designed to serve the needs of each different department within the enterprise. ERP is more of a methodology than a piece of software, although it does incorporate several software applications, brought together under a single, integrated interface." 16 There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on application of this test. If the advantage consists merely in facilitating the assessee's day-to-day- administrative business operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given
16 1165/Mum/2014 and others two appeals case. What is capital expenditure and what is revenue are not eternal verities but must be flexible so as to respond to the changing economic realities of business. The expression 'asset or advantage of an enduring nature' was evolved to emphasise the element of a sufficient degree of durability appropriate to the context. The concept of enduring benefit must respond to the changing economic realities of the business. In the case under consideration, it is admitted fact that the assessee is a Licensee. The relevant clauses of the agreement read as under :- "RECITAL Whereas, SAP desires to grant to Licensee and Licensee desires to accept from SAP, a license to use (as defined herein) SAP's proprietary R/3 Software (as defined herein) upon the terms and conditions hereinafter set forth:"
"6.1 SAP Proprietary information Licensee acknowledges that ownership of an title in and to all intellectual property rights, including patent, trademark, service mark, copyright and trade secret rights, in the SAP Proprietary information are and shall remain in SAP and its Licensors. Licensee acquires only the right to use the Software under the terms and conditions of this Agreement and does not acquire any ownership rights or title in or to the SAP Proprietary information and that of SAP's licensors.
(a) Licensee shall not copy, translate, disassemble, or decompile, nor create or attempt to create, by reverse engineering or otherwise, the source code from the object code of the Software. In the event source code is provided to Licensee, SAP, in its sole discretion, reserves the right to delete, or to require the deletion of, such source code and all copies thereof in Licensee's possession or control whenever a future Release, Version, or Correction Level provides for like functionality in an object code format.
(b) Subject to Section 6.3, all Modification and Extensions to the Software and Documentation shall be considered part of 17 1165/Mum/2014 and others two appeals the Software and Documentation for purposes of this Section 6." 17 We find from the clauses of the agreement that the agreement itself could have been terminated by any party before the expiry of the term on any of the grounds stated in the agreement and amount will not be refunded. The relevant clauses of the agreement are reproduced as under:- "5. TERMS AND TERMINATION" "5.1 Term. This agreement and the license granted hereunder shall become effective upon execution by both parties and shall continue in effect for a period of 25 years unless terminated under section 5.2. Under section 19A of the Copy- right (Amendment) Act, 1994, SAP waives Licensee's statutory requirement to use the Software within a period of one year from the date of this Agreement. "5.4 No Refund. In the event of any termination hereunder, Licensee shall not be entitled to any refund of any payments made by Licensee." 18 The expenses incurred for a software packages in the present computer world, which revolves on the modern communication technology, enables the assessee to carry on its business operations effectively, efficiently, smoothly and profitably. Such software enhances the efficiency of the operation. It is an aid in the business administration/ process rather than the tool itself. Therefore, the payment for such application software, though there is an enduring benefit, does not result in acquisition of any capital asset and it merely enhances the business administration efficiency and hence, has to be treated as revenue expenditure. The length of the period of the agreement and quantum/ amount is not of much consequence, if the nature of the advice made available is such that it cannot be called a capital asset.The concept of enduring benefit must respond to the changing economy and the realities of the business. The expenses incurred for software which revolves on the modern administrative technology for day to-day administration of business activity to enable the assessee to carry on its business operations effectively, efficiently, smoothly and profitably. Such software enhances efficiency of such business operation. Therefore,
18 1165/Mum/2014 and others two appeals acquiring such software in the present scenario of style of business, it cannot be held as a capital asset. 19 One of the aspects of the AO for disallowance of assessee's claim is that the expenditures were technical know - how. We find that payments for implementation of ERP system squarely falls outside the purview of the definition of the term 'technical know-how' provided under Explanation 4 in clause (ii) of sub-section 1 of Section 32 of the Act. The said section provides that know-how means any industrial information or technique likely to assist in the manufacturer or processing of goods or in the working of mines, oil- well or other sources of mineral deposits. In the case under consideration, the assessee neither purchased any software nor the expenditure is incurred related to manufacturing operation, therefore, we do not agree with this reason of the A.O. for disallowing the assessee's case. 20 In the light of discussions, we allow the claim of the assessee as revenue expenditures and the AO is directed accordingly .The AO further directed that if depreciation if any has been allowed same be withdrawn.” In the case of Brics Securities Ltd, the Tribunal has held as under : “6. We have heard the rival submissions. A copy of the details of the software expenses are placed at page -1 of the assessee paper book. From perusal of the same it is seen that a sum of Rs. 30,000 had been paid to Central Depository Services India Ltd. as maintenance charges. A sum of Rs. 20,000 had been paid to Contek Software Technology Pvt. Ltd. for additional connection for D-Mat programme. A sum of Rs. 75,000 had been paid to Manish D. Shah for development of Window based software for trading. A sum of Rs. 10000 had been paid to Shri Manish D. Shah for development of equity stock management system software. A sum of Rs. 7500 was paid for availing span software for BSE derivative margin conclusion. Rs. 62,900 was paid for purchase of new licence CD for Windows XP. From the nature of the expenditure incurred as aforesaid it is clear that the software in question were basically to help the assessee in carrying on its business more efficiently and effectively. We are of the view that no enduring benefit accrued to the assessee, so as to term the expenditure in question as capital expenditure. The fact that computer software is entitled to 19 1165/Mum/2014 and others two appeals depreciation under I.T. Rules 1962 does not mean that any expenditure incurred on computer software had to be treated as capital expenditure. In our view the nature of expenses in question is clearly a revenue expenditure. We, therefore, direct that the entire sum of Rs.2,09,290/- be allowed as deduction.”
Looking into the ratio laid down in the above mentioned decisions of the Tribunal, we are of the view that the order passed by the ld. CIT(A) squarely covered by the above mentioned decisions of the Tribunal. Respectfully following the same, we uphold the order of ld.CIT(A) and accordingly, reject the ground taken by the revenue on this issue.
Ground No.5 taken by the revenue relates to deletion of addition of Rs.27,32,096/- by the ld.CIT(A) as made by the AO towards Stamp Duty and Registration Fee by holding the same as revenue expenditure instead of capital in nature.
During the course of assessment proceedings, the AO found that the assessee has debited a sum of Rs.27,32,096/- under the head “Rates and Taxes” comprising of Stamp duty Rs.21,95,247/- and License fees Rs.5,36,849/- totaling to Rs.27,32,096/-. The AO treated the same as capital expenditure and consequently added the same to the total income of the assessee. The ld.CIT(A) during the course of appellate proceedings allowed the claim of the assessee by observing and holding as under : “5. Under the head "rates and taxes" the assessee has debited inter alia following expenses which are capital in nature. I. Stamp duty Rs. 21, 95, 247 2. License fee Rs. 5, 36, 849 Rs.27. 32. 096
20 1165/Mum/2014 and others two appeals
The above expenses being of capital in nature, are hereby disallowed and added in the income of the assessee 5. During the appellate proceedings the appellant has submitted that stamp duty was paid for lease transactions and not for purchase of any capital asset. For the same appellant have relied upon decisions given in case of Richardson Hindustan Ltd, 169 ITR 516 ( Bom) and CIT vs. Cinecia P. Ltd. 137 ITR 652(Bom) again. I have gone through the same and noted that same are in favour of appellant. Further as A.O. has not disputed the fact that these lease are long term lease and the licence fee is not recurring in nature, I am in agreement with appellant that in absence of any such finding same cannot be disallowed. Accordingly the addition made of Rs. 27,32,096/- being not sustainable is deleted herewith. The ground No.3 is allowed”
The ld. DR while heavily supporting the order of AO submitted that the stamp duty and licence fee incurred by the assessee by debiting to rates and taxes were of capital nature and therefore the AO has rightly treated the same as capital expenditure. The ld. DR further submitted that these expenses were incurred for the purpose of enduring Long Term Lease and license and therefore the expenses incurred by the assessee were of long-lasting nature and lastly, the ld. DR prayed that the order of ld. CIT(A) be set aside and that of AO be restored.
On the contrary, the ld.AR submitted that the stamp duty has been incurred for lease transactions and the assessee has not purchased any capital asset. The ld.AR further submitted that the AO has himself mis- appreciated the facts of the case and wrongly treated the stamp duty and license fee which were of revenue nature as capital expenditure. The ld. AR further submitted that the AO has not given finding of facts or 21 1165/Mum/2014 and others two appeals reasons for making such disallowance and the disallowance has made in the summary manner and without giving any reason or justification and hence deserved to be deleted.
We have carefully considered the rival contentions and perused the material placed before us including the orders of authorities below on the issue. We find that the ld. CIT(A) after going into the matter and facts of the case came to the conclusion that these expenses were of revenue nature which were incurred for the purpose of lease transactions and not for the purchase of capital assets . The ld. CIT(A), decided the issue in favor of the assessee by following the decision rendered in the case of Richardson Hindustan Ltd, 169 ITR 516 ( Bom) and CIT vs. Cinecia P. Ltd. 137 ITR 652(Bom) and rightly followed the ratio laid down in the said decisions. The ld. CIT(A) further observed that the AO has not disputed the fact that the lease is Long term lease/licence and is not of recurring in nature. In view of these facts and the ratio laid down in the above said decision, we find no infirmity in the order of ld. CIT(A) and accordingly upheld the same by dismissing the appeal of the revenue.
Now we shall take up the appeal bearing filed by the assessee.
At the time of hearing, the ld.AR did not press ground no.4 and therefore same is dismissed as not pressed.
22 1165/Mum/2014 and others two appeals 30. Grounds of appeal no.1,2 and 3 are in respect of confirmation of addition/disallowance made by the ld. CIT(A) amounting to Rs.21,19,699/- under section 14A r.w.r.8D of the Income Tax Rules, 1962.
The facts are same as narrated in elsewhere in this order. During the course of assessment proceedings, the AO observed that the assessee has made investment of Rs.42,44,39,890/- in the subsidiaries companies but did not receive any exempt income under section 10 by way of dividend on the said investments. The AO found that the assessee has not disallowed any expenses under section 14A r.w.rule 8D of the Income Tax Rules, 1962 and finally worked out the disallowance at Rs.21,19,699/- under rule 8D 2(iii) by considering and rejecting the reply of the assessee as incorporated in para 5.3 of the assessment order. Aggrieved by the order of the AO, assessee preferred an appeal before the ld.CIT(A). The ld. CIT (A) after considering the detailed reply of the assessee, as has been incorporated in para 4 of the appeal order, dismissed the appeal of the assessee by observing that the issue mentioned in ground of appeal is now settled in favour of the revenue by the decision of Delhi Tribunal in the case of Cheminvest Ltd vs. ITO (ITAT Delhi Special Bench) reported in 121 ITD 318(SB)(Delhi) and after giving detailed reasons dismissed the appeal of the assessee by holding as under :
“5.2.4 Having regard to fact and circumstances of the case and in view of the Hon’ble ITAT Delhi Special Bench decision cited above
23 1165/Mum/2014 and others two appeals and in the light of th e CBDT circular no. 5/2014 dated 11.2.2014 issued vide F No.225/182/2013-ITA.II Ground of appeal
No.1 is not allowed”
32. The ld.AR vehemently submitted before us that very basis on which the ld. CIT(A) by relying on the decision of Special Bench Delhi in the case of Cheminvest Ltd(supra) has founded his decision to dismiss the appeal of the assessee has now been reversed by Delhi High Court as reported in (2015) 61 taxmann.com 118(Delhi High Court) dated 2,9,2015. The ld.AR also submitted before us that all the investments amounting to Rs.42,44,39,890/- were made in the subsidiaries companies and the motive was not to earn any dividend income but to gain control over the said subsidiaries and therefore these were strategic investments and the provisions of section 14A r.w.r.8D of the Rules were not applicable. The ld. Counsel heavily relied on the following decisions:.
A. No disallowance u/s 14A of the Act can be made in respect of investments which have not yielded any dividend income during the year : 1 Cheminvest Ltd. vs. CIT 61 taxmann.com 118 Delhi HC 2 CIT vs. Shivam Motors (P.) Ltd 55 taxmann.com 262 Alla. HC 3 ACIT vs. Mr. M. Baskaran 50 taxmann.com 138 ITAT 4 Siva Industries and Holdings Ltd vs. ACIT 11 taxmann.com 404 ITAT 5. CIT vs.Delite Enterprises of 2009 Bombay HC 6 REI Agro Ltd. vs. DCIT 35 taxmann.com 404 I TAT 7 Avshesh Mercantile P. Ltd. vs. DCIT 26 taxmann.com 43 I TAT 8 Alliance Infrastructure Project Pvt. Ltd. vs. DCIT 1043/Bang/2013 ITAT B. No disallowance u/s. 14A of the Act can be made where investments are of strategic nature: 1 JM Financial Limited vs. Addl CIT ITA No. 4521/Mum/2012 ITAT 2 CIT vs. Oriental Structural Engineers (P.) Ltd. 35 taxmann.com 210 Delhi HC 3 Interglobe Enterprises Ltd. vs. DCIT ITA No.1362, 1032 and 1580/0ell2013 ITAT 4 Garware Wll Ropes Limited V/s Add. CIT Siva Industries and Holdings 46 taxmann.com 18 ITAT Ltd vs. ACIT 5. U P Electronics Corporation Lt V DCIT ITA No. 538/LKW/2012 ITAT
24 1165/Mum/2014 and others two appeals 6 ITO V/s Piuoneer Radio Training Services P L ITAT 7 Baroda Industries P L V/s ITO ITA No.4213/Mum/2013 ITAT 8 Provogue (India) Limited V/s DCIT ITA No.2155/Mum/2013 9 CIT V/s Raymond Apparel Ltd ITA No.255 and 720/Mum/2012 ITAT 10. EIH Associated Hotels Limited V/s DCIT ITA No.1503/Mds/2012 11 ACIT V/s Spray Engineering Devices 23 Taxmann.com 267 ITAT
On the other hand, the ld.DR relied heavily on the orders of authorities below and prayed that the order passed by the ld. CIT(A) be upheld. As the assessee has made huge investments in shares and other securities and therefore has definitely incurred certain expenses in relation to those investments which were rightly computed by the AO u/s 14A r.w.r.8D 2(iii) of the I.T. Rules and prayed that the order of the ld.CIT(A) be upheld by dismissing the appeal of the assessee.
We have considered the rival contentions and perused the record including the orders of authorities below and the case laws relied by the parties. From the record before us, we find that the assessee has made huge investments as stated above on which it has not received any exempt income by way of dividend during the year. Similarly from the record, we observe that the investments were made in the subsidiary companies with a motive to gain control over these subsidiaries companies and not for the purposes of earning tax free income or dividend. Having regard to the above facts and circumstances of the case, we find merit in the arguments of the ld.AR that the provisions of section 14A r.w.r 8D are not applicable to the present case of the assessee, where no exempt income is earned during the year and also where the investment are strategic in nature and not made with the motive of earning the tax free
25 1165/Mum/2014 and others two appeals dividend. However, we find that the ld.CIT(A) while dismissing the appeal of the assessee relied on the Delhi Special Bench decision of the Tribunal in the case of Cheminvest Ltd vs. ITO (supra) in which the Special Bench held that the disallowance u/s 14A r.w.r 8D were to be made even where the assessee has not earned exempt income during the year. The said findings of the Special Bench of the Delhi Tribunal has been reversed by the Hon’ble Delhi High Court vide order dated 2.9.2015, wherein the Hon’ble High Court held that where the investment are of strategic nature and no exempt income is earned by the assessee in the relevant assessment year, the provisions of section 14A read with rule 8D cannot be invoked.
In the case of Cheminvest Ltd vs. ITO (supra), the Hon’ble High Court has held as under : “In the present case, the factual position that has not been disputed is that the investment by the assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the assessee is in relation to such investments which gives rise to income which does not form part of total income. [Para 18] In light of the clear exposition of the law in CIT v. Holcim India (P.) Ltd. [2015] 57 taxmann.com 28 (Delhi) and in view of the admitted factual position in this case that the assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the assessee in the relevant assessment year and since the genuineness of the expenditure incurred by the assessee is not in doubt, the question framed is required to be answered in favour of the assessee and against the revenue. [Para 19]
26 1165/Mum/2014 and others two appeals In the context of the facts enumerated the question framed was answered by holding that the expression 'does not form part of the total income' in section 14A envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year. [Para 23] Consequently, the impugned order of the Tribunal is set aside and the appeal is allowed in the above terms. This Court should not be understood to have expressed any opinion on the issue of whether for the assessment year in question the interest expenditure incurred by the assessee would be allowable as business expenditure under section 36 (1)(iii). [Para 24]” In the case of CIT V/s Shivam Motors (P) Ltd, the Hon’ble Allahabad High Court has held as under : “Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Year in which deductible (Interest) - Assessment year 2008-09 - Assessee was a dealer of TML and vehicles were supplied to assessee on credit - Initially an agreement was entered into under which outstanding dues of assessee to TML was squared off by grant of a loan from NIT to assessee - Under said agreement loan was provided to assessee by NIT on an interest of 12 per cent per annum - However, assessee disputed said amount consistently and no interest was paid - Eventually, it was only on execution of a supplementary agreement, in current year, liability to pay interest at rate of 6 per cent per annum was agreed upon and in pursuance thereof, assessee debited an amount towards interest in current year - Whether since it was not a statutory liability of assessee but a contractual dispute which eventually was resolved and liability was crystallised only when subsequent agreement was made, Tribunal was justified in allowing deduction of interest of earlier years in relevant assessment year on basis of said supplementary agreement - Held, yes [Para 9] [In favour of assessee] Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income (Absence of tax free income) - Assessment year 2008-09 - Whether in absence of any tax free income earned by assessee, disallowance under section 14A could not be made - Held, yes [Para 10] [In favour of assessee]”
27 1165/Mum/2014 and others two appeals In the case of ACIT V/s Mr.M.Baskaran the Tribunal has held as under : “11. In the case of CIT v. Winsome Textiler Industries Ltd. [2009] 319 ITR 204, the Hon'ble Punjab & Haryana High Court held that when there is no claim for exemption of income in such situation section 14A has no application. Respectfully following the above decisions, we delete the disallowance made under section 14A as the assessee has not earned / received for exempt income during the previous year relevant to the assessment year under appeal. Thus, we sustain the order of the Commissioner of Income Tax (Appeals) on this issue.”
In the case of J M Financial Limited V/s Addl.CIT, the Tribunal has held as under : “12. A similar view was taken by the Delhi Bench of this Tribunal in the case of M/s Oriental Structural Engineers (P) Ltd (supra) which has been confirmed by the Hon’ble Delhi High Court vide decision dated 15.01.2013 in para 6.3 as under:- “'6.3 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that only interest of Rs 2,96,731/- was paid on funds utilized for making investments on which exempted income was receivable. Further, Ld. Commissioner of Income Tax (Appeals) has observed that in respect of investment of Rs 6,07,775,000/- made in subsidiary companies as per documents produced before him, they are attributable to commercial expediency, because as per submission made by the assessee, it had to form Special Purpose Vehicles (SPY) in order to obtain contracts from the NHAI and the SPVs so formed engaged the assessee company as contract to execute the works awarded to them (i.e. SPVs) by the NHAI. In its profit and loss account for the year, the assessee has shown the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the PSVs can be disallowed u/s 14A LW. Rule 8D because it cannot be termed as expense/ interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) is correct in holding that disallowance of a further sum Rs 40,556/- calculated@2%ofthedividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals), hence we uphold the same.”
28 1165/Mum/2014 and others two appeals 13. In view of the above discussion and facts and circumstances of the case we agree with the view taken by this Tribunal in the above stated cases and accordingly hold that the assessee has brought out a case to show that no expenditure has been incurred for maintaining the 98% of the investment made in the subsidiary companies, therefore, in the absence of any finding that any expenditure has been incurred for earning the exempt income, the disallowance made by the AO is not justified, accordingly the same is deleted.” In the case of CIT V/s Oriental Structural Engineers (P ) Ltd it has been held by the Hon’ble Delhi Court : “3. On going through the above observations we are of the view that this is merely a question of fact and does not involve any question of law much less a substantial question of law, as the Tribunal held that the expenses which have been claimed by the assessee were not towards the exempted income. The disallowance, therefore, was rightly limited to a sum of Rs.40,556/-. The question of interpreting Rule 8-D is not in dispute and the only dispute is with regard to facts which have been settled by the Tribunal. The appeal is dismissed.” In the case of Interblobe Enterprises Ltd V/s DCIT the Tribunal has held as under : “Following the above judicial precedents, we held that value of strategic investments should be excluded for the purpose of disallowance under Rule 8D)iii) facts, we direct the Assessing Officer to calculate the disallowance under Rule8D(iii) by excluding the value of strategic http://www.itatonline.org 11 ITA No…../Del/ investments in the calculation of disallowance. As regards disallowance under Rule 8D(i) and 8D(ii) we have already held that no disallowance is warranted”.
We are of the considered view that the facts of the case are squarely covered by the decisions as mentioned above and therefore following the ratio laid down in the said decisions, we set aside the order of ld.CIT(A) and direct the AO to delete the addition.
29 1165/Mum/2014 and others two appeals 36. In the result the appeals of the revenue stand dismissed and the appeal of the assessee is allowed.