DCIT, NEW DELHI vs. M/S. C.B. RICHARD ELLIS SOUTH ASIA PVT. LTD., NEW DELHI

PER A.T. VARKEY, JUDICIAL MEMBER : These appeals by the revenue are directed against separate orders

passed by CIT (Appeals)-VI, New Delhi dated 28.11.2011 and

19.11.2012 for assessment years 2007-08 and 2008-09 respectively.

2 Since common issues were involved, the appeals were heard

together and are thus being disposed off by this consolidated order.

grounds raised are as under:

2 ITA No.709/Del./2012 ITA No.775/Del./2013 “1 The ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 2,85,55,000/- on account of disallowance u/s 36(1)(ii) of the Income Tax Act.

2 The ld. CIT(A) has erred on facts and in law in holding that Rule 8D of the IT Rules for making disallowance u/s 14A of the IT Act will apply only from A.Y. 2008-09 onwards

3 The ld. CIT(A) has erred on facts and in law in deleting addition of Rs. 1,08,735/- on account of extra depreciation claimed on computer peripherals.

4 The appellant craves leave for reserving the right to amend, modify, alter, add or forego any ground(s) of appeal at any time before or during the hearing of this appeal. 4. Briefly stated the facts are that assessee company is engaged in the

business of real estate, consultancy services, site management services,

professional advisory and project management services. It filed a return

of income on 31.10.2007 declaring an income of Rs. 29,58,90,498/-. The

return was processed u/s 143(1) of the Income-tax Act, 1961 (hereinafter

‘the Act’) on 30.03.2009. The AO completed the assessment u/s 143(3)

of the Act dated 10.12.2010 at an income of Rs. 32,47,12,801/- after

making following disallowances;

i) Rs.2,85,55,000/- on account of disallowance u/s 36(1)(ii) of the Act; ii) Rs.1,58,568/- on account of disallowance u/s 14A of the Act; and iii) Rs.1,08,735 on account of disallowance of depreciation u/s 32 of the act

the case of Creative Travel (P) Ltd. vs. ACIT in ITA No. 190/Del/2010

3 ITA No.709/Del./2012 ITA No.775/Del./2013 for A.Y. 2006-07 dated 13.5.2011 affirmed by the Hon’ble Jurisdictional

High Court in the case of CIT vs. M/s Creative Travel (P) Ltd. in ITA

No.1672/D/2010 deleted the disallowance of Rs.2,88,55,000/- on account

of disallowance u/s 36(1)(ii) of the Act. He also deleted the disallowance

of Rs.1,58,568/- u/s 14A and Rs. 1,08,735/- on account of disallowance

of deprecation u/s 32 of the Act.

findings of the learned CIT(A). Before us the learned DR supported the

order of the AO while the ld. AR on behalf of the assessee supported the

findings of CIT(A).

representing commission paid to Sh. Anshuman Magazine, Director of

the assessee company by invoking section 36(1)(ii) of the Act.

in the year under consideration, namely, Anshuman Magazine (99%) and

Rashmi Magazine (1%). Out of two shareholders, Anshuman Magazine

was being paid salary, which included incentive of Rs. 2.85 crores. He is

w.e.f. 01.06.2003 is the Managing Director of the company. As per

resolution of the Board dated 27.05.2003, Anshuman Magazine is entitled

to incentive in the form of commission at 30% of the net profits for each

year after adding back depreciation. Similar incentive paid in earlier

4 ITA No.709/Del./2012 ITA No.775/Del./2013 years has been accepted in assessment framed u/s 143(3) of the Act and,

to other employees stands allowed as deduction including incentive of

Rs.2.21 crores to Manish Kashyap in the instant year. The AO observed

in the case of assessee company profit of Rs. 28,41,79,791/- has been

worked out for this financial year as per the statement of taxable income

filed along with the return, however no dividend has been proposed or

distributed among the shareholders who are also director of the company.

He thus was of the opinion that, sum of Rs.2,85,55,000/- has been

apparently paid as commission and bonus and not as dividend to reduce

the income of the company and to avoid dividend distribution tax.

Thereafter, he directed the assessee to show cause for admissibility of

bonus/ commission to directors and on consideration of the reply, he

disallowed the claim of deduction by holding that, had the company

declared dividend, Sh. Anshuman Magazine would have got the majority

share of the dividend and the company would also have to pay dividend

distribution tax on the same which has not been done by the company. He

held that, the assessee’s argument that the entire arrangement is tax

neutral is not correct because maximum marginal rate in the case of

companies is more than the maximum marginal rate in the case of

individuals. The CIT(A) deleted the disallowance made of

Rs.2,85,55,000/- u/s 36(1)(ii) of the Act.

5 ITA No.709/Del./2012 ITA No.775/Del./2013 9. We have considered the rival submission of both the parties and

carefully gone through the material placed on the record. The CIT(A) has

deleted the disallowance for the following reasons stated in the order:-

“i) That learned Officer has disallowed the claim of deduction essentially on the assumption that appellant company has not declared dividend and paid dividend distribution tax and as such the claim of the appellant that the arrangement is tax neutral is not tenable. It was submitted that, in holding so, the learned officer overlooked that in the year under consideration appellant company had declared dividend of Rs. 13,89,93,870 and also paid dividend distribution tax of Rs. 1,94,93,890/- and as such the basis adopted is in disregard of the facts on record and thus not tenable. A chart tabulating details of the dividend paid along with dividend distribution tax paid for Assessment year 004-05 to Assessment year 2007-08 was also placed on record and is as under:-

Assessment Dividend paid (Rs.) Dividend distribution tax paid (Rs.) year 2004-05 1,22,64,165/- 1,573,346/- 2005-06 2,04,40,275/- 26,71,286/ 2006-07 2,24,84,303/- 31,53,424/- 2007-08 13,88,93,870/- 1,94,93,890/-

ii)) That under sub clause ii) of section 36(1) of the Act, it is provided that, where any sum is paid to an employee as bonus or commission for services rendered, the limb that, a deduction shall be allowed, in respect of an amount paid to an employee as bonus or commission for services rendered and, since it was as a result of effort of Shri Anshuman Magazine that there is tremendous increase of turnover, year after year, as he relentlessly made efforts to take the company to greater heights the same is allowable as deduction. Reference was made to chart tabulating the sales, profit and, incentive paid to Shri Anshuman Magazine from Assessment year 2004-05 to Assessment Year 2007-08, which is as under:

A.Y. Sales(Rs.) Profit (Rs) Incentive paid to Shri Anshuman Magazine (Rs.) 2004-05 54,35,88,969/- 10,40,92,862/- 1,19,48,350/- 2005-06 72,17,39,964/- 10,69,57,576/- 1,91,75,160/- 2006-07 1,02,42,92,452/- 18,53,73,829/- 3,81,76,000/- 2007-08 1,55,45,13,626/- 24,86,29,998/- 2,89,55,000/-

It was submitted that, no –doubt second limb of the said clause provide that, where such sum should not have been payable to him, as profits or dividend, had it not been paid as bonus or commission, however the same is not the fact in the instant case.

6 ITA No.709/Del./2012 ITA No.775/Del./2013

iii) That in the instant case, the amount claimed as deduction has been provided to be paid because of the resolution passed by the Board of Directors to pay commission on account of excellent performance of the employee and, therefore there was no justification to have disallowed the claim of expenditure, whatsoever as it is not a case where such amount was payable to director by way of dividend. In the context it was submitted that, Shri Anshuman Magazine w.e.f. 1.06.2003 relevant to Assessment year 2004-05 became managing director of the appellant company, as would be evident from resolution of the Board dated 7.05.2003 (pages 43 to 44 of Paper book). It is submitted that, as per the resolution, he was entitled to commission at 30% of the net profits for each year after adding back depreciation. It was submitted that, the incentive so paid to Shri Anshuman Magazine from Assessment year 2004-05 has been assessed as “salary” as would be evident from the tabular chart hereunder:

A.Y. Incentive Total salary Declared and Assessment u/s (Rs) assessed as (Pages of paper salary by book) Anshuman Magazine in his return of income (Pages of Paper Book) 2004-05 1,19,48,350/- 1,82,95,160/- 72 143(3) (74) (90-92) 2005-06 1,91,75,160/- 2,69,01,560/- 93 143(1) (94) 2006-07 3,81,76,000/- 4,72,10,880/- 102 143(3) (104) (113) 2007-08 2,89,55,000/- 4,07,24,000/- 113 143(1) (115)

iv) That similar incentive has been paid to various other senior employees of appellant company, as would be evident from tabulation hereunder:

A.Y. Number of Total salary for the Total incentive for Employees to whom year to such the year incentive given employees 2004-05 344 11,46,72,189/- 2,55,71,348/- 2005-06 536 18,27,78,117/- 5,64,39,455/- 2006-07 601 29,84,15,605/- 9,59,43,058/- 2007-08 680 55,79,07,291/- 24,19,96,004/-

On illustrative basis, incentive paid to Shri Manish Kashyap, one of the employee was also paid, the detail of which is as under:-

7 ITA No.709/Del./2012 ITA No.775/Del./2013 F.Y. A.Y. Sale (Rs) Profit (Rs) Incentive paid to Shri Manish Kashyap (Rs.) 2003-04 2004-05 54,35,88,969/- 10,40,92,862/- 8,65,000/- 2004-05 2005-06 72,17,39,964/- 10,69,57,576/- 61,36,000/- 2005-06 2006-07 1,02,42,92,452/- 18,53,73,829/- 1,02,57,037/- 2006-07 2007-08 1,55,45,13,626/- 24,86,29,998/- 2,21,76,276/-

v) That incentive paid in the form of commission to Shri Anshuman Magazine, has been allowed in the past as would be evident tabular chart hereunder:

A.Y. Incentive (Rs.) Disallowance if Assessment u/s any (Rs.) 2001-02 23,00,000/- --- 143(1) 2002-03 28,50,000/- --- 143(1) 2003-04 25,00,000/- --- 143(3 (49-58) 2004-05 1,19,48,350/- --- 143(1) (78) 2005-06 1,91,75,160/- --- 143(3) (58A-58G) 2006-07 3,81,76,000/- --- 143(1)

Reliance was placed on rule of consistency as held by Hon'ble Apex Court in the case of Radha Saomi Satsang vs. CIT 193 ITR 321 and CIT vs. J. K. Charitable Trust 308 ITR 161

vi) That burden was upon the Assessing Officer and not on the assessee to establish that, what had been paid by way of commission would have been payable by way of dividend, which on the facts of appellant remains undischarged

vii) That since there existed no statutory requirement under the Income Tax Act , 1961 or even under the Companies Act' 1956 for a company to declare this sum of Rs. 2,85,55,000/- as dividend out of the profits, particularly when dividend has been separately declared. It was submitted that, unless a dividend is declared, which can only be declared out of profits, which profits can be determined only after deducting all legitimate expenses, there is no question of any sum payable as dividend

viii) Reliance was also placed on the following judicial pronouncements:

a) ITA No. 1900/2011Mis Creative Travel (P) Ltd. vs. ALIT for Assessment Year 2006-07 dated 13.05.2011

b) ITA No. 4746/De1/2010 DCIT vs Celsius Refrigeration (P) Ltd. for Assessment Year 2007-2008

8 ITA No.709/Del./2012 ITA No.775/Del./2013

c) 139 TTJ 48 (Del) ACIT vs Career Launcher India Ltd.

d) 36 SOT 456 (Del) ACIT vs. Bony Polymers (P) Ltd.

ix) That, the revenue cannot adopt inconsistent positions since the sum of Rs. 2,85,55,000/- has been assessed on "salary" in the hands of Shri Anshurnan Magazine and therefore, the same cannot be now regarded as dividend. Intact, the Assessing Officer since Assessment Year 2004-05, even in the hands of the appellant company, has held such sum to be eligible deduction u/s 36(1)(ii) of the Act in all the preceding and succeeding years.

x) That, even otherwise, the entire disallowance is revenue neutral as there is no variation in tax rates. It has been held that, if the disallowance made is revenue neutral that no such disallowance is warranted. Reliance is placed on following judicial pronouncements:

a) 33 ITR 681 (Born) CFI vs. Nagri Mills Co. Ltd. b) 331 ITR 10 (Del) CIT vs Dinesh Kumar Goel c) 196 Taxman 94 (Del) CIT vs Triveni E igd. and Industries Ltd. d) 53 DTR 1 (Del) Cyber Media (India) Ltd vs. CIT

In view of the aforesaid submissions, it was most respectfully submitted commission paid to Shri Anshuman Magazine for the aforesaid years be allowed and disallowance of Rs. 2,85,55,0001- may kindly be deleted. I have carefully considered the facts of the case, material placed on record, order of assessment and submissions made by the learned counsel for the assessee. In the year under consideration, appellant company has paid salary of Rs. 4,07,24,000/- including commission of Rs. 2,85,55,0001- to Sh. Anshuman Magazine. Sh. Anshuman Magazine is Managing Director of the appellant company. He also holds 99.99% shareholding of the appellant company. The aforesaid sum has been paid under resolution of the Board dated 27.05.2003 appointing him the Managing Director of the appellant company. However, the learned Additional Commissioner of Income Tax has held that sum is not allowable in view of section 36(1)(ii) of the Act. According to the learned officer, appellant company has through worked out profit of Rs. 28.42 crores but no dividend has been proposed or distributed amongst the shareholder and therefore sum of Rs. 2,85,55,000/- has been paid as commission and not as dividend to reduce the income and avoid dividend distribution tax. He has observed in para 3.2 as under:

“In the case of the assessee company profit of Rs. 28,41,79,791/- has been worked out for this financial year as per the statement of taxable income filed alongiwth the return. However, no dividend has been proposed of distributed among the share holders who are also directors of the company sums mentioned above have been apparently paid as commission and bonus and not as dividend to reduce the income of the company and to avoid dividend distribution tax”.

9 ITA No.709/Del./2012 ITA No.775/Del./2013 5.4 I have perused through the financial statement filed by the appellant company for the financial year 2006-07 relevant to the instant assessment year. It is evident there form that, profit declared for the instant year is Rs. 24.46 crores and for the preceding year is of Rs. 18.54 crores. It is further seen that on the aforesaid profit, the assessee had declared dividend of Rs. 13.90 crores in the instant year and Rs. 31.53 lacs in the preceding year has been paid. The challans for distribution tax paid were also called for in the course of appellate proceedings and placed on record. It is thus not a case where the appellant has not proposed or distributed any dividend either in the instant year or preceding year. The assessing Officer essentially has adopted the figure of profit at Rs. 28.40 crores which was the income declared under the head profit and gain from business or profession in computation of income and thus, overlooked the figure of profit of Rs. 24.46 crores in the profit and loss account. Therefore, the basis adopted to deny the claim of deduction overlooks the factual position. Even otherwise, it is seen that commission alongwith salary has been paid to Sh. Anshuman Magazine year after year based on the improved financial position of the company, as is evident from the chart hereunder:

A.Y. Sales (Rs) Profit (Rs) Salary Commission Total salary 2004-05 54,35,88,969/- 10,40,92,862/- 63,46,810 1,19,48,350 1,82,95,160 2005-06 72,17,39,964/- 10,69,57,576/- 77,26,400 1,91,75,160 2,69,01,560 2006-07 1,02,42,92,452/- 18,53,73,829/- 90,34,880 3,81,76,000 4,72,10,880 2007-08 1,55,45,13,626/- 24,86,29,998/- 1,17,69,000 2,89,55,000 4,07,24,000

5.5 The above salary including incentive has been assessment u/s 143(3) for above, similar incentives has also been paid to other employees. Infact, out of total salary of Rs. 55.79 crores incentive paid in the year under consideration was of Rs. 24.20 crores. It may be relevant to state here that, one of the employees Sh. Manish Kashyap has received incentive of Rs. 1.02 crores in the instant year. Moreover dividend has been declared consistently by the appellant company and dividend distribution tax has been separately paid as would be evident from the tabular chart hereunder:

Assessment year Dividend Paid Dividend distribution tax paid (Rs.) 2004-05 1,22,64,165/- 15,73,346 2005-06 2,04,40,275/- 26,71,286/- 2006-07 2,24,84,303/- 31,53,424/- 2007-08 13,88,93,870/- 1,94,93,890/-

5.6 Further, the sum so paid has been assessed to Tax in the hands of Shri Anshuman Magazine as salary in assessment made of Sh. Anshuman Magazine including assessment u/s 143(3) for assessment year 2004-05 and assessment year 2006-07. In the light of the aforesaid, in my opinion, the sum so paid is allowable as deduction. Infact, Hon’ble Delhi High Court in the case of M/s Creative Travel (P) Ltd. in 'TA No. 1672/D/2010 noted in the case of

10 ITA No.709/Del./2012 ITA No.775/Del./2013 M/s Creative Travel (P) Ltd. vs. ACTT in 1TA No. 190/D/2010 for Assessment Year 2006-07 dated 13.05.2011 has held as under: "On the facts of this case, the Income Tax Appellate Tribunal has allowed the payment of bonus and commission to the employee-Directors of the assessee company under Section 36(1)(ii) of the Income Tax Act and one of the reasons given by the Tribunal, which has specifically weighed with it, is that in the past similar commission was paid to the working Directors and it was never disallowed. Mr. Aggarwal, learned counsel for the assessee has submitted that such a deduction is allowed under Section 36(1)(ii) of the Act for the past 30 years. In view of this, we are of the opinion that no question of law arises. The appeal is dismissed." 5.7 Thus, following the aforesaid jurisdictional High Court wherein it has / been held that, if the commission paid to employee- directors has been allowed in the past, no disallowance is warranted Ws 36(1)( ) of the Act. The same is squarely applicable to the facts and as such, no disallowance other warranted. Section 36(1)(ii) of the Act, reads as under: "36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 — (i) --------- (ia) --------- (ib) ------- ii) Any sum paid to an employee as bonus or commission for services rendered. (where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission;)” 5.8 The aforesaid provision provides that deduction shall be allowed in respect of any sum paid to an employee as bonus or commission for services rendered unless such sum would have been payable to him or dividend or profit. In the instant case, there is enough material on record to establish that sum of Rs. 2,85,55,000/- has been paid as commission for services rendered by Sh. Anshuman Magazine and therefore the same is allowable as deduction. There is no material brought on record to suggest the aforesaid sum was payable as profit or dividend. On the contrary, the basis adopted to hold the sum paid of Rs. 2,85,55,000/- is profit or dividend was that, no dividend has declared in the year under consideration which has been found to be factually incorrect and thus not tenable. In view of the aforesaid, disallowance made of Rs. 2,85,55,000/- is deleted and grounds raised by the appellant are allowed.”

either factual or legal in the aforesaid reasons adopted by the CIT(A) to

11 ITA No.709/Del./2012 ITA No.775/Del./2013 delete the disallowance of claim of deduction u/s 36(1)(ii) of the Act. It

is noted that the AO proceeded to make disallowance on incorrect

assumption of fact that no dividend has been distributed amongst the

shareholders in the instant year; whereas as a matter of fact that dividend

of Rs.13.90 crores was declared in the instant year. Moreover it is also

noticed that identical commission paid to MD Anshuman Magazine has

been allowed as deduction in the preceding assessments u/s 143(3) of the

Act and also correspondingly such incentive stands assessed as salary in

the hands of Anshuman Magazine for the instant year. Further, likewise

incentive paid to other employees has also been allowed as deduction.

During the course of hearing the learned counsel for assessee supported

the order by relying of the judgments of Hon’ble jurisdictional High

Court in the case of AMD Metplast (P) Ltd. v DCIT – 341 ITR 563 (Del)

and Controls & Switchgear Contractors Ltd. v. DCIT – 269 CTR 44

(Del).

Hon’ble Court in the case of Controls & Switchgear Contractors Ltd.

(supra) has held as under:

“7. The next aspect that has to be considered is whether payment of such commissions are liable to be disallowed as an expense by virtue of Section 36(1)(ii) of the Act. At this stage it is necessary to refer the Section 36(1)(ii) of the Act, which reads as under:—

12 ITA No.709/Del./2012 ITA No.775/Del./2013 "any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission.." 8. It is also apparent from the reading of the aforesaid provision that bonus or commission paid to an employee is expressly allowed as deduction. The only exception is where the bonus or commission paid to the employee would otherwise be payable to him as profits or dividends, in the event the same had not been paid as commission. It is clear that the exception would be applicable only where an employee would be entitled to receive the amount paid as commission, as profits or dividends. In the present case, the Directors would not be entitled to receive the amount paid to them as commission, as dividends because even if it is assumed that non-payment of commission would add to the kitty of distributable profits the same would have to be distributed pro- rata to all the shareholders and not selectively to the said Directors. Dividend is paid by a company as distribution of profits to its shareholders in the ratio of their shareholding in the company. In the present case, the Directors were not the only shareholders of the company and, therefore, in the event the Commission had not been paid by the assessee it could not have been distributed to them as dividends. 9. This Court in the case of AMD Metplast (P.) Ltd. (supra) also pointed out this distinction between distribution of dividends and payment for services in the following words:— "....Payment of dividend is made in terms of the Companies Act, 1956. Dividend has to be paid to all shareholders equally. This position cannot be disputed by the Revenue. Dividend is a return on investment and not salary or part thereof. Herein the consideration in the form of commission which was paid to Ashok Gupta was for services rendered by him as per terms of appointment as a managing director." 10. Thus, in our view, the Tribunal and the Income Tax Authorities below erred in holding that the payments of commission to the Directors fell within the exclusionary limb of Section of 36(1)(ii) of the Act.”

as under:

“We fail to understand how the aforesaid observations assist and help the Revenue in the factual matrix of the present case. Ashok Gupta is the managing director and in terms of the board resolution is entitled to receive commission for services rendered to the company. It is a term of employment on the basis of which he had rendered service.

13 ITA No.709/Del./2012 ITA No.775/Del./2013 Accordingly, he was entitled to the said amount. Commission was treated as a part and parcel of salary and TDS has been deducted. Ashok Gupta was liable to pay tax on both the salary component and the commission. Payment of dividend is made in terms of the Companies Act, 1956. Dividend has to be paid to all shareholders equally. This position cannot be disputed by the Revenue. Dividend is a return on investment and not salary or part thereof. Herein the consideration in the form of commission which was paid to Ashok Gupta was for services rendered by him as per terms of appointment as a managing director.” 13. The aforesaid judgments are squarely apply to the facts of the

assessee company. Here too, the commission has not been paid to

Rashmi Magazine, other shareholder of assessee company and

commission was paid to Anshuman Magazine for services rendered by

him as per terms of appointment as a managing director, which has been

taxed as salary in his hands in the instant year. Having regard to the

above judicial position, the ground raised by the revenue is rejected.

the Act read with Rule 8D of the I.T. Rules.

carefully gone through the material placed on the record. We find that

CIT(A) has directed the AO to compute the disallowance in accordance

in the manner held in para 42 of Hon’ble jurisdictional High Court in the

case of Maxopp Investment Ltd. – 347 ITR 272 (Del). The relevant

portion of the judgment reads as under :-

“42. Thus, the fact that we have held that sub-sections (2) & (3) of section 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to

14 ITA No.709/Del./2012 ITA No.775/Del./2013 satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. If he is satisfied that the assessee has correctly reflected the amount of such expenditure, he has to do nothing further. On the other hand, if he is satisfied on an objective analysis and for cogent reasons that the amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. It would be appropriate to recall the words of the Supreme Court in Walfort Share & Stock Brokers (P.) Ltd. (supra) to the following effect:- "The theory of apportionment of expenditure between taxable and non- taxable has, in principle, been now widened under section 14 A." So, even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to verify the correctness of such claim. In case, the assessing officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the assessing officer is to accept the claim of the assessee insofar as the quantum of disallowance under section 14A is concerned. In such eventuality, the assessing officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A(1). In case, the assessing officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment.”

the order of CIT(A). No reasons have been stated by the ld. DR to

deviate from the above conclusion. Thus, in light of the above, ground

raised by the revenue is rejected.

15 ITA No.709/Del./2012 ITA No.775/Del./2013 17. Ground No.3 is regarding disallowance of deprecation of Rs.

1,08,735/- on computer accessories. The AO has held that assessee is

eligible for depreciation at 15% and not at the rate of 60%. It was stated

that this issue is covered by the decision of Calcutta Bench of the tribunal

in the case of ITO vs. Samiran Majumdar – 280 ITR 74 (AT) wherein it

has been held that, printers and scanners are integral part of the computer

and therefore, the same are also entitled for higher rate of deprecation i.e.

60%. Reliance was also placed in the following cases:

a) 25 SOT 184 (Mum) Venture Infotek Global (P) Ltd. vs. DCIT b) 118 TTJ 652 (Del) Expeditors Inter. India (P) Ltd. vs. Addl. CIT c) ITA No. 1266/2010 (Del) CIT v. BSES Rajdhani Powers Ltd. d) 11 Taxmann.com 417 (Del) CIT vs. Orient Ceramics & Inds. Ltd. e) 118 TTJ 652 (Del) Expeditors International (India) (P) Ltd. vs. ld. CIT f) 136 TTJ 505 (Del) Birlasoft India Ltd. vs DCIT ITAT

carefully gone through the material placed on the record. In our opinion,

since computer accessories in the aforesaid decisions have been held to

be part of computer, therefore they are also entitled to higher rate of

deprecation. Hence, the finding of ld. CIT(A) deleting the disallowance

is upheld and ground raised by the revenue is dismissed.

assessment year 2008-09.

16 ITA No.709/Del./2012 ITA No.775/Del./2013 “1. Whether the Ld. CIT (A) has erred on facts and in law in deleting the addition made u/s 36(1)(ii) amounting to Rs.6,47,27,888/- ignoring the fact that – (a) The assessee company has paid bonus/ex-gratia allowance of Shri Anshuman Magazine one of its Directors having 24% shareholding the company. (b) As per the provisions of section 36(1)(ii) bonus and or commission paid to an employee is allowable as deduction if and only if it is not payable as profit or dividend.

representing commission paid to Shri Anshuman Magazine, Director of

the assessee company by invoking section 36(1)(ii) of the Act.

17 ITA No.709/Del./2012 ITA No.775/Del./2013 22. We have considered the rival submission of both the parties and

carefully gone through the material placed on the record. We notice that

identical disallowance was made by the AO in order of assessment and

deleted by CIT(A) for Assessment year 2007-08, which finding stands

affirmed on appeal. Thus, in light of the discussions made in ITA

No.709/Del/2012, it is clear that the issue is squarely covered in this

appeal. Thus, the ground raised by the revenue in this instant appeal is

rejected.

17,995/- u/s 32 of the Act on computer accessories.

carefully gone through the material placed on the record. In light of the

discussions in Ground No.3 in ITA No.709/Del/2012, it is clear that the

issue is squarely covered. Thus, following the said reasons, the ground

raised by the revenue is rejected.

recruitment and training expenses

carefully gone through the material placed on the record. The CIT(A) has

deleted the disallowance for the following reasons stated in the order: “7.6 I have carefully considered the submission made by the ld. AR and have gone through the assessment order. The AO has held that

18 ITA No.709/Del./2012 ITA No.775/Del./2013 expenditure on recruitment and training of employees is deferred revenue expenditure on the basis that, out of 752 employees recruited in the year under consideration 650 employees remained in service in the succeeding years. He however has not disputed either genuineness of the expenditure or that such expenditure was not incurred for the purpose of the business of the appellant company. The basis adopted is contrary to judgment of Hon’ble Delhi High Court in the case of CIT v Industrial Finance Corporation of India Ltd. reported in 228 CTR132. The facts of the said case were that, assessee was engaged in the business of granting loans and advance to various industrial concerns. For meeting its lending requirements, the assessee also raises foreign currency borrowings. The assessee swapped such foreign currency into Indian rupees in order to augment its rupee resources for meeting its lending requirements. The foreign currencies borrowed were repayable to the foreign lenders on later dates falling within the current previous year ending on 31.3.1995 and in some cases falling within the current previous year ending on 31.3.1995 and in some cases falling in the next previous year relevant to subsequent assessment year. For repurchasing these currencies on their respective due date of repayment, the assessee entered into forward contracts with banks as a safeguard against foreign currency fluctuations. The assessee recognized the difference between the forward contract rate and, the exchange rate on the date of the transaction. The assessee thus determined the exchange difference of Rs. 8,172.85 lakhs arising out of realignment of foreign currency borrowings covered against forward contracts and treated the same as cost of borrowings. In its books of account, a sum of Rs. 1,466.65 lakhs was charged to the profit and loss account during the year itself and the balance of Rs. 67,06,33,245 was treated as deferred revenue expenditure, which was to be charged over the balance period of forward cover which spilled over into the next assessment year. However, in the computation of income, the assessee claimed the sum of Rs. 67,06,33,245/- as deductible from the total income. The Assessing officer did not allow the aforesaid claim of Rs. 67.06 crores on the ground that the expenditure claimed pertain to the future period and not to eh period relevant to the assessment year under consideration, in as much as, the transaction in question was to safeguard against future currency fluctuations. The CIT(A) held that while the Assessing Officer was wrong in treating a portion of the expenditure, not relating to the current assessment year, as capital expenditure but, at the same time, disallowance was sustained on the ground that such expenditure did not relate to the current assessment year. On appeal the ITAT allowed the claim of expenditure. The conclusion of the Tribunal was endorsed by the Hon’ble High Court after considering the judgment of Apex Court in the case of Madras Industrial Investment Corporation Ltd. vs. CIT reported in 225 ITR 802. It was held as under:

19 ITA No.709/Del./2012 ITA No.775/Del./2013 assessee was entitled to claim deduction of Rs. 67.06 crores incurred in connection with swapping of foreign currency funds in the year under consideration, i.e., the assessment year 1995-96. It is clear from the nature of the transaction, that the assessee had raised foreign currency borrowings and swapped such foreign currency into Indian rupees in order to augment its rupee resources for meeting its lending requirements. The foreign currencies borrowed were repayable to the foreign lenders on later dates falling within the current previous year ending on 31-3-1995 and in some cases falling in the next previous year relevant to subsequent assessment year. In order to ensure that it is able to repay the foreign lenders in the foreign currency on their respective due dates of repayments, the assessee had entered into forward contracts as a safeguard against foreign currency fluctuations. It is the difference between the forward contract rate and the exchange rate on the date of transaction which was claimed as deduction in that very year. The forward contract is an agreement between two parties, requiring the delivery at some specified future date of a specified amount of foreign currency by one of the parties, against payment in domestic currency to the other party, at the price agreed upon in the contract. The rate of exchange applicable to the forward contract is called the forward exchange rate and the market for forward transactions is known as the forward market. Thus, in case of a forward contract, assessee enters into a legally binding, enforceable contract for purchase of foreign currency on a future date at the pre-determined rates. The date and the rate of purchase of the foreign currency are decided at the time of entering into contract. The difference between the forward contract and the exchange rate on the date of entering into the contract has to be recognized as income or expenses, which is ascertained and definite, in terms of the contract and cannot be regarded as notional or contingent. It is clear that the swapping cost incurred by the assessee is capable of determination at the time of execution of the forward contract and such determination does not get postponed.

7.7 It was further held as under:

20 ITA No.709/Del./2012 ITA No.775/Del./2013 However, in those cases where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of matching concept is satisfied, which up to now has been restricted to the cases of debentures.

7.8 The above judgment squarely applies to the facts of the case of appellant in as much as the expenditure is on revenue account and has been incurred in the year under consideration and hence is an eligible expenditure. It is not the case of the assessee that such expenditure be spread over and hence the disallowance is contrary to above judgment. I may here also make a gainful reference to another judgment of jurisdictional High Court in the case of CIT vs. Citi Financial Consumer Finance Ltd. reported in 335 ITR 29 wherein it was held as under:

The Commissioner of Income-tax (Appeals) was unimpressed with this argument and found that the assessee was spreading over the income during the number of years that the financing is spread over and, therefore, expenditure on the aforesaid counts was required to be spread over. The Income-tax Appellate Tribunal, however, denounced this reasoning of the Commissioner of Income-tax (Appeals) and accepted the plea that the expenditure incurred had nothing to do with the period of length of time and had no linkage, whatsoever, to any period, the entire expenditure was allowable in the year in which it was incurred. The Tribunal has further held that the expenditure is incurred once and for all in the form of stamping duty as well as commission paid to the direct selling agents for procuring the loan assignments and it is not dependent upon the working out of the agreements ultimately entered into between the assessee and the customers. Since the commission is paid to the direct selling agents, for their services in sourcing hire in the year in which the loan is disbursed, it is to be allowed as business expenditure. The Tribunal, to arrive at this finding took into consideration the clauses of the agreement relating to mode of payment of consideration as well as "termination" clause in the agreement. Thus, as the entire expenditure was incurred which admittedly have a nexus with the business of the assessee, it was treated as business expenditure allowable under section 37 of the Act. The Tribunal also relied upon the judgment of the Supreme Court in the cases of Calcutta Company Ltd. v. CIT[1959] 37 ITR 1 (SC), CITv. Associated Cement Companies Ltd.[1988] 172 ITR 257 (SC), Empire Jute Co. Ltd. v. CIT[1980] 124 ITR 1 (SC) and the judgment of this court in CIT v. Salora International Ltd.[2009] 308 ITR 199 (Delhi).”

7.9 For the reasons stated above, disallowance made of Rs. 27,22,514/- out of total claim of expenditure of Rs. 34,03,142/- is deleted. Grounds raised by the appellant are allowed.

21 ITA No.709/Del./2012 ITA No.775/Del./2013 27. From the aforesaid, it is apparent that disallowance made has been

deleted following the judgment of Jurisdictional High Court in the case of

CIT v Industrial Finance Corporation of India Ltd. (supra) and CIT v Citi

Financial Consumer Finance Ltd. (supra). Following the above precedent,

we do not find any infirmity in the order of CIT(A). No reasons have

been stated by the ld. DR in the course of hearing to arrive at another

conclusion. Thus, in light of the above, ground raised by the revenue is

rejected.

total value of expenditure of Rs.77,88,935/- representing expenditure

incurred on repair and maintenance of branch offices at Pune and

Bangalore

carefully gone through the material placed on the record. The CIT(A) has

deleted the disallowance for the following reasons stated in the order:

“8.5 I have carefully considered the facts of the case, material placed on record, order of assessment and submissions made by the learned counsel for the assessee. The expenditure disallowed of Rs. 35,60,431/- comprises of Rs. 30,00,000/- being repair charges of the office at Bangalore and Rs. 5,60,431/- being repair charges of the office at Pune. Both the above expenditure are undisputedly for leased premises and as such allowability of expenditure has to be examined in terms of section 30(a)(i) which provides as under: “30 In respect of rent, rates, taxes, repairs and insurance for premises, used for the purpose of the business or profession, the following deductions shall be allowed- a) where the premises are occupied by the assessee-

22 ITA No.709/Del./2012 ITA No.775/Del./2013

i) as a tenant the rent paid for such premises; and further if he has undertaken to bear the cost of repairs to the premises the amount paid on account of such repairs.

8.5 The Hon’ble Delhi High Court has interpreted the above provision and held in the case of CIT vs. Hi Line Pens (P) Ltd. 306 ITR 182 as under:

“After having considered the arguments advanced by learned counsel for the parties and examined the decisions cited by them, we are of the view that the assessee’s claim for deduction under section 30(a)(i) has been rightly allowed by the Tribunal. The decisions cited by learned counsel for the Revenue relate to “current repairs”. There is a clear distinction between the expression “repairs” and the expression “current repairs”. It is obvious that the word “repairs” is much wider than the expression “current repairs”. This fact has also been taken note of by the Supreme Court in the case of Saravana Spinning Mills P. Ltd. [2007] 293 ITR 201. The expression “current repairs” is much more restricted than the word “repairs” because the latter is qualified by the word “current”. What the assessee has done in the present case has been construed to be repairs by the Tribunal as a finding of fact. It has not brought about any new asset and more importantly it was not the intention of the assessee to bring about any new capital asset. The expenses that were incurred by the assessee were towards repairing the premises taken on lease so as to make it more conductive to its business activity. Such expenses would clearly fall within the expression of repairs to the premises as appearing in section 30(a)(i). The Legislature has made a distinction between expenses incurred by a tenant for “repairs” of the premises and expenses incurred by a person who is not a tenant towards “current repairs” to the premises. This distinction was that a tenant would, by the very nature of his status as a tenant, not undertake expenditure as would endure beyond his likely period of tenancy or create a new asset. Whereas, an owner may undertake expenditure so as to even bring about new assets of capital nature. It was, therefore, necessary to qualify the expenditure on repairs. The deduction was, therefore, limited to expenditure on “current repairs” only. It follows, therefore, that the cost of repairs that have been incurred by a tenant in respect of such premises would have to be allowed under section 30(a)(i). The question of disallowing such an expenditure and relegating the assessee to claim depreciation. It has claimed deduction under section 30(a)(i). Once the assessee’s claim falls within that provision there is no question of considering the question of applicability of section 32. Consequently, the question that has been framed is answered in favour of the assessee and against the Revenue. The appeal is dismissed.”

8.6 Also in the case of CIT vs. Delhi Press Samachar Patra (Private) Limited 322 ITR 590, it was held as under:

23 ITA No.709/Del./2012 ITA No.775/Del./2013

“We find that the Tribunal has adequately and in great detail dealt with the entire issue. The assessee has a press building which is used for the purposes of its business which includes the printing and publication of magazines. The said press building was constructed in the year 1975 and has a built up area of 130680 sq. feet. Repairs have been carried out in the said building from time to time. The assessee incurred a sum of Rs. 35,51,245 in the year in question on the following works:

"(i) Water proofing of roofs with stones.

(ii) Reinforcement of old beams in which steel bars and plasters were corroded.

(iii) Relaying of worn out flooring of print shop/process rooms, etc.

(iv) Repairing and relaying/carpeting of roads running inside the press compound.

(v) Repairing and replacement of workers wash rooms, hand wash areas, damaged glass, wood work.

(vi) Repairing and relaying boundary walls and gates.

(vii) Repairing and reconstructions of cooling towers area.

(viii) Repairing of cement sheets and laying of fiber coated sheets to prevent seepage, water and air. (ix) Repairing of AC chiller rooms and plants."

The said sum was claimed by the assessee as an allowable expense under the head of current repairs as defined in section 31 (i) of the Income-tax Act, 1961 (hereinafter referred to as "the said Act")”

The Tribunal, after examining the facts of the case, came to the conclusion that the expenditure was incurred on repairs, reinforcement, replacement of dilapidated beams, pillars, walls, etc., of the existing press building and that the assessee did not bring into existence any new asset over and above the existing building. The Tribunal also observed that the assessee had been incurring such expenditure in the past as and when the need arose and it was towards preserving and maintaining the existing asset. The Tribunal also noted several decisions of the Supreme Court including that of CIT v. Saravana Spinning Mills P. Ltd. [2007] 293 ITR 201. The Tribunal also noted that the Department doubted the nature of the expenditure considering the magnitude of the expenditure incurred in the current year compared to the expenditure in the earlier years. The Tribunal observed that the authorities below had acted on the presumption that a part of the

24 ITA No.709/Del./2012 ITA No.775/Del./2013 building had been demolished and that the items had actually been used for erection of a new structure. However, the Tribunal also observed that for this conclusion, the Department could not bring on record any evidence to justify the stand that the expenditure was actually for erection of a new building or asset. The Tribunal also noticed that the contention of the assessee that it had undertaken major repairs to put the dilapidated columns, beams, roofs, etc., in its original position, which had become dangerous and unsafe for the workmen and hindered the normal operation of the business, was not controverted by the Departmental representative nor had any evidence to the contrary been produced before the Tribunal or the authorities below. It was ultimately concluded that employing the test indicated in Saravana Spinning Mills P. Ltd. [2007] 293 ITR 201 (SC), the assessee had incurred the said expenditure only to preserve and maintain the existing asset and that the expenditure was not of a nature which brought into being a new asset or created a new advantage of an enduring nature. Consequently, the Tribunal deleted the disallowance.” 8.7 In the case of CIT vs. Imperial Fastners (P) Ltd. in ITA No. 160/2012, the assessee had debited a sum of Rs. 31,54,844/- towards repair and maintenance. The Assessing Officer opined that the same was giving enduring benefit to the assessee for a period of 10 years i.e. the period of lease. Hence Assessing Officer disallowed the claim by treating the entire expenses as income on capital account. Learned CIT(A) affirmed the aforesaid order of the Assessing Officer. However the Tribunal held that the expenditure was revenue in nature should be allowed. The Hon’ble Delhi High Court in this regard, considered the issue and concluded as under: “Counsel for the revenue has not been able to point out and show that the aforesaid expenses were not incurred on replacement of parts, lubrication etc. No new asset came into existence. The expenditure was incurred to make the plant operational and functional.” 8.8 Respectfully following the above judgment, it is held that, since the expenditure has been incurred for civil work false ceiling, binds, wiring cables, earthing at two leased premises, which are not in the nature of any permanent alterations/changes but were incurred to enable the appellant to carry on its business efficiently is not a capital expenditure but revenue expenditure. Hence, disallowance made is deleted.”

deleted following the judgment of Jurisdictional High Court in the case of

CIT vs. Hi Line Pens (P) Ltd. (supra), CIT vs. Delhi Press Samachar

25 ITA No.709/Del./2012 ITA No.775/Del./2013 Patra (Private) Limited and CIT vs. Imperial Fastners (P) Ltd (supra).

Following the above precedent, we do not find any infirmity in the order

of CIT(A). No reasons have been stated by the ld. DR in the course of

hearing to arrive at another conclusion. Thus in light of the above,

ground raised by the revenue is rejected.

Sd/- sd/- (PRASHANT MAHARISHI) (A.T. VARKEY) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated the 7th day of March, 2016 TS