9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2021 (7) TMI 346 - HC - Income TaxDeduction u/s 35DD - being l/5th of expenses incurred on demerger of certain units of NIIT - HELD THAT - One of the undertakings of the demerged company i.e. NIIT Ltd. was transferred to another existing company i.e. NIIT Technologies Ltd./appellant/assessee. Thus, the resulting company, i.e. NIIT Technologies Ltd. was already in existence, and therefore, the argument that the deduction can be claimed only by the demerged company, which was in existence, and that the word assessee has been carefully used by the legislature, only to include the demerged company, is, misconceived. The legislature has used the word assessee having regard to the various ways in which the schemes are structured. Illustratively, two very broad mechanisms often used have been adverted to hereinabove. Secondly, having regard to the fact that the deduction claimed by the appellant/assessee under the provisions of Section 35DD of the Act was allowed in the earlier AYs i.e. AY 2004-2005 to 2006-2007, the same should not have been disallowed in the AYs in issue i.e. 2007-2008 and 2008-2009 based on reasoning which does not comport with a plain reading of the provisions of Section 35DD of the Act, and the understanding of how a demerger scheme operates. The interpretation of such provisions should align, wherever possible, with how ordinary men of commerce construe such business structuring operations. - Decided against revenue. Disallowance u/s 14A r.w.r. 8D - HELD THAT - We are of the view that the Tribunal in calculating the disallowance as per the provisions of Rule 8D(2)(iii) of the Rules was not in order - Failure of the AO to record satisfaction - no reasons have been provided but only a conclusion has been reached that the AO was satisfied that the Assessee had incurred expenses to manage its investments which may yield exempt income, and Assessee grossly failed to calculate such expenses in a reasonable manner to ascertain the true and correct picture of its income and expenses. Consequently on the aspect of administrative expenses being disallowed, since there was a failure by the AO to comply with the mandatory requirement of Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules and record his satisfaction as required thereunder, the question of applying Rule 8D (2) (iii) of the Rules did not arise. Deduction of lease rent - lumpsum amount paid by the appellant/assessee for the entire tenure of the lease i.e. 99 years - HELD THAT - Tribunal was wrong in applying the matching principle and directing that one-time lease rent should be spread equally over the tenure of the lease - The annual lease rent that the appellant/assessee was required to pay if it had chosen the said route, was ₹ 7,08,913/-. The commuted and discounted value of the one-time lease rent was eleven (11) times the annual rent; which in absolute terms was much lower than the amount that would have accrued as rent over the entire tenure of the lease i.e. 99 years. This was the option exercised by the appellant/assessee. As is evident, taking the present value or time value of the money into account, a lumpsum figure was proposed to the appellant/assessee for securing leasehold rights for 90 years. The lumpsum amount paid by the appellant/assessee, as adverted to above, was far less than the amount that it would have to pay if it were to choose the other option i.e. pay the lease rent on an annual basis for 90 years at the rate of ₹ 7,08,913/-. The matching principle, which is an accounting concept, requires entities to report expenses, at the same time, as the revenue. In other words, the revenue is matched with the expense, in the income and expenditure statement, for a particular period. Given the facts obtaining in this case, the matching principle would have no applicability. The appellant/assessee chose to incur the liability of a crystallised amount in the period relevant to the AY in issue i.e. AY 20072008, and therefore, it was entitled to seek deduction of the amount which fulfilled the following attributes - The expenditure was not in the nature of capital expenditure or a personal expense, It was expended fully and exclusively for the purposes of the business and; It did not fall within the realm of any provision of the Act which prohibited the appellant/assessee from claiming this deduction. - Decided against revenue.
Issues Involved:
1. Deduction claimed under Section 35DD of the Income Tax Act. 2. Disallowance under Section 14A of the Income Tax Act. 3. Commuted/discounted one-time lease rent. Issue-wise Detailed Analysis: 1. Deduction Claimed Under Section 35DD: - Facts: - The appellant/assessee claimed a deduction under Section 35DD for legal and professional expenses incurred in AY 2004-2005 for demerger. - The deduction was allowed in AYs 2004-2005 to 2006-2007 but disallowed in AYs 2007-2008 and 2008-2009 by the AO, CIT(A), and Tribunal. - The revenue argued that the deduction under Section 35DD is only available to the demerged company, not the resulting company. - Tribunal’s View: - The Tribunal held that the term "assessee" in Section 35DD refers only to the demerged company, not the resulting company. - Court’s Analysis: - The Court found the Tribunal’s view flawed, noting that demerger can occur in various ways, including transferring undertakings to an existing company. - Since the resulting company (NIIT Technologies Ltd.) was already in existence, it was entitled to claim the deduction. - The principle of consistency should have been adhered to, as the deduction was allowed in previous AYs. - Conclusion: - The question of law regarding the deduction under Section 35DD was answered in favor of the appellant/assessee. 2. Disallowance Under Section 14A: - Facts: - Disallowance under Section 14A was scaled down by the Tribunal to administrative expenses at 0.5% of the value of investments yielding exempt income. - Rule 8D of the Rules was applied by the authorities below even for AY 2007-2008, which came into force only from AY 2008-2009. - Tribunal’s View: - The Tribunal restricted the disallowance to administrative expenses, pegged at 0.5% of the value of investments. - Court’s Analysis: - The AO must record satisfaction regarding the correctness of the claim made by the assessee concerning the expenditure incurred to earn exempt income. - The Tribunal’s approach that disallowance follows logically from the AO’s dissatisfaction was flawed. - The AO did not examine the accounts to determine the correctness of the claim made by the assessee. - Conclusion: - The question of law regarding the disallowance under Section 14A was decided in favor of the appellant/assessee. 3. Commuted/Discounted One-Time Lease Rent: - Facts: - The appellant/assessee paid a one-time lease rent of ?77,98,042/- to GNIDA and claimed it as revenue expenditure. - The AO disallowed the deduction, classifying it as capital expenditure. - The CIT(A) allowed the deduction, but the Tribunal directed that the amount should be spread over the tenure of the lease (90 years). - Tribunal’s View: - The Tribunal agreed that the one-time lease rent was revenue expenditure but directed it to be spread over the lease period. - Court’s Analysis: - The Tribunal’s direction to spread the lease rent over the lease period was beyond the revenue’s stand and contrary to the Supreme Court’s decision in Taparia Tools Ltd. vs. JCIT. - There is no concept of deferred revenue expenditure under the Act unless expressly provided. - The matching principle does not apply, as the appellant/assessee incurred the liability in the relevant AY. - Conclusion: - The questions of law regarding the one-time lease rent were decided in favor of the appellant/assessee. Conclusion: - All four questions of law were decided in favor of the appellant/assessee, and against the revenue. The appeals were allowed with no order as to costs.
|
