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TMI Blog2012 (9) TMI 543X X X X Extracts X X X X X X X X Extracts X X X X ..... n (157 ITR 86, I.T.A. no. 1935/D/2012[AY2008-09] 1. Whether on the facts and in the circumstances of the case, the learned CIT(A) was right in law in deleting the addition of Rs.11,85,916/- made by the Assessing Officer for earning dividend income of Rs.2,11,15,548/- u/s 14A of the Income-tax Act. 2. Whether on the facts and in the circumstances of the case, the learned CIT(A) was right in law in deleting the addition of Rs.63,60,981/- on account of royalty in view of Hon'ble Supreme Court's decision in the case of Jonas Woodhead and Sons (India) Ltd. Vs. CIT in (224 ITR 342). 2. Adverting first to ground no.1 in these two appeals, facts, in brief, as per relevant orders for the AY 2007-08 are that return declaring income of Rs.44,31,46,,834/- filed on 26.10.2007 by the assessee, engaged in the business of manufacturing glass syringes, surgical blades, disposable syringes etc., after being processed u/s 143(1) of the Income-tax Act, 1961[hereinafter referred to as the 'Act'], was taken up for scrutiny with the service of a notice u/s 143(2) of the Act. During the course of assessment proceedings, on perusal of profit and loss account, the Assessing Officer (A.O. in short) notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of the same by the Ld AO for present year A Y 2007-08 therefore goes against him. Furthermore, the Ld. AO was required to satisfy himself as to the correctness of the claim of the assessee, in this case assessee had contended that no expenditure had been incurred in relation to earning of the exempt income. Even the Special Bench relied upon by the Ld. AO mentions about "satisfaction" of the AO before proceeding with the disallowance. This has not been done. On a perusal of the audited accounts of the assessee for the year, it is seen that investment during the year was made in prudential ICICI FMA series 35 and the other in Prudential ICICI liquid plan institutional plus- growth series-34 of 10,000,000 and 23,000,000 units respectively. Furthermore the assessee had contended that the investments in these two plans were from the surplus fund of the assessee company. A certificate was also filed from ICICI prudential AMC Ltd. that no expenses were claimed to its clients's account. It is also not a case of one indivisible business giving rise to taxable income as well as exempt income. Neither is this a case of assessee company dealing in several shares, mutual funds or securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been incurred for earning the exempted income. Consequently, after a careful consideration of the facts of the case and the legal position, I hold that application of the provisions of Section 14A r/w Rule 8D by the Ld. AO for making the disallowance is not acceptable. Furthermore, I am of the opinion that there is no material on record to substantiate any disallowance by the AO under Sec. 14A. I therefore have to differ from the order of the Ld. CIT(A) on the stand taken on the issue at hand for the A Y 2006-07. As such, the disallowance made by the Ld. AO is deleted. Assessee succeeds in grounds of appeal no. 3." 3.1 Likewise in assessment year 2008-09, the ld. CIT(A) deleted the disallowance in the following terms:- "11. From the impugned order it is apparent that the Ld. AO has also not found any deficiency in the claim of having incurred Rs.2,13,610/- by the assessee towards earning of the income not chargeable to tax. The AR had submitted details of the expenditure incurred U/S 14A which is stated to have been furnished before the Ld AO, which is as below: Details of Expenses Incurred on Investments U/S 14 for the Year Ending 31st March 2008: S.No. Particulars Amounts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r/w Rule 8D by the Ld. AO for making the disallowance is not acceptable. Furthermore, I am of the opinion that there is no material on record to substantiate any further disallowance under the provisions of Sec. 14A by the AO. As such, the disallowance made by the Ld. AO is deleted. Assessee succeeds in grounds of appeal no.3." 4. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. DR supported the findings of the AO while contending that the assessee did not furnish any cash flow statement in respect of investment in the aforesaid funds in these two assessment years nor the relevant details of expenditure incurred so as to enable the AO to record his satisfaction regarding the working adopted by the assessee for ascertaining disallowance u/s 14A of the Act. On the other hand, the ld. AR on behalf of the assessee supported the impugned order while contending that investment of Rs.10crores in Prudential ICICI FMP series-35-3 months Plan C and Rs.23 crores in Prudential ICICI Liquid Plan Institutional Plus-Growth Series -34 was made in the period relevant to the AY 2007-08 besides investment of 13.93 crores in Prudential ICICI Floating Ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim of the assessee u/s 14A(2) of the Act, irrespective of the fact of filing of details or otherwise. Hon'ble Apex Court in Kantamani Venkata Narayana and Sons v. First Addl. ITO [1967] 63 ITR 638 and again in Malegaon Electricity Co. P. Ltd. v. CIT [1970] 78 ITR 466 (SC) observed that it is the duty of the assessee to bring to the notice of the Income tax Officer particular items in the books of account or portions of documents which are relevant. The law casts a duty on the assessee to disclose fully and truly all material facts necessary for his assessment for that year. Not even a whisper has been made before us as to whether or not relevant accounts were placed before the AO or the ld. CIT(A) in order to enable them to examine the claim of the assessee. The ld. CIT(A) merely referred to certain decisions in relation to the disallowance without even examining the relevant accounts or ascertaining the relevant facts and circumstances. 5.1. Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd. (supra) while adjudicating a similar issue in the context of provisions of sec. 14A of the Act and Rule 8D of the IT Rules,1962 concluded that Rule 8D, inser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then that the question of determination of such expenditure by the assessing officer would arise. The requirement of adopting a specific method of determining such expenditure has been introduced by virtue of sub-section (2) of section 14A. Prior to that, the assessing officer was free to adopt any reasonable and acceptable method. 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o income which does not form part of total income, the AO is required to verify the correctness of such claim. In case, the AO 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 AO has to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act, Hon'ble High Court concluded. Following the view taken in this decision, Hon'ble jurisdictional High Court in CIT vs. Machino Plastic Ltd in their decision dated 28.2.2012 in ITA no. 92 of 2011, restored the matter to the file of the AO, being handicapped because of failure of the assessee to furnish relevant details and particulars. In the instant case also, the AO was handicapped, because of failure of the assessee to furnish relevant details/particulars and accounts while making the disallowance in terms of provisions of sec. 14A of the Act. There is nothing in the assessment order or impugned order as to whether the assessee placed the relevant details & accounts befor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 ITR 314. 6.1 However, the AO did not accept the submissions of the assessee and while referring the decisions in the case of CIT Vs. British India Corporation Ltd., 165 ITR 51 (SC); CIT Vs. Indian Oxygen Ltd., 218 ITR 337 (SC); CIT Vs. IAEC (pumps) Ltd., 232 ITR 316 (SC); Southern Switch Gear Ltd. Vs. CIT, 232 ITR 359; Jonas Woodhead and Sons (India) Ltd. Vs. CIT, 224 ITR 342(SC); Transformer & Switchgear Ltd. Vs. CIT (1976) 103 ITR 352 (Madras); Fenner Woodroffe & Co. Ltd. Vs. CIT (1976) 102 ITR 665 and M.R. Electronic Components Ltd. Vs. CIT (1982) 136 ITR 305, disallowed the entire amount of Rs.16,17,267/- on account of royalty, treating the same as capital in nature, having been incurred towards acquisition of intangible assets under the aforesaid collaboration agreement and allowed depreciation on the said amount. 6.2 Similarly, in assessment year 2008-09 disallowed an amount of Rs.84,81,307/- while allowing depreciation @25% thereon. 7. On appeal, the ld. CIT(A) allowed the claim while following the decision of the ITAT in the assessee's own case for the AYs 2005-06 and 2006- 07, holding as under in the AY 2007-08:- "18. The Authorized Representative informed that simil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such a situation the amount payable by way of royalty cannot be considered as capital expenditure but even part thereof cannot be considered as expenditure. The decision of Hon'ble Supreme Court in the case of Southern Switchgear Ltd. (supra) is not applicable. The learned DR on the other hand, relied upon the appellate order. She submitted that the Hon'ble Supreme Court in the case of Southern Switchgear Ltd. (supra) has upheld the order of the Madras High Court wherein 25% technical know-how fees was considered as capital expenditure. She also relied upon the decision of the Hon'ble Supreme Court in the case of Scientific Engineering House P. Ltd. Vs. CIT 157 ITR 86. In reply, the learned counsel for the assessee submitted that the decision of Hon'ble Supreme Court in the case of Scientific Engineering House P. Ltd. (supra) was in reference to a controversy as to whether the depreciation is allowable on the drawings and designs to be treated as plant and machinery or not. This fact has been considered by the Hon'ble Delhi High Court in the case of Sriram Pistons & Rings Ltd. Vs. CIT, 171 Taxman 81. We have considered the rival submissions. We find that the assessee was grante ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y apply to the present year also. Respectfully following the said order, the relevant portion of which has already been reproduced, we find no merit in departmental appeal which raises only one issue regarding deletion of disallowance made on account of royalty." As similar issue has already been duly considered by the Hon'ble ITAT,New Delhi in assessee's own case and since facts and circumstances and basis of the addition for the relevant year made by the AO are identical, respectfully following the decision of the jurisdictional Tribunal, the addition made by the AO on account of royalty payment is deleted. Accordingly, the assessee succeeds in his ground of appeal." 7.1 Similarly in the AY 2008-09, the ld. CIT(A) following his aforesaid decision in the AY 2007-08, deleted the disallowance. 8. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). At the outset, both the parties agreed that issue is squarely covered by the aforesaid decision dated 8.5.2009 of the ITAT in ITA no. 1866/Del./2008 for the AY 2005-06 & dated 13.8.2010 in ITA no.2609/Del./2010 for the AY 2006-07. 9. We have heard both the parties and gone through the facts of the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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