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TMI Blog2014 (7) TMI 681X X X X Extracts X X X X X X X X Extracts X X X X ..... ct in respect of surrender certificates at Rs. 52,09,568/- in AY 1993-94 and Rs. 38,58,925/- in AY 1994-95. The facts and circumstances are exactly identical, hence we will take the ground and facts for AY 1993-94 and decide the issue. The relevant ground no. 1 raised in 1993-94 reads as under: "1. That in the facts and circumstances of the case, the CIT(A) has erred in deleting the penalty of Rs. 52,09,568/- in respect of concealed income of Rs. 90,60,118/- under the head surrendered certificates without appreciating the merit of the imposition of penalty and ignoring the facts of concealment of income." 3. Briefly stated facts are that the AO during the course of assessment proceedings u/s. 143(3) of the Act calculated the interest on surrender certificates on the retained amount and made addition of Rs. 2,15,80,546/-. CIT(A) confirmed the addition. The assessee carried the matter to Tribunal in quantum appeal and Tribunal after considering the submissions computation of the assessee directed the AO to recompute the income by taking the interest on surrender Certificates at Rs. 90,60,118/-. On the basis of the directions of the Tribunal, the AO passed appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act instead of addition made by AO at Rs. 2,15,80,546/-. The main reason was that in respect of surrender certificates at the time of payment, the assessee company did not pay full amount to the certificate holders which the assessee received from the certificate holders as subscription. First of all, it is to be mentioned that in which year its income is to be added is a disputable point. This income is to be assessed on the surrender certificates u/s. 41(1) of the Act or at the time of sale of certificate i.e. in the year of sale of certificates. This is a debatable issue. Secondly, Explanation (1) to below section 271(1)(c) of the Act provides that where the assessee has submitted an explanation regarding the addition the AO is required to give a finding that the said explanation is false and not bonafide. One more fact is that the AO has to bring on record is that such addition or disallowance has not been disclosed by the assessee before him in the return of income or during the course of assessment proceedings. The assessee submitted explanation that entire detail qua the surrender certificates were available before the AO during the assessment proceedings as the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an item of expenditure may be falsely (or in an exaggerated amount) claimed, and both types attempt to reduce the taxable income and, therefore, both types amount to concealment of particulars of one's income as well as furnishing of inaccurate particulars of income. We do not agree, as the assessee had furnished all the details of its expenditure as well as income in its return, which details, in themselves, were not found to be inaccurate nor could be viewed as the concealment of income on its part. It was up to the authorities to accept its claim in the return or not. Merely because the assessee had claimed the expenditure, which claim was not accepted or was not acceptable to the Revenue, that by itself would not, in our opinion, attract the penalty under section 271(1)(c). If we accept the contention of the Revenue then in case of every return where the claim made is not accepted by the Assessing Officer for any reason, the assessee will invite penalty under section 271(1)(c). That is clearly not the intendment of the Legislature. In this behalf the observations of this court made in Sree Krishna Electricals v. State of Tamil Nadu [2009] 23 VST 249 as rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO in respect of excess claim of foreign travel to the tune of Rs. 16,77,208/- in AY 1993-94 and Rs. 43,33,186/- in AY 1994-95. Since grounds are identical except variance in amount and facts are common, we dispose of this ground of appeal together by reproducing following ground no. 2 from AY 1993-94 and also by taking facts from AY 1993-94: "2. That in the facts and circumstances of the case, the CIT(A) has erred in deleting the penalty of Rs. 9,64,395/- in respect of excess claim of Rs. 16,77,208/- under the head foreign travel without appreciating the merit of the imposition of penalty and ignoring the fact of furnishing inaccurate particulars of income." 7. Briefly stated facts are that the AO during the course of original assessment proceedings made a disallowance on account of foreign travel expenses at Rs. 16,77,208/-. The assessee carried the matter before CIT(A) and the Tribunal but Tribunal restored the matter to the AO, who again confirmed the addition disallowing the same expenses vide order dated 03.04.2009. The AO initiated penalty proceedings u/s. 271(1)(c) of the Act and levied penalty on the disallowance of foreign expenses at Rs. 9,64 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... during the course of assessment proceedings and also filed explanation during the course of penalty proceeding u/s. 271(1)(c) of the Act. From the above, it is clear that no where the AO has proved concealment or the explanation furnished by assessee is false or not bonafide. One more fact is to be brought to the notice is that the CIT(A) in the first round of appellate proceedings has directed the AO to allow 50% of foreign expenses and disallowed balance 50%. It means that there are two opinions and the issue is highly debatable. Once this is the position herein in the present case, the penalty cannot be levied. Even otherwise, the assessee has furnished complete details in the return of income and even during the course of assessment proceedings the assessee is not liable for penalty for concealment of income u/s. 271(1)(c) of the Act. Accordingly, we confirm the order of CITA) deleting the penalty. This ground of appeal of revenue for both the years is dismissed. 9. The next issue in these appeals of revenue is against the order of CIT(A) deleting the penalty levied by the AO in respect of excess claim of depreciation on leasehold properties to the tune of Rs. 2,54,752/- for A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icial owner of such properties. It was also claimed before the AO that in terms of Sec. 27(iiib) and Sec. 269UA(f) of the I. T. Act, an assessee in such circumstances is considered as the owner of the buildings. The appellant further claimed that since the word "owner" had not been defined in Sec. 32(1) of the I. T. Act, the ownership could be either legal or beneficial and consequently the appellant was entitled to depreciation on such leasehold buildings. The AR's have finally submitted that since it was a legal claim which could not be called frivolous, the disallowance of such claim cannot attract penalty u/s. 271(1)(c)." Aggrieved, revenue came in appeals before us. 11. We find that it is a simple case of disallowance of depreciation and assessee has taken land on leasehold for 99 years. Once the assessee has taken lease for 99 years the assessee is entitled for depreciation. Once the assessee is entitled for depreciation then where is the question of levy of penalty. In the case of leasehold property there are many decisions wherein it has held that the lessee is the owner of the property where lease exceeds 10 years period. Even Hon'ble Supreme Court in the case of CIT Vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the matter be re-examined by the AO so as to ascertain as to whether the assessee has been able to prove its case as per the provisions of sub-sec. (3) of sec. 94 of the Act. We, therefore, remit the matter back to the file of the AO for his fresh adjudication after giving reasonable opportunity of being heard to the assessee. The assessee shall be under its obligation to prove its case to the satisfaction of the AO as provided in the provisions of sub-sec. (3) of sec. 94 of the Act. We order accordingly." The AO made addition and the same was confirmed upto Tribunal. The assessee carried the matter to the Hon'ble High Court and Hon'ble High Court vide its order dated 26.09.2005 admitted assessee's appeal for AY 1994-95 on the point of dividend income being a legal issue. The AO initiated penalty proceedings and levied penalty on this dividend income of Rs. 91 lacs for concealment of income u/s. 271(1)(c) of the Act. Aggrieved, assessee preferred appeal before CIT(A), who deleted the penalty vide para 15 of his order by observing as under: "15. In ground No. 6, the appellant has objected to the levy of penalty of Rs. 52,32,500/- for concealment of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated November 22, 2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure" as it does not impact the profit and loss account. Pay-back or return of investment will impact the balance-sheet whereas a return on investment will impact the profit and loss account. The cost of acquisition of an asset impacts the balance-sheet. Return of investment brings down the cost. It will not increase the expenditure. Hence, expenditure, return on investment, return of investment and cost of acquisition are distinct concepts. Therefore, one needs to read the words "expenditure incurred" in section 14A in the context of the scheme of the Act and, if so read, it is clear that it disallows certain expenditure incurred to earn exempt income from being deducted from other income which is includible in the "total income" for the purpose of chargeability to tax. As stated above, the scheme of sections 30 to 37 is that profits and gains must be computed subject to certain allowances for deductions/expenditure. The charge is not on gross receipts, it is on profits and gains. Profits have to be computed after deducting losses and expenses incurred for business. A deduction for expenditure or loss which is not within the prohibition must be allowed if it is on the facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per provision of Rule 8D(2)(ii), by considering the interest component as NIL. 3. That in the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs. 20,24,545/-/- as expenses related to exempted income, without applying provision of Rule 8D(2)(i) of the I.T. Rule, 1962 and ignoring the direct nexus between exempted dividend income and Demat Account." 16. Briefly stated facts are that the AO noted that the assessee company has earned interest of Rs. 2,51,32,798/- from tax free bonds and a sum of Rs. 1,94,94,600/- as dividend income. These two incomes are exempted incomes. According to AO, the assessee has not attributed any expenses related to this tax free item. Hence, he computed the disallowance by invoking Rule 8D read with section 14A of the Act and he calculated the disallowance on account of interest at Rs. 2,77,57,075/- as under: "As per Rule 8D(2)(i) expenditure directly relating to exempt income Rs. NIL As per Rule 8D(2)(ii) A. Interest debited to P&L A/c. Rs.160,40,30,000 B. Average value of investment yielding the exempt income &nbs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duary Non-Banking companies (Reserve Bank) direction 1987 and the same investments are monitored by the RBI through the monthly statements certified by the Company's Auditors to the RBI. It is therefore clear that the interest of Rs. 160,40,30,000 payable to the Certificate-holders as debited to its P&L Account is attributable to the investments as certified by its auditors. The exempt dividend income and tax free Interest from bonds were therefore made out of its own fund consisting of share capital and Reserve. The A.O. is therefore directed to reduce the disallowance u/s.14A/Rule-8D to Rs. 45,45,263 as shown by the Appellant in its revised computation. I have gone through the A.O's order disallowing the Demat expenses of Rs. 20,24,545. The contention of the Appellant that the purpose of share holding by it is not only for earning from the dividend income but also for deriving capital gain has merit. In fact, I find from the Asstt. Order itself that the Appellant had shown both long term and short term capital gain/loss which had been assessed by the AO. Hence, keeping in mind the Hon'ble Supreme Court's decision referred to above, the demat expenses cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stments in Bonds and shares in companies and units of mutual funds which generated its exempt dividend income or Tax free interest were made out of its own funds instead of funds borrowed from the Certificate Holders. As a result, neither the fund borrowed from the Certificate Holders nor the interest of Rs. 160.40 cr. payable on such borrowed fund could be attributed to the exempt dividend income or tax free interest and hence no part of the Interest of Rs. 160.40 cr. could be disallowed in terms of Rule-8D(2)(ii) of the Rules. If so, the disallowance in terms of Rule 8D(2)(ii) of the rules is required to be taken at nil as shown by assessee in its enclosed Revised computation of disallowance under Rule-8D of the rules. The assessee is able to prove that the exempted income earned is out of its own funds not from borrowed funds and in such circumstances CIT(A) has rightly deleted the addition and we confirm the same. 19. As regards to the issue of D-mat charges, we find that the AO held that the income from shares held by assessee in its investment account was dividend income and of Rs. 1,94,96,400/-. As the assessee before us could not substantiate how this demat expenses are co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse and the share price (not exceeding Rs. 53,59,000) was fixed at arms length relying on the valuation report given by M/s Ray & Ray. Although the documentary evidences referred to above were furnished before the A.O. at the assessment stage, he had not disputed the genuineness of such evidences. He has also not alleged any collusion in the matter of execution of the MOU dt.25.11.05 nor he has alleged that the Appellant had received any amount higher than the sum of Rs. 53,59,000 on the sale of the shares. While the sale price of the shares was already fixed in the year 2005 at the time of execution of the MOU, the A.O. had computed the net worth of these shares @ Rs. 5.91 per share after the amalgamation of the two companies in F.Y. 2007-08. There is, thus hardly any reason for estimating the value of share of M/s PAFL @ 5.91 per share and recomputing the long-term capital loss on that basis. The disallowance of long- term capital loss of Rs. 3,16,71,690 is therefore deleted." Aggrieved, now revenue is in appeal before us. 22. We have heard rival submissions and gone through facts and circumstances of the case. We find that the assessee company is a promoter of PAFL, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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