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TMI Blog2014 (10) TMI 472X X X X Extracts X X X X X X X X Extracts X X X X ..... ertaining to the liability relating to earlier year – the AO is directed to verify and examine the claim of the assessee – Decided in favour of assessee. Addition u/s 14A r.w Rule 8D – Held that:- The authorities below have not dealt with the issue of disallowance u/s 14A of the Act as per letter and spirit of the relevant statutory provisions and as per decision of Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax [2011 (11) TMI 267 - Delhi High Court] - the issue of disallowance u/s 14A of the Act requires thorough verification and examination at the end of AO and hence assessment order as well as order is set aside and the issue is restored to the file of AO with a direction that the AO shall adjudicate the issue afresh by affording due opportunity of hearing for the assessee without being prejudiced with the observations and findings of the assessment order as well as impugned order – Decided in favour of revenue. Capitalization of the advertisement expenses – Held that:- The AO has not doubted the genuineness and truthfulness of the claim of the assessee pertaining to the expenses for glow sign board and hoardings in view of decision of CIT vs Liberty Gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r internet band with connectivity are expenditure revenue in nature and there is no valid reason to interfere with the same, hence, order of CIT(A) is upheld - the issue of horticulture expenses in plant and staff colony, security, charge for staff colony and software development expenses is decided in favour of the assessee and it is partly dismissed on above four issues and on the issue of computer supplies part ground of the revenue is deemed to be allowed by restoring the issue to the file of the AO with the directions - Decided in favour of revenue. - ITA No.3214/dEL/2013, ITA No.3215/Del/2013, ITA No.3684/D/2013, ITA No.3686/D/2013 ITA No.3694/Del/2013 - - - Dated:- 22-8-2014 - S. V. Mehrotra, AM And Chandra Mohan Garg, JM,JJ. For the Appellans : Shri Neeraj Jain Ms Shaily Gupta For the Respondent : Shri Satpal Singh, Sr. DR ORDER Per: Chandra Mohan Garg, Judicial Member Assesse's appeal in ITA No.3215/D/20143 for AY 2007-08 At the outset, ld. Counsel of the assessee submitted that the assessee does not want to press ground no. 1, 2 and 2.1, therefore, these grounds are dismissed as not pressed. 2. Ground no. 3 of the assessee reads as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken into account under the mercantile system of maintaining books of account. An estimated income or liability, which is yet to be crystallized, can only be adjusted as a contingency item but not as an accrued income or liability of that year. 4. Replying to the above, ld. DR submitted that it was noticed by the revenue authorities that an amount of ₹ 3 lakh was claimed in respect of annual charges for web site hosting for AY 2005-06. Since the amount paid towards annual charges for web hosting for AY 2005-06 was in the nature of prior period expenses, then the same was rightly disallowed by the AO and impugned order is justified in this regard. 5. On careful consideration of above submissions, we observe that the main contention of the ld. Counsel of the assessee is that the bill was raised on 17.4.2006, therefore, the liability of prior period was crystallized during the financial year relevant to the assessment year under consideration, therefore, as per mercantile system of accounting, the claim of expenditure was allowable and the authorities below grossly erred in making disallowance and addition on this issue. 6. As per ratio of the decision of the Hon&# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- without any basis and cogent reasons. The DR further contended that even prior to the introduction of Rule 8D, the AO has to satisfy himself with the correctness of claim of the assessee and if AO is not satisfied about the correctness of the claim of the assessee, then he shall have to reject the claim and state the reasons for doing so and in this situation, the AO is required to determine the amount of expenditure incurred not related to income which does not form part of the total income under the Act on the basis of reasonable and acceptable method of apportionment. 11. Replying to the above, ld. Counsel of the assessee submitted that Rule 8D is not applicable to AY 2007-08 retrospectively. Ld. counsel further contended that in the case of Maxopp Investment Ltd. vs CIT 347 ITR 272, the Hon'ble Jurisdictional High Court of Delhi, after considering the decision of Hon'ble Supreme Court in the case of CIT vs Walfort Share Stock Brokers 326 ITR 1 (SC) the Hon'ble High Court has analyzed the scope of provisions of section 14A and powers vested with the AO before invoking the same. Ld. Counsel of the assessee further submitted that when AO has not recorded his di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 was free to adopt any reasonable and acceptable method. 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 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 appor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A of the Act r/w Rule 8D of the Income Tax Rules, 1962 which is not sustainable as Rule 8D is not applicable to the present case which is related to AY 2007-08. From bare reading of the impugned order, we observe that the CIT(A) deleted the addition with following observations and conclusion:- 6.3 Regarding Ground No.2.2 to 2.9 of the appeal relating to disallowance under section 14A by invoking the provisions of Rule 8D, I hold that for A.Y.2007-08, the provision of Rule 8D cannot be applied as these provisions came into effect from 24.03.2008 only and cannot be applied to income earned during the F.Y.2006- 07. Since the provisions of Rule 8D determine the taxable income of the appellant and hence cannot be treated as procedural rules which could be applied to pending proceedings as on the date of their commencement of operation. Accordingly, the same are considered as substantive provisions, which cannot be applied, in the absence of clear legislative mandate, with a retrospective effect. Without prejudice to the other, even for the A.Y. for which such provisions are applicable, the provisions of Rule 8D are not applicable for each and every case and are to be applied onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e investment out of its own funds and the assessee has not used borrowed funds for the purpose of investment, therefore, there is no nexus with the borrowed funds and interest paid thereon. Ld. Counsel further pointed out that disallowance u/s 14A of the Act can only be made in respect of actual expenditure incurred, which is found to have some nexus with the exempt income and the onus to prove that the expenditure incurred was in relation to exempt income earned is on the revenue and not on the assessee. Ld. Counsel vehemently contended that the AO is not empowered to make disallowance on ad hoc basis without bringing out on record evidence of incorrectness of claim of expenditure towards earning exempt dividend income and since assessee had surplus funds to make investment, the disallowance u/s 14A of the Act is not permitted in absence of any finding of the assessee in regard to incorrectness of the claim of the assessee as well as without bringing out any direct nexus of borrowed funds with investment. 16. From para 6.3 of CIT(A)'s order as reproduced hereinabove, we note that the CIT(A) has simply deleted the addition with a bottom line conclusion that the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o-day business expenditure incurred in the normal course of business. The DR further contended that the CIT(A) deleted the addition without any cogent and reasonable basis, therefore, the impugned order may be set aside by restoring that of the AO. 19. Replying to the above, ld. Counsel of the assessee pointed out para no. 6.5 of the impugned order and submitted that as per decision of Hon'ble Supreme Court in the case of Empire Jute Co. Ltd. 124 ITR 1 (SC), CIT vs Associated Cement Co. Ltd. 172 ITR 257 (SC) and in the case of Alembic Chemical Works Ltd. 177 ITR 377 (SC), it has been held that if the advantage consists merely in facilitating the assessee's trading 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 be for an indefinite future. Ld. Counsel supporting the impugned order submitted that the AO made disallowance without any basis which was rightly deleted by the CIT(A) as the expenditure was incurred for day-to-day business of the assessee and the expenditure di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the advertisement expenses? 3. Whether Ld. CIT (A) was correct on facts and circumstances of the case and in law in deleting the addition of ₹ 68,40,900/- made by the AO under the head of Misc. expenses? 23. The revenue has raised following sole ground in ITA No. 3694/Del/2013 in pursuance to the order of the CIT(A) passed u/s 154/143(3) of the Act dated 18.3.2013:- 1. Whether ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of ₹ 1,15,32,425/- made by the AO u/s 14A r.w.r. 8D? Ground no. 1 in ITA 3683 and Ground no. 1 in 3694/Del/2013 24. Ld. DR submitted that the AO rightly invoked the provisions of section 14A r/w Rule 8D of the Rules which was applicable for AY 2008- 09. Ld. DR further pointed out that the AO made disallowance and addition of ₹ 15,71,149/- in original assessment order dated 24.12.2002 passed u/s 143(2) of the Act and subsequently, the AO passed another order dated 25.8.2011 u/s 154/143(3) of the Act. The AO rightly disallowed additional amount of ₹ 1,15,32,425/- u/s 14A of the Act. Ld. DR vehemently contended that the CIT(A) deleted the addition without any justified and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isdictional High Court of Delhi in the case of Maxopp Investment (supra). Therefore, we also find it appropriate that the issue of disallowance u/s 14A of the Act r/w Rule 8D of the Income Tax Rules, 1962 (which is applicable form AY 2008-09 prospectively) is also restored to the file of AO with a direction that the AO shall examine and verify the issue afresh by affording due opportunity of hearing for the assessee and without being prejudiced with the earlier assessment, rectification and impugned orders. The AO shall keep in mind this very fact and legal position that Rule 8D of Income Tax Rules is applicable to the assessment year under consideration i.e. 2008-09 and the AO shall decide the controversy as directed above and to adjudicate the issue as per ratio of the decision of Hon'ble High Court of Delhi in the case of Maxopp Investment (supra). Accordingly, ground no. 1 in both the appeals of the Revenue is also restored to the file of AO with aforementioned directions and deemed to be allowed for statistical purposes. Ground no. 2 in ITA No. 3686/Del/2013 29. Since similar deletion of addition on account of capitalization of advertisement expenses made by the AO a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovide necessary landscape and making the environment green. There are several other expenses, which are incurred for decorating the building and plant and for providing general security. However, all such expenses do not necessarily result in augmenting the production, however, since no other purpose is achieved other than the main purpose i.e. manufacturing and such expenses certainly facilitate the operations by providing better environment, such expenses are clearly held as revenue in nature. There are a number of incentive provisions within the I.T. Act for environment protection, therefore, the AO could have been little more environment friendly in this regard. In view of the same, addition made on account of the disallowance is deleted. 6.6 On the same ground, the disallowance made by the AO in respect of horticulture expenses for the staff colony which is in the immediate vicinity of plant and the security thereof are also held to be of same nature. The appellant's plant is away in a remote area in Gujarat and it is in the business interest of the appellant to have a staff colony in the vicinity of the plant that saves the time and cost incurred for transportation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... htly deleted the addition. 34. Ld. Counsel strenuously contended that the horticulture expenses for plant area and staff colony were incurred toward maintenance of green landscape in the factory premises and residential accommodation provided to the employees and they were essential for business purpose and therefore the disallowance has rightly been deleted by the CIT(A). 35. Ld. DR replied that the impugned expenditure on horticulture of plant and Employees Colony can not be said to be incurred for business purpose and neither it was expenditure of capital nature, hence, the same was rightly disallowed by the AO but the CIT(A) erred in deleting the additional on a wrong principle. 36. On careful consideration of above, we are of the considered opinion that we are in agreement with the reasoning and conclusion of the CIT(A) in para 6.5 of the impugned order as the main purpose of expenditure on horticulture was to facilitate the operations by providing better environment which is of revenue in nature, hence, the same is allowable u/s 37 of the Act. We also observe that there are other several expenses which are incurred for decorating the building and for providing genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ranted relief for the assessee on wrong basis, hence the impugned order may be set aside by restoring that of the AO. 41. Ld. Counsel of the assessee replied that (i) the nature of aforesaid expenses incurred on consumables are routine in nature (ii) such expenditure was incurred wholly and exclusively for the purpose of business and did not bring any benefit of enduring nature for the assessee, therefore, such expenditure should not be treated as capital expenditure as has been done in the preceding assessment year. Ld. Counsel further submitted that the expenditure incurred on consumables of computer supplies should be allowed as deductible revenue expenditure, the ld. Counsel alternatively submitted that depreciation on such computer supplies should be allowed @60%. 42. On careful perusal of assessment order, we observe that the AO treated the expenditure as capital in nature and made an addition, after allowing depreciation @15%, by holding that the assessee has not furnished details/evidence to support the claim. From para 6.7 of impugned order, as reproduced above, we observe that the CIT(A) granted relief for the assessee on perusal of the details furnished before him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n plant and staff colony, security, charge for staff colony and software development expenses is decided in favour of the assessee and the same is partly dismissed on above four issues and on the issue of computer supplies part ground of the revenue is deemed to be allowed by restoring the issue to the file of the AO with the directions as indicated above. 45. Finally, in the result, above captioned appeals are disposed of with the summarized result as under:- (i) ITA No.3214/D/2013 of the assessee is dismissed as withdrawn. (ii) ITA No.3215/Del/2013 of the assessee is partly allowed on ground no. 3 and the same is deemed to be allowed for statistical purposes. (iii) ITA No.3684/Del/2013 of the Revenue is dismissed on ground no. 2 and deemed to be allowed for statistical purposes on ground no. 1. (iv) ITA No. 3686/Del/2013 is partly dismissed on ground no. 2 and on four issues as indicated above of ground no. 3 and partly deemed to be allowed on ground no. 1 and on the issue of computer supplies a part of ground no.3. (v) In ITA No.3694/Del/2013 of the revenue the sole ground is deemed to be allowed for statistical purposes. Order pronounced in the open court o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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