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TMI Blog2015 (7) TMI 49X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure cannot be said that resulted in enduring benefit. As the expenditure has not resulted in capital asset, so has to be recorded as expenditure in capital field. It should be noted that the assessee had to incur this kind of expenditure year after year so as to be in business subsequently even the advantage secured from earlier expenditure would get dissipated. Further, we place reliance on the judgment of Supreme Court in the case of Alembic Chemical Works vs. CIT (1989 (3) TMI 5 - SUPREME Court ) wherein held that just because an expenditure is debited in books towards the business being competitive and prudence and conservatism being fundamental accounting assumptions, capitalization of such expenses or ascribing lasting abiding value to such expenses, could only be done on sound footing and cogent basis. Thus, in our opinion the expenditure cannot be attributed to capital expenditure.Being so, taking consistent view, we are of the opinion that expenditure is to be allowed as revenue expenditure only. - Decided in favour of assessee. Addition relating to expenditure incurred for exempt income while computing the book profit u/s.115JB - Held that:- Disallowance made u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,07,42,000)/2 = 670,98,30,500/-. 3.1 According to AO the disallowance of the expenditure to be made according to the provisions of the Rule 8D read with section 14A works out at ₹ 9,53,58,713. This amount constitutes 20.56% of the total expenditure claim of ₹ 46,37,20,957 (as per return of income). On the other hand, the income claimed as exempt of C 23,82,25,782 constituted 27.75% (23,82,25,000x100 /85,81,74,000) of the total receipts of the assessee. Hence, disallowance according to the provisions of section 14A, is at 20.56% of the total expenditure as against proportionate expenditure of 27.75% in relation to total receipts to be considered in the normal course. 3.2 According to Assessing Officer, there is an excess claim for deduction of expenditure of ₹ 9,53,58,713 and the same needs to be disallowed. It was noted by the AO that the determination of the expenditure in relation to the exempted income is to be worked out according to Rule 8D read with section 14A, in accordance with decision of the Tribunal the case of Income Tax Officer vs Daga Capital Management (P) Limited (117 ITD 169) (Mumbai), where in it was held that the provisions of section 14A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... top management of the company was fully involved in making strategic decisions and improving the profitability of the company. According to Commissioner of Income Tax (Appeals), therefore, it cannot be said that only few employees were involved in earning the exempt income. Had it been so, the assessee could have separately formed a new entity and earned exempt income to claim benefit from the taxation. Therefore, he agreed with the view of the AO that large portion of the expenditure incurred could be attributable towards earning of dividend income. It is also not disputed that the assessee incurred huge expenditure of C8,63,34,000/- as finance charges on its borrowed capital which was also claimed as deduction in the P&L Account. The P&L Account consists of dividend income as well as other incomes which are chargeable to tax. The quantum of the expenditure on the basis of the proportionate exempted income at the rate of 27% also works out to more than C12.52 crores which is more than the amount disallowed by the Assessing Officer. According to CIT(A), the assessee could not furnish with an evidence like cash flow to prove its claim that no part- of the interest borrowed fund was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee. The High Court of Bombay in the case of M/s. Godrej & Boyce. Mfg. Co. Ltd. vs CIT reported in 328 ITR 81 held that the AO is duty bound to determine the expenditure which had been incurred in relation to income which did not form part of the total income. It is further held by the High Court of Bombay that the AO had to enforce the provisions of sub section(1) of Sec.14A even prior to A.Y. 2008-09. This same issue also came up before the Tribunal, Chennai Bench in the case of M/s. Lakshmi Ring Travellers Vs. ACIT, Company Circle I (1), Coimbatore [ITA No.2083(Mds)/ dt. 02.11.2012] for the A.Y. 2008-09 and Hon'ble ITAT at page 4 of the said order has held that - "Rule 8D has already been prescribed. Sub-section 3 further provides that even in a case where the assessee claims that no expenditure was incurred, the assessing authority has to presume the incurring of such expenditure as provided in sub-section 2 read with the rule prescribed. Therefore, it becomes clear that even in a case where the assessee claims that no such expenditure was so incurred, the statute has provided for presumptive expenditure which has to be disallowed by force of the statute. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 22.11.2001). 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 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, incurred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at provisions of the section 14A are not attracted. According to Commissioner of Income Tax (Appeals) the stand taken by the assessee on this issue is not factually correct. In fact, the Assessing Officer during the assessment year 2005-06 has computed 2% as the expenditure incurred for earning exempt income and disallowed the same u/s.14A of the I.T. Act. On appeal, the Tribunal in Appeal in ITA No.638/Mds/2012 dated 04.02.2013 in the assessee's own case has confirmed the stand of the revenue and modified the quantum of the disallowance to C10,00,000/-. The relevant paras are mentioned below: "2.8 We considered this issue. We, are not on the question whether the income was earned without incurring any, mechanical expenditure like clearance charges, collection charges etc. or not. We are concerned about the expenditure by way of remuneration paid to top management and executives. The top management and executives of the assessee company would be required to decide about the investments, whether to continue or liquidate etc. Investment is a very important part of the assets of the assessee company. Therefore, even though there is no direct mechanical expenditure in realizi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar and unambiguous to that effect. Therefore, the stand of the AR of the assessee that provisions of section 14A are not applicable to-the assessee for the year under consideration is rejected by CIT(A). 4.7 Regarding exclusion of interest paid on TDS, FBT,ST and IT of C1,40,95,404/- for the purpose of disallowance under Rule 8D (ii) of the I.T. Rules, the assessee stated before CIT(A) that if this is taken into account the amount of disallowance works out to C.517,80,237/- as against the amount computed by the AO at C.618,09,561/-. The claim of the assessee is not accepted by Commissioner of Income Tax (Appeals) as the Rule 8D(ii) does not prescribe for exclusion of such expenditure. The Rule 8D(ii) prescribes the quantum of the interest expenditure to be disallowed i.e. amount of expenditure by way of interest other than the amount of interest included in Clause (i) of Rule 8D(ii) during the previous year in proportion of the average value of investment to the average value of total assets but does not exclude interest expenditure of the type referred in. Therefore, the plea of the assessee to exclude an interest of C1,40,90,404 for the purpose of computation of disallowance und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed is the purpose of investments made by the assessee in shares on the testing ground of "commercial expediency". In the present case, the assessee engaged in the business of investing in shares, has made investments in shares of group companies viz., Shriram Investments Limited and Shriram Transport Finance Company Limited. In that way, the assessee company is strengthening the capital and liquidity base of those two companies viz., Shriram Investments Limited and Shriram Transport Finance Company Limited. The strengthening of the capital base and liquidity of those associate concerns will definitely enhance the turnover and the profit of the group concerns. It is a fact that in group concerns some companies are carrying on operational activities and other companies are acting as catalysts to boost the performance of those operating companies. 2.5. Viewed in the above perspective, we cannot say that the assessee company has made investments in shares of Shriram Investments Limited and Shriram Transport Finance Company Limited just for the simple purpose of earning tax-free dividend income. As rightly pointed by the assessee, when those investments in shares are liquidated by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lumpsum amount of 10 lakhs. This ground is partly allowed.'' 6. According to ld. Authorised Representative for assessee, investment made by assessee is strategic investment and there is no question of disallowance u/s. 14A of the Act. In the present case, the assessee made investment in Shriram Retail Holdings Pvt. Ltd alongwith another group company Shriram Enterprise Holdings Pvt. Ltd having controlling interest in Shriram City Union Finance Ltd., a public limited company, whose equity shares are listed in stock exchanges. Similarly Shriram Credit Company Ltd., has controlling interest in M/s. Shriram Insight Share Brokers Ltd. The investments are made to acquire controlling interest. The facts of the investment made by the assessee in acquiring controlling interest was not disputed by the Revenue. In such circumstances, we are not in a position to appreciate the arguments of the ld. Departmental Representative that assessee received dividend exempted from tax for which assessee incurred expenditure also so that section 14A r.w. Rule 8D is applicable. In our opinion, the issue considered by the Tribunal in the case of Shriram Capital Ltd (cited supra) is squarely applicable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd raised by the assessee is dismissed." 8. As it is clear from the finding of Tribunal that the assessee failed to furnish the details of disallowance under section 14A and, therefore, the disallowance made by the AO was found by the Tribunal without any infirmity. For the year under consideration the assessee has specifically raised a point before the AO that 97.82% of the investment is in the subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. We find that the department has not disputed this fact that out of the total investment about 98% of the investment are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year beginning on or before the 1st day of April, 2001." (The proviso was inserted earlier by the Finance Act of 2002 with retrospective effect from May 11, 2001) 33. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or before April 1,2001, either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154." 10. It has been made clear by the Hon'ble High Court that sub -section (2) does not ifso facto empower the AO to apply the method prescribed by Rules straightaway without considering whether the claim made by the assessee is correct. 11. The assessee has relied upon various decisions of this Tribunal wherein an identical issue has been considered. In the case of Garware Wall Ropes Limited Vs. Addl. CIT (supra), the Tribunal while deciding an identical issue has held in para 2.4 as under:- "We have considered the rival submission and carefully perused the relevant records. So far as the issue regarding disallowance u/s 14A in the case where no dividend has been received, the same is covered against the assessee by the order of Tribunal in assessee's own case for the assessment year 2008-09, wherein the Tribunal has followed the decision of special bench of Tribunal while deciding the issue. Therefore, we do agree with the finding of the Tribunal on this point. Furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to find out as to whether the assessee has incurred any expenditure in relation to income which does not form part of the total income and if so to quantify the expenditure of disallowance. The AO has not brought on record any fact or material to show that any expenditure has been incurred on the activity which has resulted into both taxable and non taxable income. Therefore, in our view when the assessee has prima facie brought out a case that no expenditure has been incurred for earning the income which does not form part of the total income then in the absence of any finding that expenditure has been incurred for earning the exempt income the provisions of section 14A cannot be applied. Accordingly we delete the addition/disallowance made by AO u/s 14A r.w. Rule 8D." 12. A similar view was taken by the Delhi Bench of this Tribunal in the case of M/s Oriental Structural Engineers (P) Ltd (supra) which has been confirmed by the Hon'ble Delhi High Court vide decision dated 15.01.2013 in para 6.3 as under:- "'6.3 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that only interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rores. The third category is of equity shares the value of which is 14.88 lakhs and the last category is investment in units of mutual funds amounting to 10.15 crores. These facts and figures are verifiable from paper book page 204A. As regards the first category of shares in the form of investment into subsidiary companies we find that investment into this category of shares had increased from 78.17 lakhs to 101.74 crores which is due to increase in investment in preference shares and other equity shares. During this period, the interest bearing funds had decreased from 1.49 crores to 87,30 lakhs as is apparent from paper book page 203 and further most of the interest bearing loans are for vehicle loans as mentioned in paper book page 203. During this year under consideration, the assessee has earned a cash profit of 11 crores. The cash flow statement at paper book page 200 reflects cash from operating activities including cash profits of 49.28 crores. The assessee has also raised an amount of 50.80 crores by issue of fresh preference shares as is apparent from paper book page 200. In view of the above facts and figures it is apparent that assessee had utilized interest free funds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re would also not be permitted to be debited against other taxable income. 25. We are of the view that the expression "in relation to" appearing in Section 14 A of the said act cannot be ascribed a narrow or constricted meaning. If we were to accept the submission made on behalf of the assessees then sub-section (1) would have to be read as follows:- "For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee with the main object of earning income which does not form part of the total income under this Act." That is certainly not the purport of the said provision. The expression "in relation to" does not have any embedded object. It simply means "in connection with" or "pertaining to". If the expenditure in question has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the said Act. In Walfort (supra), the Supreme Court made it very clear that the permissible deductions enumerated in sections 15 to 59 are now to be allowed only with reference to income which is brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he previous year". The Assessing Officer was wrong in taking into consideration the investment of `103 crores made during the year which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. Thus,. It is not the total investment at all beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. The term "average of the value of investment" is used to take care of cases where there is the issue of dividend striping. iv) Under Rule 8D(2)(iii), what is disallowable is an amount equal to ½ percentage of the average value of investment the income from which does not or shall not form part of the total income/. Thus, under sub clause (iii), what is disallowed is ½ percentage of the numerator B in Rule 8D(2)Iii). This has to be calculated on the same lines as mentioned earlier in respect of Numerator B in the Rule 8D(2)(ii). Thus, not all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who are not directors of the company. The details of administrative expenses were also furnished and the same is as follows: Head of expenses Amount (Rs.) Bank charges 3070 Communication expenses 88223 Services Tax 2387 Auditors remuneration 25000 Legal & professional charges 184400 Consultancy charges 3912217 Maintenance expenses 4368 Entertainment/business promotion 226304 Newspapers, Books & Periodicals 54988 Rent 24000 Traveling/Conveyance expenses 553923 ROC filing fee 7500 Total expenses 5086380 3.1. As per the appellant's AR, the above. expenses are directly attributable to the appellant's income earned from training as expenses like consultancy charges, entertain/business promotion, traveling/conveyance etc. have nothing to do with the investments made by the company. As per the balance sheet, there are no fresh investments during the relevant assessment year and as per the appellant's AR, the source of these investments is out of interest free unsecured loans. Further, no interest expenses are debited in the P&L A/c. The only expenses which can be attributed to exempt income likely to be earned in future are t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ures in India. In he return of income filed for the Assessment Year 2007-08, therespondentassessee declared loss of ₹ 8.56 Crores approximately. The respondent-assessee had declared revenue receipts of ₹ 18,02,274/- which included interest of ₹ 726/- from Fixed Deposit Receipts and profit on sale of fixed assets of ₹ 16,52,225/-. As against this, the respondent assessee had claimed administrative and miscellaneous expenses expenditure written off amounting to ₹ 8.75 Crores. For the Assessment Year 2008-09, the assessee had filed return declaring loss of ₹ 6.60 Crores approximately. The assessee had declared revenue receipts in the form of foreign currency fluctuation difference gain of ₹ 12,46,595/-. It had claimed expenses amounting to ₹ 7.02 Crores as personal expenses, operating and other expenses, depreciation and financial expenses. 4. In the two assessment orders, the Assessing Officer held that the respondent-assessee had not commenced business activities as they had not undertaken any manufacturing activity or made downstream investments. The respondent-assessee, after receiving approval of Foreign Investment Promotion Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Section postulates that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of the expenditure incurred in relation to income which does not form part of the total income. Since the business of the respondent-assessee was to act as a holding company for downstream investments and as it was an accepted fact that they had incurred expenses to protect their investments and explore new avenues of investments, the provisions of Section 14A were applicable. The exact reasoning given by the CIT(A) in this regard in respect of the Assessment Year 2007-08 is as under:- "5.8....Thus, as admitted by the appellant; since business of the appellant exclusively is to act as a holding company for downstream investment in order (sic) companies and the admitted fact that they incurred the expenses to protect their investments and to explore new avenues of investments clearly show, that in the facts of the appellant's case the provision of Section 14A of the Act are clearly applicable". [underlining is as per the original order of CIT(A)] 8. The aforesaid reasoning given by CIT(A) was ambiguous and unclear, hence, clarity was sought from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A as interpreted in Maxopp Investment Ltd. (supra), the CIT(A) held that the said expression could not be given a narrow meaning. The expression "in relation to" would include "in connection with" or "pertaining to". No deduction should be allowed in respect of the expenditure incurred by the assessee with the main object of earning income which did not form part of the total income. He accordingly held that disallowance under Section 14A had no relation with the "dominant and immediate connection" between the expenditure and exempt income. Thereafter, in paragraphs 5.13 to 5.15, the CIT(A) held as under:- "5.13 With regards to inapplicability of Section 14A of the Act the appellant stated that they had not utilized any borrowed funds for making such investment and hence, no expenses on account of interest had been debited and claimed. It has been also contended that in absence of any clear finding or nexus between expenses incurred and exempt income or without bringing on record, specific material, no adhoc disallowance under section 14A of the Act is warranted. This contention raised by the appellant is unfound for the reason that they are based on contradiction. When it comes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the same submissions as were given during the appellate proceedings for assessment year 2007- 08, therefore relying on my order dated 01.08.2012 vide which I have adjudicated the appellant's appeal for assessment year 2007-08, I hold that in the year under consideration also that no disallowance can be made on account of noncommencement of business. However the addition of ₹ 7,02,54,564/- is to be made on account of disallowance u/s 14A because the appellant has admitted time and again that their main business activity is to act as a holding company for downstream investment in other companies which are engaged in manufacturing cement and that the expenses of ₹ 7,02,54,564/- have been incurred by them under to protect their investments and to explore new avenues of investments. Thus in view of the findings given in assessment year 2007-08, the addition of ₹ 7,02,54,564/- stands confirmed on account of disallowance under section 14A. 5. In the result, the appeal is dismissed". 12. As noticed above, the Tribunal has reversed the said finding by their common order dated 27.09.2013. It was specifically recorded that the business had been set up. We note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s earned. The second decision is of the Gujarat High Court in Commissioner of Income Tax-I Vs. Corrtech Energy (P.) Ltd. [2014] 223 Taxmann 130 (Guj.). The third decision is of the Allahabad High Court in Income Tax Appeal No. 88 of 2014, Commissioner of Income Tax (Ii) Kanpur, Vs. M/s. Shivam Motors (P) Ltd. decided on 05.05.2014. In the said decision it has been held: "As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. Hence, what Section 14A provides is that if there is any income which does not form part of the income under the Act, the expenditure which is incurred for earning the income is not an allowable deduction. For the year in question, the finding of fact is that the assessee had not earned any tax free income. Hence, in the absence of any tax free income, the corresponding expenditure could not be worked out for disallowance. The view of the CIT(A), which has been affirmed by the Tribunal, hence does not give rise to any su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following the above precedent, we dismiss the Appeal of the Revenue and allow the Cross Objection filed by the Assessee. 9. Further, in the case of Piem Hotels Limited for the assessment years 2006-07, 2007- 2008 & 2008-09 in ITA Nos. 240, 241 & 850/Mum/2012, the Tribunal vide order dated 20.03.2015 observed as under:- ''5.We have heard the rival submission and perused the material before us. We find that while deciding the appeal for the AY.2005- 06 the FAA had deleted the addition made by the AO following his order for the AY.2004-05,that the then FAA had held that assessee was holding strategic investment, that same was inherent part of overall planning, that there was no change in facts of the case that year as compared to the facts of AY.2004-05. It is found that assessee had made investment in Taj group of companies only and it is part of Taj Group, that except for one or two companies most of the companies wherein it had made investment are in the same business or in the business related with the hotel industries. It is a fact the AO has not pinpointed as to what was the expenditure that was incurred by the assessee for earning tax free income. Incurring of expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Analysis of the above two judgments lay down that the principle of consistency can be ignored only in certain conditions and without pinpointing the difference of facts for a particular year with the facts of earlier year/s consistency should be maintained. Considering the peculiar facts and circumstances of the case, we are reversing the order of the FAA. Effective ground of appeal raised by the assessee for the year under consideration, is allowed in its favour. ITA/850/Mum/2012-AY.2008-09. 6.The facts of the case under consideration are similar to the facts of earlier year-the only difference is of disallowance made. The AO had made disallowance of ₹ 6.19 Lakhs for the year under appeal as against the disallowance of ₹ 6.55 lakhs made for the earlier year. Following our order for the earlier year, we decide the effective ground of appeal in favour of the assessee. 7.The effective ground for the year under appeal is identical to the grounds raised in the two earlier assessment years i.e. disallowance u/s. 14A of the Act. During the year the assessee had received dividend income of ₹ 1.07 Crores and it was claimed exempt u/s. 10(34) of the Act. The assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground of the assessee is partly allowed in both appeals. 11. The next ground in ITA No.512/Mds/2015 is with regard to confirming the addition by Commissioner of Income Tax (Appeals) made by the Assessing Officer under the head ''providing access to branch network'' of C25,00,00,000/-. 12. The facts of the issue are that the assessee made a claim for deduction of C25 crores towards providing access to branch net work. The Assessing Officer asked the assessee company to explain the nature of expenditure, names and address of the persons to whom these amounts were paid and details of TDS made. The assessee took a plea before the Assessing Officer that the expenditure was incurred to bind or commit the chit fund companies for a period of 10 years to agree to provide access to their branch network and agency force. It was the plea of the assessee before the Assessing Officer that these payments by themselves do not entitle assessee or its nominees to get any service free of cost. The Chit companies are not obliged to provide any service free of cost to assessee or its nominees. It has to pay for services if they avail of any services. The payments made by assessee was only for ensuri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atas would enable the insurance companies to do insurance business. As the assessee is having interest in the business of these companies, assessee's business interest is involved. The expenditure has been incurred for the purpose of assessee's business. According to assessee in the earlier year, a similar claim made has been allowed by the Assessing Officer only after consideration of all these facts and circumstances. The three chit companies have accounted for the amount paid by the assessee company as revenue receipt only in their books of accounts and offered for taxation. 12.5 In view of the above, the assessee took a plea before the AO that the above expenditure incurred by the assessee is not Capital Expenditure. By this payment, no asset has been created. Payment made in the course of and for the purpose of carrying on business or in the field of trading activity it is to be treated as revenue expenditure even though the payment is of a large amount and may not have to be made periodically. For the above reasons, it was submitted by the assessee that the expenditure is allowable as business expenditure and it cannot be Capital Expenditure. 12.6 However, the above argumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any did not have branch network to distribute its various financial products. Therefore, the assessee company acquired the right of access to the entire branch network of subsidiaries for a specified consideration. The 3 chit companies were not supposed to do any work for "assessee company. The right of access to network of the chit fund companies for a period of 10 years was granted to the assessee for a specified consideration. The consideration was required to be paid in 2 instalments in the financial year 2008-09 and also financial year 2009-10. The CIT(A) observed that the manner of payment is not relevant for deciding whether the expenditure incurred for acquiring intangible asset was a capital or a revenue expenditure. Therefore, Commissioner of Income Tax (Appeals) of the considered view that the nature of the claim of expenditure incurred by the assessee is not a revenue expenditure but a capital expenditure for acquiring an intangible asset like business or commercial right to access the network of its subsidiaries and associates. According to the Commissioner of Income Tax (Appeals) this intangible right was acquired by the assessee during the FY 2008- 09 relevant t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies was made available to the assessee company i.e. SCL for a period of 10 years and consideration was paid towards acquiring right to access to the network. This particular right was acquired by the assessee company vide agreements dated 01.12.2008. The benefit for the use of the right extends over a period of 10 years. The issue here is not about creation of network. The network was already owned by chit fund companies. The assessee company acquired the right to access the network of the subsidiary companies for a period of 10 years by way of agreements executed on 01.12.2008. The Sunlan Life Insurance Ltd. and Sunlan Ltd. have recognized that the assessee company possessed the established brand but the assessee company did not have branch network to distribute its various financial products. Therefore, the assessee company acquired the right of access to the entire branch network of subsidiaries for a specified consideration. The 3 chit companies were not supposed to do any work for "assessee company. The right of access to network of the chit fund companies for a period of 10 years was granted to the assessee for a specified consideration. The consideration was requ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accountancy practice may be to allow as expense any sum in respect of liability which have accrued over the accounting period and to deduct such sums from profits. But the income tax laws do not take every such allowance as legitimate for purpose of tax. A distinction is made between an actual liability in praesenti and a liability de future which, for the time being, is only contingent. The former is deductible but not the latter. Thus in our opinion payment in lump sum cannot be a reason to treat as capital expenditure and disallowed the same. If the expenditure is incurred for the purpose of business, is made possible as obligation and there is possibility that such made necessary in view that expenditure cannot be held as enduring benefit. 16. We have to see the nature of liability of net value of the payment and whether the expenditure is capital or revenue which is wholly and exclusively used for the purpose of business carried on by the assessee. 17. If the assessee incurred expenditure as commercial expediency, it is to be allowed. When it is incurred wholly and exclusively for the purpose of business, then reasonableness of the expenditure is to be judged from the point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision aggregating to 150 in number were taken over by the assessee and to the extent remaining 69 employees the assessee and GE together contributed C45 lakhs as subsidy for the employees who were to be allowed to voluntarily retire from service. By terminating the employees of the erstwhile company and paying compensation thereof, the assessee did not get any benefit of an enduring nature and did not acquire any capital asset at all. Therefore, this payment if part of regular business expenditure incurred by the assessee for the purpose of its business. The payment of C22,50,000 paid by the assessee is just like recruitment cost. The cost of recruiting the rest of the employees were necessary for the purpose of business.. Therefore, the compensation payment of C22,50,000 is revenue expenditure. As regards the payment made towards access to information base and for transition of customer order filing this payment again, is for business consideration and it cannot be accepted that the amount was paid for obtaining information useful for a long period and that the same could be treated as plant. There is no question of acquisition of any asset when the assessee made the payments and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is the precedent for the running of the business then it would be expenditure of a revenue nature. iv) Special knowledge or technical knowledge, or patent or a trade mark, is an asset if it is acquired for payment for use and exploitation for a limited period and what is acquired is not an asset or advantage of an enduring nature and at the end of the agreed period that advantage or asset reverts back to the giver of that special knowledge or owner or patent or trade mark it would be expenditure of revenue nature. v) If it is intrinsically a capital asset, it is immaterial whether the price for it is paid once and for all or periodical or whether it is paid out of capital or income or linked up with the net sales. The out going in such a case would be of the nature of capital expenditure. vi) If the amount is incurred for acquisition of an asset of an enduring nature is in the capital field though payment has been made in small amounts or periodical instalments. vii) A lumpsum amount incurred would not cease to be revenue expenditure or get into or converted into capital expenditure merely because it is payment made in lumpsum. It is the intention and object with which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncur this kind of expenditure year after year so as to be in business subsequently even the advantage secured from earlier expenditure would get dissipated. Further, we place reliance on the judgment of Supreme Court in the case of Alembic Chemical Works vs. CIT (177 ITR 377) wherein held that just because an expenditure is debited in books towards the business being competitive and prudence and conservatism being fundamental accounting assumptions, capitalization of such expenses or ascribing lasting abiding value to such expenses, could only be done on sound footing and cogent basis. Thus, in our opinion the expenditure cannot be attributed to capital expenditure. 19. Further total payment made by assessee is C58 crores, C33 crores for assessment year 2009-10 and C25 crores for assessment year 2010-2011 and payment of C33 crores is subject matter of dispute. In the assessment year 2009-2010, the Assessing Officer allowed the claim of C33 cores as Revenue Expenditure. This was a subject matter of proceeding u/s.263 of the income by the Commissioner of Income Tax and the Commissioner of Income Tax vide order dated 18.02.2014 observed as under:- ''(1) The assessee company had clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal. The Tribunal has decided the issue in favour of the assessee in ITA No.724/Mds/2014, dated 02.1.2015 by observing that 5.1. We have heard both the parties and carefully perused the materials available on record. From the above facts, we find that the Ld.CIT had made several observations based on the materials which have already been examined by the Ld. Assessing Officer while passing the assessment order. Having made such observations the Ld.CIT had finally concluded as follows:- (i) The nature of transactions amounts to contractual obligations (ii) The assessee company did not deduct at source for the payments made. (iii) Provisions of section 40(a)(ia) of the Act will be attracted in this case. (iv) Accordingly the expenditure of `33 crores claimed by the assessee cannot be allowed for assessment year 2009-10 however, it can be allowed in the year in which the assessee deducts the tax and remits the same to the Government of India account. 5.2. From the above it is apparent that the Ld.CIT has only examined the agreement which have been already considered by the Ld. Assessing Officer. Though he has made several observations, there were no other findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same issue was considered by the Tribunal and decided in favour of the assessee by annulling the order of CIT passed under section 263 of the Income Tax Act by observing that the provisions of sec.40(a)(ia) cannot be applied, so as to disallow the expenditure by placing reliance on the order of the Special Bench Merilyn Shipping and Transports cited Supra as the amount is not outstanding at the end of the close of the financial year and it was already paid by the assessee. In other words, the Tribunal accepted the impugned expenditure as revenue expenditure and it has to be allowed though it was not subject to TDS. 19.3 Further, it is also brought to our notice that the Commissioner of Income Tax (Appeals), while disposing the appeal for the assessment year 2010-2011, made an observation that the Assessing Officer is at liberty to take remedial measures after following the due process of law for claim of C33 crores as deduction for the assessment year 2009-2010. It is to be here noted that the Commissioner of Income Tax (Appeals) is concerned with the adjudication of issues raised before him for the assessment year 2010-2011. In our opinion, the Commissioner of Income Tax (Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t while computing the book profit u/s.115JB towards expenses relating to exempt income. The ld. Authorised Representative for assessee reiterated the submissions regarding the computation of the book profit u/s.115JB of the I.T. Act. The Commissioner of Income Tax (Appeals) has already confirmed the finding of the Assessing Officer for determining the disallowance of C9,53,58,713/- u/s.14A r.w.r 8D of I.T. Rules for the same reasons, the CIT(A) confirmed the disallowance made by the Assessing Officer for the purpose of computation of book profit u/s.115JB. 22. We have heard both the parties. This issue of disallowance made by the Assessing Officer for these two assessment years by invoking provision u/s.14A r.w. Rule 8D, was already adjudicated by us in our earlier para of this order. In our opinion, disallowance made u/s.14A r.w. Rule 8D cannot be added while computing book profit u/s.115JB of the Act that the disallowance is only disallowance for the purpose of computing taxable income of the assessee in the normal course. There is no provision in the Act to add these kind of disallowance while computing book profit u/s.115JB and it cannot change the book profit on this count. T ..... X X X X Extracts X X X X X X X X Extracts X X X X
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