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TMI Blog2016 (8) TMI 1309X X X X Extracts X X X X X X X X Extracts X X X X ..... e Manufacturing Co. Ltd. vs. CIT [2010 (8) TMI 77 - BOMBAY HIGH COURT], that Rule 8D is applicable from assessment year 2008-09 and from the earlier years. So far as quantum of disallowance is concerned, it has to be seen that on the facts whether some reasonable disallowance is called for or not. Looking to the facts and circumstances of the case, we find that the Tribunal in the earlier years has upheld the disallowance of 5% of the dividend income, therefore, following the same precedence, we also hold that, disallowance under section 14A should be restricted to 5% of the dividend income. Disallowance of payment on account of registration of patents being capital in nature - Held that:- Tribunal in the AY 2000-01 had set aside similar issue to the file of the AO to decide the issue after considering the material on record as well as agreement under the head “intellectual property rights”. In pursuance of said direction, the AO has allowed the said expenditure as revenue expenditure passed under section 143(3) / 254. Thus, following the earlier years’ precedence, which is applicable on the facts of the present year also, we direct the AO to allow the same as revenue expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The learned CIT (A) erred in facts and law in upholding that the payments made for collaborative projects are expenditure to acquire know-how and disallowable as capital expenses. 1.1 The learned CIT (A) failed to appreciate that the appellant being engaged in the business of rendering research services the following payments are incurred in the normal course of business: 1.2 That the learned CIT (A) failed to appreciate that the appellant was engaged in the business of rendering research service and the appellant had outsourced some of the activities to various parties based on agreements with each of these parties in the normal course of business. 1.3 Without prejudice to the above, having held that above as capital expense, the learned CIT (A) erred in not allowing the same u/s 35 (1) (iv) of the Act. 1.4 Without prejudice to the above, the learned CIT(A), having held that the above expenses are capital in nature, erred in not allowing depreciation u/s 32 of the Income-tax Act. 2. The learned CIT (A) erred in confirming disallowance under section 14A of the Income-tax Act, 1961. 2.1 He failed to appreciate that the investments on which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rendered by various parties as given below:- 4. Before the AO, it was submitted by the asssesese that, above payment were incurred during the year for technical services rendered by the aforesaid parties, therefore, same are allowable as revenue expenditure under section 37(1). However, the AO noted that similar nature of payment was examined in the earlier years, wherein, after detailed discussion it was held that the payment made were to acquire know-how which is an intangible asset and, therefore, capital in nature as per the provision of section 35AB. Accordingly, he disallowed the same and added back to the total income. 5. Before the CIT(A), the assessee had submitted and stated as under:- - The expenditure on fees and other costs to the external agencies/experts is incurred in the normal course of the - appellants' research business and is deductible as such. -The appellant is providing research services to its group company i.e. Unilever based on the agreement entered between the appellant and the Unilever Dated 16.11.2000. The appellant had outsourced some of the activities to various parties based on agreements with each of these parties in the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and also considering the objects of the assessee as per the MoA. Similar directions were given in the AY 2003-04 also. In support, he filed the copy of the Tribunal orders in ITA Nos. 5461/Mum/2004, 1409/Mum/2005, 996/Mum/2006, order dated 27.08.2014 and order dated 08.01.2016 in ITA 1936/Mum/ for AY 2003- 04. He further pointed out that in pursuance of the Tribunal order; the AO has passed fresh assessment / consequential order, wherein, he has allowed the claim of the assessee. Even in latest assessment order, the AO has not made any such disallowance. Accordingly, he submitted that, there is no requirement for setting aside the matter back to the AO in this year and same should be allowed, because, the Department has already allowed this issue in favour of the assessee. 8. Ld. DR also admitted that, this issue had come-up before the Tribunal in the earlier years and submitted that, same should be set aside to the file of the AO. 9. After considering the relevant finding given in the impugned order for the earlier years, we find that both the AO as well as the Ld. CIT(A) have followed the earlier years orders of the AO as well as CIT(A) for the assessment year 2003-04 as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been disputed before us should be allowed as revenue expenditure . Accordingly, ground no.1 to 1.4 is treated as allowed. 10. The second issue which has been raised in ground No.2.1 to 2.7 relates to disallowance of ₹ 3,50,000 made under section 14A. 11. The AO noted that, assessee has received tax free dividend income of ₹ 35 lakhs from M/s Digital Securities P Ltd, which was acquired in the earlier years out of its surplus funds, however, the AO held that since assessee is not maintaining any separate account for dividend income and has failed to furnish the details of relatable expenditure incurred for the purpose of earning dividend income, he accordingly estimated the disallowance @10% of the dividend income. 12. The Ld. CIT(A), held that disallowance has to be made in accordance with Rule 8D and in support of his conclusion, he relied upon the decision of Special Bench in the case of Daga Capital Management Pvt Ltd., reported in [2009] 117 ITD 169 and accordingly, enhanced the disallowance to ₹ 12,93,000/-/ 13. Before us, Mr. Pardiwalla stated that, firstly , in the earlier years, the Tribunal has confirmed the disallowance at @ 5% of the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enditure, however, directed the AO to allow depreciation. 19. We find that, Tribunal in the AY 2000-01 had set aside similar issue to the file of the AO to decide the issue after considering the material on record as well as agreement under the head intellectual property rights . In pursuance of said direction, the AO has allowed the said expenditure as revenue expenditure vide order dated 08.01.2015 passed under section 143(3) / 254. Thus, following the earlier years precedence, which is applicable on the facts of the present year also, we direct the AO to allow the same as revenue expenditure in line with earlier years. Accordingly, ground no.3 is allowed. 20. In the result, appeal of the assessee is partly allowed. 21. Now, we will take-up ITA No.2942/Mum/2010, wherein the assessee has raised following grounds: The learned CIT (A) erred in facts and law in upholding that the payments made for collaborative projects are expenditure to acquire know-how and disallowable as capital expenses. 1.1 The learned CIT (A) failed to appreciate that the appellant being engaged in the business of rendering research services the following payments are incurred in the norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rsonal in nature. 3.1 He failed to appreciate that the estimated disallowance of ₹ 9,44,174/- made by the Assessing Officer was based on no fact but surmises and conjectures. 3.2. The following observations of the learned CIT(A) in the order are perverse, arbitrary, baseless and misleading and ought to be quashed:- The observations of the Assessing Officer in the order of assessment have not been challenged. By implication, appellant is admitting that voucher in respect of petty expenses have not been prepared and maintained. Appellant is therefore also admitting that the purpose of visit in respect of Directors and Managing Directors travelling to various places is not identifiable. That also means that it is admitted that log book in respect of movement of vehicles has not been maintained. 3.3 The CIT(A) failed to appreciate that the accounts of the appellant has been audited as provided under 44AB. The auditors have verified all the vouchers and certified that no expenditure of personal nature is debited to the Profit and Loss account. 3.4 He grossly erred in law in holding that ad-hoc disallowance made by the Assessing Officer is perfectly j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at, admittedly, these expenditures have been incurred by the employees and, therefore, so far as assessee-company is concerned, how it can be held for non-business purpose or personal in nature. So far as the company is concerned, it has booked the expenditure based on actual vouchers; therefore, no disallowance should be made. 26. On the other hand, Ld. DR relied upon the order of the CIT(A). 27. We find that, assessee is a corporate entity and the expenditure debited are in the nature of travelling and motor car expenses which are, admittedly for the employees of the assessee company. Once the expenditure are incurred by the employees then, so far as company is concerned, it cannot be held that it is in personal in nature or non-business-purpose. Thus, we do not find any merit in any such ad-hoc disallowance on such ground. The AO is accordingly is directed to delete the said disallowance. 28. Similarly in ground No.4, ad-hoc disallowance of ₹ 2,49,100/- being 10% of the expenditure incurred on printing and stationery, business meetings and conferences etc. has been made. The AO has made disallowance on the ground that the details placed by the assessee could not r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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