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TMI Blog2019 (12) TMI 958X X X X Extracts X X X X X X X X Extracts X X X X ..... wed a sum under section 14A of the Act read with rule 8D(2)(iii), being 0.5 per cent. of the average investments yielding exempt income. The said computation is reproduced in the assessment order, page 3, point 5. We direct the Assessing Officer to restrict the disallowance to the tune of 91,07,352 under section 14A of the Act read with rule 8D(2)(iii), being 0.5 per cent. of the average investments yielding exempt income. In a nut shell we confirm the disallowance under rule 8D(2)(i) at 56,181 and under rule 8D(2)(iii) at 91,07,352. The same principles for computation of disallowance under section 14A read with rule 8D will be applicable to the assessee s appeal in I. T. A. No. 937/Kolkata/2018, therefore, the Assessing Officer is directed to compute the disallowance as per the precedents cited above and discussion made Disallowance of prior period expenses - CIT(Appeals) rejected the claim of the assessee holding that since the assessee followed the mercantile system of accounting and as such the impugned expenditure can only be allowed in the year to which it pertains - HELD THAT:- Since the bills were not received, it was not possible to make provisions for such expenses in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectfully following the judgment of the co-ordinate Bench in the case of Sundaram Finance Limited [ 2017 (7) TMI 661 - ITAT CHENNAI] we note that it is abundantly clear that the Government securities are entitled to indexation benefits. Therefore, we note that the Government securities are different from bond and debenture for the purpose of the third proviso to section 48 of the Act (4th proviso after amendment) and therefore the benefit of indexation should be granted to the assessee on the redemption of these Government securities. Deduction u/s 37(1) on account of education cesses paid by the assessee - HELD THAT:- Education cess being not Income-tax is allowable as deduction under section 37(1) of the Act. For this, we rely on the judgment of ITC Ltd. [ 2018 (11) TMI 1611 - ITAT KOLKATA] wherein it was held that education cess is an allowable expenditure under section 37(1) of the Act. Therefore, we direct the Assessing Officer to verify all the relevant facts and allow education cess as deduction under section 37(1) of the Act. X X X X Extracts X X X X X X X X Extracts X X X X ..... lates to the deletion of the addi tion of notional interest of ₹ 82,78,301. (4) Ground No. 4 raised by the Revenue in I. T. A. No. 1439/Kolkata/ 2018, relates to the disallowance of compensation of ₹ 11,00,000 paid to M/s. Conforms Pvt. Ltd, a related company under section 40A(2)(b) of the Act without calling for remand report. (5) Grounds raised by the assessee in I. T. A. No. 938/Kolkata/2018, for the assessment year 2010-11, relates to the action of the Assessing Officer in treating the Government securities within the meaning of "bonds" for the purpose of the third proviso to section 48 of the Act and erred in dismissing the assessee's claim for indexed loss of ₹ 31,49,09,561. (6) Additional ground raised by the assessee in I. T. A. No. 937/ Kolkata/2018 for the assessment year 2010-11 reads as under : "That on the facts and in the circumstances of the case, the author ities below erred in not allowing the deduction under section 37(1) of the Income-tax Act, 1961 on account of education cesses paid by the assessee while arriving at the assessed income for the year under appeal." 4. First, we shall take up the Revenue's appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance under rule 8D. However, the Assessing Officer rejected the computation of the assessee and held that disallowance is liable to be worked out strictly in accordance with the method laid down as per section 14A read with rule 8D of the Income-tax Rules. So the amount of disallowance was calculated by the Assessing Officer, on the basis of rule 8D of the Income-tax Rules as under : (i) Direct expenses : The amount of expenditure directly relating to income which does not form part of total income in the profit and loss account. The assessee has debited an amount of ₹ 56,181 being security transaction expense depositor. The same is liable to be disallowed. (ii) Disallowance of interest : = Where A = Amount of expenditure by way of interest other than the amount of interest included in point No. (i) incurred during the previous year. Here as per the details filed by the assessee, the inter est debited in the profit and loss account is ₹ 119,15,05,151 Hence, the same figure is considered for this purpose. B = The average of value of investment. income from which does not or shall not form part of the total income, as appearing in the balance-sheet of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year that has to be considered while adopting the average value of investments for the purpose of rule 8D(2)(ii) and (iii) of the Rules. The aforesaid view of the Tribunal has since been affirmed as correct by the hon'ble Calcutta High Court in G. A. No. 3581 of 2013 in the appeal against the order of the Tribunal in the case of REI Agro Ltd. 11. We note that the assessee had sufficient fund at its disposal and the learned counsel has contended that investment have been made out of its own fund. The following table shows the amount of shareholder's funds of the assessee-company, as compared to the investments in shares : Particulars Current year 2009-10 Previous year 2008-09 Share capital (a) 331.56 331.56 Reserves and surplus (b) 11920.39 9786.59 Total Own Funds (a + b) 12,251.95 10,118.15 Average investments in exempt income yielding shares/bonds 1821.4 - As seen from the above table, it is evident that the assessee had sufficient own funds to invest in the exempt income yielding investments. Borrowed funds were not used for making investments in shares. There fore, it may be safely concluded that all the investments have been m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee suo motu disallowed a sum of ₹ 91,07,352 under section 14A of the Act read with rule 8D(2)(iii), being 0.5 per cent. of the average investments yielding exempt income. The said computation is reproduced in the assessment order, page 3, point 5. We direct the Assessing Officer to restrict the disallowance to the tune of ₹ 91,07,352 under section 14A of the Act read with rule 8D(2)(iii), being 0.5 per cent. of the average investments yielding exempt income. In a nut shell we confirm the disallowance under rule 8D(2)(i) at ₹ 56,181 and under rule 8D(2)(iii) at ₹ 91,07,352. The same principles for computation of disallowance under section 14A read with rule 8D will be applicable to the assessee's appeal in I. T. A. No. 937/Kolkata/2018, therefore, the Assessing Officer is directed to compute the disallowance as per the precedents cited above and discussion made (supra). 13. We shall take summarised and concise ground No. 2, which reads as follows : "(2) Ground No. 3 raised by the assessee in I. T. A. No. 937/ Kolkata/2018, for the assessment year 2010-11, relates to the disal lowance of ₹ 4,06,847 holding that the same to be in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by it. In response to his query, the assessee explained that as per note 22(b) of the tax audit report, an amount of ₹ 4,06,487 has been shown as prior period expenses. The summary of the prior period expenses relate to the bills for office expenses for the preceding year, being the assessment year 2009-10, which could not be paid before the close of that relevant year, being March 31, 2009, for various reasons. These bills were actually submitted in the office of the assessee after the close of the said financial year 2008-09, relevant to the assessment year 2009-10. It mainly includes the electricity and telephone bills relating to the period of February and March 2009 but actually received in the office in the month of May-June 2009. Such expenses were mostly incurred in various branch offices of the company. The bills were received by the corporate office for accounting and payment after the close of that particular year and accordingly were accounted for in the current year under assessment. We note that the bills though relating to the previous years were cleared/paid by the assessee in the current year and as such, they were claimed as deduction in this assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of notional interest of ₹ 82,78,301." 19. Brief facts qua the issue are that during the assessment proceedings the Assessing Officer noticed that as per note 3 (iii) of auditor's report on accounts (page 68) of printed accounts, interest was not being charged on loans of ₹ 16.55 crores granted to the subsidiary company M/s. Peerless Developers (P.) Ltd. The assessee-company was asked to furnish detailed justification and explained as to why the interest paid to certificate holders should not be disallowed proportionately for diversion of interest-free loan. The assessee filed written submission before the Assessing Officer dated January 17, 2013 and explained the following : "That only loan of ₹ 16.55 crores was given to M/s. Peerless Developers Limited and you have also disallowed interest during the assessment year 2009-10 and against which we have filed an appeal and we rely on our the last year's submission filed before you. The last year submission is reproduced hereunder : "that the loan of ₹ 16.55 crores was given to M/s. Peerless Devel opers Limited which is a subsidiary of the assessee-company and the said loan was given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss purposes. During the course of assessment proceedings, it was submitted that the said loan of ₹ 16.55 crores was given to M/s. Peerless Developers Ltd. in the earlier years out of own funds of the assessee. However, the learned Assessing Officer did not appreciate the submissions of the assessee and computed notional interest at the rate of five per cent. which comes to ₹ 82,78,301 and disallowed the same. We note that a similar disallowance was made by the learned Assess ing Officer in the immediately preceding year, the assessment year 2009-10. Aggrieved, the assessee went in appeal before the learned Commis sioner of Income-tax (Appeals). The learned Commissioner of Income-tax (Appeals) perused the facts of the case in detail and allowing the appeal of the assessee held that : "Next ground No. 4 relates to the addition due to charging of interest of ₹ 82, 78,301 in respect of interest-free loan given to 100 per cent. subsidiary company M/s. Peerless Developers Pvt. Ltd. for ₹ 16.55 crores at five per cent. It was contended that the loan was given out of the assessee's own funds which exceeded the amount of ₹ 16.55 crores. The authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the premise. On examination of the annual report and accounts of the assessee-company it was noted by the Assessing Officer that M/s. Conform (P.) Ltd. is a related party in terms of section 40A(2b) of the Act. The assessee-company accordingly was to produce the copy of the agreement which may support the claim of assessee. In spite of allowing adequate opportunity and time the assessee could not produce the copy of agreement or any evidence which shows that failing to vacate the said premise, the assessee-company had to pay compensation to M/s. Conforms (P.) Ltd. The assessee-company could only produce some correspondence in this respect but failed to adduce a single evidence that the compensation was the part of the terms and conditions of any agreement. Therefore, the said amount of compensation of ₹ 11,00,000 was disallowed under the provision of section 40A(2b) of the Act. 25. On appeal by the assessee, the learned Commissioner of Income-tax (Appeals) deleted the addition. Aggrieved, the Revenue is in appeal before us. 26. Before us, the learned Departmental representative for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 354,36,08,185. Later on, the case was selected for scrutiny and order under section 143(3) was passed on March 22, 2013 on a total income of ₹ 362,77,16,170. In the computation of income the assessee claimed long-term capital loss of ₹ 31,50,15,297 to be carried forward. In the assessment order the Assessing Officer remain silent on this loss that means the assessee's allowed to carried forward this loss. The learned Principal Commissioner of Income-tax, on examination of assessment records in the instant case for the assessment year 2010-11 noted the following : "Computation of income, as submitted by the assessee-company was accepted in assessment (except a few addition/disallowance of expenditure). In computation long-term capital loss (LTCL) ₹ 31,50,15,297 was carried forward. Long-term capital loss computation sheet related that the loss arose due to disinvestment in the Government securities. Book loss on transaction of the Government Securities (ignoring amortisation) was ₹ 3,05,76,150 and indexed loss was ₹ 31,49,09,561. As per the third proviso below section 48, the concept of indexed cost of acquisition (as mentioned in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee has reiterated on the submissions made before the authorities below, whereas the learned Departmental representative for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. 33. We have heard both the parties and perused the material available on record, we note that in the present case, the assessee was denied the benefit of indexation in respect of the Government securities on the belief that the cost inflation index was not applicable on the Government securities in terms of the third proviso to section 48 of the Act as these were bonds and debentures. The third proviso to section 48 read as under : "Provided also that nothing contained in the second proviso shall apply to the long-term capital gain arising from the transfer of a longterm capital asset, being a bond or debenture other than- (a) capital indexed bonds issued by the Government ; or (b) Sovereign Gold Bond issued by the Reserve Bank of India under the Sovereign Gold Bond Scheme, 2015 ;" Here, it is of utmost relevance to discuss the meaning of " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or State Governments and not by any other authority or legal entity. The definition of "bonds" and "Government securities" as per the Reserve Bank of India, the following definitions are quoted from the official website of the RBI, i. e., https:m.rbi.org.in/Scripts/FAQView. What is a bond ? 1.1 A bond is a debt instrument in which an investor loans money to an entity (typically corporate or Government) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, States and Sovereign Governments to raise money to finance a variety of projects and activities. Owners of bonds are debt holders, or creditors, of the issuer. What is a Government security (G-Sec) ? l.2 A Government security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. It acknowl edges the Government's debt obligation. Such securities are short-term (usually called treasury bills, with original maturities of less than one year) or long-term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on the other. The hon'ble Tribunal did not examine these contentions and held that the learned Assessing Officer did not examine this question at the assessment stage and as such uphold the orders under section 263 passed by the learned Principal Commissioner of Income-tax. However, the submissions made by the assessee were totally ignored by the learned Principal Commissioner of Income-tax. We note that learned Commissioner of Income-tax (Appeals), has nowhere in the appellate order disputed or challenged the difference and distinction between bonds and debentures on one hand and the Govern ment securities on the other as submitted by the assessee. As evident from pages 7, 8, 9 and 10 of the appellate order, he has made discussion under the heading "What is Bond ?", "What is a Government security?", "How do the Government securities transactions settled in primary and second ary market ?" and "How does the trading in the Government securities takes place in the secondary market and stock exchanges?". But in all the discussions he has not tried to show how the Government securities are bonds and debentures. The learned Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Government from the list of capital assets eligible for the benefit of indexation-Commissioner of Income-tax (Appeals) has erred in allowing indexation on such bonds." "UTI bonds himself to pay to the holder of MIP-99, a fixed sum at 11.3 per cent. per annum in each month and to pay back the invest ment/capital amount after the lapse of full term of five years. However, in case of premature withdrawal by the assessee, there is no guarantee of protection of capital and the same will be repaid as per NAV. This is similar to FD and NSC because in case of FD and NSC, if there is premature withdrawal, penalty is levied and rate of interest is also varied being applicable to the actual period of holding and in case interest is already paid, such deduction in interest and penalty for premature withdrawal is deducted from capital. Merely for this reason, it cannot be said that repayment is not of a specified sum. Hence, UTI, MIP-99 is also a bond as per this definition of bond. Once, it is held so, the Tribunal order cited by the authorised representative of the assessee is not applicable in the present case because in that case, the Tribunal has proceeded on this basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9; should had meaning assigned to clause 11 of Securities Contracts Regulation Act, 1956 which includes Government securi ties-Bonds could not be equated with securities-Assessee had made investments in Government securities and sold securities after hold period of more than 12 months to treat securities as long-term capital assets-Capital gains arose on transfer of long-term company assets were entitled for benefit of indexation as per section 48-From plain reading of third proviso section 48 Government securities were not excluded for indexation benefit only bond or debenture included in third proviso to section 48-Therefore, Tribunal did not find any infirmity in order of the Commissioner of Income-tax (Appeals) and same upheld-Revenue's appeal dismissed. Held From the definition of the capital asset, the Government securities are not excluded from the definition of capital asset. Therefore, the Government securities are capital assets. As per section 2(42A) the expression 'security' shall have the meaning assigned to clause II of Securities Contracts Regulation Act, 1956 which includes Govern ment securities as discussed in the learned Commissioner of Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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